Nortel gains as Metro Ethernet draws interest; Chesapeake gains as gas prices soar; WaMu bonds strengthen

By Paul Deckelman and Paul A. Harris

New York, December 23 - Nortel Networks Corp.'s bonds were seen several points better on Tuesday in fairly busy trading, helped by news reports that the Canadian telecommunications equipment company has gotten several expressions of interest in its Metro Ethernet business.

Another solid upsider was Chesapeake Energy Corp., helped by a sharp rise in natural gas prices, which were pushed up by a combination of factors.

Washington Mutual Inc.'s bonds were several points better, although there was no specific news out on the Seattle-based banking company - just a market belief that definitive recovery levels for its debt might soon emerge.

General Motors Corp. and its 49% auto-loan financing arm, GMAC LLC - strong performers in last week's market - continued to take a back seat Tuesday, with investors remaining in limbo on what GMAC is doing with its struggling debt-exchange offer; meanwhile GM said it will hold off on starting any new talks with its labor unions or its debtholders on cutting its obligations to either group as part of an overall restructuring effort until after the start of the new year.

The high yield primary meantime remained frozen in place, participants said.

The Tuesday session closed with no deals in the market, and no active forward calendar carrying into 2009.

Looking to high-grades

"We're seeing abundant liquidity in the high-grade market," a senior high-yield syndicate source commented Tuesday.

"Right now the financials and the large corporates are able to access that market to refinance debt.

"That activity has carried into our market only to a very limited extent," said the official, who made reference to the final junk deals that were priced in 2008, El Paso Corp.'s $500 million issue of 12% senior notes due 2013 (Ba3/BB-), which priced at 88.909 to yield 15¼% on Dec. 9, and Kansas City Southern Railway Co.'s $190 million issue of 13% senior notes due 2013 (B2/BB-), which priced one week later at 88.405 to yield 16½%.

Both deals addressed pending maturities.

"We're liable to see the market remain open for credits like that in January," said the source.

Potential issuers will be required to bring strong credit ratings and a name that the market knows, the official asserted, adding that the new issue market will likely not be open to cyclical stories.

Also issuers must be prepared to pay, the source added.

The fact that the two issues mentioned above came at deep discounts and subsequently traded into the mid-90s has made an impression upon investors. Those already involved in a company's capital structure are apt to be willing to take on new bonds at such phenomenal prices, especially in a debt refinancing scenario.

"We're talking to people right now about the possibility of coming early in the new year," the official said.

"If they have maturities to address we're advising them not to wait until two months before the old notes come due.

"And we are acclimatizing them to the new rate environment in the high-yield.

"However at the beginning of the year, if the market is open at all, it will likely just be open to a very limited number of issuers."

Market indicators keep rising

The widely followed CDX High Yield 11 index of junk bond performance, which rose ½ point on Monday, continuing a solid recent winning streak, continued to rise Tuesday, with a market source quoting it at 77½ bid, 78 offered, up another ½ point on the session. The KDP High Yield Daily Index meantime jumped 55 bps to 49.95, while its yield tightened by a notable 34 bps to 15.60%.

In the broader market, advancing issues kept their lead over decliners, beating them five to four. Overall market activity, reflected in dollar volumes, slid 38% from the pace seen in Friday's session.

A trader characterized the day as "absolutely boring," and suggested that he hadn't even seen much of "the usual year-end stuff" - selling the real dogs to get them out of the portfolio at year-end, or the buying of better issues, if only as window-dressing. "There really hasn't even been the cleaning up [portfolios] at year-end, because they've already done all of that.

On the other hand, a second trader said, "the day was kind of spread out, and the market was improved across the board." He suggested that there had been "some short-covering, and people filling holes in positions or portfolios, so wherever there has been interest, the stuff has traded up."

He estimated that the market was generally better by ½ to 1 point, "depending on where you looked."

Commenting on the strong surge that junk has shown over the past several sessions - albeit on relatively light pre-holiday volumes - he noted that "the market had gotten beaten down by some indiscriminate selling over the past month. I think that's gone, and I think going into year-end, people are putting some cash to work in names that they want to own, and its changing the prices upward. Some spots have just been kind of grinding higher - and some spots where there hasn't been any activity, or one or two trades and [were] oversold, it's a little more dramatic."

Another trader said that "there was not a lot to report," characterizing the market as "very quiet.

"Upside is the theme of the day," he said. "There weren't a lot of names traded - but on those that were trading, offerings were lifted."

