Distressed debt strong, mixed as investors eye elections, Fed meeting; GM ends 4 points weaker

By Stephanie N. Rotondo

Portland, Ore., Nov. 2 - It was a "double whammy" for the distressed debt market Tuesday, as investors kept an eye on elections and waited to see what Wednesday's Federal Reserve meeting would bring.

"The volume was better than yesterday," a trader said. "But it was really just not a lot of great trading."

While the trader went on to say that the market was better "in general," it was also "still pretty mixed.

"It was a double whammy," he said of the elections and upcoming Fed meeting, which led investors to sit and watch rather than participate. Still, he noted that if there was news or some other reason, "people played."

That sort of sentiment allowed General Motors Corp.'s debt to trade in triple-digit volumes during the session. But the bonds fluctuated wildly, ending down 3 to 4 points on news of the company's initial public offering valuation.

Meanwhile, NewPage Corp.'s debt held in there, finishing the day unchanged to just slightly better. The company is expected to announce "reasonable" earnings later this week, a trader said.

Looking forward, a trader opined that Thursday trading would be a "big day."

"I think we'll have volumes well over $2 billion," he said, once investors have a chance to digest what the outcome of the elections will be and what sort of action the Fed intends to take in regard to the economy.

However, he said he could not predict whether the big volume would bring gains or losses.

GM debt fluctuates

General Motors' debt gyrated throughout Tuesday's session as the company's plan for its initial public offering began to take shape.

"A lot of them traded," a trader said of the benchmark 8 3/8% notes due 2033. "The bonds were definitely active in the morning."

The trader said the notes began the day trading around 32, then traded up and back down again, ending around the 33 level.

That compared with levels around 37 on Monday, he noted.

Another trader said the paper traded "all over the place," with $200 million to $300 million of the bonds changing hands. He called the bonds 4 points cheaper, also around 33, compared with 37¼ bid, 37½ offered previously.

"That saga will continue," he speculated, as investors attempt to figure out how much exactly their holdings are worth.

GM is expected to launch an initial public offering worth as much as $10.6 billion late this month. It is said to be selling as many as 365 million shares of common stock between $26 and $29.

Bondholders will receive 10% of the new equity in the reorganized company. Under the terms of the current IPO plan, that will give bondholders 31 cents to 37 cents of new stock per each dollar of senior debt owned.

The anticipated valuation of the IPO, however, has many market players concerned.

"We, along with many others, were scratching our heads this morning over the General Motors IPO pricing," wrote Gimme Credit LLC analyst Shelly Lombard in an afternoon report. At $26 to $29 per share, she explained, that results in a price of $78 to $87 per share before a 3 for 1 split. Lombard had instead expected $116 to $134 per share.

"Shares often trade up after an IPO but there was no incentive to price this deal conservatively since all involved seemed anxious to make sure the U.S. government would recoup its investment," she said.

Lombard also noted that she expected further hills and valleys in the company's bonds and that the new stock would have to hit $40 to $45 "for holders of the old GM bonds to earn a nice return."

NewPage bonds holding in

Just a few days ahead of its earnings release, NewPage bonds were trading unchanged to "maybe up a quarter," traders reported.

One trader saw the 11 3/8% notes due 2014 inching up a quarter-point to 961/4, while the 10% notes due 2012 gained just as much, ending around 641/4.

Another trader deemed the debt unchanged amid light trading volume, though at the same levels as the first trader.

The Miamisburg, Ohio-based papermaker will announced its quarterly results on Thursday.

Vertis structure revised

Vertis Holdings Inc. has received new commitments for its proposed credit facility that will be used to refinance existing debt, after reworking its initial credit facility plans a number of times.

Under the new structure, the company plans on getting a $425 million term loan that is being led by Morgan Stanley, according to a news release. Timing and talk is still to be determined.

By comparison, the company was originally planning on getting a $425 million first-lien term loan led by Credit Suisse and Citadel, which was then downsized to $365 million and later upsized to $500 million. The company was also planning on getting a $150 million second-out term loan that was going to be backstopped by existing holders, but that was later removed from the capital structure and was going to be replaced by mezzanine debt.

At the time of launch, price talk on the first-lien term loan had been Libor plus 900 bps with a 2% Libor floor and an original issue discount of 97. There was call protection of 104 in year one, 103½ in year two, 102 in year three and 101 in year four.

In addition to the new term loan commitment, Vertis now plans on getting a $175 million revolver that is being led by GE Capital, the news release said.

Under the original plans, the company was looking to get a $200 million asset-based revolver, which was later downsized to $190 million. This revolver had been clubbed up with relationship banks.

GE Capital, Bank of America and Citibank provided commitments toward the original revolver, with GE the left lead.

As part of the refinancing, the company is offering holders of its senior pay-in-kind notes due 2014 and senior secured second-lien notes due 2012 the opportunity to exchange their existing debt by Dec. 1 for equity only, as compared with previous offers of cash, new senior secured notes and equity.

In conjunction with the exchange offers, Vertis is soliciting acceptances of a pre-packaged Chapter 11 reorganization plan.

If there is not enough participation in the exchange offers, but the plan of reorganization is accepted, chapter 11 proceedings will be started in order to complete the refinancing.

With the credit facility commitments from GE Capital and Morgan Stanley, the company should be able to complete the reorganization within 45 to 60 days of filing.

Vertis is a Baltimore-based marketing communications company.

Broad market firm, mixed

Elsewhere in the distressed debt realm, OPTI Canada Inc.'s 8¼% notes due 2014 were "kind of unchanged, maybe down a quarter" around 76, according to a market source.

The source also saw Ambac Financial Group Inc.'s 5.95% notes due 2035 trading down a deuce to 22. However, he noted that there were not many trades in the name.

Also in the world of finance, another trader said Washington Mutual Inc.'s senior bank paper - like the 5.55% notes due 2010 - were "a touch lower" around 38, while the "holdco" notes, such as the 5% notes due 2012, were "a bit stronger," gaining a point to end around 110.

Sara Rosenberg contributed to this article

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