ResCap retreats after Chapter 11 filing, Rotech rocked; Chesapeake chokes after loan news

By Paul Deckelman

New York, May 14 - The long-awaited "other shoe" finally dropped Monday for Residential Capital LLC, which will now be under Chapter 11 protection while its sorts out its troubled finances.

The embattled mortgage loan company's bonds slid by several points, even though the news was hardly a surprise.

Bank-market sources also said that ResCap will launch a big debtor-in-possession financing later in the week.

Another downsider on Monday was offshore energy operator ATP Oil & Gas Corp., whose bonds have been on the slide since the company reported poor quarterly results last week.

Traders also saw a plunge in Rotech Healthcare Inc.'s bonds and its shares after the company disclosed an overbilling problem that left it unable to file its required 10-Q report with the Securities and Exchange Commission by last Thursday's deadline.

And yet another loser was Chesapeake Energy Corp. The natural gas company's recently beleaguered bonds fell anew in very heavy trading. Several issues racked up volume of over $100 million amid news that Chesapeake took out a $3 billion loan to get over its current rough spot.

The bonds fell - a though the stock rose - as company executives tried to put the best possible face on recent developments with a special conference call.

In the convertibles market, participants saw Chiquita Brands International Inc.'s notes finally stabilizing around the levels they held on Friday, which are well down from where they were last week before the banana giant reported unexpectedly weak quarterly earnings.

ResCap retreats

A trader said activity in the high-yield secondary market Monday was all Chesapeake, ResCap and ATP Oil & Gas.

For Res Cap, he said the troubled residential lender's 9 5/8% secured notes due 2015 were off about 4 points to about the 93 bid level, following the company's Chapter 11 filing with the U.S. Bankruptcy Court in New York.

A market source said that more than $27 million of those bonds traded, making it one of the most active junk issues, although well below the trading volumes in Chesapeake.

Res Cap's other bonds - its unsecured issues, such as its 8½% notes due 2013 - all were trading around the 30 mark, which was down 5 points from recent levels.

However, a trader said that most of the activity was in the senior bonds; he saw just one trade all day in one of the junior issues.

Word from the bank-debt market is that ResCap will be holding a bank meeting at 9:30 a.m. ET on Thursday to launch a $1.45 billion debtor-in-possession financing facility that is being led by Barclays Capital Inc.

A market source said that the facility consists of a $200 million revolver, a $1.05 billion term loan A-1 and a $200 million term loan A-2.

The proceeds will be used to provide liquidity while the company's completes contemplated asset sales through its Chapter 11 process that are expected to generate about $4 billion in proceeds.

The company has agreed to sell its mortgage origination and servicing businesses to Nationstar Mortgage LLC, and its legacy portfolio, consisting mainly of mortgage loans and other residual financial assets, to parent Ally Financial.

Approval of the restructuring plan is targeted by the fourth quarter.

ATP off again

The third member of the trio of actively traded issues moving points lower on Monday was ATP Oil & Gas, which fell for a third straight session Monday.

The company's 11 7/8% senior secured second-line notes due 2015 lost another 3½ points, a trader said, pegging the notes around a 63-64 context.

More than $43 million of those bonds changed hands Monday - the only non-Chesapeake issue to make it into the Top Five volume leaders.

The bonds slid to current levels from their levels of a week ago in the low- to mid-70s.

As was the case on both Thursday and Friday, the bonds were lower in the wake of the disappointing quarterly numbers that ATP posted.

ATP released its first-quarter results after the financial markets closed last Wednesday, followed by a Thursday conference call.

In the latest period, ended March 31, the company recorded a net loss attributable to common shareholders of $145.1 million or $2.83 per basic and diluted share, wider than the $119.5 million or $2.34 per basic and diluted share of red ink seen a year ago in the 2011 first quarter.

Revenue of $146.6 million fell $32 million short of Wall Street expectations. Even the company's chairman and chief executive officer T. Paul Buhlman opened his conference call presentation by stating that the company was not pleased with those first-quarter results.

