Junk follows stocks down, most names lower; TRW tumbles but Countrywide zooms; AMD gyrates on JV

By Paul Deckelman and Paul A. Harris

New York, Oct. 7 - Against the backdrop of yet another tough day on Wall Street on Tuesday, the high-yield market was once more lower, although not as dramatically as on Monday, when there were numerous names down two, three, four points or more.

There was still such trouble for some credits- such as TWR Automotive Holdings Corp., whose bonds slid as the auto parts maker warned of a third-quarter loss and withdrew its full-year 2008 guidance. However, those kinds of losses were not really the norm.

And there were some that went the other way, such as Countrywide Financial Corp., whose bonds zoomed on the news that a legal black cloud which had been ominously hanging over the corporate head of the Calabasas, Calif.-based residential lender had been removed.

Advanced Micro Devices bonds gyrated at mostly higher levels on the news that the Sunnyvale, Calif.-based computer chip manufacturer - trying to keep up with larger rival Intel Corp., the industry leader - announced a plan to spin some of its factory operations off into a new joint venture, which will give AMD a cash injection and let it cut its debt.

Market indicators lower

The widely followed CDX index of junk bond performance, which had fallen by 1 point on Monday, lost another ¾ point on Tuesday, a trader said, quoting it at 84 bid, 84½ offered. The KDP High Yield Daily Index slid 38 basis points to end at 59.67, as its yield gapped upward by 17 bps to 13.75%.

In the broader market, advancing issues trailed decliners by a margin of better than two to one. Activity, represented by dollar volume, rose by 35.5% from the levels seen on Monday.

With junk players largely taking their cue from equities - and the direction there was certainly downward, with the bellwether Dow Jones Industrial Average down 508.39 points, or 5.11%, to 9,447.11, this on top of Monday's 370-point loss - a trader characterized the session as "pretty bloody."

Another said it was just "more ugliness," pretty much all around.

Following Monday's sorry session, at the open Tuesday "there was definitely a feel of bottom-fishing," he said, "with more guys from the sidelines jumping in." But that was not to last.

"As soon as [Federal Reserve chairman Ben] Bernanke started speaking and the equity market started cratering, everybody [in Junkbondland] ran for the hills again."

The Fed boss warned in a Washington speech that the financial crisis could prolong the difficulty the economy is already facing. Optimists saw that caution as a sign that another interest rate cut, or even two, might be possible before the end of the year - but they were outnumbered by the pessimists, who instead focused on his downbeat assessment.

Wall Street also drew little solace from the announcement earlier by the Fed that the central bank plans to buy massive amounts of three-month commercial paper, hoping to jump-start that market, which had slid to a three-year low of $1.6 trillion last week. That latest Fed initiative follows Monday's announcement that the central bank was expanding its auctions of cash to banks to as much as $900 billion.

Manager sees forced selling

Forced selling had the market in free-fall again on Tuesday, according to a high-yield mutual fund manager who spoke shortly after the close.

The junk bonds of Graham Packaging LP Co. were at 75¼ offered, the source said, adding that they fell 3 points in two hours.

Forced selling by the hedge funds was at play, the buy-sider maintained.

"It's repricing everything," the source added.

"Hedge funds own all the loans. They're forced to sell, so they're just hitting bids. And the bids keep getting lower and lower.

"That reprices the cash market."

Meanwhile the Chicago Board Options Exchange Volatility Index, the VIX, closed Tuesday at 53.68, an all-time closing high, the fund manager said, noting that during the Monday session the VIX reached an intraday high of 58.25.

"In the dot-com bust it got as high as 49.35," the manager commented.

"So volatility, now, is higher than during the dot-com bust."

Meanwhile on Tuesday there was no activity in the primary market, sources said.

A Fed cut

The fund manager is looking for a cut in the Fed Funds rate when the Federal Reserve Bank's Federal Open Market Committee meets on Tuesday.

Right now there is a positive Treasury curve, the source added.

But it needs to steepen.

For example on Tuesday the difference between the yields of the two-year Treasury and the 10-year Treasury was 210 basis points.

At the beginning of September it was 145 bps, the source said, adding that it was at 100 bps at the beginning of the year, and 50 bps in the middle of 2007.

"So it's steeper but it needs to be a lot steeper," the manager asserted.

"The steeper the yield curve, the more money banks can make, if they're lending."

Reflecting on the bail-out

The money manager also believes that the U.S. Government's massive financial rescue legislation, which cleared Congress last week and was signed into law by president Bush, should have a positive impact on the credit markets.

"The Fed has the biggest balance sheet in the world, and can hold the assets they are buying for a very long time," the money manager said.

"They're planning to buy mortgages.

"Ninety-four percent of mortgages are performing. It is the 6% which aren't performing that are causing most of the problems. Those 6% were leveraged up 20 times, so the problem is magnified by that much.

"But the Fed can hold those things until they are performing, or until they can rework or renegotiate them to where they can perform.

