Distressed names stay weak amid junk retreat; coal continues to crumble; Toys ‘R’ Us launches loan

By Paul Deckelman

New York, Sept 29 – Distressed-debt names were seen mostly weaker on Monday in the context of a continuing overall retreat in the junk bond market, traders said.

Several traders said that the surprise shakeup at investment giant Pimco – with Friday’s announcement that its longtime superstar fund manager, Bill Gross, had resigned from the company to go to rival Janus Capital amid record outflows – was continuing to weigh on the already unsettled market, as investors try to make some sense of the developments. Others, however, disagreed.

Coal names – recently under pressure in the wake of a negative report on the prospects for the industry’s metallurgical coal segment – mostly continued on the downside, including Arch Coal Inc. Higher-quality rival Peabody Energy Corp.’s debt, on the other hand, was seen firmer.

Also in the natural resources area, traders saw a continued downward drift in rare-earths producer MolyCorp, Inc.’s paper.

And energy exploration and production names, such as Endeavour International Corp. and Quicksilver Resources Inc., continued to lose ground.

Traders saw Toys 'R' Us, Inc.’s bonds remaining easier, even as the specialty retailer launched a $1.375 billion credit facility with a Monday bank meeting.

Distressed debt easier

Traders said that the overall market for distressed bonds was easier, reflecting continued weakness in the wider high-yield market.

A trader stated, “The whole market just opened very weak this morning, given the opening in stocks,” which were sharply lower across the board. Later on in the day, equities cut their losses and ended only moderately lower with the bellwether Dow Jones Industrial Average finishing down 41.93 points, or 0.25%, at 17,071.22, after having been down almost 170 points earlier.

“You started seeing some bids fill in during the afternoon as stocks rebounded. But in general, the tone was pretty weak today.”

After a shaky start, another trader said, “late this afternoon, the market caught a little bid.”

He cautiously said that the junk market “rallied into the close” to end above its earlier lows, but he said that it has clearly been under pressure the past few sessions.

The trader said that nothing really stood out in Monday’s dealings.

“Everything was under pressure. There was nothing that I saw underperformed significantly, or vice versa, that outperformed. It was kind of a lackluster day.”

He saw most items trading off by ¼ to ½ of a point on Monday, “the same as Friday.”

Natural resources names come in

Several traders noted that resources – energy and mining credits – seemed particularly vulnerable.

One said that MolyCorp’s bonds “continue to drift lower,” pegging the 10% notes due 2020 down at 66½ bid, “so that’s down another few points.”

Another market source said that the Greenwood Village, Colo.-based rare earths and rare metals producer’s bonds were ending at 66¾ bid, down 2¾ points on the day.

He saw no fresh news out about the company.

Also in the mining sphere, a trader said that coal credits “continue to get slaughtered,” with the sector feeling the after-effects of the recent Goldman Sachs warning about likely continued erosion in the metallurgical coal space.

The trader said that “the unsecureds are trading in the high 20s.”

Among the better-secured credits, he saw Arch Coal’s 7¼% notes due 2021 having traded down to around the 47 bid level, calling them off 2 to 3 points, while the St. Louis-based coal producer’s other bonds were in the lower 50s. But he said that was down about 2 points, “so coal continues to be weak.”

A market source at another desk saw the Arch 7¼s going out at 47¼ bid, down some 2¼ points on the day. But he quoted crosstown rival Peabody Energy’s 6¼% secured notes due 2021 up ¾ of a point at 92¾ bid.

Among the oil names, Houston-based independent exploration and production operator Endeavour International’s 12% notes due 2018 were at 70 bid, down 3½ points.

Denver-based oiler Quicksilver Resources’ 9 1/8% notes due 2019 were quoted at 65 bid, down 2 points.

Toys ‘R’ Us bonds off

Among the retailers, a trader said that Toys ‘R’ Us bonds “have continued to be a little on the weak side.”

The Wayne, N.J.-based toy, game and children’s product retailer’s 8½% notes due 2017 were seen at 100 7/8 bid.

He noted that the company “is in the market with that loan deal, but in general, [Toys ‘R’ Us] bonds are a little bit softer.”

The company meanwhile held its bank meeting on Monday, with a market source saying that price talk on the $1.375 billion secured loan deal was announced.

The source said that the $1.025 billion 5½-year term loan B-4 (B2) is talked at Libor plus 800 bps to 825 bps with a 1% Libor floor, an original issue discount of 99 and call protection of non-callable for 18 months, then at 102 for a year and 101 for the following year, the source said.

And, the $350 million five-year first-in, last-out asset-based loan (Ba3) is talked at Libor plus 550 bps to 575 bps with a 1% Libor floor, a discount of 99 and 101 call protection for one year, the source continued.

Goldman Sachs Bank USA and Bank of America Merrill Lynch are leading the deal, with Goldman left lead on the term loan B-4 and Bank of America left lead on the first-in, last-out loan.

Proceeds from the new loans will be used to refinance $646 million of secured term loans due fiscal 2016, a significant portion of the $583 million of incremental secured term loans due 2018 and $350 million of 7 3/8% senior secured notes due 2016.

Sara Rosenberg contributed to this review

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