Distressed debt wanes as government fails to restart; OGX bonds dip further into single digits

By Stephanie N. Rotondo

Phoenix, Oct. 7 - A political standstill in Washington, D.C., was weighing on the distressed debt market on Monday.

One trader said the entire high-yield space saw trading of less than $1 billion during the session, as lawmakers remained unable - or perhaps unwilling - to agree on a budget, much less how to deal with the approaching debt-ceiling limit.

The federal government went into a partial shutdown early last week. Coming up, the debt ceiling is expected to be reached by Oct. 17, barring some sort of agreement.

But of the day's dealings, OGX Petroleo e Gas Participacoes SA saw its debt slide further into the single digits on Monday as Reuters reported that the company was meeting with creditors in an effort to avoid a bankruptcy filing. However, the article also stated that a debtor-in-possession loan was being sought in case talks fell through.

Among domestic names, Navistar International Inc.'s paper dipped slightly as the company planned a sale of convertible notes, as well as a draw on a credit facility. But the market as a whole didn't take the news well and Standard & Poor's cut its rating on the heavy-duty truck manufacturer.

OGX closing in on zero

A trader said OGX's debt was the day's biggest loser, as both the 2018 and 2022 maturities dropped 3 points.

He placed the 8½% and 8 3/8% notes around 6, though he said he had heard the bonds were inching back up toward the end of the day to end in a 7 to 8 context.

Another trader said the bonds "keep slumping," pegging the notes around 6.

That compared to an 8-9 trading range on Friday, he said.

The declines came as Reuters reported that the Brazilian oil producer was meeting with creditors in New York on Monday to attempt to avoid a Chapter 11 filing. However, the company was also said to be seeking a DIP loan just in case those talks failed.

Goldman Sachs Group Inc., Barclays plc and Credit Suisse Group are said to be arranging the DIP financing.

Getting the loan could prove to be a debacle, however, as DIP lenders in Brazil are not provided the same protections as those in the United States.

OGX - the company majority-owned by billionaire Eike Batista - missed a $44.5 million coupon on the 2022 paper on Oct. 1. The company has 30 days to pay the interest, or find itself in default.

However, OGX has said it will not pay the funds during the grace period. Should a bankruptcy filing emerge, it will be a record-holding corporate debt default in all of Latin America.

OGX has about $3.6 billion of bond debt.

As previously reported, the company has retained Lazard and Blackstone Group LP as advisors on a restructuring.

Navistar's rocky road

Navistar's 8¼% notes due 2021 were deemed a point lower on Monday, as a trader placed the bonds around 1011/2.

But another trader said the debt was about unchanged around 101½ bid, 101¾ offered.

"It's been trading with a 101-handle, so it wasn't a real notable move," the second trader said.

The Lisle, Ill.-based company said Monday that it was planning a private sale of $200 million convertible due 2018. The company said it would use proceeds from the sale - along with $270 million of credit facility borrowings - for general corporate purposes, which could include capital expenditures and a partial redemption of its convertible notes coming due in 2014.

Though the bonds were little moved by the announcement of the offering, S&P was not thrilled with the news and cut Navistar's long-term corporate credit rating to CCC+ from B-.

Fitch Ratings, however, affirmed its ratings on the company.

Gimme Credit LLC analyst Vicki Bryan had little positive to say on the matter.

"Interestingly, the interest rate Navistar will get today [on the planned new issue] could be much more expensive than it would get by waiting another year to refinance those notes when they mature next October after operations can turn around as management has projected, so this also seems to signal less confidence in that outcome," she wrote in an afternoon report published Monday.

"Indeed, it's troubling that Navistar is borrowing now, and so substantially, just weeks ahead of the Oct. 31st end of the critically important fourth quarter - a quarter which typically is the strongest of the year for cash generation."

Bryan went on to say that the new deal could mean that cash burn has been enough that the company has fallen short of its $1.1 billion projection last quarter.

She also noted that the new convertible bonds would be unsecured and that it was possible secured debt would not be fully covered in a bankruptcy situation.

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