Trading in MF Global quiets down, bonds slip; Bon-Ton topples on sales release; Kodak weakens

By Stephanie N. Rotondo and Paul Deckelman

Portland, Ore., Nov. 3 - The distressed debt market was on the stronger side Thursday, though a few of the most notable credits of the day were instead declining.

MF Global Holdings Ltd.'s debt was "not as active" as it has been of late, a trader said. However, the bonds were seen moving lower.

Also lower were Bon-Ton Stores Inc.'s notes. One trader said the debt lost as much as 11 points on the back of "cruddy numbers."

The retailer reported preliminary quarterly figures and lowered its outlook.

Eastman Kodak Co. also reported disappointing earnings Thursday and also indicated it was looking to secure as much as $500 million in loans to provide incremental liquidity. Though there was little trading in the bonds, they were quoted weaker, according to traders.

MF Global quieter, down

MF Global Holdings', the New York-based futures broker run by former Goldman Sachs head Jon Corzine, saw its debt declining Thursday.

However, traders noted that the name was not as active as it has been of late.

One trader called the 6¼% notes due 2016 down 2½ points around 46.

Another trader quoted the bonds at 45 bid, 46 offered.

MF Global filed for bankruptcy on Monday after a week of bad news toppled the firm. The negativity continued into the current week, as regulators discovered that millions of dollars of client funds were missing.

Bon-Ton topples on sales

York, Pa-based retailer Bon-Ton Stores reported "cruddy numbers" on Thursday, a trader said.

As such, he saw the 10¼% notes due 2014 falling as much as 11 points to end around 75.

"Bon-Ton was down hard on weak numbers and lowered outlook," said another trader.

He quoted the issue at 74 bid, 75 offered.

For the quarter ending Oct. 29, Bon-Ton reported that sales dropped 6.3% to $656.1 million. Same-store sales were down 5.9%.

For the month of October, total sales dropped 10.4% to $192 million and same-store sales dropped 10.2%.

"We are clearly disappointed with our October sales results," said Tony Buccina, vice chairman and president of merchandising, in a statement. "We attribute the weak performance to changes we made in our advertising calendar, which did not drive the results we expected, continued lackluster customer response to traditional merchandise offerings in ladies' ready-to-wear and consumer resistance to increased pricing on certain products."

Additionally, the company lowered its fiscal 2011 outlook. Full-year guidance now reflects EBITDA of $190 million to $210 million and a net loss of $0.65 per share to a profit of $0.25 per share.

That compared to previous guidance released in May of a $1.00 per share to $1.25 per share profit.

Kodak debt quoted lower

Eastman Kodak paper was on the quiet side, even after the company reported a wider loss for the third quarter.

Still, traders noted that the bonds were quoted lower.

One trader saw the 9¾% notes due 2018 quoted at 67 bid, 70 offered, which he estimated was down 3 points from previous markets.

Another trader said the secured notes "dipped to the high-60s."

A third market source, however, called the 7¼% notes due 2013 up more than 3 points to 45 bid.

Third quarter loss for the Rochester, N.Y.-based company was $222 million, or $0.83 per share.

For the same quarter of 2010, net loss was $43 million, or 16 cents per share.

Kodak blamed the wider loss on "the absence of sizable patent licensing revenue in this year's third quarter versus the year-ago period and the continued secular decline of traditional products¸ partially offset by better operating performance, excluding non-recurring intellectual property revenue, in the company's digital businesses," according to the earnings release.

Sales for the quarter fell 17% to $1.46 billion.

Like Bon-Ton, Kodak also lowered its full-year guidance. Total revenue was revised to $6.3 billion to $6.4 billion, down from $6.4 billion to $6.7 billion. Total loss is expected to be $400 million to $600 million, versus guidance of $200 million to $400 million.

The company maintained that it was seeking ways to improve its royalty revenues, but noted that in the interim, it could seek up to $500 million in loans to provide incremental liquidity.

Jefferies drifts down

A junk bond trader opined that "the most interesting situation of the of the entire day was not the high-yield calendar, was not MF Global - it was Jefferies, as the New York-based investment bank's nominally high-grade bonds gyrated wildly, some of them trading down to levels normally associated with distressed debt, although, like the company's shares, the bonds bounced off their badly oversold bottom levels.

A trader declared that "the bonds just got crushed," seeing one issue - the 8½% notes due 2019 - falling as much as 23 points on the day, from Wednesday's close above 103 bid, all the way down to 82 in intra-day trading, before coming back above 90, to close in the mid-90s, still down at least 8 points. Well over $50 million of those bonds changed hands.

