Caesars bonds active, mostly off amid dueling lawsuits; coal credits climb

By Paul Deckelman

New York, Aug. 5 – Caesars Entertainment Corp.’s bonds were among the most actively traded credits on Tuesday. They were seen mostly lower, in line with a slide in the gaming giant’s shares, amid what could be called “dueling lawsuits” between the company and its creditors, with the latter alleging Caesars fraudulently transferred billions of dollars of assets to a new company to keep them out of the hands of the creditors in the event of a debt restructuring. The company, in turn, alleged that some of its big creditors are trying to panic the markets and push Caesars into a default so they can profit on derivatives trades.

Elsewhere, traders saw a fair amount of activity, mostly to the upside, in the bonds of coal operators such as Arch Coal, Inc., Alpha Natural Resources, Inc. and Peabody Energy Corp.

But 21st Century Oncology Inc.’s bonds were once more on the downside.

In the convertibles market, meanwhile, earnings news was driving a lot of the action, including movements in Cobalt International Energy Inc. and sector peer Endeavour International Corp.

Cobalt’s two convertible issues fell, along with the underlying shares, which dropped 11%, after the Houston-based oil exploration and production company reported a bigger-than-expected quarterly loss and disclosed it received a Wells notice from the U.S. Securities and Exchange Commission – a warning that the SEC plans to bring an enforcement action against a person or company – relating to Cobalt’s oil operations in Angola.

Endeavour International’s 5.5% convertibles due 2016 were quoted at 41 bid, 45 offered as shares of the Houston-based oil and gas exploration and production company fell about 12% after it posted a wider adjusted net loss for its quarter but said that physical production exceeded revised guidance. The Endeavour bonds had recently been at about 50.

And municipal investors with exposure to Puerto Rico’s bonds were pondering the meaning of the latest economic data to come out of the island commonwealth.

Caesars seen active

A distressed-debt trader said that overall things were “pretty quiet – but there’s a lot of that going around.”

However, he did see about $10 million of Caesars’ 10% notes due 2018 trading in a 31-32 context, calling the bonds “pretty much unchanged.”

Another trader saw those bonds – originally issued by the Las Vegas-based gaming giant’s corporate predecessor, Harrah’s Entertainment Corp. – up 7/8 point on the day at 31 7/8 bid on volume of over $11 million, and a third also saw the bonds up around 1 point, at 31¾ bid.

The company’s Caesars Operating Escrow LLC 9% notes due 2020 were seen by a market source having firmed by ½ point on the session to 83¾ bid on about $10 million of turnover.

However, many of the company’s other bonds were seen lower.

A trader said that the Caesars Entertainment Operating Co. 8½% notes due 2020 closed 1 point lower at 88 bid on volume of over $11 million.

He saw that entity’s 12¾% notes due 2018 down as much as 10 points in intraday trading before going home at around 35¼ bid, still a 4-point loss. But while there were a lot of trades, he said, “it was all odd lots.”

Two other issues also were seen down about 4 points on the day, though again, almost all of the busy dealings were in odd-lots rather than the larger round-lots.

The old Harrah’s 10¾% notes due 2016 dropped to 57 bid, while its 6½% notes due 2016 finished at 60½ bid.

At the same time, Caesars’ Nasdaq shares slid by $1.34, or 9.54%, to close at $12.71 on volume of around 4.6 million shares, about five times the norm.

The bonds and shares gyrated against the backdrop of further legal battling between the beleaguered gaming company and some of its bondholders.

A bondholders’ group filed suit with the Delaware Court of Chancery – Caesars is incorporated in Delaware, even though it is based in Nevada – alleging that the company had acted improperly late last year and earlier this year with the transfer of some of its assets – including Caesars’ interactive gambling unit, its Planet Hollywood casino in Las Vegas, Bally’s Las Vegas and Harrah’s New Orleans – to a newly formed entity, Caesars Growth Partners. They said this was done to keep those assets out of the reach of bondholders and other creditors in the event of a debt restructuring, a possibility that analysts have been talking about for some months now.

Caesars fought back with a lawsuit in New York, where many of its creditor firms are based, alleging that they were attempting to push the company into being declared in default in order to profit on CDS trades linked to its securities, using such tactics, the company said, as “unfounded threats and bogus allegations” aimed at panicking Caesars investors. The company also cited what it termed “meritless appearances before regulators” and the serving of what Caesars says was a “baseless” default notice in June.

Coal credits climb

In the coal sector, a trader said that “Arch Coal had some activity,” calling the St. Louis-based coal operator’s 7% notes due 2019 up between 1 and 1½ points in a 68½ to 69½ context on volume of over $10 million.

He saw the company’s 7¼% notes due 2021 at 64-66, calling that up 1 to 1½ points on around $10 million of volume, “so there was good activity in that name today.”

Another trader saw the latter notes up 1 9/16 point at 65 5/16 bid.

Arch’s cross-town competitor, Peabody Energy’s 6½% notes due 2020 gained 2 points on the day to close at 97½ bid, a market source said.

