Lehman Brothers notes rally after credit default swap auction; Hertz bonds hit by tourism, auto woes

By Stephanie N. Rotondo

Portland, Ore., Oct. 10 - It was another "interesting" day in the distressed bond market Friday, traders reported, as volatility continued to reign.

"It starts every day with a little bit of fear," a trader said. "Every day is a little more interesting than the next."

"So many things are all over the place," said another trader. "People are being forced to liquidate stuff. Technicals are just dominating."

Lehman Brothers Holdings Inc.' debt took a dip in early trading, sources said, as the company's credit default swap auction got under way. But by the end of the session - and the end of the auction - the bonds had come back a little, though it still finished weaker.

Meanwhile, Hertz Corp.'s bonds continue to deflate. There has been no news to explain the nearly 15-point loss in two days, but some are speculating that struggles in the tourism industry, as well as the automotive industry, are placing pressure on the company.

Lehman paper rallies

Lehman's senior paper took a dip early in the session but rallied late in the day as the company's credit default swaps auction ended.

One trader said the debt was "bracketing 9" shortly before the market closed early for the Columbus Day holiday. He noted that the paper had opened around 11.5.

As the market closed, however, a trader saw the bonds coming back to close around 11 bid, 12.5 offered, up from its lows of 8.5 bid, 9 offered and down slightly from opening levels of 12 bid, 13 offered.

The trader also noted how the price of the bonds seemed to be manipulated ahead of the CDS auction.

And, the results of said auction came as a disappointment. The final recovery rate on the bonds, according to results posted by auction administrators Creditex and Markit on creditfixings.com, was 8.625 cents on the dollar, lower than earlier estimates of 9.75. Therefore, sellers of the protection on the bonds will have to pony up 91.375 cents on the dollar, nearly 4 cents more than the 88 cents predicted earlier in the week. The final result was also the largest ever in the credit derivatives market, moving ahead of Parmalat in 2003.

Hertz bonds drop again

With the economy being what it is, the tourism industry has gone downhill. Business travel has decreased, as well as travel for pleasure, with the rising costs of airline tickets, fuel and food.

That has likely put a strain on rental car company Hertz, which over the past two sessions saw its debt lose about 15 points.

One trader placed the 8 7/8% senior notes due 2014 at 64 bid, 66 offered, versus opening levels of 60 bid, 70 offered. Another called the bonds "pretty active," pegging the issue at 65.5 bid, 67, compared with levels around 74 previously.

"Travel is down, autos are in trouble," the first trader said. "Hotels are going empty and rental cars probably follow suit."

In fact, many companies associated with the industry are facing obstacles. Host Hotels & Resorts posted a third-quarter loss on Friday and a tourism summit held in Sanibel, Fla., noted how financial turmoil in Iceland is keeping United Kingdom tourists - typically one of the region's highest international guests - away from its sunny shores.

An unnamed analyst, who noted that he did not closely follow the industry, speculated that companies like Hertz could also face issues as their collateral - the cars themselves - lose value.

"They basically only use these cars until 20,000 miles," he said. After that, the company then sells the gently used vehicles for a slight profit, using those proceeds to restock its fleet.

But as the automotive sector has taken a turn for the worse - market research firm J.D. Power & Associates said Thursday that sales will be well below those in 2007 and sales in 2009 could "collapse" - Hertz and its peers might be lucky to sell the cars for what they owe, but nothing more.

Meanwhile, General Motors Corp.'s 8 3/8% notes due 2033 hit 17 bid, a trader said, while its GMAC LLC unit's 6¾% notes due 2014 ended at 28 bid, 33 offered.

GM also saw its term loan decline, along with rival Ford Motor Co. General Motors, a Detroit-based automotive company, saw its term loan quoted at 41.5 bid, 46.5 offered, down from previous levels of 47 bid, 50 offered, the trader said.

And Ford, a Dearborn, Mich.-based automotive company, saw its term loan quoted at 43.5 bid, 48.5 offered, down from previous levels of 47 bid, 50 offered, the trader added.

On Thursday, Standard & Poor's placed both General Motors' B- long-term corporate credit rating and Ford's B long-term corporate credit rating on CreditWatch with negative implications.

The rating agency said that the CreditWatch reflects the rapidly weakening state of most global automotive markets, along with capital market conditions that will remain a serious challenge for the foreseeable future.

Broad market pushed lower

Harrah's Entertainment LLC's 10¾% notes due 2016 fell to 31 "before bouncing back a little bit" to 35.5 bid, 36.5 offered, a trader said.

Freescale Semiconductors' 8 7/8% notes due 2014 dropped to 47 bid, 50 offered, versus levels around 53.5 on Thursday.

A trader said Michael's Stores Inc.'s 10% notes due 2014 dove a dozen points to around 41.

Sara Rosenberg contributed to this article.

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