WaMu, Lehman bonds up while most others slide; GM, Ford continue skid; Six Flags slides

By Paul Deckelman and Paul A. Harris

New York, Oct. 2 - Junk bond trading Thursday was characterized by several traders as "ugly," with many issues down multiple points, including such widely traded benchmark names as General Motors Corp., Ford Motor Co. and healthcare powerhouse Community Health Systems Inc.

Among the biggest losers were Pilgrim's Pride Corp. and Six Flags Inc.

However, Constellation Brands Inc. and Levi Strauss & Co., both of which reported quarterly numbers and held conference calls with investors, more or less held their own, declining only modestly amid the overall carnage.

Market observers said that in the junk market, as in other financial markets, all eyes would be on Washington on Friday, to see whether the House of Representatives will in fact pass the amended version of the proposed $700 billion bailout plan, which crashed and burned there on Monday, shocking the markets, but which was then approved in a revised form Wednesday by the Senate, which added some features, such as tax breaks and an increase in bank depositor insurance limits, aimed at selling the plan to Main Street as well as to Wall Street.

With the capital markets seized up in the absence, so far, of an approved bailout plan, primaryside activity remained nil.

High yield mutual fund flow statistics generated by AMG Data Services had not been released to the market as of press time Thursday evening, according to market sources.

Market indicators lower

The widely followed CDX index of junk bond performance, after losing ½ point on Wednesday, fell by a full point on Thursday, a trader said, quoting it at 88½ bid, 89 offered. The KDP High Yield Daily Index tumbled by 153 basis points to end at 61.86, as its yield ballooned out by 46 bps to 12.94%.

In the broader market, advancing issues trailed decliners by a margin of almost three to one. Activity, represented by dollar volume, rose by 29% from the levels seen on Wednesday.

"We didn't think [the market's situation] could get any worse than it was last week," a trader lamented, "but it certainly has."

He said that "there is just total disarray in the market. There's no liquidity whatsoever. An offering comes in at a price, someone shows a bid 3 points lower, and BANG! It's hit, which leaves the bond offered at that price, and then there's no bid. So there's very little liquidity."

He opined that "a majority of the accounts are really on the sidelines, waiting for a finalization of this bailout plan, one way or another, before they act. I think the actual trading that's taking place in the Street is mostly dealer-driven, and/or hedge fund liquidations."

He said that there had been "a few" of the latter over the last few days. There was one bid-wanted list of over $700 million, one of $500 million, and another of over $200 million. "That's just putting additional pressure on the market."

The most active issues, he continued, were "all on the negative side, down anywhere from 2 points to 10½ points. It's really ugly."

"The market started out down a point or two in the morning," another trader said, "and I think where stuff was trading [later] was down a lot more than that."

He noted that "there's supposed to be a large loan list in the market-place, $2 billion or $3 billion, and we're hearing that there continued to be liquidation lists on the bond side. Away from that, we were also hearing rumors about one more large SIV unwinding, and God [only] knows what's in those things."

On top of all of that, he said, "the uncertainty in Congress" on the bailout package "is weighing on market more heavily each day." He said he saw some trades that were down like 5 points from [Wednesday] and they're offered where it traded, and the bid is 2, 3, 4 points away from that."

Gallows humor ran through Thursday's conversations with market sources.

"I asked a trader for some quotes on energy names we trade, and he said that by the time I had them typed they'd be off some more," one sell-side source quipped.

"This is the worst day I've seen in junk, ever," a high-yield portfolio manager said in the middle of the afternoon, and added that everything was off 3 to 6 points.

"If you're looking for a buyer you throw out down-five or down-10 point bids," the source added.

These sources also attributed Thursday's massive sell-off mostly to liquidations.

"They're coming from a lot of places," the money manager said.

"What's controlling a lot of this selling is hedge funds taking off leverage. That reprices the loan market which reprices the cash market."

A high-yield syndicate official also had much the same color.

