Junk slips as shares slide; Hertz gets hurt; Las Vegas Sands hit by loan warning; funds gain $286 million

By Paul Deckelman and Paul A. Harris

New York, Nov. 6 - Junk bonds finished mostly on the downside on Thursday, traders said, although the slippage was relatively restrained compared with the carnage that went on over on the equity side of the fence, where the bellwether Dow Jones Industrial Average plummeted more than 440 points, bringing stock losses over two sessions to a staggering 10% - the worst such slide since the October 1987 crash.

Hertz Corp.'s bonds opened lower and stayed there all day in busy round-lot trading after the Park Ridge, N.J.-based top vehicle rental company warned that it will miss its previous earnings guidance for the year due to worsening economic conditions, and it will give out no further financial projections. At one point, the bonds nosedived badly, but came back from that nadir, although they still ended a few points lower on the day.

Las Vegas Sands Corp.'s bonds plunged into the lower 40s, in tandem with a more than 30% fall in its shares, after the Nevada-based gaming company warned that it might be in violation of some of its loan covenants.

From that same sector, the new MGM Mirage five-year bonds, which fell several points after they priced last week, but then managed to crawl back over several sessions to around their issue price, were again in retreat on Thursday.

And once again on Thursday the primary market remained dormant.

However the buzz continued on the approximately $35 billion of debt financing backing the history-making LBO of BCE Inc.

Funds rise by $286 million on week

As trading was wrapping up for the session, market participants familiar with the high yield mutual fund flow statistics generated by AMG Data Services of Arcata, Calif., said that in the week ended Wednesday $285.62 million more came into the weekly-reporting funds than left them, versus the $74 million outflow reported last week for the seven-day period ended Oct. 29.

The inflow was only the second one seen in the last eight weeks, along with the $72.3 million cash infusion seen in the week ended Oct. 22. Over that eight-week stretch - which included a streak of five consecutive outflows through the week ended Oct. 15 that totaled $1.706 billion, according to a Prospect News analysis of the AMG figures - net outflows have totaled $1.422 billion. That run of mostly outflows stood in stark contrast to the trend which had been seen in the eight weeks before that, from July 23 through Sept. 10. Inflows were seen in seven of those eight weeks, according to the Prospect News analysis, totaling $632.366 million.

Over the somewhat longer term, although inflows and outflows have been pretty much evenly matched during the last 21 weeks, dating back to the week ended June 18, with 10 inflows against 11 outflows, the funds have still lost a net of $1.585 billion during that time, according to the analysis, mostly due to large cash losses last month - $590 million in the week ended Oct. 15 and $471.7 million in the week ended Oct. 8 - and the massive $651.2 million outflow seen in the week ended June 25, which was the biggest single cash loss of the year. Before that had come a run of 11 consecutive weekly inflows, stretching from early April through mid-June, during which time some $3 billion of inflows were recorded, according to the analysis. Prior to April, outflows had been recorded in most weeks, with net outflows totaling around $1 billion.

But with the calendar fourth quarter now more than one-third gone, inflows, after that slow start, remain ahead, with 25 inflows versus 20 outflows seen in the 45 weeks since the start of 2008, according to the analysis. According to market sources, net inflows from the weekly-reporting funds since the start of the year, excluding distributions but including previous retroactive adjustments and revisions, are now estimated at $328.8 million, up from $43.5 million the previous week. At its peak, the 2008 net inflow totaled $1.933 billion in the week ended June 11, the final week of the 11-week run of straight inflows.

A market source meantime said that funds which report on a monthly basis rather than a weekly one showed a $763.5 million outflow on the week, which brought the net year-to-date inflow for that category down to about $2.8 billion. Year-to-date aggregate flows, combining the totals for the weekly- and monthly-reporting funds, came to $3.129 billion.

The flow of money into and out of the junk bond funds is seen as a generally reliable market barometer of overall high yield market liquidity trends - although they comprise considerably less of the total monies floating around the high yield universe than they used to - because there is no reporting mechanism to track the movements of other, larger sources of junk market cash seen in recent years such as insurance companies, pension funds and hedge funds.

Market indicators lower

The widely followed CDX High Yield 11 index of junk bond performance, which had fallen by 7/8 point on Wednesday, lost another 1¼ points Thursday, a trader said, quoting it at 80¼ bid, 80¾ offered. The KDP High Yield Daily Index meantime fell by 26 basis points to 54.64, as its yield widened by 9 bps to 15.56%.

