ATP, Kodak, Harrah's points higher amid general junk rally; beaten down converts also climb

By Paul Deckelman

New York, Oct. 6 - The high-yield bond market firmed smartly for a second consecutive session, and traders said that no segment improved more impressively than distressed names, which had been soundly clobbered over the previous few days as investors vented their angst.

But on Thursday, as had been the case on Wednesday, those volatile, high-beta names slapped around last week and earlier this week were leading all of their more highly-rated sector peers, both in terms of price movements and trading volumes.

The most notable name from this group was clearly ATP Oil & Gas Corp., which was seen up by 10 points - and some sources said even more amid heavy dealings.

Another always-active credit seen having gained multiple points on sizable turnover was Caesars Entertainment Corp. - the gaming giant more familiar to market denizens as Harrah's Entertainment, which rose into the mid 60s, a solid comeback from its levels in the 50s earlier in the week.

Traders also saw Eastman Kodak Co.'s bonds better, but this time it was the photo giant's secured bonds, which heretofore had been pretty steady while its unsecured paper had gyrated first wildly lower and then handsomely higher off those lows.

Kodak's convertible notes, as well as the recently badly beaten converts of such other issuers as Dry Ships Inc. and AMR Corp., were also seen considerably better on the session.

ATP rally rolls on

Among specific credits, a trader said that Thursday's activity "featured a lot of typical things," with the hardest-hit bonds of the recent several sessions seeming to post the biggest gains coming back.

Just as had been the case on Wednesday, ATP Oil & Gas' 11 7/8% second-lien senior secured notes due 2015 "were up another 10 points," as he pegged the Houston-based offshore energy operator's bonds at around 72 bid.

A market source at another desk said that the ATP bonds had gotten as good as 75 during the day - up from lows around 67 - before coming off those peak levels to finish at 72¼ bid, which he called a gain of more than 11 points on the session.

The source saw very heavy trading in the bonds, with over $40 million having changed hands by the close.

"ATP follows oil," said yet another trader, who had the bonds going home at 71 bid, which he called a 9-point improvement. "As oil goes, so ATP goes."

Actually, crude oil - on a tear the last few sessions - finally took a breather on Thursday, with the November contract easing by as much as 47 cents to $82.15 a barrel on the New York Mercantile Exchange. On Wednesday, it had hit a high of $82.59, for a two-day gain of 9.1%, marking the biggest jump seen since Feb. 22-23.

Crude prices are up by 3.9% this week, although they remain down 10% on a year-to-date basis.

Before that surge in oil prices, ATP's bonds had been getting crushed over the previous few sessions on apparent investor angst over soft world energy prices in the face of an economic slowdown, as well as more company-specific worries that ATP might not be able to fulfill its debt obligations when the bonds come due.

Harrah's higher again

Another big gainer, traders said, was Caesars Entertainment's 10% notes due 2018, which one of them said had gained as much as 3 points to end at 65 bid, 65½ offered, on top of a similar-sized gain on Wednesday.

Another trader saw the bonds up nearly 4 points on the day, at 65 ¾ bid, on very busy volume of over $30 million.

The Las Vegas-based gaming giant, still more popularly known in junk as Harrah's, had recently been taking it on the chin, getting hammered down to around 57 bid earlier this week in heavy trading, as usual, on continued investor fears that the soft economy would wreak havoc with the finances of companies heavily dependent on discretionary consumer spending. They include Caesars and sector peers MGM Resorts International.

Las Vegas-based MGM's six 5/8% notes due 2015 meantime were also better on the day, up nearly 3 points at 85½ bid.

It's 9% notes due 2020 likewise rose to 103¾ bid on active volume approaching $15 million, making it the company's busiest bond of the day.

Kodak comeback continues

A trader said that Eastman Kodak Co.'s bonds continued to firm for yet another session, as investors apparently became more confident that the iconic film, camera and printer giant will not be filing for bankruptcy any time soon, as had been rumored at the end of last week.

This time, its secured bonds the 9¾% notes due 2018 and the 10 5/8% notes due 2019, which heretofore had mostly held steady around a 70-71 context while its unsecured 7¼% notes due 2013 gyrated all around, were the major price movers, the trader said, seeing those notes climb to a 73-75 context, "definitely up on the day."

