Distressed debt supply remains low; commodity names fall in line with market; Dynegy ends firm

By Stephanie N. Rotondo

Phoenix, Sept. 25 - The distressed bond market was "heavy towards the end of the day," a trader reported Tuesday.

"The general tone seems to be a little bit softer," said another trader, who opined that most "on-the-run" names were down a couple points from last week's highs.

The market was not helped by an over 100-point decline in the equities, traders also remarked.

Despite the weaker tone, new issues continued to crank out. While even the new issue realm was on the lower side, investors remained focused there, taking attention from straight distressed names.

"There's not a tremendous amount of product," a trader said. "People aren't in the mode of selling things."

Generally, commodities like oil and gas, steel and coal were all mostly lower on the day. Alpha Natural Resources Inc. and ATP Oil & Gas Corp. were posting losses, though on no credit-specific news.

The decline in commodity names was in line with a dip in oil prices. U.S. crude oil dropped $1.09, or 1.19 to $90.84 per barrel.

A bubble to burst

The high-yield bond market has been raging of late, especially in the realm of new issues. But that has meant that investors are not too focused on distressed issues, resulting in a lack of activity.

One trader said a lack of supply in that arena was partly to blame.

"So many companies have been able to refinance very costly debt at low rates," he said. They have also been able to extend maturities. That combined with the lowered interest expense gives the companies a chance to get cash flows back up to snuff.

While this has been good for the broader market and certainly good for many organizations bottom lines, it might also be creating a bubble, he said.

"If our market corrects, there are so many things that are trading well through historical yields," he said. New money inflows keep rolling in, keeping prices and yields at these higher levels. If there is a correction, one has to ask: Will all that new money leave the market?

"The expectations are that we are setting up for some kind of bubble," the trader said. The question is what the catalyst will be to burst said bubble and how well have companies been able to position themselves to deal with it.

"It's hard to imagine an uptick in the default rate," he noted. Especially in current market conditions, when companies that might not otherwise have access to capital can actually get it.

Commodities getting cheaper

A trader said that "coal was again slipping," adding that "steel was lumped in with them."

He saw AK Steel Corp.'s 7 5/8% notes due 2020 losing 1¾ points to 891/4.

Another market source pegged that issue at 89¼ bid, down 1¾ points.

Among oil and gas explorers, ATP Oil & Gas' 11 7/8% notes due 2015 were quoted at 22 bid, 23 offered by one trader. Another trader echoed that level, but called the paper stronger on the day.

In coal names, Alpha Natural Resources' 6¼% notes due 2021 dipped over 1½ points, a trader said, to end around 86 5/8. Another source saw the issue at 86½ bid, down 1½ points.

But as was the case Monday, Patriot Coal Corp.'s 8¼% notes due 2018 continued to inch upward.

One trader gave a 51½ bid, 52½ offered market for the notes. Another source placed the notes at 51 bid, up half a point.

The first trader said that he had heard the company was considering restructuring itself around "non-union mines that don't have as much legacy costs," given that pensions for workers are obligated by mine, not "cross-guaranteed." Instead, the company could opt to place the pensions at the holdco, which would allow the mines themselves to generate more revenues.

Dynegy conversion coming up

A trader saw Dynegy Holdings LLC's 8 3/8% notes due 2016 trading around 58 on Tuesday.

He noted that the bankrupt Houston-based power producer is getting ready to convert the bonds into equity next week. The conversion is part of the company's reorganization plan, which was confirmed Sept. 5.

Broad market declines

Elsewhere in the distressed space, Clear Channel Communications Inc.'s 10¾% and 11% notes due 2016 continued to fall, losing "another point" to end in a 70-71 context, according to a trader.

The trader also saw Momentive Performance Materials Inc.'s 9% notes due 2021 "continuing to give back." He called the issue down a point around 73.

Caesars Entertainment Corp.'s 10% notes due 2018 were likewise down "at least a point" to 66 bid, 67 offered.

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