Market meanders in listless trading; gaming sector, autos lower; funds lose $9 million on week

By Paul Deckelman and Paul A. Harris

New York, Aug. 21 - Junk traders saw a generally featureless and slightly easier session on Thursday, with no one or two names standing out in the generally sedate dealings.

Gaming issues were seen lower, including Trump Entertainment Resorts Inc., Harrah's Entertainment Inc. and Majestic Star Casino LLC.

So were automotive names like General Motors Corp. and Ford Motor Co., although there was no specific reason for the retreat.

NXP BV, whose bonds had firmed smartly on Wednesday in response to news that it will sell its stake in a high-tech joint venture, were seen having retreated from those levels in Thursday's session.

The new-deal side meantime remained in hibernation.

Funds fall by $9 million on week

And as trading was wrapping up for the session, market participants familiar with the high yield mutual fund flow statistics generated by AMG Data Services of Arcata, Calif., said that in the week ended Wednesday some $8.63 million more left the weekly-reporting funds than came into them. That small decline broke a string of four consecutive inflows, including the $53.5 million cash infusion seen in the previous week, ended Aug. 13. Over those four weeks, inflows totaled $328.7 million, according to a Prospect News analysis of the AMG figures.

There have been five inflows and five outflows seen during the last 10 weeks, dating back to the week ended June 18; during that time, the funds have lost a net of $476.346 million, according to the Prospect News analysis. Before that had come a run of 11 consecutive weekly inflows, stretching from early April through mid-June, during which time $3 billion of inflows were recorded, according to the analysis. Prior to April, outflows had been recorded in most weeks, with net outflows totaling around $1 billion.

With the calendar third quarter now more than half completed, inflows, after that slow start, remain solidly ahead, with 20 inflows versus 14 outflows seen in the 34 weeks since the start of 2008, according to the analysis. According to market sources, net inflows from the weekly-reporting funds since the start of the year, excluding distributions but including previous retroactive adjustments and revisions, are now estimated at $1.439 billion, down from $1.448 billion the previous week. At its peak, the 2008 net inflow totaled $1.933 billion in the week ended June 11, the final week of the 11-week run of straight inflows.

Junk mutual funds which report on a monthly basis, rather than week-by-week, were meantime estimated to be holding at a year-to-date inflow total in the $2.8 to $2.9 billion range. Combining the year-to-date fund flow totals of both the weekly- and the monthly-reporting funds, about $4.3 billion more has come into them since the start of the year than has exited, junk market sources indicated.

The flow of money into and out of the junk bond funds is seen as a generally reliable market barometer of overall high yield market liquidity trends - although they only comprise 10% to 15% of the total monies floating around the high yield universe, far less than they used to - because there is no reporting mechanism to track the movements of other, larger sources of junk market cash, such as insurance companies, pension funds and, more recently, hedge funds.

Market indicators mostly lower

Back among the established issues, a trader said Thursday that the widely followed CDX index of junk bond performance was up 3/8 point on the day, quoting it at 92 5/16 bid, 92 9/16 offered. The KDP High Yield Daily Index meantime dropped by 8 basis points, to end at 70.24, while its yield rose by 2 bps to 10.67%.

In the broader market, advancing issues trailed decliners by a more than four-to-three margin. Activity, represented by dollar volume, was unchanged from the weak levels seen on Wednesday.

A trader characterized Thursday's session as "a kind of choppy day - there were a lot of numbers out this morning, but not a lot of trading as we get closer to the weekend and people are starting to head for the beach."

He said that a lot of factors were weighing on the junk market's psyche. For instance, "everyone still has their eye on these auction-rate settlements - Merrill [Lynch] got dinged today, and [people are] speculating whether they're going to have to come to the [capital] markets again - what could that do to the rest of the market?"

On top of that, he said, the Olympics are still on and sports-loving investors and traders alike were watching the games from Beijing "with one eye and seeing what's going on there.

"So it was a typical mid-August trading session - I get busy in the morning, then people go out for a walk, and if it's a nice day" - and in New York, anyway, Thursday certainly was - "they don't come back in the afternoon."

Gaming issues easier

The trader said that in actual junk market action, the gaming sector "slid a little today - it continues to drift down a little bit."

Several traders said they had seen no activity in Mohegan Tribal Gaming Authority's bonds, even though Moody's Investors Service said that it was putting the Uncasville, Conn.-based operator of the Mohegan Sun casino under scrutiny for a possible downgrade, citing the continued weak economy and intensifying gaming competition in the Northeastern United States.

One market source saw the Authority's 7 1/8% notes due 2014 at 74 bid, down a point from previous levels, though on just one large-block trade. Its 6 7/8% notes due 2015 lost ½ point to 70.5 on some small odd-lot dealings.

