WaMu walloped on JP Morgan suit; battered chemical names come back; BWAY slates five-year deal

By Paul Deckelman and Paul A. Harris

New York, March 25 - Washington Mutual Inc.'s bonds were seen several points lower in active trading on Wednesday, as J.P. Morgan Chase & Co. filed a lawsuit against the bankrupt Seattle-based savings institution and federal banking regulators, seeking to hang on to several billion dollars of assets obtained as part of its acquisition of the WaMu branch network last spring when the feds liquidated WaMu's operations. If successful, the J.P. Morgan suit would lessen the amount of assets available to pay WaMu bondholders and other creditors.

Elsewhere, Hertz Corp.'s bonds were once again seen better, likely enjoying a boost from the car-rental giant's move to buy back some debt to improve its leverage picture.

Constellation Brands Inc.'s bonds were seen holding their own, even as the Fairport, N.Y.-based wine and liquor manufacturer and importer's shares fell after it issued lower guidance for the current fiscal year; the company announced progress in its debt-cutting efforts, as well as the closing of a previously reported asset sale, the net proceeds of which will go to further reduce its borrowings.

Two distressed chemical manufacturers - Momentive Performance Materials Inc. and Hexion Specialty Chemicals Inc. - were seen better in busy trading, despite a lack of any fresh news about either.

In the primary market, BWAY Corp. announced plans to sell $200 million of five-year notes and use the anticipated deal proceeds to redeem a current bond issue.

Meanwhile, Kansas City Southern de Mexico SA de CV's new issue firmed from where the bonds had priced on Tuesday.

Market indicators stay strong

Back among the established issues, a trader saw the widely followed CDX High Yield 11 index of junk bond performance - which eased by 1/8 point Tuesday - up about ½ point in Wednesday's trading, quoting it at just under 70.5.

The KDP High Yield Daily Index meantime improved by 30 basis points to 52.62, while its yield tightened by 12 bps to 13.61%.

In the broader market, advancing issues maintained their lead over decliners, by a margin of five to three.

Overall market activity, measured by dollar-volume totals, was down around 1% from the levels seen in Tuesday's session.

A trader said that generally, things were about ½ point better. A better tone in equities helped out, with stocks modestly firming on government data for February durable goods orders and new-home sales that would seem to indicate that after a truly traumatic fourth quarter the economic downturn may finally be starting to moderate a little.

The bellwether Dow Jones Industrial Average essentially recovered most of the ground it had lost on Tuesday, when Monday's big rally stalled, finishing Wednesday's session up 89.84 points, or 1.17%, at 7,749.81. The broader Standard & Poor's 500 index gained 0.95%, while the Nasdaq composite index firmed by 0.82%.

In Junkbondland, market barometer bond Community Health Systems Inc.'s 8 7/8% notes due 2015 was actually seen down ¾ point at 95 bid, but another large issue that is sometimes thought to act as a proxy for the general market, First Data Corp.'s 9 5/8% notes due 2015 firmed by a touch more than a point to just over 57 bid, despite the Greenwood Village, Colo.-based financial transaction processor's report of a wider fourth-quarter loss.

WaMu worse for the wear

Washington Mutual's bonds were seen down several points in active dealings, likely in response to news of the J.P. Morgan suit against the bankrupt company and the Federal Deposit Insurance Corp.

A market source saw its 4 5/8% subordinated holding company bonds due 2014 fall as low as 55 bid, down nearly 10 points from the Tuesday close, before coming off those lows to settle at just under 62, still about a 3 point deficit, although on a round-lot basis, the loss is more like 6 points. The source saw heavy trading in the credit, with more than $25 million having changed hands by mid-afternoon.

Another WaMu sub holdco issue, the 7¼% notes due 2017 was also busily traded at such lower level, though not quite as actively as the 4 5/8s. The bonds dropped some 7 points in early dealings to around 57 bid, before climbing back to around 60.

WaMu's recently robust senior holding company paper was not immune to the fallout from the Morgan lawsuit. Its 5¼% notes due 2017, which had finished trading Tuesday at 85 bid, dipped about 3 points before steadying a little to around 1½ points lower, while its 4.20% senior holdcos due 2010 were seen down about 3 points on a round-lot basis to 82.

The bonds slid on the news that banking giant J.P. Morgan - which bought the faltering WaMu's vast branch network and other assets last September at the fire-sale price of $1.9 billion in a deal brokered by the FDIC, which was acting as the receiver for the failed thrift's operations - had filed suit against WaMu and the FDIC, to stop any legal move by either party to take assets back from J.P. Morgan.

The lawsuit was a counter-suit against Washington Mutual's suit, filed last Friday, seeking at least $13 billion in claims from the regulators, claiming they had wrongfully deprived WaMu of its assets without just compensation and had sold them to J.P. Morgan for far less than the assets could have fetched in a straight liquidation procedure, which would have generated proceeds for WaMu's creditors and other claimants.

