Disappointing retail data hurts retailers; Ford, GM lower; Hertz continues decline; Brocade joins calendar

By Paul A. Harris and Stephanie N. Rotondo

Portland, Ore., Oct. 15 - The high-yield bond market took a turn Wednesday, pushed lower in line with the equity markets.

Just as new retail data were blamed for causing a good portion of the Dow Jones Industrial Average's 733-point drop Wednesday, so was it blamed for declines in retailers' bonds. Claire's Stores Inc., Bon-Ton Stores Inc. and Michael's Stores Inc. all ended the session weaker.

The automotive industry remained under pressure, as Ford Motor Co. was said to be considering selling its stake in Mazda to increase liquidity. But traders gave mixed reports on the automaker's debt. On the other hand, General Motors Corp.'s bonds finished the day weaker yet again.

Hertz Corp.'s debt also closed weaker. The company received a rating downgrade Tuesday, and its recovery rating was also revised.

Brocade launches $400 million

The primary market, which has been quiet as the grave all month, rattled to life shortly after the Wednesday close.

That's when news circulated the market that Brocade Communications Systems Inc. will start a roadshow next week for its $400 million offering of six-year senior unsecured notes (BB-).

Banc of America Securities and Morgan Stanley are joint bookrunners for the deal backing the acquisition of Foundry Networks, Inc.

The size of the unsecured financing was downsized by $100 million in September, with the proceeds shifted to the company's bank loan.

Convert cast aside

Up until Brocade issued a press release late Wednesday afternoon announcing the notes, some market sources had been expecting the company to do its unsecured financing with a convertible bond.

Until that release the company was in fact retaining the option of doing the convert. And a market source said there was a buzz about a possible convertible when the company was in the market syndicating its credit facility.

However Brocade's stock (Nasdaq: BRCD) closed the Wednesday session at $3.43 per share, its 52-week low.

The market source, noting that Brocade's share price was down 53% from its 52-week high of $9.54 per share - significantly underperforming the battered equity market - reckoned that the low share price may have had something to do with why the company ultimately elected not to go with a convertible.

The source reasoned that when the stock price is so low, no matter where the company sets the strike price for the convertible there will be a fair amount of dilution.

If the company believes the fair value of its stock is significantly higher than what is, in this case, the 52-week low, and could trade back up to that fair value relatively quickly, it would be destroying a lot of value by doing a convertible with a strike price - usually somewhere around 20% above the present share price - that is too low compared to the fair value estimate.

Also the market tends to react negatively to a company doing a convertible in extremely adverse circumstances, the market source added.

In addition the convertible market is in as much disarray, if not more disarray, than the high-yield market, the source added, noting that presently convertible arbitrage funds have suffered among the worst of all hedge fund categories.

Indexes slip

Market indicators turned negative Wednesday, following the declines in the equity markets.

A trader called the CDX high yield index "off a couple points" at 80 bid, 81 offered, while the KDP High-Yield Index fell to 54.68 with a yield of 15.67%, from 56.22 with a yield of 15.06%.

"It's just wild and wooly," a trader said.

"'Ugly' is a good word to describe it all," said another.

As the market remains volatile, some have wondered when the fallout will end. According to Standard & Poor's, it could be a while.

The rating agency said Wednesday that it expected the default rate to hit a six-year high in 2009 at 7.6%, pointing out that 139 companies are in danger of default.

"The increase in defaults reflects a continued slide in economic fundamentals," S&P said in a report. "We do not think the baseline projection of 7.6% constitutes a peak in default rates for this cycle, and foresee further defaults materializing beyond the one-year forecasting horizon."

The report came one day after S&P said that nearly $800 billion in debt was coming due over the next five quarters. And, refinancing could come at a pretty penny.

"They can't [repay the debt or refinance]," a trader said of those companies affected. "There are a lot of restructurings coming, which people have been waiting for. "That is why S&P is expecting the default rate to go through the roof."

Retail data pressure retailers

New retail data showed sales slipped yet again in September, and the report was blamed for losses in the stock market. In the bond market, retailer bonds reacted by declining as well.

A trader called Pembroke Pines, Fla.-based Claire's Stores weaker, its 10½% notes due 2017 at 22 bid, 23 offered. The trader also saw the 9 5/8% notes due 2015 trade at 20 and the 9¼% notes due 2015 trade at 35.

Another trader pegged Claire Stores' 9¼% notes at 33 bid, 34 offered and Bon-Ton Stores' 10¼% notes due 2014 at 22 bid, 24 offered.

At another desk, Michael's Stores' 10% notes due 2014 slipped to 43 bid, 44 offered. Another trader placed the 11 3/8% notes due 2016 at 27 bid, 29 offered.

"They are really getting down there," he said.

Another trader called Bon-Ton's debt "down again today" at 16 bid, 20 offered. However, the trader noted that throughout the day he saw quotes as low as 15 bid, 17 offered and as high as 20 bid, 22 offered.

"So go figure," he quipped.

But even higher-end retailers suffered during the session. Neiman Marcus Group Inc.'s 9% notes due 2015 fell 8 points to 67 bid. Dillard's Inc. was one of few retail names that went against the grain, its 7 1/8% notes due 2018 ending a point better at 61.5 bid.

