Junk back on the slide as rebound fizzles, many names down points, funds see big redemptions

By Paul Deckelman and Paul A. Harris

New York, Aug. 10 - The "Bernanke Bounce" which the financial markets in general and high yield in particular saw on Tuesday proved to have all of the staying power of a droplet of water on an exposed surface in the sizzling mid-August sun.

By the close Wednesday, just about all of the gains which had been notched the previous session after the Federal Reserve signaled that it will keep already very low interest rates in place for at least the next two years to remove interest-rate risk and spur lending, had evaporated.

While traders saw some issues continuing to move up by as much as 1 to 2 points, they saw as many, if not more, moving down by that same amount, including such familiar names as NewPage Corp. and Dynegy Holdings, Inc.

But other high yield stalwarts such as Caesars Entertainment Corp.'s bonds were seen having held in fairly well, with only limited downside, while the new HCA Inc. mega-deal was seen mixed.

However, statistical indicators of market performance pretty much told a sad story, spitting up whatever gains they had notched on Tuesday.

Amid the renewed downturn, junk marketeers noted the heavy pace of investor redemptions from mutual funds, wondering what kinds of big net outflows will be seen when the major tracking agencies report their weekly numbers on Thursday.

Immucor getting 'eaten up'

Turbulence in the global capital markets kept the high-yield primary market quiet again on Wednesday.

Immucor Inc. began a roadshow for a $400 million offering of eight-year senior notes (Caa1/B-).

J.P. Morgan, Citigroup and UBS are the joint bookrunners.

Initial guidance on the bond deal is 11½%, a market source said.

The Immucor deal, backing a leveraged buyout by TPG Capital, should go well, regardless of the present market volatility for several reasons, sources say.

"It's a good company, and they should have absolutely no difficulty getting the deal done," said an investor.

"There is considerable leverage, but they have a leading market position," the buy-sider added, conceding that the deal is more than six-times leveraged.

And notwithstanding its credit merits, the Immucor deal is a committed financing backed by a bridge loan that is 100% syndicated, sources say.

A captive audience

Following the hung bridge loan debacle of 2008, where as much as $330 billion of committed financing got hung up on the balance sheets of the banks, in part because bonds could not be placed, the banks began to syndicate the bridge loans.

As a rule, more than 90% of the participants in the bridge loans take part because they intend to play the bond deals that will take out the bridges, sources say.

When the junk market rallies, as in the first half of 2011, paper becomes scarce and the struggle to stay invested becomes more intense. Bridge participants say their bond allocations are more favorable than would be the case had they not played the bridge.

In a case such as Immucor, with 100% of the bridge syndicated ahead of the bond launch, and more than 90% of the bridge participants intending to play the bonds, Immucor, as well as other bridged deals in the pipeline, is playing to something of a captive audience, a debt capital markets banker said.

"Investors have already done their credit work on the issuer," the banker explained.

"You have a captive audience because investors are going to want to be in the bonds as soon as possible because whereas the bonds are liquid, the bridge loan is illiquid."

A high yield mutual fund manager, speaking on background, concurred with the banker's reasoning.

"The only thing that might stop a bridge participant from playing the bonds would be redemptions," said the manager.

$2.1 billion outflow

Indeed, redemptions have hit the junk bond market in a major way, according to information reported on Wednesday by EPFR Global.

Global high yield bond funds saw a whopping $2.1 billion of outflows on Tuesday, the most recent number that EPFR had reported at Wednesday's close.

That's the biggest daily outflow since the $1.43 billion outflow reported on Monday, May 10, 2010, when the markets were being rocked by uncertainties surrounding the sovereign debt of Greece.

High yield funds based in the United States saw $1.1 billion of outflows on Tuesday, EPFR said.

Junk remains under pressure

A secondary market trader said that high yield was certainly weaker than it had been on Tuesday, when it followed the lead of a suddenly revived equity market and rallied late in the day, spurred on at least in part by reaction to the Federal Reserve's moves to counter economic uncertainty by guaranteeing at least two years of relative interest rate stability.

That having been said, he allowed that "we clearly didn't collapse the way equities did" - the bellwether Dow Jones Industrial Average gave back all of Tuesday's nearly 430-point gain on Wednesday, and then some, tumbling back below 11,000 to a close at 10,719.94, a loss of 519.83 points, or 4.l62%.

In Junkbondland, in contrast, he said that "the same way that high yield didn't rally as much as equities rallied [Tuesday], we definitely didn't sell off as much today as equities sold off.

"There was a little bit less volatility, in that respect."

However, he admitted that "numerous issues are making new lows in the high yield market." He said this was particularly true of "issues which haven't traded in three to five days - you see them coming across and you say 'oh, wow," as those credits "play catch-up" with the rest of the market to fall to appropriate levels.

Junk bonds were "still weak, no question."

But all in all, though, he said it was "definitely not as violent a downtrade as you would expect for a negative [over 500-point] equity day."

An up or down session

Another trader saw more of a mixed market, declaring that "a lot of our names seemed to be up - but then again, you still have the occasional guys that no matter what, can't seem to get out of their own shadow, per se."

He said that "if you look at the Trace report, you see where the big volume was. Some of them are up 1½ and some of them are down 1½ points, just depending on the specific issue."

He said that "gyrating is a good term for what's going on here, because it just seems like stuff is either getting hammered down or [pushed] up. Stuff will get beaten down a point, or two, and then, just when you think, 'okay. Let's go and buy those' - of course, they're not there. There's a lot of diceyness going on right now."

He added that "depending on how you sort the data, you could have a list of stuff that traded up or that traded down."

He likened Wednesday's market range to "kind of a window - everything that traded was either up a point or two points, or down a point or two points. It just depends what people are focusing on for the day."