Jefferies' issues on the whole were easily the most actively traded bonds of the day, with some racking up even heftier volume totals. A market source said that the company's 5 1/8% notes due 2018 zoomed to an astonishing $262 million traded by the time they closed at 88 bid, while its shortest issue, the 7¾% notes coming due on March 15 of next year, saw turnover of over $124 million, ending around 98¾ bid - well-down from week-earlier levels around 1021/2, and down even from Wednesday's close at just below 101.

A high-yield trader said that those kind of movements - particularly among the shorter-dated paper - pushed yields up even well above average junk yields, which, which currently hover a little above 8%, signaling a possible buying opportunity.

"I spent a good portion of the morning talking to high-yield people, saying, 'you got to take a look at this,'" he said.

He said that the company's 8½% notes due 2019 were closing around 95-96, after having traded as low as 82 earlier in the morning. That low represented a yield of 12.17%, while the eventual close was still a hefty 9¼% to 9½% yield.

He saw the 6 7/8% notes due 2021 get as low as 85, or a 9.30% yield, while the bonds bounced off their lows to close at 87 bid, for an 8.95% yield.

The 6.45% notes due 2027 - which unlike some of the other Jefferies bonds was not very heavily traded, with just one round-lot transaction seen all day, was down to 77 at its low point, or a 9.27% yield, while its close at 79 yielded 8.98%.

Further out on the curve, Jefferies' 6¼% notes due 2036 hit a low of 74 bid, on an 8.88% yield, while their close at 78 bid was yielding 8.38%.

In falling from recent levels, which for the shorter- and medium-term bonds were in most places at or above par, to where they eventually ended up trading, "it went right by crossover, right by the mainstream high-yield guys," with some Jefferies debt even hitting the traditional benchmark for distressed issues, meaning spreads of over 1,000 basis points.

For instance, a market source saw the March 2012 bonds' yield going home above 11½%, and with short-term Treasuries yielding practically nothing, a spread of almost 1,150 bps.

A trader characterized the latter bond as one of the most volatile in the whole capital structure, plunging as low as 86 bid during the day, though not on a large trade, before recovering to end in the upper 90s.

The bonds seemed to be moving in tandem with Jefferies' stock; its New York Stock Exchange-traded shares - which have been getting hit hard all week - fell as much as 20% in intra-day trading, before coming off their lows, briefly moving into positive territory, but then ending down $0.26, or 2.12% on the day, at $12.01. Volume of 45.8 million shares was nearly 18 times the norm. While the stock managed to cut its losses, those shares still trade well below the nearly $15 level seen as recently as last Friday.

As to what was hammering those bonds and shares down, a trader said it was a combination of factors, including market unease over whether Jefferies has any kind of substantial exposure to deeply troubled European debt and a ratings downgrade on Thursday from the small, but influential, Egan-Jones agency, which rates the creditworthiness of financial companies. A junk trader also mentioned Jefferies' prominent role as the lead underwriter on this past summer's $325 million bond issue by the beleaguered and now bankrupt MF Global Holdings Inc., and cited investor fears that the investment bank might conceivably find itself "caught in the crossfire" of possible bondholder legal action against MF Global, which also faces severe regulatory and legal scrutiny over allegedly missing client funds.

A Jefferies spokesman on Thursday declined comment at this time over the latter potential scenario.

Jefferies meantime has taken pains to reassure the markets that its exposure to both MF Global and to Europe's sagging sovereign debt was small; it said over the weekend that its exposure to MF Global was only about $9 million. On Thursday, it put out several news releases outlining the limits of its exposure to the European sovereigns, explaining while it has long inventory of over $2.684 billion, it also has offsetting short positions in such sovereign debt of $2.545 billion, as well as offsetting positions in futures instruments.

And it said that among the sovereign issues of the economically weakest European nations - the so-called "PIIGS," consisting of Portugal, Ireland, Italy, Greece and Spain - it has just $3 million of exposure to Greece, and among the five countries, combined net short exposure of about $38 million, or around 1% of the total value of Jefferies' shareholders' equity.

One of the factors giving Jefferies' stock, and presumably, its bonds, a boost from their day's lows was an endorsement of sorts by prominent financial analyst Meredith Whitney, who told CNBC that the company is "conservative" in its outlook - and should not be unfairly lumped in with the failed MF Global.

Among junk traders, opinion was mixed. One trader said that while Jefferies was denying any major exposure to potentially bad debt, "when in doubt, people sell." A second noted that the company's recent financial results were weak, which was further spooking investors.

However, a third trader declared that "the people who were blowing out of these things today just panicked," and may have "thrown out the baby with the bathwater."

Broad market mostly firm

Elsewhere in the distressed universe, Realogy Corp.'s 11½% notes due 2017 were active but unchanged at 791/2, according to a trader.

The trader also said that Sprint Nextel Corp. debt was "up a point across the board." He pegged the 6.9% notes due 2019 at 84 and the 6 7/8% notes due 2028 at 73.

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