Mostly easier junk market takes back seat to Bear, whose bonds bounce; Thornburg lower, Chiquita gains

By Paul Deckelman and Paul A. Harris

New York, March 17 - Junk bond market activity fell off on Monday as high yield players continued to hug the sidelines in the wake of the momentous developments shaking the U.S. financial industry - the decision by the beleaguered Bear Stearns Cos. Inc. to end 83 years of independence and put itself under the protection of larger rival J.P. Morgan Chase for just a tiny fraction of what Bear was worth as recently as Friday.

That sobering news - that the once-powerful investment bank had become the latest victim of the credit crunch going on since last summer - cast a pall over the financial markets generally, including high yield, where most names were seen off a point or two and upsiders were relatively few and far between.

The major exception to that rule was Bear Stearns' own bonds, which last week had fallen to lows more appropriate for distressed junk than for a nominally investment-grade credit. While Bear's stock was getting thoroughly clawed, its bonds were rising smartly.

With financial names other than Bear's debt especially feeling the pinch, Thornburg Mortgage Inc.'s bonds - which had pushed strongly upward a week earlier - were continuing a retreat that began on Thursday. Realogy Corp. was also notably lower, in active trading.

Outside of mortgage- and real estate-related names, Ford Motor Credit Co. was a notable loser.

Chiquita Brands International Inc. was one of the few names seen definitively moving to the upside, though there was no fresh positive news out on the Cincinnati-based fruit and vegetable importer.

Primary activity remained virtually nil.

Market indicators point south

A trader saw the widely-followed CDX index of junk market performance having eased ¼ point Monday to 86¼ bid, 86¾ offered. Meanwhile, the KDP High Yield Daily Index dropped 0.41 to end at 72.04, while its yield jumped out by 11 basis points to 10.16%.

In the broader market, declining issues led advancers by a five-to-two margin. Overall activity, reflected in dollar volumes, fell by nearly 18% from Friday's already reduced levels.

A trader said that the market was down around a point or two "until stocks turned around [late in the session] and went into positive territory - not that high yield necessarily regained all of their losses, but there certainly was less pressure on the sell-side by accounts to get out of paper once they saw the relief in the stock market." The bellwether Dow Jones Industrial Average, down nearly 200 points early on, came back later in the session to actually gain 21 points, on investor hopes that the Federal Reserve will deliver a huge 100 bps cut in its federal funds target when the central bank's policy-setting committee meets Tuesday.

"So we did not rebound in sync with equities, but there was sort of a pullback in the selling pressure once equities did rebound."

But the shocking fall of the venerable and once-formidable Bear Stearns was the prime topic of market attention, even in junk bond land, for most of the session. A trader said "people are watching CNBC and wondering how they're going to make their house payment, or which of their friends is going to be out of work."

The junk market, another trader said "was crappy today," because "most people were still watching Bear Stearns." He estimated that "pretty much the whole market was down a point or two points."

Bear bounces back

Even veteran junk traders used to big price swings in volatile credits were impressed by the gains notched by Bear's own bonds, which have recently been quoted around a few junk desks.

One such trader - who on Friday had seen the company's 2 7/8% notes coming due this July trading down at the 77 level, for a bloated yield of over 100% - rhetorically asked "how funny is it that now they're trading at 94.5-95?" Buying at the lower level the bonds hit during Friday's turmoil should have been "a no-brainer," he said.

It was not just those short-dated bonds that zoomed back upward on the weekend news that J.P. Morgan will buy Bear Stearns for about $240 million, or $2 per share - a 93% discount from its $30 per share closing price on Friday, which itself represented a 47% decline in price at Thursday's close. While Bear Stearns' shares lost nearly 84% of their remaining value on Monday, or $25.19, ending at just $4.81, the company's bonds were moving strongly in the opposite direction. Its 7¼% notes due 2018, which had fallen to 79 bid on Friday, jumped to as high as 96 on Monday before coming off that peak level to still close up some 12 points on the session at 91. Its 6.4% notes due 2017 got as good as the 91 level before falling back to finish still up some 7 points on the day at 86 bid.

Thornburg back on the slide

Alas for the junk financial names, Bear Stearns had nothing in the way of coattails that might help them. A trader saw Thornburg Mortgage's 8% notes due 2013 at 37 bid, 40 offered, down 7 points on the day.

