Dynegy debt ends mixed as discounted exchange offer revealed; Mueller Water bonds dribble down

By Stephanie N. Rotondo

Portland, Ore., Sept. 16 - It was a typical Friday in the distressed debt space. That is, it was on the slow side, though generally the tone remained firm.

The big news of the day was a debt-for-debt exchange announced by Dynegy Holdings LLC. The subsidiary of Dynegy Inc. is swapping up to $1.25 billion of their notes for new debt. The exchange is the most recent effort affected by the company as it attempts to reorganize itself out of court.

However, a trader said the bonds were "a mixed bag" on the news, though trading was quite active.

Elsewhere, Mueller Water Products Inc. paper was weaker, just one day after the company announced it was eliminating a top executive position.

William Lyons Homes Inc. said Friday that it had made an interest payment on its 7½% notes due 2014. That gave the debt a boost, according to a trader. Among other homebuilders, Hovnanian Enterprises Inc. was unchanged, but busy, a trader said.

Dynegy mixed on exchange

Dynegy Holdings announced a discounted exchange offer for up to $1.25 billion of its debt for new 10% senior secured notes due 2018.

Included in the exchange are $1.1 billion of 7¾% notes due 2019, $175 million 7 5/8% notes due 2026, $175 million of 7 1/8% notes due 2018, $1.05 billion of 8 3/8% notes due 2016, $785 million of 7½% notes due 2015, $88.5 million of 8¾% notes due 2012 and $200 million of the 8.316% series B subordinated capital securities due 2027.

Bondholders, however, will only receive a fraction of the $1,000 par value. For example, holders of the 7¾% notes will receive $120 in cash and $565 of new notes if tendered by the early deadline. Otherwise, holders will receive $635 in new notes.

In response to the news, the Houston-based power producer's debt traded actively but mixed as traders opined that the terms might have to be tweaked.

"People don't think this is going to be the final word," a trader said. "They're going to have to make another pass to get people on board."

The trader saw the 7¾% notes pushing up to around 64, versus 61 bid, 62 offered previously. The 8 3/8% and 7½% notes, however, fell to 64 and 66½ bid, 67½ offered, respectively.

Another trader said the 7¾% notes were up "almost 3 [points]" at 641/2, calling the issue the "most active bond" of the day. The 7½% notes were deemed down about a point to 67, while the 8 3/8% notes slipped a half-point to 643/4.

Mueller Water dips

A trader said Mueller Water Products' 7 3/8% notes due 2017 were weaker around the 84 level.

The losses came after the company said on Thursday that it was eliminating the position of chief operating officer "to flatten its organizational structure." As such, the current COO, Robert "Bob" Leggett will be leaving the post on Oct. 1.

Mueller is based in Atlanta.

William Lyon up, Hovnanian steady

Newport Beach, Calif.-based homebuilder William Lyon said in a regulatory filing Friday that it paid the $2.92 million coupon on its $77.8 million of 7½% notes due 2014 on Sept. 14, just one day before the 30-day grace period was set to expire.

"They snuck it right in under the wire," a trader said.

The payment was originally due on Aug. 15.

He said the paper moved up "a little bit" to 25½ and that it was once gain trading with accrued interest.

Among other homebuilders, a trader said Hovnanian's 10 5/8% notes due 2016 were trading actively, but unchanged at 861/2.

There was no fresh news out on the Red Bank, N.J.-based company.

PMI pays coupon

In other coupon-payment news, a trader said he had heard PMI Group Inc. made the coupon on its 6% notes due 2016 and 6 5/8% notes due 2036.

The trader said he heard about the payment from holders of the debt.

The bonds headed upward post-payment, rallying to 30 bid, 31 offered from 26 bid, 27 offered previously.

PMI is currently operating under the supervision of its primary regulator, the Arizona Department of Insurance. Though the mortgage insurer has been allowed to pay claims, it is not being allowed to write up new business - which could eventually put a pinch on the holdco's $70 million in available liquidity.

In a report put out by CreditSights, the Walnut Creek, Calif.-based company's future did not look bright.

"At this time, we would recommend investors avoid PMI credit risk," the firm said in the report. "While previously we suggested that speculative investors consider selling CDS with a tenor of 12 months or less, we now recommend that investors avoid PMI credit risk, as our degree of confidence in a protracted state of regulatory purgatory has been eroded."

Broad market gains

Among other distressed issues, Caesars Entertainment Corp.'s 10 % notes due 2018 gained "almost a point," a trader said, closing around 73.

The trader also saw Bon-Ton Stores Inc.'s 10¼% notes due 2014 rising a point to 851/4.

Another trader said NewPage Corp.'s 11 3/8% first-lien notes due 2014 were half a point better at 86½ bid, 87 offered.

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