Distressed market closes week in the red; Caesars bonds hit again; NewPage debt hangs in there

By Stephanie N. Rotondo

Portland, Ore., Aug. 5 - Distressed debt was "on a little bit of a bumpy ride," a trader said Friday.

"Everything was heavy," he said. "Everything was quoted wide."

Caesars Entertainment Corp. remained the top trading credit in the secondary space, as investors shed lower-quality paper, especially those tied to discretionary sectors.

Market mainstay NewPage Corp., on the other hand, held in there for the most part. One trader even noted that the bonds had been higher at one point in the session, though by the end of business, the bonds were unchanged to just slightly weaker.

PMI Group Inc.'s debt meantime fell a couple points. The mortgage insurer warned that it might be forced to shut down in the near future, resulting in a downgrade from Standard & Poor's.

No big win for Caesars

Caesars Entertainment's 10% notes due 2018 were "active again," a trader said, deeming the debt down "another point or so" at 80½ bid, 81 offered.

Another trader said the issue opened higher at 84 bid, 85 offered, but soon fell to levels around 80. By the bell, the bonds had regained some ground, closing near 81 bid, 82 offered.

"At midweek, they were coming off pretty precipitously," he said. In a downward market, "discretionary gigs get hit" and Caesars was no exception. "All casino bonds were a little heavier, but this one has had heavy volume all week."

Caesars is a Las Vegas-based casino operator.

NewPage holds its own

Miamisburg, Ohio-based papermaker NewPage managed to hold its ground for the most part in Friday trading.

A trader said the 10% notes due 2012 were "kind of unchanged," seeing a 16 or 17 bid.

Another trader said the 11 3/8% notes due 2014 were "about unchanged, maybe a little bit lower," around 85.

There has been no fresh news out on the company, but its weak credit quality has caused already-spooked investors from shedding the risky investment.

PMI pressured

A trader said PMI Group's 6% notes due 2016 were down "a couple points" around the 34 mark, while the convertibles issues were "down a bunch," falling into the high-20s.

Another trader placed the 6% notes around the 34 mark as well.

On Thursday, PMI said that a backup plan put in place to allow it to continue operating in the event of a subsidiary failure might no longer be a workable arrangement. In the second-quarter, its primary subsidiary missed a key capital-adequacy target, which might result in a shutdown by regulators in Arizona.

In order to avoid a shutdown, PMI must "obtain significant capital" or come up with a plan for doing so - no easy feat in the current market environment.

The Walnut Creek, Calif.-based mortgage insurer lost $134 million in the second quarter.

"I do not know if we will be able to complete a capital transaction that will successfully allow us to continue to write new insurance business," said L. Stephen Smith, chief executive officer, in a conference call Thursday.

"I do believe, however, that there is recognition from a variety of parties that a creative solution to PMI's current challenges would be beneficial to PMI, its investors, policyholders, potential future investors and the housing market."

Sino Forest declines

A trader said that even though Friday was not the market debacle that Thursday had been, "you still had some names here that were down multiple points, on pretty good volume."

He saw Sino-Forest Corp.'s 10¼% notes due 2014 were down 4 points on the day, last trading at 70 bid.

The bonds eased despite the disclosure on Friday that a large Singapore-based fund - The Mandolin Fund, run by New Zealand-born billionaire Richard Chandler - had increased its already sizable equity stake in the embattled Canadian-Chinese timber company.

The fund disclosed that it had bought another 2.7 million Sino-Forest shares on Thursday, raising its stake to 18%. The fund has been gradually boosting its stake in the company.

Chandler's buying, and stock buys by other funds, have helped to revive the company's shares, bringing them back up to current levels a little under C$6, from their lows at C$1.29 which they had hit in mid-June after Hong Kong-based Muddy Waters LLC, a trading and research fund run by short-seller Carson Block, had released a devastating report in which it alleged company officials had engaged in fraudulent practices - charges that the company has vehemently denied.

That hammered its bonds down from around the par level, and caused the stock to nosedive from its pre-report level above C$18 per share. Sino-Forest's biggest holder, the hedge fund run by billionaire investor John Paulson, eventually sold its entire stake in the company after seeing the value of its position decimated by more than 90%. But Paulson defended his fund's rationale for making its investment in the first place, challenging and rebutting Block's charges of corporate chicanery.

Paul Deckelman contributed to this article

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