Sprint shrugs off stock downgrade, slide; GM keeps cruising; Charter a champ, Momentive massacred

By Paul Deckelman and Paul A. Harris

New York, March 16 - Sprint Nextel Corp.'s bonds and paper from its Sprint Capital Corp. subsidiary were seen actively traded and points higher on Monday, even though there was no fresh positive news out about the Overland Park, Kan.-based wireless telecommunications provider - and in fact, ample negative news, including a downgrade of its shares by a bank analyst and a resulting slide in the stock's price.

Charter Communications Inc.'s bonds moved higher, unfazed by news of a wider loss quarterly loss and the company's decision - admittedly not unexpected - to skip making a scheduled bond interest payment, as holders looked beyond the immediate negatives to focus on what they believe will be a healthier debt picture once the St. Louis-based cable-TV operator restructures through the bankruptcy courts.

Also on the upside, General Motors Corp.'s bonds continued to gain for a third consecutive session, riding the momentum they gained last week after the company said that it did not need - for now, anyway - the $2 billion in federal assistance GM had thought it might need to get through the month. GM bondholders meantime presented their ideas on how to restructure the company to the Obama administration's auto-bailout task force.

On the downside, Momentive Performance Materials Inc.'s bonds slid badly on Monday after the company reported wider losses for fiscal 2008 versus a year earlier and warned that it may be unable to maintain compliance with the leverage covenants in its credit facility.

After having successfully priced the upsized secured bond offering from Dole Food Co. Inc. at the tail end of last week, the junk primary market was inactive on Monday. The new Dole bonds were meantime seen continuing to cling to levels slightly above their Friday issue price, but traders said they didn't seem to be moving up much.

Market indicators mostly keep rising

Back among the established issues, a trader saw the widely followed CDX High Yield 11 index of junk bond performance - which had risen in each of the four previous sessions, including a ¼ point gain Friday - unchanged on Monday, quoting it steady at 69½ bid, 70 offered.

However, the KDP High Yield Daily Index shot up by 75 basis points to end at 51.16, while its yield tightened by 25 bps to 14.12%.

In the broader market, advancing issues fattened their lead over decliners to a two-to-one margin.

Overall market activity, measured by dollar-volume totals, rose by 7% from the levels seen in Friday's session.

Even so, a trader said it seemed to him that "everyone was filling out their basketball pools today," jockeying for position to cash in on "March Madness," as the annual college basketball championship tournament rounds get underway.

Apart from that, he said that "the tone was a little bit better, but there wasn't a tremendous amount of action, to be quite honest."

Easing from early gains

Another trader said that "although not extremely active in the morning, there was definitely a positive bias, of high yield following along with equities and it seemed like as soon as the equity market started pulling back, we came to an abrupt halt."

While stocks rose for most of the session, they gave back all of those gains as the afternoon wore on to close slightly lower, with the bellwether Dow Jones Industrial Average ending down 7.01 points, or 0.10%, at 7,216.97, while the Standard & Poor's 500 closed down 0.35% and the Nasdaq composite index lost 1.92%, on market uneasiness about the outlook for the tech sector that it well-represented in the latter index.

The trader said that he "did not personally see things weaken, as stocks faded back down to unchanged, but I certainly saw some [junk] buyers pull out."

But not all - he saw the Community Health Systems Inc. 8 7/8% notes due 2015, often cited as a junk market barometer because of the Franklin, Tenn.-based hospital company's issue's great size and widespread distribution, move up to 94.375 bid from a Friday close at 93, on volume of $26 million. "It's good volume for that one," he said. "It should be trading with that kind of volume," since it's a $3 billion issue, "but it typically doesn't. So that's actually a good uptick and an indication of what our market did, at least initially."

A high-yield syndicate source described cash bonds as ½ point higher on Monday.

"The secondary was higher in the morning, and remained firm, on limited volume," the source said.

However he saw the CDX High-Yield index fading more notably with the stock market.

Sprint springs ahead

One of the more active names, showing good volume as well, was Sprint Nextel and Sprint Capital. The latter's 8 3/8% notes due 2012 were seen by a market source to have busily traded up to 84 bid, a more than 4 point gain on the day.