Chesapeake churns anew

Among specific names, a trader said the largest activity today was in Chesapeake, which "was getting crushed again."

"Portfolio managers were talking about whether they should get out of it at 7%. Well, now it's trading at 8½%, so go figure," the trader said.

He quoted the Oklahoma City-based natural gas company's short-dated paper -7 5/8% notes coming due in July of next year - as trading right at par. While there was some trading around 101, he said that was just a small piece.

More typical were the company's longer-dated issues, which were seen down by at least a point and in some cases, by several points, across the board.

For instance, he said its 9½ notes due 2015 were down a point on the day, last trading at 1021/2, while its 6 5/8% notes due 2020 were down a deuce, last trading at 91¾ bid with more than $100 million of each bond changing hands Monday, easily topping the junk market's most-actives list.

A market source at another desk said that more than $118 million of the 9½% notes traded and more than $105 million of the 6 5/8s.

Chesapeake's 6.775% notes due 2019 were off by three-quarters of a point, at 921/2, on volume of more than $65 million.

"The rest of the issues are down around a point," the first trader said.

Its 7 5/8% notes due 2013 eased to about 101¾ on volume of more than $35 million while its 6 1/8% notes due 2021 retreated to 90 bid on turnover of about $32 million.

Another trader said some of Chesapeake's bonds, like the 6 5/8s, "were up a point from their earlier lows, but still down a couple of points on the day."

"They were by far the most actively traded name," the trader said.

Convertibles get clobbered

Chesapeake's group of convertibles fared no better than its straight junk bonds. They were called down 1.5 points to 2 points at the end of the session, although that was better than early Monday when the losses were seen in the 1- to 3-point range.

The Chesapeake 2.75% convertibles due 2035 traded between 86 bid, 87 offered.

Chesapeake's 2.5% convertibles due 2037 traded last at 80.875 and Chesapeake's 2.25% convertibles due 2038 ended at 72.25 after printing earlier at 71.5.

"They were weaker at the open and bounced a bit later," a Connecticut-based trader said of the convertibles.

Bond holders were concerned about Chesapeake rushing to market with an expensive loan that came at Libor plus 7%, the trader said.

A second source said, "They had maxed out their credit."

Chesapeake tries to explain

While the bonds fell, the company's recently hard-hit New York Stock Exchange-traded shares rose by 71 cents or 4.79%, to end at $15.52. Volume of 78.5 million shares was three times the norm.

All of that movement was going on against a backdrop of the company's disclosure late Friday that it took out a $3 billion unsecured loan from Goldman Sachs and Jefferies & Co., using the money to pay down its secured revolving credit borrowings, noting that the credit line that could be tightened by the effect of low natural gas prices on the company's reserves.

That tightening could restrict sales of energy assets, which lenders could require to be pledged as increased collateral amid lower natural gas prices.

In a quickly-scheduled conference call Monday, Chesapeake's chief executive officer Aubrey McClendon described the new financing as a bridge loan until he can sell some of the company's $50 billion in assets in the second half of the year.

During the conference call, McClendon and Chesapeake's chief financial officer Domenic J. Dell'Osso sought to calm market fears that were stoked Friday when Chesapeake indicated that it may delay the sale of some of its assets so as not to run afoul of loan covenants requiring a certain cash flow be maintained.

Chesapeake has been using asset sales to bridge the gap between its operating revenues - sharply reduced in the current low-price environment for natural gas sales - and its extensive capital needs, to pay for its drilling of wells in areas that contain oil and potentially valuable natural gas liquids as it seeks to move away from its traditional position as mostly a "dry gas" company.

The asset sales also are helping Chesapeake hold to its previously announced strategy, announced at the beginning of 2011, of aggressively paying down debt so it could reach a target by the end of this year of reducing its debt burden by 25% over that two-year stretch.

McClendon said instead of pursuing a deal to sell Texas asset for $1 billion, the company opted to borrow the $3 billion instead.

