Overseas Shipholding improves, but DryShips in rough seas; Penney, Kodak show improvement

By Paul Deckelman

New York, Nov. 16 - Overseas Shipholding Group Inc.'s bonds remained active Friday for a third consecutive session following the oil tanker operator's mid-week bankruptcy filing. They continued to firm - a sign, traders said, that investors see value in the restructured company.

But while Overseas Shipholding seemed to be headed for calmer waters, sector peer DryShips Inc. extended losses, its convertible debt slipping down into the upper 60s from about 73 on Thursday and 79 or 80 on Wednesday. The Athens-based dry bulk ship and tanker operator reported poor quarterly results late Wednesday and gave a bleak outlook.

Also in the converts market, Central European Distribution Corp. traded all the way down to 60 on Friday, after putting in a relatively strong showing on Thursday in the aftermath of a letter from its largest stockholder and chairman of the board, Roustam Tariko, outlining problems plaguing the Polish vodka maker and beverage distributor, including a bribery investigation.

In the bank debt market, some details emerged on the exit financing package being put together for bankrupt paper manufacturer NewPage Corp.

Back among the bonds, traders saw some improvement in J.C. Penney Co., Inc.'s recently beleaguered paper, and in that of the restructuring Eastman Kodak Co.

But Cengage Learning Acquisitions Inc.'s bonds remain under pressure.

OSG bonds get better

Traders saw continued post-filing improvement in the bonds of Overseas Shipholding Group, which sought Chapter 11 protection from its bondholders and other creditors at mid-week from the U.S. Bankruptcy Court in Wilmington, Del.

A trader said that the New York-based oil tanker operator's 8 1/8% notes due 2018 were up about ¾ point Friday to the 37 bid mark. With over $18 million of the notes having changed hands, it was among the busiest junk bond issues.

That mirrors the pattern seen on Wednesday, when more than $50 million of the bonds traded, and again on Thursday, on volume of $25 million - in each case situating the '18s at or right near the top of the Most Actives list.

A second trader pegged the bonds in a 37 to 38 bid context, versus the 36 level seen on Wednesday, "so it was a little bit better today."

Overseas Shipholding's bonds "definitely popped after the bankruptcy news," another trader agreed, noting that the bonds had gyrated around from Wednesday's lows under 20 bid into the lower 30s, and then up to the mid-30s by Thursday and somewhat beyond that on Friday.

"You have the guys buying it" in anticipation of the company's eventual emergence from bankruptcy, presumably expecting to trade their respective stakes in the debt for sizable equity positions in the ultimately restructured company.

"Your distressed players are now the typical buyers and active traders and participants in that name."

DryShips treading water

While Overseas Shipholding's bonds seemed to be stabilizing in the 30s after having traded well below that initially when the company filed for bankruptcy, one of its sector peers, Athens-based dry bulk and tanker operator DryShips, continued to encounter some rough seas.

The company's 5% convertibles due 2014 traded down to 68 bid, 69 offered on Friday, from about 73 on Thursday and are well down from the 79 to 80 range seen on Wednesday.

Its Nasdaq-traded shares meantime plunged as low as $1.46 in intraday dealings, down some 12.5%, before finally bouncing off their lows late in the day to finish up 3 cents, or 1.80% on the day, at $1.70. Volume of 13.3 million shares was nearly four times the norm.

On Thursday, the shares had plummeted 20%.

The shares were downgraded to neutral from buy by Global Hunter Securities on Friday.

The slide in the converts and the underlying shares has been sparked by disappointing earnings the company posted at mid-week.

DryShips reported a third-quarter net loss of $51.3 million, or 13 cents per share, versus a profit of $25 million, or 7 cents per share, in the year-earlier period.

Excluding one-time items, the company loss $33.3 million, or 9 cents a share, which was greater than the 2 cents a share loss expected.

Revenue rose 8% to $343.6 million.

The company warned that the shipping market remains severely depressed, with both its tanker and drybulk spot charter rates standing at historic low levels, which are well below cash breakeven, its chairman and chief executive George Economou, commented in a release.

