Junk tone better as stocks gain; NRG jumps on buyout bid; WaMu whacked as FDIC eyes cash stash

By Paul Deckelman

New York, Oct. 20 - Junk bonds started the new week off on a better note, rising around a point or two on average Monday in tandem with a stock market rally spurred on by an easing of key credit measures and the possibility of another economic stimulus package.

Probably the strongest gainer was NRG Energy Inc., whose bonds were up anywhere from five to almost 10 points across the board on the news that Exelon Corp. had made an unsolicited $6.2 billion all-stock offer for the Princeton, N.J. -based wholesale power generating company.

Also on the upside were automotive issues like General Motors Corp. and its 49%-owned auto loan unit, GMAC LLC, helped by the overall market tone as well as by continued media reports of ongoing talks between GM and smaller crosstown rival Chrysler LLC which could lead to a merger between the two problem-plagued car makers. GM is said to be especially interested in Chrylser's big cash cushion, estimated in the $10-$11 billion range.

On the downside, news that the Federal Deposit Insurance Corp. may try to grab some, or perhaps even all of Washington Mutual Corp.'s multi-billion-dollar cash horde clobbered the Seattle-based thrift operator's holding-company level bonds - which otherwise stand to be paid down using that money.

In the primary arena, Brocade Communications Systems Inc. formally began marketing its upcoming $400 million bond issue, the proceeds of which will be used to help finance its $3 billion purchase of Foundry Networks Inc,

Market indicators turn north

The widely followed CDX index of junk bond performance, which had risen by about 1¼ points on Friday, was up 1½ points on Monday, a trader said, quoting it at 81 5/8 bid, 82 1/8 offered. The KDP High Yield Daily Index rose by 76 basis points to end at 54.18, as its yield tightened by 32 bps to 15.99%.

In the broader market, advancing issues led decliners by a better than five-to-four margin. Activity, represented by dollar volume, was off by about 8% from the levels seen on Friday

A trader said that there was "a definitely positive tone" Monday, "but not an exceptional amount of bonds trading. I think people are just a little bit skeptical and gun-shy to just jump in, because they've gotten burned before over the last few weeks" by what turned out to be false signs that a market bottom had been reached.

That having been said, he opined that "no one was out there hitting bids" and driving offered levels lower as had been the case in a few previous sessions which saw the junk market go down.

He saw a number of recently actively traded names bouncing back by multiple points on Monday, in line with a generally firmer junk market in which participants "breathed a sigh of relief" that the relentless pounding which junk and equities received last week, "the onslaught," appears to be over - at least for now.

With junk players watching stocks for clues on Monday, the latter did not disappoint; the bellwether Dow Jones Industrial Average finished at 9,265.43, up 413.21 points, or 4.67%, and other indexes pretty much replicated that rise, with the Nasdaq up 44.85 points, or 4.77%, to end at 985.40.

Wall Street got a boost from a number of factors, including a market perception that credit conditions might be easing a little - interbank lending rates fell for a sixth straight day Monday, with the closely-watched three-month Libor rate on dollar loans down 36 bps to 4.06%, the biggest daily drop since January. There was also some optimism about news out of Washington, where Federal Reserve chairman Ben Bernanke told a House committee that a fresh round of government stimulus measures might help ease the country's economic weakness, while the White House expressed a willingness to study any ideas that Congress might come up with.

Community Health more robust

That pushed stocks broadly higher, which in turn encouraged the better tone in bonds. A trader, for instance, noted "our tone was better today, with most things up ½ to 1" point. One issue in particular which he saw was Community Health Systems Inc.'s 8 7/8% notes due 2015, which he saw "grinding higher," up to 83 bid, 84 offered from prior levels at 80 bid, 81 offered.

The Franklin, Tenn.-based hospital operator's bonds have been among the most heavily traded in recent weeks, with traders explaining that accounts needing to raise capital quickly have been selling the large and always liquid issue, driving its price levels down to around the 80 mark from levels not too far from par just a few weeks ago.