He saw the 71/4s, which had shot up to around a 46-47 finish on Wednesday, a gain of between 5 and 10 points, depending on whether you were basing their movement on round-lot or odd-lot trades, staying in that same neighborhood since "they didn't file or do anything crazy."

He noted that normally, the subs move a lot quicker and more than the secured bonds.

Another trader said that the market had "put a floor" under the secured bonds in the lower 70s, figuring that would be what the bonds would be worth in any kind of a restructuring scenario, in or out of court.

"The crappy unsecured bonds are the ones that fluctuate," moving from recent lows in the upper 20s at the tail end of last week to their current levels in the mid-to-upper 40s.

The latter bonds had been beaten down into the 20s following Kodak's hiring last week of Jones Day, a law firm that specializes in restructurings, but began coming back solidly from Monday on as it denied having any plans for filing Chapter 11.

Kodak claimed that "it is not unusual for a company in transformation to explore all options and to engage a variety of outside advisers, including financial and legal advisers. Jones Day is one of a number of advisers that Kodak is working with in that regard."

Kodak also proclaimed that it is "committed to meeting all of its obligations," and the company indicated on Monday that it had made the scheduled Oct. 1 interest payment of $14 million on its $400 million of 7% convertible notes due 2017.

The latter notes, which had swooned to 26 bid last Friday, climbed to 34 bid by Wednesday and hit 40 on Thursday.

A trader in the coverts market said that the 7s had moved to 40 from 33.75 bid to 34 on Wednesday. Last Friday, the convertibles slumped to around 26 with the underlying shares at $0.75 each.

Kodak's stock jumped 23 cents, or 19%, to $1.45 on Thursday.

"Kodak is hugely affected by the capital markets because it can refinance indefinitely if strong capital markets make it possible for companies like EK to float new high-yield and/or convertible bonds - whereas a weak market (such as we've been suffering lately) causes traders/speculators/investors to focus on EK's questionable ability to generate cash flow from operations/royalties/patent sales," a New York-based buyside source said.

Kodak is working on licensing out its patents in order to increase cash flows, but the longer it takes for a deal to materialize on those patents, the more doubts grow that a sale will occur.

DryShips riding higher

Also in the convertibles market, DryShips' 5% convertible senior notes due 2014 traded at 55.5 versus an underlying share price of $2.20. That was up from 49 to 50 when the stock was $2.00 on Tuesday.

Shares of the Athens, Greece-based provider of marine transportation jumped 30 cents, or 14%, to $2.39 each.

The company's shares dropped on Monday when it announced that it had adjusted the conversion price of the convertible notes in connection with its planned partial spinoff of Ocean Rig UDW Inc. The new conversion price is $6.90, down from $7.19 each.

AMR gains altitude

Another troubled transportation name seen better on Thursday was American Airlines parent AMR's 6.25% convertible notes due 2014 traded at 53 versus an underlying share price of $2.50. It had fallen to the low 40s on fears the Fort Worth, Texas-based air carrier parent could have to file for Chapter 11 protection soon.

This week, independent credit research firm Gimme Credit downgraded AMR to deteriorating from stable.

"AMR has been burning cash faster than it could generate it for years, but over the past year, it has been losing ground at an increasing rate," Gimme Credit analyst Vicky Bryan wrote.

"This has put even more pressure on the company's dwindling cash reserves ahead of massive near-term obligations, making it even tougher and more expensive for the company to refinance and extend debt maturities.

"AMR is fast becoming an airline without dominance in any market niche - it is losing market share to larger peers, which are claiming an increasing share of more lucrative business and international travel, and to leading low cost carriers able maintain a dramatically lower cost structure," Bryan wrote.

AMR has been unable to sell Eagle to raise cash. In August, AMR announced it had decided to spin off its American Eagle regional carrier after failing to sell it in the open market. Last week, AMR sought financing in a dismal market environment and got stuck with its highest interest rate since 2009.

And, for all of its efforts to shore up its cash position, it could be in vain.

Economy the major factor

The New York-based buyside source told Prospect News that DryShips and other transportation companies like AMR are "hugely affected by the economy."

Also noting Kodak's situation, he said that while cash flows also matter for DryShips and AMR, "it's more apparent that a strong economy would help the fundamentals of these transportation companies - whereas Kodak is in the midst of restructuring."

The source further said that non-traditional convert players, including high-yield and regular distressed-debt accounts were in the market this week, presumably looking for "stuff that has been oversold."

Rebecca Melvin contributed to this report.

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