AIG, other faltering financials, dominate junk; GM rebounds, leads afternoon bounceback move

By Paul Deckelman and Paul A. Harris

New York, Sept. 16 - Troubled American International Group Inc.'s bonds were by far the most heavily traded corporate debt on Tuesday, actively traded at mostly lower levels in the junk bond market as well as in the high-grade sphere, even though the bonds - for the moment - are still nominally investment-grade issues.

Lehman Brothers Holdings Inc., after having been junked by the major agencies following Monday's bankruptcy filing, was the busiest purely "junk" issue, its bonds continuing their downside ride. Washington Mutual Inc. - not bankrupt, but certainly now junk as well - was also actively trading at lower levels.

Outside of that trembling trio of faltering financials, traders saw a few upsiders, including General Motors Corp., whose bonds firmed a bit as part of a late bounce back that tracked an equity market rebound probably triggered by news reports that the Federal Reserve might be having second thoughts about its refusal to extend any credit to AIG. Jarden Corp.'s bonds were higher - the only news being the Rye, N.Y.-based consumer products company's declaration that it has no material exposure to either Lehman or AIG.

Sprint Nextel Corp. - hit with bad news on the legal front as well as the announcement that Moody's Investors Service will continue scrutinizing it for a possible downgrade - was seen in retreat.

The Tuesday session failed to produce any primary market news.

A money manager from a high-yield mutual fund said that in spite of a rally in the U.S. stock indexes cash bonds were off again on Tuesday, but reckoned that the market was still catching up from Monday's volatile session.

The buy-sider said that junk bonds were trading.

"We tried to buy a couple of things," the source said, adding that no one seems willing to offer any paper from good credits.

This money manager was in the market for Graham Packaging paper, which was not for sale at 88. Nor was the source able to buy Biomet subordinated paper at 1031/4.

Fed schmed

The money manager was non-committal with respect to the decision on the part of the Federal Reserve Bank's Federal Open Market Committee to leave short term interest rates unchanged.

However the buy-sider hopes that the government does step in to provide meaningful assistance to AIG, and believes that if it does so the result would likely be a big rally in the stock market.

"Everybody has exposure to AIG," the buy-sider said, noting that such a wide dispersal of exposure renders the AIG situation markedly different from that of Lehman Brothers Holdings, Inc., which the government declined to bail out.

"[Treasury secretary Hank] Paulson had a press conference on Monday saying that the government was not looking at bailing out AIG," the investor said.

"Paulson said the financial markets were functioning and providing liquidity.

"That surprised me."

This source added that cash remains to be put to work in high yield, but added that everyone continues to seek clarity as to where they stand following the Lehman bankruptcy.

The cash trail

Meanwhile during a Tuesday conversation with Prospect News, an investment banker wondered aloud where the cash could be going.

"We've seen the bank loan market dry out, and the high-yield has also dried out," the banker said.

"So there are two sources of liquidity: the ABL market and the mezzanine market.

"There is evidence that the ABL market is going to dry out soon, which will leave the mezz."

However this banker wonders how much longer the mezzanine market will remain liquid when mezzanine pricing is beginning to approximate high-yield pricing.

So where is the cash going? Prospect News asked.

This banker bets that it's going into distressed financial securities and hung debt.

"If the banks were able to sell $200-plus million of Clear Channel it probably means people are looking for stuff like that," the source said, referring to last week's downsized $228 million amount of Clear Channel Communications Inc. 10¾% senior cash-pay notes due 2016 (Caa1/CCC+) that was sold in a secondary trade at 70.00, resulting in a yield of 18.012%.

Although the underwriters made a unified approach to the market with the entire $980 million tranche of 10¾% cash-pay notes, which they had priced at par on Aug. 1, and then downsized the amount on offer to $325 million and then again to $228 million, this banker asserted that the ability to sell $228 million is not insignificant.

What there is not a market for, presently, is par-pricing paper, the banker contended.

Having said it, however, the source added that if the stock market rallies underwriters have their books ready for some best-efforts high-yield refinancing deals.

"All they need is the green light," the source said.

"They just want to see some improvement in market conditions before they launch."

Market indicators continue retreat

The widely followed CDX index of junk bond performance - which had plummeted 2½ points on Monday - was about unchanged on the day Tuesday, a trader said, quoting it at 90 5/8 bid, 90 7/8 offered. The KDP High Yield Daily Index virtually replicated its rout Monday, nosediving by another 73 basis points to end at 69.14, as its yield gapped out by 18 bps to 11.03%.

In the broader market, advancing issues trailed decliners by a seven-to-two margin. Activity, represented by dollar volume, was almost triple the levels seen on Monday.

While things began moving south almost from the market's opening, there was an improved tone later on, participants said, in line with improved stocks, which bounced back from large early deficits on investor expectations that something would be done to prevent AIG from following Lehman down the tubes, as well as better-than-expected results from another financial giant, Morgan Stanley, which offset the earlier announcement by Goldman Sachs of a big plunge in profits versus a year ago.

