More Lehman, WaMu carnage; Ticketmaster off; Clear Channel sells at discount; funds add $130 million

By Paul Deckelman and Paul A. Harris

New York, Sept. 11 - The usual hustle and bustle of Lower Manhattan's financial district subsided a little for a few hours early Thursday, with the focus for many turning to the somber and dignified ceremonies marking the seventh anniversary of 9/11. But what did not subside - in fact, if anything, it got worse - was the growing belief among Wall Streeters as day session wore on that the venerable Lehman Brothers Holdings Inc.'s days as a viable independent investment bank were numbered, reflected in a renewal of the savage pounding undergone by its bonds and its shares.

Traders were also watching the slide in Washington Mutual Corp.'s debt and stock, although that ongoing disaster was largely overshadowed by the dizzying fall of the once-profitable Lehman, for the moment the fourth-largest investment bank in the United States. The bonds of both stuttering financial giants, once solidly investment-grade rated, are now being actively traded around by many shops in the junk world as well.

Apart from those all but officially fallen financial angels, high yield players saw a steep slide in the recently issued bonds of Ticketmaster, after the New York-based live entertainment ticketing and marketing services provider's current biggest partner emerged as its likely major rival, inking its own exclusive ticket-sales agreement with the company that runs some of the biggest concert venues in the United States.

On the upside, General Motors Corp.'s bonds, and those of its 49% owned GMAC LLC auto loan subsidiary, were seen solidly higher, on expectations that the top U.S. carmaker will be able to line up its own version of an auto loan, in the billions, from the federal government, depending upon Congressional approval. Domestic arch-rival Ford Motor Co., also potentially in line for such a loan, followed GM higher.

Toys 'R' Us Inc.'s bonds were higher, after the Wayne, N.J.-based toy store chain reported solidly higher second-quarter earnings.

With the U.S. stock indexes all staging late rallies, the Dow Jones Industrial Average, the Nasdaq composite and the S&P 500 each posting gains on the day of greater than 1.3%, a high-yield syndicate official said that junk felt okay Thursday afternoon.

"It's basically flat," the source added.

"We started out down and have bounced back a little."

Meanwhile the primary market stayed mostly quiet. Market sources said that banks looking to sell hundreds of millions of dollars of the recently privatized Clear Channel Communications Inc.'s bridge loan rollover eight-year bonds to investors had managed to move a chunk of that paper - though at a steep discount to par.

Also in the new-deal arena, price talk emerged on Frontier Oil Corp.'s upcoming issue of eight-year senior notes.

Funds rise by $130 million on week

And as trading was winding down for the day, market participants familiar with the high yield mutual fund flow statistics generated by AMG Data Services of Arcata, Calif., said that in the week ended Wednesday, $130.303 million more came into the weekly-reporting funds than left them. It was the third straight inflow, following and nearly matching the $137.293 million cash infusion seen in the previous week, ended Sept. 3, as well as the seventh inflow in the last eight weeks, according to a Prospect News analysis of the AMG figures. During that stretch, net inflows have totaled $632.366 million, according to the Prospect News analysis.

However, over the somewhat longer term, although there have been eight inflows seen during the last 13 weeks, dating back to the week ended June 18, against just five outflows, the funds have still lost a net of $164.05 million during that time, according to the Prospect News analysis, mostly due to the massive $651.2 million outflow seen in the week ended June 25. Before that had come a run of 11 consecutive weekly inflows, stretching from early April through mid-June, during which time some $3 billion of inflows were recorded, according to the analysis. Prior to April, outflows had been recorded in most weeks, with net outflows totaling around $1 billion.

But with the calendar third quarter now in its final month, inflows, after that slow start, remain solidly ahead, with 23 inflows versus 14 outflows seen in the 37 weeks since the start of 2008, according to the analysis. According to market sources, net inflows from the weekly-reporting funds since the start of the year, excluding distributions but including previous retroactive adjustments and revisions, are now estimated at $1.751 billion, up from $1.621 billion the previous week. At its peak, the 2008 net inflow totaled $1.933 billion in the week ended June 11, the final week of the 11-week run of straight inflows.

