VeraSun debt lifted by record revenues; Sbarro hurt by earnings, downgrade; airlines, autos better

By Stephanie N. Rotondo

Portland, Ore., Aug. 12 - VeraSun Energy reported record revenues during its second quarter Tuesday. The better-than-expected figures gave the ethanol producer's bonds a 5-point boost.

The company attributed the sizable gain to its recent merger, which was completed during the second quarter. VeraSun's good news was also felt in the rest of the sector.

In the restaurant arena, Sbarro Inc. continued to face obstacles. Weak earnings released on Friday resulted in a downgrade on Monday. On Tuesday, the company began to feel the weight in its bonds, which lost a good 4 to 5 points on the day.

Meanwhile, in Tuesday trading airline and automotive sectors gained some momentum - at least in the bank debt. Traders reported that UAL Corp. and US Airways Group Inc. both saw their term loans gain some altitude. In the autosphere, Ford Motor Co. and General Motors Corp. also drove up.

Still, traders across the board said that trading activity was slight, a typical August trait.

"It's a little subdued," said one trader. "But that's just the nature of the beast right now."

Record revenues boost VeraSun

A 58% increase in profit gave VeraSun Energy's bonds as much as a 5-point boost during Tuesday's session.

One market source called the 9 3/8% notes due 2013 up 5 points around 59. Another also saw the 9 3/8% notes at that level, while the 9 7/8% notes due 2012 closed at 87.5 bid, 88.5 offered, up from 85 bid, 87 offered previously.

At another desk, a trader quoted the 9 3/8% notes at 59 bid, 60 offered as well as Aventine Renewable Energy Holdings' 10% notes due 2017 at 68 bid, 70 offered, both up 3 to 4 points.

For the second quarter, VeraSun posted net income of $24 million, versus $15 million the year before. Total revenues increased nearly 500% to $1.015 billion, compared to $170 million in 2007.

The better-than-expected figures were largely due to a merger with US BioEnergy that became effective during the quarter. The merger added five facilities and 420 million gallons to operations, according to a press release. VeraSun also completed construction at several facilities, adding another 330 million gallons per year to its total output. Higher ethanol prices and efforts to resell unused grain inventory also helped to improve the company's balance sheet.

"VeraSun exceeded $1 billion in revenues this quarter," said VeraSun's top executive, Donald L. Endres. "More importantly, our large scale allowed us to capture $73 million in EBITDA, more than double last year, in a challenging operating environment."

VeraSun is a Brookings, S.D.-based producer and marketer of ethanol and distillers grains.

Sbarro bonds weaken

Sbarro released its earnings on Friday. Come Monday, the fast-food chain saw its rating slashed by Standard & Poor's. Once Tuesday hit, it was all down hill.

Traders reported a 5-point drop in the company's 10 3/8% notes due 2015. One source saw the bonds fall more than 5 points to 73.5 bid, while another called the debt down 4 to 5 points at around 74.

On Friday, the quick-service Italian restaurant operator reported an increase in quarterly revenue to $85.4 million. Net loss for the second quarter of 2008 widened, however, to $5 million from $2.4 million the year before. EBITDA fell to $5.5 million versus $9.7 million previously. The company attributed the decline to an increase in product and labor costs.

For the six months ended June 29, Sbarro showed revenues of $168.6 million, a slight increase year over year. Net loss narrowed to $7.7 million, compared with a net loss of $35.6 million in 2007. However, $31.4 million in special event bonuses in conjunction with the company's merger attributed to the bigger loss in 2007.

"The reduction in profitability in the first half of the year was driven primarily by higher commodity costs versus the comparable period in 2007. Commodity prices started to increase toward the end of the second quarter of 2007 and therefore we do not expect to see a corresponding negative impact on a year-over-year basis from commodity costs in the second half of 2008," said Peter Beaudrault, chief executive officer of Sbarro, in a news release. "Furthermore, in recent weeks we have begun to see a decline in overall commodity costs which, if maintained, would favorably affect our year-over-year comparisons."

On Monday, S&P cut its corporate credit rating on Melville, N.Y.-based Sbarro to CCC+ from B-. The rating agency also lowered the grade on the bonds to CCC- from CCC+.

Air, auto loans drive up

The airline sector in general, including names like United Airlines and US Airways Group, continued to grind higher during the trading session as oil prices dropped by nearly $2, a trader said.

UAL, a Chicago-based airline, saw its term loan quoted at 73¾ bid, 74¾ offered, up from Monday's levels of 73¼ bid, 74¼ offered, the trader said. Tempe, Ariz.-based US Airways also experienced a jump, its term loan quoted at 70½ bid, 71½ offered, up from 68¼ bid, 70¼ offered.

When asked why US Airways experienced such a big jump in levels, the trader explained that the company's term loan has lagged behind the other airlines, and with it being the last one in the 60s, it was viewed as the cheapest deal, inspiring buyers to get involved.

Also experiencing positive momentum in trading was the auto sector, as names like Ford Motor and General Motors posted some gains, a trader reported.

Ford, a Dearborn, Mich.-based automotive company, saw its term loan quoted at 78 bid, 78½ offered, up from previous levels of 77½ bid, 78 offered, while Detroit-based GM saw its term loan quoted at 75¼ bid, 76¼ offered, up from 75 bid, 76 offered, the trader said.

The trader attributed the rise in autos to the high-yield market. He said that the companies' high-yield debt has been moving up recently, and the loans were just showing a delayed reaction to that high-yield performance.

Broad market modestly better

Realogy Corp.'s 12 3/8% notes due 2015 inched up to 44.25 from 43.25 earlier in the session, a trader said.

The trader also said that Trump Entertainment Resorts Inc. and Harrah's Entertainment LLC traded somewhat actively. He saw Trump's 8½% notes due 2015 at 47 bid, 47.5 offered and Harrah's 10¾% notes due 2016 at 70.75 bid, 71 1/8 offered. Another trader called Trump's bonds up half a point at 47 bid, 47.5 offered and Isle of Capri Casinos' 7% notes due 2014 at 70.5 bid, 71 offered, up a point.

Meanwhile, the trader said there was "no real trades" in Linens n'Things floating-rate notes due 2014, even as the company delayed filing its 10-Q. The trader said the bonds were quoted "a bit higher" at 29 bid, 30 offered.

Elsewhere, a trader said Qubecor World Inc.'s 6 1/8% notes due 2013 ended half a point better at around 36.5, despite what he called "so-so" quarterly numbers.

Swift Transportation Co. Inc.'s 12½% notes due 2017 were called unchanged at around 40.

R.H. Donnelley's 6 7/8% notes due 2013 ended slightly better in light trading, the trader continued, closing at 48 bid, 48.25 offered. Rival Idearc Inc. saw its 8% notes due 2016 trade a bit heavier at 42.5 bid, 43 offered, "pretty much where they have been."

Cheniere Energy's 7½% notes due 2016 continued to move up, finishing the day at 86 bid, 86.5 offered.

Sara Rosenberg contributed to this article.

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