In the broader market, advancing issues trailed decliners by a nearly five-to-three margin. Overall market activity, reflected in dollar volumes, rose about 7% from Wednesday's pace.

"The Obama rally [in the equity markets] is over, for sure" a trader opined, "and the stock market is really getting hammered. I think questions remain and there's a lot of uncertainty out there, and people are lightening up on stocks."

In junk on the other hand, he said, "it's been mixed - a little bit softer, but we're not seeing the forced selling that we had seen that really pushed the market down significantly in the early part of October." That having been said, he continued that "it feels a little heavy, feels a little soft, a little uncertain."

He saw "nothing really noteworthy today, no real big movers." He said that "we've seen a little bit of profit-taking, [after] the market traded up. There was a mad scramble the other day for guys to get in when they felt like the market was getting away from them on the upside - but it doesn't feel that way anymore."

The trader allowed that even with the overall heavier feel, "there are still opportunistic buyers at lower levels, but it has been quiet. Today has been slow - every day this week [seems to have been] getting slower and slower. We are headed into a bit of a holiday weekend, with Tuesday being Veterans' Day." U.S. fixed income markets will close early on Monday and will be totally closed on Tuesday.

Hertz stalls out

Among specific issues, Hertz Corp.'s 8 7/78% notes due 2014 were lower on very active trading - more than $35 million of the bonds had changed hands as of mid-afternoon - after it reported a steep drop in third-quarter earnings and said it will not make its previously announced earnings targets for the full year.

A market source saw those notes open at 72 bid, down about 2 points from Wednesday's close, and proceed to move down to around the 70 level, mostly on round-lot trades, and stay there pretty much all day. At one point late in the session, the bonds swooned as low as 59 bid, but did some back to close around 70, down 4 points on the day.

Hertz's New York Stock Exchange-traded shares lose 83 cents, or 12.46%, to end at $5.83. Volume of 5.2 million shares was more than double the usual turnover.

Hertz repudiated its earlier guidance, issued in August, under which it had projected full-year adjusted earnings of between $340 million and $375 million, or $1.05 to $1.15 per share, on revenues of $8.7 billion to $8.8 billion. The company said that reduced demand for rental vehicles, weaker pricing, and declining values for its vehicle fleet, some parts of which are sold when cars or trucks are taken out of service and replaced by newer models, has made it increasingly difficult to accurately forecast market conditions - leading it to abandon further financial projections.

Hertz reported late Wednesday that third-quarter earnings plunged some 89% from a year ago to $17.7 million, or 5 cents per share, from $162.7 million, or 50 cents per share.

Las Vegas Sands melts on covenant warning

A trader saw Las Vegas Sands' 6 3/8% notes due 2015 fall to 46 bid, 48 offered.

A market source said the bonds were seen having opened at 43 - well off from their most recent previous levels around 60 bid, and even off from their most recent round-lot close earlier in the week around the 51-52 level. The paper came off those initial lows, rising to around 47 in round-lot trading. However, several smaller trades late in the session pegged the closing level around 50.

Meanwhile, the company's NYSE-traded shares were seen having plunged as much as 44%, before finally ending down $3.81, or 32.68%. at $7.85. Volume of 54 million shares was six times the norm.

The bonds and the shares nosedived after the company, controlled by billionaire investor Sheldon G. Adelson, warned in an 8-K filing with the Securities and Exchange Commission that that it is in jeopardy of missing certain financial covenant requirements and needs to raise more capital.

Sands said in the filing that it does not expect to comply with its maximum leverage ratio covenant for the fourth quarter which ends on Dec. 31, and potentially afterward, unless it cuts spending on its development projects in Macau, Singapore Las Vegas and Pennsylvania, boosts earnings at its Las Vegas Strip casinos, the Venetian and the Palazzo - hard-hit by the current U.S. gaming industry downturn - and raises more capital.

The $16 billion of development projects under way in Macau - where it already operates two casino resorts, the Sands Macau and the Venetian Macau - and in Singapore, are considered crucial to the company's future, since they would attract high-rolling Asian gamblers and enhance Sands' diversification away from an overdependence on its Las Vegas properties, which are currently struggling along with other Nevada-based gaming. The company - which formerly also operated in Atlantic City, N.J. - looks to come back to the East Coast gaming market with its Sands Bethworks hotel and casino development project being built on the side of the old Bethlehem Steel Corp. works in southeastern Pennsylvania, with a planned opening set for next summer.

