Catalyst Paper stays strong; Rite Aid bonds gain on sales; Horizon Lines refi boosts converts

By Stephanie N. Rotondo and Paul Deckelman

Portland, Ore., June 2 - The distressed debt market "continued to be on the slower side," a trader said Thursday.

"Summer is here," he noted.

Plus, the general heaviness of the broad markets resulted in a "few things being quoted lower," he said.

Still, Catalyst Paper Corp. continued to buck the trend and the company's debt ended a couple of points better on the day. The bonds had risen in the previous session as well on news of an amend-and-extend agreement.

Rite Aid Corp. was also slightly higher following the release of the company's latest sales report. Though sales improved for the month - and the quarter - an analyst believes that Rite Aid might not perform as well as its peers.

Also on the winners list was Horizon Lines Inc. The company announced a refinancing plan late Wednesday and come Thursday, a trader saw the convertible notes gaining at least 8 points.

On the down side, iStar Financial Inc.'s preferred shares were unusually active during the session and weaker. However, there was no news out to explain the losses.

DirectBuy Holdings Inc. was also lower, also on no news.

Catalyst gains continue

Catalyst Paper's 7 3/8% notes due 2014 "have been better," a trader said.

He saw the notes at 61 bid, 62 offered, up from levels around 59. The 11% notes due 2016 were meantime pegged at 92½ bid, 93½ offered, compared with 91 bid, 92 offered the day before.

On Tuesday, the Richmond, B.C.-based papermaker said it had secured an amend and extend on its $330 million asset-based loan facility due August 2013. The amendment altered the facility, making it a C$175 million ABL facility coming due May 31, 2016.

The reduced borrowing capacity "reflects reduced working capital levels due to the permanent closure of the company's Elk Falls mill in 2010," Catalyst said in a press release.

The financial covenants in the facility were also replaced by a covenant to maintain a minimum fixed charge coverage ratio of 1.1/1.0. The covenant is triggered only if excess availability under the amended facility falls below $22 million.

Additionally, the fixed assets of the Snowflake mill are not part of the borrowing base and become first-lien security under the company's senior secured note facilities. This will allow for the issuance of an additional $60 million of senior secured notes under those facilities.

In sector peer NewPage Corp., a trader said there was "not too much" going on, adding that prices were "not all that different."

He saw the 11 3/8% notes due 2014 around 96 and the 10% notes due 2012 at 41 bid, 42 offered.

Fraud charge hurts Sino-Forest

In a related industry, a trader said that he had heard that Sino-Forest Corp. paper was "down huge - the converts were down a lot, and the stock was getting crushed," purportedly on allegations of what he called "massive fraud."

However, he did not have any levels available. A second trader, while noting a deep dive in the shares, did not see trading in the bonds.

But a market source at another desk saw the company's 6¼% notes due 2017 having tumbled to a closing price of 49 bid - well down from Wednesday's close in a 931/2-94½ context, and even down from the 92 bid round-lot trading level seen earlier in the day on Thursday. The plunge took place late in the day - but only reflected a handful of trades no larger than $100,000 apiece, the source noted.

Two other Sino-Forest bonds essentially went nowhere on the session, according to the source - its 10¼% notes due 2014, which had traded on Tuesday just under 109 bid, traded once - earlier in the day, before the stock was halted - at 107 bid, while its 4¼% convertible notes due 2016, which had last traded in late May around the 111 mark, were untraded.

However, there was no shortage of volatile activity in the company's Toronto Stock Exchange-traded shares, which plunged as much as 25.4% during Thursday's hectic session before being halted at mid-afternoon down C$3.75, or 20.59%, at C$14.46, and never re-opening. Volume of 11 million shares was nearly eight times the usual turnover.

Muddy Waters says sell

Sino-Forest shares took a dive after a research report alleged that there had been fishy accounting by the company, which maintains twin-headquarters in metropolitan Toronto and Hong Kong and which operates timber plantations in mainland China.

The research piece from a Hong Kong-based outfit called Muddy Waters Research, declared that the amount of land Sino-Forest reported buying from Lincang City in the Chinese province of Yunnan doesn't match city records - meaning that the company could not have produced as much timber in the area as it claimed.

