Junk mostly lower despite stock gains; auto names fall on losses; AMC, Virgin Media up on asset-sale news

By Paul Deckelman and Paul A. Harris

New York, Nov. 7 - The junk bond market and equities continued to diverge for yet another day Friday; while junk had pretty much hung in over the previous two sessions, recording only relatively small declines even as equities saw the biggest two-day post election swoon in U.S. history, on Friday stocks roared back with a vengeance - but junk was mostly lower, though on relatively light volume.

Leading the way downward were General Motors Corp. and its 49%-owned GMAC LLC financing arm, as well as domestic arch-rival Ford Motor Co., after the two auto giants reported big third-quarter losses and deteriorating liquidity positions, as if to underscore the arguments made by their respective CEOs, and that of sector peer Chrysler, in seeking a federal bailout for the beleaguered industry.

Among automotive-linked names, losers included car-rental operator Avis Budget Group Inc,, which reported poor third-quarter numbers, and used-vehicle auctioneer KAR Holdings Inc., on no news.

Among the relatively few gainers, AMC Entertainment Inc.'s bonds shot upward on the late news, disclosed in a regulatory filing, that the Kansas City, Mo.-based movie theater company had agreed to sell its Mexican unit for $315 million in cash.

Another upsider presumably helped by asset-sale news was Virgin Media Inc., which was reported to be considering the possible sale of its content unit, which includes several TV channels serving the United Kingdom.

Las Vegas Sands Corp.'s bonds bounced off the lows they had hit on Thursday on news that the Nevada-based gaming company was in danger of breaching its bank loan covenants.

In the primary arena, PNM Resources, Inc. was heard by syndicate sources to be remarketing an issue of 6 5/8% notes due 2010.

Market indicators mostly lower

The widely followed CDX High Yield 11 index of junk bond performance, which had fallen by 1¼ points on Thursday, edged up by 1/16 point on Friday, a trader said, quoting it at 80 3/8 offered, 80¾ bid. However, the KDP High Yield Daily Index meantime fell by 21 basis points to 54.43, as its yield widened by 8 bps to 15.64%.

In the broader market, advancing issues trailed decliners by a 10-to-seven margin. Overall market activity, reflected in dollar volumes, fell about 31% from Thursday's pace.

A trader said that Friday's market was "definitely more to the downside than to the upside."

He noted that "equities were up - but high yield was not, certainly not to the same extent." While the bellwether Dow Jones Industrial Average - down around 10% over the prior two sessions - shot back up by 248.02 points Friday, or 2.85%, to end at 8,943.81, and broader market indexes saw a similar rebound, junk seemed to be mostly treading water.

While he saw one of the market's main benchmark issues, the Community Health Systems Inc. 8 7/8% notes due 2015, actually up a point on the day at 88 bid, after several days of treading water around an 87 context, slightly off its recent high, he added that "it sure didn't feel like the whole market was up on the same type of movement as the CYHs - it was more of a lackadaisical day. I think people were thrilled that equities rebounded today, but the last couple of days really took a toll on people.

"A lot of market players thought that we were out of the woods, so to speak," with the U.S. elections producing a decisive victory at almost all levels for one party, the Democrats - but given the worsening economy and questions about what the incoming administration will do to tackle these problems, electoral uncertainty has been replaced by post-electoral anxieties.

"It was one of the most boring days I've ever had," a second trader opined. "It was all news - but not a lot of trading."

He further characterized the session as "a kind of a weird day. You just couldn't get a feel for anything all day." Stocks he said "were down 10% over the past two days, so they were due for a little bit of a bounce. We'll see if it follows through next week."

As for junk bonds, he said, "I think that if you check around in the Street and talk to people, [you'll find that] bonds have taken a beating here, and they're probably much more interesting [to potential investors] than stocks are now."

He said that it has long been believed that with high yield bonds, "you get paid while you're waiting - and right now that's probably more true than at any other time."

He predicted that "there will be a lot of volatility in stocks as we see the economic numbers roll out - and those numbers are only going to get worse. If you think they were bad today" - with the Labor Department reporting that U.S. employers cut non-farm payrolls by 240,000 jobs in October, the unemployment rate hitting a 14-year high of 6.5% and major companies like GM and Ford reporting big quarterly losses - we've got another couple of quarters of bad numbers coming out. Even if stocks bounce," he said, nobody would mistake the current situation for a bull market.

"On the other hand," he said, junk market investors "can wait this out, buying high yield bonds they have confidence in at deep discounts and with decent coupons.

"I think that's starting to affect the market here, in particular if they get cheap enough to where you have equity guys saying 'I might want to add some high yield bonds to my portfolio.' It's happened before - and it's usually presaged a rally in high yield."

Auto names skid on bad numbers

However, if you were looking for signs of something which might develop into an eventual rally in junk, you would be sorely disappointed looking at the movements in the automotive-sector bonds on Friday.

