Vought flies on Boeing deal; Lear gyrates on Chapter 11; junk steady despite stock slide

By Paul Deckelman and Paul A. Harris

New York, July 7 - Vought Aircraft Industries Inc.'s bonds were climbing for the skies on Tuesday, propelled higher by the news that major customer Boeing Co. will pay $580 million to buy Vought's South Carolina operations that manufacture parts of the fuselage for Boeing's much-anticipated - but long-delayed - 787 Dreamliner passenger plane, thus giving Boeing more control over the project's progress.

Back on terra firma, Lear Corp.'s bonds - which had been rising over the past several sessions in anticipation of the auto parts supplier's impending bankruptcy filing - pushed several points higher in busy trading on the news that Lear had in fact finally filed for Chapter 11 protection. However, the bonds were seen having come down from their early peak levels to mostly end unchanged to just modestly higher.

NRG Energy Inc.'s bonds firmed by more than 2 points, continuing the climb seen since the Princeton, N.J.-based power generating company's would-be acquirer, Exelon Corp., announced a sweetened acquisition offer, even though NRG has continued to hold Exelon at arm's length.

Teck Resources Ltd.'s bonds firmed for a second consecutive day, aided by the news that the Canadian mining and energy company had sold a major stake to China Investment Corp.

Generally speaking, traders said that high yield hung in relatively well, considering that equities saw a major slide.

Primary market activity was meantime muted, with no issues having priced and no prospective deals joining the forward calendar.

Market indicators retreat modestly

Looking at statistical market measures, the CDX Series 12 High Yield index - which had lost ¼ point on Monday - was off by another ½ point on Tuesday, a trader said, dipping to 82¼ bid, 82¾ offered.

The KDP High Yield Daily Index, which had inched up by 1 basis point on Monday, eased by 6 bps on Tuesday to end at 62.88, while its yield gained 3 bps to 10.49%.

In the broader market, advancing issues - which had fallen behind the decliners on Monday after seven straight winning sessions before that - remained in that subordinate position on Tuesday, lagging by a not quite six-to-five margin.

Overall market activity, measured by dollar-volume totals, jumped 53% from Monday's relatively sedate post-holiday level.

Tuesday, a trader said, "was another very lackluster day. It just seems to drag on and on."

But another trader said that apart from the busy activity in Lear, "we've had bid-wanteds, offer-wanteds. There was a little bit more activity than we've seen the last couple of sessions around the [Independence Day] holiday."

The junk market, he said, "still seems pretty firm - guys are looking to put money to work. There are some decent trades going through."

He noted that while "everybody's complaining that it's so quiet and whatever, you've got equities off, and our market feels like it's holding in."

Stocks were broadly lower Tuesday as oil prices, slumping for a fifth straight session, dragged energy issues down and also sent a message to the overall market that economic activity will likely continue to be weak for some time to come. The bellwether Dow Jones Industrial Average tumbled by 161.27 points, or 1.94%, to close at 8,163.60, its lowest finish since late April. In the broader equity arena, the Standard & Poor's 500 index lost 1.97% on the day, while the Nasdaq composite slid 2.31%.

But while stocks were staggering, back in Junkbondland, the trader continued, "certain spots were weaker, but generally speaking, the market was holding together pretty well, despite the equity weakness."

He recounted the story of how a customer called in with some bids to work on and asked him "what's going on - the equity market is [at that time] down almost 150 [on the Dow] and you're not seeing any weakness at all?"

The answer, he said "was no - you can't buy stuff. It's very strange."

He did not know if it was because "it's summertime, or guys are just stuck on price."

It was not so very long ago that a stock slide of the magnitude of the one seen Tuesday would have sent junk players running for the exits as well - but the trader said that "any kind of a bailout [by market players] now is met with buying. If guys feel like they can pick up paper cheaper than they could yesterday or a couple of days ago, then they're throwing bids out."

Meanwhile, new and recently priced issues "are at higher levels offered. Some of the more solid BB names are better bid."

Telecom junk names were better on the day, a syndicate banker added. However gaming softened, giving up 1/8 point, the source added.

Meanwhile cash continues to come into the high-yield asset class, say sources on both the buy-side and sell-side.

Investors continue to favor credit versus the stock market, they add.

In spite of the massive second-quarter 2009 rally in stocks, the S&P 500 is flat to slightly negative year-to-date, while the Merrill Lynch Master II High-Yield index has posted a whopping 29.9% year-to-date return, as of Tuesday's close, a syndicate banker said.

Vought Aircraft soars on sale

The biggest gainer on the day was Dallas-based Vought Aircraft's 8% notes due 2011, which gained altitude smartly on the news that aerospace giant Boeing will buy the North Charleston, S.C., facility where Vought produces fuselage sections for Boeing's next-generation jet, the Dreamliner 787. Boeing will give Vought $580 million in cash and forgive $422 million in advance payments it has already made.

Market rumors that Boeing would do this, fed by a Wall Street Journal story last week indicating the two companies had been in lengthy talks about such a transaction, caused the Vought bonds to shoot up to the low 70s a week ago from prior levels around 62.

