Overseas Shipholding bonds sink on tax bite fears; Edison Mission busy; no J.C. Penney moves

By Paul Deckelman

New York, Aug. 26 - Overseas Shipholding Group Inc.'s bonds fell in busy trading on Monday along with its shares, after the bankrupt tanker company filed revised financial statements.

The company said it was ready to begin negotiating with the Internal Revenue Service on the federal agency's claims for back taxes - and warned that the possible tax bite that could result will be "significant," perhaps reaching as much as the roughly $460 million that Uncle Sam is seeking.

Elsewhere, there was relatively busy trading seen in some of Edison Mission Energy's bonds. However, there was no fresh news seen out on the wind-powered energy company, which is currently in Chapter 11.

Also in the power-generation space, some distressed market watchers took notice for possible future reference of the current troubles of another California-based energy company - PG&E Corp. The company is currently under scrutiny by state utility regulators in connection with a 2010 pipeline explosion, which could result in more than $2 billion of fines - a sum that the company warns could potentially push it into bankruptcy.

There was little immediate trading in J.C. Penney Co. Inc.'s bonds on the news - announced around the time that the financial markets were closing - that the troubled retailer's largest shareholder, hedge fund manager William Ackman, will put his company's 39 million shares, or 18%, up for sale.

Overseas Ship springs leak

A trader said that even though the distressed market overall was pretty quiet, "stuff was still happening."

For instance, he said that Overseas Shipholding Group's 8 1/8% notes due 2018 "dropped down a couple of points today," pegging the bonds as trading in an 87-to-88 context most of the day.

He said the last trade, at 88½ bid, was down 2 points on the day.

A second trader also saw those bonds down a deuce, going out at 89 bid, on volume of over $6 million.

The 7¼% notes due 2024 sank by 3½ points to 87 bid, but on only one or two large trades.

The company's over the counter-traded shares nosedived by 45 cents, or 11.84%, to end at $3.35. Volume of 227,000 shares was almost twice the norm.

The paper got pounded as the bankrupt New York-based tanker operator said that it is now in a position to begin negotiating with the Internal Revenue Service after completing a review and restatement of its financial statements for the past 12 years.

"The company believes, based on its analysis and its interactions with the IRS to date, that the actual amount of tax that the company ultimately will be required to pay to the IRS in respect of the potential deemed dividends and other adjustments discussed above will be significant and could be as high as $460 million, or potentially higher, for all periods ending on or before December 31, 2012, not taking in account any potential penalties but including interest," the company wrote in a form 10-K filed Aug. 26 with the Securities and Exchange Commission.

However, the company says it "has several defenses available to mitigate its liability and intends to assert those defenses vigorously."

The IRS has filed proofs of claims totaling $463.01 million in the Chapter 11 bankruptcy case.

The company's attorney said during an Aug. 26 hearing in the U.S. Bankruptcy Court for the District of Delaware that the completion of the financial review provides the basis for negotiations to begin on that claim.

Edison busy, little changed

Another bankrupt name seen trading around on Monday was Edison Mission Energy, whose 7% notes due 2017 were seen by a market source up a quarter-point on the day at 64¾ bid on volume of over $5 million.

The 7¾% notes due 2013 fell by 2 points, to 61¾ bid, but on only a handful of odd-lot transactions.

A second trader said that Irvine, Calif.-based wind energy projects company's 7% notes were "pretty much unchanged" in a 64 to 65 context.

"They've been in the 60s, around 62 to 64, most of last week. They seem about unchanged."

Edison Mission is a unit of major Southern California utility operator Edison International Inc.

PG&E not distressed - yet

San Francisco-based PG&E Corp. is not a distressed-debt name - yet, the second trader said, noting that "it still trades on spread off the investment-grade desks."

But recent news could conceivably change all that, possibly even returning the company to bankruptcy, where it had landed 12 years ago during the California power deregulation crisis.

"We made a lot of money trading their first mortgage bonds back then," the trader noted.

California utility regulators are scrutinizing the company in connection with a 2010 pipeline explosion that killed eight persons.

The staff of the California Public Utilities Commission has recommended a $2.25billion fine against the company.

PG &E's chief executive officer, Tony Earley, warned last week that imposing such a large penalty might force the company back into bankruptcy if it can't sell enough shares to pay for it.

The company has already spent almost that amount to clean up from the disastrous accident, and such a large fine could bring its total tab to over $4 billion. It is asking the CPUC to let what it has already spent be counted toward any fine.

The final decision, around year-end, will rest with the commission's administrative law judges.

J.C. Penney quiet

Elsewhere, there was little immediate bond-market response to the news - announced late in the day - that Pershing Square Capital Management is offering to sell its 39.1 million shares of J.C. Penney Co. stock.

While there was some odd-lot trading in the company's bonds, there were few sizable trades of, say, over $100,000, and none in round-lot territory of $1 million or up.

The company's 7.65% notes due 2016 rose by a half-point to 89 bid, but on limited trading.

The New York-based hedge fund, controlled by activist investor William Ackman, is for the moment the largest single shareholder in the troubled Plano, Texas-based department store operator.

Ackman recently announced his resignation from the company's board of directors following rounds of mutual sniping over appointing another chief executive officer.

Two years ago, Ackman helped engineer then-CEO Myron "Mike" Ullman III's replacement by Apple Inc. executive Ron Johnson, but the latter's attempts to boost Penney's sales by drastically overhauling the venerable store chain proved to be disastrous, as sales fell even faster.

That led to Johnson's ouster earlier this year.

Jim Witters contributed to this review

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