The company had $8.8 billion of long-term debt on its books as of the end of the second quarter on June 30, including $250 million of outstanding junk bonds. Should it default on its credit agreements, its lenders would have the right to accelerate the loan and seek immediate repayment. It said that the defaults would "raise substantial doubt about the company's ability to continue as a going concern."

Adelson, who serves as chairman and chief executive officer of the company and whose family owns 64% of its equity, stepped forward in September to resolve a similar covenant problem by loaning the company $475 million through the issuance of new 6.5% convertible senior notes due 2013.

Last month, Sands announced that it was working with an investment banking firm, which it did not identify, to develop a capital-raising program for the company, and said that Adelson and other members of his family intend to participate in the program.

New MGM issue comes off peak

Out of that same gaming sector, several traders noted that MGM Mirage's new 13% notes due 2013, which had been trading around 93 bid on Wednesday, had come down from that level. One saw the bonds at 91.375 bid, 91.875 offered, while a second quoted them at 91.25 bid, 91.75 offered.

The Las Vegas-based gaming giant had priced $750 million of the bonds at 93.132 to yield 15% last Thursday; when they were freed for secondary dealings, they immediately fell around 4 to 5 points to levels in an 88-89 context. Over the next few sessions, the bonds climbed back up, finally getting back to the 93 level on Wednesday - but were undermined by the generally soft market on Thursday and slipped back.

Among its established bonds, a market source saw its 8 3/8% notes due 2011 at 59 bid, bucking the generally softer trend, particularly among the Sands-influenced gaming credits, by actually finishing up 1½ points on the day.

Community Health hangs in

A trader saw Community Health Services Inc.'s 8 7/8% notes due 2015 at 87.25 bid, 87.5 offered, which he called "down about ¼ point or ½ point, not really off significantly."

Those bonds - which had been beaten down to around 80 from prior levels near par as the junk market careened downward in September and most of October - had languished at levels as low as the upper 70s even when the junk market went up over two sessions early last week on better market sentiment. However, once the company came out with positive third-quarter earnings around the middle of last week, the bonds began moving back upward steadily over the next few sessions, peaking at around 88 bid earlier this week.

The Franklin, Tenn.-based hospital operator's issue is regarded by some in the market as a fairly reliable barometer of overall market trends because of its benchmark size of $3 billion and widespread holding by accounts.

"A lot of people look at Community Health as a proxy - a real market-trading vehicle," the trader said. "If the market's up, that's up. If the market's down, it's down. It just trades with the flows of the market."

He added that "credit-wise, when their numbers were out, they were OK. It was down in the 70s, which was an absolute steal, and we saw huge buyers, hedge fund-type guys in trying to buy that bond down in the 70s, and now here it is back in the high 80s. I don't really expect those to sell off - unless the market comes unglued. Then you'll see them go lower again."

HCA mixed on earnings.

In that same sector, he said that HCA Inc. "had reasonable [earnings] numbers, they were OK, and the bonds kind of traded up a little bit." He said "guys were in trying to buy them."

A market source saw the Nashville-based hospital operator's 5¾% notes due 2014 up 4 points on the day at the 63 level, while another saw the bonds up more than 3½ points at that same level.

However, another source saw the company's 9 5/8% notes due 2016 down nearly 3 points at 79.5.

HCA said that third-quarter net income was $86 million, well down from $300 million in the year-earlier period. However, it should be noted that the year-ago earnings total included some $316 million of one-time gains from the sale of facilities, while the comparable figure in the latest quarter was $50 million. The latest figure also includes a $44 million impairment of assets. On an adjusted EBITDA basis, earnings in the latest quarter were $1.053 billion, versus $983 million a year earlier.

The first trader meantime said that another sector peer, Tenet Healthcare Corp.'s numbers "were terrible the other day, and the stock got crushed - but the bonds kind of held in. It was more of an equity story than a bond story, clearly, and they continue to execute their turnaround plan - so Tenet is more of a longer-term play."

While the company reported a third-quarter swing into the black from red ink a year earlier - Tenet earned $104 million, or 22 cents per share, versus a loss of $59 million, or 12 cents per share, in last year's third quarter - that profit was primarily due to a $140 million gain from the sale of its interest in health care services company Broadlane Inc. Without that one-time profit and other special items, earnings came in with a 6 cent per share loss - about double what Wall Street was expecting.