The trader meantime saw those bonds up 2½ points to that 84 level, on $22 million traded, calling the move "a nice uptick."

He also saw the parent company's 6% notes due 2016 up more than 3 points at 68.5 bid, on $9 million traded, while Sprint's 6 7/8% notes due 2013 were also "up nicely" at 56 bid, a 2 point gain with $14 million changing hands.

The move was all the more notable, he said, because the company's New York Stock Exchange-traded shares slid by 57 cents, or 13.77%, to finish at $3.57 on volume of 61 million, about 25% more than normal.

The shares slid after Wachovia Corp. analyst Jennifer Fritzsche, in a research note, lowered her rating on the wireless service provider's stock to "market perform" from "outperform," cautioning that Sprint's "churn," or customer turnover, in its bread-and-butter iDEN business walkie-talkie service segment will likely exceed forecasts, and raised her own first-quarter churn estimate to 2.3% from 2.1%.

While acknowledging that sometimes, a company's shares and bonds may move in opposite direction on news that is favorable to one at the expense of the other, he added "but not on something like this. Welcome to high yield."

Another trader saw the Sprint Capital 6.90% notes due 2019 some 4 points better on the day, around the 70 level.

Charter charms investors

Also in the communications area, Charter Communications' bonds headed higher during the trading session following the company's release of fourth-quarter earnings and the news that a bond interest payment will be skipped.

A trader saw Charter's 10¼% notes due 2010 firm to 86 bid, up a point from Friday, although he said this took place on "not a lot of trading." He saw more activity in the company's CCO Holdings LLC 8¾% notes due 2013 which traded up to 83 bid from prior levels at 80.5 bid, 81 offered, on "some trading."

Another trader saw Charter's 11% notes due 2015 at 10 bid, 11 offered, which he called "up 4 or 5 points" on the news, while another suggested that "short-covering" might be behind that bond's rise. At the other end of the price spectrum, its Charter Operating 8% notes due 2012 gained more than 2 points to close just below 92.

A trader at another shop opined that market players known that "they're going to be filing for bankruptcy within the next month, and people just want to make sure that the [company's previously announced] restructuring plan doesn't get derailed."

For the three months ended Dec. 31, 2008, Charter had a net loss of $1.495 billion, or $3.96 per common share, compared to a net loss of $468 million, or $1.27 per share, in the previous year. However, the company said that the increase in net loss resulted primarily from an impairment charge, and was partially offset by the increase in sales of bundled services and improved cost efficiencies.

Heartening its bondholders, Charter actually reported gains in some financial measures.

It said that its pro forma adjusted EBITDA totaled $619 million for the fourth quarter, an increase of 10.1% versus the pro forma results for the year-ago quarter of $562 million.

Actual adjusted EBITDA for the quarter was $620 million, an increase of 9.7% versus $565 million in 2007.

Fourth-quarter pro-forma revenues were $1.653 billion, an increase of 7% from the year-earlier period.

Actual revenues for the quarter were $1.656 billion, up from $1.553 billion.

As was previously reported, Charter - which had $21.66 billion of debt on its books at the end of 2008, roughly evenly split between outstanding bonds and bank debt - recently reached an agreement in principle with an ad hoc committee of debt holders on the terms of a financial restructuring aimed at reducing its $11 billion of bond debt by approximately $8 billion. That restructuring is expected to be implemented through a Chapter 11 filing that will take place on or before April 1.

With the plan in mind, one of Charter's subsidiaries, CCH II LLC, consequently did not make its scheduled interest payment on Monday on certain of its outstanding senior notes.

The governing indenture for the notes permits a 30-day grace period, and according to its agreement with the bondholders, Charter expects to make its bankruptcy filing prior to the expiration of the grace period.

Momentive mauled on numbers, warning

While a wider loss and even the prospect of a missed bond coupon had little impact on Charter's charge, the same could not be said for the market's Dog Of The Day, as one trader called it, Momentive Performance Materials, whose bonds dropped sharply after the Albany, N.Y.-based company, which provides specialty high-technology materials products to the silicone, quartz and ceramics markets, reported wider losses for fiscal 2008 versus a year earlier, and warned that it may have a hard time staying in compliance with its credit facility financial covenants.

