Aventine, VeraSun slip as corn supply declines; Equipment rental companies holding steady

By Stephanie N. Rotondo

Portland, Ore., June 18 - In what was deemed a "jittery" market Wednesday, the distressed bond market was seen generally softer, down a half to a full point.

The jitteriness was linked to a Royal Bank of Scotland report that claimed that the fallout from the subprime meltdown is far from over. Without any positive news during the day - and a declining equity market - investors were erring on the side of caution.

As weather conditions in the Midwest continue to be soggy, corn supplies have dwindled, resulting in higher prices. That has not been good news for ethanol producers, such as Aventine Renewable Energy Holdings and VeraSun Energy. Traders reported that Aventine and VeraSun's bonds have been continually pushing lower, and were lower still on Wednesday.

"They are getting killed," one trader said.

Meanwhile, the equipment rental sector has managed to hold its own, despite a continued slowdown in construction. With some exceptions, several companies ended unchanged Wednesday, such as United Rentals Inc. Neff Corp. was called unchanged to slightly lower. But Rental Services Corp. and Ahern Rentals were both seen weaker on the day. Still, the American Rental Association believes that the situation may not be as bad as it seems.

Market gets jittery

A report from the Royal Bank of Scotland caused investors to stop in their tracks and was given credit for the softening marketplace.

According to one trader, the article said that the "ugliness" from the subprime meltdown "hasn't really hit yet."

"That got everyone off to a jittery start," the trader said. He noted that the analyst group that released the report had "just enough credibility" to cause that reaction.

"There really wasn't any other news," he added. "So that gave everyone an excuse to be cautious."

In the report written by bank strategists Bob Janjuah, Kit Juckes, Tim Jagger and Richard Smith, the group said that the stock and credit markets would experience an even bigger decline in the next three months. For example, they expect the S&P 500 index to drop 22% by September.

"Our macro economic road map is playing out - slow growth for longer, deep into 2009, with the pain spreading globally, gradually," the report said.

Supply hurts ethanol producers

Ethanol investors might be rethinking their summer barbeque menus after one analyst lowered his capacity forecast, citing flooding in prime corn-growing regions.

The report from Credit Suisse analyst Mark Flannery played havoc on the sector's stocks. Corporate debt did not fare too well either.

One trader said Aventine Renewable's 10% notes due 2017 were "getting knocked down," closing the session around 62.

"Everything in ethanol is getting hit because of corn prices and supply," he said.

Sector peer VeraSun also saw its debt dip, the 9 3/8% notes due 2017 ending around 56, down from 60.

At another desk, a trader said Aventine's bond were "hitting the skids," quoting the notes at 62, down from 75 bid, 76 offered about 10 days ago. VeraSun's bonds were seen around 56.5, down from "nearly 70" just last week.

"Those companies are getting killed," he said. "Anybody trying to produce ethanol is getting killed."

As floods have ravaged the Midwest, the price of corn - a key ingredient in producing ethanol - has increased dramatically as supply has dwindled. According to current estimates, at least 10% of Iowa's corn crop is under water.

Still, Flannery said that he expects things to even out by the end of the year.

Rental companies holding steady

Despite a slowdown in construction, the equipment rental sector is holding its ground - for the most part.

Sources said that companies like United Rentals have managed to stay steady, its bonds ending Wednesday's session unchanged. But others, such as Neff - "They are in trouble in general," one trader said - have seen their debt slide.

Neff's 10% notes due 2015 were quoted in a range of 44 to 44.5, which one source called unchanged. Rental Services' 9½% notes due 2014, however, were called "a little softer, nothing drastic," at 86.5.

Another trader said that Ahern Rentals' 9¼% notes due 2013 were "getting beat up," closing at 77 bid, 78 offered. The trader noted that Ahern has "a lot to do with Las Vegas," which has been called one of the hardest hit areas during the housing downturn.

But even as these companies have faced some struggles, the American Rental Association brings some optimism.

At a Webinar on June 11, the group released its State of the Equipment Rental Industry forecast, which showed that construction revenues in 2008 and 2009 should be on par or above levels from 2005 and 2006. In fact, rental revenue is expected to increase through next year, but at a slower pace than previous years.

The ARA is scheduled to host another Webinar in late July.

Broad market tidbits

Rite Aid Corp.'s 9 3/8% notes due 2015 slipped 1 point from its Monday levels to 74 bid, 74.5 offered. That is down from Tuesday levels of 74.75 bid, 75 offered. The dip comes as the company announced that it had received the needed consents for its proposed debt exchange.

Claire's Stores Inc.'s 10½% notes due 2017 "continue to be weak," a trader said, pegging the issue at 44.5. The retailer's debt has slowly but steadily declined since the company posted disappointing numbers last week.

In the gaming sector, Boyd Gaming's 7 1/8% notes due 2016 were reversing their upward move to end at 79, down from 80 bid, 80.5 previously. A trader said the bonds were coming in as buyout rumors cooled down.

Six Flag's Inc.'s 9 5/8% notes due 2014 fell a point to 62.5, while Charter Communications Inc.'s 11% notes due 2015 "drifted lower" to 84.75 bid, 85 offered.

Quebecor World Inc., whose bonds had gyrated around over the prior two sessions, were unchanged on Wednesday, its 4 7/8% notes coming due on Nov. 15, 2008 and 6 1/8% notes due 2013 each at 44 bid , while its 9% notes due 2015 and 8¾% notes due 2016 likewise held steady and rebounded by 1 point each to 55.

A trader saw Dura Automotive Systems Inc.'s 8 5/8% notes due 2012 down 2 point to 4 bid, 6 offered.

Paul Deckelman contributed to this article.

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