Junk stays split from stocks as market drifts lower; most names on downside, primary becalmed

By Paul Deckelman and Paul A. Harris

New York, Aug. 24 - Junk bond traders saw another mostly listless session on Wednesday, with little real impetus in the market.

The new-deal arena continued to take its mid-summer snooze, with no announcement of upcoming new issues heard.

In the secondary realm, statistical measures of market performance remained mixed, but with mostly a bias to the downside.

Among specific names, traders saw mostly quiet dealings even in heretofore relatively busy credits, such as gaming powerhouse Caesars Entertainment Corp. and papermaker NewPage Corp.

That was also the case for another normally well-traded name, pharmacy operator Rite Aid Corp.

A trader said that a name which has recently been taking its lumps is AK Steel Holding Corp.

On the upside, he saw a little strengthening in hospital benchmark Community Health Systems Inc.

Primary seen shut for August

The primary market remained quiet on Wednesday as high-yield bonds underperformed a rallying stock market, a syndicate source said.

No issues were priced and none were announced.

The possibility that high-yield primary market business might materialize prior to the three-day Labor Day weekend in the United States, which begins at the Friday, Sept. 2 close, is becoming more and more remote, the investment banker added.

Market indicators stay mixed

For a second straight session, the stock market and high-yield bonds - which previously had largely moved up and down in tandem, as both represented risk assets for investors so inclined - went their separate ways.

Building on Tuesday's big advance - its first big gain in a week and largest in two weeks - stocks again made a pretty strong showing Wednesday, with the bellwether Dow Jones Industrial Average up by another 143.95 points, or 1.29%, to finish at 11,320.71. Broader indexes were also firmer, with the Standard & Poor's 500 up 1.31% on the day and the Nasdaq Composite gaining 0.88%.

It was quite a different story, though, in Junkbondland, where more issues finished down than up, and this downside bias was largely borne out by the statistical performance indicators, which were mixed on the day for a second straight session, though with a downside bias.

A trader saw the CDX North American Series 16 HY Index unchanged on the day on Wednesday at 92¼ bid, 92½ offered, after having moved up by 11/16 point on Tuesday.

But the KDP High Yield Daily Index weakened again, down another 17 basis points on Wednesday to end at 71.33, on top of Tuesday's 47-bps nosedive. It was the fifth straight fall in the index, whose yield also went up by 6 basis points, to 8.16%, after having ballooned out by 17 bps on Tuesday.

And the Merrill Lynch U.S. High Yield Master II Index fell for a fifth straight session on Wednesday, dipping by 0.282%, on top of Tuesday's hefty 0.624% downturn.

Wednesday's loss lowered the year-to-date return to 0.719% from 1.004% on Tuesday, which left it well below the peak level for the year of 6.362%, set on July 26.

A trader said that "not too much" was going on, either in terms of volume or price movement, in contrast to some of the recent sessions which saw long lists of bonds down multiple points, some of them in heavy trading.

"It looks like the market was really soft in the morning, after they came back a bit [Tuesday] afternoon. It's been kind of unchanged today.

"Some of the weaker credits may be off a little bit, but the on-the-run stuff seems to be fine.

On Wednesday, he said, there was "a fair amount of volume" in some issues, although a lot of that was in split-rated credits like education finance company SLM Corp. and clothing retailer Gap Inc. that largely appeal to crossover buyers looking to reach down from their usual investment grade territory in order to pick up some yield.

Even with them, he said, "there was not a lot of round-lot trading."

Funds hang back

Another trader said that "it's strange that this market is showing a lack of activity, for all of the volatility we've seen in the past month or so."

He opined that "it looks like dealers that have positions are cutting them and trying to get out of items going into the end of the month."

He said that "anecdotally, you've had a couple of large mutual fund accounts, that manage both open-end and sort of closed-end and ETF kind of stuff, they're kind of keeping their powder dry because they're concerned about getting redemptions toward the end of the month.

That's slowed some things down with those guys."

Usually busy Caesars is quiet

A trader said that "the higher-beta names that are usually active in the market are kind of quiet."

For instance, he saw Caesars Entertainment's 10% notes due 2018 "usually on the top of the leader-board" in terms of volume, had only light trading on Wednesday.

"There were more odd-lot trades than round-lot trades in the Las Vegas-based casino giant's most widely traded issue, which he saw as "about unchanged" in the lower 70s. Late in the day, he said, they traded in a 73-74 context, before "drifting up" to the 74 bid level.

