Blockbuster backs off; U.S. Concrete debt dips; Lehman helped by settlement news; Kodak steady

By Stephanie N. Rotondo

Portland, Ore., Feb. 25 - Inclement weather in the New York area Thursday drove many distressed debt players away from their desks early.

The area was under a winter storm warning until 6 p.m. ET and it was expected that as much as 16 inches of snow could fall. That, coupled with declining equities, made for a wishy-washy day for distressed credits.

Of the day's active names, it was a lot of the same, notably for Blockbuster Inc. and U.S. Concrete Inc. Both companies' bonds were unchanged to lower as investors considered what a potential restructuring could mean for recovery levels.

Meanwhile, Lehamn Brothers Holding Co.'s debt firmed, according to traders. The gains came as it was learned the company had reached a settlement with JP Morgan Chase & Co.

Also, Eastman Kodak Co. continued to be active. The bonds followed the day's trend, ending unchanged to lower. The debt had moved up on Wednesday as the company readied to launch a new issue. The new issue was seen ending Thursday's session unchanged from its original issue price.

Blockbuster bonds back off

Blockbuster's debt, "which was up a good bit yesterday afternoon, traded off some," a trader said.

The trader said the 9% notes due 2012 slipped a deuce to around 20, while the 11¾% notes due 2014 were also 2 points weaker around 72.

Another source called the 9% notes down 1 point to unchanged, also around that 20 level.

On Wednesday, Blockbuster reported its dismal fourth-quarter earnings and also said it had hired financial advisors to explore its restructuring options. News reports also indicated that the Dallas-based movie rental chain was looking at picking up some of the assets of bankrupt Movie Gallery Inc.

Though Blockbuster also affirmed that it would be making its 2010 debt payments - including a payment due next week - some are concerned that liquidity will be an issue before the year is out.

"Even though Blockbuster seems to have decided not to file bankruptcy immediately (which we think would lead to liquidation) we think it will become liquidity constrained later in the year," wrote Gimme Credit analyst Kim Noland in an afternoon note to clients.

"Despite some positives in the [fourth] quarter (comp store sales declines abated over the period of Nov.-Dec. and slightly better gross margin than we expected) we cannot envision the company avoiding a debt restructuring at this point," Noland said. Unfortunately for subordinated debtholders, it is believed that recovery will be little.

U.S. Concrete debt dips

Like Blockbuster, U.S. Concrete is also exploring its restructuring options, which has resulted in a fair amount of activity in the bonds.

A trader said "more bonds traded" during the session, pegging the 8 3/8% notes due 2014 around the 57 mark.

But another source saw the notes falling about a point to 55 bid. 56 offered.

The bonds are trading flat, or without accrued interest.

Last Friday, the concrete manufacturer said it had hired advisors and that it had also amended its credit facility. Additionally, the company said it would skip its April 1 coupon.

"U.S. Concrete is ready to parley with bondholders - now that it has run out of time," said Vicki Bryan, an analyst with Gimme Credit LLC. With the company's bank lenders now seemingly calling the shots, the outlook is not great.

Bryan noted that fourth-quarter results - typically the company's weakest quarter - are expected in March, though that could be pushed out "amid the maelstrom.

"The banks have an inside view, and they certainly were spooked," she noted.

Still, Bryan speculated that it could have a chance at staying alive if it is able to eliminate $23 million in annual interest costs - "more than the company has generated in annual free cash flow since 2005."

"So, [the company] could potentially offer bondholders such unsavory options as a debt exchange at pennies on the dollar for cash pay or even dreaded pay-in-kind notes without any benefit of equity," she opined. "We don't care for the 'beggars can't be choosers' play."

Bryan maintained her sell recommendation on the bonds.

Also, Moody's Investors Service dropped the company to Caa2 from Caa1, citing difficult market conditions.

Lehman helped by settlement news

A trader said that Lehman Brothers Holding's legacy bonds "moved up," apparently helped by the news that the remnants of the failed New York-based investment banking icon had agreed with JPMorgan Chase & Co to settle a $7.68 billion claim stemming from collateral obligations after Lehman's bankruptcy filing in 2008.

He pegged the issues up around a point to the 23½ bid, 24 offered area at their peak, although he saw them ending at 23 bid, which he called a ½ point gain on the session.

Another market source saw active dealings in its 6 7/8% notes due 2018, with over $15 million having changed hands by mid-afternoon, making it among the busiest overall issues in Junkbondland. These ended up about 3/8 point at 23, the source said. Also active were its 5.50% notes due 2016, ending up ½ point at 221/4; its 6% notes due 2012, which gained more than a full point to close just under the 23 mark; and its 6 5/8% notes due 2012 - one of the few downsiders in the structure, losing nearly a point to end around 211/4. Its 5 5/8% notes due 2013 firmed to 211/2.

Lehman will make a one-time cash payment of $557 million to JPMorgan, which had provided various financial services to Lehman's primary broker-dealer unit prior to Lehman's bankruptcy filing in September 2008, and JPMorgan in turn will reduce a $7.68 billion claim it had against Lehman to $557 million.

Kodak notes steady

Eastman Kodak's bonds, which had traded up Wednesday as the company launched a new issue, ended the day unchanged to weaker, following the broader market trend.

A market source said the 7¼% notes due 2013 were "still in the mid-90s," while another called the debt down over a point at 94½ bid.

At another desk, the new issue - the 9 3/8% notes due 2014 - was seen around the issue price at 97¾ bid, 98 offered.

The new $500 million issue was upsized late Wednesday from $400 million. Of those proceeds, about $300 million is expected to be used to repay outstanding debt held by Kohlberg Kravis Roberts & Co. L.P., while the remaining amount will be used for a tender offer for the 7¼% notes.

Also on Wednesday, the Rochester, N.Y.-based company increased the maximum tender amount for the exchange to $200 million from $100 million. The tender deadline was also extended to March 9.

As of Feb. 24, approximately $218.61 million of the debt had been validly tendered.

Broad market mixed

Also in the distressed debt realm, Park-Ohio Industries Inc.'s 8 3/8% notes due 2014 were unchanged around 80 bid, 80½ offered in active odd-lot trading.

A trader said that Washington Mutual Inc.'s "holdco" paper, such as the 4% notes that were to have matured Jan. 15, 2009, "continue to move up." He quoted the paper at 101 bid, 102 offered.

-Paul Deckelman contributed to this report

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