ATP debt rallies on new financing news; foreign coal demand may rise, sector response is mixed

By Stephanie N. Rotondo and Paul Deckelman

Phoenix, June 20 - Distressed debt was "strong like a bull," a trader said Wednesday.

However, "it could be short-covering in some of this crappier stuff," he said.

ATP Oil & Gas Corp. was the nom du jour. The bonds rallied during the session on news the company had improved its liquidity position. The debt ended the day higher, but down from the session's highs.

Meanwhile, the coal sector was mixed on the day, though trending toward the higher side. The movement came as new reports indicated that foreign coal demand could soon increase. That would be a good thing for names like Patriot Coal Corp. and Alpha Natural Resources Inc., which have recently been on the decline due to a decrease in coal usage in the United States.

ATP gains on financing

ATP Oil & Gas' 11 7/8% notes due 2015 got a boost in midweek trading following the announcement that the company had raised $35 million via a private placement of convertible debt.

One trader deemed the notes up over a point, trading around 49. Another trader said paper had rallied up as high as 50, before settling back in around the 49 level.

On Wednesday, the Houston-based oil and gas exploration company said it had closed a $35 million private placement of 8% convertible notes due 2013.

Proceeds will be used for working capital purposes.

A trader noted that while the financing was not huge, it could provide enough cash to get the company through the next three to six months.

According to ATP's most recent 10-Q quarterly filing with the Securities and Exchange Commission, covering the period ended March 31, ATP - unlike many other high-yield issuers - does not have a revolving credit facility in place that it can draw on to meet such needs. Its $2.115 billion of total debt at the end of the quarter consisted of the nearly $1.5 billion of bonds, $353 million of term loan debt and $303 million of debt under a separate term loan facility secured by its ATP Titan undersea drilling rig vessel and certain other infrastructure assets.

It said in the 10-Q that as of March 31, it had a working capital deficit of $267.9 million; in order to "preserve [its] development momentum in such a negative working capital environment," it had increased its term loans - most recently in March, with a $155 million expansion - issued convertible perpetual preferred stock, granted net profits interests in some of its wells to certain of its vendors, sold such NPIs and dollar-denominated overriding royalty interests in its properties to its investors, and entered into prepaid swaps against future production that provided cash proceeds to ATP at closing. It engaged in such short-term cash-management tactics in 2011 and has continued such measures so far this year.

A high-yield market source said that he had heard no rumblings at all that ATP might be in the market for a larger or more permanent financing transaction, such as another junk bond deal or term loan tranche, or a revolver, reasoning that the $35 million it generated from the convertible deal should be enough to tide the company over and meet its needs in the near-term.

A trader said "let's face it - if they can stick it out" with such short-term measures until the company starts generating sufficient revenues from one or more of its Gulf of Mexico undersea wells to meet its working capital needs, "oil [prices] are going to come back, right? Sooner or later."

The prospect of equity dilution through the possible conversion of the 8% note or the issuance of up to nearly 4 million shares through exercise of the warrant was not welcomed on Wall Street, where ATP's Nasdaq-traded shares traded down as much as 4.4% on an intra-day basis while investors digested the company's announcement. Those shares came off their lows, though, to go home quoted down 4 cents on the day, or 0.9%, at $4.42, on about-normal volume of 1.7 million shares.

Coal sector could get reprieve

The coal industry might soon be making a comeback, if the foreign demand for coal grows, according to a report issued by the Paragon Report.

"The emergence of natural gas as a cheaper energy alternative in the U.S. has been a major problem for coal investors in 2012," Paragon said in a statement released Wednesday. "Coal stocks may finally be on the upswing as foreign demand for coal remains strong."

The report went on to say that China has recently approved $23 billion in steel projects. Forging steel requires quite a lot of coal.

Additionally, the Centre for Monitoring Indian Economy said in its monthly report expects that the country's coal imports would increase by 28.3% in 2012 alone.

"Domestic coal production is not sufficient to meet the rising demand from power, cement and steel industries. Therefore, the country relies on imported coal," CMIE said in its report.

On that news, there were signs of improvement in the coal sector.

One trader said Arch Coal Inc.'s 7% notes due 2019 were a point higher at 853/4. However, he noted that the 7¼% notes due 2021 were down 1½ points at 821/2.

The trader also deemed Patriot Coal's 8¼% notes due 2018 "basically unchanged" at 383/4, while James River Coal Corp.'s 7 7/8% notes due 2019 slipped to 543/4.

However, another market source called Patriot's debt up over a point at 84¼ bid, while Alpha Natural Resources' 6¼% notes due 2021 rose over 2 points to 86¾ bid.

Broad market trends higher

Other distressed names were also following the positive market trend during the midweek session.

A trader saw Edison International Inc.'s Edison Mission Energy-linked 7% notes due 2017 gaining a deuce, closing at 573/4.

Another trader said AMR Corp.'s benchmark 6¼% convertible notes due 2014 were stronger again, trading around 60.

NewPage Corp.'s 11 3/8% first-lien notes due 2014 were meantime inching upward to levels around 62.

And, the trader said Dynegy Holdings LLC's 8 3/8% notes due 2016 "continued to be well bid for," seeing paper trade around 65.

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