"It's major carnage," the source said, adding that the high-yield asset class appeared to be losing value at an astonishing rate.

"There are hedge fund redemptions," the source added.

"Everyone is selling. No one is putting in a bid."

Bailout priced in

Asked whether the anticipated government financial rescue package, which has now cleared the U.S. Senate, might make a difference, the mutual fund manager was not optimistic.

"Everybody expects that to happen now, so I don't know if the market is going to turn around," the manager said.

Prospect News asked this money manager whether the battered junk market is oversold.

"I thought that a week ago," the manager said.

"We bought some stuff a week ago, and it's down 10 points."

This source spotted the General Motors Corp. long bonds, the 8 3/8% notes maturing in 2033, trading at 35 bid, and added that they were probably 15 points lower than a week ago.

Volatility

"Volatility is high," the money manager said, and mentioned a story which others brought up throughout the Thursday session, that Senate majority leader Harry Reid, a Nevada Democrat, had stated that one of the country's premier insurance companies was about to go bankrupt if the financial rescue is not enacted soon.

Another story that weighed heavily upon the session was that General Motors Acceptance Corp. was selling a $2.7 bill portfolio of loans. Later GMAC withdrew the sale because of market conditions.

The money manager pointed to the Chicago Board Options Exchange's Volatility Index (VIX).

"You're seeing 20 to 40 point swings in a day," the buy-sider said.

"The VIX really started exploding on Sept. 12, when it was at 25. It peaked a couple of days ago at 45. But we're still at 45 today."

This money manager, whose fund has not seen extensive redemptions, expressed a preference for cash, given the present circumstances, and counseled that even Treasuries, which give almost no yield whatsoever under current circumstances, there is still the risk of price moves.

The buy-sider anticipated that by Thursday's close the junk index would post a year-to-date return of negative 10% or worse, and added that from this point it would be satisfying to have the fund reach a position by year's end of being down less than 5%.

WaMu a winner, Lehman too

A trader said that generally speaking, "the only stuff that seems to have improved today is stuff that has already blown up - like Washington Mutual paper and Lehman paper."

He saw Lehman's senior subordinated notes trading in a 14-14.5 context, which he said "was actually up from [Wednesday]."

WaMu did even better, with its senior holding company paper trading in the low to mid 60s.

A trader saw its 4% senior holdco notes due 2009 rise to a final round-lot trade level of 66.5, up 4 points on the day, with $28 million of the bonds traded.

Another said WaMu's "been all over the place," calling the senior 4s up 1 point on the day at 62.5 bid, 64.5 offered.

"The story with the seniors," a trader said, "is that there's still money at the holding company that was never spent from their last equity investment, from TPG Capital," which pumped $7 billion into the faltering WaMu in April in hopes of stabilizing it (the transfusion proved to be for naught, rendered valueless by last month's FDIC seizure of WaMu).

"That money is still at the holding company," he continued, "and with the bank assets having already been moved out of the operating company [by the FDIC, which oversaw their transfer to J.P. Morgan Chase & Co.], there's no way to force that money to be downstreamed to the operating company, which is why the senior holding company debt is trading so much richer."

He also cited a Bloomberg news story reporting that the holding company actually had $5 billion on deposit - more than originally estimated - "and that's when the bonds shot up from the 30s to the 60s, because that's more than the senior debt outstanding." Some of the WaMu senior paper traded as high as 70 cents on the dollar Wednesday, he said, before coming off that peak level to settle in around 60 and from there, into the lower 60s on Thursday.

"It's an unusual situation," the trader continued, "like a reversal - there are more assets at the holding company level than there are at the operating company.

"Usually all of the assets are at the operating company level and the holding company guarantees the operating company assets. Now you have a situation in which the asset that would force the downstreaming of assets from the holding company into the operating company [i.e. the banking network transferred to J.P. Morgan] are not there."

