Junk higher as Fed rate cut boosts sentiment; Thornburg bounces back; primary quiet

By Paul Deckelman and Paul A. Harris

New York, Aug. 17- High yield bonds went along for the ride on Friday as Wall Street moved up solidly after the Federal Reserve surprised observers by stepping in to try to ease investor fears of a credit crunch with a 50 basis point cut in its discount rate. The U.S. central bank sought to further calm the waters by vowing that it stands ready to take other measures, if they are needed.

That unexpected Fed announcement early in the U.S. trading day gave what are perceived to be relatively risky asset classes, including junk bonds and equities, a badly needed boost. Those markets had been roiled by several days of turmoil sparked by renewed fears that the U.S. subprime mortgage lending industry meltdown would have wider-ranging effects than initially thought.

With mortgage-related names having been hit the hardest, the Fed move took some of the pressure off that sector. Thornburg Mortgage Inc.'s bonds - which on Thursday had surrendered some of the sizable gains notched during Wednesday's snapback from Tuesday's 20-point debacle - were once again on the upside on Friday, up some 8 or 9 points on the day.

Residential Capital Corp. - one of Thursday's notable losers - was mixed on Friday but mostly trending higher, which in turn presumably helped the bonds of its parent, GMAC LLC - the former General Motors Acceptance Corp. And another Thursday loser, electronic banking operator E*Trade Financial Corp., was seen better on the day, as it sought to assure the financial markets that its $48 billion mortgage loan portfolio is secure.

With the mortgage industry bloodletting apparently stopped - at least for now - homebuilders who depend on a vibrant mortgage business being able to provide financing for the builders' customers were also seen as beneficiaries of the Fed move. Among the upsiders were Hovnanian Enterprises Inc., Beazer Homes USA Inc. and Technical Olympic USA Inc.

Late Friday a sell-side official said that the Federal Reserve's decision earlier in the day, to "open the discount window" by dropping its discount rate by 50 basis points created a positive tone in junk.

Specifying that the market "felt better," the source added that the high yield tracking CDX closed Friday at 94 7/8 bid, up a point from Thursday's close of 93 7/8 bid.

Sources were in agreement that the Fed decision probably does not have direct and immediate ramifications for the junk bond market.

"It helps the commercial paper market," one senior high yield syndicate official commented on Friday morning.

"To whatever extent that helps the overall liquidity situation, as a whole, it is a positive development for the high yield," the source added.

However the official went on to say that Fed move would do little if anything to address a major impediment which the market now faces: the risk overhang which remains on underwriters' balance sheets as a result of pulled junk bond and syndicated loan deals.

Primaryside activity remains pretty much in its usual late-August summer vacation mode, where it would probably be even if the debt markets weren't being whipsawed by new credit concerns.

Indexes move up

While most of the recently hardest-hit mortgage names were rebounding and most other names were also higher, the activity level wasn't all that great. "The market didn't really trade that much," one trader said. "Most of the action was in the indexes, with most of these guys hedged and wedged every which way."

He saw the widely followed CDX junk bond performance index up 1¼ point on the session, at 94 7/8-95 1/8. The Banc of America Securities High Yield Broad Market Index was up 0.17% on the day, cutting its year-to-date loss to 0.09%. The KDP High Yield Daily Index was up 0.12 on the day to 77.63, its yield coming in by 3 basis points to 8.52%. However, the index still remains well below its 52-week high of 82.63, and not too far off its 52-week low of 76.45.

Thornburg bonds better

Thornburg Mortgage, whose 8% notes due 2013 have been at the epicenter of junk market activity this past week - falling sharply on Monday and even more precipitously on Tuesday, regaining all of that lost ground on Wednesday but giving some of it back on Thursday - was back on the upside on Friday, with a trader quoting the bonds at 75 bid, 78 offered, up from 70 bid, 72 offered late Thursday.

Another trader called the bonds up 9 points at 73 bid, 75 offered, while another market source saw them 9.5 points ahead on the day at 75.5, in very active dealings.

Yet another said "TMA had a pretty good run," seeking the bonds at 74 bid, 76 offered, up from 65.5 bid, 66 offered on Thursday, "a pretty good move."

He noted that the Santa Fe, N.M.-based lending company's New York Stock Exchange-traded shares jumped as well. They were up $2.66 (21.49%), at $15.04, on volume of 17 million, almost five times the norm.

There was no fresh news out about the company - which ironically had trouble tapping the capital markets even though it was nowhere near being a subprime lender. Thornburg, in fact, is considered to have mostly high-quality assets in its portfolio.

E*Trade bonds

E*Trade Financial, whose bonds had pushed lower on Thursday on worries about the company's mortgage portfolio, was bouncing back on Friday.

A trader saw its 7 7/8% notes due 2015 at 85 bid, which he called up 1½ points on the day. He noted that at the beginning of the week those bonds had been trading at 98 and last month had hovered above 103.

"There was a little bounce," he said, "but it's still nowhere near where they were."

The company's 8% notes due 2011 were quoted at 92.5 bid, essentially little changed on the day; earlier in the week, they were trading in the higher 90s.

Along with the bonds, the company's Nasdaq-traded shares rose on Friday, gaining $0.95 (7.01%) to $14.50 on volume of 32.7 million, some 2½ times the usual turnover level.

