ATP weakness continues; falling gas prices help Edison, hurts coal demand; ResCap debt boosted

By Stephanie N. Rotondo

Phoenix, June 12 - The energy arena remained a big investor focus in the distressed debt market on Tuesday.

ATP Oil & Gas Corp.'s debt was "probably the ugliest one of the day," one trader said. The oil exploration company's bonds continue to be depressed as investors attempt to sort out the recent - and hasty - departure of a new chief executive. Though some have speculated that the new hire found something he did not like, one trader ponders that perhaps the job was just more than he expected it to be.

Meanwhile, Edison International Inc. paper remained on an upward course, despite a lack of fresh news. However, natural gas prices have been declining of late, which could be contributing to the rise.

On the other hand, weakening demand for coal - a direct result of the falling price of natural gas - has hurt the coal sector.

"They're all lower," a trader said Tuesday of names such as Patriot Coal Corp. and James River Coal Corp.

ATP remains soft

ATP Oil & Gas' 11 7/8% notes due 2015 were again trading actively Tuesday.

One trader said $30 million to $40 million of the paper changed hands, seeing the notes "continue to drift lower."

He said the bonds traded in a 44-45 context during the session.

Another trader pegged the notes at 44, down from a 45-46 context.

Late last week, the Houston-based company said that CEO Matt McCarroll - hired June 1 - was leaving his new post due to an inability to come to terms on an employment contract. Investors, however, were dubious and several sources asked why ATP would have announced the hiring before securing a contract.

But while others are concerned about something fishy, at least one market source speculated that the job was simply too much for McCarroll to handle.

"He probably didn't know what he was getting into," he said. "It's a much bigger job than it seems to be.

"[ATP] has always been marginal at best," he continued. "At the end of the day, they are over-levered and under-revenued. That's definitely a little concerning."

He held on to hope, however.

"They'll work through it," he said. "Right now, it's good because it's causing some activity in the bonds."

The source further stated that he expected the current episode to take six months or so to play out, at the end of which the company would either emerge stronger or as the big loser.

Edison rises as gas falls

Declining natural gas prices have been helping Edison International's debt climb higher recently.

A trader said the bonds were "still all better," seeing the debt up half a point to about 2 points.

The 7.2% notes due 2019 gained half a point, closing around 56, the trader said.

The 7% notes due 2017 meantime moved up a point to 561/2, while the 7½% notes due 2017 put on "almost 2 [points]," ending around 61.

On June 1, 2011, natural gas futures were trading near $5 per MMBtu. Just one year later, the price is hovering around $2 per MMBtu.

Weak demand hurts coal

While the declining price of natural gas has been good for some power producers - and of course, consumers - it has not been so wonderful for others, namely the coal industry.

Demand for coal has reached its lowest level on record, according to an Associated Press article published Tuesday. The article reported that coal's overall market share in the United States is expected to drop below 40% in 2012, the lowest level since 1949. Demand for natural gas, however, is expected to hit 29% in 2012, up from 20% in 2008.

The decline in demand has not been good for coal producers, whose bonds have been under pressure. Coal sector debt was "all lower" in Tuesday trading, a trader said.

Patriot Coal's 8¼% notes due 2018 were quoted wide at 38 bid, 44 offered, the trader said. That compared to previous markets around 46.

James River Coal's 7 7/8% notes due 2019 meantime were pegged at 56 bid, 57 offered, "but no action."

Another source called Alpha Natural Resources Inc.'s 6¼% notes due 2021 down nearly 2 points at 84¼ bid.

ResCap DIP loans boosted

Residential Capital LLC's term loan A-1 and term loan A-2 under its debtor-in-possession financing facility were better in trading on Tuesday as word emerged that Berkshire Hathaway is looking to buy the company's businesses, according to a source.

The term loan A-1 was ups an eighth of a point at 99 5/8 bid, par offered, and the term loan A-2 was up a quarter of a point at par bid, par 3/8 offered, the source said.

In the bonds, a trader said the 9 5/8% notes due 2015 were "up a couple" around 96.

The company is currently involved in a Chapter 11 process that is expected to result in the sale of substantially all of its assets, and has already reached an agreement to sell its legacy portfolio, consisting mainly of mortgage loans and other residual financial assets, to Ally Financial Inc. and its mortgage origination and servicing businesses to Nationstar Mortgage LLC.

In a court document, it was revealed that Berkshire is offering to be the stalking-horse bidder for either or both the mortgage businesses and loan portfolio on more beneficial terms than those offered by Ally and Nationstar.

Specifically, Berkshire is proposing to buy Residential Capital's mortgage businesses at the same roughly $2.4 billion price as Nationstar, but with a breakup fee of $24 million, compared to $72 million fee under the Nationstar agreement, and zero expense reimbursement, versus $10 million under the Nationstar plan.

Also, Berkshire would like to purchase Residential Capital's loan portfolio on substantially the same terms as the agreement with Ally, but with an increased price of $1.45 billion, compared to $1.4 billion under the Ally offer.

The loan portfolio acquisition offer by Berkshire includes a 3% breakup fee.

Residential Capital is a New York-based mortgage originator and servicer.

Sara Rosenberg contributed to this article

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