A market source at another desk saw those bonds - which on Tuesday had been gyrating around between a low of 70 and a high of 75 - going out up 1 point on the day, at 73 bid.

But at another desk, those former Harrah's Operating Co. Inc. bonds - while seen at that same 73 bid level - were described as down 2 points on the day.

NewPage moves up

NewPage was "up a touch," but on thinner volume than has recently been seen in the Miamisburg, Ohio-based coated-paper manufacturer's bonds.

He quoted its 11 3/8% first-lien senior secured notes due 2014 slightly higher on the day at 81 bid, 82 offered, but said that "not more than $5 million traded," well below recent turnover levels for those bonds. "It was just small trades."

A second trader saw the bonds get as good as 83½ bid, 84 offered, which he said was "more like 3 points" to the upside.

He saw NewPage's 10% notes due 2012 remaining in a 12-13 context, "pretty much unchanged, with not as much activity [as in the 11s]."

NewPage sector peer Catalyst Paper Corp.'s 11% notes due 2016 were at 65-66, up 1 point, with "some activity in that today," the first trader said, but its 7 3/8% notes due 2014 were at 28-30 with "no activity - the activity was all in the 11s, but it wasn't a big change."

Rite Aid at rest

A trader said that Rite Aid's paper "has been a little bit active," though he saw no particular change from recent levels in the Camp Hill, Pa.-based Number-3 U.S. drugstore chain operator.

He said that the name traded down on Tuesday, "especially in its more junior bonds" like the 9½% notes due 2017 and 9 3/8% notes due 2015, where were trading around 83 bid and 87 bid, respectively.

"They were kind of active [Tuesday]; I saw quotes today, but I didn't see many trades," he said.

Healthcare holds its own

A trader said that he saw a little bit better levels for Community Health Systems' 8 7/8% senior secured notes due 2015.

The Franklin, Tenn.-based hospital operator's issue - considered a benchmark for the sector because of its great size, at $3 billion, and widespread distribution among investors - was trading on Wednesday a little above 99 bid.

He said that the bonds started the day as low as 98, and ended in a 98¾ to 99½ context. He saw the last trades going off at 99¼ bid.

The trader saw little real activity in the newly issued 6½% first-lien senior secured notes due 2020 sold by Community Health Systems' sector peer, based in neighboring Nashville, HCA Inc. Those bonds - $3 billion of which priced at par on July 26 as part of a radically upsized $5 billion two-part offering - were being quoted at 97¼ bid, well down from their pricing level, though up from recent lows around 96.

The trader saw just one transaction in those bonds all day.

Another trader agreed that he had not seen much trading in it.

AK Steel softer

A trader said that "one thing I've seen getting beat up" lately is AK Steel's 7 5/8% notes due 2020.

He explained that "anything that's a deep cyclical has been leading the market down" - and the West Chester, Ohio-based steelmaker, now the third-biggest domestic player in a greatly shrunken American steel industry - certainly qualifies.

He noted that the bonds traded as low as 88 on Wednesday, a new low for the year for those notes, which had been trading as high as 103 bid just last month, but which have been losing ground steadily since then.

"When you look at the fear of an economic slowdown, and a cyclical company like AK burning cash, I think it's one of the first things you want to kick out, if that's your mindset."

He further noted that with the economy still weak, AK "keeps cutting profit estimates, and they've got rising raw material costs. That doesn't make them any different [from other companies], but they don't seem to be weathering it as well as some other guys, I guess."

He said that "a lot of guys who looked at that credit as having some upside in a strong market are leaning away in a weaker market."

Canadian junk steady, easier

Among Canada-based companies, Paramount Resources Ltd.'s 8¼% senior notes due 2017 were trading unchanged on the day, a trader said.

Also in trading, Noranda Operating Trust's 6.875% notes due 2016 and Savanna Energy Services Corp.'s 7% senior notes due 2018 edged lower in the secondary market.

A trader said that OPTI Canada Inc. "moved a little," and saw the Calgary, Alta.-based oil-sands energy company's 8¼% notes due 2014 at 63 bid, which he called "up slightly," while its 7 7/8% notes due 2014 were at 63 bid, 63½ offered, up ½ point, and both on "some volume."

A second trader called the bonds of the company - which recently announced that it would be acquired by Chinese energy operator Cnooc Ltd. for $2.1 billion - unchanged on the day.

Cristal Cody contributed to this report

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