Another trader saw the Community Health bonds as among the most active issues on Monday, although he said that the volume levels, with around $25 million of the notes changing hands "weren't really all that active" by the standards of recent trading levels. He saw the notes at 83.5 bid, versus 81.25 on Friday.

Community Health Systems was one example of a bond which had been knocked down by several points and was now coming back up in the same way. The trader said that "the same way bonds were gapping down" recently - a bid would get hit and then the next offered level would be not a half point lower but 2 or 3 points down - "they're gonna gap up the same way," leading to the multiple-point rises seen Monday.

Another bond on the rebound, he noted, was Aramark Corp. The Philadelphia-based professional food, hospitality and facility management services company's 8½% notes due 2015 "had been getting crushed over the last few days," but on Monday, rebounded with a vengeance, up 4¾ points to 83.

Another sizable gainer, he said, was Freeport McMoRan Copper & Gold Inc., whose 8¼% notes due 2015 pushed up to 81.25 from 79, while its 8 3/8% notes due 2017 gained a point to 80. While he acknowledged that some of the recent activity in the Phoenix-based metals mining company's paper might be due at least in part to investors seeing the bonds as a way of playing in gold and silver markets without investing in the volatile precious metals themselves, he pointed out that that market "has been decimated over the last couple of weeks" as the price of gold has dropped from above $900 per ounce to under $800, although it did rise on Monday. Other, perhaps more germane factors, he said might be short-covering as well as "someone trying to pick the bottom."

NRG energized by buyout bid

But the most impressive gains came in the bonds, and the shares, of NRG Energy, spurred upward by the news that Chicago-based power generator Exelon Corp. covets NRG enough to make a $6.2 billion offer for the latter company, which translates to 0.485 share of Exelon for each NRG share, putting the latter's value at $26.43 per share based on the closing prices of the respective stocks on Friday, the session before the offer was announced. NRG's New York Stock Exchange-traded shares zoomed by $5.67, or 29.33%, to an even $25 on volume of $26.3 million, or over four times the norm.

Its bonds followed a similar trajectory, with a market source seeing the active NRG issues all jumping to around the 87 level, up anywhere from 6 to 11 points from the previous close, depending on the issue, although the bonds all came off those highs to finish about 2 or 3 points off from their peak levels, though still up handsomely on the day.

NRG "died up there" a trader said," noting that the bonds were "maybe a little cheaper" at the end of the day, "after they came back in a little."

He saw the 7½% notes due 2014 finishing the day at 87 bid, 88 offered, up from Friday's closing level at 81, while its 7 3/8% notes due 2016, which were actively traded, backed down to 85 bid, 86 offered, still well up from Friday's finish at around 78. Another trader saw those bonds up 7 points on the day at 84 bid, 86 offered.

At another desk, a trader saw NRG's 7 3/8% notes due 2017 up 8 points on the day at 84 bid.

The transaction "would be a positive event for NRG bondholders," analyst Carl Blake of the Gimme Credit investment advisory service in a research note on Monday. He said that Exelon envisions that the combined companies "would have a strong balance sheet, with investment-grade credit ratings." Exelon, he noted "expressed confidence in its ability to arrange for the refinancing of NRG's debt" - about $8.2 billion, less $1.2 billion of cash, with the refinancing triggered by change-of-control covenants in its paper. And Exelon also believes that it can "appropriately address NRG's lien facility with its trading counterparts."

NRG, Blake concluded, is "an improving credit, with a decent liquidity position" that generates positive cash flow.

NRG had no immediate official response to Exelon's unsolicited move. The latter's chief executive, John Rowe, expressed a preference for a consensual agreement with NRG - but would not rule out a possible hostile appeal directly to NRG shareholders if need be, telling participants on a conference call that "we are committed to pursuing this offer and we shall do so."

M&A buzz lifts GM

In the automotive realm, merger-and acquisition speculation was giving General Motors' bonds a lift, several traders said, amid news reports that the Detroit-based auto giant was continuing talks aimed at a possible combination of GM and Chrysler LLC, which would give beleaguered GM access to a dowry of some $10 billion that Chrysler would bring to such a marriage.

