Patriot Coal slides on restructuring worries; other coal names weak; Kodak languishes

By Rebecca Melvin

New York, May 22 - Some of the same themes that have been in play in recent weeks were influencing trade in the convertible bond market again on Tuesday.

The coal sector has been a theme of late, and Patriot Coal Corp.'s convertibles and underlying shares slid sharply on concerns of possible restructuring and as refinancing efforts for the St. Louis-based coal producer continue.

Patriot's convertibles fell about 20 points outright but bounced off their lows to settle around 53 bid, 55 offered on the day, market sources said.

There was a modest amount of trade in other coal convertible issues pulled into trade in sympathy with the Patriot slide, a New York-based trader said.

Peabody Energy Corp.'s 4.75% convertible junior subordinated debentures due 2066 traded last at 88.6, which was down about 2.5 points, according to Trace data, on shares that were 4% lower.

James River Coal Corp.'s convertibles were a few points lower, a Connecticut-based trader said. The James River 4.5% traded between 34.5 and 36.5.

"Patriot traded in line with sentiment and stock negative news about restructuring, and then bounced on the positive headline about financing," a trader said.

Eastman Kodak Co.'s 7% convertibles, which slumped nearly 10 points on Monday, were a little weaker Tuesday to trade at 15 in continued action related to a negative ruling in a patent infringement case.

Elsewhere, Medtronic Inc. was not as actively traded as is typical for this issue despite the medical device maker's reasonably upbeat earnings report. Medtronic shares ended 2% lower.

The Medtronic 1.625% paper, which comes due a month before Patriot Coal's convertible, ended up 0.125 point on the day at 100.125. Initially, it had been down 0.5 point to 99.5, following the underlying shares.

SanDisk Corp. was flattish and in line with the underlying shares of the Milpitas, Calif.-based maker of flash memory storage chips. The SanDisk 1% bonds were holding in and closed at the 98.125 bid, 98.625 offered mark.

"Everything keeps going sideways," a New York-based convertibles trader said. "There's no conviction one way or the other, and today the pressure to the sell side is a little stronger than to buy."

A trader in technology issues said that outright buyers stepped in to buy issues toward the end of the session. There were issues that hedged players offered and the outright players were unafraid to buy despite macroeconomic concerns, the trader said.

"There was decent flow today; it was more like normal. Most stuff has traded abnormally heavy or light, and today was a normal day for once, flow-wise; things were getting lifted," the trader said.

Patriot slide resumes

Patriot Coal's 3.25% convertibles due May 31, 2013 traded down sharply to as low as 45 bid from a close Monday in the mid 70s, a trader said. But the issue later bounced back a bit, to trade at 55, before settling out at 53 bid, 55 offered. At the start of this month, the bonds stood at par.

Patriot shares ended down $1.18, or 35%, at $2.18 on Tuesday.

On Tuesday, the shares slid more than 40% and were halted on concerns that the company has hired a restructuring adviser. A company news release Tuesday afternoon cited continuing efforts at refinancing. That seemed to stem the slide and pull the securities off their lows. The company also said it has enlisted the involvement of private equity firm Blackstone Group.

Earlier this month, the company announced that it entered into a commitment letter for a new revolving credit facility and new term loan facility for $625 million from Citigroup Global Markets Inc., Barclays Bank plc and Natixis, New York branch.

Patriot is continuing to work with these lenders to strengthen its finances, including the replacement of its current credit facilities prior to March 2013, the company stated in the release.

The Patriot Coal convertibles traded very actively, sources said.

Shares of Peabody Energy and Alpha Natural Resources Inc. were a little lower, and sympathy flows weren't significant, a trader said.

Peabody's 4.75% convertibles traded late in the day at 88.6, which was down nearly 2.5 points.

Peabody shares fell 97 cents, or nearly 4%, to $23.65 in heavy volume.

In fact, investors have been worried about the viability of the whole sector. Including other sector peers like Arch Coal Inc., the coal names have been hurt by a falloff in the domestic use of coal as unusually low natural gas prices have caused gas to displace coal in many regions as the inexpensive fuel of choice.

The coal companies have pinned their hopes on making up for the lost domestic sales with orders from overseas, particularly the heretofore booming BRIC economies, including China and India, but a recent slowing of the Chinese economy has endangered that strategy.

Medtronic little moved

Medtronic's 1.625% convertibles due 2013 traded last around 100.125, which was up 0.125 point. Early on it traded at 99.5, which was down 0.5 point on the day.

Medtronic shares ended the session down 74 cents, or nearly 2%, at $36.96.

Medtronic's fiscal fourth-quarter earnings jumped 28% and were a $1 better than analysts' estimates, but its latest earnings report revealed some chinks in its armor.

Revenue was higher in emerging markets, but lower in U.S. markets, for example. The company has seen lower sales in its heart-rhythm and spine segments in recent quarters, for example.

The company said that its U.S. market for implantable defibrillators was stabilizing. Demand for the devices was hurt by the U.S. Department of Justice investigation and a negative medical journal article last year.

Medtronic earns revenue from heart rhythm disease management, cardiovascular, spinal, neuromodulation, diabetes and surgical technologies.

U.S. sales of Medtronic defibrillators were down 2% from a year earlier.

For the quarter ended April 27, Medtronic reported profit of $991 million, or 94 cents a share, which was up from $776 million, or 72 cents a share, a year earlier. Excluding items, per-share earnings rose to 99 cents from 90 cents.

Revenue rose 2% to $4.3 billion.

Analysts expected earnings of 98 cents a share on revenue of $4.23 billion.

For the full year, the company projected earnings of $3.62 to $3.70 on revenue growth of 2% to 4%. Analysts expected earnings of $3.66 a share on revenue growth of 1% to $16.53 billion.

Paul Deckelman contributed to this article

Mentioned in this article:

Eastman Kodak Co. Pink Sheets: EKDKQ

James River Coal Co. Nasdaq: JRCC

Medtronic Inc. NYSE: MDT

Patriot Coal Corp. NYSE: PCX

Peabody Energy Corp. NYSE: BTU

SanDisk Corp. Nasdaq: SNDK

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