J.C. Penney, Caesars, Connacher bonds trade around, but OSG, Nokia activity dwindles

By Paul Deckelman

New York, Aug. 28 - Distressed-debt traders said that their market was generally featureless on Wednesday, with even some recently busy names seen tapering off.

For instance, volume dwindled in Overseas Shipholding Group Inc.'s paper, which had been in the spotlight over the previous two sessions on investor worries about the possibility that the bankrupt tanker operator could owe the Internal Revenue Service as much as $463 million in back taxes, interest and penalties.

Volume also dried up in Nokia Corp. paper, which had been among the most active issues on Tuesday after a Deutsche Bank analyst put out bearish comments on the Finland-based wireless phone manufacturer.

However, J.C. Penney Co. Inc.'s bonds generated respectable volume, though with little movement, even as its shares fell in the wake of top shareholder Pershing Square Capital Management liquidating its nearly 18% stake in the troubled retailer at a big loss from what it originally paid for that stock.

There was also a fair amount of activity in Caesars Entertainment Corp. bonds.

And Canadian oil shale producer Connacher Oil & Gas Ltd.'s normally little-traded bonds saw some volume, although there was no fresh news seen out about the company.

In the bank-debt market, Texas Competitive Electric Holdings Co.'s extended term loan lost ground after Moody's Investors Service came out with some comments on its parent company's potential restructuring and downgraded one of the parent's other subsidiaries.

A slow session

A trader in distressed bonds said that he had not seen very much going on, owing to the overall slowdown in the larger junk bond market during the run-up to the looming Labor Day holiday weekend in the United States, traditionally one of the market's slowest times of the year.

He said that even names which had been busy earlier in the week were doing little or nothing.

For instance, he said that Overseas Shipholding Group's 8% notes due 2018 were about unchanged, trading between 87½ and 88½ bid.

"I didn't see any real volume in it," he noted.

At another desk, a trader quoted the bankrupt New York-based tanker operator's bonds as up perhaps ½ point, but with only about $1 million of the bonds having changed hands.

On Monday, those bonds were seen having lost 2 points, from an 89-90 beginning, on volume of more than $6 million traded, and the slippage continued Tuesday, when they were down another ½ point on over $4 million of volume.

The paper got pounded as the company said that it is now in a position to begin negotiating with the IRS after completing a review and restatement of its financial statements for the past 12 years.

"The company believes, based on its analysis and its interactions with the IRS to date, that the actual amount of tax that it ultimately will be required to pay to the IRS in respect of the potential deemed dividends and other adjustments discussed above will be significant and could be as high as $460 million, or potentially higher, for all periods ending on or before December 31, 2012, not taking in account any potential penalties but including interest," the company wrote in a form 10-K filed Aug. 26 with the Securities and Exchange Commission.

However, the company says it "has several defenses available to mitigate its liability and intends to assert those defenses vigorously."

Nokia notes little moved

Another formerly busy credit was Nokia's 5 3/8% notes due 2019, with a market source quoting the bonds off by ½ point at 95¼ bid, on volume of just $1 million.

On Tuesday, more than $18 million of the bonds had traded, including over $12 million in round-lot trade, and the company's shares fell, after Deutsche Bank analyst Kai Korschelt put out a negative research note on the Finland-based wireless phone manufacturer. He cautioned that Nokia's main profit driver, its Nokia Solutions and Networks division, could see declining revenues and profit margins going forward, especially due to a slowing of sales in Asia and limited growth prospects in more mature markets, such as the industrialized countries.

He warned that if the trend were not reversed, Nokia was likely to burn through its cash reserves, currently at €3.6 billion but on pace to decline to less than €1 billion by the end of 2014.

The analyst said that the division might have to be restructured - which could cost the company as much as €600 million.

Caesars seen busy

Among the issues that were seen trading around, Caesars Entertainment's 10% notes due 2018 were seen by a trader to be unchanged at 58 bid, with over $12 million having traded.

The Las Vegas-based gaming giant's 11¼% notes due 2017 were likewise unchanged at 102¾ bid, on volume of more than $5 million.

Its NYSE-traded shares gained 95 cents or 4.53%, to end at $20.63, investors apparently heartened by the Tuesday announcement that the city of Boston had reached an agreement on a proposed casino facility at the city's Suffolk Downs horse racing track. Final approval has to come from Massachusetts state gaming regulators.

