Radian rises as company plans convertibles; CEDC shares plunge; Hostess sets meeting

By Paul Deckelman

New York, Feb. 25 - Radian Corp.'s formerly beleaguered notes were seen trading in the mid- to upper 90s on Monday, even as the mortgage insurance company announced plans to sell new convertible debt to beef up its balance sheet and improve the liquidity of its main business.

J.C. Penney Co. Inc.'s bonds continued to trade at a steep discount to par, with investors and analysts expecting the retailer to report sizable fourth-quarter losses when it releases its latest earnings data on Wednesday afternoon.

In the convertibles market, Central European Distribution Corp. was mostly quiet, although a tiny piece traded during the session in the low to mid-20s - well down from recent levels above 30 - as shares of the Polish vodka maker and beverage distributor skidded by more than 50%.

That plunge in the shares - and the weakness in the converts - was driven by growing speculation that CEDC may not be able to pay off the maturity on its 3% convertibles looming March 15 and that it may have to file for Chapter 11 bankruptcy protection from creditors.

The company effectively confirmed that speculation after the market close with an SEC filing and the announcement of an exchange offer aimed at taking out all of those converts as well as its existing 2016 junk bonds as part of an overall reorganization, which will likely take place via Chapter 11.

In the bank debt market, Hostess Brands set a bank meeting in New York for Wednesday to launch a $510 million credit facility, the proceeds of which would be used to fund the purchase of iconic baked snack food brands, such as Twinkies and Ding Dongs, from the bankrupt bakery products company.

Radian on the rise

A trader said that Radian's 5 3/8% notes due 2015 have moved up to around the 96-98 level, calling that up a couple of points.

He said that the Philadelphia-based mortgage insurance company "is a real thin name, so you don't see much trading in it."

However, he noted that at the end of the day, the company announced plans to sell $200 million of new convertible notes, plus a $30 million greenshoe, to improve its finances. Proceeds from that offering will be used to fund working capital requirements and for general corporate purposes, including additional capital support for the company's mortgage insurance business.

The trader said that Radian, along with sector peers MGIC and MBIA Inc., "were at death's door a year and a half ago, all of them," but have since improved. The Radian 5 3/8s, for instance, were trading around the 70 level about a year ago and dipped as low as 60 bid last spring, before coming off those lows to eventually make it back to the 90s.

"So there was some activity in that name," he said, adding that while there was trading in the company's bonds and shares, it was "mainly the converts." The 3% convertible notes due 2017 saw $7 million trade on Monday.

However, sector peer Ambac Financial Group Inc. continues to have its troubles. The New York-based mortgage insurer's 6.15% bonds due 2037 were quoted by a market source down more than 2 points on the day, to close at a deeply distressed 10¾ bid.

Penney trades pre-earnings

A trader said that the bonds of J.C. Penney continued to trade at a sizable discount to par, even as investors anticipated the Plano, Texas-based department store retailer's quarterly earnings release on Wednesday.

He saw its 6 3/8% bonds due 2036 trading in the high 70s, saying that the bonds moved between 78 and 80 bid, with most of the activity around 781/2-79 on volume of $3 million to $5 million.

He noted, "They actually moved up from last week," having gained about 1½ points.

Penney's 5¾% notes due 2018 were being quoted in an 89-90 context, but the trader said less than $1 million changed hands.

There was, he said, "a little more activity" in the company's 5.65% notes due 2020, pegging the bonds around the 85 level for most of its trades. He estimated the volume around $5 million to $6 million.

"They were in that range, plus or minus a point."

Penney is scheduled to release its fourth-quarter and full-2012 year results as the market is closing on Wednesday afternoon. Wall Street is expecting a loss of about 20 to 22 cents per share, versus a 59 cents per share profit a year ago.

The trader noted a big article in Monday's Wall Street Journal detailing CEO Ron Johnson's struggles to overhaul the aging franchise and make it more inviting to customers/

In the process, Johnson, the well-respected former retailing chief for tech trendsetter Apple Inc., did away with special sales promotions, coupons and clearance racks, all familiar fixtures for Penney's shoppers and saw sales plummet.

Johnson was forced to backtrack on some of the more sweeping revisions to the traditional Penney's marketing strategy.

Alcatel-Lucent not active

Elsewhere, a trader said that Alcatel-Lucent's 6.45% bonds due 2029 were going home around a 79-80 context.

He said there "wasn't that much activity" in the French electronics and telecommunications equipment maker's paper.

