Coal sector retreats following Peabody earnings and global supply warnings; PDVSA bonds weaken

By Stephanie N. Rotondo

Phoenix, July 24 - Distressed debt remained "heavy" in line with the broader markets, a trader said Tuesday.

The coal sector - represented by Patriot Coal Corp. and Alpha Natural Resources Inc. - was getting dragged down after Peabody Energy Corp. reported weak second-quarter results. On top of that, there continued to be chatter that weak demand for coal would result in further production cuts, if not layoffs and possible bankruptcies.

Meanwhile, RadioShack Corp. paper was trading ahead of the company's earnings release on Wednesday. Though the numbers are not expected to be extraordinary, the bonds were holding their ground.

Coal feeling the burn

Coal names were under pressure Tuesday following the release of Peabody Energy's second-quarter results.

For the quarter, the St. Louis-based company reported net income of $204.7 million, or 75 cents per share. That compared to a profit of $284.8 million, or $1.05 per share, the year before.

Revenues gained a bit to $2 billion.

The company blamed the weaker profits on declining demand and the low price of natural gas - something that the industry as a whole has had to reckon with.

With no sign of demand improving, or of natural gas prices rising to that of coal prices, investors pushed down the sector's debt.

One trader saw Alpha Natural Resources' 6% notes due 2019 falling 1½ points to 851/2, while Patriot Coal's 8¼% notes due 2018 dipped over a point to 473/4.

Patriot's debt had been steadily climbing higher.

A second market source placed Patriot's notes at 49 bid, down a point.

At a third desk, a trader said Patriot's bonds dropped to "48-ish." The trader noted that the company had filed an 8-K on Tuesday - a lender presentation slide indicating the company's projected 13-week cash flow - that "looked pretty good to me."

Of the 13 weeks forecast, nine of them were cash flow negative, though underlying liquidity improved.

Yet another trader called Patriot's debt "down a couple points" at 47½ and Alpha Natural's 6% notes a point weaker at 851/2.

"Both were probably dragged down by Peabody earnings," he said.

On top of Peabody's earnings release - and a subsequent rating cut - a Reuters article out Tuesday stated that global output of coal was expected to decline, due to cheaper alternative fuels, weak demand and cost and currency issues.

The article noted that there is currently a surplus of coal in the market. It is expected that the current supply will decline by 2013, but that the problem facing the industry currently will remain.

Another issue is the cost of coal per tonne. The price of the commodity in the U.S. is a bit more volatile than other markets, where prices have hung around the $85 mark. The problem is that at that price, it is below the costs associated with just getting the fuel out of the ground.

PDVSA active, but weaker

In other energy names, Petroleos de Venezuela SA saw its bonds trading actively, as per usual, but on the softer side.

A trader saw the 8½% notes due 2017 falling nearly a point to 81 7/8, on about $28 million traded.

Concerns about Hugo Chavez's rule in Venezuela have caused some to worry about the state-owned oil company's future. The government has essentially based its entire economy on the business.

Some concerns, however, might have been alleviated Friday, when the country released new currency rules that would allow PDVSA to convert U.S. dollars to bolivars at a better rate than the "official" rate.

The rules would allow PDVSA and other state-run companies to convert 5% of their dollar income from exports to bolivars at 5.3%. That compares to the official rate of 4.3%.

RadioShack set to report

RadioShack is set to report its second-quarter results on Wednesday right after the market opens. Ahead of the release, a trader said bonds were on the active side.

He pegged the 6¾% notes due 2019 around 75, which was about unchanged.

According to FactSet, analysts are expecting earnings of 3 cents per share. However, there is some concern about the Fort Worth-based electronics retailer's business model and whether it can survive in the current climate.

Among other retailers, Supervalu Inc.'s 8% notes due 2031 were "still facing," a trader said, seeing the bonds fall nearly 2 points to 55 1/4.

More declines for distressed debt

In the rest of the distressed sphere, Eastman Kodak Co.'s 7¼% notes due 2013 fell to around 17, while the 9¾% second-lien notes due 2018 held in at 70 bid, 70½ offered.

AMR Corp.'s benchmark 6¼% notes due 2014 were also down, closing around 671/2.

NewPage Corp.'s 11 3/8% first-lien notes due 2014 were also trading at 671/2, according to a trader, which was a tad lower day over day.

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