Harrah's activity attributed to investor dumping; Dynegy debt stays strong; broad market firms

By Stephanie N. Rotondo and Paul Deckelman

Portland, Ore., Aug. 17 - The distressed debt market ended Tuesday with a positive tone, allowing investors to do some portfolio maintenance, a trader said.

"The calendar last week has enabled some people to do some portfolio management that they couldn't do before when things were so tight," he said.

Portfolio management might have been what caused Harrah's Entertainment Inc.'s debt to metaphorically fly off the shelves. The bonds saw heavy trading, though they ended a tad weaker. Rumors are circulating as to why the debt was such a heavy trader, with the most widely believed scenario being that one of its owners dumped some of its holdings.

Meanwhile, Dynegy Inc.'s notes continued to gain strength in trading. The bonds were up anywhere from 1½ to 3½ points on the day, its second consecutive day of gains.

Harrah's sees heavy trading

Harrah's Entertainment bonds - specifically its 10% notes due 2018 - saw heavy trading during Tuesday's session, with at least $100 million of the notes changing hands.

One trader quoted the paper at 80 bid, 81 offered, while another pegged the notes at 81½ bid. The latter source called the level down nearly a point on the day.

"A large block traded in the market," another trader said, placing the debt at 80½ bid, 81 offered.

Still, it was not clear what sparked the massive activity, but traders had plenty of theories.

There was no obvious fresh negative news out about the Las Vegas-based gaming giant that might explain the heavy activity at easier levels.

One theory mentioned was investor unease over Harrah's plans to register a portion of its shares - the nearly 10% held by billionaire investor John Paulson - with the Securities and Exchange Commission. It was one of the conditions of the acquisition back in June that saw the New York-based hedge fund Paulson & Co. Inc. take that ownership stake in exchange for $710 million in Harrah's debt Paulson held. In a filing last Thursday, Harrah's told the SEC that Paulson & Co. intends to sell its 9.9% stake as soon as possible.

Paulson's deal was part of a larger transaction which saw Harrah's two principal owners - Apollo Global Management LLC and TPG Capital LP - take an additional 5.7% equity stake in Harrah's in exchange for $408 million in debt, bringing their combined holding in the company to 89.3%.

Still, not everyone was buying that story.

"I think everyone knew he was going to do that," a trader said.

Apollo said to be dumping

Another possible cause for the heavy activity in the 10% bonds was a rumored sale of a big chunk of the $3.7 billion issue by one or more major bondholders - likely the aforementioned equity owners, who also hold much of Harrah's debt - looking to reap some solid profits on such a transaction.

A trader said that he had heard talk that Apollo had "sold all of their [10% 2018] bonds through the Citigroup syndicate desk," estimating the total size of that transaction at $350 million. Then, he said, "the desk was moving them out, on the Street, going to the customers," causing the run-up in the volume.

Both Apollo and Citigroup declined comment.

But another trader said the big volume in the 10% notes was due to Apollo unloading a good-sized chunk of the notes into the market. One other source said he had heard that Apollo sold off as much as $300 million of the bonds, though he added that he was "not completely sure."

A market participant at another desk said it was his understanding that while Apollo was, in fact, selling some bonds on Tuesday, they were "not alone," meaning not the only large holder to be doing so, although he had no specifics as to the overall amount of bonds, which were being offered for sale or how much anyone in particular was selling.

He noted that the bondholders had acquired those 10% secured notes, among other debt, about a year ago, for a price around 37 cents on the dollar, and opined that unloading the bonds at their current level around 80 cents was "a good transaction" for them, and suggested that that particular piece of debt was likely no longer "a strategic holding" and probably represented a relatively small portion of the total Harrah's debt held.

'Opportunistic' deal

So this was, he surmised, "an opportunistic" transaction and a chance to get "a great return - 2½ times what they paid" in the space of less than a year.

A spokesman for Harrah's noted that TPG and Apollo had acquired several series of Harrah's bonds, including more than $300 million of the 10% 2018 secured notes, via an exchange offer last fall, at which time Harrah's filed a registration statement with the SEC to allow for the holders to publicly resell those bonds. The filing has since been updated several times with amended prospectuses, "so these are bonds that they are selling in the market." He said such sales were being undertaken by those bondholders, not Harrah's, which gets no proceeds from such bond re-sales.

He did not have any information about the exact size of the block or blocks of bonds being offered for sale on Tuesday, and declined comment on the likely motivation for the sale. "The company [i.e., Harrah's] really doesn't have anything to do with this, other than just putting out the prospectus," he reiterated.

He did say, however, that the sale of the bonds by their holders was not connected with the prospective Paulson stock transaction. "They're independent transactions," he said. "They just happen to be around the same time."

Dynegy debt remains strong

Dynegy's debt extended its Monday gains into Tuesday trading, with market sources seeing the bonds improve as much as 3½ points on the day.

A trader called the various Dynegy issues up 1½ points across the board, the 7¾% notes due 2019 at 68 7/8, the 8 3/8% notes due 2016 at 77 and the 7½% notes due 2015 at 80 bid, 81 offered.

At another desk, a source saw the 7¾% notes putting on 3½ points to end at 69 bid.

Tuesday's gains - as well as those incurred on Monday - came after the company announced its would be acquired by the Blackstone Group in an all-cash deal.

The news, which came on Friday, first resulted in a decline for the debt, but the bonds have been steadily climbing back up ever since.

Blackstone will pay $4.50 per share for Dynegy. The price per share reflects a 62% premium over the Aug. 12 closing share price.

The total transaction value is estimated at $4.7 billion.

But Blackstone will not have to pay anything upfront, as it has agreed to sell certain of Dynegy's assets to NRG Energy for $1.36 billion.

The acquisition is expected to close by the end of the year.

Elsewhere in the energy space, Energy Future Holdings Corp.'s 10¼% notes due 2015 were a point better at 65, while the 9¾% notes due 2019 were steady at 97, according to a trader.

On Tuesday, Fitch Ratings dropped the company's issuer default ratings to CCC from B-.

Broad market firms

Among other distressed issues, General Motors Corp.'s benchmark 8 3/8% notes due 2033 were "about half a point better," a trader said, at 35¼ bid, 35½ offered.

The trader also saw Ahern Rentals Inc.'s 9 ¼% notes due 2013 "a touch better" around 37.

Also, General Growth Properties Inc. said it had revised terms of its reorganization plan to the benefit of some of its Rouse Co. noteholders. However, a trader said he "didn't see any late reaction" to the late-day news.

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