Investors react negatively to Patriot Coal bankruptcy filing; Navistar lower; CEDC steady

By Stephanie N. Rotondo

Phoenix, July 10 - It was another subdued day in the convertible bond market Tuesday, traders reported.

"By and large, it was more of a slow day," one trader said.

There was, however, action in Patriot Coal Corp. as investors reacted to the company's late Monday bankruptcy filing.

"They were all over the place," a trader said of the St. Louis-based coal producer's convertibles.

Navistar International Inc. was also on the softer side. The paper has been weakening since Friday when the company said it was making a transition from one engine technology to another in order to gain federal approvals. The scenario turned even uglier Tuesday as sector peer Cummins Inc. lowered its full-year sales forecast.

Meanwhile, Central European Distribution Corp.'s convertible debt was "holding yesterday's gains," according to a trader. The bonds had moved up in the previous session on word of an inked strategic alliance.

Patriot convertibles lower

A trader said that news of a bankruptcy filing late Monday had sent Patriot Coal's 3.25% convertible notes due 2013 down 20 points in after-market trading - and the hits kept coming on Tuesday.

The trader said that the bonds fell to a 9 to 10 context after the filing was officially announced Monday. On Tuesday, the paper drifted even lower to trade in a 5½ to 7¼ context.

"They were all over the place," said a second trader, seeing paper trade as high as 9 "for institutional size" and as low as 51/2.

The convertibles were trending toward the lower end by the end of the day.

"It was pretty wild," the trader said.

Meanwhile, the company's stock held in at 61 cents.

The St. Louis-based coal producer's debt began drifting down Monday on a news report by Bloomberg that stated the coal producer had lined up financing ahead of the entrance into Chapter 11.

In the report, Bloomberg cited "two people with knowledge of the matter" who said that the company had lined up debtor-in-possession financing via Citigroup Inc., Barclays plc and Bank of America Corp.

Well after the market closed, the report proved true: Patriot announced it had in fact filed for Chapter 11 protections and that it had secured $802 million in DIP financing.

Falling demand has hurt the company, which has lost more than $7 billion in value this year. New environmental regulations have also burdened Patriot and its peers, as consumers seek cleaner forms of energy.

The company has been working with creditors since May to come up with a restructuring plan and had hired Blackstone Group LP to facilitate negotiations. A proposal was not settled on, however.

News of the bankruptcy filing resulted in a downgrade from both Standard & Poor's and Moody's Investors Service on Tuesday. S&P dropped the company to D from CCC, while Moody's lowered the ratings to D from Caa1.

The news was also not helping the sector as a whole.

A trader said Peabody Energy Corp.'s 4.75% convertible notes due 2066 were "continuing lower," seeing the paper at 79½ on an outright basis. That gave the debt a 6¼% yield, he said.

"They're suffering a bit," he said, noting that the bonds had been in an 83 to 83½ context a week ago.

Another trader quoted the issue at 79 bid, 80 offered.

The stock was down 87 cents, or 3.73%, to $22.44.

Alpha Natural Resources Inc.'s 3.25% convertible notes due 2015, however, were trading "right in line" with where they had been, a trader reported.

"Obviously people aren't looking at that in the same light as patriot, he said, quoting the convertibles at 87¼ bid, 87 5/8 offered.

Despite the steadiness of the convertibles, the stock dropped 49 cents, or 6.11%, to $7.53.

More hits for Navistar

Navistar's 3% convertible notes due 2014 were "kind of lower," according to a trader.

He said the paper traded outright at 88 3/8 bid, 88 5/8 offered.

Another trader quoted the notes at 86¼ bid, 87¼ offered, up from an intraday low around 843/4.

"It was interesting because of how low they ultimately traded," he said. With three large holders owning "40-odd percent" of the equity - a group that includes Carl Icahn - the trader thought it strange that so many investors were moving out of the name.

"Those are reputable names," he said. It seemed odd "for someone to be selling into that with that knowledge."

The stock fell $1.72, or 7.27%, to $21.95 in Tuesday trading.

The Lisle, Ill.-based company has had a rough go of late. On Friday, the company announced that it was switching gears, so to speak, on its diesel engines. Instead of using technology that it has developed itself, it will begin using the same technology as its sector peers.

The transition is being done in an effort to gain federal environmental approvals, something that has eluded the company.

And there was more bad news Tuesday, as sector peer Cummins Inc. lowered its full-year sales forecast.

Cummins said it was expecting sales of $4.45 billion for the second quarter and added that its full-year forecast would likely be closer to 2011 levels, instead of the 10% increase that was previously expected.

Cummins' disclosure follows a similar one from Dover Corp. on Monday. That company cut its 2012 profit, pointing to Europe's economic woes.

CEDC hangs in

Central European Distribution's 3% convertible notes due 2013 held on to the previous day's gains, according to a trader.

He quoted the notes at 96¾ bid, 96 7/8 offered.

The stock, however, lost 3 cents, closing at $3.67.

The convertibles had gained 8 to 9 points on Monday following news of a strategic alliance with Russian Standard Corp. The alliance is expected to strengthen the company's balance sheet and create enhanced production, distribution and sales channels of a strong portfolio of brands throughout Central and Eastern Europe.

On Tuesday, Moody's affirmed its B3 rating on the company following the announcement.

The outlook is positive.

Mentioned in this article:

Alpha Natural Resources Inc. NYSE: ANR

Central European Distribution Corp. Nasdaq: CEDC

Navistar International Inc. NYSE: NAV

Patriot Coal Corp. NYSE: PCX

Peabody Energy Corp. NYSE: BTU

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