Retailers fall on weaker sales; Ford, GM softer; casinos pare gains; broad market reverses course

By Stephanie N. Rotondo

Portland, Ore., Oct. 15 - The distressed bond market was characterized as "ugly" by several sources Wednesday.

"'Ugly is a good word to describe it all," one trader said.

"Everything just keeps coming in," said another trader. "Distressed guys are looking at short bank paper, but the yields aren't really there."

The same retail data that were given credit for wrecking havoc on the stock market also played a role in distressed territory. Retailers like Claire's Stores Inc., Bon-Ton Stores Inc. and Michael's Stores Inc. all finished the session with less weight than they started the day with.

In the autosphere, Ford Motor Co. ended the day better to unchanged - or weaker, depending on whom you asked. General Motors Corp.'s bonds meanwhile closed softer.

The gaming sector tried to make a comeback on Tuesday, but most of the gains seen in that arena were lost come Wednesday. As the broad market turned heavy, so did casinos like Harrah's Entertainment LLC, MGM Mirage and Trump Entertainment Resorts Inc.

In a market where volatility has ascended the throne, many are left wondering where the bottom is. According to Standard & Poor's, it could be awhile.

The rating agency said Wednesday that it expected the default rate to hit a six-year high in 2009 at 7.6%, pointing out that 139 companies are in danger of default.

"The increase in defaults reflects a continued slide in economic fundamentals," S&P said in a report. "We do not think the baseline projection of 7.6% constitutes a peak in default rates for this cycle, and foresee further defaults materializing beyond the one-year forecasting horizon."

The report came one day after S&P said that nearly $800 billion in debt was coming due over the next five quarters. And, refinancing could come at a pretty penny.

They can't repay the debt or refinance, a trader said of those companies affected. "There are a lot of restructurings coming, which people have been waiting for. That is why S&P is expecting the default rate to go through the roof."

Retailers fall on sales

New retail data showed sales slipped yet again in September and the report was blamed for losses in the stock market. In the bond market, retailer bonds reacted by declining as well.

A trader called Pembroke Pines, Fla.-based Claire's Stores weaker, its 10½% notes due 2017 at 22 bid, 23 offered. The trader also saw the 9 5/8% notes due 2015 trade at 20 and the 9¼% notes due 2015 trade at 35.

Another trader pegged the 9¼% notes at 33 bid, 34 offered and Bon-Ton Stores' 10¼% notes due 2014 at 22 bid, 24 offered.

At another desk, Michael's Stores' 10% notes due 2014 slipped to 43 bid, 44 offered. Another trader placed the 11 3/8% notes due 2016 at 27 bid, 29 offered.

"They are really getting down there," he said.

Another trader called Bon-Ton's debt "down again today" at 16 bid, 20 offered. However, the trader noted that throughout the day he saw quotes as low as 15 bid, 17 offered and as high as 20 bid, 22 offered.

"So go figure," he quipped.

The Commerce Department's monthly retail sales analysis showed a 1.2% decline in September, the biggest decline in three years and nearly double what had been expected. The report marked the third consecutive month that sales have fallen, further evidence that consumers are worried about the state of the economy.

As a result of the ever-decreasing sales figures - and the tightening of credit markets - some retailers have made efforts to ensure their longevity. Michael's Stores, for example, said in a filing with the Securities and Exchange Commission that is drew $120 million from its revolving credit facility. The arts and crafts retailer said the draw would be used to fund general corporate purposes, as well as upcoming debt payments.

Ford, GM bonds softer

Traders gave mixed reports of Ford Motor's debt as the company said it was considering selling its stake in Mazda.

At one desk, a trader quoted the 7 3/8% notes due 2009 at 61 bid, 61.5 offered and the benchmark 7.45% notes due 2031 at 24 bid, 25 offered.

"There is a point where there is no sense in these going any lower, but they still do," he said. "Theoretically, Ford still has cash," he added.

At another desk, a trader deemed the benchmark issue down 4 points on the day at 22 bid, 24 offered.

But other sources saw the bonds gaining, albeit slightly, during the session.

One source called the 7% notes due 2013 up nearly a point at 40 bid, while another pegged the benchmark paper at 28 bid, 30 offered, unchanged on the day.

Ford owns one-third of Japanese automaker Mazda and, according to a Bloomberg article, might be looking to unload some of its shares. Tentatively valued at around $1.3 billion, the deal could happen as early as next month as the Detroit carmaker looks for ways to restructure and shore up liquidity.

But the potential deal might have been only part of what was weighing on the sector Wednesday. General Motors' bonds were down as well, with no news. In the Commerce Department's report, it showed that auto sales decreased 3.8% in September - another sign that the sector is in trouble.

GM's benchmark 8 3/8% notes due 2033 were called 2.5 points weaker by one trader, who place the debt at 18.5 bid, 20.5 offered. Another trader saw the issue lose 2 points to 19 bid, 21 offered.

Meanwhile, GM's GMAC LLC unit saw its 8% notes due 2031 fall just over a point to 25 bid, 27 offered.

Casinos pare previous gains

Despite posting modest gains in the previous session, casinos once again fell victim to pressure from the broad market.

A trader saw Harrah's Entertainment's 10¾% notes due 2016 slip to 34 bid, 35 offered from closer to 40 previously.

"It was only down 4 or 5 points," he said. "But that is still a lot, especially given how far it's come down."

MGM Mirage's 7½% notes due 2016 dipped a point to 65.5 bid, 67 offered, while Trump Entertainment Resorts' 8½% notes due 2015 fell 1.5 points to 27 bid, 29 offered.

Station Casinos, however, managed to gain slightly, despite a downgrade from Moody's Investors Service. The 6% notes due 2012 were seen at 39.75 bid, up nearly 2 points.

Moody's cut Station's corporate family rating and probability-of-default ratings to Caa2 from B3. The senior unsecured notes were dropped to Caa2 from B3 and the senior subordinated notes to Caa3 from Caa2.

"The downgrade reflects the significant strain the deeper and more prolonged downturn in gaming demand is having on the company's credit metrics," Moody's senior analyst Peggy Holloway said in a written statement.

Broad market reverses direction

One trader saw Swift Transportation Co. Inc.'s 12½% notes due 2017 around 30.

"Fuel prices have come down, which helps," he said of the struggling trucking company. "But now you need business to improve and it doesn't look like it is going to in this market."

The trader also saw Lehman Brothers' senior paper at 9.5 bid, 10.5 offered, which he called unchanged. But another trader called the bonds down a point to 8 bid, 10 offered.

The second trader quoted Washington Mutual Inc.'s senior holding company paper - such as the 4% notes due 2009 - at 68 bid, 70 offered, down 3 points.

"It started strong in the morning, then faded a little in the afternoon," he said. When asked why the notes had fallen, the trader said it was partly due to things being "unclear" about where recoveries would fall.

"I am not sure why they are up as high as they are," he said, noting that chatter has placed recovery on the senior holdco paper around 80.

"But nothing is definitive," he said. He added that the "weakness is just based on the market and they are not as heavily traded."

Solo Cup Co.'s 8½% notes due 2014 closed at 69 bid, 71 offered, about half a point weaker.

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