Market Starts 2009 Waiting For Recovery


With 2009 upon us, high yield investors are nursing their wounds and looking forward to a Happy New Year, or at least a Happy Second Half of the Year.

The prognosis for the next few months is grim, but market participants do not expect 2009 to be as bad a year for the credit markets as 2008. "Anyone who has picked up a newspaper or watched television knows that there has been speculation by the media recently that the current financial crisis could turn into another depression," said Adam Larson, an investment analyst and member of the investment services team at Savant Capital. "The truth is that the current situation is nowhere near that bad." Larson cites the quick action by the U.S. federal government, relatively strong corporate earnings, and the remaining tangible value of homes as significant differences between 1929 and 2009.

But the economic news is bad enough. The Conference Board's Consumer Confidence Index dropped to 38.0 in December from 44.7 in November. The reading is the Board's lowest on record. Home prices, the economy's favorite punching bag in this cycle, kept on sliding. The Case-Schiller home prince index declined 2.2% in October from the previous month, and dropped 18% for the year. Oil prices were on the rise last week as fighting in Gaza between the Israeli military and Hamas caused investors to worry that the violence could disrupt oil shipments from the region.

The volatility sent investors to Treasurys last week, pushing prices up and yields even further down. The yield on the 10-year note dropped below 2.06% after opening close to 2.10% last Monday. News of the GMAC bailout buoyed stocks, and the yield soon rose above 2.14% after Tuesday's opening. Midday Tuesday saw the yield at 2.11%.

The Merrill Lynch U.S. High Yield Master II Index remained above the 400 mark as the New Year approached. The index climbed to begin the week, closing at 422.439 Monday, up from the previous week's close of 417.580. The index illustrated the credit markets' steep decline over 2008. In late December 2007, it was just above 590.00. It was just below 580.00 six months later.

Gainers gained more than losers lost for the week ending Dec. 30, providing a bittersweet end to a trading year where even the winners were losers.

Case in point is Washington Mutual, which was the top gainer for the week, according to Advantage Data. Earlier in 2008, the failed bank sold its assets to JPMorgan Chase for $1.9 billion. However, the bank's lawyers informed a bankruptcy judge in December that its investments in its strategic capital fund and in certain venture capital funds would generate value for its creditors. Washington Mutual's 5.5% bonds due 2019 gained 45 points to trade at 47.125 by Tuesday's opening.

But it was GMAC bonds that dominated the gainers list last week. The financing arm of General Motors got a late $5 billion Christmas present in the form of a bailout by the U.S. government, which pledged to use its Troubled Asset Relief Program fund to help GMAC restructure. The government will take an equity stake in GMAC with its $5 billion investment, and will lend another $1 billion to GM. Prior to that, the government approved GMAC's application to become a bank holding company, which will enable it to take insured deposits. GMAC's 5.1% bonds due 2009 gained 29.875 points to trade at 66.375 by last Tuesday. One tranche of 5% notes due 2009 gained 28.5 points to trade at 66.75, and the other tranche of 5% notes due 2009 gained 26.125 points to trade at 63.25.

GMAC's home mortgage unit, Residential Capital, also made it to the top gainers list. Its floating-rate notes due 2010 climbed 22.25 points in secondary trading to reach 37.625.

Legacy bonds from Texas Utilities Electric Co., which is now part of Energy Future Holdings, were the top losers last week. The utility company was fined for manipulating the wholesale power market and fined $210 million, though the Texas Public Utility Commission approved a settlement to cut the penalty to $15 million. Texas Utilities' 7.48% notes due 2017 lost 37 points to trade at 58.625 early Tuesday.

Illinois boat maker Brunswick Corp. saw its bonds suffer in the wake of an agreement with lenders to amend its revolving credit facility and convert it into a secured, asset-based facility. The company also announced that it made an accounting error in a previous earnings statement, and would have to take a charge of $135 million. Brunswick's 7.375% bonds due 2023 slipped 18.25 points to reach 33.625 by Tuesday's opening.

Packing product provider Tekni Plex was a loser in secondary trading as well. The company said it entered into a second amendment to its credit agreement that extends its maturity date by two years and provides for an asset-based credit facility in the maximum amount of $110 million. The company closed manufacturing plants throughout the year and completed a debt-for-equity exchange in June. Tekni Plex's 10.875% notes due 2012 fell 17.5 points by Tuesday to trade at 60.625.

Arkansas-based meat processing giant Tyson Foods had bonds taking significant losses in the wake of Mexican authorities' imposition of a ban on meat from several of its plants. The government of Mexico suspended meat imports from 30 processing plants in the U.S., citing sanitary issues, including six plants run by Tyson. Tyson's 7% notes due 2028 lost 11.875 in secondary trading to trade at 55 early Tuesday.

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