"And there is some value to them," the buy-sider contended.

"They're not just worthless."

TRW takes the plunge

Against that somber backdrop, most junk issues moved lower, and there perhaps was no bigger loser than TRW Automotive. A trader saw its 7¼% notes due 2017 trading in a wide 59-64 range "early this morning," versus levels of 62.5-67 on Monday and 68.5-71 on Friday.

Another market source meantime saw the bonds swoon by a full 10 points to 61 bid.

The bonds fell after the Livonia, Mich.-based automotive parts supplier company said it expects to post a third-quarter loss and pulled its full-year guidance, causing both Moody's Investors Service and Standard & Poor's to put its ratings under scrutiny for a possible downgrade.

Back during the summer, TRW had projected that that it would post a full-year profit of $2.40 per share to $2.70 per share on $16.4 billion to $16.8 billion in sales - up from its earlier expectations of earnings in a $2.15 to $2.45 per share range.

But that was then - and now is now. TRW said sales have been lower than expected since it issued its guidance in July, while its restructuring and commodity costs have increased markedly, causing it to withdraw the forecast. It blamed the change on lower-than-anticipated vehicle production in both the United States and Europe.

TRW tows other parts makers lower

That helped pull down other automotive suppler names such Visteon Corp.; a trader saw its 7% notes due 2014 down 5 points at 29 bid, 32 offered, while Lear Corp.'s 8¾% notes due 2016 were down a deuce at 60 bid, 63 offered. Lear's 5¾% notes due 2014 were off by 3 points at 58 bid.

The trader said that auto parts supply names were "obviously feeling downward pressure as GM, GMAC and Ford continued to fall."

And those automotive benchmark names were also down as well. A trader saw General Motors Corp.'s 8 3/8% benchmark bonds due 2033 down 1 point at 31 bid, 33 offered, saw GMAC LLC's 8% bonds due 2031 off 1 point at 32 bid, 33 offered, and saw the Ford Motor Co. 7.45% bonds due 2031 down 2 points at 32 bid, 34 offered.

At another desk, a trader saw the GM long bonds down 2 points, at 31.5 bid. He saw the GMAC bonds "actually up a little" in the midst of a down market, at 35 bid, versus 34.5 on Monday, adding "that's a shock." And he saw the Ford '31s down ¼ point at 33.75.

Yet another trader saw those Ford bonds slide 2½ points to 32 bid, 35 offered, and saw the GM benchmarks down an identical 2½ points to 31 bid, 33 offered.

Among the shorter-dated GM and Ford issues, a trader saw GM's 7.20% notes due 2011 lose ¾ point to end at 45.25. Its 7 1/8% notes due 2013 were down 3 points at the 35 level, a market source said, while another source saw those bonds at 36, but called that up 1½ points on the day.

GMAC's 8 7/8% notes due 2012 gained more than a point to 38.5, while its 6% notes due 2011 were 3 points better on the day at just under 40. However, a market source said that GMAC's 6¾% notes due 2014, recently in the mid 30s, slid all the way to the 24 level, though on no news about the automotive and residential lender.

Ford Motor Credit Co.'s 7 3/8% notes due 2009 were nearly 3 points better, closing just under 72.

Community Health less than robust

Outside of the autosphere, a trader noted yet another fall in Community Health Systems Inc.'s 8 7/8% notes due 2015, one of the most actively traded issues, with some $45 million of the bonds changing hands by the close.

He saw those notes - which had hovered near par only a few short weeks ago-as having lost another 5/8 point on Tuesday to end at 89.875 bid. He noted that the Franklin, Tenn.-based hospital operator's issue - one of the main junk market bellwether, due to its enormous size, at some $3 billion - is perhaps "the best provider of liquidity" in the market for anyone needing to raise cash.

Countrywide cruises on suit settlement

On the upside, nobody did it better Tuesday than Countrywide Financial's 6¼% notes due 2016. Those bonds - technically investment-grade rated (Aa3/AA-/A) but widely traded in the junk market - had traded on Monday in a range of 63 to 67, mostly in small pieces, according to a market source; the largest trade, around $200,000, had taken place just under 64, although the final trades that session were closer to 67.

But it was a completely different story on Tuesday morning, when proceedings opened with a round-lot trade at 84 and then the bonds got as good as 86. The final round-lot trade was just a shade lower, although the last trades of the session were several points below that.

Another market source saw the bonds going home around 82 and estimated a nearly 20 point rise, in active dealings.

The bonds - as well as Countrywide's other issues - are seen having gotten a boost on the news that Bank of America Corp. - which bought Countrywide for $4 billion earlier this year, thus becoming the biggest U.S. mortgage lender - had reached a settlement with the attorneys general of 11 states, who had been pursing legal actions against Countrywide for alleged predatory lending practices which they say helped bring on the subprime mortgage crisis that is at the center of the current credit crunch.

