Kodak downgrade 'completely expected,' bonds steady to down; NewPage busy, better in trading

By Stephanie N. Rotondo and Paul Deckelman

Portland, Ore., March 3 - Volumes remained muted in the distressed debt space on Thursday, as new issues were "dominating the market and taking eyes off secondary," a trader said.

JPMorgan conferences were wrapping up on Thursday, but as it was a travel day, there was "still light attendance out there," another trader said.

Despite the absent desks and new issue focus, the market was "up a bit with strong equity markets and economic numbers coming out," the trader added. He noted that "depending on quality," things were generally better by three-quarters to a full point.

But market strength did not help Eastman Kodak Co. The bonds traded down to unchanged - though on thin volume - as Moody's Investors Service cut its rating on the company.

The firmer market was given credit for gains in NewPage Corp. bonds. However, those bonds have been steadily climbing in recent sessions, with no fresh news out to act as catalyst.

Meanwhile, Dynegy Inc. traded unchanged to weaker amid speculation about the company's future.

Kodak downgraded

A market source said a downgrade of Eastman Kodak was "completely expected," as the company has been "burning more cash" after its most recent disappointing earnings report.

Still, the source said, "We've tended to be buyers of some of the shorter dated paper."

Another trader said the news of the downgrade from Moody's Investors Service "didn't stir up a lot of trading," but added that the bonds were losing ground.

He saw the 7¼% notes due 2013 trade at 95, compared with 95½ bid, 96½ offered previously.

"They're probably no better than 94 bid now," he said.

Another trader said the debt "continues to drift down," seeing the 7¼% notes around that 95 level. He called that 1 to 1½ points weaker on the day.

Moody's dropped Kodak's long-term credit rating to Caa1 from B3, and gave the credit a negative outlook. The ratings agency attributed its action to ongoing weakness in the company's core business operations.

On Wednesday, news outlets reported that Investment Partners Asset Management was looking to Kodak shareholders Legg Mason Capital Management and Fidelity Management - which own a total of about 24% of the company's equity - to take a more active role in the company's turnaround by bringing in a turnaround specialist or forcing a sale.

Also on Wednesday, the Rochester, N.Y.-based company said it completed the acquisition of substantially all of the assets of the relief plates business of Tokyo Ohka Kogyo Co., Ltd.

NewPage still busy, better

NewPage remained inexplicably busy during Thursday's session, as one trader said the Miamisburg, Ohio-based coated papermaker's debt was "up with the market."

He pegged the 10% notes due 2012 a point better at 69½ and the 11 3/8% notes due 2014 half a point higher at par ¼ bid, par ¾ offered.

Another trader said the 10% notes "keep creeping up," also placing them around that 69½ mark.

Dynegy debt dips

Dynegy paper was unchanged to softer as the market pondered what the company's future held.

A market source deemed the 7¾% notes due 2019 a point lower at 71 bid. Another said the 8 3/8% notes due 2016 were "kind of where it's been trading" at 79½ bid, 80 offered.

At another shop, a trader said the 8 3/8% notes were on the active side, echoing the 79½ bid, 80 offered market.

"It mostly looks unchanged," he said.

On Tuesday, Standard & Poor's cut the Houston-based power producer deeper into junk territory, giving it a CCC rating.

The agency said the downgrade was based on the "plethora of challenges" facing the company, including dwindling cash flows and a looming default risk in June.

Also on Tuesday, billionaire Carl Icahn said in a regulatory filing that he was seeking to place two directors on Dynegy's board, which is undergoing a shakeup, as previously reported. Dynegy had previously said it would offer Icahn - whose $5-per-share bid for the company recently failed - and Seneca Capital one director spot each.

Icahn's recently failed takeover proposal came on the heels of a $4.50-per share bid by Blackstone Group LP in November. Seneca fought against both buyout proposals, claiming that Dynegy was easily worth $6 to $7 per share.

Solo Cup, TXU gain

Recent notable names like Solo Cup Co. and Energy Future Holdings Corp. continued to see some action during Thursday trading.

A trader saw Solo Cup's 8½% notes due 2014 ending around 85 bid, which he called up 1 point on the day, on "decent volume."

He said that the bonds of the Lake Forest, Ill.-based maker of paper and plastic cups, plates and utensils were "bouncing back up, a little bit," after several consecutive sessions on the downside which saw the bonds fall into the lower 80s from prior levels north of 90, on no real news.

A second trader said that Solo "did bounce a little" on Thursday, quoting them at 85 bid, 86 offered.

A market source elsewhere estimated that the bonds were up 1½ points on the day at 85½ bid.

In Energy Future, a.k.a. TXU bonds, a trader said that bonds are "always active, " seeing the Dallas-based utility operator and merchant power generator's 10¼% notes due 2015 still right around the 55-56 context to which they had recently fallen amid all of the speculation over whether an intra-company loan to EFHC from subsidiary Texas Competitive Electric Holdings Corp. triggered a debt default by failing to be a true "arm's-length" transaction as mandated by the company's bond indentures. While a debtholder has said that is the case and repayment of more than $20 billion of debt should be accelerated, TXU itself says the default allegation is without merit.

The trader said that TXU saw a decent amount" of activity across its whole capital structure."

AES keeps bouncing

AES Eastern Energy LP's bonds - which have been moving up from recent lows after they were hammered down earlier in the week - "bounced a couple of points again" on Thursday.

A trader saw its 9% notes due 2017 at 77 bid, 78 offered.

At another shop, a market source pegged those bonds up 1 7/8 points on the day at 78 bid.

The company's bonds fell early in the week after parent AES Corp. took a big charge against its earnings after writing down its investment in the New York State-based subsidiary and said that it would look to sell its four coal-fired plants. AES' chief executive officer, Paul Hanrahan, said that those 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 with 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 slashed the unit's rating to B- from B+ in late January. The agency at that time cited increased pressures on AES Eastern Energy's credit profile due to a change in hedging policy that had increased its merchant exposure, as well as the decline in market prices since the fourth quarter of 2009 and declining debt service coverage.

"They had their conference call for earnings and there was a lot of discussion on what's going to happen to these plants," he said, "so that was part of it, clearly."

The 9s fell as low as 70 bid on Monday before starting to come back in the subsequent session.

Its 9.67% notes fell into the upper 60s on Monday, but then had bounced back to around 74 bid by Tuesday on short-covering after the overdone drop, another trader said.

The first trader said that the 9.67s were also better on Thursday "in sympathy, they'll trade up with the 9s."

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