A market source meantime said that funds which report on a monthly basis, rather than weekly, saw an inflow of $106.976 million in the week ended Wednesday, continuing the positive trend of the previous week, which saw a cash infusion of $428.058 million.

The flow of money into and out of the junk bond funds is seen as a generally reliable market barometer of overall high yield market liquidity trends - although they comprise considerably less of the total monies floating around the high yield universe than they used to - because there is no reporting mechanism to track the movements of other, larger sources of junk market cash seen in recent years such as insurance companies, pension funds and hedge funds.

Market indicators seen mostly easier

The widely followed CDX index of junk bond performance was up 3/16 point at 93 3/8 bid, 93 5/8 offered, a trader said, while the KDP High Yield Daily Index fell by 5 basis points to end at 70.58, its yield 2 bps higher at 10.59%.

In the broader market, advancing issues trailed decliners by a nearly five-to-four margin. Activity, represented by dollar volume, declined about 19% from the levels seen on Wednesday.

Lehman losses main market focus

Looming above all was Lehman, whose bonds were easily the most widely traded issues on the day, with high yield players now actively joining in as well as the usual investment-grade investors. The beleaguered bank's bonds are now being traded at some junk desks despite its nominal A2/A/A+ ratings, people there said, and on a dollar-price basis rather than the usual spread-versus Treasuries. Spreads on a number of the Lehman bonds now top the 1,000-bps mark that is the traditional indicator of a distressed issue.

Easily the busiest issue, with over $100 million of paper changing hands, was the 5 5/8% notes due 2013, which was seen swinging wildly between a high around 86 and a low just under 71, before finally settling in at the 78 bid level.

A number of other Lehman bonds easily traded up in the tens of millions of dollars, volume-wise, with a trader seeing Lehman's 6 7/8% notes due 2018 "really active" - well over $60 million - finishing the session at a final round-lot trade of 81, well down from its end Wednesday at 88. Also in big-block trading, he saw the company's 5½% notes due 2016 at 74 bid, a 10 point fall from late Wednesday, while its 5¼% notes due 2012 swooned to 78 from late levels Wednesday near 87.

Among the relatively short paper, he saw Lehman's 3.60% notes due 2009 nosedive to 81.5; while he had seen no round-lot trades on Wednesday, the bonds had been trading that way on Tuesday, way up around 96.

And he saw the 4¼% notes due 2010 decline to 79 bid from 85.5 on Wednesday.

A trader at another desk quoted the Lehman 7 7/8% notes due 2009 at 79 bid, 81 offered, down a relatively modest 3 points. He said that while his shop had begun trading Lehman, he thought that particular issue - almost alone among the Lehmans on Thursday - "wasn't heavily traded. There are very little buyers out there, and odd-lots are tough - you gotta work a lot of orders. No one really wants the exposure to it."

While he said that there had "definitely" been some round-lot trades in the issue was well, "you just had to get lucky - there were [odd-lot] pieces for sale all over the place. There was just no one who wanted them."

A market source elsewhere pegged the Lehman 7 7/8% 2010 bonds as down 5 points on the day in active dealings at 78, although that was an improvement from the day's lows at around 71. Lehman's long issue, its 7½% bonds due 2038, also bottomed around 70 before coming much of the way back up to end at 77, off 3 points, in busy dealings.

A market source said that the Lehman bonds began cascading downward in line with a steep fall in its New York Stock Exchange-traded shares, as equity and debt investors expressed their disappointment with the package of "key strategic initiatives" to cut risk and generate cash which the company had hoped would calm market nerves inflamed anew by the nearly $4 billion second-quarter loss reported on Wednesday morning. It didn't, with analysts and commentators noting that the measures - including the sale of some British mortgages, the spin off of commercial real estate assets and the sale of a majority stake in Lehman's asset management business - were not definite, and there was no solid commitment by anyone to buy anything or make any kind of sizable investment in Lehman.