A trader saw General Motors' 8 3/8% benchmark bonds due 2033 at 25 bid, 26 offered, which he said was "sort of in a range. GM didn't move that much."

He also saw GMAC's 8% bonds due 2031 at 41 bid, 43 offered, "definitely off from [Thursday], by around 3 points." He said that "GM-GMAC angst" was a key area of market concern on Friday.

He also saw Ford's 7.45% bonds due 2031 "maybe a point lower" at 26 bid, 28 offered.

However, at another desk, a trader said the GM long bonds were down 1¾ points in round-lot trading at 26.5 bid, though only on $5 million of turnover.

He saw the 7.20% notes due 2011 as GM's most active issue at $20 million; the bonds were down 2 points to 35.5 bid.

He also saw GMAC's 8s at 41 bid, down 2½ points, though with only $5.5 million traded. The most active GMAC issue, he said was its 5 3/8% notes scheduled to come due next May, a "very short piece of paper," that was down 3 points to 78 bid on $6 million of volume.

He further saw Ford's 7.45s lower by ½ point lower at 27.5 bid, on $9.5 million traded, while Ford Motor Credit Co.'s 7 3/8% notes coming due in next October were at 78 bid on a round-lot basis, versus 79.125 on Thursday.

Yet another trader saw the GM long bonds down 2 points at 25 bid, 27 offered, while Ford's were unchanged at 27.5 bid, 29.5 offered.

A market source saw the GM benchmarks as low as 24.75 bid, down some 3½ points on the session, while the Ford issue was a point lower at 27. The source saw other GM issues off by 3 points, like the 7.20s, pegged at 34.5 bid, as well as the GMAC 8s, at 40.

Detroit-based GM, the nation's largest automaker, said that it had suffered a net loss of $2.5 billion, or $4.45 per share during the third quarter, compared with a record-setting loss of $39 billion, or $68.85 per share, a year ago. However, revenue slid to $37.9 billion from $43.7 billion, due largely to a world-wide credit freeze-up.

The red ink was greater than Wall Street's consensus expectations of a loss of about $3.70 per share on sales of just over $39 billion.

Factoring out unusual items, its adjusted loss in the latest period was $4.2 billion, or $7.35 a share, including an adjusted loss of $2.8 billion for its automotive operations.

GM also warned that it was burning through its cash position at a significant rate and could run out of cash next year absent government help - even with a series of potentially money-saving measures which it announced Friday, including the indefinite layoff of some 3,600 workers beginning early next year, as it slows production at 10 assembly plants.

GM said it had $16.2 billion in cash, marketable securities and readily available assets as of the quarter's end at the end of September - a $4.8 billion deterioration from the $21 billion cash cushion it reported on June 30.

GM had been eyeing an acquisition of Chrysler LLC in order to get hold of the roughly $11 billion of cash which its smaller rival has on its balance sheet - but those talks with Chrysler owner Cerberus Capital Management LP had stalled out in the absence of any offers of up-front merger aid from Washington, and GM said Friday that it was suspending those talks.

Meanwhile, Ford reported a $129 million third-quarter net loss, including a pretax loss from its global automotive operations of $2.9 billion for the quarter, far wider than the $362 million deficit a year earlier. The smaller Ford's cash-burn for the quarter was even greater than bigger rival GM's at $7.7 billion.

Ford announced plans to cut more than 2,000 additional white-collar jobs.

The expectations of higher cash-burn caused Standard & Poor's to cut GM's ratings, as well as those of GMAC and the latter's fully-owned Residential Capital LLC; it GM's corporate credit status one notch to CCC +, cut GMAC two notches to CCC and also cut ResCap two notches to CCC- .

"We expect cash outflows to quickly reduce the company's liquidity during the next few quarters, perhaps to levels that would force GM to consider a financial restructuring, even if it does not file for bankruptcy," S&P warned.

Moody's Investors Service meantime cited similar concerns in cutting Ford's corporate family and probability of default ratings one notch to Caa1 and cutting Ford Credit's slightly better rating by one notch to B3.

Avis off on loss, debt warning

Among other automotive-related names, Avis Budget Group's bonds fell after the Parsippany, N.J.-based Number-Two rental-car company posted a big third-quarter loss and warned of possible non-compliance with financial covenants in its debt accords.

A trader saw Avis' 7 5/8% notes due 2014 at 35 bid, down from 38 on Thursday, while its 7 ¾% notes due 2016 fell to 33.125 bid from 35.875 previously.

Avis's loss follows by a day losses in the bonds of larger rival Hertz Corp., which warned that it will miss previously announced earnings guidance for the full fiscal year.

Avis late Thursday reported a loss of about $1 billion in the third quarter, much of it on writedowns. That red ink matched preliminary results released by the company on Oct. 28.