A trader said that the company's bonds were "definitely down a good bit" from previous levels, quoting its 11½% senior subordinated notes due 2016 at 11 bid, 12 offered, down from prior levels at 17, while seeing its 9¾% senior notes due 2014 as "active" in the mid-20s, down at least 7 points from prior levels in the lower 30s.

Another trader saw the latter issue as one of the session's most active bonds, pegging them at 24.25 bid, down 32 at the close Friday, on volume of $24 million.

He said that the 111/2s had slid to 12 bid from 16 on Friday, on volume of $3 million, while the company's 10 1/8% notes due 2014 were trading at 14, well down from the last previous round-lot level of 24, back on March 4.

The bonds were beaten down after the company reported that while its net sales rose 4% last year to $2.639 billion from $2.538 billion a year earlier, its other financial measures showed a clear deterioration. Its net loss nearly quadrupled to $997.1 million from $254.3 million in 2007, and it swung to an operating loss of $836.6 million versus year-earlier operating income of $82.2 million. Adjusted EBITDA fell 15.6% year-over-year to $377.1 million from $447 million previously.

Momentive said that the fourth quarter had seen "dramatic and in many ways unprecedented declines in demand for our products, which significantly impacted our adjusted EBITDA" - and things don't seem to be getting any better. The company said that over the first eleven weeks of the current quarter, it has "continued to see weak demand in all regions across all major product segments and we expect more of the same for the remainder of the quarter. While we have seen deflation in certain raw materials, the impact of this effect has been marginal in comparison to the drop-off in product demand."

Against those challenging conditions, Momentive projected first-quarter revenue in the range of $410 million to $440 million and adjusted EBITDA of $5 million to $15 million, both well behind its year-ago pace, as well as a GAAP operating loss of $60 million to $75 million.

Momentive also warned that although it was in compliance with the senior secured leverage ratio covenant of its credit facility as of Dec. 31 - the covenant sets a maximum ratio between its total senior secured net debt and its trailing 12-month EBITDA of 4.25 to 1 - it "may have difficulty" complying with that covenant going forward if "weak demand stemming from the global economic downturn continues throughout 2009 and we experience sufficient declines in sales and EBITDA for which we cannot compensate with restructuring or business optimization initiatives."

Momentive also noted that it drew down $90 million of its remaining revolving credit availability on March 10 in order to "preserve our financial flexibility and access to capital in light of the current volatility of financing markets," leaving unused capacity of $28.1 million under the revolver and $7.1 million under its synthetic letter of credit facility at that time. Momentive said it expects to have total debt, net of cash, of between $2.85 billion and $2.91 billion at the end of the current first quarter.

GM upside ride continues

Back on the upside, trader saw continued gains for General Motors's debt, which were in the passing lane for a third straight session, cruising along on the momentum of last week's announcement that the troubled Detroit giant would not need to tap the $2 billion of federal bailout money it thought it would need to get through March.

A trader saw its benchmark 8 3/8% bonds due 2033 up 2 points on the day at 16 bid, 18 offered, while another saw the bonds get "as high as 17" from prior levels at 15 bid, 16 offered. A third trader saw those benchmarks climb to 17.25 bid at the close from 16 earlier, on $13 million of turnover.

Before GM's Thursday announcement that its cost-cutting was going better than expected, sparing it the need to tap the $2 billion of federal funds, those bonds had languished around 11-12.

Also on Monday, advisers to a GM bondholders committee said they had presented a framework plan to the federal autos task force and to the company which they said would provide the company's best chance for an out-of-court restructuring.

MGM Mirage eying revolver

On the restructuring front, the new bonds of troubled Las Vegas gaming, entertainment and lodging company MGM Mirage traded up as much as 5 points during the Monday session, according to an official on the high-yield trading desk of an investment bank.

The 13% notes due 2013 were at 83¼ bid, versus 78½ bid at Friday's close.

