Verso's mill fire pressures debt; Dynegy weaker; Kodak loses footing; AMR, Bon-Ton gain ground

By Stephanie N. Rotondo

Phoenix, May 31 - The distressed debt market was trending toward the downside Thursday, according to traders.

"Everything was heavy in distressed," a trader said.

NewPage Corp. and Verso Paper Corp. were taking hits during the session, as one of Verso's paper mills had caught fire. A trader opined that NewPage's declines were done "in sympathy" with its sector peer's troubles.

Meanwhile, Dynegy Holdings LLC paper took a dip, even as the company said it had reached a deal with subordinated bondholders that would put an end to the group's opposition of a reorganization plan.

Eastman Kodak Co. was also losing ground and one trader attributed the losses to monthly operating numbers that came out Wednesday.

Despite the overall weakness in the market, there were a few names that were on the rise.

AMR Corp., for one, was deemed stronger following news reports that U.S. Airways was looking at alternative avenues in its bid to take over the bankrupt airline.

Also higher were Bon-Ton Stores Inc.'s bonds. The company reported an increase in May sales.

Verso, NewPage soften

Verso Paper's Sartell paper mill in Minnesota had been burning for the last several days, which resulted in pressure on the company's bonds, as well as those of its sector peer NewPage.

One trader said Verso's 11 3/8% notes due 2016 dropped 1½ points on the day, ending around 49.

Another trader said NewPage's 11 3/8% first-lien notes due 2014 "got hammered" as the debt suffered "in sympathy" with Verso.

The trader pegged NewPage's notes around 601/2, down a point or two on the day.

A massive explosion occurred at the Sartell mill on Monday, killing one worker and injuring four others. Firefighters struggled to get the blaze under control, but the fire was reported to be 99% contained as of late Wednesday.

However, additional crews were called in Thursday to tackle the remaining enflamed areas.

Verso has not yet issued a statement on the fire and it remains unclear what will happen to the affected mill - and Verso's bottom line.

Dynegy debt declines

Dynegy Holdings said in court papers on Wednesday that it had reached an agreement with junior bondholders in which the group would agree to drop their opposition to the company's plan of reorganization.

Come Thursday, however, the market did not take kindly to the news and the bonds declined.

One trader said the 7¾% notes due 2019 fell to levels around 61, while another market source called the issue down 1½ points at 61½ bid.

But another trader said the credit "looked about unchanged after dropping [Wednesday]." He said paper was "still active" in the low-60s.

Under the agreement with subordinated bondholders holding about $220 million in claims, the group will actually be able to claim $55 million of that. The group will also have their legal fees paid by the company.

In Dynegy's first proposal, the treatment of subordinated creditors was about equal to the recent agreement. However, a second agreement increased their recovery to 35 cents on the dollar - compared to 25 cents in the original plan - and a third plan did not detail the group's treatment at all.

A hearing to approve the plan is set for Friday and, if approved by the judge overseeing the Houston-based power producer's bankruptcy case, the plan will go to creditors for a vote.

Kodak loses weight

A trader said Eastman Kodak's monthly operating figures out Wednesday did not help the Rochester, N.Y.-based company debt come Thursday.

"They didn't look the greatest," he said of the report.

He placed the 7¼% notes due 2013 down around the 13 level.

"There was heavy trading in the converts," the trader said.

Another trader called the issue "a little lower" at 13 bid, 13½ offered, while the 9¾% notes due 2018 were down a deuce around 66.

A third source called the 7 ¼% notes down nearly a point at 14¼ bid.

On Wednesday, Kodak reported a $91.34 million loss for April on revenues of $156.03 million.

That compared to a net loss of $128.66 million on revenues of $108.62 million in March.

However, cash and equivalents fell to $617.61 million by the end of April, compared to $661 million at the end of March.

AMR flies higher

AMR, the Fort Worth, Texas-based parent company of American Airlines, saw its bonds gaining altitude during the session.

A trader quoted the benchmark 6¼% notes due 2014 at 53½ bid, 54½ offered. At midday, paper had been trading at 52½ bid, 53½ offered.

The gains came as Tempe, Ariz.-based U.S. Airways was said to be in talks with private equity firm TPG Capital to develop a takeover plan of the bankrupt airline.

In a Reuters report, unnamed sources claimed the two parties were involved in developing a plan that could give U.S. Airways an upper hand. First, the report indicated that a partnership with TPG could give U.S. Airway more financial flexibility, which includes the possibility of being able to pay some AMR creditors in cash. TPG has also previously invested in airlines, not only giving it industry experience, but also providing validation to an AMR-U.S. Airways merger.

Bon-Ton sales, bonds boosted

Bon-Ton Stores reported improved monthly sales for May on Thursday, giving its bonds a boost.

One trader said the 10¼% notes due 2015 gained as much as 3 points, closing around 691/2. Another trader said the debt was "better by a few points" at 69 bid, 70 offered.

The second trader noted that the bonds had gotten as good as 74 before coming back to settle in the 70 ZIP code.

For the four weeks ending May 26, same-store sales rose 1.5%, the company said in a press release. Total sales increased 1.2% to $183.1 million.

The York, Pa.-based retailer also said that it had gained borrowing capacity under its credit facility.

The company had $423 million available, it said, compared to $400 million available at the end of April.

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