He said that "a lot of the stuff that was up, was in the 1 to 2½ point range."

HCA hangs in

Among specific issues, a trader saw HCA's new 6½% first-lien senior secured notes due 2020 up 1½ points, "back up around 97" after having dropped well lower in Monday's sell-off.

However, he saw the Nashville-based hospital operator's new 7½% senior unsecured notes due 2022 "actually down about 11/2" to close out at 93½ bid.

A second trader said that HCA "had a nice day," considering the heaviness of the overall market.

"They rallied this morning, and are holding onto some of their gains."

He saw the 61/2s going out in a 96-97 bid context, while the 71/2s were at 931/2-941/2, "so those bonds held in."

HCA priced both tranches as part of a massively upsized drive-by offering of new junk back on July 26. It increased the size of what had originally been announced as a $1 billion two-part deal to an eye-opening $5 billion, making it one of the biggest-ever junk deals. The deal consisted of $3 billion of the 61/2s and $2 billion of the 71/2s, both of which priced at par.

A market source said over $20 million of the 61/2s treaded on Wednesday, making them one of the busiest names on the junk most-actives list.

Ford falls back

Also among the recently priced large deals, a trader saw Ford Motor Credit Co. LLC's 5 7/8% notes due 2021 going home wrapped around 96½ bid, which he said was about a point down from the day's highs but unchanged on the day.

However, another trader said that level actually represented a deterioration from around the 97-98½ range at which the bonds had traded on Tuesday.

Last Friday, the bonds were trading at par - the same level at which the Dearborn, Mich.-based auto-loan financing arm of the second-largest domestic carmaker, Ford Motor Co., had priced its $1 billion of new paper in a drive-by deal that came to market on July 27.

A trader meantime saw parent Ford's benchmark 7.45% bonds due 2031 down 1½ points at 106 bid, 108 offered. The bonds had been unchanged on Tuesday, and had gotten hammered down by 4 points during Monday's widespread rout.

Caesars eases

A trader said that Caesars Entertainment's 10% notes due 2018 were down about 5/8 point at 79 bid, while seeing the Las Vegas-based gaming giant once known as Harrah's 12¾% senior secured notes due 2018 down 1¼ points, last trading at 89½ bid.

However, a second trader said that the Harrah's bonds "held in pretty well - they kind of faded at the end, but they were unchanged-to-better for most of the day, until stocks really crapped out this afternoon." He saw the company's paper going home down ½ point, "which is really not a bad day for them."

He also noted that the just-released June performance numbers for the casinos in Las Vegas, where Caesars has a very sizable presence, "looked very strong, so that clearly helped the Harrah's paper."

ATP shows improvement

Bucking the generally easier trend, ATP Oil & Gas Corp.'s 11 7/8% senior secured second-lien notes due 2015 were seen up 2 points on the day at 86 bid.

The Houston-based offshore energy company's bonds have recently bounced around, trading last Friday in a range of 87 to 90, before going out at 89 bid, 90 offered, then falling to 85½ during Monday's junk market meltdown and sliding further on Tuesday to 83-84 bid

ATP on Tuesday reported a net loss attributable to common shareholders of $56.9 million or $1.11 per basic and diluted share for the second quarter of 2011, versus an $82.9 million loss, or $1.63 per share, a year ago. Revenues from oil and gas production were $172.9 million for the 2011 second quarter, compared with $101.1 million for the second quarter 2010.

Dynegy down on day

A trader noted that Dynegy Holdings Inc. had on Monday "completed a debt restructuring and reported slightly better-than-expected second-quarter earnings"

But he saw the Houston-based power generating company's 8 3/8% notes due 2016 down 1½ points on Wednesday to around the 62 bid, level, while its 7¾% notes due 2019 were ½ point lower at 60½ bid.

NewPage ends lower

Among the more distressed names, a trader said that NewPage Corp.'s 11 3/8% senior secured first-lien notes due 2014 were down by as much as 3 points on Wednesday, "again, but then came back a little," to end down 2½ points at 80½ bid.

He saw the Miamisburg, Ohio-based coated-paper manufacturer's 10% second lien notes due 2012 "actually" up by ¾ point - "but then again, it's paper that trades down at 141/4."

A second trader said that NewPage "remains heavy, as you would expect."

A market source at another desk quoted the NewPage 11 3/8s at 801/2, on over $25 million traded, making it one of the most active high yield bonds of the day, and saw the 10s at 15 bid, on volume of around $20 million.

OPTI Canada moves up

A trader said that OPTI Canada, Inc.'s 7 7/8% notes due 2014 were up 2½ points near the end of the day, trading at 63 bid.

There was no fresh news out on the Calgary, Alta.-based oil-sands energy producer, which recently announced that Chinese energy concern CNOOC Ltd. had agreed to buy OPTI for $2.1 billion, subject to approval by the Canadian court currently overseeing OPTI's restructuring and other governmental authorities.

Market indicators back off

Market statistical indicators, which had turned mixed on Tuesday after having been down sharply on Monday, once again headed into negative territory on Wednesday.

A trader saw the CDX North American Series 16 HY Index fall by 1 7/8 points on Wednesday to finish at 92 7/8 bid, 93 1/8 offered, essentially wiping out the 2 point gain seen on Tuesday and leaving the index about where it had finished on Monday, when it suffered one of its biggest losses eve, down by 4 points.

The KDP High Yield Daily Index, after holding pretty much unchanged in the morning, gave up the ghost later in the day and finished considerably lower, dropped by 47 basis points Wednesday to close at 71.68. It was the third huge loss in a row, following Tuesday's 36 bps loss and Mondays 52 bps nosedive.

Its yield rose by 16 bps on Wednesday to 8.08%, after having increased by 12 bps on Tuesday and ballooning out on Monday by 22 bps.

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