Walter Energy debt weaker as new add-on priced at discount; Verso downgraded, bonds end softer

By Stephanie N. Rotondo

Phoenix, July 8 – Walter Energy Inc. was taking focus in the distressed debt arena on Tuesday, as the company priced a $320 million add-on to its 9½% senior secured notes due 2019.

“[The bonds] were off a little bit with the add-on,” one trader said, deeming the 9½% notes off 1½ points around par.

The trader also saw the 11% senior secured second-lien PIK toggle notes due 2020 at 81, which compared to an 82½ to 83½ context previously.

“There wasn’t a lot of trading in the unsecureds, but they were quoted lower,” he added.

Another trader said, “All the Walter paper got hit today on that [add-on],” pegging the 9½% notes at 99¾ bid, par ¼ offered.

That compared to 101 bid, 102 offered on Monday, he said.

The add-on was priced at the discounted price of 99, with a 9.741% yield. The new issue comes on top of the original $450 million, which came September 2013 at 99.425, and a $200 million add-on priced at 101.5 on March 19.

On the heels of the latest addition, Moody’s Investors Service downgraded the Birmingham, Ala.-based metallurgical coal producer to Caa2 from Caa1.

Moody’s rated the new deal at B3.

Walter intends to use the proceeds to improve its liquidity position. However, in undertaking the new deal, it reduced its revolver capacity to $77 million from $314 million. Of that amount, $43 million will be used at closing for letters of credit.

As such, Moody’s said it was basing its downgrade on the belief that the company will burn through about $300 million in the next year, assuming current coal prices stay the roughly the same. And, any draws on the revolver could be restricted by the springing first-lien ratio.

Verso downgraded

Verso Paper Corp. was also slapped with a downgrade on Tuesday, this one from Standard & Poor’s.

One trader said the 8¾% notes due 2019 were “one of the more active [bonds]” of the day, falling 3 points to 57.

Another trader echoed that level.

Whether it was the downgrade, the company’s recently announced sweetened exchange offer or a generally weaker marketplace that caused the decline, the second trader was not sure.

S&P dropped Verso to CC from CCC, with a negative outlook.

The 8¾% notes, which are part of the exchange offer along with the 11 3/8% notes due 2016, were meantime downgraded to C from CC.

S&P cited the exchange as the reason for its actions.

Late Wednesday, Memphis-based papermaker Verso said it had revised terms of an exchange offer linked to its planned merger with Miamisburg, Ohio-based NewPage Corp.

Under the new terms, holders of the 8¾% notes will receive $950 of new second-lien notes and warrants if tendered by the early deadline. After that deadline, holders will get $668.75 of new notes and warrants.

Investors holding about $213 million of the $396 million principal amount issue have already agreed to participate in the exchange, the company said in a press release.

Holders of the 11 3/8% notes – a $142 million issue – will receive $950 of new subordinated notes and warrants if tendered by the early deadline. After that deadline, holders will get $681.875 of new notes and warrants.

Additionally, the company – which struggled to get the necessary level of participation when it first launched the exchange offer – lowered the minimum threshold level that it must get in order for the merger to move forward, dropping it to 75% from 85%.

The early tender deadline is midnight ET at July 16. The deal expires July 30.

Market slides

A trader said 21st Century Oncology Inc.’s debt “took a little beating today.”

He said the 8 7/8% notes dropped 4 points to 97, while the 9 7/8% notes declined 3½ points to 77.

With the overall market being on the weak side, iPayment Inc.’s 10¼% notes due 2018 drifted down 2 points to 87¼, according to a trader.

And, Sears Holdings Corp.’s 6 5/8% notes due 2018 “traded a lot but were basically unchanged,” the trader said, placing the bonds in a 92 to 92¾ context.

However, another trader called the debt “a little bit lower” at 92, versus 92¾ bid, 93 offered previously.

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