GM keeps jumping around, helped by equities surge; Levi off on earnings; Hovnanian up with shares

By Paul Deckelman and Paul A. Harris

New York, July 8 - With stocks leading the way, the high yield market came off its earlier lows to finish mixed in trading Tuesday. Although traders anecdotally saw a better tone as buyers came out of the woodwork late in the day, some widely followed market barometers still indicated weakness.

General Motors Corp. bonds were seen gyrating around at mostly lower levels for most of the day before turning upward late in the session, helped by the stock market recovery, Meanwhile, the troubled automotive giant's leader told his subordinates that it is exploring plans to cut costs and save cash.

Levi Strauss & Co.'s bonds fell, after the venerable San Francisco-based apparel company reported a dizzyingly steep decline in second-quarter profits from a year ago.

Hovnanian Enterprises Inc.'s bonds were seen having risen, in tandem with a sharp rise in the Red Bank, N.J.-based homebuilder's stock, spurred on by news that the company's chairman had recently voted on Hovnanian's prospects with his wallet, aggressively shares buying a big block of shares of the company he had founded.

Also in the housing sector, subordinated bonds of Tousa Inc. were seen up solidly on a percentage basis, given a boost by a news report indicating that bondholders may notch big gains if a lawsuit filed by several big holders against the bankrupt company's secured lenders seeking a return of assets pledged as collateral for a loan helps to pry loose some of those assets, to the benefit of the bondholders.

Primary market activity was essentially nil, other than the late word that Horsepower Holdings Inc. will delay its upcoming offering of 10-year notes till after the middle of the month.

Market indicators seen mixed

Back among the established issues, a trader said that the widely followed CDX junk bond performance index was up by ½ point on Tuesday, seeing it around the 92¾ bid, 93 1/8 offered level. The KDP High Yield Daily Index, however, was once again lower, retreating 29 basis points to end at 71.27, while its yield widened by 7 bps to 10.49%.

In the broader market, advancing issues again lagged behind decliners, by a nearly three-to-two margin. Activity, represented by dollar volume, was up about 42% from the levels seen in Monday's session.

A trader said that "the market opened up a little bit softer, with the equity markets opening lower and overseas markets lower, everything kind of went offered."

However, later in the session, "as oil sold off again today and equities rallied, we saw the high yield market turn around pretty nicely." He pegged the CDX "up a good ¾ of a point," closing around 92 7/8 bid, 93 1/8 offered.

He saw "a decent amount of activity." Early in the day, "it was mostly bids-wanted, but as the day wore on, we saw some buying late in the day, particularly in Ford [Motor Co.] and GM paper."

But apart from that interest in autos, "there's really very little going on. It was very quiet."

'Struggling' to gain momentum

He said that "a lot" of people in the market are "frustrated. There are vacations [still] going on, and people are kind of sitting on the sidelines a little bit - but the market did rally back pretty significantly, so who knows" what the rest of the week may bring?

He said that "with the holiday week last week" - the fixed-income markets closed up shop early on Thursday and then were completely closed on Friday for Independence Day - "and the quarter-end, the market just sort of took a vacation. So we've been struggling to get back in the groove here."

He noted that "people are loath to sell stuff down several points, which is how the market has traded off over the last week or so. It sort of made a comeback this [Tuesday] afternoon, and we'll see if we get any follow-through" on Wednesday and beyond.

GM gyrations continue

In the autosphere, General Motors' bonds were seen moving around at mostly lower levels in active dealings. Initially most of this was in smaller odd-lot trades, although there were larger pieces traded as the day went on.

A market source saw the company's benchmark issue, the 8 3/8% bonds due 2033, as having opened the day at 54 bid, then pushing all the way down to just below 52, before coming off that low to hit a high of 56 and then finally to return to a 54-55 context. That stands in contrast to Monday's action, when the '33s had mostly traded in a 55-58 range, with the final round-lot trade around 58, although there were several smaller trades later in Monday's session that saw the bonds go home around the 53.5-54 area.

A trader saw the 8 3/8% paper unchanged on the day at 55, although he said that they were down by 2 points "for a while" earlier.

A second quoted the 8 3/8s up "a point or so" on the day in a 54-55 range. Yet another saw the GM benchmark bonds down ½ point at 54.5 bid, 55.5 offered,

A trader meantime saw GM's 49%-owned financing unit GMAC LLC's 8% bonds due 2031 gain a point to 57.5, and saw GM domestic arch-rival Ford's 7.45% bonds due 2031 unchanged at 55 bid, 56 offered. Another source saw the GMAC 8's finishing as high as 59.5 bid, up 1½ points.

Among the shorter-dated paper, GM's 7 1/8% notes due 2013 were seen down 1½ points at 59 bid., although its 8.10% paper due 2024 rose a point to 50 bid, and its 7.20% notes due 2011 were slightly lower at about 67.

