MBIA notes again rise; Caesars paper up in busy trading; Colt Defense rebounds from recent lows

By Paul Deckelman

New York, May 14 - Fully a week after MBIA Inc. and Bank of America reached a settlement of their long-running legal dispute, bond insurer MBIA's once-sagging 2014 surplus notes were seen continuing an amazing comeback on Tuesday, traders said, moving up by as much as 5 points on the session to end in the 90s.

Those bonds had been languishing in the 20s before news of that settlement, which resolved a legal battle surrounding MBIA's efforts to reorganize its operations in order to fence off toxic mortgage-backed securities, whose value had plummeted when many of the underlying mortgages defaulted during the national financial crisis several years ago.

Exide Technology Inc.'s bonds were again fairly active on Tuesday, as the automotive and industrial storage battery manufacturer's paper continued to rise from their recent lows that followed the forced closure of a California manufacturing plant by state authorities there.

Another name seen on the comeback trail was Colt Defense LLC, whose bonds were blasted some weeks back amid investor unease about the prospects for firearms manufacturers in the wake of the heated political battle over gun control, but they have since come off those lows.

Traders said that Caesars Entertainment Corp.'s 2018 bonds remain among the most actively traded junk issues most days, and Tuesday was no exception. They saw the bonds about a point better on the session despite a lack of fresh news about the giant gaming company.

MBIA gains continue

A trader said that the MBIA 14% surplus notes due 2033 "went even higher today," moving as high as 94 bid.

He said that the bonds had finished on Monday in a context of 87 to 891/2, "so they're up another 5 points."

He added that it "looks like there was a lot is trading, heavy volume."

A market source at another desk said that not counting the numerous small odd-lot trades, the bonds actually did even better than that on Tuesday, advancing to a final round-lot level of 91 bid, up nearly 9 points on the session from Monday's closing round-lot trades in the 82 area.

Tuesday's round-lot volume was over $11 million, making the notes one of the more active junk bond issues.

The Armonk, N.Y.-based bond insurance company's notes have come roaring back over the past week from levels in the mid-20s, fueled by news last Tuesday of a legal settlement between MBIA and longtime nemesis Bank of America, which agreed to pay MBIA $1.7 billion and receive warrants for a 5% equity stake in the company.

Their long-running legal battle had arisen from MBIA having insured billions of dollars of securities backed by mortgages written by BofA or Countrywide Financial, which was later acquired by the banking giant, only to see those securities turn sour as many of the underlying loans defaulted during the financial crisis that began in 2007.

In 2009, MBIA attempted to reorganize itself to segregate those toxic securities from the rest of its business, only to have that move legally challenged by BofA and 17 other banks. It eventually reached settlements one by one with the other lenders, with BofA the last holdout until last week, when it finally agreed to not oppose the plan.

Colt Defense on target

Another recovering issue on Tuesday was West Hartford, Conn.-based gunsmith Colt Defense LLC's 8¾% notes due 2017.

A trader said that those bonds had cratered in the mid-60s a month ago, "when everything hit the fan" during the national debate about possible tighter gun control restrictions in the wake of the Sandy Hook school shootings elsewhere in Connecticut.

But with the demise of that legislation at the federal level, he said, the bonds moved back up into the 70s.

"They have been moving up because the company's doing well," he said.

He said that he had sold some bonds last week at 75¼ bid and lamented, "I sold them too early" since they had subsequently moved up to around a 76½ to 77 context by the end of the week.

On Tuesday, another market source said, the bonds got as good as 82 bid, although that was mostly in odd-lot dealings, up from Monday's close at 74. Strictly counting just round-lots, the movement was considerably less drastic, as the bonds finished Tuesday at 781/2, up a half-point from Monday's final size trading.

Ironically, Colt Defense's bonds have been taking their rollercoaster ride even though proposed legislation, including bans or other restrictions on the sale of "assault rifle" type firearms, would actually have little or no impact on the company's operations - evidence of the role that irrational sentiment sometimes plays in the movement of bonds in the junk and distressed markets.

The company makes guns exclusively for the United States military, the militaries of other friendly nations and for law enforcement and the private security industry, none of which would be affected at all by any kind of legislation being passed.

Colt Defense used to be a part of the larger Colt's Manufacturing Co. LLC, which does produce guns for the civilian consumer market and whose sales would have been impacted by any tighter gun control legislation aimed at rifles, but the two companies officially split in 2002.

Exide rise continues

Yet another underperforming name seen on the comeback trail on Tuesday was Exide Technology's 8 5/8% notes due 2018. A trader saw them moving around between 73½ and 75 bid.

He noted that the bonds had been in the mid-70s in mid-April, and then by the end of April had dropped down from peak levels of almost 80 to around 65 on bad news out of California. But then "for all of May, they've been inching up."

He said that about $5 million of the bonds traded Tuesday, going home at 731/2, which he called up 1 point on the day.

The Milton, Ga.-based automotive and industrial storage battery systems maker's bonds have bounced off the lows in the 60s, to which they had slid last month after California's state Department of Toxic Substances and Control issued an order on April 24 telling the company to suspend operations at its plant in Vernon, Calif.

The agency charged that the facility isn't in compliance with the state's environmental standards.

Caesars a busy name

One of the busiest bonds in Wednesday's session was the 10% notes due 2018 issued by what used to be Harrah's Operating Co. Inc., now a part of Las Vegas-based casino giant Caesars Entertainment.

Those bonds saw brisk dealings around the upper 50s to lower 60s. That's well down from the levels around 70 bid seen earlier this year, even though a trader opined, "I don't see any news on it - it's just that, in general, month-over-month, the gaming industry's numbers haven't been great."

He said that the 10s were trading right around the 58½ level, which he called off about 3/8 of a point, with $9 million or $10 million of them traded during the session.

A second trader noted that the company's capital structure has two separate issues of the 2018 bonds, pegging one of them at 581/2- to 59, which he said was "pretty much unchanged, where they've been," or perhaps up a half-point.

He said that the larger issue - $3.3 billion, in contrast to the other tranche's size around $800 million - was finishing at 601/4, which he called up 1½ points, on over $16 million.

"A lot of activity," he said.

Another market source called the larger tranche up 1¾ points on the session, at 60¼ bid.

In a research note, Gimme Credit LLC senior analyst Kim Noland wrote that Caesar's operations "continue to be negatively impacted" by its exposure to the hyper-competitive Atlantic City market, which overall has seen total casino revenues and winnings dropping because of the impact of competition from newer casinos in nearby states.

Noland also noted that within Caesar's own capital structure, the unsecured legacy Harrah's bonds, like the 10s, "are impaired not only because of the downturn in operations, but also because of the large amount of secured debt layered in ahead of them" as Caesars' buyout of Harrah's several years ago boosted the company's leverage ratio of debt to nearly 10 times EBITDA.

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