GM debt mixed on asset sale news; VeraSun bonds hurting; MGM Mirage bonds slip after downgrade

By Paul A. Harris and Stephanie N. Rotondo

Portland, Ore., Oct. 22 - As the stock market turned ugly again, so did the junk bond market, traders reported Wednesday.

General Motors Corp. was once again in the news, announcing that it was looking to sell its ACDelco unit. The automaker's bonds ended mixed - though largely weaker - on the day. But not all were pessimistic about the sector's future.

Meanwhile, VeraSun Energy Corp.'s bonds were "down significantly," a trader said, losing as much as 5 points. VeraSun, like other ethanol producers, has been under pressure due to the rising cost of corn and the viability of the industry, which has been called into question.

A ratings downgrade sent MGM Mirage's bonds down, albeit slightly. The downgrade reflected, among other things, market conditions that have caused the once thought to be "recession proof" sector's revenues to decline.

Primus Telecommunications Group Inc.'s bonds were offered "everywhere," a trader said. But investors did not seem keen to pick up the company's debt. One trader opined that the lack of interest was due to the belief that the company will enter bankruptcy.

Market heads down

Market indicators turned lower during Wednesday's session on what one trader called "panic selling."

The CDX High Yield Index fell 2 points to 80 bid, 80.5 offered. The KDP High Yield Index was also lower at 54.05, with a yield of 15.96%, from 54.26, with the same yield.

"It's an ugly market out there," a trader said.

"Nobody is buying anything," said another trader. "Buyside guys are not doing anything, except trying to stay alive."

GM mixed on asset sale news

General Motors' debt was mixed on the day, following the announcement that the company might sell its ACDelco parts unit.

A trader called GM's benchmark 8 3/8% notes due 2033 down half a point at 26 bid, 28 offered. Another trader also saw the issue slide half a point to 28 bid, 29.5 offered. The second trader pegged the 8¼% notes due 2023 at 24.5 bid, 26 offered, up a point.

Detroit-based GM said in a statement that it hired Merrill Lynch to assist with the potential sale of the replacement parts business. The sale is part of the automaker's plan to raise $4 billion through asset sales. The company is also reportedly looking at unloading its Hummer unit, a French parts factory and its medium-duty truck business.

The news of the sale comes as chatter of a possible merger with Chrysler LLC persists, along with concerns about declining auto sales. Both GM and its rival, Ford Motor Co., have seen their debt wobble back and forth for months, but the bonds are currently near their lowest levels.

Ford's benchmark 7.45% notes due 2031 were seen down anywhere from 0.5 point to 1.5 points. One trader quoted the issue at 27 bid, 29 offered, while another placed the paper at 29 bid, 31 offered.

However, while most of the market is viewing the automotive industry as a whole as a sinking ship, some have expressed optimism.

"I think people will figure out that GM and Ford might be a little bit undervalued right now," said a trader, citing reports that the companies have enough cash to at least get through 2009.

VeraSun bonds hurting

Ethanol was once touted as the fuel of the future. As corn prices climb, however, some see the industry falling.

"It's dead, it's over," said one trader of the sector.

If current bond levels of ethanol producers, such as VeraSun, are any indication, the trader might have a point.

The trader called the company's subordinated debt, the 9 3/8% notes due 2017, at 16 bid, 18 offered.

Another trader called the bonds "down significantly," its 9 7/8% notes due 2012 at 50 bid, 52 offered, 5 points weaker.

At another desk, a trader saw the subordinated paper at 15 bid, 17 offered and the senior debt at 49 bid, 51 offered. He noted that not that long ago the senior bonds were trading around 88.

Recently, the Financial Times did some research and found that ethanol investors, such as Bill Gates, have lost billions of dollars. Six of the nation's biggest ethanol producers have posted losses totaling more than $8.7 billion in 2006.

Earlier this year, ethanol companies were further pressured when floods ravaged the Midwest, the largest corn-growing region in the country. Destroyed crops sent the price of the commodity skyrocketing, which in turn affected those companies' bottom line.

Among other energy producers, a trader called Mirant Corp.'s 8½% notes due 2021 lower at 65 bid, 66 offered. Another source, however, saw the 7 3/8% notes due 2013 up 1.5 points at 85.5 bid.

Mirant has scheduled a conference call to discuss its third-quarter results at 9 a.m. ET on Nov. 7.

MGM slips on downgrade

MGM's bonds headed lower after Fitch Ratings downgraded the casino and hotel operator.