GMAC's 6 5/8% notes due 2012 were down a deuce at 61, although at another desk, they were quoted down a point to 62. Its 7¼% notes due 2011 were up by ½ point to just under 70.

GMAC auto finance competitor Ford Motor Credit Co.'s 7¼% notes due 2011 lost 1½ points to end at 76, while its 5.80% notes due 2009 were also off by 1½ to close at 94.

In the equity market, Dow Jones Industrial Average component GM's New York Stock Exchange-traded shares recovered from their early downturn to end up 54 cents, or 5.27%, at $10.78, the day's peak level. Volume of 25.6 million was normal. Ford's NYSE-traded stock rose 43 cents, or 9.62%, to end at $4.90. Volume of 72.8 million shares was slightly above average.

GM - the once-dominant carmaker whose domestic sales have eroded steadily to the point where it now only holds about 20% of the U.S. car and light truck/SUV market, with hard-charging rival Toyota now Number-Two and moving up fast - recently reported an 18.2% slide in June sales from year-earlier levels which, while not as bad as many analysts had expected, still represents a substantial drop.

Several analysts have recently issued negative commentary on GM's prospects, including Merrill Lynch's John Murphy, who warned that the scenario of GM being forced into a bankruptcy filing "is not impossible if the market continues to deteriorate and significant incremental capital is not raised." Murphy said in a research note a week ago that GM might have to raise as much as $15 billion to cope with the eroding conditions in the auto market.

GM has reportedly embarked upon an effort to find new ways to cut costs, conserve cash and rationalize its production to better bring it into line with current automotive market trends. News reports on Monday said that it was looking into the possible sale or even shutdown of one or more of its eight remaining domestic brands, as well as considering additional cuts in its white-collar workforce.

The company's chief executive officer, Rick Wagoner, was reported Tuesday to have dispatched an e-mail to GM's far-flung network of managers outlining the steps that the carmaker was taking to this end, including such recently announced measures as the strategic review of what to do with GM's poorly-selling Hummer SUV brand, the cessation of production at four plants that build pickups, SUVs and medium-duty trucks - once profitable hot-sellers that have been turned into unsalable white elephants by $4 per gallon gas - and on the other hand, the addition of third shifts at the two plants that build the popular, more fuel-efficient Chevrolet and Pontiac small cars.

Wagoner also said that GM is working on developing a new global compact car program for Chevy, is planning the next generation for the popular Chevy Aveo compact, and is designing a high-efficiency engine module for the U.S. market, as well as going forward with its plans for the Chevy Volt extended-range electric vehicle.

Beyond those specific product initiatives, the CEO said that GM's North American management "continues to develop further action plans to optimize our operating structure under these new market conditions, improve our cash and funding position and keep our key product and technology investments on track." Wagoner also sounded the battle cry that each GM employee should stay focused on his or her job, and especially "on what each of us can do to conserve and generate cash."

Wagoner's memo to the managers was dated June 27, but it is believed that it did not begin circulating widely around the company until this week because of the seasonal disruptions to GM's normal routine caused by the run up to the July Fourth holiday weekend.

Levi lower as profits plunge

Elsewhere, a trader saw Levi Strauss' 9¾% notes due 2015 fall to around 95.75 bid, 96.25 offered from Monday's levels north of par, citing the impact of the earnings data released Tuesday.

Another trader saw the bonds at 95.25 bid, 96.25 offered, but only saw that down a point on the day. At yet another desk, those bonds were quoted down nearly 4 points on the day to the 97 level.

Levi - the iconic original manufacturer of blue jeans, although it has since broadened its clothing menu - reported Tuesday that second-quarter net profit was just $701,000, down nearly 99% from $45.7 million a year earlier. Revenues declined by 8% to $936 million from $1.02 billion last year.

The company said that its bottom line was hurt by costs from the roll-out of its enterprise resource planning system, which also created problems in shipping merchandise, as well as a fall-off in sales in its Americas region.

Western Hemisphere sales fell by 19% from a year earlier, offsetting the gains that Levi posted in other parts of the world - a 10% sales rise in Europe and a 6% increase in the Asia-Pacific region.

Besides the shipping-problem impact of the new enterprise resource planning system - which also caused Levi to pull some scheduled second-quarter sales forward into the first quarter, ahead of the system change - sales and profits in the Americas were hurt by a difficult U.S. economic environment which saw consumer discretionary spending fall off, and lower sales of U.S. Dockers products.

Hovnanian bonds seen firmer

A trader Hovnanian's 6½% notes due 2014 up 2 points on the day at 63.5 bid, 64.5 offered, apparently in tandem with a sharp rise in the company's stock on the news that its chairman had bought Hovnanian shares. He saw the company's 8 7/8% notes due 2012 unchanged at 68.5 bid, 70.5 offered.

But another market source saw Hovnanian's 6 3/8% notes due 2014 down 2 points on the day at 61.

