SunGard sells seven-year deal, bonds jump; fallen financials dominate trading; VeraSun up on alternatives

By Paul Deckelman and Paul A. Harris

New York, Sept. 19 - One of the most incredible weeks in the history of the financial markets drew to a close on Friday, going out not with a whimper but with a bang - a huge two-day stock market relief rally, with investors' spirits suddenly lifted by the prospect that the federal government will step up and move to take toxic loans off the books of banks and other financial institutions - loans that in one form or another have dragged down such companies as the now-bankrupt Lehman Brother Holdings Inc. and the shaky Washington Mutual Inc., and which helped to kill off Bear Stearns Cos. altogether earlier this year.

Lehman's bonds, WaMu's and those of the still nominally investment-grade Morgan Stanley again dominated corporate bond trading on Friday; whatever the ratings, all three, plus American International Group Inc. now routinely trade off junk desks at many shops, and the names have even attracted the attention of distressed-debt investors. The faltering financials were seen higher on the wave of possibly irrational exuberance which overtook the equity markets on the government debt-plan news.

The junk market had its own big news on Friday, as SunGard Data Systems Inc. successfully priced a $500 million offering of senior notes - the first sizable deal in many weeks for a junk market which had seen its primary side almost completely dry up in the wake of the horrific shakeout that the credit markets generally and the financial sector specifically have lately been going through. Market players were heartened even further when they saw the new bonds - which had priced at a discount to par - shoot up by several points when they were freed for initial secondary dealings.

Back among the established non-financial issues, the overall market optimism was mirrored in gains of several points by such junk bellwethers as General Motors Corp.

VeraSun Energy Corp.'s bonds were seen solidly higher, in line with a jump in the Brookings, S.D.-based ethanol producer's shares, after it said that it would evaluate its strategic alternatives, which could include the sale of the company. But sector peer Aventine Renewable Energy Holdings, Inc.'s bonds were off after a downgrade by Standard & Poor's.

SunGard sells, rises

The primary market burst to life on Friday with SunGard Data Systems pricing a downsized $500 million issue.

The bonds traded sharply higher on the break.

With the phenomenal strength in equities during the final two days of the Sept. 15 to Sept. 19 week, underwriters saw an opportunity to roll out the deal quickly. Although SunGard was expected September business, it had been parked on the apron for some time owing to capital markets volatility.

Elsewhere a high-yield syndicate official said the broad market traded higher on Friday.

Meanwhile a trader who works for a high-yield mutual fund said that junk was likely 2 points to 3 points higher on the day, but added that his measure factored double B credits being unchanged while single B and lower quality credits were up 3 points to 5 points.

"Right now it's very technical market," said the trader.

"You've got the loans that Lehman Brothers had out. And there are a lot of technical offer lists, and hedge funds scrambling to cover shorts.

"There are dealers unloading inventories as they merge companies.

"It's very technical.

"It's tough to really gage where the real levels are out there because there are so many forces that have to buy or have to sell."

However all hands attributed the late week strength in junk, as well as the stock market, to the belief that the U.S. government will create a Resolution Trust Corp.-style entity to systematically deal with the bad debt that has been poisoning the credit markets.

"Clearly the markets love that response," a high-yield syndicate official said.

"Also banning short-selling, which may not be totally fair, clearly had a big impact as well."

SunGard oversubscribed

SunGard Data Systems priced a downsized $500 million issue of 10 5/8% senior notes due May 15, 2015 (Caa1/B) at 98.852 to yield 10 7/8% on Friday, according to an informed source.

The yield came in the middle of price talk of 10¾% to 11%, with an original issue discount.

The source said that the order book was two- to three-times oversubscribed, and added that the deal went very well.

The bond issue was downsized by $200 million, with that amount shifted to the credit facility.

Goldman Sachs, Citigroup and Lehman Brothers Capital Markets (notwithstanding the bankruptcy of parent, Lehman Brothers Holdings, Inc.) were joint bookrunners for the Rule 144A/Regulation S with registration rights transaction. KKR Capital Markets was the co-manager.

Proceeds will be used to fund the acquisition of a majority stake in GL Trade.

Sources around the market noted that the new SunGard paper shot up on the break.

Shortly after the terms surfaced a trader spotted the 10 5/8% notes due 2015 at 100 7/8 bid.

A little later a syndicate official, not in the deal, said that the new SunGard paper was up two points at the break: 100¼ bid, 100¾ offered.

SunGard was the only deal to price during the week, and the first deal to price since Frontier Oil Corp. priced a $200 million issue of 8½% senior notes due 2016 on Sept. 12.

Cheap to existings

If the buyers of the new SunGard notes got a bargain, holders of the existing paper appeared to get something of a bath, according to sources.

One sell-sider, noting that the Friday session had seen a fair amount of trading compared to earlier in the week, said that the SunGard 9 1/8% notes due 2013 were seen late in the session at 97¼ bid while SunGard's 10¼% senior subordinated notes due 2015 were at 96¼ bid, both down a point or so since the time of the new deal announcement.