Analyst Kathleen Shanley of the Gimme Credit investment research service derided Lehman's much-touted strategic plans on Thursday as not being ready "for even an off-Broadway run. In particular, the proposed spin-off of $25 to $30 billion of commercial real estate assets won't close before the first quarter of next year, which Lehman is still exposed to losses on the portfolio."

Moody's Investors Service also starkly laid it on the line, saying Lehman's financial flexibility "has become more limited as its stock price has fallen to near all-time lows and the firm is experiencing a crisis of confidence. Although Moody's believes liquidity remains firm and has not shown signs of material erosion, the potential for rapid franchise impairment in this environment remains a significant rating concern."

It noted that while the sharp reduction in market confidence had led Lehman's management to consider all strategic alternatives - even including the possible sale of the firm - Moody's said the heightened level of market stress on Lehman has increased pressure on the firm to consider this latter option, warning that if a strategic transaction with a stronger financial partner were not to materialize in the near term, Moody's would have no choice but to downgrade the ratings, kicking them down to the Baa level.

Lehman's shares - which on Tuesday had plunged nearly 45%, and which had then failed to rebound on Wednesday after the release of its strategic plan, gyrating around and ending moderately lower - resumed their nosedive on Thursday as different analysts weighed in on its plan as being a case of 'too little-too late." By day's end, that stock had collapsed by another $3.03, or 41.79% to end at $4.27, on volume of 471 million shares, over seven times the norm. The stock was trading down another 9% in after-hours trading on Thursday night.

During the session various reports popped up indicating that Lehman had taken the market criticism to heart, and would look to sell the firm. Lehman executives were reported to be in talks with representatives from several large banks on a possible sale; one name being bandied about was Number-Two U.S. lender Bank of America Corp., although there was no immediate confirmation by any of the parties involved. The Financial Times late Thursday also mentioned banking giants Barclays of the United Kingdom and Nomura of Japan as potential buyers, although this speculation was also unconfirmed.

The Wall Street Journal said late Thursday that the Federal Reserve and the Treasury Department "have been working with Lehman to help resolve the bank's troubles, including talking to potential buyers." While the Journal said that although prospective buyers "would likely want the U.S. government to help shield them from future losses from any such transaction," as happened in March, when J.P. Morgan Chase & Co. absorbed the faltering Bear Stearns Cos. and Washington agreed to absorb as much as $29 billion in potential losses, the paper said that the feds - sensitive to the political implications of another such move just two months before the elections - are not expected to structure any Lehman bailout along the lines of the Bear transaction or this past weekend's direct governmental rescue of mortgage giants Fannie Mae and Freddie Mac.

Market watches WaMu as well

The other troubled financial giant whose nominally investment-grade bonds have been bouncing around the junk market at sharply lower levels lately is the nation's largest thrift institution, Washington Mutual, which a trader termed "another disaster."

He saw its 7¼% notes due 2017 beaten down to 25 bid 30 offered, which he called a loss of 15 points on the day.

WaMu finally officially fell to junk status at Moody's late in the day, as the ratings service lowered the company's senior unsecured debt rating two notches to Ba2, from Baa3 previously, with a negative outlook.

That followed WaMu's announcement that it would increase its reserves for bad loans by $4.5 billion, although the company said it has sufficient capital.

Moody's said the downgrade resulted from WaMu's "reduced financial flexibility, deteriorating asset quality, and expected franchise erosion as the bank continues to face adverse performance across its asset base. Its ability to deal with this issue is constrained by prospective earnings that are inadequate to restore or attract capital. This has complicated WaMu's ability to access external capital. Further, as a result, its funding sources have become more concentrated."

