First Data falls on numbers; Nortel still languishes; Unisys partially rebounds; Catalina bridge rolls to bonds

By Paul Deckelman and Paul A. Harris

New York, Nov. 14 - High yield was seen broadly lower on Friday, although traders said the decline was relatively restrained - especially in the wake of yet another big stock market decline that accelerated late in the session.

First Data Corp.'s bonds moved lower in active trading, pushed downward, market participants said, by investor response to a sharply wider third-quarter loss for the electronic transaction processing company versus its year-earlier results.

Elsewhere, Nortel Networks Corp.'s bonds - which have been getting drubbed all week on response to poor earnings figures released Monday by the Toronto-based telecommunications equipment producer - continued to have trouble gaining traction, with all of this issues gyrating around on either side of the 30 mark.

High-tech solutions provider Unisys Corp.'s bonds - which were quoted sharply lower on Thursday, despite a lack of fresh news about the Blue Bell, Pa.-based company, thanks to several large-block trades that dropped the debt notably - had recovered at least part of those losses on Friday.

In the primary sphere, ION Geophysical Corp. was heard to be bringing a new five-year notes deal to the market soon.

There was also a junk-rated LBO financing transaction as Catalina Marketing Corp.'s bridge loan rolled into bonds.

Market indicators mostly lower

The widely followed CDX High Yield 11 index of junk bond performance, which had risen by ¼ point on Thursday, lost 1/8 point on Friday, a trader said, quoting it at 79 3/16 bid, 79 9/16 offered. The KDP High Yield Daily Index meantime fell by 50 basis points to 52.16, as its yield widened by 20 bps to 16.23%.

In the broader market, advancing issues trailed decliners by a better than five-to four margin. Overall market activity, reflected in dollar volumes, rose 34% from Thursday's pace.

A trader said "we opened up a little bit off the highs from [Thursday's] close." But "even as the stock market sold off this afternoon, our market held in, unchanged to a little bit softer."

While the junk indexes were in fact not much changed, stocks fell sharply, with the bellwether Dow Jones Industrial Average - which had jumped around 550 points on Thursday - gave back 337.93 points, or 3.82%, to end at 8,497.31, while broader market indexes also moved lower. The main cause of the retreat was described as profit-taking, along with technical factors like hedge funds selling ahead of a looming Saturday deadline for investors to withdraw their money, on top of the latest weak economic data - a 2.8% October decline in retail sales - and investor angst about the growing roster of companies seeking federal bailouts, including troubled automotive giants General Motors Corp. and Ford Motor Co.

The trader said that "we had a couple of bid wanteds [lists], again, but we also had some 'offer wanteds,' we had a couple of customers in looking" to buy. "So we saw some decent two-way flows. There were guys looking to sell some stuff and pare down positions - not wholesale liquidations, but looking to clean up here and there, and we did see a decent amount of interest, surprisingly. There were guys looking to put some money to work."

He estimated overall that the market was down perhaps ¼ to ½ point from its Thursday highs.

But a fund manager commented: "It's very quiet. You certainly can't sell anything, but you can't really buy anything either - at least not in size."

First Data off on numbers

First Data's bonds were seen by a market source as one of the most actively traded issues on the day, with over $25 million of its 9 7/8% notes due 2015 having changed hands as of mid-afternoon, outpacing most other bonds.

The source saw the bonds down more than 5 points on the session at 61 bid.

The Denver-based electronic commerce transaction processing company posted a third-quarter net loss and loss from continuing operations of $164.5 million, versus a year-earlier $28.7 million for both. However, the company pointed out that the latest big loss included $270 million of incremental interest expense, net of tax, and $124 million of incremental depreciation and amortization, net of tax, compared to the third quarter of 2007.

Unisys partly rebounds from plunge

A market source saw Unisys' 6 7/8% notes due 2010, which swooned down to the mid-to-high 40s on Thursday from prior levels in the mid-60s, coming back to the mid-50s on Friday.

A trader said that "a lot of tech names have been under pretty decent pressure" lately, blaming the downturn on the slowdown in the global economy. "I didn't see anything specific about Unisys, but I know that names like Flextronics and Amkor, and the chip manufacturers, have come under tremendous pressure."

Another trader saw the bonds at 53 bid, 55 offered. He said that "one big trade [Thursday] knocked them way down, now they're starting to come back again today."

