NewPage pays coupon on senior debt, bonds improve; Lehman stays busy, better; Sino-Forest dips

By Stephanie N. Rotondo and Paul Deckelman

Portland, Ore., June 30 - The final day of the month and the quarter was a positive one for the distressed debt space, traders reported Thursday.

"The market is up, up and away now," a trader said. "All is well again."

NewPage Corp. had the big news of the day, as the company made its coupon on its senior notes due 2014. The payment in turn caused the bonds to regain a little bit of lost ground.

In the financial realm, Lehman Brothers Holdings Inc.'s paper continued to be active and better as investors reacted to a new bankruptcy plan that has thus far received wider creditor support.

Sino-Forest Corp. experienced light volume during the session, but did weaken as its credit rating was downgraded. Muddy Waters Research founder Carson Block also reported in a television interview Thursday that he was continuing to short the company's common equity.

In other downgrade news, Edison Mission Energy got not one, but two downgrades. Still, the company's bonds were little impacted by the news.

NewPage up on payment

NewPage made its much speculated-about coupon payment on its 11 3/8% first-lien notes due 2014 Thursday, giving the senior and subordinated debt a boost.

A trader said the bonds were "up a good bit," the 11 3/8% notes at 93½ and the 10% notes due 2012 at 30 bid, 31 offered.

"I don't know that it shocked me," he said of news that the Miamisburg, Ohio-based papermaker had made the $100.7 million interest payment.

Another trader said the 11 3/8% notes ended 1½ points higher at 93½ and deemed the 10% notes 2½ points stronger at 301/4.

A third trader noted that "the 10s had the bigger move," though on smaller volume. He saw them ending in a 30-31 context, while pegging the 11 3/8% notes between 93 and 94 bid, calling them up 1½ points.

An analyst who watches the paper industry told Prospect News that in his view, there was never any doubt that NewPage would make the interest payment since "they have enough liquidity," almost $200 million cash, to enable them to do so. "There was a consensus out there" that it would happen.

In the run-up to the due date, the bonds fell in response to "the rumor that they weren't going to make the payment," which he said was spread "by people that were aggressively shorting the first-lien paper. They added fuel to the fire by saying [NewPage] was going to miss the payment."

He attributed most of the scuttlebutt to "a couple of aggressive hedge funds that put [the notion that the payment might not be made] in people's minds to bolster their short position."

He noted that the bonds had traded up a little on Tuesday and, especially Wednesday, in advance of the due date, even with no word from the company, attributing the upside movement to short-covering, which continued into Thursday.

NewPage, he said, had every motive to make the coupon payment rather than hang onto the cash in anticipation of some kind of a restructuring transaction.

"You [the issuer] would want to keep the optionality alive, because in a restructuring, they are likely to reinstate the first lien, or roll it over, so you'd have to make that payment anyway, and they had the liquidity to do it, so, to me, there's no reason why they would not have made that payment.

"If it was the second-lien coupon, which might be equitized anyway, especially at the levels where they are trading, they should not throw away dollars" making the payment, "but it made a difference being the first-lien rather than the second-lien."

He said that the 10% notes "rallied a little bit, on the idea that maybe the numbers are not so bad. But I still think that this company's capital structure is too aggressive, and they will need to figure out something soon."

The $806 million of 10% notes are scheduled to mature next May 1. However, according to the company's most recent 10-Q filing with the Securities and Exchange Commission on May 12, it faces deadlines before that time by which it must either repay or refinance those bonds, or else see the maturities of various other parts of its capital structure accelerated.

For instance, in January, the company amended its $500 million revolving credit facility - which it entered into in December 2007 - to extend its termination date. Lenders accounting for $470 million of revolver commitments accepted the extension, while lenders accounting for $30 million did not.

