Distressed market firms by day's end; TXU active, mixed post-downgrade; Penney takes a beating

By Stephanie N. Rotondo

Portland, Ore., Oct. 12 - Distressed bonds opened softer on the first trading day after the long holiday weekend, but managed to end with a generally firm tone, traders reported Tuesday.

"Most stuff hung in there," a trader said.

"It started soft, then bids filled in," said another.

Energy Future Holdings Corp. was one of the day's most active distressed names, as investors reacted to a rating downgrade. The bonds, however, were mixed on the day.

Though the market was more positive than negative, J.C. Penney Corp. Inc. saw its debt losing as much as 5 points during the session. The declines came as investors expressed concern - and in some cases, confusion - regarding recent investments made by Pershing Square Capital Management LP and Vornado Realty Trust.

Meanwhile, Ahern Rentals Inc.'s bonds headed for higher ground, as did those of Tribune Co. For the latter, the gains came as the company received support for its reorganization plan.

TXU bonds active, mixed

Energy Future Holdings' debt was among the day's most active credits, following Moody's Investors Service's rating downgrade of the company on Monday.

A trader said the 10¼% notes due 2015 were "pretty active" around 621/4.

Another trader, however, said the 10 ¼% notes were "kind of right where they were" at 621/4. The 11¼% toggle notes due 2017 were meantime "up a bit" around 53, "but on small size."

At another desk, a trader said he didn't "think [the bonds were] that much different," the 10¼% notes at 62 bid, 63 offered and the 11¼% notes at 53 bid, 54 offered.

Moody's dropped its rating on the Dallas-based power producer to Caa2 from Caa1, citing the company's recent disclosure that it intended to cut its goodwill by $4 billion.

Energy Future said it was taking the reduction in value because of low natural gas prices.

"Today, there is little evidence indicating a significant improvement to natural gas commodity prices, and as a result, EFH is likely to remain in financial distress," Moody's said in a statement released Monday. "EFH's weak cash flow generation prospects call into question the company's overall liquidity profile."

The downgrade also came on the back of news out Friday regarding a debt exchange. The company issued approximately $336 million of 15% senior secured second-lien notes due 2021 for about $478 million of its 10¼% notes and 10½%/11¼% senior toggle notes.

The exchange offer was completed on Wednesday but was first announced in an 8-K filed with the Securities and Exchange Commission on Friday.

Penney's paper plummets

J.C. Penney bonds "took a nice beating," a trader said, as investors worried about what recent investments made by Pershing Square Capital Management LP and Vornado Realty Trust could mean for the company.

The trader called the 6 3/8% notes due 2036 5 points weaker around 93, while the 5.65% notes due 202 dipped 3 points, ending around 981/2.

Another trader said about $50 million to $60 million of J.C. Penney's assorted bonds changed hands, with the "longer paper down more."

He pegged the 5.65% notes at 97 3/8, 3 points off from Friday levels. The 5¾% notes due 2018 slipped "a couple points" to around 99 and the 6 3/8% notes closed around 941/4.

There is some chatter in the market about what investors Pershing and Vornado intend to accomplish with their recently acquired stakes in the Plano, Texas-based retailer.

Pershing said Friday is had incurred a 16.5% stake in the company. Vornado said it had acquired a 9.9% stake.

Even rating agency Standard & Poor's expressed confusion, specifically about Vornado's stake and what it plans to do with it. S&P said it was considering downgrading the real estate trust because of the investment.

The purpose of the investment, in S&P's view, is "unclear to us at this time," the agency said last week. As such, the agency intends to meet with Vornado management over the next few weeks in order to get "clarity as to the company's allocation intentions, including the longer-term strategy regarding the J.C. Penney stake."

Ahern heads higher

Ahern Rentals' 9¼% notes due 2013 have been "quietly moving up," according to a trader.

The trader estimated the bonds had gained as much as 10 points in the last couple of weeks. They ended Tuesday's session around 521/2, he said.

Another trader said the bonds "seemed like they were a little bit better," seeing them quoted at 52 bid, 54 offered. That compared with 46 bid, 48 offered previously, he said.

"So that's up a good chunk," he said. "That's definitely a mover."

There was no news out on the Las Vegas-based construction equipment rental company, but the first trader opined that investors are taking notice, as there are few opportunities left at that price point.

Tribune up as plan supported

Tribune's paper was "trending a little bit better," according to one market source, as the company secured support for its reorganization plan.

He pegged the newspaper publisher's debt - which tends to trade on top of each other - around 46.

On Tuesday, the official committee of unsecured creditors and JPMorgan Chase Bank NA joined senior lenders in backing an expanded reorganization plan that would allow the company to deal with legal claims related to the 2007 leveraged buyout that ultimately led to its bankruptcy filing.

Bondholders are expected to recover a total of $420 million, or about 33 cents on the dollar, once Tribune exits Chapter 11 protections.

"The additional value being allocated to our bondholders and other unsecured creditors represents a fair and equitable settlement for all of our constituencies," said Don Liebentritt, chief restructuring officer, in a statement.

"We remain confident that Tribune continues on a path toward resolution of its Chapter 11 cases that maximizes the value of the bankruptcy estates, preserves all stakeholders' legitimate entitlements and enables the company to conclude its bankruptcy proceedings as soon as possible."

Papermakers trending higher

In the wide world of papermaking, a trader said NewPage Corp.'s 11 3/8% notes due 2014 gained about half a point to close around 94 3/8.

He also saw Catalyst Paper Corp.'s due 2014 gaining "about 2 points" to end around 491/2.

Another trader said a "big hunk" of NewPage's 11 3/8% notes turned over, pegging them at 94 3/8.

"That one has quietly and slowly crept up," he said.

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