"Our market definitely came back towards the end of the day," a trader said. "There was definitely some bottom-fishing going on - not that there was excessive downside volume earlier, because there wasn't, but we definitely saw a pickup on the prices on the bid side later in the day."

Another trader said that activity in actual junk issues, rather than fallen-angel financials, was restrained. "I don't think I did anything in high yield today - because high yield is now financial firms." There were "just list after list of bid-wanteds. It was all financials."

Yet another trader said he had seen "no activity" in the usual junk names Tuesday - it was "all in the big names" that have dominated the headlines.

AIG bonds pounded down

Chief among these was AIG.

The renewed beating which its New York Stock Exchange-traded shares took on Tuesday - they plunged as much as 73% at one point before finishing down $1.01, or 21.22% at $3.75 on incredible volume of 1.225 billion shares, some 20 times the norm, reflecting market concern over the insurance giant's increasingly perilous situation - was mirrored in the continued slide in its bonds, which for the moment are nominally still investment-grade instruments, but trading at badly distressed levels.

AIG's most active issue with over $200 million changing hands, its 5.85% notes due 2018 - which on Monday had tumbled about 20 points into the lower 50s - opened at 38 bid, a market source said, and then proceeded from there to gyrate wildly at mostly lower levels. The bonds swung from an early low point around 21 to as high as 66 later, where there were several big-block trades in a failed attempt to stabilize the price, and then cascaded back down into the 20s before finishing around the mid-30s.

A trader looking only at round-lot transactions as representative saw the bonds go as low as 35 before coming back to finish at 44.75 bid - still well below a closing price Monday of 57.

He saw insurer's 6 3/8% notes coming due in March get as low as 61 before closing at 65 - still well down from Monday's close at 79.625.

He said that over $100 million of the 5 3/8% notes due 2012 had been traded, with round-lot levels gyrating between 33 and 45 before finishing at 35, down from 67 on Friday.

Another trader, pointed out that AIG "did recover at the end of the day, at least a little bit," helped by news reports indicating that New York State and City officials and executives of other financial firms having exposure to AIG - which is most of them - had prevailed upon the Fed to at least take a second look at the idea of providing AIG a bridge loan that would buy the troubled Manhattan-based insurance behemoth some time to get its financial house in order. The Fed had initially nixed such a loan, instead urging AIG to borrow from a consortium of banks, but by Tuesday night, well after trading had folded up for the day, there were news reports indicating that the Fed would extend that life line. Some of the reports said that officials were thinking of putting AIG under a conservatorship, not unlike what the government did earlier in the month with troubled Freddie Mac and Fannie Mae.

Those signs that one way or another, AIG would not be permitted to slide into bankruptcy like Lehman - being considerably more important in the overall scheme of things than Lehman was - helped cut the shares' big losses down to a more manageable size and brought the bonds back from their day's lows.

The trader said that the company's 5.45% notes due 2017 had been trading near the low 30s earlier in the day, "if they were even that good," but had risen to 42 bid, 44 offered, "and I think most of the paper went out like that.

"The sub debt was down in the low 30s and it recovered by the end of the day to being in the low-to-mid-40s, depending on the issue, and by mid-40s, I mean maybe 45, not above that level." Even with the bounce off the lows, the AIG paper was "definitely down."

Lehman a loser again

Lehman Brothers bonds - which had been trading off the high yield desks like de facto junk bonds for a couple of days last week and earlier this week, officially became junk with the massive agency rating cuts following the venerable New York-based insurance bank's descent into Chapter 11 on Monday; the bonds are now going to be considered junk by the various companies which compile indexes of high yield bonds, and by Finra's Trace bond tracking system. On its first full day as a junk bond, in fact, Lehman dominated the end-of-day list of active high yield issues put out by that organization, occupying eight out of the 10 positions.

A trader said that Lehman's most active issue was probably its 6 7/8% notes due 2018, which saw $59 million bonds change hands with a final round lot trade of 31, "definitely down points" from Monday, when the bonds ended at 33.

Almost as active, he said were Lehman's 5 5/8% notes due 2013, some $57 million of which traded at 31.5 bid, which he saw down 3 points on the day.

The trader said that same pattern followed for other Lehman senior issues like its 6.20% notes due 2014, and its 4¼% notes due 2010; they all finished in a 30-31 context in round-lot trading, down about 3 or 4 points from Monday. "The seniors were in a range and the subs were in a range," the trader said, "and it seems like the seniors were more active than the juniors."

Among the latter, he quoted the 6½% notes due 2017 at a final trade of 2, almost half of the 3.375 at which the bonds had finished Monday, with between $10 million and $15 million traded Tuesday.

He saw $8 million of the 5¾% notes due 2017 trading at a final round-lot level of 2.625, versus 3.25 on Monday.

WaMu continues to get whacked

A trader said Washington Mutual's 4% notes due 2009 "really gyrated," seeing a round-lot range of between Monday's close at 60.5 and Tuesday's low at 47, before a close around 50.

