Junk falls with equities slide; Wachovia, WaMu bonds higher; Dish broken on lost AT&T contract

By Paul Deckelman and Paul A. Harris

New York, Sept, 29 - The high yield market took its cue from stocks, with most bonds seen down points as the equity markets slid dramatically.

But while financial names were mostly lower, Wachovia Corp.'s bonds rose on news of the acquisition of its bank assets by Citigroup. Washington Mutual Inc.'s bonds were seen higher pretty much across the board, bouncing back from the low, low levels they hit Friday morning after the company was seized and closed by Federal regulators

Dish Network's bonds were seen lower on AT&T's decision to partner with the Colorado-based satellite TV operator's rival, DirecTV, starting next year, instead of renewing its arrangement with Dish.

There was no news in the primary market.

Late last week market watchers had been expecting the downsized Fresenius Kabi $800 million bond offering, via Deutsche Bank, Credit Suisse and JP Morgan, to possibly launch early in this week.

However it is unlikely to launch this week unless conditions in the capital markets improve significantly, an informed source said.

The bond portion was downsized by $500 million, from $1.3 billion, with that amount shifted to the $2.95 billion bank deal (Baa2/BBB-).

Prior to the most recent downsizing the Fresenius high-yield bridge had already been downsized to $1.3 billion from $1.65 billion.

Market barometers slide

The widely followed CDX index of junk bond performance, which lost ¼ point on Friday, lost continued to slide by nearly another point Monday, a market source said, quoting it at 89.688. The KDP High Yield Daily Index plunged by 135 basis points to end at 64.49, as its yield shot up by 43 bps to 12.23%.

A high-yield syndicate source marked the CDX High Yield 10 index down 1 1/8 points on the session, adding that cash bonds have fared considerably worse.

In the broader market, advancing issues again trailed decliners by a three-to-one margin. Activity, represented by dollar volume, fell by 40% from the levels seen on Friday, and actually outpaced that of the usually busier investment-grade market.

Asked to describe the market in a nutshell, a trader laughed and said: "Well, it sure ain't up!"

Another trader said that the day was "just a catastrophe," adding that "hopefully by Wednesday or Thursday, [Congress] will manage to revote and pass something."

He said that outside of some of the Washington Mutual issues "I can't think of anything that's higher."

Besides the pressure that was exerted on junk by Monday's collapsing stock market, "there were a series of bid lists for bank debt that were making the rounds," putting everyone in a further selling mood.

He further noted that even high-grade issues were pretty much wider across the board and that "as high-grade widens, junk widens - even more."

Another trader characterized the market as "disastrous." It was "a little busy in the morning. We tried to trade some stuff early - a little bit of Lehman paper, WaMu, other distressed financial paper."

But then, he said, "there was a $300 million bank loan 'bid-wanted' came in, and a $700 million 'bid wanted' for high yield bonds came through, and that kind of took the focus of secondary trading."

Then things dried up as the House voted on the $700 million bank bailout bill - only to see it unexpectedly go down the tubes.

"If there was an opportunity to sell" at a decent level, "it was a couple of days ago, and you're going to have to hang on."

He said that he had seen "very little in terms of bids. "Guys are showing bids, but they're down five or six points. "Liquidity is there," he said, "but it's lower, when it comes down to active trading."

"Most people are sitting, watching and waiting" to see what happens next. It was his understanding that there will be no congressional revote on the bailout package until Thursday or Friday at the earliest, "so we can expect more of the same," predicting that the overnight markets would "get hammered."

For the most part, he said, people in the market thought the bailout bill would get done "because it's highly unusual for congressional leaders to bring a bill that's going to fail."

With most people expecting a "yes" vote, "when the no votes came rolling in, the market just got crushed."

Wachovia, WaMu up

Washington Mutual's holding company paper regained a fair amount of ground during Monday trading, with some traders saying the debt was trading closer to expected recovery levels.

One trader placed the debt, such as the 4.20% notes due 2010, around 50, noting that the bonds hit a high of 53. Another trader said the senior unsecured holding company paper got as high as 54, before coming back slightly to close at 51 bid, 53 offered.

As some traders predicted, WaMu filed for bankruptcy protections on Friday after federal regulators seized control of the company and sold the banking operations and loan portfolio to JPMorgan Chase & Co. for a mere $1.9 billion. In a court filing on Friday, the Seattle-based financial institution said it had $8.1 billion in debt and $32.8 billion in assets.

Recovery models have already started to emerge. Independent research service CreditSights said Monday senior unsecured bondholders could receive as much as 80% of their principal value. However, subordinated noteholders should expect limited recovery.

The recovery model assumes that the company's debt will remain at the holding company, which is estimated to have about $4 billion in cash.

"With that said, there is still significant uncertainty over whether this cash will remain at the parent company," CreditSights said. There is a possibility that the cash could be moved to the banking business to settle FDIC claims, it said.

According to Gimme Credit analyst Kathleen Shanley, "If funds are trapped at the bank and end up being viewed as unsecured debt, recoveries could be lower than implied by the parent company's apparent liquidity." In a morning report, Shanley wrote that given the circumstances, "we would sell the senior debt at current levels."

Elsewhere in the financial sector, Wachovia Corp.'s bonds were sent into the high 70s on the news of a sale to Citigroup. However, distressed traders said that company's bonds were still trading at high-grade desks

Dish is dumped

Loss of its AT&T contract to rival DirecTV left Dish Network in disarray; a market source saw its 7 1/8% notes due 2016 down more than 5 points at 82 bid.

The telecom giant's decision leaves Dish without a partner with any of the nation's three biggest telecom companies to help sell its programming to their customers.

Stephanie N. Rotondo contributed to this report.

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