Hawaiian Telcom debt dips on downgrade; Spectrum bonds hold their ground; Portola Packaging dives

By Stephanie N. Rotondo

Portland, Ore., Aug. 19 - A downgrade from Standard & Poor's took down Hawaiian Telcom Communications Inc.'s debt structure Tuesday.

The rating agency cut Hawaiian Telcom's grade due to liquidity issues facing the telecommunications provider. The announcement sent the company's bank debt down a point while the bonds lost as much as 5 points.

Meanwhile, Spectrum Brands Inc.'s bonds managed to hold steady despite a nearly 20% drop in its stock. It was unclear what might have caused the equity to slide, but one market source speculated that the company's recent financials might have been the issue.

After dropping off the radar for about a month, Portola Packaging Inc.'s bonds reappeared during Tuesday's session. But the notes' reemergence onto the playing field was not necessarily positive, as market sources saw the bonds dive as much as 12 points on the day.

As the end of summer draws near, some market players are taking advantage of the lull in the market - not to mention the sunshine. Coupled with the lack of news and - as one trader put it - a lack of conviction, the week has gotten off to a slow start.

But not all is lost, at least in the minds of some.

"There's always tomorrow," said one hopeful source.

Hawaiian Telcom debt dips

Hawaiian Telcom's term loan C weakened after S&P downgraded the debt as well as the company's corporate credit rating.

The term loan C went out at 78½ bid, 79½ offered, down from Monday's closing levels of 79½ bid, 80½ offered, a trader said.

Earlier in the Tuesday session, levels had dropped to 78 bid, 79 offered, but they rebounded slightly prior to the close, the trader continued.

On the bond side, a trader said the 12½% notes due 2015 fell 4 to 5 points to around 20. Another pegged the 9¾% notes due 2013 at 28 bid, 30 offered.

"Downgrade affected it as holders were less inclined/unable to hold CCC rated paper," the trader explained.

On Tuesday, S&P cut the company's credit facility and corporate credit rating to CCC+ from B-. The outlook is negative.

"The downgrade reflects our increased concerns that Hawaiian Telcom's cash balance - it's only source of liquidity - will be inadequate to fund operations through 2009 given the challenging business environment, the company's weak operating results, and its excessive leverage," said Susan Madison, S&P credit analyst, in the rating release.

In May, Hawaiian Telcom revealed that it had drawn all available funds under its revolving credit facility in response to uncertain conditions in financial markets.

The company also put in a request to increase the borrowing capacity under the revolver to $150 million from $90 million, but the Public Utilities Commission of the State of Hawaii denied the request. The company's right to elect to increase the revolver borrowing capacity expired on June 1.

Then, last week, in a 10-Q filed with the Securities and Exchange Commission, the company said that it is conducting a strategic review to consider possibilities to improve cash flow and liquidity, including product development opportunities, cost reductions, asset rationalization, capital raising opportunities and debt reduction.

For the second quarter, Hawaiian Telcom reported adjusted EBITDA of $35.7 million, down from $42.3 million last year.

Operating revenue for the quarter was $115.3 million, down 5.1% from $121.4 million in the second-quarter 2007. Net loss for the quarter was $30.5 million, compared to net income of $21.4 million in the previous comparable period.

At the end of second quarter, the company had $71.8 million in cash and cash equivalents compared to $93 million at the end of the first quarter and $4.7 million a year ago.

The company ended the quarter with a total of roughly $1.075 billion in debt.

Hawaiian Telcom is a Honolulu-based telecommunications provider.

Spectrum notes steady

Spectrum Brands' debt managed to hold its ground - mostly - despite an almost 20% drop in the company's equity.

One trader saw the 11% toggle notes due 2013 at 71.75 locked, which he said was "kind of where they were."

But another trader called that issue down a point from the previous session at 71 bid, 72 offered.

"The stock is down 50 cents, which is huge on a $2 stock," the first trader said.

There was no news out to cause the drop in the equity, but the first trader speculated that recent research reports might have been the catalyst.

The second trader opined that the company's recent financials were to blame.

"They had numbers out week before last, I think," he said. "I think they met expectations on the cash flow side, but maybe equity guys were looking for something bigger an didn't get it."

Atlanta-based Spectrum posted a loss of $283.9 million earlier in the month, attributed to more than $250 million in charges related to restructuring, goodwill impairment and other fees. The quarter's wider loss compares to a loss of just $7.5 million the year before. However, sales gained 11% to $729.6 million.

"I'm pleased with our strong sales growth for the quarter, which I believe reflects the strength of our new product offerings and marketing programs as well as a consumer shift toward value brands during this tough economic time," said Kent Hussey, Spectrum's chief executive, in a press release.

Portola bonds dive

A trader saw Portola Packaging's 8¼% senior notes due 2012 slide to 30.5 bid from prior levels at 42, calling it a 12-point drop on the day. He said the notes were trading flat, or without their accrued interest. He suggested that "they're getting down toward the end of the [30-day] grace period," after having missed the Aug. 1 coupon payment on the bonds, "and may file for bankruptcy."

However, another market source noted that the bonds had last previously traded around mid-July, at that previous 42.5 level, but then disappeared from the market until Tuesday, first dropping as low as 10 bid on several small trades before roaring back from those lows to the 30 area, on several big-block trades.

The source noted that Portola had already announced at the end of July that it had reached agreement with its lenders and bondholders on restructuring the company's debt via a pre-packaged Chapter 11 filing.

Broad market weakens

Harrah's Entertainment LLC's 10¾% notes due 2016 "broke below 70 for the first time in a while," a trader said, pegging the bonds at 69.5 bid, 69.75 offered.

Idearc Inc.'s 8% notes due 2016, which had edged up slightly in the previous session, retreated to 42 7/8 bid, 43 offered.

Claire's Stores Inc.'s 10½% notes due 2017 lost a point to 33 bid, 35 offered.

Sara Rosenberg and Paul Deckelman contributed to this article.

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