Patriot Coal bonds rise on news of Peabody, Arch deals, new capital; TXU paper actively quoted

By Stephanie N. Rotondo

Phoenix, Oct. 10 - The distressed debt market was firming up Thursday, as investors hoped an olive branch from House Republicans might help the federal government avoid hitting the debt ceiling.

News outlets reported that the group was considering a proposal that would raise the debt limit for six weeks without imposing any further conditions. The government's partial shutdown, however, would likely remain until a budget was agreed upon.

Aside from that news, Patriot Coal Corp.'s debt popped during the session as the bankrupt coal producer said it had inked a deal with former parent Peabody Energy. The terms of that deal include key financing that the company is hoping will allow it to exit bankruptcy protections by the end of the year.

Even Energy Future Holdings Corp.'s bonds were moving up, albeit slightly. The slight gain came on the back of a downgrade from Standard & Poor's on Wednesday.

Patriot gains strength

Patriot Coal's 8¼% notes due 2018 jumped 4 to 6 points on the day, after the company said it had reached a settlement with Peabody Energy.

One source pegged the issue at 59 bid, up 6 points. Another source quoted the issue at 59½ bid, 60 offered, which compared to previous trades around 54.

Under the terms of the settlement with its former parent company, Peabody will pay $310 million to fund retiree health benefits and will also provide another $140 million in liquidity to Patriot Coal.

Additionally, Patriot inked a settlement with Arch Coal Inc. that will provide it with $5 million in cash.

Patriot's unions had previously alleged that Peabody and Arch had unfairly saddled Patriot with overwhelming obligations in order to avoid paying what they owed.

In more good news, Patriot said that Knighthead Capital had agreed to provide $250 million of new capital via a rights offering.

All agreements are expected to be heard by the bankruptcy court in early November.

TXU actively quoted

A trader said he saw "a lot of markets" for Energy Future bonds on Thursday, though he said trading was not all that much.

The trader pegged the 10% notes due 2020 linked to Energy Future Intermediate Holdings Co. LLC at 105 5/8, which he called unchanged. The 15% notes due 2021 linked to Texas Competitive Electric Holdings Co. LLC held were up almost a point at 231/4.

He also saw another Texas Competitive issue, the 10¼% notes due 2015, trading at 31/2.

On Wednesday, S&P cut its ratings on Energy Future and several of its subsidiaries to CCC- from CCC.

S&P said the rating revisions were based on the belief that a restructuring is imminent for the Texas Competitive and Energy Future Competitive units.

For its part, Texas Competitive has $23 billion of debt maturities over the next four years.

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