High-yield was up on the week through mid-Thursday, but there was no dramatic activity, according to Jon Budish, a trader at Jefferies & Co. "No money. A lot of short covering. No calendar. People don't have cash. You'd expect a rally with the stock market, but unfortunately it's just ebbs and flows," he says. Another trader says benchmark names such as Nextel and Charter were modestly improved, while technology issues were better in sympathy with a strong Nasdaq Stock Market. Here is other action.
Foamex International Is Hammered
By Chemical Costs
Foamex International, a Pa.-based maker of fabricated products, saw its 10.75% senior secured notes of '09 (B3/B) plunge from the low 80s all the way to 50 last Wednesday, while the 9.875% senior subordinated notes of '07 (NR/B) dropped from 58 to 20. The bonds dropped after the company pre-announced third quarter EBITDA of $7-9 million, down sharply from $31 million last quarter and $35 million in the third quarter of last year. Executives blamed a surge in the cost of raw materials.
Timing differences between cost increases and price increases were painful in the third quarter, says Fran Brodowicz, analyst at Bear Stearns. She says conservative distressed analysis and limited information about the situation indicate that investors should avoid the bonds. Brodowicz is particularly concerned because Foamex is the largest global buyer of polyurethane, and should have significant ability to negotiate on pricing. "It's definitely alarming news, and we have recommended that investors underweight fabricated product names with significant chemical exposure due to heightened raw material prices," she says.
The big disappointment is that Foamex had trouble passing price hikes on to its customers, says Ed Mally, head of high-yield research at CIBC World Markets. He also has an underweight on the sector.
HealthSouth Jumps On Suspension
Of Surgery Spinoff
The HealthSouth 7.625% notes of '08 (B2/B+) were up four points to 78 on news that it had suspended plans to spin off its surgery business. The news allayed investor fears that the company would try to circumvent bond covenants prohibiting such a sale without investor consent, says Elie Radinsky, analyst at Jefferies & Co. Radinsky says the spinoff would have been a negative for investors as it would have created a less diverse company with a weaker business position. Radinsky continues to see at least 10 points of upside in the bonds.
PanAmSat Rallies After Strong Earnings
PanAmSat saw its most recent issue, the 8.5% notes of '12, surge eight points to an 88 bid after hitting its target for third quarter earnings and guiding fourth quarter numbers toward the high end of the previous range. The company, 81% owned by Hughes Electronics, is one of the world's largest fixed satellite service providers.
Andrew Van Houten, head of fixed-income research at Deutsche Bank Securities, maintains his buy on the credit. "We think they were oversold, and even after the recent rally have the opportunity to appreciate a couple of points," he says.