Penney bonds mixed

J.C. Penney's 5.65% notes due 2020 were seen by a trader to have finished about unchanged on the day at 76 1/8 bid, with over $7 million traded.

A second trader agreed that there was "not much movement" in the issue, quoting it trading in a 75¾ to 76¾ context.

The underperforming Plano, Texas-based department store chain operator's 7.95% notes due 2017 finished at 87 bid, 87¼ offered, about unchanged on the day. Over $2 million of the bonds had traded.

Its 7.40% notes due 2037 actually gained 1½ points, ending at 69¼ bid, but on volume of only $1 million.

The company's NYSE-traded shares fell by 41 cents of 3.11% to $12.76 on volume of 30.9 million - more than twice the norm.

Those bond and stock movements followed the disclosure that the company's formerly largest shareholder Pershing Square Capital Management - had lost nearly half of its more than $900 million investment in the company by the time it cashed out earlier this week.

The hedge fund - controlled by billionaire activist investor William Ackman - sold its entire 39.1 million stake in the company, or 18%, following a dispute between Ackman and other members of the company's board on efforts to hire a new chief executive officer. That caused Ackman to step down from the board earlier this month.

A filing with the Securities and Exchange Commission disclosed that Pershing Square had sold all of its shares to underwriter Citigroup for $12.60 per share, or $492 million total.

That sale price was a little more than half of the $25 per share, or $903 million, that Ackman had paid when his fund bought the stock in 2010.

Citi offered to re-sell the stock to other hedge funds for $12.90 per share.

Connacher trades around

While credits like Caesars and Penney are usually found at or near the top of volume lists in the distressed and/or/underperforming sector, the same cannot normally be said for Calgary, Alta.- based oil-sands shale producer Connacher Oil & Gas.

But those normally little-traded bonds saw some decent volume Wednesday, despite a lack of fresh news about the company.

The company's 8½% notes due 2019 were seen going home at around 71 7/32 bid, with over $5 million of the bonds having changed hands.

On Tuesday, they had been quoted at 70¼ bid going home.

Downgrade hits TXU unit loan

In the bank debt market, Texas Competitive Electric Holdings Co.'s extended term loan was seen a bit lower in trading on Wednesday as Moody's Investors Service came out with some comments on its parent company's potential restructuring.

The extended term loan softened to 67½ bid, 68 offered from 67 5/8 bid, 68 1/8 offered during the quiet trading session, according to a market source.

Earlier in the day, Moody's announced that it had downgraded the corporate family rating for Energy Future Intermediate Holding LLC (EFIH) to Caa1 from B3.

The ratings agency said that it sees "an increasing likelihood that EFIH will be affected by the restructuring contagion at Energy Future Competitive Holdings Co. LLC, despite the attempts to disentangle the legal entities."

Jim Hempstead, a Moody's associate managing director, went on to caution that "as a result, and based on recent company disclosures, we now think EFIH and its ultimate parent holding company, Energy Future Holdings Corp, will likely be included in any bankruptcy restructuring events that could be announced as early as the next quarter."

Energy Future Competitive Holdings, the parent company of Texas Competitive, has been surrounded by chatter of a potential bankruptcy filing for months.

Texas Competitive Electric, its parent Energy Future Competitive Holdings and Energy Future Intermediate Holding are all subsidiaries of Energy Future Holdings Corp., the Dallas-based electric utility operator and power generating company formerly known as TXU Corp.

Distressed dries up

Overall, a high yield trader said of the distressed-debt sphere that "I don't know where the value is any more - that's the problem."

He said that at his shop, "we have people looking for value and putting out low bids - but it's hard to say because there are not that many offerings."

He continued that "there's just very little going on in that space - I don't even see much going on in casino-land either."

He said that "the brokers' brokers, who normally send out five or six pages [of bids or offerings wanted] on distressed stuff, they're sending out maybe two [pages] and they're all smaller pieces."

He acknowledged that even though prices in the junk market in general, and the stressed or distressed segment of it as well, have come in by a few points over the past several months since hitting their highs around mid-May, driven by investor interest-rate angst, prices for many CCC or below-rated pieces of paper are still trading well above what one would traditionally think of as "distressed" price levels, in the 50s, 60s, 70s or low 80s - although some issues do trade there. Some are even in the high 90s to around or even above par.

He said that had had recently been speaking to "one of the premier distressed buyers - and he's given up the ghost. He's just looking now for [bonds of] companies that he can buy and put in management, because he can't find any value."

Sara Rosenberg contributed to this review

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