Skilled Healthcare bonds slide on verdict news; Tronox falls, Anadarko gains; financials firm

By Stephanie N. Rotondo

Portland, Ore., July 8 - Skilled Healthcare Group Inc. was again the notable name in the distressed debt arena Thursday, as its bonds started to trade at substantially lower levels.

The nursing home operator made headlines on Wednesday after the company was slapped with a lawsuit judgment for almost $700 million. The bonds were seen quoted lower during that trading session, but it wasn't until Thursday's session that the debt began to trade. Once trading, the bonds fell from previous levels above par to levels closer to the high-60s.

Tronox Worldwide LLC's paper also saw double-digit losses. Sources saw the bonds dropping at least 10 points on the day following news that the company had filed its plan of reorganization.

Tronox's plan mentions another recent headline-maker - and a defendant in a lawsuit with Tronox as plaintiff. Tronox is currently involved in litigation with Anadarko Petroleum Corp. relating to Tronox's spinoff from Anadarko-owned Kerr-McGee.

Away from that, the market was "better" for the most part, a trader said. The positive tone helped names like CIT Group Inc. and First Data Corp. end higher.

But with the positive comes the negative, as the trader noted that the market's rally had made it "hard to get people to sell stuff when you don't have anything to replace it with."

A light calendar was also tempering activity, he said.

Skilled Healthcare bonds slide

Skilled Healthcare Group's bonds actually traded during Thursday's session and, in keeping with the lower markets seen on Wednesday, the debt declined substantially from previous levels.

One trader noted that the bonds were "trading a lot," given the small size of the issue - just $130 million. He said the 11% notes due 2014 opened around 68, but closed slightly higher around 70. That compared to the last round-lot trade on July 1 at 104.

"They really screwed up, eh?" the trader said, referring to the news out Wednesday that a Humboldt County jury had ruled the company should pay nearly $700 million in damages related to a 2006 lawsuit.

Another source quoted the notes at 69 bid, 70 offered.

However, the Foothill Ranch, Calif.-based company's term loan pared some of the losses incurred on Wednesday following the news.

The term loan was quoted at 90 bid, 92 offered, and at least one guy traded the paper in that context, a trader said. By comparison, on Wednesday, the loan was quoted at 82 bid, 85 offered, but the trader remarked that he didn't think it actually traded at those levels. Prior to the news, the loan was seen in the 98½ bid, 99½ offered area.

On the equity side of the fence, the company's New York Stock Exchange-traded shares were seen up 82 cents, or 53.95%, to close at $2.34, on volume of 9.22 million, over 40 times the usual turnover, rebounding solidly from the 75.6% plunge they took on Wednesday; however, the stock price remains well below the $6.22 level it held before news of the verdict.

Jury verdict

The verdict relates to a complaint filed in 2006 that claimed certain of the company's California-based facilities were understaffed and misrepresented the quality of care provided in their facilities. The jury judgment called for the company to pay $613 million in statutory damages and $58 million in restitution.

Upon announcing the verdict, the company said that it intends to vigorously pursue various post-trial motions as well as an appeal, if necessary, after the final judgment is made in the next few weeks.

Also, on Thursday, Standard & Poor's dropped Skilled Healthcare's corporate credit rating to CCC from B+. The subordinated notes were also downgraded to CC from B-.

The rating agency said it took such actions in part because of the potential bonding requirement. If the jury verdict is upheld at final judgment, the company will likely be required to post a bond equal to 150% of the damages. However, S&P does not believe Skilled Healthcare has the means to do so, with only $94 million available under its $100 million revolving credit facility.

Leverage, liabilities

"Considering the company's highly leveraged state and negative tangible book value" - its total debt to capitalization ratio stands at 62.5% - "we are hard pressed to see where management could secure sufficient capital to meet this requirement," warned James L. Bellessa, Jr., a senior vice president and senior research analyst with D.A. Davidson & Co. in Lake Oswego, Ore.

In a research note on Thursday in which he downgraded Skilled Healthcare's shares to "underperform" from their previous status as a "buy," Bellessa noted that according to the company press release announcing the verdict, Skilled Healthcare's liability insurance coverage has already been exhausted for the policy years applicable to the case.

With that in mind, Bellessa opined that "at this point, it is difficult for us to see how Skilled Healthcare will be able to pay the statutory damages awarded to the plaintiffs in the case or put up a bond to appeal, let alone pay any punitive damages yet to be handed down. Therefore," he cautioned, "the company may have to seek protection from its creditors through a bankruptcy filing."

Accordingly, he said that in addition to lowering its rating on the stock, Davidson is cutting its 12-to-18 month price target to $1 from the previous $9, "which reflects our assumption of an approximate 90% subjective probability the company will be forced into bankruptcy over this legal matter."

Skilled Healthcare did not respond to a call from Prospect News on Thursday seeking further comment.

Tronox falls, Anadarko gains

Chemical maker Tronox Worldwide saw its bonds drop 10 points or more after the company filed its reorganization plan.

A trader said the 9½% notes due 2012 opened the day around 90, but closed out at 79½ bid, 80 offered. The bonds had traded around 92½ on Wednesday.

"Well, I guess the market didn't like it," the trader said of the newly filed plan.

Another source pegged the paper at 79 bid, 80 offered, down from 92 bid, 92½ offered.

Under the terms of the plan, unsecured creditors holding over $470 million in claims will receive 80% to 100% recovery. Secured creditors holding just $1 million in claims will be repaid in full.

Also, the company will set up trusts to deal with certain environmental claims, estimated to be as high as $5.2 billion. The trusts will be funded with up to $145 million in cash and other assets. And, the trusts will have the right to receive 88% of recoveries related to litigation involving Anadarko Petroleum.

Anadarko purchased Kerr-McGee - Tronox's former parent - for $18 billion just a few months after the 2006 spinoff. After Tronox filed for bankruptcy protections in January 2009, the company then filed suit against both Kerr-McGee and its new owners in May 2009, claiming its parent had overloaded the spinoff with so much environmental liabilities that it had no choice but to file for Chapter 11.

Anadarko's bonds - which have been trading actively recently due to its association with the Gulf of Mexico oil leak - gained 1 to 2 points on the day, a trader said.

The trader placed the benchmark 5.95% notes due 2016 at 92½ bid, 93½ offered and the 8.70% notes due 2019 around 1011/2.

Financials firm

In the financial arena, CIT Group's 7% notes due 2017 were "up with the market," a trader said, gaining half a point to end around 93 bid, 93 ¼ offered.

First Data's 9 7/8% notes due 2015 were meantime up "a point or so" at 78 ¾ bid, 79 ¾ offered, the trader added.

Another market source saw First Data's notes at 79 bid, up over 2 points.

Sara Rosenberg and Paul Deckelman contributed to this article

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