WaMu's suit further claimed that that the feds had improperly directed corporate parent WaMu to make hundreds of millions of dollars in capital contributions to its savings bank subsidiary to augment its liquidity in the weeks and months before the bank's closure, while they were allegedly contemplating the subsequent seizure of that subsidiary.

The WaMu lawsuit seeks the recovery of such payments, as well as $4 billion in trust securities $234 million in tax refunds, assorted taxing rights, insurance policies, and other assets. It does not seek to unwind the transfer of the branch network to JP Morgan, which is not named as a defendant party in WaMu's suit against the FDIC.

Elsewhere among financial names that have fallen on hard times, embattled American International Group Inc.'s aircraft leasing arm, International Lease Finance Corp.'s 5% notes due 2010, were seen down more than 4 points to 80 bid. ILFC's 4 3/8% notes slated to come due Nov. 1 were likewise easier at 87.5 bid, for a 29% yield to maturity, while its 4.55% notes maturing on Oct. 15 ended at 88.25 bid, also a 29% yield. Lehman Brothers Holdings Inc.'s 6 7/8% notes due 2018 languished at just under 15 bid.

Constellation shines, despite lower guidance

A trader said that the bonds of Constellation Brands were feeling no pain, despite lowered guidance from the leading wine, spirits and beer maker and marketer's lowered guidance, which caused its shares to stagger.

"They're doing okay," he said, noting that "the company has a ton of cash, and they're buying back debt," allowing the bonds to trade up by ¼ to ½ point even with the bearish earnings projections.

He saw Constellation's 8 1/8% notes due 2012 up about ½ point at par bid, 100.5 offered. Its 7¼% notes due 2016 and 2017, which generally trade in tandem, "just moved up moderately - nothing earth-shattering" to 95 bid, 95.5 offered, up from 94.25 bid, 94.625 on Tuesday. "It's a good credit," he added.

However, Constellation's New York Stock Exchange-traded shares fell as much as 7.9% intraday, finally ending down 71 cents, or 5.35%, at $12.55, on volume of 5 million, about twice the norm, as it forecast that fiscal 2009 earnings, excluding some unusual items, would come in at $1.62 per share tops, down from its own previous guidance of a $1.68-to-$1.72 range, and from Wall Street expectations of around $1.70. The company is scheduled to announce earnings on April 8.

Even though the slowing economy is no doubt driving a lot of people to drink, Constellation said in its announcement that the downward guidance revisions were "driven primarily by an increasingly challenging global economic environment, particularly the accelerated deterioration in the company's U.K. and Australian businesses during its fourth quarter".

It also said that during the fourth quarter, it expects to record an estimated $430 million of after-tax charges, primarily related to the non-cash impairments of goodwill, intangible assets and equity-method investments associated with its international businesses.

However, on the bright side, and of special interest to bondholders, chief financial officer Bob Ryder said that free cash flow generation "continues to be strong," and is expected to be within previous guidance of $360 million to $390 million.

"We continue to be in a strong liquidity position," he said, as total debt has decreased by more than $800 million from the end of fiscal 2008, primarily through a combination of strong free cash flow and proceeds from asset dispositions.

Constellation announced on Wednesday that it had completed the sale of its value spirits business to Sazerac Co., Inc. for $334 million, subject to post-closing adjustments. Ryder said that Constellation would get $274 million in cash proceeds and a note receivable for $60 million. The entire net after-tax cash proceeds of approximately $210 million will be used to further reduce Constellation's borrowings.

Hertz pleasure cruise continues

Hertz's bonds continued their upside ride, which has been helped by the announcement that the Parsippany, N.J.-based car rental industry leader is looking to clean up its balance sheet by buying back some term loan debt at a discount to face value.

Its 8 7/8% notes due 2014 were seen by a market source up 3 points on the session to a 58-59 context.

Another source saw them up more than 3 points Wednesday, on top of a 3 point gain on Tuesday, to the 57.5 level. A week ago, those bonds had been trading nearly 10 points lower.

Market participants noted that Hertz is seeking an amendment in its term loans that would allow the company to use up to $500 million of cash to buy back its approximately $1.4 billion term loan.

Another trader, who said the Hertz paper was "doing OK," suggested, half-facetiously, that with signs that the economic downturn may be moderating, people might be "more optimistic about renting cars in the summer."

Ford forging ahead on Volvo sale

Ford Motor Co.'s notes were a little higher, though in relatively light trading, mostly in smallish transactions, helped a little by news that the carmaker is making progress in its efforts to sell its Volvo nameplate - Ford confirmed that it has been in talks with more than three potential bidders for Volvo, but did not identify the possible buyers.