NewPage said in the SEC filing that if the company does not repay or refinance the 10% notes by July 4 - this Monday - the maturity of that $30 million commitment portion of the revolver is moved up to this coming Oct. 3, rather than the scheduled date of Dec. 21, 2012. If the company does not repay or refinance the notes before this coming Dec. 2, the $470 million portion of revolver commitments will mature next March 1, rather than in December of 2012. And if the notes are not repaid or refinanced by next Jan. 31, the maturity on the 11 3/8% notes - which at $1.7 billion make up the biggest part of the capital structure - will be moved up to next March 31, instead of the scheduled maturity IN December of 2014.

NewPage said in the filing that because of these springing-lien clauses in the credit agreement and the first-lien notes' indenture, those pieces of debt have now been classified as current, rather than long-term, liabilities. It warned that "absent a refinancing of our second-lien notes, an additional [$1.3 billion] will become current during the [now-ending] second quarter of 2011."

Lehman active again, firmer

A trader said Lehman Brothers Holdings' bonds were "very active, maybe a little bit higher."

He saw the 6 7/8% notes due 2018 move up to 26¾ from 261/2.

The bonds were "up another [half-point] today to around 26½ bid, 27 offered," another trader said.

On Wednesday, the now defunct-investment bank said it had secured wider creditor support for a new plan that would hopefully result in a quick exit from bankruptcy and faster payouts to creditors.

Lehman filed for Chapter 11 protections on Sept 15, 2008 and was the largest corporate failure in U.S. history. The bank is expected to pay out $60 billion to creditors.

"The current amended plan values the senior debt at 21.1 [cents on the dollar], so the market is expecting much higher," the second trader said.

He also noted that there was "very heavy volume again" in the bonds.

Sino-Forest slips

Sino-Forest's 6¼% notes due 2017 were "a touch lower," a trader said, on news of a downgrade by Standard & Poor's.

The trader said the notes ended around "46-ish."

A Bloomberg Television interview with Muddy Waters Research founder Carson Block might have also brought about the decline.

Another trader said there was "a couple trades" in the paper, which he called down nearly a point at 461/4.

On Thursday, S&P dropped its rating on the Hong Kong- and Ontario-based timber products company to B+ from BB. The agency cited an inability to collect cash from its offshore subsidiaries, as well as the allegations of fraud by Muddy Waters in early June.

In an interview with Bloomberg on Thursday, Block said that he was continuing to short Sino-Forest stock.

"I'm just as certain today that the company is a fraud and that the stock is a zero as I was on the day that we published," he said, referring to the June 2 report that claimed Sino-Forest had incorrectly stated its Chinese land holdings.

The company has repeatedly said it is free of any wrongdoing, but that hasn't stopped the bonds or stock from plummeting. Paulson & Co.'s divesture of its equity holdings on June 17 did little to improve investor confidence.

Edison shakes off downgrade

Edison Mission Energy received downgrades from both Moody's Investors Service and Fitch Ratings on Thursday, but the news did little to affect the company's debt.

"They really didn't get impacted by that downgrade," a trader said. "The market felt pretty good, so that probably offset any negativity."

Another trader said the bonds were "pretty much unchanged," the 7% notes due 2017 at 81¼ and the 7.20% notes due 2019 at 791/2.

Moody's said it cut Edison's rating due to an expected decline in operating cash flow over the intermediate term. For its part, Fitch said it decided to lower its rating because it expected margins to remain weak amid higher costs from environmental regulations and low power prices.

Fitch did, however, affirm its rating on Edison International.

Nortel gains, Greek bank falls

Elsewhere in the land of distressed, Nortel Networks Corp.'s 10 1/8% notes due 2013 and its 10¾% notes due 2016 continued to move up, closing around 97, according to a trader.

There was still no word on the outcome of the company's patent portfolio auction that began Monday.

Also, National Bank of Greece SA's 9% series A preferreds (NYSE: NBGPA) dropped 94 cents to $9.04, despite Greece securing approval on a five-year austerity plan that would also allow it access to bailout funding.

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