Bristol, Va.-based based Alpha Natural Resources’ 6¼% notes due 2021 were seen up more than 4 points at 65 bid.

Radiation Therapy retreats

The recently battered bonds of the former Radiation Therapy Services Inc. – the Fort Meyers, Fla.-based health-care company now known as 21st Century Oncology – lost 2¾ points on Tuesday to end at 78¾ bid, a market source said.

A second trader, who also saw the bonds at that level, called them down 3 points on the day.

The company’s bonds have been under pressure over the past several weeks because of investor worries about possible reductions in federal Medicare and Medicaid reimbursements to health-care services providers may mean for the company’s bottom line.

Cobalt ‘comes in’

In the convertibles market, Cobalt International Energy’s issue of 3 1/8% convertibles due 2024, which is the company’s newer bond that priced in May, traded at 93.343, according to Trace data at mid-afternoon.

Cobalt 2 5/8% convertibles due 2019 changed hands at 85.25.

Cobalt shares were down $1.81, or 11%, at $14.16 at that point.

The two bond issues were called down by 1 point on a dollar-neutral basis.

Earlier in the session, a second New York-based trader said that Cobalt “was the No. 1 trader posting earnings” and that the stock was down 10%, but the bonds were “just nuking,” or moving lower in line, or flat, on a hedged basis with lower shares.

As for what was weighing on the securities most, one trader said, “I think it’s both, but more the Wells notice” – a warning from the SEC that it intends to commence an enforcement action.

That investigation news has been out there, he said, but there was nothing good about the earnings.

“They abandoned one of their wells,” he noted.

The investigation related to the Wells notice has been ongoing since 2011.

As for the recommendation of an enforcement action alleging violations of certain federal securities laws, the company said in a filing that the SEC staff “may recommend that the SEC seek remedies that could include an injunction, a cease-and-desist order, disgorgement, pre-judgment interest and civil money penalties.”

The company also said the Wells notice “is neither a formal allegation nor a finding of wrongdoing. It allows the company the opportunity to provide its reasons of law, policy or fact as to why the proposed enforcement action should not be filed and to address the issues raised by the staff before any decision is made by the SEC on whether to authorize the commencement of an enforcement proceeding. The company intends to respond to the Wells notice in the form of a ‘Wells Submission’ in due course.”

The company said it believes its activities in Angola have been compliant with all laws, including the U.S. Foreign Corrupt Practices Act.

As for its quarterly results, Cobalt said it lost $95 million for the second quarter, or 23 cents per share, compared with a net loss of $79 million, or 19 cents per share, in the year-earlier period. Analysts were expecting a loss of 17 cents per share.

Endeavour slides

Also among the convertibles, Endeavour International’s 5.5% converts due 2016 were seen at 41 bid, 45 offered on Tuesday. Recently the bonds had been at about 50.

Endeavour shares fell 19 cents, or 13.5%, to $1.22 on Tuesday.

A slide of that amount for a $1.00 stock isn’t much, a New York-based trader said of Endeavour, and “the converts trade like once every few months.”

The convertible trades in oil/energy sector names were not associated with a sector move, a New York-based trader said. The trading was company-specific. Trading in Penn Virginia, for example, was related to amounts the company will be receiving from an asset sale and arbitration settlement. The company will receive $73 million from the closing on its sale of Mississippi assets and about $35 million in an arbitration settlement related to its 2013 Eagle Ford acquisition.

Pondering Puerto Rico

In the municipals market, investors with exposure to the bonds of Puerto Rico and its Puerto Rico Electric Power Authority have been studying the latest economic figures out of the island commonwealth to see what they might mean for their holdings.

In a research note Tuesday, Alan Schankel, a managing director at Janney Montgomery Scott LLC, noted that the past three monthly releases of Puerto Rico’s Economic Activity Index “have shown month-over-month as well as year-over-year contraction.”

But he suggested that “perhaps there is a silver lining to the June report, which indicated a 1% annual decline.”

He pointed out that “for the first time in two years, three of the four indicators that comprise the index were higher YoY. Cement sales, electric power generated and gasoline consumption totals were all higher than in June 2013 (+4.3%, +1.9% and +1.4%), but employment pulled the index lower, falling -1.2% versus last June.”

Schankel said that a further breakdown of employment data “shows that the private payroll component actually rose by +0.8% YoY, but the overall number was dragged down by a -6.5% YoY decrease in public sector employment, with the PR Government Development Bank noting the 16,500-job decline in public employment was ‘due to policy decision to bring down the fiscal deficit.’”

“Commonwealth and municipal government employment account for over 25% of total employment, so reduction in public payroll should provide a long-term benefit to fiscal balance, however painful in the short term,” he declared, noting that Puerto Rico bond trading levels have been steady in recent weeks, with blocks of the 8% general obligation bonds of 2035 printing in the 8.97% to 9.13% range since July 18, while the Electric Power Authority issues have traded at a 47½ to 48 5/8 dollar price.

Rebecca Melvin and Sheri Kasprzak contributed to this review.

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