A trader saw GM's 8 3/8% notes due 2033 up 4 points on the session at 26 bid, 28 offered. He saw GMAC LLC's 8% bonds doing even better, up 10 points at 36 bid, 38 offered, while GM domestic arch-rival Ford Motor Co.'s 7.45% bonds due 2031 "didn't move quite as much," up ½ point to 29 bid, 31 offered.

Another trader who also saw the GM benchmark issue at 26 bid, 28 offered, called them up 2½ points on the day, while pegging the Ford long bonds up 2 points to the 29-31 level.

Yet another trader called the GM bonds up 4½ points at 27.5 bid, while the GMAC bonds gained 3 points to 36 bid.

At another shop, a trader saw GM up on "a combination of the overall [more positive] market tone and speculation that a GM merger [likely with Chrysler] is coming closer."

WaMu is walloped

A trader said that Washington Mutual's bonds "took a hit at the end of the day," quoting the company's senior holdco notes as having fallen from around 67 bid, 30 offered at around 3 p.m. ET to a late-day close around 63 bid, 66 offered, noting news stories about how the Federal Deposit Insurance Corp. may try to legally claim at least some of $4.4 billion of cash that company has earmarked for paying its holding company bonds.

The subordinated holding company bonds meantime were trading at 15 bid, 19 offered.

A market source saw the senior holdco 4% notes coming due in January down 4 points at 65 bid, in fairly active dealings.

Washington Mutual - which filed for Chapter 11 protection last month - filed a request with the bankruptcy court in Wilmington, Del. for court approval of a $4.4 billion cash transfer from JPMorgan Chase Co., which bought WaMu's banking network for $1.9 billion in a deal brokered by the FDIC. The cash - about $3.7 billion it had deposited in its Washington Mutual Bank FSB, and another $707 million on deposit with Washington Mutual Bank - is part of the bankruptcy estate, WaMu contends.

Revelation of the cash on the bank's books and the likelihood that it would be used to pay down the parent holding company's senior and subordinated notes helped boost those notes, particularly the senior paper, in busy trading last month, and the senior notes have largely hung onto those gains on expectations of such a buyout.

However, in court papers filed Monday, the FDIC said it may have "significant claims" against WaMu and to the funds.

Elsewhere among the financials, Lehman Brothers Holdings Inc.'s 6 7/8% senior notes due 2018 were meantime seen up a point at 9 bid, 11 offered. Lehman's notes were seen busily traded, rising on investor hopes

At another desk, Lehman's 7.20% notes coming due next August were seen having eased to just under the 8 bid level.

A trader saw Countrywide Financial Corp.'s 6¼% notes due 2016 better by 4 points at 88 bid, and saw Residential Capital LLC's 6½% notes due 2013 up 3 points at 17 bid.

MBIA Inc.'s 14% surplus notes rose 3 points to 53 bid, 55 offered.

A market source saw iStar Financial Corp.'s 8 5/8% notes due 2013 down 2 points at 46 bid.

American International Group's 5.45% notes due 2017 rose 4 points to 41 bid.

Brocade hits the road

In the primary market, things remained quiet despite the secondary market rebound, as primaryside players waited to see if the bounceback was the real thing or just another mirage.

Asked what he was hearing in the market, one sell-side source succinctly answered, "crickets."

Another answered that it was "totally dead," and several others expressed some variation on this.

About the only thing of note happening was Brocade Communications starting its roadshow for its $400 million issue of six-year notes (B2/BB-). That marketing drive kicked off Monday in Los Angeles. A market source said that it would shift to the New York metropolitan area on Tuesday and Wednesday. He said it was slated to run a full week, although he did not have any additional details about the deal's itinerary.

Brocade, a San Jose, Calif.-based storage area network equipment supplier and data center networking solutions provider plans to use the proceeds to help fund its $3 billion acquisition of Foundry Networks, which will allow Brocade to better compete with Silicon Valley rival Cisco Systems Inc.

Banc of America Securities and Morgan Stanley are joint bookrunners for the unsecured portion of Brocade's funding for the takeover deal.

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