However, disregarding the traditional financial market advice to investors to "buy [on] the rumor, sell [on] the news," the Vought bonds resumed their steep climb Tuesday when the deal between the companies was officially announced. A trader saw Vought as one of the day's busier issues as well as its biggest gainer, pegging the bonds at 87¾ bid - well up from the 74½ level at which the bonds had last traded, back on Thursday. Volume was $17 million.

Another trader, however, mused that "we don't really see those too much. It's pretty tightly held." He said that at his shop, "we used to trade it more, but they just don't seem to trade all that much any more." He said that the $270 million issue was mostly held by large institutional holders, naming New York Life and Goldman Sachs among them. "There's a lot of the traditional high yield holders - a Who's Who of high yield managers - on the list, so it's probably not a name" that's much in play for speculators, he added.

The sale of the plant to Boeing gives the leading U.S. aircraft maker greater control over the pace of the 787 project. The company made what most analysts now consider to be a big mistake by contracting out work on sections of the plane to a large number of vendors all around the world, including Vought - a system which has produced numerous delays in the much-anticipated plane's entry into service, with the most recent postponement coming just last month, when Boeing put off its launch indefinitely until the latest problems could be solved.

While Boeing was looking to take back more control over the development process, Vought, which invested over $500 million in the plant, was clearly looking to get out from under that operation, complaining that the numerous delays - which delay payment to vendors - were making the project unsustainable. In announcing the deal to unload the plant, Vought said that "the financial demands of this program are clearly growing beyond what a company our size can support."

However, Vought, owned by private-equity firm Carlyle Group, will continue to do other work on the 787, as well as work on other existing Boeing aircraft currently in production such as the 737 and 747.

Lear bounces around on bankruptcy

A trader saw Lear Corp.'s bonds among the most actively traded junk issues on the day following its not-unexpected Chapter 11 filing with the U.S. Bankruptcy Court for the Southern District of New York in Manhattan.

He quoted the Southfield, Mich.-based automotive interior components producer's 8¾% notes due 2016 having firmed to 41 bid from 39, with $23 million of the bonds changing hands, and also saw the Lear 8½% notes due 2013 finishing at 411/4, up from 40 bid previously, with $15 million traded, while its 5¾% notes due 2014 were unchanged at 40 bid, also on $15 million of turnover.

Another trader said that "after their filing, there was a little bit of short-covering," which lifted the bonds into the low to mid 40s, before they started to back off. "We traded some bonds here," he said, quoting Lear in a 421/2-43½ context, "but I think if anything, it left better buyers."

A market source saw the 83/4s get as good as 44 during the session, in fairly heavy trading, before the bonds backed off that peak to finish around 40, up a point on the session, while the 53/4s also got as good as 44 before coming back down to 40, essentially unchanged. The source saw the 81/2s as the only bond to buck that trend, going out at its peak level of 43, up about 3 points on the day, at least on a round-lot basis, although the source saw several smaller trades subsequently that knocked the 81/2s back down to around 40, unchanged.

The Lear bonds had been steadily rising over the past several sessions, including Monday's in anticipation of the bankruptcy filing.

American Axle active, lower

Another actively traded automotive name Tuesday was American Axle & Manufacturing Holdings Inc.'s 5¼% notes due 2014. A trader saw them fall to 28 bid from 31 1/8 at the end of last week, with $14 million traded.

The bonds, as well as the company's shares, were seen down in the wake of a J.P. Morgan Chase & Co. analyst's warning that the company still faces a more than 50% chance of sliding into bankruptcy, despite having gotten credit facility covenant waivers good through July 30 from its senior lenders, giving the Detroit-based company time to continue talks with those bankers on restructuring its debt.

Himanshu Patel said in a research note Tuesday that even though American Axle "suggests the waiver is a positive step toward a more permanent solution . . . we worry that if American Axle were going to achieve meaningful medium-term covenant relief, its lenders would likely have not merely granted a waiver" due to expire at month's end.

The analyst further warned that "even if management were successful in dealing with its 2010 maturity out of court, we highly suspect that any solution has the potential to significantly impair the existing equity." Such fears caused the company's New York Stock Exchange-traded shares to slide as much as 32% at one point, before ending down about 16%, on four times the usual volume.

A trader at another shop said that the slide in Axle's bonds Tuesday "doesn't surprise me. I think all of these [parts supplier] companies are hoping for a federal bailout. But I don't think it's coming. The suppliers are kind of left the lurch here in a big way, and it remains to be seen just what's going to happen to them .It's going to be up to the lenders, what they decide to do with these companies, otherwise, they're all going to file."

The problem for credits like Lear and American Axle, he said, is "there's no financing available to them in the public market and if you have a maturity due, or you need to refinance in some way, you're at the mercy of the market, because I don't think the window is open for auto suppliers."

He noted that such companies also have exposure to the faltering carmakers - in its bankruptcy filing, General Motors Corp. listed nearly $45 million owed to Lear and almost $27 million owed to American Axle, among other trade creditors.