Moody's currently rates Mohegan's corporate credit at Ba2, its senior notes at Ba1 and its senior subordinated notes at Ba3.

Also in the sector, a trader saw MGM Mirage's long-dated paper, like its 7 5/8% notes due 2017 "down ¾ point in the last day and a half."

At another desk, the bonds were going home quoted at 80 bid - down more than 3½ points on the session and at least 2½ points when compared to the most recent prior round-lot closing price.

A trader saw Harrah's Entertainment's 6½% notes due 2017 at 40 bid, 42 offered, down a point.

Elsewhere in the sector, he saw Wynn Las Vegas LLC's 6 5/8% notes due 2014 at 91 bid, 93 offered, up a point on the day.

Trump Entertainment Resorts' 8½% notes due 2015 rose ¼ to 44.5 bid, 45.5 offered. Another trader saw the bonds at 44.5, which he said came on a "knee-jerk move down from yesterday," but added that "then the bid did lift."

Yet another trader saw the bonds unchanged at 44.5 bid, 45.5 offered on "some activity." But still another trader said the Atlantic City, N.J.-based casino company's bonds "got hit early," and moved down to 44.5 mark from prior levels around 46.

He also saw Majestic Star Casino's 9½% notes due 2010 were at 62 bid, 64 offered, down from Wednesday levels at 63.75 bid - which in turn had been off from prior levels around 68 the day before.

Idearc much quoted, little traded

A trader saw Idearc Inc.'s 8% notes due 2016 "quoted actively all day long" - but when push came to shove, by the end of the day, he said, "there's [only] been like one or two trades." He saw the bonds steady at 42.5 bid, 43.5 offered.

Another market source saw the Dallas-based telephone directory publisher's bonds down 1 point, but at 43 bid.

Idearc's main industry rival, Cary, N.C.-based R.H. Donnelley Corp., was meantime seen by another trader to be ending mixed on the day - while he saw the last round-lot trade at 48 bid as a 1½ point rise from the last prior round-lot transaction earlier in the week, he saw the company's 8 7/8% notes due 2016 down ¼ point at 47.

While that was happening, Donnelley's New York Stock Exchange-traded shares were zooming by 40 cents, or 19.32%, to $2.47 on volume of nearly 4 million shares, almost double the usual turnover. There was no fresh news out on the company, although one or two people mentioned that last weekend's Barron's piece touting the stock as an "attractive, though risky" investment and also highlighting its bonds as a possible option for investors - which gave a similar-sized boost to the shares and also pushed the bonds up earlier in the week-was still circulating around and being reposted all over the internet. One said that with all of that repetition, "maybe it began to sink in" for some players.

Junk marketeers dabble in troubled hig-grade credits

A trader saw "a lot of accounts playing in the [high-grade] financial space" - credits like Countrywide Financial Corp., Washington Mutual Inc., MBIA Inc. and Radian Group Inc., nominally investment-grade rated, at least for the moment, but now trading off the junk-bond desks at some shops because high-yield investors are attracted to the fat yield levels at which those companies' bonds now trade, given their depressed price levels.

Countrywide's 6¼% notes due 2016 were seen trading in size Thursday as low as just above 81, for a yield of 9.757% - far above the yield at than A3/AA-/A credit would normally produce.

The trader said that those credits "are traded in between a lot of the desks on either side. Certainly, we're seeing a lot more high yield accounts focus on those names, with the yields they're trading at."

He said "we have this debate all day long - which desk should be trading them. Every shop seems to be handling it differently, but accounts don't care who they're trading them with - as long as they're trading them."

He also said "we're seeing more and more accounts, particularly fast money high yield accounts kind of looking at them trading at these attractive levels and trying to take advantage of some 'information arbitrage,' if you can call it that, as things kind of bang around and are pretty illiquid."

While he personally hadn't traded such paper, "we're seeing a lot of accounts get involved in it here at our desk."

Speaking for example of Radian Group's bonds, he said that "people buying it are typically high yield accounts, that's who are buying it." He said that since the paper (which is split-rated at Ba1/BBB/A-) is nominally still thought of as investment grade, a lot of it, for now, is "in investment-grade hands." However, he added, "a lot of them are selling, and we're seeing a lot of paper move from investment-grade players who've held it, to high yield holders who are more comfortable with handling workout situations and taking on risk of this nature."

The Philadelphia-based credit insurance company's 7¾% notes due 2011 were seen going home Thursday at 65 bid, up more than 3 points from Wednesday's ending level and 1 3/8 higher versus the last previous round-lot trade on Tuesday. The rise in its price cut its yield - which had been above 29% on Wednesday - although it was still a swollen 26.326%.