A second trader also quoted them that low - but another trader said that while the bonds were indeed being quoted that low, he had not seen any actual trades in them at those levels. He did see some trading happen around the 40 bid mark. Another market source estimated the bonds at 40, calling them down nearly 6 points on the session.

A week ago, those Thornburg bonds had begun an amazing comeback from their earlier battering that had beaten them down to 28 bid from prior levels near 90. From that nadir at 28, they had soared as high as 50 bid by mid-week, helped by investor belief that the earlier slide - triggered by news of big margin calls against the Santa Fe, N.M.-based mortgage company's short-term mortgage-backed borrowings - had been overdone. Thornburg also said it would work with its banks in order to address all of its margin calls. But the bonds had fallen back to around 44 bid on Thursday, on news that Morgan Stanley had filed a notice of default against Thornburg. The bonds went nowhere on Friday, but turned decidedly southward on Monday.

ResCap, Realogy in retreat

In that same mortgage sector, a trader saw Residential Capital LLC's 6% notes coming due this year at 68 bid, 62 offered, while its 6 1/8% notes due 2008 were at 63 bid, 65 offered, although he only saw "little bits and pieces."

It was his understanding that "the bonds weakened on refinancing situations."

Another trader saw ResCap's 6½% notes due 2013 down 1½ points to 43.5 bid, 45.5 offered, and quoted ResCap parent GMAC LLC's 8% bonds due 2031 a point lower at 66 bi8d, 68 offered. ResCap's 8 7/8% notes due 2015 were off a point at 45 bid.

Parsippany, N.J.-based real estate operator Realogy's 12 3/8% notes due 2015 were seen actively trading at lower levels before ending down some 3 points on the day at just under the 47 mark. Another market source pegged those bonds down more than 4 points on the day at 45.5.

Apart from real estate and mortgage-related names, a notable decliner was Ford Motor Credit, particularly after a Credit Suisse analyst had some negative things to say about its prospects. A market source saw Ford Motor Co.'s finance unit's 7% notes due 2013 down a point at 75 bid, while at another desk, a market source saw those 7s down more than 3 points on the day to end below 73. Its 9¾% notes due 2010 lost some 1½ points to close at 86. Both bonds were actively traded.

Credit Suisse analyst Mark Altherr said in a research piece that with the weakening economy likely to further depress new-car sales, both parent Ford and its credit arm will come under increased pressure.

"When people are more concerned about meeting every day expense requirements, the last thing they are thinking about is buying a car," he declared.

He said that while Ford Credit's liquidity is sufficient to tide the company over in the near term, any kind of extended and severe economic slowdown could spell trouble, since Ford Credit "depends on its cash as well as private and public financings both secured and unsecured," and "should this access [to capital] be unavailable, and it increasingly appears shaky, we expect that Ford Motor credit will [have to] use its cash as well as maturing receivables to make new loans."

A trader saw Ford's 7.45% bonds due 2031 down ¼ point on the day at 62.5 bid, 63.5 offered, while its larger domestic arch-rival General Motors Corp.'s benchmark 8 3/8% bonds due 2033 were 1½ points lower at 68.3 bid, 69.5 offered.

Chiquita up - but why?

Outside of the auto realm, some strength was seen in Chiquita Brands, whose 7½% notes due 2014 were seen nearly a point better at just below the 83 bid level, while another source who saw those bonds at that level called that a nearly 2 point gain.

But there was no fresh positive news seen out Monday on the company, which last week was named as a defendant in a federal lawsuit filed by relatives of U.S. missionaries killed in Colombia; they claim that the company contributed to the men's deaths by financing the leftist rebel group known as FARC. Chiquita claims that FARC extorted those payments out of it and that it paid the money reluctantly and involuntarily to ensure the safety of its employees in Colombia and their family members.

Primary stays quiet

The primary market, unsurprisingly, produced no news during the Monday session.

As the second half of March got underway only one high yield bond deal was on the road.

FairPoint Communications Inc. is marketing a $540 million offering of 10-year senior unsecured notes (B3/B+), a merger deal via Banc of America Securities, Lehman Brothers and Morgan Stanley.

An informed source confirmed that the FairPoint bonds are expected to price during the post-Easter week.

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