Distressed market quiet before holiday, Caesars bonds up, oil names struggle despite crude surge

By Paul Deckelman

New York, Jan. 16 – The distressed debt market finished out the week on a relatively quiet note, traders said Friday, in line with a generally calmer high-yield market in the run-up to Monday’s Martin Luther King Day holiday, which will see the debt markets in the United States closed.

For a second consecutive session, the various bonds of Caesars Entertainment Corp. moved higher – although not on any kind of overwhelming volume – as investors positioned themselves in the wake of Thursday’s move by the troubled Las Vegas-based gaming giant to voluntarily put its principal operating entity into Chapter 11 in order to reorganize its more than $18 billion of debt. That has set off a confrontation for control of the reorganization process between the company and some of its bondholders, who filed their own, involuntary Chapter 11 petition against the company.

There was little action seen in RadioShack Corp. bonds, as bankruptcy rumors swirled around the troubled Fort Worth, Texas-based consumer electronics retail chain operator.

Crude oil futures moved sharply higher on Friday after the International Energy Agency predicted that the recent slide in world oil prices would eventually help to correct the over-supply problem that’s been undermining prices – by leading to output cuts, particularly from oil producers outside of the Organization of the Petroleum Exporting Countries. However, that surge did not prevent oil and gas names like Linn Energy, LLC from heading lower.

In the convertibles market, participants saw wild swings at mostly lower levels in the price of FXCM Inc.’s convertibles – which plunged to as low as 30 bid, although they later recovered enough to come back up in to the mid-60s. The key driver in those gyrations has been speculation about how the New York-based foreign exchange company would cope with massive client losses related to the spike in the Swiss franc after the Swiss National Bank dropped its currency cap versus the euro on Thursday.

Caesars climb continues

Traders saw Caesars Entertainment paper heading higher for a second straight session, although volume was not anything huge.

A market source saw its Caesars Entertainment Operating Co. 12¾% notes due 2018 rise by 2 points to end at 17½ bid, while its 10% notes due 2018 also ended at 17, up 1¾ points on the day. Volume was about $2 million.

More than $7 million of its 10¾% notes due 2016 had pushed up to 20¼ bid, a nearly 2 point gain on the day The bonds had risen about ½ point on Thursday.

“They’re up from where they had been,” a trader said, “but the volume was not a whole lot.”

He said that some of its paper, such as the 11½% notes due 2017 and the 9% notes due 2020, continued to trade in the 70s, “reflecting their better status in terms of security for the holders.”

With all of the bonds across the company’s capital structure having risen in the two sessions since Caesars’ announced that it was putting the operating company into Chapter 11 to restructure its $18 billion of debt, the trader noted that “that puts them in default,” causing the bonds to trade flat, or without their accrued interest, resulting in a nominal price rise.

Caesars Operating meantime received interim access to the cash collateral of its pre-bankruptcy secured creditors, according to a Thursday order from the U.S. Bankruptcy Court for the Northern District of Illinois (see related story elsewhere in this issue).

As previously reported, Caesars Operating intends to use the cash collateral to fund continued operations while in bankruptcy.

Absent the use of cash collateral, Caesars Operating said the debtors will be unable to pay their thousands of employees, fund working capital, pay their taxes, maintain their insurance policies, continue their cash management system, make capital expenditures or pay the administrative costs throughout the Chapter 11 cases.

Caesars’ Nasdaq-traded shares, which had fallen by nearly 6.5% on Thursday after announcement of the unit’s bankruptcy filing, dipped another 7 cents, or 0.59% to end at $11.83, on volume of about 1.3 million shares, a little below the normal turnover.

Radio Shack little moved

Talk continued in the market place, meanwhile, that troubled electronics retailer RadioShack may be the next junk-bond issuing company to find itself in bankruptcy court, although the company has not confirmed this.

A trader said that its 6¾% notes due 2019 “were being quoted in the single digits on Friday,” having fallen “below 10” to end bid around 9 cents on the dollar.

But he said that “there was really no volume in them. We’re just not seeing a lot of activity,”

The company’s New York Stock Exchange-traded shares had plunged by over 35% on Thursday when the bankruptcy rumors intensified, on volume of over four times the norm, On Friday, they were unchanged at 26 cents. Volume was 7 million shares, more than three times the usual daily handle.

Oil surge leaves some behind

World crude oil prices firmed up on Friday and saw their first weekly gain following seven straight weeks on the downside after the International Energy Agency said the current oil price plunge will curtail supply growth as non-OPEC producers will likely curb their output.

That sent the benchmark West Texas Intermediate light, sweet crude grade up by $2.44 or 5.3%, settling at $48.69 a barrel on the New York Mercantile Exchange.

But while some oil and gas credits, like Chesapeake Energy Corp.’s 6 5/8% notes due 2020 rose – they were up ½ point at 107 bid – others in the energy space failed to make any gains and even lost ground. A trader saw Linn Energy’s 6½% notes due 2021 fall by 4 points to the 76 level, on volume of more than $10 million.

A second trader saw Energy XXI’s 6½% notes due 2021 down 2 or 3 points on the day, finishing at 44-45 bid.

FXCM plunges, recovers

In the convertibles space, FXCM’s 2.5% converts due 2018 fell to as low 30 and then traded for a while at 49 bid, 50 offered, before climbing up to the mid-60s. The bonds were previously at 95.

FXCM shares were halted for the entire session but fell about 90% to $1.49 in pre-market action.

The initial moves were sparked by FXCM’s statement late Thursday that it may be in breach of capital requirements following losses in the wake of the Swiss National bank’s surprise currency move. The bonds recovered some ground, apparently amid reports that Jefferies was working to throw them a financial lifeline, market sources said. After the market close, news of that lifeline was forthcoming.

Any “way to prolong the life of FX is going to be a huge positive,” a New York-based trader said ahead of the market close.

FXCM had warned in a news release late Thursday that client losses caused by the Swiss franc’s surge when the cap was removed may have put it in breach of regulatory capital requirements.

It said that due to unprecedented volatility of the EUR/CHF pair clients experienced significant losses and generated negative equity balances owned to FXCM of about $225 million.

But late Friday, Leucadia National Corp., which owns Jefferies Group LLC, said it extended to FXCM a $300 million two-year secured term loan with an initial coupon of 10%.

The deal will allow FXCM to continue normal operations and was reminiscent of Jefferies’ rescue of Knight Capital Group Inc. in 2012 after the electronic trading firm suffered $440 million in losses due to a trading error.

“FXCM was kind of the focus [today]” a New York-based convertibles trader said. “There wasn’t an astronomical amount of volume, but it was what everyone was watching.”

-Rebecca Melvin contributed to this review

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