Downgrade threat pressures VeraSun; Vertis defaults, paper slips; 'Happy talk' helps Thornburg

By Stephanie N. Rotondo

Portland, Ore., June 25 - The distressed bond market got a bit of a slow start Wednesday as the market waited to hear what the Federal Reserve's decision would be on interest rates.

After the central bank elected to keep interest rates steady, the equity markets recouped some losses and the distressed sector seemed to rally some as well.

But a possible downgrade weighed on VeraSun Energy's already heavy bonds during the session. Traders saw the ethanol producer's debt lose a couple more points on the day, adding to the losses it has incurred since floods began raging through the Midwest. Sector peer Aventine Renewable Energy Holding's bonds were also weaker, and one market source claimed it was more than the rising price of corn.

Vertis Inc. was also the victim of a rating cut, as the company is in default after missing its June 15 coupon payment. Those bonds were seen down about 2 points, though one trader said the downgrade was a "non-event."

Positive comments regarding its potential liquidity helped Thornburg Mortgage Inc.'s debt gain on the day. The company's top executive said that, should preferred holders agree to a tender offer, liquidity would be ample.

Downgrade threat pressures VeraSun

Threat of a downgrade put more pressure on VeraSun's already declining bonds.

Standard & Poor's said it has placed the ethanol producer's ratings on CreditWatch with negative implications Wednesday. One trader said there was "some action" in the name, with its 9 3/8% notes due 2017 a couple points lower at around 54 from 56 bid, 57 offered previously. Its 9 7/8% notes due 2012 were "not too much different" in the high-80s.

Another source pegged the 9 3/8% notes at 53.75 bid, 54 offered, leaving a seller.

The potential downgrade comes as the company announced it would delay startup at its Hankinson, N.D., plant. VeraSun has also previously delayed startup at two other new facilities due to rising corn prices associated with the flooding that had ravaged the Midwest.

At another desk, Aventine Renewable Energy's debt was also quoted lower, its 10% notes due 2017 at 62 bid, 64 offered. Another trader placed the bonds in a 63 bid, 64 offered context.

"As corn goes higher, these guys go lower," a trader said.

But, he continued, the problem for Aventine goes so much farther than rising commodity prices.

"They had like $126 million in cash and they turned it into $97 million," he said. The trader was citing news from earlier in the month when Pekin, Ill.-based Aventine said it sold $127.2 million per value of student-loan-based auction-rate securities for a total of $97.1 million.

"So not only can they not make money in their main business, they lost money in their sideline business as well," he said. "That certainly doesn't help."

Vertis paper loses weight

A downgrade might be to blame for losses in Vertis' debt Wednesday.

A trader called the 13½% notes due 2009 lower by 2 points at 10.5, while another saw the bonds quoted wide at 3 bid, 8 offered.

But another trader called the downgrade from S&P a "non-event."

S&P cut its rating on Vertis after the company failed to make a June 15 coupon payment. However, Vertis had warned earlier in the month that it would not make the interest payment.

"I am more concerned about the exchange and when it is going through," he said, citing the joint plan between Vertis and American Color Graphics to exchange old debt for new, as well as most of the new equity in the combined company.

S&P also cut American Color's rating, but traders said they did not see any action in that name. One source noted that the last trade occurred on May 23 - just one day after the two companies announced their restructuring-merger proposal.

'Happy talk' helps Thornburg

A trader saw Thornburg Mortgage's 8% notes due 2013 up 3 points to 57.5 bid, 58.5 offered after what he called some "happy talk" from management - the company CEO said that Thornburg had potential equity of as much as $1.7 billion if its preferred shareholders approve a previously announced tender offer that is central to the company's efforts to straighten out its finances.

At another desk, a trader saw the bonds up even further, quoting them as having gone to 60 bid from prior levels around 52 bid, on those management statements.

The trader also saw Residential Capital LLC's 6½% notes due 2013 unchanged at 43 bid, 45 offered, while Countrywide Financial Corp.'s 6¼% notes due 2016 remained at 90 bid, 92 offered. Countrywide shareholders on Wednesday approved of its sale to Bank of America.

Bond insurer MBIA Inc.'s 14% surplus notes due 2033 fell 1 point to 43 bid, 45 offered.

Broad market rebounds some

Wide spreads, such as those in Vertis' paper, seemed to be the norm Wednesday, a trader said, after the Fed decided to hold interest rates steady.

For example, the trader saw Ahern Rentals Inc.'s 9¼% notes due 2013 at 74.5 bid, 76.5 offered.

"In the morning [before the Fed decision], it made sense [that spreads were wider]," he said. But in the afternoon, it didn't really.

Still, as the equity market rebounded somewhat, so did the distressed bond sector.

Harrah's Operating's 10¾% notes due 2016 - which had previously been declining on no news - "fought back" to close at 83.75 bid, 84.25 offered.

Claire's Stores Inc.'s 9¼% notes due 2015 and its 10½% notes due 2017 rebounded 1 to 2 points to 52 bid, 53 offered and 40.5 bid, 41 offered, respectively.

Claire's term loan was also stronger, although there was no credit-specific news seen pushing the name up, according to a trader. The term loan was quoted at 73.5 bid, 74 offered, up from 72.25 bid, 73.25 offered, the trader said.

"Might have gotten lifted by just one buyer or something," the trader added.

Pilgrims Pride's debt was also better, its 7 5/8% notes due 2015 at around 86, up from 83 bid, 84 offered, and its 8 3/8% notes due 2017 at 76 bid, 76.5 offered, up from its recent low of 72 bid, 73 offered.

A trader saw MagnaChip Semiconductor Ltd.'s bonds "down significantly," though he saw no news out on the South Korean computer chip manufacturer. He said that its 8% notes due 2014 had previously been trading around 50 bid, 52 offered but then "fell into a vacuum" and finally "reappeared" on Tuesday down "six or seven points" at around 43 bid, 45 offered, and were seen at those levels Wednesday. He saw the company's 6 7/8% notes due 2011 "sloppy," down 3 points at 70.5 bid, 71.5 offered.

Another trader saw the 8s at 43.5 bid, 45.5 offered, although he had last recently seen the bonds as good as 55 bid. He saw the 6 7/8s at 74 bid, which he said was down 2 points from recent levels, while its floating-rate notes were likewise down a deuce at 74.

Sara Rosenberg and Paul Deckelman contributed to this article.

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