McClendon said that the company's other plans for sales of non-core assets - estimated to raise between $11 billion and $14 billion - are on track.

He and the CFO also said that having repaid the $3 billion of revolver borrowings, there are no restrictions on other draws against that facility.

The officials said the company, which had a leverage ratio of 2.67x as of March 31, remains well within the 4x leverage level permitted by its covenants.

Loan raises concern

Despite Chesapeake's efforts to explain recent news, some new concerns for debtholders have been raised.

For instance, Alex Diaz-Matos, an analyst at Covenant Review LLC, told Prospect News on Monday that even though the new $3 billion loan is unsecured, nothing would prevent Chesapeake from entering into a secured loan at some point, adding another layer of debt senior to its existing bonds.

"Even though Chesapeake is a high-yield company, they use investment grade-style covenants for their bonds that have remained outstanding. Even worse than that, the [bond] covenants have a loophole that allows any credit facility to be secured, while not also securing those bonds."

He said, "There certainly is the potential that in the future, secured bank loans could come in ahead of those rather substantial bonds."

He said the company's loans - including its new term loan - have much better covenant protection than the bonds.

The Covenant Review is an independent New York-based agency that reviews the bond covenants of newly issued bonds, or those of existing bonds from companies involved in special situations, such as Chesapeake.

The review has had "a lot of client interest in the name and a lot of concern with the fact that, at least on the bond side, the covenants don't give them the type of protection that they would like from a company in Chesapeake's situation," the trader said.

A convertibles market source said, "I don't think they are going to go bankrupt, but he announced that he is going to be a seller of natural gas assets in a very poor market for natural gas assets and that's not putting them in a very strong position."

Chiquita stabilizes after sharp slide

Also in the convertibles market, Chiquita Brands International's 4.25% converts due 2016 traded actively on Monday at about 75, which was steady versus Friday's levels.

But 75 represented another leg down from where the prints were on Thursday.

"Considering the first prints after the stock came in on earnings in the mid-80's, this is quite a move," a New York-based trader said.

On Monday, Chiquita's NYSE shares ended down by 11 cents, or 2%, at $5.51.

The Cincinnati-based company's 7½% junk bonds due 2014 got peeled by 3¾ points on Monday, going from above par down to 96½ bid.

Last Wednesday, Chiquita reported a first-quarter loss of $11 million, or 24 cents per share, versus earnings of $24 million, or 52 cents per share, for the same period a year earlier.

Excluding items, the company posted earnings of four cents, which was significantly below the 32 cents per share that analysts on average had expected.

Revenue fell 3% to $520 million. Lower pricing in North America and lower European exchange rates were cited for the deterioration.

Rotech roiled by delay

Elsewhere, Rotech Healthcare's 10¾% notes due 2015 were seen by traders having been hammered down to about the 99 level; those bonds had last traded a week earlier at 102 5/8 bid.

Round-lot volume on Monday was around $4 million.

That followed the Orlando, Fla.-based medical products and services provider's disclosure in an SEC filing that it would have to delay its 10-Q quarterly filing, a trader said.

In its filing, the company said that it identified a programming error in the company's automated billing logic dating back to January 2009.

As a result, and following substantial independent analysis, the company this week self-reported this error and voluntarily refunded $6.5 million to the appropriate Durable Medical Equipment Medicare Administrative Contractors (DME MACs), the filing said.

The filing raises the possibility that Rotech may likely have to restate results going back several years in light of the error it discovered.

While the 2015 notes were trading around in some size, the company's 10½% notes due 2018 dropped down to around the 65 level from 69 bid, although those were strictly smallish odd-lot trades. The bonds last traded in size May 9, around 67½ bid.

Rotech's over-the-counter-traded shares nosedived by 59 cents, or 48.75%, to end at 62 cents a share on Monday. Volume of 839,000 shares was more than 21 times the usual turnover.

Sara Rosenberg and Rebecca Melvin contributed to this report

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.