Guitar Center shrugs off downgrade to move higher; CalRes steady; semiconductor converts swoon on report

By Paul Deckelman

New York, Nov. 29 – Traders in distressed debt and the bonds of otherwise underperforming companies and sectors reported a generally quiet market on Wednesday, noting that many portfolio managers and other investment decision makers were off at the annual Bank of America Merrill Lynch Leveraged Loan Conference going on this week in Boca Raton, Fla.

But there was still activity in the market, particularly in Guitar Center Inc.’s 2019 notes – which moved up in active trading for a second consecutive session despite Moody’s Investors Service having downgraded the musical instrument and performance electronics store chain’s ratings.

Elsewhere, traders saw sizable volume – but precious little price movement – in energy sector bellwether name California Resources Corp., despite a third straight session of lower crude oil prices. Oil and gas sector peers MEG Energy Corp. and Denbury Resources Inc. were lower on the day.

Wireline telecommunications operators Frontier Communications Corp. and CenturyLink, Inc. continued to lose ground.

In the convertibles market, Lam Research Corp.’s 2.65% notes due 2041 and 1.25% converts due 2018 both nosedived during Wednesday’s session amid a selloff in the underlying stocks and the linked converts of memory-chip manufacturers following a bearish research report by Morgan Stanley.

Lam sector peers Micron Technology Inc. and Microchip Technology Inc.’s convertible notes also tumbled during the trading session, as their underlying equity fell.

Guitar Center up despite downgrade

Guitar Center’s 6½% notes due 2019 were seen up ¾ point on the day, ending at 94¾ bid, on volume of more than $30 million.

It was the second straight session of stronger performance by that issue, which had also risen some 2¼ points on Tuesday from its most recent previous round-lot levels last week, ending at 94 bid, with around $12 million changing hands.

The two-day rise was notable because it came in the wake of Moody’s Investors Service having actually downgraded the Westlake Village, Calif.-based musical instrument and performance electronics retail store chain.

Moody’s said in a research note on Tuesday that the company’s $375 million asset-based credit facility matures on April 2, 2019, while its $615 million of 6½% senior secured first lien notes mature on April 15, 2019. Together, they constitute about 65% of the company’s debt. Its $325 million of 9 5/8% senior unsecured notes do not mature until 2020.

The ratings agency warned that “although GCI is currently in negotiations to refinance its outstanding debt, and still has time to refinance these debt obligations, Moody's believes the more compressed that time period becomes from this point on, the more challenging it will be for GCI to address its debt maturity profile particularly in light of the key challenges faced by the company. These challenges include the company's high leverage – debt/EBITDA on a Moody's adjusted basis is about 6.2 times – and limited revenue visibility regarding the retail environment for musical instruments.”

It downgraded Guitar Center’s Corporate Family Rating Caa1 from B3, and its Probability of Default Rating to Caa1-PD from B3-PD. At the same time. The company’s senior secured first-lien notes were downgraded to Caa1 from B3, while its unsecured notes were downgraded to Caa3 from Caa2. The rating outlook is negative.

Cal Res steady despite crude drop

Elsewhere, a trader noted that California Resources Corp.’s 8% notes due 2022 “is one of those higher-beta names that see outsized moves up or down” – but he saw the Los Angeles-based oil and gas exploration and production company’s bellwether issue unchanged on the day at 73 bid, despite a third straight slide in world crude oil prices Wednesday.

More than $17 million of those notes changed hands on the session.

While CalRes was little changed, a trader said that Plano, Texas sector peer Denbury Resources’ 6 3/8% notes due 2021 lost ½ point to end at 74½ bid.

Calgary, Alta.-based oil producer MEG Energy’s 6 3/8% notes due 2023 lost 1¼ point on the day, ending at 90¼ bid.

Crude prices were meantime lower on the day for a third straight day after three consecutive sessions before that on the upside.

West Texas Intermediate crude for January delivery slid by 69 cents per barrel in New York Mercantile Exchange trading, settling at $57.30, following losses of 12 cents per barrel on Tuesday and 84 cents on Monday.

January-contract North Sea Brent crude was off by 50 cents per barrel in London futures trading, to $63.11, after having retreated by 23 cents on Tuesday and having eased by 2 cents on Monday.

Landline telecom remains weak

The embattled landline telecom sector remained under pressure on Wednesday, with Stamford, Conn.-based Frontier Communications’ 11% notes due 2025 finishing the day at 76¾ bid, down more than ¼ point, with over $13 million having traded.

Its 9% bonds due 2031 dropped 1¼ points, to 68¾ bid, also on $13 million of turnover.

Monroe, La.-based sector peer CenturyLink’s 7½% notes due 2024 closed down ¼ point on the day at 98 bid, with over $11 million traded.

Its 7.65% long bonds due 2042 closed at 83 13/16 bid a market source said, down nearly 1¼ points.

Semiconductor converts clobbered

In the convertibles arena, Lam Research Corp.’s 1.25% convertible notes dropped about 32 points, and its 2.65% convertible notes swooned by about 52 points by late afternoon, according to a market source.

Last-minute trades attempted to adjust both convertible notes to their previous closing levels, with only partial success.

The 2.65% notes were seen ending the day with a 2-point gain at 634.375, despite previous trading in a 573.82-to-598.64 range throughout Wednesday’s session before those last-minute transactions brought them up from those lows, Trace data indicated.

The company’s 1.25% notes meantime saw a last-minute trade of 352.9, attempting to adjust the issue to its level at Tuesday’s close, according to the Trace data. However, those notes still ended the day at 320.75 – a 32-point drop – after having traded in a 317.47-to-321.25 range throughout the session.

Lam stock also dropped 8.69%, closing the day at $194.62.

Lam, a developer, manufacturer and marketer of semiconductor processing equipment, appeared the hardest hit by a recent Morgan Stanley report, which downgraded several memory chip companies after forecasting a NAND glut that would result in falling NAND prices.

The report forecast falling stock prices for semiconductor companies that have surged over the past year.

In his note to investors, Morgan Stanley analyst Shawn Kim warned that NAND flash memory chip prices have reached their peak after being spurred on by a shortage of supply, which will no longer exist in coming months.

With falling NAND prices, Kim forecast chipmakers will see no material earnings growth in 2018.

Lam sector peers Micron Technology Inc. and Microchip Technology Inc.’s convertible notes also tumbled during the trading session, as their underlying equity fell.

Microchip Technology also saw active trading and falling prices for its 1.625% notes due 2025. The notes wavered between 172.403 and 166.618 before closing the day at 168.497, according to Trace data.

The convertible notes for the manufacturer of microcontroller, memory and analog semiconductors dropped more than 7 points from Tuesday’s final trade. Company stock also dropped 4.42%, closing Wednesday at $86.58.

Micron Technology’s 3% converts due 2043 also saw significant fluctuations in trades and an almost 14-point drop from Tuesday’s close. The notes traded between 164.92 and 153.25 before ending the day at 153.25, according to the Trace data.

The semiconductor device producer’s stock also decreased 8.74%, closing the day Wednesday at $43.74.

Abigail W. Adams contributed to this review

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