TXU bonds continue to trade on default talk; Solo Cup off again; AES unit gyrates on sale talk

By Paul Deckelman and Sara Rosenberg

New York, March 1 - The bonds of Energy Future Holdings Corp. - the Texas utility operator formerly and perhaps more familiarly known as TXU Corp. - continued to trade actively on Tuesday, although considerably less busily than they had been on Monday, when news first hit the market that an investor was alleging that the company had defaulted on one of its issues. TXU denies the allegation.

Meanwhile, the default story was putting pressure on the bank debt of TXU unit Texas Competitive Electric Holdings Co. LLC.

Out of that same utility and merchant power sector, AES Eastern Energy LLC's bonds continued to gyrate; they had fallen on Monday after parent AES Corp. announced it would look to put the New York power producer's plants up for sale, seeking to divest itself of a unit that had dragged its earnings lower in the latest quarter. On Tuesday, the bonds bounced back on short-covering.

Solo Cup Co.'s bonds continued to fall on Tuesday, with traders not certain why; they noted that there has been no fresh news out on the company lately - but they say that its bonds have gradually lost about 10 points from where they were at the start of the year.

OPTI Canada Inc.'s bonds were little changed on the day, with traders noting that activity in the Canadian energy company's paper has dwindled from the busy levels seen just about two weeks ago or so.

TXU active but steadier

A trader said that Energy Future Holdings' bonds "continued on" from what they were doing on Monday, when the Dallas-based utility company's paper was roiled by an investor's accusation that a unit of the company had defaulted on one of its issues.

But he said that "the seniors that were up the most [Monday] gave a teeny bit back, and the subs that were off the most got a teeny bit back - but it was kind of a sleeper."

He saw "marginal change" in the bonds, with the 10¼% notes due 2015 the most active issue both on Monday and again on Tuesday. He saw about $30 million to $40 million having traded Tuesday - but that was "a lot less trading" than was seen on Monday, when, he said, "well over" $100 million changed hands.

At the end of the day, he said, the bonds had firmed a little to around 56 bid, 56½ offered. That half-point gain, he said, lifted the bonds back up to where they were before they lost ground on the default speculation.

He said that "the only other one that really traded more than $1 million or two" was the 10% notes due 2020. He saw them at 104½ bid, 105 offered, up ¼ on the day.

All the rest [of the issues] "were onesies and twosies" - small, isolated, one-off transactions.

In the bank loan market, meantime, Energy Future Holdings unit Texas Competitive Electric Holdings' term loans were a bit weaker in trading with sources claiming that the downward pressure was a result of profit taking since the debt has recently rallied by a few points.

One trader had the company's term loan B-1 and B-2 quoted at 84¼ bid, 84¾ offered, down from opening levels of 85 bid, 85½ offered and Monday's late-day levels of 84½ bid, 85½ offered.

A second trader, meanwhile, had the term loan B-1, B-2 and B-3 all quoted at 83 7/8 bid, 84 3/8 offered, down from 84¼ bid, 84 5/8 offered.

"Plenty of people want to take profits. It's still up two points. Was 821/2-83 before letter [regarding potential default] was released," the first trader added.

When news of the alleged default hit, the company's bank debt rallied, with some guessing that investors may view this as a catalyst to improve pricing.

As previously reported, Aurelius Capital Management LP, a lender under the credit facility, is alleging that Texas Competitive Electric Holdings is in default as a result of certain intercompany loans that were made. The firm is claiming that the loans do not comply with the arm's-length basis requirement and that the non-compliance has resulted in a failure to make certain mandatory prepayments under the credit facility.

Aurelius has hired law firm Dechert to pursue the alleged default and is trying to put together an informal group of lenders to join in the complaint, a source remarked.

A call is scheduled to take place on Wednesday for lenders that want to join the fight.

There was already a conference call with Citigroup, the administrative agent on the credit facility, late Monday. According to the source, Citi claimed it was doing what was required under the credit agreement, but for now, everything is staying status quo.

Texas Competitive has said in filings with the Securities and Exchange Commission that the default allegations are without merit and that it will defend itself against the accusations.

The bond trader meantime said that the argument about the alleged default "is ongoing. I don't think very many people consider it a true active default. There's only one person claiming that what they have is technically defaulted upon. There isn't enough follow-through to make me think that anything will come of it, other than that they may extract some sort of a concession [from the company], although what form that would take and whether it was monetary or not, I don't know."

AES unit gyrates around

A trader said that the 9.67% notes issued by AES Eastern Energy - which had dropped on Monday down to around 66¾ - "popped back up" to end Tuesday around 74 bid, suggesting that short-covering might be the cause.

"There were not a lot of trades, but, they're gyrating quite a bit. The space between the trades is pretty big."

Activity in the credit the past two sessions, he said, has been "kinda wild."

On Monday, AES Eastern's corporate parent, AES, said it would look to sell the company's four power plants, which provide power to customers in the New York area. Speaking on the Arlington, Va.-based independent power producer's fourth-quarter conference call on Monday, its chief executive officer, Paul Hanrahan, said that those coal-fired plants, which sell power under short-term contracts and on the spot market, would be better owned by a closely held company rather than AES, a public company that has far-flung operations in 29 countries.

AES wrote down the value of AES Eastern by $827 million, contributing to the parent's slide into the red in the fourth quarter, when AES suffered a net loss of $169 million, or 56 cents a share, versus year-earlier net income of $283 million, or 7 cents per share. AES cited falling power prices, prospects for lower prices and a recent credit-ratings cut for the unit by Standard & Poor's, which downgraded the unit's rating to B- from B+ in late January.

The ratings agency cited increased pressures on the company's credit profile due to a change in hedging policy that had increased its merchant exposure. It also cited the decline in market prices since the fourth quarter of 2009 and declining debt service coverage, S&P said

The trader opined that "there is pressure on these guys - they're not able to hedge their costs, and spread between the cost of their coal and what they can get for [the power output] is getting really tight and uneconomical. That probably pushed them down - and the pop in the market [Tuesday] indicates there might be some short-covering."

Solo continues to go so low

A trader said that Solo Cup "is one of those names that for the last month has been trading off without a lot of news - I presume somebody has been doing some work on it."

The Lake Forest, Ill.-based paper and plastic cup, plate and utensil maker's 8½% notes due 2014 were trading at bid levels between 83 and 84, which he said was "about unchanged, or on the weak side."

He pointed out that when the year began, Solo was in the low-to-mid 90s, "so they've been sort of drifting off by a point or two kind of regularly, and here we are - they're down 10-plus points from their highs."

A second trader said that the sell-off in Solo Cup continued Tuesday, although he said that unlike Monday, "the new issues sort of took over a lot of the focus."

He saw about $30 million or $40 million of the 81/2s traded, pegging them down another 1½ points as they went home at 83½ bid, "so they're continuing to suffer a bit."

OPTI Canada little changed

A trader called OPTI Canada's 7 7/8% and 8¼% notes both due 2014 "not very active" on "a pretty light trading day," pegging the Calgary, Alta.-based energy company's bonds around 55 bid, "so they were relatively unchanged."

Another trader said that OPTI Canada is "a perennial favorite" in the distressed-debt precincts, but he saw much less trading than had been seen recently - less than $20 million of both the subordinated issues, trading around 551/2, "so that was a sleeper."

OPTI'S 9% notes due 2012 were at 99½ bid, par offered.

He further said that OPTI "had really been sort of the market bond for a while, but now it has really tamed itself."

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