He suggested that if that bank asset was still there, "the operating company would have holding company guarantees. [The money] would be downstreamed in favor of the depositors. But the bank asset is not there, and there's no way for the regulators to force that money to come down into the operating company from the holding company."

He said that initially, "the word was there was somewhere between $2.3 billion and $2.8 billion." That was last Friday, when the senior holdco paper traded as low as 12 and as high as 30, before settling in the 20s. "On Monday, we were hearing $5 [billion], when the bonds basically doubled."

Another trader said that "since J.P. Morgan has said it's not assuming the bonds, typically, you'd think that [the senior holdco bonds] would be trading in the single digits. But more and more research is coming out that there's a cash position earmarked for this [senior holding company] tranche. One [research] piece said some $5 billion was 'earmarked' at the holding company level."

He also said that this was helping the subordinated holding company notes as well, since "there's a potential cash payout there too - any of that money is left over from the senior holdco [bonds] will go to the sub holdco [bonds]." He saw WaMu's 4 5/8% notes due 2014 at 21.75 bid versus 15 bid Wednesday.

At another desk, a market source pegged WaMu's 7¼% notes due 2017 up nearly 9 points on the day to just under the 24.5 bid level, while its 5½% notes due 2010 gained 5 points to end at 31.

Another market source saw the WaMu 4 5/8s as the company's most actively traded bond, with over $40 million changing hands at 19, up nearly 7 points, while the 71/4s were up 10 full points on the day to 23. Among the senior holding company issues, WaMu's 5¼% notes due 2017 were up more than a point to just over 62.375.

Among other recently troubled financials, Lehman's 5¾% notes due 2011 were up more than 2 points to almost 15 bid, while its actively traded 6 7/8% notes due 2018 rose nearly a point to 14 and change.

Gold miner not so glittering

Apart from the financials, one of the more actively traded issues was Freeport McMoRan Copper & Gold Inc.'s 8 3/8% notes due 2017, which a trader called "a surprise to see." He quoted the Phoenix-based precious-metals producer's 8 3/8% notes due 2017 at 96 bid, down from 98.5 on Wednesday.

Noting that the issue was actually a split-rated 5-B credit, at Ba2/BBB-, "the highest-rated high yield piece of paper," the trader said its decline proves that "nothing is immune to what's going on.

"Essentially, a bid is nameless - a bid is liquidity. You sell the bonds into the bid, and [only] then you ask 'what issue was that'? That's how rare it is to see any bids in our market - because there's no liquidity. So when a bid comes up, it's an opportunity to raise cash. It's BANG! You're done, I sell you."

While that was going on in the junk market, Freeport McMoRan's New York Stock Exchange-traded shares were also getting hammered down, along with other metals and mining issues, on lower gold prices, worries about whether the bailout package will be passed and whether it will be enough to get the economy growing again, as well as a Goldman Sachs forecast of weaker demand for commodities and softer metals prices until next year's second half. Those shares lost $7.36, or 13.90%, to end at $52.96, on volume of 23.4 million shares, about 50% above normal turnover. Goldman removed Freeport-McMoRan from its "conviction buy" list, noting a 10% decline versus its coverage group, although the bank maintained its overall "buy" rating on the stock.

Meanwhile, with fears of an economic slowdown mounting, gold for December delivery initially fell as low as $833.50 an ounce on the New York Mercantile Exchange, before coming off that low to settle at $844.30 - still down $43, or 4.8% on the day.

Auto issues skid lower

Still reeling from Wednesday's announcements of sharply lower September sales from a year ago - General Motors' sales fell 16% year-over-year, the downturn limited by its "employee pricing" discounts on most models, while Ford slid over twice as much, by 34% - the big carmakers' benchmark bonds slid on Thursday.

A trader saw GM's 8 3/8% bonds due 2033, which have "fallen off a cliff" since the start of the week, at 34 bid, down 3 points on the day, while GM's 7.20% notes due 2011 slid by 9 points to 47 bid.