Another sell-side source said the SunGard 9 1/8% senior notes had been 99 bid in the morning, but closed the Friday session off 1¾ point at 97¼ bid.

A source close to the deal pointed out that the new bonds came cheap to the existing paper, which traded down to make room.

Primary could reopen

Although the preponderance of primary market sources who spoke to Prospect News on Friday maintained the view that new issue activity is unlikely during the week ahead, one syndicate official - having the benefit of seeing the SunGard print as well as the trail the notes were blazing in the aftermarket, late Friday - thought that primary market activity is possible, especially during the latter part of the week ahead.

"We heard today from some of the accounts that they will begin to look at some new issues next week," the source said.

"It all depends upon how the week starts, and whether volatility subsides a little.

"But we take that as a good sign...a sign that the new issue market may open up sooner than we thought."

This official warned, however, that should the markets remain volatile, new issue activity would be unlikely.

"The fact that you have a lot of forced selling on the Street is killing people," the source said.

"Paper needs to find a home."

New SunGard bonds shine

When the new SunGard 10 5/8% senior notes due 2015 were freed for secondary dealings, the bonds immediately began moving northward from their 98.852 issue price, with a trader late in the day seeing them settle in at 101.5 bid, 102 offered.

A trader at another shop declared that "the highlight in this market, if there is one, is that we were able to market a new issue, and the SunGards are up from their starting point. That's significant. They [investors] liked it."

Market barometers move up

The widely followed CDX index of junk bond performance, which rose 1½ points on Thursday, was up by a similar amount on Friday, a trader said, quoting it at 93¼ bid, 93¾ offered. The KDP High Yield Daily Index soared by 72 basis points to end at 68.53 as its yield tightened by 18 bps to 11.17%.

In the broader market, advancing issues led decliners by a better than three-to-two margin. Activity, represented by dollar volume, fell by 16% from the levels seen on Thursday.

A trader characterized Friday's session as "a wild and wooly day. A lot of things moved around pretty well."

Another said that "some of the stuff is like a yo-yo" due to its volatile nature of late.

"There definitely was a better tone," a third trader said. "You have much fewer sellers in this kind of environment. Why is someone going to stick their bonds out at a price, only to have them close two points higher?"

He said that "you have some day trading going on, but again, this is really being fueled by short-covering, and money that's been sitting on the sidelines for a few weeks."

He continued that "there was definitely a euphoria here in the market. You've got guys putting money to work and you have investors covering shorts, and it's a snowball effect that creates these kind of gaps, of multiple-point boosts."

"Obviously, some buying came with the financials," yet another said, "so all that stuff was up. Accounts which normally don't buy financials, were in them."

Focus on financials

And how.

A trader saw Morgan Stanley's 4% notes due 2010, "a nice short piece of paper, still investment-grade," swing between a high of 88.375 and a low of 82, all in round-lot trading of sizable blocks of bonds, many of them anywhere from $3 million to $10 million.

He said that "it wasn't all in one direction - they were down, they were up, they were down - and that's just an example of all of that paper that's been in a similar zone."

A market source at another desk said the 4s had moved up to 86 bid on brisk turnover of some $22 million by mid-afternoon.

Another source said that on a round-lot only basis the bonds had jumped 13.5 points on the day to 86; counting in all trades, they finished at 84, and gyrated violently over a 20-point range between 70 and 90.

That source saw other Morgan Stanley debt on a wild ride as well, with its most actively-traded issue - the 6 5/8% notes due 2018, with well over $175 million of bonds traded - gyrating between a low around 72 and a high of nearly 90, before finishing at 86, up 18 points on the day, while the company's 4.75% notes due 2014 bounced around dizzily and finally rose 16 points to end at 67. Its 6% notes due 2015 finished up almost that much, and with the same kinds of big price swings, finally getting off the roller-coaster at a price of 84.

Morgan Stanley was reported to still be in merger talks with Wachovia Corp., while at the same time keeping its options open and exploring other possibilities, including selling stakes in the company to overseas financial firms such as HSBC, or getting China's state-run investment company, which currently owns 9% of Morgan Stanley, to buy a bigger piece of the U.S. investment bank.

But the psychological lift given the markets by Treasury secretary Henry Paulson's declaration that Washington will step in to help investment and commercial banks as well as other financial institutions cleanse their balance sheets of toxic mortgage and other bad loans, while the SEC will hold the short-sellers at bay, has eliminated some of the sense of urgency to do a deal like the recently announced and hastily arranged shotgun wedding between Morgan Stanley rival Merrill Lynch & Co. and Bank of America.

Other flailing financials move up

Among the other bonds of troubled financials, a trader saw Washington Mutual's 4% notes coming due in January at 70 bid, which he called a 10-point jump from Thursday's final round-lot transaction at 60. He said that beside the big round-lot trades, there had been "a lot of odd-lot trading as well," amounting to about $7 million of the bonds turning over.