After that initial trade took the bonds all the way down to the 45 level from around 68, where they had previously been settled, several other traders took place in that same 44-46 context, assuring that the bonds would end there.

Another market source said that while those trades were all $1 million-plus transactions, a series of smaller trades late in the day pushed the bonds down further to as low as the 37.5 level. However, several large-block trades Friday afternoon lifted the bonds back into the mid-50s.

Nortel still struggles

A trader said that Nortel Networks' bonds "rebounded a little bit" after their fall on Thursday, seeing the company's 10 1/8% notes due 2013 and 10 ¾% notes due 2016 coming back from their low levels around 27 to a 28-29 context, "and I think they ended up doing better than that, on the day."

However, at another desk, a market source saw the 10 1/8s lower on the day, falling to 30 bid from late-Thursday levels around 34, while the 103/4s were little changed on the day around 27.75 bid

The telecom equipment maker's floating-rate notes were likewise steady around the 30 bid level to which they had tumbled on Thursday.

Nortel's bonds have struggled since Monday, when it released poor third-quarter numbers. On Thursday, an RBC Capital Markets analyst warned that the company faced the prospect of running out of money and said that a bankruptcy filing was "a distinct possibility."

Auto bonds mixed, credit issues firmer

A trader said "we continued to see better sellers of Ford and GMAC paper," adding that "that stuff was continuing to come out, particularly the shorter maturities, the '09s and whatever. People are panicked," with "anything in the 70s or 80s getting a pretty good offer."

Another trader saw GMAC LLC's 8% bonds due 2031 unchanged at 35 bid, 37 offered, while GM's 8 3/8% bonds due 2033 were likewise unchanged at 23 bid, 25 offered.

At another desk, a trader said the GM long bonds were unchanged at 22 bid, 24 offered, while Ford's 7.45% bonds due 2031 were down ½ point at 25 bid, 27 offered.

A market source saw the GM '33s up a point at 23, after seeing the bonds gyrate between lows around 20 and highs around 26, while the Ford benchmark issue was also up by a point at 25 bid, 27 offered.

Among other GMAC and Ford Motor Credit Co. issues, GMAC's 7% notes due 2012 were seen up ½ point at 44 bid, and its 6 7/8% notes due 2011 were quoted 2 points better, also at the 44 level, although GMAC's 6 5/8% notes due 2012, likewise at the 44 mark, were seen having lost a point on the day.

Ford Credit's 7.80% notes due 2012 gained 2 points, to 54 bid, while its 8% notes due 2016 were up slightly, to 52 bid.

With investors worrying that the carmakers may run out of gas - or at least, out of cash - some time in the near future, efforts to craft federal relief for the embattled auto industry remained stalled heading into the weekend, with Congressional Democrats seeking loans of at least $25 billion, or even as much as $50 billion, for Detroit, with the money to come out of the $700 billion Troubled Asset Recovery Program. However, the White House is resisting the idea, saying that TARP should be only for financial services companies, as originally intended, and suggesting that Congress free up some $25 billion in loans already earmarked for the carmakers, which is being held up by the requirement that they cannot receive the money until they have already invested in advanced technology to produce more fuel-efficient cars. The president wants to waive that requirement, but Capitol Hill Democrats are reluctant to backtrack on their stated goal of pushing Detroit to invest in energy-saving technology.

GM bankruptcy - no big deal?

Meanwhile, with a number of analysts having speculated that GM will rapidly burn through its remaining cash and could face possible insolvency sometime in the coming year absent a government bailout soon, a Citigroup executive suggested Friday that the debt markets have already priced in a potential failure by the Detroit-based auto giant.

Marc Heimowitz, a director at Citigroup Global Markets, told attendees at a distressed investment conference Friday in New York that unlike the case of Lehman Brothers Holdings Inc., whose sudden collapse shocked the financial markets back in September and threw those already-fragile markets into a tailspin from which they have yet to recover, GM's slide into oblivion has been obvious for some years as it has lost market share and its finances have weakened, driving its shares and bonds progressively lower, and such a final development likely would not come as a terrible shock or badly hurt the debt markets.

Instead, he likened the erosion of GM's standing to "a slow, big car wreck," and said it had already been priced into its bonds - the long-dated issues of which now trade in the low 20s - and the prices of its credit-default swap contracts protecting the holders of its debt against a possible default, which have ballooned sharply outward in recent days.

Heimowitz said that at Citi, "we've already marked our books, [and] other dealers have marked their books. The incremental loss is not that large."

