Distressed debt steady, weaker by mid-week; Dynegy falls on Icahn takeover bid; OPTI bonds dip

By Stephanie N. Rotondo

Portland, Ore., Dec. 15 - Distressed debt closed out Wednesday's session "unchanged to a little softer," according to a trader.

Another trader lamented the lack of any real movements and speculated that the market was now preparing to shut down for upcoming holidays.

"Unless there is an event [to act as a catalyst], there is no real impetus to do anything," he said.

Investors were, however, driven to do something upon learning that Icahn Enterprises LP had made a bid for Dynegy Inc. The new bid is 10% above Blackstone Group's previous offer, which might be good for equityholders. But bondholders are worried about what it might mean for them and pushed the company's debt lower as a result.

Meanwhile, investors remained concerned about the fate of OPTI Canada Inc., which has been trading on the active side for a while now. The bonds have been in a steady decline and one trader said that "people are expecting the worst."

Rite Aid Corp. will announce its quarterly results on Thursday. Ahead of the release, however, market sources saw little in the way of volume and what did trade was mixed.

Dynegy dips on Icahn bid

Dynegy announced it had entered into an agreement with Icahn Enterprises LP to be acquired for $5.50 per share, a 10% increase over Blackstone Group's failed $5-per-share bid.

But in reaction to the news, the bonds traded down. One trader opined that "bondholders are figuring they are not going to benefit much from Icahn taking over."

The trader called the 7¾% notes due 2019 down "about a point" at 66 bid, 67 offered, while the 8 3/8% notes due 2016 fell 1½ points to 74 5/8.

Another trader said the bonds fell 1½ to 2 points on the day, seeing about $25 million of the 7¾% notes changed hands. He placed that issue at 66 1/8 and the 8 3/8% notes at 741/2, with about "$10-odd million" trading.

"The likelihood of [an Icahn takeover] not adding leverage is almost zero," he said.

Yet another source saw the 7¾% notes losing 2 points to end at 66¼ bid.

Icahn is expected to pay a total of $665 million for the Houston-based power producer if the sale is approved. Under the terms of the agreement, Icahn is launching a tender offer for outstanding stock, which ends Dec. 22. Dynegy will then have until Jan 24 to find a superior offer.

The agreement provides that if a better bid is found and Icahn doesn't want to top it, IEP will support it.

"All stockholders should benefit from the auction process which has now begun at a price which is 10% higher than the last bid," said Carl C. Icahn in a statement posted on Dynegy's website.

Still, bond market players are not all that jazzed about the proposal.

"We don't see how this improves bondholder status or recovery since Icahn presumably will be free to dividend out cash, do a recap or sell assets when and if he gets control - all equity-friendly results," wrote Gimme Credit LLC analyst Kim Noland in an afternoon report.

Noland noted that it seemed unlikely Dynegy would find a better bid, as it failed to do so after Blackstone made its offer just a few months ago. However, she isn't ruling out Seneca Capital, which - along with Icahn - had protested the Blackstone takeover, claiming that the valuation was too low.

"Maybe Icahn is trying to force someone else's hand, but right now given the previous shareholder vote in favor of a Blackstone deal, and Icahn affiliates ownership, IEP may already have enough votes to achieve a majority," she said in the report.

Among other energy companies, Energy Future Holdings Corp.'s 10% notes due 2020 fell a point to 1023/4.

OPTI hit by investor concern

A trader said "well over $100 million of assorted issues" of OPTI Canada traded during Wednesday's session - and the bonds continued to trade down.

He saw the 8¼% notes due 2014 dropping "almost 2½ points" to 643/4, on "certainly $50-odd million" traded. About "$40-odd million" of the 7 7/8% notes due 2014 changed hands, also lower at 64.

The 9% notes due 2012 - OPTI's first-lien paper - dipped to 98½ bid, 98¾ offered.

"Those had been a steady par bid through all the upheaval before," the trader said. "They should be more than covered."

"Part of it is the official downgrade [by Standard & Poor's announced Tuesday]," he said of the day's hefty trading activity in the credit. The other part was the fact that the Calgary-based company "has been in the process of presenting their plan now for months...and nothing has happened.

"People are starting to expect the worst," he added.

Additionally, "there is a whole group of people who still think it is 10 points too high and another group who still think it's fine."

At another shop, a trader said the bonds "continue to get hit," also placing the 8¼% notes around that 84 mark.

In early 2010, OPTI had said it was reviewing its strategic alternatives. As months wore on, it issued new debt, which gave it added liquidity, but didn't really improve its overall capital structure.

Just last month, OPTI said its ability to turn a profit depended largely on its Long Lake joint venture with Nexen Inc. However, due to production issues, Nexen warned that production from the project would be less than was anticipated.

Rite Aid quiet pre-earnings

Rite Aid's debt traded mixed - and in thin volume - ahead of the company's quarterly results release on Thursday.

A trader said the 8 5/8% notes due 2015 traded down a point to 88, but that there was only one trade. The 9 ¾% notes due 2016, however, traded up almost a point to 110 1/4, but again, on light volume.

"People have already done what they wanted to in anticipation [of the numbers]," the trader said. He speculated that the results could trigger more trading in the name, but only if the figures "deviate from what people are expecting."

Another source also deemed the 8 5/8% notes a point weaker at 88 bid.

Rite Aid is a Camp Hill, Pa.-based drugstore chain.

Broad market mixed

Elsewhere in distressed land, a trader said Clear Channel Communications Inc.'s 11% notes due 2016 were "maybe a touch lower" at 82½ bid, 83 offered.

The trader also said that the Great Atlantic & Pacific Tea Co. Inc.'s 11 3/8% notes due 2015 were continuing to trend higher into the high-80s.

In the financial space, Lehman Brothers Holdings Inc.'s paper was active, trading "with a 24-odd handle on most of them," according to a market source.

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