OGX bonds get hit as company cuts targets; positive executive comments help boost coal credits

By Stephanie N. Rotondo

Phoenix, June 27 - The distressed bond market was mixed Wednesday, though trending toward the firmer side.

A new name popped up on distressed players' radar during the session. OGX Petroleo e Gas Participacoes SA, the Brazilian oil company owned by Eike Batista, saw its bonds drop as much as 8 points on the day after the company cut its production targets.

However, Petroleos de Venezuela SA, the Venezuelan state-owned oil company, saw its bonds gain despite no fresh news.

In the coal sector, names like Patriot Coal Corp. and Alpha Natural Resources Inc. were rebounding a bit. Coal stocks were also higher, which was attributed to comment made by Peabody Energy Inc.'s top executive in a conference call on Tuesday.

Away from anything energy-related, Residential Capital LLC paper gave back some recent gains, though there was no news out to cause the decline.

OGX suffers as targets clipped

OGX bonds were down Wednesday after the company cut its first production targets.

One trader saw the bonds dropping at least 6 points, the 8 3/8% notes due 2022 at 89 5/8 and the 8 ½% notes due 2018 at 89.

Another trader said the debt was "very active" and "down a good bit," speculating paper had fallen 7 to 8 points on the day.

He said the debt dropped to the high-80s from the mid-90s.

OGX "was the big volume leader, after they reported that some wells weren't working out the way they planned," a third trader said, and another of its issues was the fourth-most-actively traded credit.

He saw the 8½% notes last trading on a round-lot basis at 89, versus Tuesday's levels between 96¾ to 98, "so from yesterday's high to today's low, it was like 9 points."

He meantime saw the 8 3/8% notes last trading at 89 5/8, versus only one trade Tuesday at 96, a change of 6 3/8 points.

OGX said late Tuesday that it plans to maintain output of 5,000 barrels per day at its first two wells. The company had previously estimated that it could get 20,000 barrels per day.

However, the company also noted that it intended to increase production within the next 12 months.

Among other foreign oil companies, PDVSA's bonds were heavily traded and firmer, though on no news.

A trader placed the 9% notes due 2021 at 72, up nearly 3 points on about $46 million traded. The 8½% notes due 2017 inched up more modestly, closing at 80¼ on about $32 million traded.

Coal sees a rebound

Positive comments about the coal industry made by Peabody Energy's chief executive, Gregory Boyce, helped to give the entire space a boost in midweek trading.

"Coal still seems to be on the heavier side, although there were some prints that were moving up today," a trader said.

Patriot Coal's 8¼% notes due 2018 "definitely rebounded," he said, pegging the issue in a 32 to 35 context. That compared to levels with a 30 handle on Tuesday.

Another trader called Patriot's debt up 4 points around 35. Alpha Natural's bonds were up about a point, the 6% notes due 2019 at 85¾ and the 6¼% notes due 2021 at 85.

In a conference call Wednesday, Boyce speculated that the coal arena could soon turn around, given expectations that foreign demand for coal will increase.

"We project they will reach a record 285 million tons in 2012 as the country increasingly looks to the seaborne coal markets," Boyce said. "We expect global metallurgical coal use to increase 25% by 2016, translating to an additional 250 million tons of demand growth, with the bulk of increases led by China and India."

But Boyce's optimism has not been shared by all.

On Tuesday, James River Coal Co. was downgraded for the second time in three months by Standard & Poor's. On Wednesday, Moody's Investors Service cut its rating on Arch Coal Inc.

And, independent research firm Gimme Credit LLC downgraded Alpha Nautral to 0 from 1.

In all cases, the downgrades were based on the belief that the coal industry will have several more quarters of hard times. There has also been speculation that foreign coal demand might not meet expectations.

ResCap gives up gains

There was no news out on Minneapolis-based Residential Capital on Wednesday, but the bonds were heavy nonetheless.

A trader called the 6½% notes due 2013 down 1½ points at 251/2, with about $22 million of the bonds changing hands. Another trader also called the issue weaker, placing it at 25, down from "26 and change."

Strength for distressed

Among other distressed issues, Nokia Corp.'s 6 5/8% notes due 2039 "had a little bit of a rebound," according to a trader.

He deemed the notes up half a point at 771/2.

Another trader said NewPage Corp.'s 11 3/8% first-lien notes due 2014 were "up dramatically, but no trades." He saw a 66 bid for paper, leaving him to opine, "There might be a short squeeze going on."

Dynegy Holdings LLC's 8 3/8% notes due 206 meantime were "up a few" at 67 bid, 68 offered.

And, Ambac Financial Group Inc.'s debt - which tends to trade on top of one another - climbed up to levels around 24.

"They are potentially closer to an IRS settlement," the trader said.

Paul Deckelman contributed to this article

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