Harrah's sees boost on investment news; ATP bids fall, gets negative outlook; Blockbuster weak

By Stephanie N. Rotondo

Portland, Ore., June 4 - Distressed debt ended Friday's session on the softer side, as the Dow Jones Industrial Average fell more than 323.31 points to close below 10,000.

"The market is lower and nobody seems to care," said one frustrated trader. "The stocks opened with a big gap down."

"Given the abrupt decline of the stock market, it made for an interesting day," said another trader. He noted that total volumes in the secondary world did not even hit $1 billion.

But Harrah's Entertainment Inc.'s debt "managed to buck the trend," according to a source, as the market learned of a debt-for-equity swap that would give the company $557 million in cash proceeds. The bonds improved as much as 5 points during trading, though they ended as much as 4 points better. The bank debt was also up, firming about a point or two.

ATP Oil & Gas Corp. continued to be a name thrown around. Traders saw the company's debt ending lower to unchanged, as Moody's Investor Service changed its outlook on the oil and gas exploration company to negative.

And, Blockbuster Inc. also remained active in an otherwise lackluster marketplace. The movie rental chain's debt was mostly softer, ending firmly in single-digit territory.

Investment news boosts Harrah's

Casino operator Harrah's Entertainment saw its debt "pop because of that debt-for-equity swap," a trader said, referring to news that the company had secured an investment from a Paulson & Co.-led group.

The trader said the bonds "were up 4 to 5 points at one point," but came back in slightly, ending up "3 to 4 points, depending on where you look."

The trader placed the 10% notes due 2018 - deemed the most active Harrah's issue by traders across the board - around "81-ish," the 11¼% notes due 2017 around 106 and the 10¾% notes due 2016 around 80. On the latter issue, that compared to 78 bid, 79 offered on Thursday.

"[Harrah's] has probably been the most volatile," he said.

Another trader said Harrah's was "obviously the most active," seeing "certainly $100 million" of the 10% notes turn over. He placed the paper at 811/2, up 4 points day over day.

The trader also saw about $25 million to $50 million of both the 11% notes and 10¾% notes change hands, with the former at 105¾ and the latter at 80.

And, yet another trader remarked that Harrah's was "one of the more active names given the news out." He also saw the 10% notes up 4 points, placing them at 82, while the 11¼% notes were "up about a point" at 105¾ bid, 106 offered.

Harrah's term loans also headed higher in trading, according to traders.

The term loan B-1 was quoted by one trader at 84 5/8 bid, 85 1/8 offered, up from 83½ bid, 84 offered and by a second trader at 84 bid, 84½ offered, up from 83½ bid, 84 offered.

The term loan B-2 was quoted by the first trader at 84 7/8 bid, 85 3/8 offered, up from 83½ bid, 84 offered, and by the second trader at 84¼ bid, 84¾ offered, up from 83¾ bid, 84¼ offered.

And, the term loan B-3 was quoted by the first trader at 84½ bid, 85 offered, up from 83 ¼ bid, 84 offered, and by the second trader at 83 7/8 bid, 84 3/8 offered, up from 83 bid, 83½ offered.

Investment terms

Under the investment agreement, Harrah's is exchanging $1.118 billion of debt for up to approximately 15.6% of its common equity.

Specifically, Paulson & Co., along with Apollo Management and TPG Capital, has agreed to purchase approximately $835 million of Harrah's 5 5/8% senior notes due 2015, 6½% senior notes due 2016 and 5¾% senior notes due 2017 for approximately $557 million.

Paulson has agreed to exchange approximately $710 million of notes in a private exchange for equity in Harrah's, and Apollo and TPG have agreed to exchange approximately $408 million of notes for equity on the same terms and conditions as Paulson.

In addition, through this transaction, Harrah's will raise $557 million of cash proceeds, which will be used for general corporate purposes, including further balance sheet optimization and strategic investments.

Las Vegas-based Harrah's expects to close on the exchange in the fourth quarter of 2010 or the first quarter of 2011.

"Upon closing of the transaction, Harrah's will have approximately $3 billion in available liquidity, including $1.5 billion in cash on hand and amounts undrawn under Harrah's revolving credit facility, and upon the closing of the previously announced amendments to Harrah's commercial mortgage-backed securities loans, no significant debt maturities until 2015," the company said in a press release announcing the news.

"This is an important transaction for Harrah's Entertainment for a number of strategic reasons," remarked Gary Loveman, chairman, president and chief executive officer, in the release. "We are raising capital for emerging domestic and international growth opportunities, and upon closing of the exchange, will reduce our debt and lower our interest expense. The investment from Paulson, an independent third party and a large sophisticated investor, reflects the strong and resilient performance of our company, particularly as we emerge from a difficult economic climate, and the encouraging prospects for our future. We also are gratified by the confidence in Harrah's demonstrated by our sponsors, Apollo and TPG."

Following the announcement, Moody's Investors Service upped Harrah's speculative grade liquidity rating to SGL-3 from SGL-4.

ATP bids fall

Bids for ATP Oil & Gas' 11 7/8% notes due 2015 were on the decline, a trader said.

The trader quoted the paper at 71 bid, 73 offered, compared to 72 bid, 73 offered on Thursday. He noted that while "bids are lower, offerings aren't really chasing it."

Another trader said that ATP was "interesting. Given that they had dominated [on Thursday] I don't think $20 million [in bonds] traded."

The trader pegged the notes at 70 bid, 71 offered, versus 73½ bid, 74 offered at the market's open.

But another trader said the debt was "still down around 72 bid, 73 offered." He noted that trading was "not nearly as active as it has been."

On Friday, Moody's changed ATP's credit outlook to negative from positive. It affirmed the Houston-based oil explorer's rating at Caa2.

"The move to a negative outlook reflects that the ratings and prior outlook were tied specifically to successfully drilling, completing and tying in three deepwater Gulf of Mexico Telemark Field wells to first production this year, at roughly the projected production rates, and that by year-end 2010 ATP's 2011 drilling program would adequately capable of supporting the post-Telemark higher production base," Moody's said in a statement. "Telemark is located in approximately 4,450 feet of water and most of ATP's other core prospects are located in [Gulf of Mexico] deep waters."

Additionally, the rating agency said the recent six-month moratorium on offshore drilling played a role in the outlook alteration.

Blockbuster remains weak

Blockbuster's bonds continued to slip in trading, market sources reported.

One trader said the 9% notes due 2012 were "real active again," seeing them fell to 9 bid, 9¼ offered, on $15 million to $20 million traded. He added that the 11¾% notes due 2014 "held in a little better because there is some value there." He placed the paper around 58.

"Those bonds have settled in that 9-10 zip code," another trader said, pointing to the 9% notes.

Blockbuster is a Dallas-based movie rental chain.

Sara Rosenberg contributed to this article

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