Yet another source saw the company's bonds essentially little changed, pegging the 8 7/8s around the same 69.5 level at which they had finished on Monday, despite a brief flurry as high as the 72 area, and saw the 61/2s actively traded but little moved, hanging in at 64. That source did, however, see Hovnanian's 6¼% notes due 2016 lose 2 points to end at 62, in busy dealings.

Hovnanian's NYSE-traded shares zoomed by as much as 26% at one point before coming off that peak to still end up $1, or 21.55%, at $5.64. Volume of 5.2 million shares was almost 1½ times the norm.

The shares rose - and, at least one of the traders said, the bonds followed - on the disclosure in a filing with the Securities and Exchange Commission that the company's founder and chairman, Kevork S. Hovnanian, had bought 220,000 shares on July 3, paying $5.18 apiece for them, or about $1.139 million total.

Tousa up on lawsuit expectations

Also in the housing sector, a trader saw some activity in Tousa Inc.'s bonds, noting a Bloomberg News article indicating that bondholders are optimistic about the outcome of a lawsuit against the bankrupt Hollywood, Fla.-based builder's secured lenders aimed at forcing them to give up collateral they were given in a bailout package for a subsidiary not long before the whole company slid into Chapter 11t.

"The article said that if the lawsuit is successful, it could make the bonds go up a serious amount," he said - perhaps even all the way up to par.

While Tousa's 9% senior notes due 2010 were actually seen down almost 3 points on the session at 52, amid a few smallish trades, its 7½% subordinated notes due 2015 were lifted more than 3 points to 8.25 on the strength of several round-lot trades at high levels late in the day. Its 7½% subordinated notes due 2011 moved up nearly a point to just under 7, helped by several sizable trades during the session.

Bondholders, led by Blackstone Group LP and Carlyle Group, are challenging Tousa's deal late last year with a banking syndicate led by Citigroup, which made a $500 million term loan to Tousa and set up a $700 million credit line so the company could try to keep its troubled Transeastern Properties Inc. from going broke. In return, it pledged assets of some of its subsidiaries as collateral.

Once Tousa itself entered restructuring on Jan. 29, the bondholders cried foul. They're challenging the shift of those assets to the banks, contending that it was an improper conveyance made when the company knew it would likely seek protection, and are demanding that the U.S. Bankruptcy Court in Fort Lauderdale, Fla., strip the banks of the assets and restore them to the estate out of which the bondholders anticipate getting their recovery. The banks, meanwhile, insist that they have done nothing wrong and should not be so penalized.

Better but uncertain

A trader from a high yield mutual fund said that junk was better on Tuesday.

"We rebounded," said the trader.

"There was a lot of short-covering in the homebuilding sector and in some of the financials, and it's hard to say how much you should read into that.

"But we were due, we had been beaten down pretty well."

The trader suspects that Tuesday's moves reflect that activities of the "fast money" hedge funds rather than the more traditional buy-and-hold accounts.

Meanwhile a money manager from a different high yield mutual fund, also speaking on background, said that presently investors don't know what to do.

Noting that equities staged a rally on Tuesday, the money manager remarked that mortgage securities firms Fannie Mae and Freddie Mac were the big news Monday, sliding 20% on investor apprehensions that the companies would have to raise piles of new capital.

"Today Fannie Mae equity is up $1.66 [10.55%], a pretty big move after an ugly day on Monday," the investor commented.

The money manager said that energy and commodities were the losers, Tuesday - at least in the stock market.

"All E&P companies off 4% to 5%," said the buy-sider. "Coal companies are off 4% to 5%. Steel and copper are off.

"They've come up from the morning lows, but they're still down pretty much.

"People think they're going to miss getting out when oil starts to roll over," the buy-sider added, noting that oil was selling for $136 per barrel at the Tuesday close, down $5 on the day.

"Oil was $145 per barrel two days ago," the money manager said

"There was definitely a panic this morning."

Master limited partnerships were also off on Tuesday, the source said.

This investor's portfolio includes Inergy LP bonds, which are off 3 to 4 points during the past two to three weeks.

Meanwhile Tuesday's primary market produced no news whatsoever.

Why don't we do it in the mezz?

Elsewhere market sources commented on Monday's news that sponsors have elected to use a $600 million private placement of senior unsecured notes - which they themselves will take down - to help fund the approximately $3.5 billion LBO of The Weather Channel by NBC Universal, Bain Capital and the Blackstone Group.

One source from a high-yield syndicate desk noted that conventional wisdom suggests an issuer seeking to raise $600 million would see a much better execution in the Rule 144A junk market.

However a source from a high yield mutual fund commented that the phenomenon of LBO sponsors financing in the mezzanine/private placement space is apt to develop into a trend.

"That might be the way the sponsors are going to have to finance their way, going forward, because the high-yield and loan markets are just not going to take the stuff," the buy-sider said, "at least not on the terms that the sponsors would approve.

"If this financing window opens up they're going to start trying to drive trucks through it."

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