Junk follows stocks lower, most issues down; financials lead slide; autos driven lower

By Paul Deckelman and Paul A. Harris

New York, Oct. 6 - The high yield market took its cue from equities Monday, with participants exhibiting the same trepidation about the possibility of a continued credit crunch - this despite last week's passage of the $700 billion government bailout of the banking system .

Numerous issues were down by multiple points, while gainers were few and far between. One of the hardest-hit areas, as has been the case for quite some time lately, has been the financials; fallen-angel Washington Mutual Inc., which last week had soared on news reports that the troubled Seattle-based thrift institution had some $5 billion squirreled away at the holding company level to pay off its senior and then junior holdco bonds, was in retreat, giving up some of those gains.

Also lower from that sector were the likes of Lehman Brothers Holding Co., as well as iStar Financial Inc. - formerly investment grade, but now split-rated (Ba1/BBB/BBB-).

Widely held automotive benchmark names like General Motors Corp. and Ford Motor Co. were also well down.

With a credit crunch in full force, primaryside players were hunkered in the bunker.

Market indicators lower

The widely followed CDX index of junk bond performance - which rolled into Series 11 on Monday, reflecting recent dramatic changes in the high yield market - fell by 1½ points on Monday, a trader said, quoting it at 84 5/8 bid, 85 1/8 offered. The KDP High Yield Daily Index slid by 139 basis points to end at 60.05, as its yield ballooned out by 49 bps to 13.58%.

In the broader market, advancing issues trailed decliners by a margin of more than four to one. Activity, represented by dollar volume, fell by 22.3% from the levels seen on Friday.

A trader said that "equities and the world was falling apart", although he added that "for all of the aggravation on the equity side," nothing in junk particularly stood out, since a lot of names were down by multiple points.

Another trader said suggested that some of the day's downside activity may have had its catalyst in "people getting their brokerage statements over the weekend. We're probably going to have a lot more of this in about another week-and-a-half, with hedge funds reporting on or about the 15th." However, he qualified that latter point - "it may not be as big an event as people think it is" - since a lot of the selling had been done previously and had already been accounted for.

"What a crazy market," another trader exclaimed. "This is really ugly."

The junk bond market, like stocks, slid despite the hopes of those who had counted on the $700 billion debt bailout bill that passed Congress last week and was signed into law to stanch some of the bleeding. But the only positive that could be attached to that bill by Monday, the trader said was "had they not done it, things would be worse."

He lamented the fact that "had [the House of Representatives] approved it the first time, I think we'd be in a totally different level of the market right now. Psychologically, we'd be in a different place."

Yet another trader saw the behavior of Cascades Inc.'s 7¼% notes due 2013 as an example of what was going on all around the junk marketplace.

He saw the bonds trade as low as 50 bid, well down from prior levels around 73-74. "I don't know if that print is right - but everybody is scared," he said. The paper company's issue, which fell after its ratings were put on watch for a possible ratings downgrade, was indicative of the larger market. "That's basically what's been going on. It's almost a total capitulation here."

"I don't know if it's a freak trade or not - but it looked like it happened."

Another trader also saw the bonds hit as low as 50 on a big-block trade earlier in the day, but noted that by day's end, the bonds were back up trading around 70.125 bid on a round-lot basis - still down nearly 5 points from the 75 level at which they had ended on Friday. So the low outlier trade "may have been a mistake" - or may have been a typical trade in a panicky market were even low bids were getting hit left and right by bondholders eager to get out of an issue, even at the cost of locking in a sizable loss.

The first trader watching Cascades further opined that the market "is taking no prisoners. What's happening is that a lot of time, people have to liquidate - and they just sell anything that they can get a bid on," no matter how low, locking in whatever loss the bond has suffered, which up to that point was only on paper. "Relative value or any of that stuff means nothing. A lot of time, the good names go down, because they're the only things that have a bid.

"Just getting the bond out of there" because there's a bid on it becomes the objective. "It's like you don't have any choice."

People "are frightened here right now." And that fright does not just affect individual investors. Companies which under normal circumstances would be buying back debt, with prices as low as they are, are in many cases not doing so, he said, because they too have grown fearful, holding onto their cash because they're afraid they might not have access to more from their lenders.

"I am sitting here watching this in total disbelief."

Cash bonds were off between 1 and 3 points, according to a trader from a high-yield mutual fund.

"We saw trading both ways, but not in much size," the trader added, remarking that a number of the day's trades seemed correlated to more liquid bank loans.

"There was a lot of LBO debt and automotive stuff trading," the source added.

"The market was definitely down, but we were able to trade a little more than I would have expected given what was going on around us."