Those notes priced at 93.132 in a $750 million issue during late October of last year.

The Monday financial headlines reported that the company has been exploring casino sales.

"It looks like almost anything is up for sale," the official commented.

"There was some talk about the Bellagio, but the bids weren't too attractive.

"They are also seeking to securitize their revolver up to $2 billion, which they seem to think that they can do within their covenants."

MGM releasing numbers, may secure loans with casino assets

The company announced plans to release its long-delayed 2008 fourth-quarter and full-year numbers after the close Tuesday. Players were said to also be looking for some kind of increased clarity as to what the company plans to do about its deteriorating debt and liquidity situation, even as the Bloomberg news service was reporting that it was considering putting up casino properties as collateral in return for easier covenants from its bankers.

A trader saw MGM's most active issue, its 6¾% notes due 2012, essentially unchanged at a touch over 40 bid, on $9 million traded, and saw its 6% notes coming due on Oct. 1 as also unchanged at 64 bid, with $8 million changing hands. However, he saw the company's 8 3/8% notes due 2011 at 21 bid, up from 18 - "a real mover," he called it, although there was only volume of $3 million.

At another desk, a trader saw MGM's secured 13% notes due 2013 having "moved up a little," to 83 bid, 84 offered from previous levels at 82, and said there seemed to be some "good size" to it.

However, a different market source quoted MGM's 6 5/8% notes due 2015 down more than a point at 38.

Bloomberg reported that MGM was in talks with its banks, seeking to modify lending terms on its unsecured debt and avoid default by perhaps pledging some of its many casino properties as loan collateral.

The report attributed its information to an unidentified source said to have knowledge of the discussions.

Neither MGM Mirage nor Bank of America Corp., the administrative agent for the company's $7 billion senior unsecured credit facility, would confirm the specific details of the Bloomberg report, other than a general statement from the casino company that talks with its financial partners are "ongoing," that it is "evaluating every possible option" and "will explore all serious and credible possibilities."

MGM Mirage, hard hit by the gaming industry downturn, warned back on March 3, when it said it would delay filing its 10-K annual report for 2008 with the Securities and Exchange Commission, that it might be in breach of some of its credit facility covenants, which would constitute a default and allow its lenders to accelerate its loan and demand payment and which could also trigger cross-default provisions in some of its other debt instruments, such as its numerous bond issues. The company faces a Tuesday deadline for filing its 2008 year-end and fourth-quarter reports with the SEC. Those reports are expected to include a "going concern" warning from the company's auditors, raising the possibility that it may slide into bankruptcy.

Plenty of properties

MGM Mirage may be cash-strapped, but has no shortage of properties should it decide the play "Let's Make A Deal" with lenders; it outright owns nearly two dozen hotel, casino or other resort properties, many on the famed Las Vegas Strip or elsewhere in Nevada, as well as in such other jurisdictions as Mississippi, Illinois and Detroit. It also owns 50% stakes in the Borgata resort in Atlantic City, N.J., the MGM Grand resort at the Foxwoods Casino in Connecticut, and the MGM casino in the Macau gaming enclave in China. Additionally, it is 50-50 partners with Dubai World on the ambitious CityCenter project in Las Vegas, largely built but needing at least another $1.2 billion to finish construction, and has other projects under development but not yet built in Abu Dhabi and Atlantic City.

Whether the company opts to put up one, some, many or even most of its casinos or other properties as collateral to secure its loan and buy off its impatient bankers is a complex question, since MGM Mirage is essentially a gaming conglomerate cobbled together since 2000 by the original merger of what were then MGM Grand Inc. and Mirage Resorts Inc., followed by the subsequent acquisition of Mandalay Resort Group. MGM Mirage inherited bonds of predecessor companies such as Mandalay and the latter's old Circus Circus Enterprises Inc. unit, as well as issuing its own debt, with the numerous bond issues having differing and potentially contradictory indenture clauses permitting or in some cases, limiting, the offering of collateral.