B of A agreed to modify troubled mortgages with up to $8.4 billion in interest rate and principal reductions for nearly 400,000 Countrywide customers.

Financials a mixed bag

Apart from Countrywide, a trader saw Washington Mutual Inc. senior holding company bonds like the 4% notes due 2009 or the 4.20% notes due 2011 up ½ point "or maybe 3/4" at a generic 61.5 bid, 63.5 offered.

He also saw Lehman Brothers Holdings Inc.'s 6 7/8% notes due 2018 up ½ point at 11 bid, 13 offered.

Another trader saw Lehman's 5 5/8% notes due 2013 down ¾ point on the day at 13.25 bid, and saw Washington Mutual's 4% notes down ½ point at 61 bid, on $29 million traded.

Among other junk-traded financial names, a trader saw iStar Financial Corp.'s 5.95% notes due 2013 fall 4½ points to 47.5 bid.

Bond insurer MBIA Inc.'s 14% surplus notes due 2033 were "in the 52 area," a trader said, which would be up from Monday's levels at 48-52.

Residential Capital LLC's 8½% senior notes due 2010 were at 45 bid, 50 offered, while its subordinated 6 3/8% notes due 2010 held in at 17 bid, 19 offered.

AIG unit American General Finance's 4 5/8% notes due 2010 gained more than 5 points on the session to around 58.5. But AIG's International Lease Finance Corp.'s 6 3/8% notes due 2013 retreated 4 points to the 67 level.

AMD up on JV plan, though off highs

Advanced Micro Devices' 7¾% notes due 2012, which had recently languished in the upper 60s to lower 70s, shot into the low to mid 80s Tuesday on news of the company's planned joint venture with Abu Dhabi's state-owned Advanced Technology Investment Co., although they subsequently came down from those peak levels.

A trader called the bonds "very volatile today, seeing them push as high as 85 before closing at 75 bid, 76 offered, which he said was up 5 points.

A market source at another desk saw the bonds open at 81 bid, and then push as high as 85 in several large-block trades, before coming down from that zenith and falling back down to the low to mid 70s. That was still up from the last level seen on Monday, a smallish trade just under 69, but was little changed from the last previous round-lot trade at 75 on Oct. 1.

Another trader said that on a strictly round-lot-trade basis, the bonds were up perhaps a point at 76, but noted they had come down from their peak levels at 85, giving up their early gains "just like the rest of the market. Nothing is immune to the market's overall tone."

AMD's NYSE-traded shares meantime soared as much as 31% in early trading before giving up most of that advance and finishing up 36 cents, or 8.51%, at $4.59. Volume of 79.7 million shares was more than triple the norm.

The company's bonds and shares moved up after AMD announced that it will spin off its factory operations in Germany and upstate New York into a new joint venture, to be 45% owned by AMD and 55% owned by ATIC. The latter will initially invest $2.1 billion in the venture, including a $700 million direct payment to AMD, and will assume some $1.2 billion of AMD debt associated with the manufacturing operations. It will eventually invest another $3.6 billion to $6 billion in the venture, which will be called The Foundry Co.

Besides the spin-off transaction, AMD said that a second state-run Abu Dhabi company, Mubadala Development Co., will spend $314 million to raise its current 8.1% stake in AMD to 19.3% and will name a director to AMD's board.

Armed with the fresh cash from the spin off and the cash infusion, and having shed a big block of debt as well as sharing the cost of running the semiconductor fabricating plants, AMD envisions being better able to focus on its core activity of designing, marketing and distributing computer microprocessor units, in head-to-head competition with the larger Intel; the latter company has about 80% of the worldwide market, some four times the size of AMD's share.

Moody's Investors Service said Tuesday that AMD's B2 corporate family rating and negative outlook are not affected by the company's announcement.

Moody's - which downgraded AMD's debt to its current levels and attached a negative outlook back in August - said that if AMD "demonstrates operational progress in the third and fourth quarters of fiscal 2008 and is able to close the transaction within the framework that it has described," its outlook could be stabilized - although the agency also warned that the ratings "could be reviewed for possible downgrade to the extent that operational progress fails to materialize and/or if the transaction is not consummated."

Gaming names on the rise

In the gaming arena, a trader saw Isle of Capri Casinos Inc.'s 7% notes due 2014 as "a rare gainer" in an otherwise mostly bearish market, quoting the bonds at 60.5 bid, up from 59.74 on Monday, on volume of $24 million. However, he also saw MGM Mirage's 7½% notes due 2016 "up as well," ½ point better at 67.5 bid.

At another desk, a market source pegged the MGM 6 5/8% notes due 2015 up more than 2 points at 69, while Isle's 7s moved above 60, 1½ points better.

From the deeply distressed realm, Harrah's Operating Co.'s 5¾% notes due 2017 were a little better - but still languished around 20 bid. Harrah's 5 5/8% notes due 2015 were up 2½ points at 21.5.

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