Bad News Bears Still Mauling HY
February 2, 2009
High yield investors on the secondary market remained cautious last week as the economic news brought little cheer despite the U.S. House of Representatives passage of an $819 billion economic stimulus bill.
U.S. consumer confidence dropped to an historic low, according to The Conference Board's survey. The survey's January consumer confidence index was at 37.7, down from a revised December reading of 38.6. U.S. home sales fell by almost 15% for December, making 2008 the worst year for home sales since 1982, according to the National Association of Realtors.
Initial jobless claims rose by 3,000 to 588,000. The number of people in the U.S. receiving continued unemployment benefits jumped to a record 4.78 million for the week ended Jan. 17, a new high according to the U.S. Labor Department.
Yield on the 10-year Treasury note fell below 2.55% Tuesday, as more investors sought safety in Treasurys. The yield rose Wednesday to more than 2.65% from below 2.55%. It was at 2.71% by midday Thursday.
The Merrill Lynch U.S. High Yield Master II Index slowly and steadily moved upwards last week. Coming from the previous week's close of 454.095, last week saw the index climb from 454.357 to 458.748 prior to Thursday's opening.
Auto parts maker Delphi was the biggest loser for the week ending last Thursday, according to Advantage Data. General Motors is in discussions with the bankrupt company as part of its own restructuring plan. Parts suppliers stand to take bigger losses as the effects of plant stoppages and declining auto sales continue to ripple through the industry. Delphi was poised to exit Chapter 11 last year, but a deal with investors fell through. Auto sales fell 18% last year and are expected to fall for a fourth consecutive year this year. Delphi's 8.25% notes due 2033 lost 56.375 points to register a measly 0.25 early Thursday.
Industrial bearings and specialty steel parts manufacturer Timken also took big losses last week. The company reported a net loss of $36.2 million for the fourth quarter of 2008. The same time frame a year earlier yielded a $48 million profit. Timken said that its 2009 performance would fall below expectations due to deteriorating economic conditions worldwide. The company has been hurt by falling demand from the U.S. auto industry. It has cut approximately 2,500 jobs since October 2007 and expects its 2009 earnings to be less than half those seen in 2008. Timken's 6.875% bonds due 2028, which were trading well above par, lost 25 points to reach 93.75 by Thursday's opening; this price was still higher than all but one of the top 20 gainers.
Canwest Mediaworks lost ground in secondary trading as well. The Canadian newspaper owner may soon have to file for bankruptcy. Earlier this month, Standard & Poor's downgraded the long-term corporate credit rating of the company to B- from BB-, citing its expectations that the company's revenue and operating profits would decline this year. S&P said that its key markets of Canada and Australia would be hurt by declining advertising revenues and the general global economic environment. Canwest's 9.25% notes due 2015 dropped 23 points by Thursday's opening to trade at 13.625.
The fortunes of Turkish conglomerate Calik Holding have caused a setback for Globus Capital Finance on the secondary market. Calik guarantees Globus 8.5% bonds due 2012. Fitch Ratings lowered Calik's issuer default ratings to B- from B, citing its concerns about Calik's acquisition of a television station and the impact it would have on its natural gas revenues. The Globus 8.5% bonds due 2012 fell 22.75 points to reach 49.625 early Thursday.
Outdoor clothing company Quiksilver was the biggest gainer in secondary trading last week. The gains followed serious cost cutting measures. The Huntington Beach, Calif.-based company announced an overall restructuring that would include 200 layoffs and an annual savings of $40 million. The company cut about 400 jobs last year. Quiksilver's 6.875% notes due 2015 gained 21 points to trade at 54.125 by Thursday.
The transregional, subsidiary bonds of Russian Transcapitalbank got a boost from a $30 million increase in the loan that the bank received from the European Bank for Reconstruction and Development. In December, the EBRD provided a 10-year subordinated loan of $15 million to bolster the balance sheet of Transcapitalbank, which serves small and mid-sized businesses in Russia. The Transregional 9.125% bonds jumped 18 points to reach 65.625 by Thursday's opening.
Tabloid newspaper publisher American Media Operations extended its tender offer on its 10.25% subordinated notes and benefited from a sweetened debt swap deal it offered bondholders, who now stand to gain a lot more equity for tendering. The exchange offer would reduce the company's debt by as much as $250 million. The company is backed by private equity firms Thomas H. Lee Partners and Evercore Partners. American Media has remained profitable despite its loss of advertising revenue to online advertisers and significant debt burden. The company's 8.875% bonds due 2011 rose 17 points by early Thursday to reach 31.625.
Finally, Nova Chemicals managed to post strong sales for the month of December, even though its fourth quarter 2008 performance was weak. Nova's fourth quarter liquidity increased to $573 million from $510 million at the end of the third quarter. In addition to upping its liquidity by $90 million in the second half of last year, the company reduced its debt by $290 million in Q4. Nova's 7.4% notes due 2009 gained 16.125 points by Thursday's opening to trade at 82.5.
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