American Tire notes drop after bankruptcy news; Mallinckrodt weakens amid competition

By James McCandless

San Antonio, Oct. 4 – Traders saw a pullback from recent gains in distressed trading amid negative news on Thursday.

After months of languishing, American Tire Distributors, Inc.’s notes dropped after the company declared bankruptcy Thursday morning.

In the medical space, Mallinckrodt plc’s issues fell in reaction to news that a competitor received FDA approval for a generic version of one of the company’s most popular products.

Elsewhere in the sector, Community Health Systems, Inc.’s paper moved lower.

A pullback in oil futures tied to worries about supply led to losses in recent gainers Ensco plc, California Resources Corp. and Sanchez Energy Corp., though EP Energy Corp. saw an unexplained jump.

Propane name Ferrellgas Partners, LP’s tranches continued a negative trend spurred by a bad fourth-quarter earnings report.

American Tire bankrupt

American Tire’s notes fell on Thursday, traders said.

The 10¼% notes due 2022 lost 4¾ points to close at 22 bid.

The Huntersville, N.C.-based tire distributor announced Thursday morning that it had filed for Chapter 11 bankruptcy and reached a definitive recapitalization agreement with 75% of its bondholders, reducing its debt by $1.1 billion.

Under the definitive agreement, which is subject to court approval, bondholders will receive 95% of the new equity in the recapitalized company and existing equityholders will receive 5% of the new equity, Prospect News reported.

Talks with senior lenders are ongoing.

The notes entered distressed territory in April, when news broke that Goodyear would be terminating its distribution agreement with the company. The 10¼% notes plummeted to 49 bid from 97½ bid. They hovered in the 50 context until late June, when Bridgestone scrapped a similar agreement, sending the bonds into the 20’s.

“They’ve made the right step in equitizing the debt,” a trader said. “There’s been a big loss in revenue, and they needed to reduce whatever interest they’re going to have to pay out.”

Following the news, Moody’s Investors Service cut the company’s probability of default rating, corporate family rating, and the rating on its senior secured term loan. S&P Global Ratings lowered its issuer credit rating.

Mallinckrodt lower

Meanwhile, Mallinckrodt’s issues were also moving lower, market sources said.

The 4¾% notes due 2023 dropped 3¼ points to close at 82½ bid.

Traders went negative on the London-based drug maker after competitor Praxair, Inc. received FDA approval for a generic version of neonatal respiratory aid Inomax, one of Mallinckrodt’s most popular products.

The drug is responsible for 21% of the company’s second-quarter sales.

“Everyone got a little skittish and definitely oversold, especially on the equity side,” a trader said. “The bonds weren’t as bad. But it all seemed like an overreaction.”

The company’s common stock lost 17% of its value in Thursday trading.

Praxair is still awaiting FDA approval on a delivery system for the drug, market sources said.

“Mallinckrodt is pretty entrenched in this space,” a trader said. “So, until the other drug’s on the market, that part of the business seems solid.”

Elsewhere in the medical space, Franklin, Tenn.-based hospital operator Community Health’s paper was also in decline.

The 7 1/8% paper due 2020 shaved off about ½ point to close at 87½ bid. The 6 7/8% notes due 2022 dropped 1 point to close at 55 bid.

Oil tightens

Distressed oil names backed off of recent gains amid uncertainty in the oil market, traders said.

London-based offshore drilling contractor Ensco’s 5¾% bonds due 2044 lost 3 points to close at 73¾ bid.

Los Angeles-based independent oil and gas producer California Resources saw its 6% notes due 2024 lose ¾ point to close at 90¼ bid. The 8% notes due 2022 lost ½ point to close at 96½ bid.

Houston-based peer Sanchez Energy’s notes fell 2 points to close at around 58¼ bid.

An outlier in the sector was another Houston-based producer, EP Energy.

Its 6 3/8% notes due 2023 jumped up 8¾ points to close at 72½ bid.

West Texas Intermediate crude oil futures lost $2.08 to end at $74.33 per barrel after reaching a four-year high on Wednesday at $76.90. North Sea Brent crude oil futures finished at $84.64 a barrel on a $1.65 loss.

Ferrellgas trends negative

In natural gas, Ferrellgas’ paper continued to trade down, market sources said.

The 6¾% paper due 2022 fell 3 points to close at 81 bid. The 6¾% paper due 2023 lost ¼ point to close at 82 bid.

The Overland Park, Kan.-based propane supplier has seen paper dipping further into distressed territory after reporting fourth-quarter results on Sept. 27.

The company showed a shrinking EBITDA of $8.2 million, lower than the $19.2 billion that it posted the year previous. It also reported a 63 cents per share loss against an expected loss of 41 cents.

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