Junk barometer jumps

One such name, he said was Community Health Systems Inc.'s 8 7/8% notes due 2015, sometimes thought of by some in the market as a pretty reliable proxy for junk market activity as a whole, because of its relatively large size, widespread distribution and easy tradability.

"Holy cow!" he exclaimed, channeling the late baseballcaster Phil Rizzuto's signature phrase, as he examined the Franklin, Tenn.-based hospital operator's jump to 91 bid from prior levels around 87. "I don't know if it's short-covering - or guys jumping in before the rally that we're supposed to have in the first quarter." Volume was a relatively sedate $3.5 million, but given the overall paucity of real dealings, "for a day like today, it isn't bad."

In that same sector, HCA Corp.'s 9¼% notes due 2016 were equally robust, advancing to 88.25 bid from 83.75 on Monday, on volume of $6.5 million, "so we've got some movers here," he said.

Nortel heads north

Nortel Networks was "up 2 or 3 points," a trader said, although he added that he saw "not a lot of trading" on news that North America's largest telecom equipment manufacturer, fishing around for a possible buyer for its Metro Ethernet business, has gotten a few nibbles. Its 10¾% notes due 2016 ended around the 25 level.

A market source quoted the Toronto-based company's 10 1/8% notes due 2013 up 5 points at the 26 level, while a second saw them also up 5 points at 25 bid.

At another desk, a trader called it a 5-point jump to 25 on volume of $3 million, while seeing its floating-rate notes due 2011 a full 6 points better on the day at 24.25, on volume of $5.5 million.

Nortel's New York Stock Exchange-traded shares - which have been beaten down by the company's misfortunes to the level of nearly valueless penny stock - gained 4 cents on the session, or 16%, to end at 29 cents. Volume of 18.9 million shares was twice the norm.

Canadian newspaper Globe & Mail reported that Nortel has gotten three offers for Metro Ethernet, all close to analysts' earlier estimates that the unit might fetch as much as $1 billion. The paper said that executives are trying to determine "whether its best route to profitability would be to sell more than its Metro Ethernet unit," which accounted for 13% of Nortel's $7.7 billion in sales in the first nine months of the year. Nortel, looking to cut costs and bring in money, has been shopping the unit around to interested parties since September.

The report further said that besides Metro Ethernet, Nortel is considering a possible sale of its carrier networks division, which sells gear to phone companies, as well as its enterprise division, which sells to businesses.

And the Globe & Mail said that Nortel has even received expressions of interest in buying all of Nortel from three companies other than those which have made offers for the Ethernet unit, but "none has floated a price yet, and valuations for the entire company appear more volatile than for the Ethernet unit alone."

ProLogis up on asset-sale

While Nortel considers the bids for Metro Ethernet - and mulls whether to sell itself whole to some buyer - a junk bond trader said that actual asset-sale news was pushing the bonds of industrial real estate investment trust ProLogics sharply higher. While those bonds are nominally investment grade, he noted, they have been trading like deeply distressed junk for quite some time.

He said that from where he sat, the "news of the day" was the sharp rise in ProLogis' 5¾% notes due 2016, which zoomed to 52 bid, 53 offered, up 10 points on the day, while its 2¼% convertible notes due 2037 gained 4 points to 43 bid - on the news that the REIT is selling its China business and 20% of its Japanese operations.

WaMu a winner

A trader said that Washington Mutual's bonds were up by several points; while he said that he did not know why, he speculated that it was investor "expectations of a better recovery"

WaMu, he said, was "the most active name in the high yield universe today, without a doubt."

He saw its zero-coupon notes due 2012 push up to 68.5 bid from prior levels at 64.625, on volume of $12 million. WaMu's 5¼% notes due 2017 gained nearly 3¾ points to end at 68.15, with $9 million traded, while its 4% notes coming due on Jan. 15 moved up to 67.875 from 64.75, on turnover of $7 million.

A trader said that generally, the WaMu holding company bonds were higher, seeing them north of 68.

WaMu "was up a little bit today," another trader said, although he saw senior holding company paper like the '09s at 64 bid, 66 offered, and subordinated holdco paper like the 4¼% notes due 2010 at 21 bid, 23 offered, each up 2 points.

Investors, he said "are trying to figure out the final valuation" on the Seattle-based bank's debt. "Some people think they're worth 40, some people think they're worth 80. But there were some stronger buyers out there - some of the bigger guys, and that was driving them up." He saw no "real news" that would otherwise account for the movement, "just the whole idea that the WaMu stuff" - i.e. the winding down of the bankrupt company's other operations following the formal takeover of its banking network by J.P. Morgan Chase & Co., and the valuation of its remaining assets - "could be finished by the end of the year, and that's driving the price up a little bit."