He also saw GMAC LLC's 8% bonds due 2031 off 3 points at 38 bid, while Ford's 7.45% bonds due 2031 were "really active," with $17 million traded; they were down another 5 points Thursday to 35 bid.

Another trader said the autos were "messy, very messy," with the GM benchmarks down 2 points to 36 bid, 37 offered, while the GMAC 8s were also at that level, down a point. Ford, he said, "has actually been taking the worst of it lately," quoting its long bonds at 35 bid, 37 offered, down 3 points.

Yet another trader said the sector "got whacked again," with the GM '33s down another 2 points to 33 bid, 35 offered and the Ford '31s sliding another 5 points to 35 bid, 40 offered.

Among shorter-dated auto-finance issues, GMAC's 5.85% notes due 2009 plunged some 8 points to under the 75 level and its 6 7/8% notes due 2012 lost 3 points to end at 37.

Ford Motor Credit Co.'s 7% notes due 2013 were 4-point losers, down to 54, while its 7 3/8% notes due 2009 tumbled nearly 7 points to 75.

Other issues down points

Apart from the autosphere, a trader said that "when you look at plain-vanilla stuff, like Community Health" continuing to trade down - he saw the Franklin, Tenn.-based hospital operator's 8 7/8% notes due 2015 trading at 91.75-92, down from prior levels around 94 - "that just tells you that a portfolio is getting liquidated, or that people are selling things that they can, because they can't sell things that they have to. There still seems to be cash out there to absorb this, but it's going to make a bid at lower levels every time it comes out."

A trader saw Pilgrim's Pride's 7 5/8% notes due 2015 down 10½ points in round-lot trading to 48.5 bid, while its 8 3/8% notes due 2017 lost 8 points to close at 37 bid, on volume of $14 million and $10 million respectively.

Six Flags' 9 5/8% notes due 2014 fell more than 8 points to close at 44.625 bid. "It was just one of those names where you can get a bid for it, you sell it, if you're liquating a portfolio."

Constellation eases, Levi lower

Among names reporting quarterly results, a trader said that Constellation Brands' 8¾% notes due 2014 were off ½ point at 96 bid, 97 offered, since the numbers "weren't in line with estimates. They weren't as good as everyone thought."

He meantime saw Levi Straus' 9¾% notes due 2015 down 1 point at 83.75 bid, 84.75 offered; the San Francisco-based apparel maker also had quarterly results out.

A trader remarked that in an overall market getting killed like Thursday's, an easing of only ½ point to 1 point was "almost a positive."

Watching and waiting

Overall, traders said, Friday activity would certainly be muted in the morning, with everyone awaiting the crucial vote in the House on the credit industry bailout plan, slated for mid-morning.

"Let's hope that the plan passes [Friday] and things improve," one trader said. However, even if the House does reverse its Monday vote and pass the plan, he cautioned that most likely, the market would not see "the same bounceback that we would have seen had it been approved initially. My bet is that it's going to be mild, versus [the positive financial market response which would have occurred had the plan been passed] the first time around. We would have seen the Dow soar over 500 points, where now, I think [market reaction] will just be 'okay - but we have other problems.' The initial failure of the plan to pass has taken all of the wind out of its sails."

And should the plan fail again in the House, he said, "we're all in a lot of trouble, on a personal front, in terms of property values being cut in half and additional millions of people being unemployed. It will get really ugly."

No primary news

The Thursday session failed to generate any primary market news.

Perhaps notable, however, was the Thursday launch of the Apria Healthcare Group Inc. $150 million asset-backed revolver, via Bank of America, Wachovia and Barclays, at Libor plus 275 basis points. Talk had been 250 bps.

The company is also eventually expected to bring $1 billion of senior secured notes.

An informed source, pointing to that the fact that the notes are secured, said that the bond deal is tailored to the post-correction high-yield market, and added that dealers remain confident that it can be done.

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