Ford's flagship 7.45% bonds due 2031 firmed to 29.5 bid late in the session, a gain of more than a point, although the trades were small and not necessarily as representative of the market as round-lot trades might be.

The source saw Ford Motor Credit Co.'s 7.375% notes due 2011up some 5 points on the session at the 76 bid level, although its 7% notes due 2013 were down a deuce, hovering just below 64, while its 7 3/8% notes coming due on Oct. 28 eased to a hair over 92, or a 22.5% yield to maturity, from 93 on Tuesday.

Published reports indicated that all three potential buyers for Volvo are Chinese car manufacturers - Geely Automobile Holdings Ltd., which first approached Ford about Volvo more than a year ago, before it was even thinking of selling the Swedish luxury nameplate, Chery Automobile Co. and Chongqing Changan Automobile Co.

Although Ford is in nowhere near as bad shape as Detroit rivals General Motors Corp. and Chrysler LLC, it could certainly use the cash as it tries to retain its status as the only major traditional U.S. carmaker not requiring federal bailout money, and selling Volvo could bring as much as $2 billion - still only one third of what it paid for the carmaker when it made its ill-fated foray into European luxury auto production several years ago with the purchases of Volvo, Aston Martin, Jaguar and Land Rover, the latter three of which have since been sold off.

GM's benchmark 8 3.8% bonds due 2033 were meantime seen having edged up perhaps ¼ point to a round-lot level of 18.25 bid. However, counting several smaller trades later on, the bonds were seen going home down a point, at 17 bid.

Right formula for chemical names?

Two recently battered chemical industry names were being quoted better in fairly busy trading, although there was no fresh positive news seen out on either one of them. Albany, N.Y-based quartz and silica maker Momentive Performance Products' 9¾% senior notes due 2014 were seen having gained some 3½ points on the day to the 29 area, while its 10 1/8% subordinated notes due 2014 were up about ½ point at 18.

Columbus, Ohio-based Hexion Specialty Chemicals' 9¾% notes due 2014 gained about 2 points on the day to close out at 22.

New Kansas City Southern bonds better

A trader saw the new Kansas City Southern de Mexico 12½% notes due 2016 get as good as 96.25 bid, before settling in around 95.5 bid, 95.75 offered area.

The Kansas City, Mo.-based operator of railroads in the United States and Mexico priced $200 million of the bonds on Tuesday at 94.49 to yield 13.75%.

BWAY brings $200 million

In primary news, BWAY Corp. will start a roadshow on Thursday for a $200 million offering of five-year senior subordinated notes (B3/existing B-).

The deal is expected to price during the middle part of next week.

Deutsche Bank Securities and Goldman Sachs are joint bookrunners.

Proceeds will be used to redeem $200 million of the company's 10% senior subordinated notes due Oct. 15, 2010.

Road hazards

In running a roadshow that stretches from one week into the next, BWAY becomes part of a group of issuers that represents a distinct minority of 2009's primary market business.

Less than 30% of year-to-date primary market business has been marketed via the once-customary high-yield roadshow.

The most recent deal in the "roadshow" category came from Dole Food Co., Inc. on March 13.

The two most recent deals, Tuesday's issue from Kansas City Southern de Mexico, SA de CV, and Lamar Media Corp.'s March 20 deal, were both quickly shopped.

"You don't want to be out in the market too long if you can help it," an investment banker cautioned on Wednesday.

"It's better to begin the process early and quietly.

"And of course you don't want to be out in the market at all if you're not going to have any traction."

Shadow book

Presently dealers have a preference for quietly and discreetly canvassing promising accounts in order to build up a "shadow book," before announcing a deal to the market.

For example, bookrunners were marketing the Kansas City Southern de Mexico deal as early as last Friday, according to a high-yield mutual fund manager.

Word on the deal leaked out Monday night, and it was formally launched and priced on Tuesday.

"That is going to be the case with almost all deals now," an investment banker said on Wednesday.

"You're not going to just stick something out there and see what happens.

"There will be quiet pre-marketing in order to achieve participation at a certain level before you announce anything."

Surprisingly quiet

Although the high-yield primary has produced a modicum of news this week, with the Kansas City Southern de Mexico drive-by and the BWAY launch, syndicate sources expressed surprise on Wednesday that the new issue arena has not become more active in recent days.

Although stock trading - often thought of as a point to junk market sentiment - has been volatile, the S&P 500 is up 20% since March 9, a banker pointed out Wednesday afternoon.

"After this boom in equities we expected to see more paper," the source conceded.

Elsewhere syndicate officials report they are preparing to bring offerings to market.

Shortly after Wednesday's close one syndicate source acknowledged visibility on business that could materialize before the end of this week, but is more likely to come next week.

"Kansas City Southern and Lamar both traded well on the break, so new issuers are likely to come," the official remarked.

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