Economou went on to say: "The deteriorating economic situation in Europe, together with Basel III capital requirements, have led a number of shipping banks with large portfolios to exit the sector. High profile restructurings and payment defaults have started to take their toll on the few remaining lenders. This comes at a time when we have significant capital expenditures to finance our drybulk and tanker newbuilding programs. The lack of liquidity is further exacerbated by falling asset values, which continued to decline during the quarter."

Central European converts fall

Also in the convertibles market Friday, Central European Distribution's 3% converts due 2013 traded down to 60 after having changed hands earlier in the session at 66 bid, 67 offered, a New York-based trader said.

The paper traded at 73 and 74 on Thursday, and on Wednesday, it was quoted 55 bid, 75 offered, but weren't heard in trade.

"If he doesn't give them money, they aren't going to pay back these bonds," the trader said, referring to its largest stockholder and chairman of the board, Roustam Tariko. Management hasn't been holding up its end of the bargain, he added.

This past week, the company disclosed in a regulatory filing, via a letter from Tariko, that its executives are subject to a U.S. government investigation that is potentially serious.

The company had previously determined that payments were made in a foreign country where the company operates and that there was insufficient accounting about the payments.

Kodak, Penney's bonds better

Back in the junk bond market's distressed-debt precincts, a trader said that Eastman Kodak's bonds were better, with the bankrupt Rochester, N.Y.-based photography and visual imaging products giant's 9 ¾% senior secured notes due 2018 having firmed several points to around the 73 bid level.

He said that he had not seen any specific news out that might be responsible for the strengthening, instead opining that "there's been more [recent] clarity on the potential new financing for the company. That's what probably is helping drive this."

The trader also saw retailer J.C. Penney's lately faltering bonds a little better on Friday, again for no concrete reason.

"There was not a tremendous amount of activity in them - but the bonds were a little bit better."

He saw the Plano, Texas-based department store operator's 2037 bonds trading around 83½ bid, 84½ offered, up from Thursday's levels around 82.

"It just felt like J.C. Penney bonds were a half-point to a point better."

He meantime saw "some activity" in Penney peer Sears Holding Corp.'s 6 5/8% notes due 2018, but no real change in levels, with the bonds holding around 92 bid, after the Hoffman Estates, Ill.-based department store company posted earnings. While Sears' bonds were steady on busy volume of over $11 million, its Nasdaq-traded shares nosedived $10.99, or 18.79%, to end at $47.49 on the numbers. Volume of 6.6 million shares was six times the usual turnover.

Cengage weakness continues

While Kodak and Penney were doing better, the trader said that Cengage Learning's 11½% notes due 2020 were "a little lower" on the session, locating the bonds around 77 bid, 78 offered.

The bonds have been losing ground since the Stamford, Conn.-based provider of teaching, learning and research services recently reported disappointing fiscal first-quarter results.

For the fiscal first quarter, Cengage's net income was $13.2 million, down from $131.5 million in the prior year, revenues were $538.3 million, down from $691.9 million, and adjusted EBITDA was $233.1 million, down from $348.8 million in the previous year.

Following those poor results, Moody's Investors Service downgraded the company's corporate family rating on Tuesday to Caa3 from Caa1.

NewPage loan pricing takes shape

In the bank debt market, a source said that NewPage had reduced pricing on its $500 million six-year term loan to Libor plus 650 basis points from earlier talk of Libor plus 675 bps to 700 bps.

The loan will have a 1.25% Libor floor and an original issue discount of 98 and is non-callable for one year, then at 102 in year two and 101 in year three.

The company's $850 million exit financing credit facility also includes a $350 million five-year asset-based revolver that is priced at Libor plus 200 bps with a 37.5 bps unused fee.

Goldman Sachs & Co., J.P. Morgan Securities LLC, Barclays Capital Inc., Wells Fargo Securities LLC and UBS Securities LLC are the lead banks on the deal for the Miamisburg, Ohio-based coated paper manufacturer, which filed for protection in September 2011.

Proceeds of the financing will be used to fund distributions under the company's Chapter 11 plan, including repayment of claims arising under the debtor-in-possession financing facility and a cash distribution to the first-lien noteholders, payment of cash distributions under the settlements in the plan and the funding of the reorganized debtors' post-emergence working capital needs.

Rebecca Melvin and Sara Rosenberg contributed to this report.

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