Navistar swings to loss, bonds dip; hedge funds buying up J.C. Penney; Fannie, Freddie boosted

By Stephanie N. Rotondo

Phoenix, Sept. 4 - The distressed debt market was firm to mixed on Wednesday, as investors continued to keep a watchful eye on Syria and how the U.S. government intended to handle the situation.

Still, there was plenty of credit-specific news out to drive bonds one direction or another.

Navistar International Inc.'s debt dropped, albeit in light trading, after the company reported dismal earnings - including a 12% decline in revenues.

J.C. Penney Co. Inc. remained topical as the market learned that hedge funds were scooping up Bill Ackman's stake in the struggling retailer.

Among other distressed names, Arch Coal Inc.'s 7% notes due 2019 were seen up a touch at 801/4, while NII Holdings Inc.'s 8 7/8% notes due 2019 fell a deuce to 811/2.

Edison Mission Energy paper meantime was holding with a 64 handle and Overseas Shipholding Group Inc.'s 8 1/8% notes due 2018 were deemed "active" and better, trading around 89.

And, MF Global Futures Ltd.'s 6¼% toggle notes due 2016 traded at 52, according to a trader. He said the issue was up "about three-quarters since the last trade."

Navistar slips

Navistar fell into the red for the third quarter of 2013, as truck sales dipped.

A trader said the 8¼% notes due 2021 traded off over a point to 983/4.

For the quarter, the Lisle, Ill.-based heavy-truck manufacturer reported a loss of $247 million, or $3.06 per share. That compared to a profit of $84 million, or $1.22 per share, for the same quarter of 2012.

Revenues dropped 12% to $2.86 billion as demand for heavy-duty trucks declined.

"We clearly need to accelerate progress with our financial results, and we are already implementing additional cost reduction and business improvement actions to counter our near-term volume challenges," said Troy Clarke, chief executive officer. "This includes resizing our company to match our current business environment."

As such, the company said it would cut about 500 jobs.

Hedge funds grab J.C. Penney

Hedge funds are scooping up Bill Ackman's stake in J.C. Penney just as fast as they can, according to recent regulatory filings.

The investments by the funds are making some investors view the company's future in a more positive light, giving a boost to the bonds.

One trader said the 5.65% notes due 2020 gained over a point on Wednesday, ending at 781/2. Another market source pegged the issue at 79 bid, up almost 2 points on the day.

A third trader said the 7.4% notes due 2037 were up a point at 701/2, while the 7.95% notes due 2017 also ended up that much at 881/2.

Late Tuesday, Hayman Capital Management and Glenview Capital Management said in filings with the Securities and Exchange Commission that their respective stakes in the Plano, Texas-based retailer had increased.

Hayman reported a 5.2% stake in the company, while Glenview said it was holding 9.1%.

Last week, Perry Corp. - managed by Richard Perry - reported that its stake had increased to 8.6% on Aug. 30, just days after Ackman sold off his shares to Citigroup, which then resold the shares.

George Soros' Soros Fund Management I said to now be the largest shareholder, having a 9.1% stake, or nearly 20 million shares.

Berkowitz lauds Fannie, Freddie

Fannie Mae and Freddie Mac preferreds got a boost on Wednesday as Bruce Berkowitz went on CNBC stating that the agencies were valuable to the U.S. housing market.

Fannie's 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) rose 19 cents, or 3.7%, to $5.33, while Freddie's 8.375% fixed-to-floating rate noncumulative perpetual preferreds (OTCBB: FMCKJ) increased by 20 cents, or 3.91%, to $5.32.

In his interview with CNBC, Berkowitz - the head of Fairholme Capital - said that given Fannie and Freddie's return to profits, they should be returned to private hands instead of being dissolved and replaced by a government-run agency.

"There would be no middle-class housing, no cornerstone of American dream of housing, no 30-year mortgage, without Fannie and Freddie. There is no alternative," he said in the interview.

Berkowitz's Fairholme is participating in a lawsuit against the government, calling a change to the terms of the September 2008 bailout that required most of the agencies' profits to be handed over to taxpayers unfair to shareholders.

A market source noted that Berkowitz was "quite confident" that the lawsuit will turn in the favor of his fund, along with others - although the source remarked that the interviewer was "making fun of him" for holding that stance.

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