Dynegy's ownership transfer draws negative response; Hovnanian falls ahead of midweek earnings

By Stephanie N. Rotondo

Portland, Ore., Sept. 6 - Declining equities and continued general fears about the economy did little to help distressed debt gain any traction in the first trading session back from Labor Day.

Dynegy Inc., for example, saw its bonds drop anywhere from 2 to 5 points. The losses came after the company said last week it had completed an internal restructuring that created two new entities and stripped away assets from bondholders.

Meanwhile, Hovnanian Enterprises Inc. was getting no love ahead of its earnings release on Wednesday. Traders saw those bonds falling 1½ to more than 3 points on the day.

The discretionary sector - which includes retailers and casinos - was also getting beat down. Among the more active issuers were Rite Aid Corp., Bon-Ton Stores Inc. and MGM Resorts International Inc.

Dynegy restructuring hits debt

Dynegy debt took a hit as investors reacted to the recent completion of a restructuring that moved assets from the holding company to the parent company, which could make it more difficult for bondholders to recover their investments in the event of a bankruptcy filing.

A trader said the 8 3/8% notes due 2016 were "down a lot" - he estimated about 5 points - to 613/4, while the 7½% notes due 2015 slipped 1½ to 2 points to 64.

Another market source pegged the 7¾% notes due 2019 at 58 bid, a loss of more than 3 points.

The 7.67% notes due 2016 of Dynegy Danskammer LLC, a unit that operates a coal-fired power plant in upstate New York, dropped 1¾ points on the day to end at 61 bid.

On Friday, the Houston-based power producer said it had transferred ownership of a new entity, Dynegy Coal HoldCo LLC, to the parent company. Coal Holdco is in turn the indirect parent of Dynegy Midwest Generation LLC.

For bondholders, the transfer of the assets mean that in the event of a bankruptcy at a subsidiary level, they cannot claim those assets in any recovery attempts. Market watchers now fear that bondholders will be asked to participate in some sort of exchange that greatly undervalues their holdings.

"This latest action strips the coal assets away from bondholders without promising a direct return," wrote Gimme Credit LLC analyst Kim Noland in an afternoon report. "This is because the 'undertaking' can be reduced if [the Dynegy] parent or certain other subs retire or acquire [Dynegy Holdings Inc.] debt without having to compensate DHI."

Noland said that while she believed bondholders will "likely be coerced" into a distressed exchange of some sort, " the activist shareholders who are behind the 'delevering' scheme probably won't push the company into bankruptcy because it would hurt the value of their own holdings."

Hovnanian falls pre-earnings

Hovnanian's 10 5/8% notes due 2016 were on the decline Tuesday, ahead of the Red Bank, N.J.-based homebuilder's Wednesday earnings release.

One trader called the paper down 1½ points to 861/4. Another saw the debt falling nearly 3 points to 86½ bid.

The company had previously forecast a loss of $0.28 to $0.67 per share. Analysts are expecting a loss of $0.50 per share on revenues of about $292 million.

Retail, gaming soften

As economic fears grow, discretionary sectors such as retail and gaming tend to get hit the hardest.

Such was the case Tuesday, as credits like Rite Aid and MGM Resorts got battered.

A trader said Rite Aid's 8 5/8% notes due 2015 were down "probably a couple of points" at 881/4. He also saw Bon-Ton Stores' 10¼% notes due 2015 at 871/4, a point weaker on the day.

In the gaming realm, the trader said MGM Resorts' 7 5/8% notes due 2017 dropped 3 points to 883/4.

At another desk, a market source called Caesars Entertainment Corp.'s 10% notes due 2018 about 3 points softer at 72½ bid and MGM's 6 5/8% notes due 2015 off by 1¾ points at 91 bid.

The source also saw Rite Aid 8 5/8% notes at 88½ bid, down 2½ points.

NewPage weakens

A trader said NewPage Corp.'s 11 3/8% notes due 2014 lost about 2 points to end around 85.

At another desk, the 11 3/8% first-liens were seen trading down around 84¼ bid, 85¼ offered, while the 10% second-lien notes due 2012 were languishing around a 10-12 context.

On Tuesday, Moody's Investors Service downgraded the notes - as well as other ratings - to Caa2 from B2. The rating agency cited deteriorating liquidity and challenges surrounding the Miamisburg, Ohio-based papermaker's attempts to refinance a large portion of its debt.

Paul Deckelman contributed to this article

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