The trader said that the most recent sizable issue to price in the high-yield market, the SunGard Data Systems Inc. 10 5/8% senior notes due May 15, 2015 (Caa1/B) which priced at 98.852 to yield 10 7/8% on Sept. 19, was quoted at 91 bid on Monday.

Things may seem dire in high yield, the trader said, but junk is outperforming both high-grade bonds and stocks.

Forced selling abates

There was less evidence of forced selling in high yield on Monday, the traders said, but added that there had been some evidence of it in the bank loan market.

"The forced selling took place last week, and that was both selling and buying," the source said.

The trader said a lot of last week's activities had to do with settling outstanding contracts with Lehman Brothers.

"To the extent that you had total return swap offer repos at Lehman that stuff was delivered in," the trader said.

"JP Morgan kept stuff that they wanted and sold whatever they didn't want.

"To the same extent there were people who had buy-ins on stuff that Lehman was short. So there were people out there bidding for it.

"That gave a false impression of a lot of trading going on. But it had to happen. It was good that the stuff cleared. Now you're back to fundamentals."

The source reckons that the buy-side continues to build up cash by dint of a combination of coupon payments and a total absence of a new issue calendar.

Financials are faltering

Despite the government debt bailout bill passing, the financial names were seen leading everyone else lower.

A trader saw Lehman Brothers' bonds in a 12-13 context "that seemed to cover all of them."

A market source at another desk saw the Lehman 5 5/8% notes due 2013 as perhaps the most actively traded issue of the day, seeing the bonds dip as low as 11 bid before going out at 14, still down ½ point. Lehman's longer 7% notes due 2027 were off nearly a point, ending around 12.

A trader saw Washington Mutual's senior holding company bonds at 60 bid, 62 offered, with the subordinated holdco paper at 16 bid, 18 offered.

Another trader saw WaMu's 4% notes due 2009 come down to 61.5 bid, after having traded as high as 64 last week on speculation that WaMu had winkled away some cash at the holding company level which could be used to at least partially pay off those bonds; before those reports, the holdco senior bonds had languished around 30.

A trader said that he "didn't even see Thornburg Mortgage Inc.'s 8% notes due 2013," pegging them around 45 bid on "no real volume." He saw Residential Capital LLC 8½% notes due 2010 at 48 bid, 50 offered, "a little lower," while Countrywide Financial Corp.'s 6¼% notes due 2016 were trading in "all small pieces" around 62 bid, 64 offered.

MBIA Inc.'s 14% surplus notes due 2033 were at 48 bid, 52 offered, down the 52 bid, 58 offered level to which those bonds had fallen on Friday.

A trader saw iStar Financial's 5 7/8% notes due 2014 unchanged at 45 bid, 56, but on "some activity in that."

Another trader - noting that iStar was "a new entry to high yield" - saw $30 million of its 5.15% notes due 2012 trade as low as 47.75 before closing at 49 bid, down 2 points on the day, while

He also saw its 5½% notes due 2012 lose 2¼ points to end at 48.75, with $29 million of the bonds changing hands.

Autos' skid continues

Automotive bonds - caught between the rock of the panic generated by the credit crunch and the hard place of the sour sentiment arising from the carmakers' own bad news - poor September sales numbers released last week, especially by Ford - continued to be towed lower.

A trader saw General Motors' benchmark 8 3/8% bonds due 2033 down 2½ points at 32.5 bid, 34.5 offered, while domestic arch-rival Ford's 7.45% bonds due 2031 also lost 2½ points on the day to 33.5.

Another trader saw the GM benchmarks at 32 bid, 34 offered "all day long," which he called "down half a point on some decent volume." He saw GMAC LLC's 8% bonds due 2031 at 33 bid, 35 offered, down ½ point, but on "not a lot of volume," while quoting the Ford long bonds finishing at 33.5 bid, 34.5 offered, down from 36 bid at the opening, "so there was a lot of volatility in those Fords. There were good trades in size," and said the 36 opening "sounds a lot higher than what it was [Friday]."

Other names points lower

Outside of the autosphere, a trader saw Community Health Systems Inc.'s 8 7/8% notes due 2015 as one of the most actively traded bonds, and like most other issues, a big loser; the Franklin, Tenn.-based hospital operator's notes lost 3 points to 89.75.

He noted that the big benchmark issue - there are some $3 billion of the bonds out there - is always a target for anyone needing to liquidate some holdings quickly to raise cash. "It's an avenue of liquidation."

Another loser was Baldor Electric's 8 5/8% notes due 2017, which fell as low as 86.25 bid, well down from Friday's levels at 94, before coming off the lows to still end down 3½ points on the day at 90.5. Over $20 million of the bonds changed hands.

© 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.