Government turmoil wreaks havoc on distressed debt; TXU yet to reach deal with creditors

By Stephanie N. Rotondo

Phoenix, Oct. 15 - Trading in distressed debt was muted Tuesday as the federal government persisted in its back and forth on a debt-ceiling deal.

"It's very quiet," a trader said. "Everybody is just waiting for somebody to do something."

Early in the session, the stock market had inched up slightly on hopes that a deal was soon to come. By late afternoon, those hopes had been dashed and the equities dropped significantly.

However, after the bell, it was reported that the House intended to vote on a plan proposed by the GOP. It was unclear whether that plan would be able to pass the Senate, which had proposed its own bipartisan bill.

Also after the bell, Fitch Ratings said it was placing the U.S. credit rating on negative watch.

The government is expected to reach its borrowing capacity by Thursday unless a deal can be reached.

Of distressed dealings, Energy Future Holdings Corp.'s bonds were not much moved as the company said that talks with creditors on a restructuring plan had stalled. The company said three plans had been submitted by creditors, though it did not say why the talks had proven unfruitful.

Meanwhile, J.C. Penney Co. Inc. was taking a hit as the rumor mill began circulating a series of claims, such as that the company had hired a bankruptcy attorney. The company later denied the claim, but the bonds - and the stock - were softer nonetheless.

And, MolyCorp's bonds were seen slipping after the company said it expected to fall short of cash in the third quarter.

No deal yet for TXU

Negotiations with creditors on a restructuring plan stalled out, Energy Future Holdings said in a regulatory filing on Tuesday.

However, one trader said he saw "no real reaction" in the bonds.

He pegged the 10% notes due 2020 at 106 bid, 106¼ offered.

Another trader called that issue up a tad at 1061/4. Another trader echoed that sentiment, seeing the issue hit a high of 1061/2.

Energy Future, or TXU as it is more commonly referred to, said in an 8-K filed on Tuesday that while it was continuing to talk with creditors of its Texas Competitive Electric Holdings Co. LLC unit, talks with creditors of its Energy Future Intermediate Holdings Co. LLC unit had failed.

The parent company has been trying to put together a restructuring plan for one or both of the subsidiaries, as a $270 million coupon payment due Nov. 1 looms large.

Three proposals had been submitted, the company said, though it did not specify which creditors had proposed the plans. The Wall Street Journal reported that creditor Fidelity Investments had been the author of one plan, while the company said that creditors of both Texas Competitive and Energy Future Intermediate had turned in plans.

Prospect News had previously reported that Fidelity was working on a proposal.

J.C. Penney rumors circulate

The rumor mill was abuzz with J.C. Penney chatter on Tuesday, which a trader said was weighing on the company's debt and equity.

"The stock was getting clobbered," one bond trader noted. He said the rumors began popping up as players tried to find out why the equity had hit a 30-year low.

The stock (NYSE: JCP) fell 70 cents, or 8.89%, to $7.17.

As for the bonds, the trader said the 5.65% notes due 2020 fell to around 71, which compared to previous levels around 73.

One rumor circulating was that the Plano, Texas-based retailer had hired a bankruptcy attorney. The company later denied that claim.

Another rumor was that one of the rating agencies was planning a downgrade.

There was also talk that the company had hired lawyers to deal with recent shareholder lawsuits pertaining to its recent $800 million stock sale.

What was verifiably true was that JPMorgan analysts put out a report on Tuesday that was not altogether favorable to the struggling retailer.

Analysts Matthew Boss, Anne McCormick and Esteban Gomez said that while they believed management had refocused on its core strengths and on its long-term viability, "we left HQ without a clear sense of timing around a top-line inflection, which remains key to the turnaround."

The analysts also stated that the recent capital raise provided a "backbone" for the company to work on its turnaround, but that the current amount of cash on hand was "far from infinite," which could cause the company to take more aggressive measures in the coming year.

MolyCorp weakens

MolyCorp's 10% notes due 2020 were "down a couple points," a trader said Tuesday.

He placed the debt at 98½ bid, 99 offered, which compared to levels around 101 previously.

The mining company said during the session that it was running short of cash, despite a $414 million stock offering in January. Those funds were expected to continue funding operations through the year.

But as those funds have started to deplete, the company said it is planning a $200 million stock offering to stay open.

As of Sept. 30, the company had about $160 million in cash.

MolyCorp blamed the shortfall in part on delays in getting its Mountain Pass, Calif., facility up to production targets.

OSG bonds pop

Overseas Shipholding Group Inc.'s 8 1/8% notes due 2018 jumped 4 points to 88 after the company put out its monthly operating report, according to a trader.

For August, the New York-based bankrupt shipping company said it had operating income of $5.6 million on shipping revenues of $77.75 million. Those figures compared to income of $6.5 million in July on revenues of $77.91 million.

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