Toys ‘R’ Us weakens; AMD retreats on CEO exit; more pain for coal sector; Fannie, Freddie gain

By Stephanie N. Rotondo

Phoenix, Oct. 10 – Distressed debt ended the week soft yet again, as investors continued to worry about a slowing global economy and looming interest rate hikes.

“It’s still ugly,” a trader said. “A lot of stuff just continues to get beaten up.”

Toys “R” Us Inc. was on the decline, just one day after the company revised the interest rate on its new term loan. The dip could signal that investors don’t have much confidence in the retailer as it tries to muddle through the holidays.

Meanwhile, Advanced Micro Devices Inc. retreated further, following news out midweek regarding the exit of its president and chief executive officer.

And the coal sector was again under pressure, as China readies to raise tariffs on coal imports and Morgan Stanley downgraded the sector as a whole.

“Coal keeps getting beat up,” a trader said. “It’s like a broken record.”

Toys debt takes dip

Toys “R” Us’ debt was losing ground Friday, both its bonds and its new bank debt.

On Wednesday, the Wayne, N.J.-based retailer’s term loan – a $1.025 billion facility due 2020 put together by Goldman Sachs Group Inc. – increased the interest rate on the deal to Libor plus 875 basis points.

The deal had originally been talked at Libor plus 800 bps to 825 bps.

The bank debt was originally issued at 97 cents on the dollar, but was seen trading at 92 cents on the dollar come Friday.

In the bonds, the 7 3/8% notes due 2018 were seen “down 5½ points from a couple days ago,” a trader said, placing the issue at 64. The 10 3/8% notes due 2017 then dropped nearly 4 points to 76.

Another trader said the name was “definitely lower.

“It was not immune from the [day’s] carnage.”

He saw the 10 3/8% notes at 76, down from 80. The 7 3/8% notes of 2018 were deemed down 4 to 5 points at 64.

A third market source pegged the 7 3/8% notes at 66½ bid, down 2 points on the day.

AMD declines further

Advanced Micro Devices was “a little bit lower,” a trader said, as investors continued to react to a recently announced management transition.

The trader said the 7% notes due 2024 were the more active of the company’s bonds, which fell 1½ points to 90½.

Another trader echoed that level.

At another desk, a market source called the 7½% notes due 2022 down a point at 96½.

On Wednesday, AMD said that Rory Read, president and chief executive officer, is leaving the post he has held for the last three years as the company attempts to take market share from Intel.

Lisa Su, chief operating officer, will take over.

But analysts at Wedbush Securities were concerned about the transition, which came so close to the company’s next earnings release. The move could indicate that the turnaround is taking longer than anticipated.

Wedbush cut its rating on the equity to “neutral” from “outperform,” also lowering its price target to $3 from $6.

Additionally, Wedbush lowered its fourth-quarter guidance, while maintaining its third-quarter outlook.

Looking to the fourth quarter, Wedbush is now predicting earnings of 4 cents per share, down from its previous 8 cents per share. Revenue estimates were lowered to $1.44 billion from $1.9 billion, both falling below the consensus estimates of 5 cents earnings per share on $1.49 billion in revenue.

No help for coal

There was just no relief for the coal sector on Friday.

“The coal sector really got bamboozled yesterday,” one trader said, noting that most names saw losses of 6 to 7 points on the day. He said the declines were being blamed on news that China was raising tariffs on imported coal, beginning Oct. 15.

Also on Thursday, Morgan Stanley analysts downgraded the entire sector, stating that while they believed prices for metallurgical coal had hit a floor, the ensuing recovery could take longer than anticipated.

The analysts also cut the 2015 price target for hard coking coal to $125 per ton from $133 per ton.

The space remained weak as the week came to an end, but the massive losses seen the day before were mostly contained.

A trader called Arch Coal Inc.’s debt down 1 to 1½ points on the day, seeing the 7¼% notes due 2021 at 36, the 9 7/8% notes due 2019 at 40 and the 7¼% notes due 2020 at 41¾.

Another trader said the 8% senior second-lien notes due 2019 fell 3 to 4 points to 68.

In Alpha Natural Resources Inc. debt, a trader said the 6% notes due 2019 were off over 5½ points in one trade, ending at 46. The 6% notes due 2021 declined 3 points to 47.

Another source deemed the 6¼% notes due 2021 at 47 bid, a 3-point loss for the day.

A trader also saw Walter Energy Inc.’s 9½% senior secured notes due 2019 dipping nearly 2 points to 84 5/8, while a second trader placed the issue in an 84 to 85 context.

The second trader said that it was a 1 to 2 points drop for the first-liens.

Fairholme appeals Fannie, Freddie ruling

Fannie Mae and Freddie Mac preferreds were again rising Friday and dominating overall trading in that space.

A market source said the preferreds were “up a bit... I’m assuming it was because [Fairholme Funds] formally went ahead with the appeal,” referring to a Sept. 30 decision by federal judge Royce Lamberth in which he dismissed investors’ lawsuits regarding what they claimed was an illegal takeover by the government of a majority of the agencies’ profits.

In the most actively traded issues, the shares were up 15% to 18%, the source said.

Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) traded up 60 cents, or 17.65%, to $4 per share and Freddie’s fixed-to-floating rate noncumulative perpetual preferreds (OTCBB: FMCKJ) gained 53 cents, or 15.5%, to finish around $3.95.

Endeavour around 5

Meanwhile, Endeavour International Corp.’s 5.5% convertibles were quiet as shares of the Houston-based oil and gas exploration and production company were halted pending news. The convertibles were seen last at about 5, a trader said.

“They haven’t traded for a while,” the trader said, calling the market on the bonds 5 bid, 7 offered.

Endeavour’s forbearance agreement was expected to expire following a couple of extensions. The agreement has to do with the company’s skipped interest payment last month on three series of bonds, including its 6.5% convertibles due November 2017, 12% first-priority notes due 2018 and 12% second-priority notes due June 2018.

“They keep extending it,” a trader said of the forbearance agreement.

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