A trader pegged the 7½% notes due 2016 at 67 bid, 68 offered. Another saw that issue down a point at 66 bid, 68 offered.

Fitch cut its issuer default rating on MGM to BB- from BB, its senior notes to BB- from BB and senior subordinated debt to B from B+.

Fitch attributed the downgrade to market conditions that have weighed on the gaming sector as a whole. The agency also cited the company's refinancing risk as it tries to complete its CityCenter project, as well as refinance more than $1 billion in debt over the next year.

In the rest of the gaming arena, Trump Entertainment Resorts Inc.'s 8½% notes due 2015 were called unchanged at 24 bid, 26 offered.

Primus offered, but no takers

A trader said Primus Telecommunications Group's bonds were "offered everywhere," but there were few - if any - takers.

"They are going out of business, that's why," said another trader. "They are one of the many companies that will not make it through this crisis."

The first trader said the 14¼% notes due 2011 were offered at 70, down from the "high-80s not too long ago." The 3¾% convertible notes due 2010 were offered at 45, the 8% notes due 2014 at 24 and the 12¾% notes due 2009 at 75.

Broad market mostly lower

A trader quoted Lehman Brothers' senior paper, like the 6 7/8% notes due 2018 at 11.25 bid, 12.25 offered, while another pegged the debt at 9 bid, 11 offered, down a point.

Washington Mutual Inc.'s senior holding company paper was called unchanged by one trader at 65 bid, 66 offered. A second trader, however, deemed the bonds up a point on the day at 63.5 bid, 66.5 offered. Still, he said that the debt "did some weird stuff" during the session.

The trader said the bonds opened weaker at 62.5 bid, 66 offered, then proceeded to fluctuate throughout the day.

"There was definitely some intra-day movement," he said.

GMAC LLC's 8% notes due 2031 fell a point to 37 bid, 38 offered.

Bon-Ton Stores Inc.'s 10¼% notes due 2014 "seemed to have found a floor," a trader said, at 17 bid, 18 offered.

In the homebuilding sector, "builders were lower but not as much as you would think," another trader said. He called Toll Brothers Inc.'s 8¼% notes due 2011 down a deuce at 80.5 bid, 90 offered.

Another source saw KB Homes' 8 5/8% notes coming due this December up a point at 99.25 bid.

Loan tranche for bond investors

The mid-week session produced no primary market news.

But evidence that junk bond investors are shopping in the bank loan market continues to mount.

Consider the case of JDA Software Group Inc., a Scottsdale, Ariz.-based company which earlier in the week made dramatic revisions to its $450 million five-year senior secured credit facility.

A $425 million Libor plus 575 basis points term loan has been replaced with a $250 million Libor plus 600 bps first-out term loan priced at 95, and a $175 million Libor plus 950 bps first-loss term loan, also priced at 95.

The company had been in the market with the $425 million term loan talked at Libor plus 575 bps priced at 97.

Proceeds, in part, will be used to help fund the roughly $346 million cash acquisition of i2 Technologies Inc.

During a Wednesday conversation with a bank loan analyst Prospect News asked whether the JDA retranching was done with any specific audiences in mind - particularly the breakout of the $175 million Libor plus 950 bps first-loss tranche.

"I don't see a lot of hedge funds playing right now," the analyst replied.

"But the target audience could be bond investors, who have been coming into the leveraged loan market because they need the yield."

From the sidelines

Meanwhile a money manager from a mutual fund, whose portfolio includes high-yield bonds, remains on the sidelines wondering when the volatility will subside.

This veteran investor has weathered bear markets in the past, but sees something unique in the present circumstances.

"Even during the worst bear markets for high yield you didn't see this kind of price erosion," the investor said.

The money manager said that last Friday the Merrill Lynch Master II index yielded 18.91%.

The spread, meanwhile, was 1,595 basis points, whereas the previous peak was 1,000 bps, the investor added.

Prospect News inquired as to whether at these levels junk is oversold?

"I don't think of it in that way," the buy-sider replied.

"It certainly represents great investment value. But you still have massive selling on the part of unwinding hedge funds and leveraged players.

"Even though you don't have any calendar you have a huge amount of secondary selling. And you have diminished buyers because people don't have that much cash, and the risk-preference has moved away from riskier securities."

This investor is keeping back a bit more cash than usual - "You can never have enough in circumstances like this" - and believes that spreads could move wider still.

"It doesn't look like we're near the end of this, although when secondary selling stops, with no new issue calendar, things could start gapping closed.

"But that could be months away, if not years away, although it looks more like months than years, to me."

© 2015 Prospect News.
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