Catalyst Paper punished after poor earnings; NewPage doesn't follow; Sino-Forest seen higher

Paul Deckelman

New York, Aug. 1 - The distressed debt market began the new month with the bonds of Catalyst Paper Corp. gyrating wildly at lower levels after the Canadian paper manufacturer reported a wider adjusted second-quarter loss from a year ago. The numbers also showed a sequential deterioration from the company's first-quarter results; total liquidity was also lower from a year ago, mostly on a reduced credit facility borrowing base.

While many people in the market sometimes think of them almost as twins joined at the hip, since their bonds often move in tandem, Catalyst sector peer NewPage Corp. demonstrated that it ain't necessarily so. NewPage's bonds were only slightly easier while Catalyst was on its roller coaster ride.

Sino-Forest Corp.'s bonds were seen up more than a point, although real trading in the beleaguered timber company's paper, which had been savagely chopped down some weeks back due to a hugely critical research report on the company, was actually pretty light.

Traders saw some activity in Hovnanian Enterprises Inc.'s bonds, which recently have been getting hammered down on renewed investor worries about the health of the overall homebuilding sector.

Overall trading in the distressed debt precincts, however, was described as pretty quiet, in line with generally relaxed activity levels in the larger junk bond market.

There was little or no activity seen in the bank loan paper of distressed companies, traders in that market said.

Catalyst gets clobbered

A trader said: "From the opening this morning, I saw Catalyst go on a ride," after the Richmond, B.C.-based paper manufacturer reported poor earnings.

"They had numbers out," he said, "and it was just ugly."

He said that he "didn't think there was much volume, but [levels] sure did go on a ride. It was pretty interesting."

He saw the company's 7 3/8% notes due 2014 were being quoted down as much as 12 points from their prior levels at one point in the day, bottoming at around a 40-42 context, while the company's 11% senior secured notes due 2016 were seen during the morning at 70-73, down 8 points from their Friday finish.

By the end of the day, he saw the 7 3/8s having come off their lows a little to end around 43 bid, 45 offered, while the 11s were going home at 74 bid, 75 offered, "so they were up off the bottom. So down 8 [points], up 4 [from the bottom], they're still down 4 for the day."

He noted that the 11% notes are 144A, "so you really can't see how much volume there was, but there definitely wasn't any volume in the 7 3/8s. They were just quoted down. I would say that the 11s definitely traded more, and they were definitely heavily traded," even though there was no visibility on just how much.

A second trader said the Catalyst secured notes traded down as much as "7 or eight points," but saw trades "in the middle of the day" around the 73 level versus a price of 80 bid on Friday, "so definitely" they were off.

Another trader said he didn't think any of the 7 3/s8 actually traded, "so it'll probably work out to the upper 40s."

Catalyst, which runs five mills in British Columbia and one in Arizona, disclosed that during the second quarter ended June 30, it lost C$47.4 million, or 13 cents per share, on C$297.8 million of revenue. That compares favorably to its year-earlier per-share loss of 96 Canadian cents, although that earlier period included unusual expenditures, such as the cost of closing down its Elk Falls, B.C. mill and paper recycling division.

Excluding such non-recurring gains and losses, including C$5.7 million of costs during the latest quarter related to fires at two of its mills, the company lost C$46.9 million in the quarter, or 12 Canadian cents per share, versus its adjusted 11 cent per-share loss a year ago.

The loss was also wider than the first quarter, when Catalyst lost C12.9 million, or 3 cents per share, on C$303.6 million of revenue. Ex-special items, the first-quarter loss came toC23.6 million, or 6 Canadian cents per share.

Catalyst blamed its wider sequential loss on reduced production and increased maintenance costs and downtime - particularly at its Powell River and Snowflake mills, each of which suffered a fire.

The company also cited a slackening off of buying by Chinese customers, and the strength of the Canadian dollar, which makes Catalyst's products more expensive to non-Canadian customers.

Catalyst's chief executive officer, Kevin J. Clarke, predicted that in the current second half of the year, demand for coated and uncoated papers is likely to firm up while pulp prices recover from their summer downturn. But demand for the grades of paper used in phone books and other directories, as well as for newsprint, will continue their long decline.

Catalyst's total liquidity at the end of the quarter was C$136.4 million, down from C$208.3 million at the end of the year-earlier quarter. This was primarily due to a lower borrowing base associated with its amended revolving asset-based loan facility. In late May, the company and its bankers agreed to reduce the size of that loan to C$175 million from C$330 million and extend the maturity to May 31, 2016 from Aug. 13, 2013.

Catalyst also cited the impact of a decrease in cash on hand and an increase in letters of credit.