In a bluntly-worded screed, Muddy Waters - which put out a "strong sell" recommendation on the shares, saying they were worth no more than $1 - charged that "like Madoff, TRE [the company's TSE ticker symbol] is one of the rare frauds that is committed by an established institution. In TRE's case, its early start as an RTO fraud, luck and deft navigation enabled it to grow into an institution whose "quality management" consistently delivered on earnings growth."

It said that "TRE, which was probably conceived as another short-lived Canadian-listed resources pump and dump, was aggressively committing fraud since its RTO in 1995."

The damning research report further charged that "TRE relies on Jakko Poyry to produce reports that give it legitimacy. TRE provides fraudulent data to Poyry, which produces reports that do nothing to ensure that TRE is legitimate."

Finally, "TRE's capital raising is a multi-billion dollar ponzi scheme, and accompanied by substantial theft," the Muddy Waters report concluded.

There was no immediate reaction from the company. According to published reports, some in the market dismissed the report as a wild exaggeration. They noted that Muddy Waters was founded by prominent short-seller Carson C. Block - who would be in a position to make substantial money from a decline in the company's shares.

Rite Aid sales up

A trader said Rite Aid bonds were "about the same to maybe a smidge better" after the company reported its same store sales for May, as well as its total quarterly sales.

He said the 9½% notes due 2017 were active around 92½ bid, 92¾ offered. He also saw the 8 5/8% notes due 2015 around the 93 level.

Another market source placed the 8 5/8% notes at 93¼ bid.

For the month, the Camp Hill, Pa.-based drugstore chain reported a 1.3% gain in same store sales. Total sales increased 1% to $2.5 billion.

For the quarter, sales ratcheted up 0.8% for the 13 weeks ending May 28. Total sales were essentially flat at $6.36 billion.

UBS equity analyst Steven Valiquette said in a report out Wednesday that Rite Aid will likely continue to lose money for the foreseeable future, while rival Walgreen Co. will perform better as it concentrates on improving its fewer stores.

Additionally, upcoming patent expirations on drugs such as Lipitor will probably help Rite Aid gain 11 cents per share in value, though Walgreens is expected to earn an additional 21 cents per share.

Horizon refi boosts notes

Horizon Lines said late Wednesday that it had inked an agreement with a majority of its 4.25% convertible noteholders to refinance the Charlotte, N.C.-based company's capital structure.

Come Thursday, a trader said the credit was "the refi of the day," as the bonds traded up "8 or so points" to end around 92.

"The stock was up a little bit also," the trader said.

The stock (NYSE: HRZ) gained 20 cents, or 19.61%, to close at $1.22.

Under the terms of the agreement, Horizon will conduct a debt-for-equity exchange, thereby shedding about $50 million of debt. The company is also in process of securing a new $125 million asset-based revolving credit facility to replace its current facilities.

The company is also looking at issuing new first-lien $350 million 9% senior secured notes due five years from the date of issuance.

Horizon Lines is a domestic ocean shipping company.

iStar takes a hit

iStar Financial's preferreds were seen falling in active trading Thursday, though there was no news to cause the movements.

"Something must be going on," a preferred trader said. "That is bizarre."

The 7.5% series I preferred (NYSE: SFIPI) fell 13 cents to $20.91, on volume of over 871,000 shares. The 8% series D preferred (NYSE: SFIPD) was also weaker, dropping 16 cents to close at $22.28.

iStar is a New York-based fully-integrated finance and investment company focused on the commercial real estate industry.

DirectBuy debt dips

Market softness was blamed for weakness in DirectBuy Holdings' debt Thursday.

A trader said the 12% notes due 2017 had fallen "a couple points" to end around 42.

"It's a crappy credit," said another trader.

There was no news out on the Merrillville, Ind.-based home improvement club.

Broad market mostly lower

Also going on in distressed land, Ahern Rentals Inc.'s 9¼% notes due 2013 traded around 47, a trader said.

The trader also said that Lehman Brothers Holdings Inc.'s paper "continued to be strong.

"They are kind of hanging in there," he said, pegging the benchmark 6 7/8% notes at 26½ bid, 26¾ offered.

Dex One Corp.'s 12% notes due 2017 meantime "continued to slowly weaken," the trader said. He quoted the issue at 44½ bid, 45½ offered.

And OPTI Canada Inc.'s 7 7/8% and 8¼% notes due 2014 were "down a touch" around 481/2.

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