He pointed out that while $5 million to $10 million of the '29s have traded "over the last week or so, they've just had a couple million traded today, pretty much unchanged."

Another trader saw those bonds going home at 78½ bid, calling them up 1¼ points.

CEDC shares slump

In the convertibles market, Central European Distribution's 3% notes scheduled to come due less than three weeks from today, on March 15, were mostly quiet on Monday, but did trade in an odd lot at 23 and were seen 24 bid, 26 offered at the end of the session. That represented a retracement of gains that had lifted those converts as high as 30 bid last week.

The convertibles were not trading actively. There were no buyers for the paper, a trader said.

The underlying Nasdaq-traded CEDC shares plunged 77 cents, or 55.40%, to close at 62 cents. Volume of 14.2 million shares was more than 15 times the norm.

One trader said that he didn't see any change in the fortunes of CEDC from Friday, and he thought the stock move was a delayed reaction.

A second trader said that he hadn't watched the name "since 20 points ago," having written CEDC off.

Meanwhile, the nosedive in CEDC shares put them at their lowest levels in 12 years.

Speculation was growing that the company would not be able to pay out the upcoming maturity and that the prospects in bankruptcy were not good.

One trader pointed out that it was already too late for a pre-packaged bankruptcy filing since a 20-day window had passed.

"The bonds [are] in the 20s, the stock is at 65 cents; I mean anything could happen, but it's not likely going to be good for the converts," a trader said.

That speculation about the company's perceived inability to make the upcoming maturity payments on the $257.9 million of outstanding 2013 convertible notes was confirmed after the financial markets had closed, when the Mount Laurel, N.J.-based maker and importer of Russian and Polish vodka filed an 8-K report with the Securities and Exchange Commission in which it disclosed that as of Feb. 13, it had just $59 million of available cash on hand and $17.7 million of availability under its credit facilities.

Of the facilities, $9.9. million of overdraft availability is scheduled to terminate on March 7, just days before the converts must be paid back.

The company also noted that it has a $43.5 million interest payment on its dollar- and euro-denominated senior secured notes due 2016 coming up on June 1.

CEDC said in the filing: "Our current cash on hand, estimated cash from operations and available credit facilities, will not be sufficient to make the repayment on the [3% notes]."

Accordingly, the company will conduct a "restructuring transaction," which was announced early Monday evening.

The company is offering to give the convertible noteholders 8.86 shares of new common stock per $1,000 principal amount tendered under the offer. It also seeks to take out the roughly $957 million-equivalent of senior secured notes due 2016. $380 million of 9 1/8% dollar-denominated notes and the remainder in 8 7/8% euro-denominated notes, offering those holders shares of new stock and $500 million of new 6½% senior secured notes due 2020.

Convertible and secured noteholders will also be asked to approve a back-up Chapter 11 plan of reorganization. The company set a March 22 tender offer deadline.

The company also noted in its announcement that a committee of holders of the 2016 senior secured notes, along with Roust Trading Ltd., a major CEDC investor, have proposed an alternative to the company's exchange offers.

CEDC said that this alternative proposal has not been formally presented to its board of directors.

Hostess bank meeting set

In the bank debt market, Hostess Brands set a bank meeting in New York for Wednesday to launch a $510 million credit facility that includes a $60 million ABL revolver and a $450 million seven-year first-lien covenant-light term loan, according to a market source, who said that price talk is not yet available.

Credit Suisse Securities (USA) LLC and UBS Securities LLC are leading the deal.

Proceeds will be used to fund the purchase of the baked snack foods business by Apollo Global Management LLC and Metropoulos & Co. from Hostess Brands Inc. for $410 million.

Commitments are due March 8, the source said, and closing on the acquisition is expected by the end of April, subject to approval by the United States Bankruptcy Court and customary conditions.

Hostess is a fresh-baked sweet goods company.

Singing the blues

Overall, a trader at a distressed-debt shop noted that the VIX [equity volatility index] is up 5 points, 10-year Treasuries are down almost a full point, and it's all headline risk, with the sequester and the Italian elections."

He said that investors were pursuing "risk-off trades, and people are kind of hedging themselves."

That having been said, however, he added hat nothing he was seeing stood out from the pack.

"There's been [junk mutual fund and exchange-traded fund] outflows for the past three weeks. [It's] kind of continuing on that trend and the headlines are very weak. People are just continuing to sell. All of the market indicators - from stocks to bonds to VIX - they're all down. So it's just kind of following the same path."

Rebecca Melvin and Sara Rosenberg contributed to this review

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