He saw an even bigger jump in WaMu's 5½% notes due 2013, which zoomed to 62 bid from 48 on Thursday, on volume of $5 million.

The Seattle-based top U.S. thrift's New York Stock Exchange-traded shares zoomed $1.26, or 42.14%, to end at $4.25, on volume of 207 million shares, amid reports that it has attracted the interest of potential merger partners such as JP Morgan Chase & Co., Citigroup, Wells Fargo Corp. and overseas players HSBC and Banco Santander.

Lehman higher

The trader said that among all of the issues actually rated as junk - thus excluding Morgan Stanley - the most active name was another fallen financial, Lehman, with its busiest issue its 6 7/8% notes due 2018, which he saw closing at 18.25 bid, up ¾ point on $85 million. Lehman's 4½% notes due 2010 closed at 18.5 bid, up 2 points on the day from 16.5 late Thursday, on volume of $53 million.

Several traders said that "generically speaking," Lehman's senior notes all traded around an 18 level, up from previous levels in the mid-teens.

Meanwhile its subordinated debt, which had been trading at a fraction of a point earlier in the week, was seen having improved greatly on a percentage basis, though only marginally on a price basis, to 1. The busiest was probably Lehman's 6½% subs due 2017 which had traded as low as 1/8 point on Thursday, though it had moved up to 7/8 by day's end, and the bonds bumped up to end at 1 on Friday, on volume of $10 million.

Non-financials share in the volatility

Apart from the faltering financials, a trader said that Harrah's paper traded, and Ford Motor Co., "and even in that stuff, the swings are pretty remarkable." He said that while the Fords "kind of hung in within a 2 point range, while Harrah's had a 3 or 4 point swing, so it's hard to tell. The one thing that seems pretty clear to me is that there isn't so much a conviction as there is people just trying to rearrange positions and be opportunistic to the extent that they can be, and play."

Interestingly, the trader said that the volatility "has all been in the higher-rated credits."

He noted that Sprint Nextel Corp. "has more volatility as a split-rated (Baa3/BB/BB+) credit, albeit in our universe, than some of the CCC stuff that barely moves."

As if to underscore that point, a trader at another desk said that Overland Park, Kan.-based wireless telecommunications operator Sprint Nextel's flagship issue, its 6% notes due 2016, moved up to 86 bid from 83.5 on Thursday, on active volume for a non-financial of $32 million.

Among the automotive names, a trader saw GM's benchmark 8 3/8% bonds due 2033 up 1½ points at 53 bid, 54 offered, while Ford's 7.45% bonds due 2031 were also up 1½ points at 54 bid, 55 offered. Another trader saw the GM benchmarks at a final round-lot trade of 54, well up from 50.375 on Thursday, and saw Ford's long bonds 3 points better, at 56.

A trader saw the Harrah's 10¾% notes rise to 61 bid, well up from Thursday's levels at 55. Then the paper "got pushed back down" to 58, but came back from their lows to end at 59.5 bid, 59.75 offered. The Harrah's Operating 5¾% notes due 2017 rose 4 points to 34, while its 5 5/8% notes due 2015 were up 5 points to 37.

Ethanol producers go both ways

Traders saw VeraSun's bonds better on the news that the ethanol producer will explore strategic options, which observers believe could include the sale of assets, or even of the whole company itself.

A trader saw its 9 7/8% notes due 2012 up 3 points at 72.5 bid, 74 offered.

Another trader saw its 9 3/8% notes due 2017 do even better, up nearly 10 points to the 43 level.

The company's NYSE-traded shares jumped 58% at one point, before coming off that peak and ending up 26 cents, or 17.81%, to $1.72. Volume of 11.1 million shares was almost five times the norm.

However, those shares had lost three-quarter of their value earlier in the week, plunging to $1.33, an all-time low, after the company began a public offering of 20 million shares - which it subsequently abandoned just a day later after an outcry from its shareholders - and said it expects to post a third-quarter loss between $63 million and $103 million.

Its bonds were meantime downgraded at mid-week by Moody's Investors Service, which cut its corporate family rating one notch to B3.

Standard & Poor's meantime downgraded sector peer Aventine Renewable Energy by one notch Friday to B. A trader saw its 10% notes due 2017 drop a point to 55. Another market source saw them ending the day down 4 points to 52.

An interesting day ahead

Elsewhere, a trader said that at his shop, they traded Park Ohio Holding Corp's 8 3/8% notes due 2014 at 79.25 bid, 79.5 offered on Thursday, while on Friday, he said, "a small piece" traded at 85.75.

"I don't know how significant" that was, but "it looks like, for a change, some of the shorts were covering it a little bit."

Looking ahead, "I think Monday should be a very interesting day," another trader said. If we get some follow-on and we actually start to trade, then it should get very interesting - and I am optimistic that this will be the case."

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