Moody's vice president and senior credit officer Craig Emrick said that WaMu's limited financial flexibility "makes it more difficult for it to replenish capital and preserve diversified and stable funding sources. Both issues are critical to restoring the strength of the institution."

Moody's also expects WaMu to report future quarters of large losses. "This could exacerbate negative market sentiment and lead to franchise impairment," the ratings agency warned.

Ticketmaster gets punched

Apart from the failing financial fiascos, a trader saw Ticketmaster's 10¾% notes due 2016 lower, in line with a steep plunge in the company's shares, which came on the news that a company that right now is its biggest partner aims to become its biggest rival in the concert-ticket business. Live Nation, which puts on concerts by such well-known artists as Madonna, Jay-Z, and Shakira, has up till now partnered with Ticketmaster, depending upon the latter to sell the tickets to the event. That arrangement accounts for 17% of Ticketmaster's revenue, or about $210 million of the estimated $1.24 billion Ticketmaster took in last year.

But that contract is scheduled to expire in January - and Live Nation on Thursday unveiled a deal it signed with SMG, one of the country's largest venue operators, which over 200 stadiums and other concert sites, including Chicago's Soldier Field, the New Orleans Superdome and the Los Angeles Forum. Under the terms of the deal, Live Nation will be the exclusive sales agent of entertainment events at such SMG venues - putting it on a direct collision course with soon-to-be-former partner Ticketmaster.

Over the course of the five-year deal, which starts in late 2009, Live Nation will sell an estimated 25 million to 30 million SMG tickets, generating up to $60 million dollars in ticketing fees.

Potential loss of as large an account as Live Nation and its emergence to boot as a competitor caused Ticketmaster's bonds - which had traded on Wednesday at 103.25 bid, 104.25 offered, but which had then fallen to around 99 bid, 101 offered at Thursday's opening - to slide even further, to 97 bid, 99 offered late Thursday.

The company's Nasdaq-traded shares fell by $3.32, or 17.69%, to $15.45, on volume of 3.1 million, or over three times the normal level.

GM, GMAC bonds cruise

On the upside, a trader saw General Motors's benchmark 8 3/8% bonds due 2033 gain 2 points to end at 54 bid, while its GMAC LLC financing unit's 8% bonds due 2031 were a point better at 57.5.

Another trader said that there was "good activity" in the GM and GMAC bonds, with $16 million of the GM benchmarks traded at 52.5 bid, up ½ point on the day and a 1 point gain on the GMAC long paper to 57.5 bid.

Looking at the two companies' shorter-dated paper, he saw GM's 7.20% notes due 2011 jump to 72.25 bid in just round-lot trading, up 4½ points.

"Wow," he exclaimed with no small degree of understatement, "that sure is a big move."

He also saw GMAC's 6 5/8% notes due 2012 gain 1½ points to 58.75 bid, on busy volume of $14 million, while its 6 7/8% notes due 2011 powered up by 1¾ point to 67 bid.

"There definitely was a positive, bullish bias" towards the automotive names, he opined. He further said that he "didn't see much activity" in Ford's bonds, but allowed that its 7.45% bonds due 2031 were up 3½ points at 52. The latter's Ford Motor Credit Co.'s 7% notes due 2013 meanwhile gained almost a point to end just below 76. But the Ford Credit 8 5/8% notes due 2010 lost more than 1½ points to finish at 84.

The automotive bonds were seen generally higher on heightened expectations that Washington will enact a $25 billion loan package that will let the stressed-out carmaking giants borrow funds at favorable interest rates. J.P. Morgan Chase said Thursday in a research note that such a loan program could "notably reduce bankruptcy risk" for one or more of the traditional Big Three.

The loan package was technically enacted last year, but Congress must approve $3.8 billion in taxpayer funds to cover the default risk for it to take effect. House Speaker Nancy Pelosi said Thursday that authorization was likely to be included in one of the pieces of must-pass legislation the House will take up before it adjourns for the year on Sept. 30.