Elsewhere in the autosphere, a trader said that GM's benchmark 8 3/8% bonds due 2033 were unchanged at 12¾ bid, 13¾ offered.

He also saw Ford Motor Co.'s 7.45% bonds due 2031 up ½ point at 60 bid, 62 offered, citing market "talk about upgrading their bonds."

On the other hand, a market source was quoting those bonds down 1½ points on the day in a high-59ish context.

Another trader saw the Ford long bonds dip to 60 from 61½ previously, on $5 million of turnover.

He saw the GM benchmarks unchanged at 12¾ bid, on just $1 million traded.

NRG gains continue

Apart from the automotive names, NRG Energy was being quoted up more than 2 points at just under the 101 mark, on busy mid-afternoon volume of more than $17 million.

The bonds have been steadily rising from levels around 95-96 in mid-June, apparently given a lift by the continued efforts of would-be suitor Exelon Corp. to acquire rival power producer NRG. Last week, Exelon raised its hostile all-stock takeover bid for NRG by about $1 billion to $8 billion, and urged NRG's shareholders to vote for its slate of directors at the company's July 21 annual stockholders' meeting.

NRG - which had spurned Exelon's original unsolicited takeover bid as inadequate - said last week that that it was reviewing the new bid, and urged its shareholders to take no action in the meantime.

However, the company has scheduled a Wednesday morning conference call on which its executives will discuss Exelon's revised proposal and NRG's upcoming annual meeting.

Teck tacks higher

Elsewhere, a trader saw Teck Resources' bonds higher for a second consecutive session, in the wake of the Vancouver, B.C.- based energy and mining concern's announcement Monday that it will sell a 17.5% stake in the company to China Investment Corp. for C$1.74 billion.

He saw Teck's 5 3/8% notes due 2015 - which on Monday had moved up some 3 points to 87¼ bid, add on an additional 1¼ points Tuesday to finish at 881/2, on $3 million traded.

While he saw the company's 6 1/8% notes due 2035 unchanged at 77 1/8 on $2 million traded, those bonds had firmed solidly on Monday to that 77ish context from prior levels at 731/2.

Sallie Mae still active

For a second straight session, the trader said, the most actively traded junk name was SLM Corp., its junk bonds apparently given a boost by its successful sale last week of $1.1 billion of bonds backed by student loans under the Federal Reserve's Term Asset- Backed Securities Loan Facility program.

He saw the Reston, Va.-based education lender's 5 3/8% notes due 2014 as the busiest junk bond, with $39 million changing hands. "For a day like today, that's extremely active," he said. The bonds moved up to 83 bid from 81 previously.

He also saw the Sallie Mae 8.45% notes due 2018 as "very active," with $24 million traded. The bonds were unchanged at 89 bid.

The company's 4½% notes due 2010 eased ¼ point to 95 bid, on $22 million traded. He said the credit was "a big odd-lotter, because of the short maturity."

Slow news Tuesday

The high-yield primary market generated no news during Tuesday's session.

Ruling out Fridays, which are customarily quiet, you would likely have to dial back a couple of months to arrive at a perfectly quiet day such as Tuesday, a syndicate official remarked a couple of hours after the close.

A whiff of news arrived in the form of a rating from Moody's Investors Service.

The ratings agency assigned a provisional Ba2 rating to $250 million of debt to be issued by Reliance Intermediate Holdings LP.

Moody's said that about C$103 million will be invested in the company's wholly owned subsidiary, Reliance LP, in the form of additional equity, with the balance used to fund transaction costs and a distribution to Reliance Intermediate's owners.

DBRS assigned its BB rating to the Reliance notes.

Deals in the market

Elsewhere, Basic Energy Services Inc. held an investor call for its $225 million offering of eight-year senior notes, via Goldman Sachs, sources said.

Price talk could come out on Wednesday afternoon, according to a syndicate source.

The deal is expected to price late Thursday or early Friday.

The market expects a yield in the 12½% context, a high-yield mutual fund investor said late Tuesday afternoon.

Basic Energy's existing paper trades in the high-11% range, the syndicate official commented.

"If you tack on a new issue premium it gets you near that [12½%] zip code," the source added.

Meanwhile Yonkers Racing Corp. is in the market with a $225 million offering of seven-year senior secured notes (B1/B+), via Credit Suisse and J.P. Morgan.

The deal is expected to price early in the July 13 week, a market source said on Tuesday.

Although the notes come with four years of call protection, Yonkers Racing will have the option to call up to 10% of them at 103 in each of the first four years during which the bonds are outstanding.

The only other deal in the market is One Communications Corp.'s $275 million offering of first-priority six-year senior secured notes (expected B-).

That deal, which is being led by Morgan Stanley and J.P. Morgan, was initially expected to price during the run up to the July 4 holiday weekend.

Since then it has been "radio silence" on One Communications, with market sources pointing out that "no news," in the primary market, is not necessarily "good news."

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