The Commerce Department's monthly retail sales analysis showed a 1.2% decline in September, the biggest decline in three years and nearly double what had been expected. The report marked the third consecutive month that sales have fallen, further evidence that consumers are worried about the state of the economy.

As a result of the ever-decreasing sales figures - and the tightening of credit markets - some retailers have made efforts to ensure their longevity. Michael's Stores, for example, said in a filing with the Securities and Exchange Commission that is drew $120 million from its revolving credit facility. The arts and crafts retailer said the draw would be used to fund general corporate purposes, as well as upcoming debt payments.

Ford, GM bonds softer

Traders gave mixed reports of Ford Motor's debt as the company said it was considering selling its stake in Mazda.

At one desk, a trader quoted the 7 3/8% notes due 2009 at 61 bid, 61.5 offered and the benchmark 7.45% notes due 2031 at 24 bid, 25 offered.

"There is a point where there is no sense in these going any lower, but they still do," he said. "Theoretically, Ford still has cash," he added.

At another desk, a trader deemed the benchmark issue down 4 points on the day at 22 bid, 24 offered.

But other sources saw the bonds gaining - albeit slightly - during the session.

One source called the 7% notes due 2013 up nearly a point at 40 bid, while another pegged the benchmark paper at 28 bid, 30 offered, unchanged on the day.

Ford owns one-third of Japanese automaker Mazda and, according to a Bloomberg article, might be looking to unload some of its shares. Tentatively valued at around $1.3 billion, the deal could happen as early as next month as the Detroit carmaker looks for ways to restructure and shore up liquidity.

But the potential deal might have been only part of what was weighing on the sector Wednesday - General Motors' bonds were down as well, with no news. In the Commerce Department's report, it showed that auto sales decreased 3.8% in September - another sign that the sector is in trouble.

GM's benchmark 8 3/8% notes due 2033 were called 2.5 points weaker by one trader, who placed the debt at 18.5 bid, 20.5 offered. Another trader saw the issue lose 2 points to 19 bid, 21 offered.

Meanwhile, GM's 49% owned GMAC LLC financing operation saw its 8% notes due 2031 fall just over a point to 25 bid, 27 offered.

Hertz continues to hurt

Rental car company Hertz saw its bonds get "worse today," a trader said, following a ratings downgrade on Tuesday.

The trader pegged the 8 7/8% notes due 2014 at 70 bid, 72 offered. That compared to the "best" quote of 74 bid, 75 offered previously.

Another trader placed the issue at 71 bid, 72.5 offered.

S&P cut its rating on the company's senior unsecured debt to B+ from BB- and revised the recovery rating to 5 from 4.

"The revised recovery ratings reflect its expectation that the current credit markets will result in higher collateralization requirements for the secured vehicle facilities, leaving less available for the unsecured lenders," said S&P credit analyst Betsy Snyder in a report. "This increase in collateralization at a time when Hertz has shifted to a higher percentage of risk vehicles and the automotive retail market is softening also suggests that unsecured recoveries would be lower in the event of a payment default."

Broad market reverses direction

After staging a modest comeback Wednesday, casinos once again succumbed to broad market pressure.

Pinnacle Entertainment Inc.'s 8¼% notes due 2012 fell to 72 bid, 73 offered from 84 bid, 84.5 offered, according to a trader. The trader also saw Harrah's Entertainment LLC's 10¾% notes due 2016 slip to 34 bid, 35 offered from closer to 40 previously.

"It was only down 4 or 5 points," he said. "But that is still a lot, especially given how far it's come down."

MGM Mirage's 7½% notes due 2016 dipped a point to 65.5 bid, 67 offered, while Trump Entertainment Resorts Inc.'s 8½% notes due 2015 fell 1.5 points to 27 bid, 29 offered.

Station Casinos, however, managed to gain slightly, despite a ratings downgrade from Moody's Investors Service. The 6% notes due 2012 were seen at 39.75 bid, up nearly 2 points.

Away from the gaming arena, there was not much positive to report. Community Health Systems Inc.'s 8 7/8% notes due 2015 dropped back to around 80 after nearly hitting 90 earlier in the week.

One trader saw Swift Transportation Co. Inc.'s 12½% notes due 2017 at around 30.

"Fuel prices have come down, which helps," the trader said of the struggling trucking company. "But now you need business to improve, and it doesn't look like it is going to in this market."

The trader also saw Lehman Brothers Holdings Inc.'s senior paper at 9.5 bid, 10.5 offered, which he called unchanged. But another trader called the bonds down a point to 8 bid, 10 offered.

The second trader quoted Washington Mutual Inc.'s senior holding company paper - such as the 4% notes due 2009 - at 68 bid, 70 offered, down 3 points.

"It started strong in the morning, then faded a little in the afternoon," he said. When asked why the notes had fallen, the trader said it was partly due to things being "unclear" about where recoveries would fall.

"I am not sure why they are up as high as they are," he said, noting that chatter has placed recovery on the senior holdco paper at around 80.

"But nothing is definitive," he said. He added that the "weakness is just based on the market and they are not as heavily traded."

Solo Cup Co.'s 8½% notes due 2014 closed at 69 bid, 71 offered, about ½ point weaker.

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