Patriot Coal, Verso, ATP, SuperValu move around in otherwise quiet pre-holiday session

By Paul Deckelman

New York, Aug. 31 - The distressed-debt market closed out the last week and the month of August on a quiet note on Friday, with traders reporting only a relatively small amount of activity in the bonds of familiar names of underachieving or bankrupt companies.

That was in line with an overall lack of activity in the broader high-yield market.

ATP Oil & Gas Corp.'s second-lien 2015 notes were among the more active issues, at least in relative terms. The bankrupt offshore energy operators bonds gyrated around the same lower levels they hit on Thursday, when they surrendered the all of the solid gains notched the session before that.

Also in the energy arena, Patriot Coal Corp.'s bonds were gainers on the day, even though the bankrupt coal operator reported operating and net losses for July and is now the focus of new attacks by the union representing its miners.

Verso Paper Holdings LLC's bonds were seen better, even though no fresh news was seen out about the coated-paper manufacturer.

And there was some activity - though mostly smaller-sized trades - in SuperValu Inc.'s bonds following the news that the problem-plagued supermarket operator had completed a big debt refinancing transaction.

Not much happening

Although Friday was officially a "regular" session in the fixed-income markets in the United States - the Securities Industry and Financial Markets Association ended the long-held practice of recommending an early market close ahead of the Labor Day holiday break several years ago - the reality was that by noon ET, those junk and distressed-debt traders and other market participants, who even bothered coming in for what promised to be an extremely light session, were getting ready to leave.

And they saw not much in the way of real trading going on.

ATP remains active

One of the few names seen generating any kind of activity was ATP Oil & Gas' 11 7/8% second-lien senior notes due 2015, which has been about the busiest issue in the junk and distressed precincts for most of the past two weeks.

This has been ever since the Houston-based offshore energy company sought protection from its bondholders and other creditors via a Chapter 11 filing with the U.S. Bankruptcy Court in that Texas city after the financial markets closed on the evening of Aug. 17.

After racking up heavy trading right after that event - over $75 million changing hands the first session after the filing and about $40 million per day for the rest of the week - activity remained brisk this past week, in the $20 million to $30 million area the first few days, although it slowed down to around $14 million on Thursday and for the first time was exceeded by other busy junk credits.

Friday saw the same $14 million figure, according to a market source, with over $10 million of that being round-lot dealings, but relatively few other junk credits were that busy.

The bonds were seen "sinking like a lead balloon" on Friday, a trader opined, pegging them in a 251/2-to-26½ context.

"They were one of the larger volume names today," a second trader said, "though volumes were lower today than expected - and they were being quoted down."

The bonds had moved from pre-filing levels in the high 20s up to the low-to-mid 30s immediately after the bankruptcy filing, the price affected by the changeover to flat trading, which frequently causes unusual price movements. But after a day or two in the 30s, the bonds began sinking over the next several sessions, finally stabilizing around 26 to 26½ by around the middle of this week.

They jumped to levels as high as 29 bid on Wednesday, though on no firm news. Traders suggested the catalyst for that rise might be short-covering after the bonds had been beaten down so badly, while at least one suggested that the move might have been a "relief rally" by investors glad that Hurricane Isaac apparently did not play havoc with the troubled company's Gulf of Mexico drilling operations off the coast of Louisiana when the storm blew through there at the beginning of the week.

But that gain proved to be short-lived; by the end of trading on Thursday, all of those gains had been wiped out, the bonds finishing around 261/2, and on Friday, they continued to bounce around at those same lower levels.

"The bottom line is the company is in trouble" despite any short covering "or short-term positive news from the oil Russell 2000."

Patriot gains despite loss

Also in the energy sphere, Patriot Coal's 8¼% notes due 2018 were seen having gained nearly 1 point on the day on a round-lot basis and 2¼ points overall, ending at 45¼%. Volume was over $5 million, making it one of the more active credits of the session.

The notes rose even though the St. Louis-based coal company, which filed for bankruptcy on July 9, reported both an operating loss and a net loss for July.

In its required monthly report to the U.S. Bankruptcy Court in Manhattan, Patriot said it sustained an operating loss in July of $32 million due to weaker coal prices and reduced coal demand as a result of the stagnant domestic and global economies, tougher environmental regulations and the emergence of natural gas as a cheaper alternative fuel.

Overall, the company lost $135.6 million in July, much of it coming from charges related to its bankruptcy case: $57.2 million due to restructuring costs and $41.8 million attributable to the financing related to its bankruptcy loan.

Earlier this month, the court gave the green light to an $802 million debtor-in-possession loan via Ctigroup Inc., Barclays plc and Bank of America Corp.

As if the losses weren't bad enough, Patriot came under fire on Thursday from the United Mine Workers union, which represents the company's several thousand miners; the labor group announced plans to do "whatever it takes" to protect the benefits of active workers, retirees and their families from being reduced or eliminated as part of the bankruptcy process.

Union leaders, noting Patriot's origins as a company spun off from Peabody Energy Corp., claimed that Peabody, also St. Louis-based, had deliberately set up Patriot in 2007 "to fail," transferring all of its pension and long-term retiree health care obligations to the new company in order to shield the parent. They said that Arch Coal Inc. did the same thing with Magnum Coal Co., which was eventually acquired by Patriot.

Verso seen firmer

Elsewhere, Verso's 8¾% notes due 2019 were seen having risen by 1 point, to 46½ bid.

More than $5 million of the Memphis-based coated paper company's bonds traded, about $2 million in round-lot transactions.

However, no fresh news was seen about the company.

SuperValu gains

SuperValu's 8% notes due 2016 were seen by a market source to have moved up to nearly the 91 bid level, after having finished on Thursday at 89¾ bid.

However, almost all of the trades were smaller odd-lot pieces, with no round lots seen and only a few sizable non-lot transactions.

The underperforming Eden Prairie, Minn.-based supermarket operator's bonds firmed in the aftermath of the company's announcement after the close on Thursday that it had successfully completed two previously announced debt financing transactions, totaling $2.5 billion.

The company entered into a new five-year $1.65 billion asset-based revolving credit facility, secured by its inventory, credit card receivables and certain other assets, which will bear interest at a rate of between 175 basis points and 225 basis points over Libor, depending on usage.

The company also entered into a new six-year $850 million term loan, secured by a portion of its real estate and equipment, bearing interest at a rate of 675 basis points over Libor and including a 1.25% Libor floor.

The new financing replaces SuperValu's existing s senior secured credit facilities, composed of a $1.5 billion revolver scheduled to mature in April 2015; a $574 million term loan B-2, scheduled to mature in October 2015; and a $446 million term loan B-3, scheduled to mature in April 2018.

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