But not everyone is so sanguine about the prospect of a GM failure. Billionaire financier Wilbur Ross said in a CNBC interview Friday that "this notion that letting GM go bankrupt as an alternative to government financing is wrong," saying such financing to help GM is "essential" to restoring investor confidence in the financial markets. Letting GM go down the tubes, he said, "simply doesn't work."

Ross - who over the past several years has been accumulating auto parts-making assets through his International Automotive Components Group, buying units from companies like Lear Corp. and the failed Collins & Aikman and taking major stakes in other sector companies like Safety Components International and Oxford Automotive - warned that if any of the Big Three automakers were to go bankrupt, auto parts suppliers who sell to them would ultimately end up in bankruptcy too.

He said that the suppliers employ some three-quarters of a million workers - four times as many as the total number employed by the Big Three. A bankruptcy by GM or any of the other big carmakers, Ross said, would force the affected supplier companies to write off a very large chunk of their sales and would cause some to have to close, which in turn would affect production at the remaining carmakers and then knock even more suppliers down in "a vicious cycle."

Healthcare a little less robust

A trader said that healthcare paper "continues to get slapped around a little bit," quoting the Community Health Systems Inc. 8 5/8% notes due 2015 - considered something of a benchmark bond for the junk market and a proxy for overall market moves - at 85.5 bid, 86 offered, which he called down "probably a point or so on the week, just on general market weakness."

Gaming names stand pat

A trader saw Wynn Las Vegas LLC's 6 5/8% notes due 2014 unchanged at 73.5 bid, 75.5 offered, apparently little moved on the news that the Nevada-based gaming concern had raised nearly $350 million via an equity sale, moving an upsized 8 million of shares at a better-than-expected $43.50 per share. A portion of the proceeds could be used to take out debt, the company said.

Also in that sector, traders saw little additional movement in Las Vegas Sands Corp., whose 6 3/8% notes due 2015 were trading around the 60-61 mark seen on Thursday, after having been in the 40s previously

A trader said he had not seen much movement in gaming, since "people were laying low" as they tried to figure out which way the sector was going.

The week ahead

No new issues priced on Friday.

Other than the conversion of Catalina Marketing Corp.'s $490 million high-yield bridge loan into two tranches of notes (Caa1/B-), the holiday-shortened Nov. 10 week saw no new issues.

However the week ahead holds at least a slight amount of promise for the primary market.

With its $1.2 billion bank deal in progress Precision Drilling could come during the Sept. 17 week with its $400 million of debt securities, a market source said.

Proceeds are slated to help fund Precision's acquisition of Grey Wolf Inc.

RBC Capital Markets and Deutsche Bank are leading the debt financing.

Elsewhere on Friday, ION Geophysical announced a $175 million offering of five-year senior notes, which Standard & Poor's rated at BB- earlier in the week.

Proceeds will be used to repay debt incurred in ION's acquisition of ARAM Systems Ltd. and related companies in September 2008.

ION has a commitment from Jefferies Finance LLC for a $150 million senior bridge loan facility that would be drawn down if its attempts to raise other long-term debt, including the high-yield notes, is not successful.

Cash coming in

On Thursday AMG Data Services reported $157.1 million of inflows to the high-yield mutual funds for the week to Wednesday's close, the third inflow seen in the past four weeks, according to market sources.

That news jibes with cash flows lately seen by a high-yield mutual fund manager who spoke to Prospect News on Friday.

Cash is moving into high-yield bonds from stocks, the source said, adding that beaten up though they may be high-yield bonds are currently seen as safer than stocks, while still providing equity-like returns.

The buy-side is sitting on a greater-than-normal amount of cash, the investor said, adding that although cash is lately coming in the buy-side must remain wary of redemptions, given the present volatility in the capital markets.

The source reckons that the buy-side is currently sitting on a percentage of cash in the high single-digits, whereas in normal times it might maintain a 3% to 5% cash reserve.

Unusual measures

The high-yield mutual fund manager has been uninterested in the primary market since late summer, and may remain so for the next six months.

Ordinarily a buy-and-hold investor, lately this source has been on the lookout for beaten down bank loans and junk bonds - not hard to find - and opportunistically selling into rallies.

"You have a choice between catching them as they fall or chasing them higher," the investor said, stating a preference for the former.

The source acknowledged harboring disdain for fast-money plays in ordinary circumstances, but added that present circumstances in the leveraged markets are anything but ordinary.

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