Radian's 5 5/8% notes due 2016 were quoted late Thursday at just below 53, unchanged on the session, for a yield of 23%; in last week's dealings, the yield had ballooned out to above the 30% level.

A trader saw MBIA's 14% junk-like surplus notes due 2033 down 2 points at 74 bid, 76 offered. He also saw Countrywide's 61/4s down a point at 81 bid, 82 offered on "good-sized trading."

NXP rally fizzles out

Among credits which had been active on Wednesday, a trader saw NXP's 9½% notes due 2015 "maybe up a little" at 66.5 bid, 68 offered, which he called a ½ point gain. Those bonds had shot up by 3 or 4 points Wednesday on the news that the Dutch semiconductor manufacturer's joint-venture partner, STMicroelectronics NV, will buy out NXP's 20% stake in the two companies' recently established ST-NXP Wireless for an as-yet undetermined sum, so STMicroelectronics can join that fully-owned unit with Swedish telecommunications equipment maker Ericsson AB's wireless chip and software businesses in a 50-50 joint venture that will supply components to four of the world's top five mobile-phone makers.

Another trader saw those 9½% bonds, however, ¼ point lower on the session at 67.75. He also saw the company's 7 7/8% notes due 2014 at 82, down from Wednesday's levels at 84.

"So that was a short-lived rally," he declared, suggesting that there was profit-taking on Wednesday's gains.

Energy XXI gyrations settle down

Another active credit on both Tuesday and Wednesday has been Energy XXI Gulf Coast Inc.'s 10% notes due 2013, which on Tuesday was seen having plunged a good 7 points on the day down to the 80 level and which then recouped some of that lost ground on Wednesday, moving up to around the 83.5 level, in active dealings both days. There was no news out that might explain those fluctuations, although one possibility was that the gyrations were based on market technicals rather than on fundamentals.

However, on Thursday, the Houston-based independent oil and gas exploration and production company's bonds were seen pretty much unchanged, in greatly diminished dealings.

GM takes downside ride

A trader saw General Motors's 8 3/8% benchmark bonds due 2033 down 1½ points at 48 bid, 50 offered, while seeing GM's 49%-owned GMAC LLC auto-financing unit's 8% bonds due 2031 at 52.5 bid, 54.5 offered, "down ½ point on continued weakness in the autos."

He also saw Ford Motor's 7.45% bonds due 2031 lower by ½ point at 40 bid, 42 offered.

Another trader the GM 8 3/8s "drifted a little lower" to 48.5 bid, 49.5 offered, which he called down a point, and saw the GMAC 8s at 55.

Investor parses possible GM bank deal

Earlier in the week a source from a high-yield mutual fund, a money manager who has lately been playing in the bank loan market, said that GM is expected to show up in September with an $8.5 billion bank deal.

Since then sources who have any information - or even expectations - about such a deal have proven to be scarcer than hen's teeth.

However on Thursday a money manager from a different mutual fund, whose portfolio includes bank loans as well as junk bonds, said that the consensus feel is that there is going to be a fairly big bank deal from GM in the near future.

"That will push the bonds down via subordination," the money manager remarked.

The investor recollected that on its most recent earnings call GM made mention of unpledged collateral, and said that assertion, itself, gave rise to an expectation that the troubled auto maker would do a deal.

"Everybody believes they need a lot of cash, and unsecuritized assets seem to be the most logical means of getting it," the investor said.

The buy-sider also said that at least one of the ratings agencies will notch GM's unsecured debt ratings downward if the bank deal materializes, which is bad news for the bondholders.

"However if GM can get billions of dollars of liquidity that's probably better than the alternative," the investor said.

"To a certain extent I think that people who are invested in GM bonds at this point are betting that the company will survive into the next economic upturn.

"And anything that helps them survive is worth it."

A drifting market

This investor's sense is that presently the credit markets are drifting, and that GM's existing bonds are drifting with it.

"The automotive bonds were priced several weeks ago for the decline in fundamentals," said the money manager. "Everyone expects the auto makers to take steps to insure their survivability. Those steps are uncertain so there is no point in bidding things up a lot.

"There is a lot of yield on auto bonds at this point."

Beyond the automotives, the investor believes that the drifting credit markets reflect a view that the messes du jour in the financial sector - concerns about the solvency of Fannie Mae and Freddie Mac, and news reports that Lehman Brothers is considering selling its money management operations to offset real estate-related losses - will come to less than catastrophic conclusions.

"If the markets are drifting, which is how they appear to me, that would seem to say that there is confidence that the government is going to step in and do something about Freddie Mac and Fannie Mae, but that no one is certain it's already a done deal to the extent that they are running in and buying.

"But if people were truly fearful that it was going the other way they would probably sell more readily, and I don't see these things tanking.

"People are just annoyed that they don't know what's going on."

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