He said the same held true for Lehman Brothers Holdings Inc., which is in the process of being dismantled after its failure in September.

Lehman's 5½% notes due 2016 were up more than 2 points Tuesday to the 10 bid level.

A trader said that Nuveen Investments LLC's bonds were big gainers, its 5% notes due 2010 rising to 55 bid, up 10 or 12 points, although he did not know what was happening with the bonds, other than that they were "trading higher than the bank debt is being quoted at this point." He opined that "it sounds like something is in the works."

Chesapeake is charmed

Elsewhere, Chesapeake Energy's 6½% notes due 2017 were up more than 3 points at 72 bid, while its 6¼% notes due 2018 were quoted at 73, up as much as 5 points on the session.

The Oklahoma City-based independent energy operator - one of the largest U.S. natural gas producers - was seen solidly better in line with Tuesday's hefty gains in natural gas prices; gas for January delivery finished up 44.3 cents, or 8.4%, in trading on the New York Mercantile Exchange, its biggest one-day gain in three months. It settled in at a price of $5.737 per million Btu.

Among the factors seen pushing gas prices up were the biting cold weather currently seen in the U.S. Midwest and Northeast; drawdowns of U.S. gas stockpiles to cope with the lower than normal temperatures; and news that international gas producers such as Russia and Iran want to get together and form an OPEC-like cartel to regulate global gas supplies and defend prices.

GM seen unchanged to easier

A trader saw General Motors' benchmark 8 3/8% notes due 2033 trading on a round-lot basis at 15.75 bid, versus 20.375 late last week, the last previous round-lot trade, with no large trades seen on Monday.

He also saw GM's 7.20% notes due 2011 dip to 16.875 bid from 17.

At another desk, a trader saw the benchmark bonds "down a couple" of points at 13 bid, 15 offered.

Yet a third saw the GM long bonds trading "a little sideways" at 18 bid 20 offered.

A trader noted that GM - which is required to show progress in cutting its debt and labor costs by March 31, as one of the conditions of its federal bailout - announced late in the day that it will hold no talks with its labor union or with debtholders until the first week in January, around the time when the new Congress is being convened.

The change in presidential administrations, as well as the changeover in Congress, with a more solid Democratic majority in both houses, is seen as a boost to the United Auto Workers union, which is balking at some of the labor-cost reduction goals contained in the federal bailout plan put forward by the outgoing Bush administration. Disputes over the size and timing of concessions to be asked from the union were a major factor in the failure of the Senate to pass a House-okayed bailout bill for GM and Chrysler LLC earlier this month.

No developments in GMAC offer

A trader meantime saw GMAC's 6.875% notes due 2011 down ¾ point on the day at 42 bid, but saw no large-block trades in either the company's shortest duration bond, the 5.85% notes maturing on Jan 14, most recently trading around 90 bid, or its longest issue, the 8% bonds due 2031, last seen previously around 33 bid.

At another desk, a market source saw GMAC's 6¾% notes due 2014 off 2 points at 35 bid, although its 7% notes due 2012 were being quoted up nearly 4 points on the day at the 40 bid level.

Investors awaited fresh news about the troubled Detroit-based automotive and mortgage lender's pending attempt to get bondholders to trade $38 billion of outstanding GMAC bonds and those of wholly owned subsidiary Residential Capital LLC for a lesser amount of new debt, preferred shares and cash.

As of this past Friday - the latest extended deadline for early-delivery of those bonds under the offer - only about 58% of the bonds had been tendered, far less than the75% the company needs to receive under its offer so it can raise adequate capital to meet federal requirements for becoming a bank company.

As of press time, there had been no further update from GMAC as to whether it had again extended the deadline of the exchange offer, or whether it had decided to again amend the offer terms in order to lure wavering bondholders and get their approval for the debt swap.

Elsewhere in the automotive realm, a trader saw Ford Motor Co.'s 7.45% bonds due 2031 at 25 bid, off by ½ point on the day.

A second saw them little moved around 21.5 bid, 23.5 offered.

Another trader called them several-point losers at 23 bid, 25 offered.

And among other automotive-related issues, a trader saw Avis Budget Car Rental LLC's 7 5/8% notes due 2014 rise 3 points to 28, helped by the news that the car-rental company's lenders have committed to renew two conduit agreements used to fund its rental car fleet.

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