Decoding the indentures

In a research report, Covenant Review LLC - a New York-based company specializing in detailed legal analysis of bond indentures and credit facility covenants of companies engaged in restructurings or other special situations - declared that MGM's situation "is a good example of what happens when multiple bonds are issued under multiple indentures by different companies that are merged together." Company founder Adam B. Cohen speculated: "It may be that MGM and the lenders consider possible security packages, but decide that it's just too complicated to try to manage around all of the covenants."

On the other hand, Cohen theorized that the lenders "may be much better off going into bankruptcy as secured lenders six months from now, rather than as unsecured parties battling on par against bondholders now."

Should MGM Mirage and its lenders decide to go that course and be "bold and creative" in structuring such a collateral agreement, Covenant Review projected that holders of the MGM Mirage secured 13% notes due 2013 that the company issued late last year "should expect to receive equal and ratable liens" with the bank debt holders, since their covenants provide much tighter protection than most of the company's other bonds. Cohen said that this is "not surprising, given the timeframe" during which the indenture for those bonds was negotiated and executed. The $750 million of bonds priced last Oct. 31 - well after the credit crunch had begun and the gaming industry had gone into its steep swoon.

Cohen also that the $100 million of 7¼% debentures due 2017 issued by the old Mirage Resorts might either be secured or else be tendered for by MGM, and predicted that because of the legal difficulty in securing them without then having to also secure other bond issues, the $150 million of 7 5/8% senior subordinated debentures due 2013 issued by the old Circus Circus might have to be tendered for, either for cash or in a debt exchange.

Analysts also raised the possibility that MGM could actually transfer a property to bondholders in exchange for debt or, transfer it to an investor who would then buy out certain of the bondholders by paying them a premium over the current market value of their bonds, bringing down the company's total debt load an improving its covenant ratios, while avoiding the need to sell a property outright at currently depressed price levels.

Cohen said that speaking generally, such a course "would be possible," though there would be some limitations on the total number of properties transferred generally, with respect to MGM Mirage bonds, or the number of properties transferred out of a specific entity, like the properties owned by Mandalay Resort Group subsidiaries with respect to Mandalay Resort legacy bonds.

The Bloomberg report further stated that Evercore Partners has been hired to help MGM Mirage restructure its debt.

Dole holds at higher levels

Traders saw the new Dole Foods 13 7/8% secured notes due 2014 continuing to trade above the 93 bid mark, keeping the Westlake Village, Calif.-based fruit and vegetable processor's new issue a bit above the 92.883 level at which the upsized $350 million issue of bonds priced - but not by very much.

A trader saw the bonds at 93.5 bid, 94.5 offered, which he said was "not that much higher" than issue.

A market source noted that some of the new deals that have priced in recent weeks have just "shot right up" once they were freed - notably the Tyson Foods Inc. $810 million of 10½% notes due 2014 which priced on Feb. 26 at 92.756 and which were most recently seen in a 98ish context - but said the Dole offering didn't seem to be among that elite group.

Another trader pegged the new Doles at 93.625 bid, 94.125 offered.

Quiet in the primary

The high-yield primary market failed to produce any news on Monday.

However an expected $10 billion sale of high-grade notes from Pfizer Inc. has kindled interest among high-yield observers - not least because the drugs company's notes, rated AAA by Standard & Poor's, appear to be coming at spreads more characteristic of triple-B paper, sources said.

The deal is expected to come in tranches of three-year notes, talked at 310 bps over Treasuries, six-year notes at the 345 bps area, 10-year notes at the 330 bps area and 30-year notes at the 350 bps area, according to a market source. There is also a floating-rate piece talked at three-month Libor plus 200 bps, plus or minus 5 bps.

However, the high-yield primary market remained quiet on Monday, sources said.

One syndicate official's outlook for the week ahead was muted during the mid-Monday morning hours, even as the Dow Jones Industrial Average - which would eventually close 0.10% lower on the day - was still continuing the rally that stretched back across the four previous trading sessions.

"I don't think we're there yet," the syndicate official said.

"This rally feels a little premature.

"A bunch of banks saying that they've been profitable for a couple of months doesn't really mean anything yet."

Sara Rosenberg contributed to this report.

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