NewPage not connected

A trader said that while the Catalyst paper was being quoted and traded at considerably lower levels on the company's numbers, "I don't think that [sector peer] NewPage really followed - why should they?"

He quoted the Miamisburg, Ohio-based coated paper manufacturing company's 11 3/8% first-lien senior secured notes at 89½ bid, 90½ offered, while its 10% second-lien notes due notes due 2012 were at 23 bid, 125 offered.

He said those levels were "pretty much where they started the day," allowing that the 11 3/8s might be "down slightly," meaning about a half-point on "decent volume," while the 10s may have been off by a point in "moderate trading."

A second trader said that the NewPage bonds "started out weaker, down a quarter, and is probably unchanged at the close, pegging the bonds at around 90-901/4.

At another desk, a market source quoted the 11 3/8s at 89 7/8 bid, while seeing the 10s at 23. He saw fairly active dealings in both issues, estimating volume in the 11 3/8s at about $9.5 million at mid-afternoon, while seeing $7 million of turnover - enough to put both issues near the top of the day's Junkbondland most-actives list, particularly if split-rated "5B" or hybrid credits from otherwise investment-grade rated financial companies like Capital One Financial Corp. are excluded.

Sino-Forest seen higher

Sino-Forest Corp.'s 10¼% notes due 2014 were seen by a market source to have moved up by 1 3/8 point on Monday to 76½ bid.

However, the source noted that the move reflected just one large-block trade.

Sino-Forest's bonds and shares were actively traded for several weeks back in June after short-seller Carson Block's Hong Kong-based research and trading firm Muddy Waters LLC issued a scathing report on Sino-Forest, in which it accused the Canadian-Chinese timber company of widespread fraud and likened its capital-raising efforts to Ponzi scheme. The company vehemently denied the allegations and suggested Block was deliberately trying to hammer the share price down so he could make money selling it short.

That battered the bonds heavily and caused its Toronto Stock Exchange traded shares to plunge to as low as the C$2 mark - a 90% plunge - from pre-report levels above C$18.

After that June flurry, the company seemed to drop off the radar screens for a while, but resurfaced in July with the disclosure that two large hedge funds - Wellington Management and New Zealand billionaire Richard Chandler's Mandolin Fund Pte. - had taken large equity positions in the company, of 11.5% and 15%, respectively, helping to bring the shares back to around the C$7-8 range.

Clear Channel comes off

A trader said that Clear Channel Communications Inc.'s bonds "looked like they moved a little lower," quoting the San Antonio, Texas-based media company's 10¾% notes due 2016 in an 87-88 context, which he called down a point.

He said, though, that it was mostly "small trades, not much [activity], but that's a big facility," weighing in a nearly $1 billion.

There was no fresh news seen out about the radio and outdoor advertising company.

Hovnanian holds levels

A trader said that Hovnanian Enterprises' issue of 10 5/8% notes due 2016 "has been a pretty active name," quoting the Red Bank, N.J.-based homebuilder's credit at 93 bid, 94 offered, which he said was in line with recent levels, "but I've just seen them quoted a lot."

He said that credit default swaps protecting Hovnanian holders against a potential defaults "definitely [are] actively quoted."

At another desk, a trader said that Hovnanian "was pretty active," seeing the 11 7/8% notes due 2015 were up a point to 63 bid, 63¾ offered, "though I don't know why."

The Hovnanian bonds had been getting pushed around last week, traders said, on a combination of investor angst about continued weak housing sales and home prices, proven by recent federal and industry data, as well as fears that home mortgage deductibility could in theory be on the chopping block as Washington looks for new revenues through tax code revisions, although it appears no such actions will be immediately taken, according to news reports about the much-heralded debt ceiling agreement.

OPTI quiets down

A trader said that OPTI Canada Inc.'s 8¼% notes due 2014 and 7 7/8% notes, also due 2014, "seem to be holding" in a 64-65 range, the level to which the troubled Calgary, Alta.-based oil-sands energy company's paper rose on the recent announcement that it is to be bought by China National Overseas Oil Corp. in a transaction valued at $2.1 billion.

He said that the bonds were about unchanged, with not too much activity, since "the activity was [when the July 20 announcement was made], not today, that's for sure."

Kodak is quiet

A trader said that Eastman Kodak Co.'s 7 ¼% notes due 2013 looked about unchanged at 81 bid, 83 offered. The Rochester, N.Y.-based photographic products and digital imaging technology company's bonds had traded actively at lower levels last week after the company announced a wider second-quarter loss versus a year earlier and greater cash burn through its liquidity resources.

Separately, Kodak on Monday adopted a shareholder rights plan designed to protect some $2.9 billion of tax assets it can use to offset tax liabilities, by making it more difficult for an individual shareholder to accumulate more than a 4.9% stake in the company.

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