E*Trade's president and chief operating officer Jarrett Lilien said in an interview that the company would continue to change the mix in its loan portfolio, with any future portfolio growth coming from first-lien mortgages.

Lilien said that while his company has "a pretty conservative portfolio," a lot of the areas to improve upon "are shifting away from consumer loans much more toward first lien mortgages."

Residential Capital popular

Residential Capital's bonds, after a tough Thursday which saw its 6 3/8% notes due 2010 fall some 12 points on the session, was seen mostly firmer on Friday.

While those bonds got as good as 80 during the session, they gave back those gains to end a point lower at 66.5 bid.

However, other ResCap issues were seen firming, with its 6½% notes due 2013 quoted up ½ point at 73. Its 6% notes due 2011 were up slightly, closing at 70. The ResCap bonds were among the most actively traded issues of the day.

ResCap parent GMAC's bonds - which had been lower earlier in the week on investor concern about subprime lending by the residential unit - were seen solidly up on the day, with its 7¼% notes due 2011 up 2½ points at 90.5.

Its 7% notes due 2012 were quoted up 4 points at 89. However, its more widely traded 8% notes due 2031 were seen actually down 1½ points at 88.5.

Homebuilders head back up

Apart from the mortgage names, homebuilders were also seen up, not surprisingly.

Technical Olympic USA's 8¼% notes due 2011 were up 3 points to 71 bid, 73 offered. Another trader saw Tousa's 10 3/8% notes due 2012 up 4 points to 44.5 bid, 46.5 offered.

Among other homebuilder names, he saw Beazer Homes USA Inc.'s 8 1/8% notes due 2016 a point better at 81 bid, 82 offered, and saw Hovnanian Enterprises Inc.'s 8 5/8% notes due 2017 at 79 bid, 80 offered, up a point.

Real estate powerhouse Realogy Corp. - owner of the Century 21, ERA and Coldwell Banker real estate brokerage chains - was also better, its 12 3/8% notes due 2015 were 3 points better, closing at 71.

Primary becalmed

There was no primary market news whatsoever on Friday, sources said.

Only one deal is in the market as business expected to be priced early in the Aug. 20 to Aug. 24 week.

Sabic Innovative Plastics Holding BV is expected to price its downsized $1.5 billion offering of eight-year senior unsecured notes (B1/B+) on Monday.

On Thursday the company lowered price guidance to 9½% at par, from earlier talk which had the notes pricing at a discount to yield 10¼%.

Meanwhile the planned registration rights for the Rule 144A notes have been withdrawn; the notes will be issued via Rule 144A for life.

An informed source told Prospect News on Tuesday that much of the demand for both the bond paper and the loan paper is from Middle Eastern institutions, with European investors and a smattering of U.S. accounts also expected to be in the deal.

Citigroup, ABN Amro, GE Capital, HSBC and JP Morgan are joint bookrunners for the deal to help fund the acquisition General Electric's plastics business by Saudi Basic Industries Corp. (Sabic) for $11.6 billion, including the assumption of liabilities.

On Friday one syndicate official, noting that price talk had tightened by 75 basis points on the Sabic deal said that such a lowering of talk would be notable in any market circumstances, so that it is all the more noteworthy in light of the present volatility in the junk market.

However, the source added, since much of the deal is expected to taken down by Middle Eastern investors it may not have major implications for the overall health of the high yield primary market.

Also on Friday an informed source said that the Downstream Development Authority of the Quapaw tribe of Oklahoma remains in the market with its $235 million offering of eight-year senior notes (B-), via Banc of America Securities.

However there was no news to report on the project funding deal from the native North American gaming concern.

Goose egg

With no issues pricing Friday the Aug. 13 to Aug. 17 week came to a close with no issuance having cleared the high yield new issue market.

Year to date issuance at Friday's close came to $111.84 billion in 290 dollar-denominated tranches.

Nevertheless, in the face of the present sell-off in the junk market, and the overall negative tone of the credit markets, 2007 issuance remains more than 30% ahead of the record-setting issuance seen in 2006, on a year-over-year basis.

At the Aug. 17, 2006 close, $84.625 billion of issuance had cleared the high yield primary in 245 tranches.

Volunteers

Prospect News continued to quiz its sell-side sources as to what kind of September might be expected in the primary market.

On Friday a senior sell-side official said that the first issuer to step up would not likely be one with exceptionally strong credit ratings because given the present volatility - along with the barrage of restructurings, price talk hikes and postponements seen in the primary over the past month - higher quality issuers will almost certainly conclude that waiting for the present volatility to pass will result in lower interest expenses.

This official suggested that one possible species of deal that might work in the post-Labor Day environment is a new LBO financing "that is priced in recognition of the new reality."

The source went on to say that if an LBO is financed based on a cost of financing that works in "the new environment," investors might be tempted back into the primary market.

The official added that a deal which factors in higher interest rates and investors' decreased tolerance for high leverage and exotic, leverage-amplifying structures such as PIK toggle features, might be successfully marketed by the investment banks.

"It would have to be a big enough deal to be liquid, but not so big that it requires everybody to be in, in order to get done," the official added.

The main obstacle to such a scenario, the sell-sider said, is that the mergers and acquisitions market has not fully recognized the impact of the higher pricing in the bond and loan markets.

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