Odd lots in that bond, he said "were all over the place;" another market source saw the 4s bouncing as low as 24 bid and as high as almost 51, before finally going home down 5 points on the day at 46.

The first trader also saw WaMu's 5¼% notes due 2017 closing on a round-lot basis at 32, up from intraday lows at 26 but ½ point below Monday's finish.

GM drives higher

With junk issues seeing a better tone later on, the non-financials seemed to be poised for a bounceback.

A trader said the General Motors benchmark issue "actually bounced back a little bit" as the junk market seemed to strengthen in the afternoon from its earlier weakness. "I definitely saw bids out there, although I'm not sure how low they had gotten earlier in the day."

He said the GM 8 3/8% bonds due 2033 closed at 51.5 bid, unchanged on the day after "definitely" trading as low as 49.75 earlier. "So they opened up, traded lower and bounced back to [Monday's] close - which is actually pretty good," considering the gyrations that the equity markets went through.

He saw the GM 7.20% notes due 2011 get as low as 69.5 on a round-lot basis before going out at 70.5, off from 71.5 on Monday.

Meantime, the Ford Motor Co. 7.45% bonds due 2031 got as good as 53 earlier in the day, and closed at 51.5, down 1 point from Monday's finish, the trader said.

Another trader saw the GM long bonds up a point on the day at 51.5 bid, 52.5 offered, while the Ford '31s gained ½ point to end at 52.5 bid, 53.5 offered.

Jarden higher

Another upsider, market participants said, was consumer products maker Jarden. A market source saw its 7½% notes due 2017 up ½ point to 90 bid, while a trader at another desk also saw that movement, on relatively active dealings of $9 million.

The company said on Monday that it plans to replace Lehman Brothers as the administrative agent on its credit facilities under the terms of its credit agreement, and said that Lehman provides under 10% of Jarden's revolving credit facility. It said that it has "no material financial exposures to Lehman Brothers and, while AIG is not one of Jarden's first tier insurance carriers, the company has reviewed the lower tier coverage provided by AIG to confirm it has no material financial exposures at this level."

Jarden's chairman and chief executive officer, Martin Franklin, further said that the company has elected to partially draw down on its previously undrawn revolver, although it has no current need for the liquidity, just as a precautionary measure.

Judge gavels down Sprint Nextel

On the downside among the non-financials - and traders said there were no shortage of those, despite the late-day upside move - one said that Sprint Nextel "got hit today with news out." He saw the Overland Park, Kan.-based wireless provider's 8 3/8% notes due 2012 trade as low as 98.5 bid before closing at 99, down from 100.375 at the close Monday, with $19 million of the bonds traded Tuesday.

He also saw the company's 7 5/8% notes due 2011 go as low as 97.5 before closing at 98, down from their recent levels around 99.875. Volume on that issue was $16 million.

What is usually the most widely traded Sprint Nextel issue, the 6% notes due 2016, were seen falling as low as 83 before coming back to finish at 84.125 bid, well down from Monday's close at 86, on volume of $14 million.

At another desk, a market source saw the 5.95% notes due 2014 lose more than 3 points on the day before finishing at 75.

Investors were digesting a Monday ruling by an Illinois state judge, who denied a motion by Sprint Nextel to dismiss a lawsuit filed by one of the company's own wireless affiliates, iPCS Inc.

That Schaumburg, Ill.-based Sprint Nextel affiliate is seeking to derail the company's efforts to establish what it has called a state-of-the-art, next-generation national high-speed mobile internet service. Sprint Nextel is working with Clearwire Corp. and other partners to create the $14.5 billion network, the commercial rollout of which is expected to begin later this month. It would be the first national network for WiMax, a standard for laptops and mobile phones that can transmit data five times faster than current technology.

But the fly in the ointment is iPCS, which was acquired by Sprint Nextel several years ago in a roll up of its local affiliate partners across the country; the affiliate contends that such a deal with Clearwire would violate exclusive agreements iPCS has with Sprint.

Besides the legal setback, investors also heard that Moody's is continuing to assess the efforts of Sprint Nextel's new management team to effect an operational turnaround at the company with an eye towards a possible downgrade.

Moody's, which began eyeing the telecom provider for a possible ratings cut in May, said that while the company has continued to implement its turnaround strategy, has supplemented its executive team, and has materially reduced its debt levels, as well as turning in a somewhat less-weak-than-expected second-quarter financial performance, "Moody's remains concerned that the company's ability to restore the health of its operations may be constrained by powerful competitive challenges, slowing subscriber growth and economic weakness. In addition, the fragility of the capital markets could hamper the company's efforts to further strengthen its balance sheet and improve liquidity."

The agency warned that the ratings would fall if it concludes that Sprint Nextel "will have difficulty shaping a turnaround in its operations within a reasonable timeframe such that its ratio of free cash flow to debt remains materially below 10% for an extended period of time and/or its debt to EBITDA ratio trends towards 3.5x."

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