Avis also said Friday that it may be unable to comply with its financial covenants, citing the drop in rental car demand and increased borrowing costs related to fleet financing. Avis said that it plans to seek an amendment to the covenants to relax some of their requirements

A trader meantime saw used-vehicle auction operator KAR Holdings' 10% notes due 2015 as "a big mover," a trader said, "down 12 points since Tuesday" to 45.5 bid on no fresh news about the Carmel, Ind.-based company.

Sprint off after it reports loss

Outside of the autosphere, a trader saw Sprint Nextel Corp.'s bonds off after the Overland Park, Kan.-based wireless telecommunications company reported a swing into the red in the third quarter, and more subscriber losses.

He saw its 6% notes due 2016 fall to 68.75 bid from 70 previously, labeling the drop "no big surprise." Sprint's 7 5/8% notes due 2011, however, were up ¼ point on the day to 85.5, "so go figure," he said.

Number-Three U.S. wireless operator Sprint Nextel lost $326 million, or 11 cents per share in the third quarter, versus its year-ago earnings of $64 million, or 2 cents per share.

Sprint Nextel also reported that its subscriber base fell by 1.3 million in the quarter, as customers abandoned the carrier for bigger rivals like AT&T/Cingular and Verizon Wireless. That figure includes 1.1 million valuable "postpaid" customers who have regular monthly contracts.

AMC up on asset sale

On the upside, AMC Entertainment's 8% notes due 2014 were seen better by 5.5 points to 74 bid. That rise coincided with the news that the company - one of the largest movie theater operators in the United States - has agreed to sell its wholly-owned Cinemex unit, which operates 44 theaters in Mexico, to Entretenimiento GM de Mexico SA de CV.

According to a filing late Friday with the Securities and Exchange Commission, AMC said that the AMC subsidiaries and affiliates which own Cinemex and a related company, Symphony Subsisting Vehicle, will be paid $315 million, which was decreased by about $77.5 million - the approximate amount of Cinemex's net funded debt as of Sept. 30. The exact amount of net funded debt will depend upon the unit's cash and cash equivalents at the closing, which is expected within 60 days, as well as the exchange rate between the U.S. dollar and the Mexican peso.

Separately, AMC's chairman, president and chief executive officer, Peter C. Brown, was named chairman on Friday of Midway Games Inc., the money-losing video-game company controlled by media tycoon Sumner Redstone, after Redstone's daughter Shari resigned the chairman's post to focus her attentions on refinancing efforts at the Redstone family's National Amusements Inc. Brown - who will continue to hold his multiple executive posts at AMC - has been a member of Midway's board since 2005.

Virgin Media gains

A trader also saw Virgin Media's bonds as "a surprising upside mover" with the British television company's 9 1/8% notes due 2016 at 75.5 bid, up from 72.75 on Thursday, with $12 million of bonds changing hands.

Virgin Media's 8¾% notes due 2014 were "up significantly," he said, at 78.25, a gain of more than 4 points on the day.

The bonds may have been helped by a report in the Financial Times that Virgin may sell its content division, including the U.K. television channels Virgin 1 and the oddly-named Dave - so called, the company said, because "everybody knows a bloke named Dave."

The paper said that talks about the possible transaction have taken place among board members and with at least one large shareholder.

The paper cautioned that such talks are at an early stage and no buyer is being actively sought yet.

Virgin Media had no immediate comment.

Las Vegas Sands bounces a little

A trader said that Las Vegas Sands' 6 3/8% notes due 2015 were "a surprise on the upside, given the continued bad news about the company." He saw them "actually moving higher" to 48.5 bid, from 47 late Thursday.

The company's bonds had fallen into the 40s Thursday from prior levels around the 50s after it disclosed in an SEC 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 company was reported in talks Friday with banks in Singapore and Hong Kong, aimed at ensuring continued liquidity to keep the $16 billion of Asian development projects on tract.

Shut-out week

The primary market remained quiet Friday as it had throughout the first week of November.

The last deal to price was MGM Mirage's $750 million issue of 13% five-year senior secured notes (Ba1/BB) which came at 93.132 to yield 15% on Oct. 30.

Precision Drilling Trust could launch a $400 million offering of debt securities via RBC Capital Markets and Deutsche Bank once it wraps up its $1.2 billion bank deal which launched last Tuesday, a market source said.

The Calgary, Alta.-based provider of energy services to the oil and gas industry is acquiring Grey Wolf Inc.

A source close to the deal said that it seemed like a reasonable enough assumption, keeping in mind that the now-customary "market conditions" caveat pertains.

Elsewhere PNM Resources, Inc. launched a remarketing of its 6 5/8% senior notes due Nov. 16, 2010 (Ba2/BB-/BB) on Friday, according to informed sources.

No official price talk was available.

However, PNM Resources' 9¼% senior notes due May 15, 2015, which were issued back in May, were spotted Friday at 82½ bid to yield approximately 13½%, one source said.

The remarketed 6 5/8% notes might reasonably be expected to come at a premium to the 9¼% notes, the source added.

Citigroup is leading the deal which is being run off the high grade desk.

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