Toys ‘R’ Us seeks bankruptcy, bonds trade up; oil and gas bonds improve; telecom under pressure

By Stephanie N. Rotondo

Seattle, Sept. 19 – Toys ‘R’ Us Inc. was “probably the more notable name” in the distressed debt market on Tuesday, a trader reported.

The Wayne, N.J.-based toy retail chain’s bonds were gyrating throughout the day on news the company had officially filed for bankruptcy. The market has been waiting for such a filing for several weeks, ever since it was learned that Kirkland & Ellis had been retained as restructuring advisers.

Though the bonds have rapidly declined since then, there was a bit of a pop in Tuesday trading. However, a trader noted that at least part of the gain was due to the fact that the bonds are now trading flat, or without accrued interest.

Away from Toys, the usual go-to distressed names and sectors were trading.

In the oil and gas space, most issuers saw their bonds improving despite modest weakness in crude oil prices.

Denbury Resources Inc., for instance, saw its 5½% notes due 2022 rising 1¼ points to close at 50, according to one trader. The trader also saw California Resources Corp.’s 8% second-lien notes due 2022 ticking up almost half a point to 58 7/8.

In EP Energy Corp. paper, the trader pegged the 8% notes due 2025 at 72¾, up three-quarters of a point.

Meanwhile, the telecommunications arena continued to lose ground.

At one desk, a trader said Frontier Communications Corp.’s 10½% notes due 2022 came in half a point to finish at 84¾. Windstream Holdings Inc.’s 7¾% notes due 2020 declined almost 2 points to 82¾, the trader said.

At a second shop, Frontier’s 7 5/8% notes due 2024 were called almost a point softer at 75¾, while Windstream’s 6 3/8% notes due 2023 fell nearly 2 points to 73½.

And, a third source pegged Frontier’s 10½% notes in an 84½ to 85 context.

“They continue to drift a little bit lower,” he said.

Toys trades flat

Toys ‘R’ Us announced it filed for Chapter 11 protections on Tuesday.

The filing came less than two weeks after the company said it had hired Kirkland & Ellis to advise on its restructuring options. The struggling retailer had previously retained Lazard as a financial adviser.

With the bonds trading flat after the filing, the debt experienced a little bit of a bounce.

One trader said the 7 3/8% notes due 2018 were “8 points off of yesterday’s lows,” trading around 26¼. A second source called the paper 2 points better at 27 bid.

Yet another trader said the notes opened the day trading in the high-teens, but then the debt rallied to go out in a 27 to 28 context.

Toys is hoping to use court proceedings to restructure its $5 billion debt-load, $400 million of which comes due at the end of the year.

The entry into bankruptcy also provides some relief for the company’s suppliers, such as Jakks Pacific Inc. Last week, vendors were cutting shipments to the retailer on concerns they might not get paid. But a bankruptcy filing gives such group of creditors peace of mind that they will be paid – eventually.

As for Jakks, its convertible bonds were weaker in wake of the filing, though its stock rebounded.

A trader said the 4.875% convertible notes due 2020 were trading in a 77 to 77.5 context.

“I would have thought they were trading 78 to 79,” he said.

The underlying equity (Nasdaq: JAKK) closed up 2.5 cents at $2.825.

The trader further opined that the weakness in names like Jakks – a Malibu, Calif.-based designer and manufacturer of toys – was “overdone.

“Obviously, there’s disruption in the chain,” he said. But no matter the situation trade creditors always get paid. “It may take some time, but they get paid.”

Still, he also remarked that Toys and its impact on names like Jakks was “interesting.

“Enough guys own [Jakks] in the swap community that they will be interested,” he said.

Fannie, Freddie weaken

Fannie Mae and Freddie Mac were under pressure in active trading yet again on Tuesday.

Freddie’s 8.375% fixed-to-floating rate noncumulative preferreds (OTCBB: FMCKJ) fell 9 cents, or 1.30%, to $6.81. About 4.87 million of the preferreds traded during the session.

Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) were meantime off 7 cents at $6.97. Over 5 million of those preferreds were exchanged.

Last week, Democratic senators wrote a letter to the Federal Housing Finance Agency head, Mel Watt, to urge that the overseer of the GSEs allow the agencies to rebuild their capital coffers, which are set to fall to zero by 2018.

For his part, Watt has previously said that, under the current terms of the bailout agreement between Fannie, Freddie and the Treasury Department, the GSEs could need up to $100 million more in bailout funding in the next year or two.

Under the current terms, Fannie and Freddie pay out a majority of their quarterly profits as dividends to the Treasury. Both have paid back more than the amount they took in the financial crisis of 2009.

Also last week, Treasury Secretary Steven Mnuchin said that reforming the GSEs would occur in 2018. However, Mnuchin – along with the Trump Administration as a whole – had previously promised that reform would come by August of 2017.

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