Dallas-based Tenet's 6 3/8% notes due 2011, its 9 7/8% notes due 2014 and its 9¼% notes due 2015 were all seen in a 79-80 context on Thursday.

Cablevision firmer on earnings

Also on the earnings front, Cablevision Systems Corp.'s earnings "were decent," a trader said, in seeing the Bethpage, N.Y.-based cable-TV operator and professional sports team and arena owner's bonds firmer.

"We traded a lot of the short paper today - the '09s - but we had buyers for the '12s." The latter bonds - the 8% notes due 2012 - were "up a couple" of points at 87 bid, 88 offered, although the 8 1/8% notes coming due next year were steady at 98.5.

The company earned $27.1 million, or 9 cents per share, versus a loss of $79.3 million, or 27 cents, in the year-ago third quarter, whose results were weighed down by higher charges, such as write-offs and investment and divestiture losses. It said that strong gains in its cable service - it is the fifth-largest U.S. cabler - programming and its Madison Square Garden businesses like the New York Knicks and New York Rangers sports teams contributed to the turnaround.

Cablevision also shelved plans to sell assets, at least for the moment.

Neiman Marcus takes a dive

Among the retailers, a market source saw Neiman Marcus' 9% notes due 2015 slide more than 6 points to just under 60 bid on poor October same-store sales numbers - they were down some 26.8% from a year earlier - while at another desk, the Dallas-based operator of pricy department stores' 10 3/8% notes due 2015 swooned by more than 10 points to 57 bid.

Auto bonds spin their wheels

Among the widely held automotive benchmark issues, a trader saw General Motors Corp.'s 8 3/8% bonds due 2033 down ½ point at 27 bid, 29 offered.

He also saw Ford Motor Co.'s 7.45% bonds due 2031 unchanged at 27.5 bid, 29.5 offered.

Another market source saw GM's 7 1/8% notes due 2013 at 33 bid, up 2 points on the day. However, its 7.20% notes due 2011 were down more than 2 points to the 37 level.

GMAC LLC's were off 1 point at 44, and its 6¾% notes due 2014 were down a deuce at 47.5. But its 5.85% notes slated to come due on Jan. 14 improved by more than 1½ points to 92.

A technical rally

While some saw prices lower in trading Wednesday, others said the positive technicals for junk currently persisted into Thursday, sources said.

"The market feels better," said a high-yield mutual fund manager.

It's a technical rally, the source added, noting that it is being driven by a high-yield secondary market that is oversold.

Also there is cash out there, said the investor.

"We are seeing inflows," the source added, becoming the second high-yield mutual fund manager to make such an assertion to Prospect News this week.

Market data seem to bear out this view.

AMG Data Services reported $285.6 million of inflows into high-yield mutual funds for the week ending Wednesday.

An oversold secondary market owing to massive deleveraging, in addition to built up cash positions on the buy-side as a result of ongoing coupon payments and the total absence of a new deal calendar, have sparked a technical rally in high-yield that has so far resisted downdrafts from the stock market, sources say.

The rally began early in the last week of October, a banker reckoned, noting that on Oct. 27 the high-yield index was yielding more than 19%, and in the interim came in slowly to 18 3/8% on Wednesday, and ended the Thursday session at 18½%.

"It maybe will last for another two or three days, and then reset again," the banker said.

"It's probably going to be a tough ride through the end of the year."

A high-yield mutual fund manager seemed more or less to agree.

"I would be very selective about trying to keep pace with this rally," the investor said.

"I wouldn't chase it."

BCE buzz

Market conditions are not preventing some high-yield watchers from asserting that at least some of the approximately $35 billion of bank and bond debt backing the LBO of BCE Inc. by Ontario Teachers, Providence Equity Partners and Madison Dearborn Partners is about to go on sale.

A broker in Canada on Thursday said that the dealers are about to roll out at least some of that debt soon - presumably some or all of the C$23.05 billion of bank debt - a source confided to Prospect News during a telephone conversation. The debt financing also includes $11.3 billion of junk.

This expectation is the reason why the company's stock (NYSE: BCE) outperformed the market on Thursday, closing 1.15%, or $0.35, higher at $30.68 per share, the source asserted.

Elsewhere, however, sources on both the buy-side and sell-side will only agree that the market has been buzzing about the Bell Canada debt financing for weeks.

No announcements have been forthcoming.

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