Toys gets a boost

Elsewhere, a market source saw Toys 'R' Us' 7 7/8% notes due 2013 jump 3 points on the session to 85 bid, following Wednesday's release of favorable quarterly numbers. A trader at another desk called the bonds 2 point gainers at 83.5 bid, 85.5 offered.

However, yet another trader, looking only at round-lot transactions, saw the bonds just ¼ point up on the day at 84.5.

The company reported Wednesday that it earned $13 million in the fiscal second-quarter ended Aug. 2, versus a $42 million loss. Sales were up 6.3% from a year ago to $2.77 billion, beating many analysts' estimates.

The company's results were boosted by strong sales of Nintendo Co.'s popular Wii game console, and other video-game and electronic items.

Sales increased at all three of the company's divisions.

Frontier Oil sets talk

In the primary, Frontier Oil Corp. set price talk for its $200 million offering of eight-year senior notes (Ba3/BB) at 8½% on Thursday.

UBS is the bookrunner for the general corporate purposes deal from the Houston-based refiner.

Pricing is set for Friday.

A high-yield syndicate official, not in the Frontier Oil deal, said that a good print on the refiner's new eight-year senior notes would be a positive event. However a successful Frontier Oil transaction would probably not have implications for the broader primary market.

This official professed visibility on four pending transactions, but specified that all of the prospective issuers are "rate sensitive," and therefore might spend some time on the launch pad before actually coming into the market.

Clear Channel notes traded

In what sources characterized as a secondary market trade, dealers sold a downsized $228 million of Clear Channel Communications Inc. 10¾% senior cash-pay notes due 2016 (Caa1/CCC+) at 70 on Thursday.

The resulting yield is 18.012%.

Price talk was 71 to 72.

As the syndicated resale was being marketed a source familiar with the deal recounted that the deal pro formaed at 74, and was marketed early on in the context of 72 to 73.

Initially the underwriters made a unified approach to the market with the entire $980 million tranche of 10¾% cash-pay notes, which they had priced at par on Aug. 1.

The amount of the sale was then downsized to $325 million and then downsized again to $228 million.

Thursday's syndicated sale generated $159.6 million of proceeds.

Deutsche Bank Securities, Morgan Stanley, Citigroup, Credit Suisse, RBS Greenwich Capital and Wachovia are the underwriters.

The notes are part of the financing for the LBO of Clear Channel by Thomas H. Lee Partners and Bain Capital.

Thursday's syndicated sale leaves $752 million of the original $980 million 10¾% cash-pay notes tranche unsold.

In addition to the cash-pay notes, the bond portion of the financing also includes $1.33 billion of 11% senior PIK toggle notes due 2016. Those notes were also initially priced on Aug. 1 when underwriters converted Clear Channel's $2.31 billion bridge loan into the notes.

A unique trade

A sell-side source told Prospect News that Thursday's Clear Channel transaction is "a print," because all of the underwriters were working together.

However, the official added, the notes had already priced, ultimately rendering the Thursday transaction "a secondary market trade."

The sell-sider expects the remaining Clear Channel notes to be sold a little at a time by underwriters working independently from one another, as opposed to in consort.

The source also expressed doubts that underwriters will elect to act in consort again in the near future, to bring more Clear Channel paper or other portions of the LBO legacy supply.

The source termed the Thursday Clear Channel syndicated sale "a unique situation."

$130.3 million inflow

Meanwhile news regarding the cash flows of the high-yield mutual funds remains positive.

Sources told Prospect News late Thursday that AMG Data Services reported $130.3 million of inflows for the week to Sept. 10.

It follows the previous week's $137.3 million inflow.

The inflow to the funds which report to AMG on a weekly basis is the seventh positive flow seen during the past eight weeks.

The only negative flow during that period was a meager $8.6 million outflow for the week to Aug. 20.

Meanwhile a source said that AMG is reporting that high-yield mutual funds which report on a monthly basis saw $106.9 million of inflows during the most recent period.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.