Momentive, Walter calm down amid quieter overall market; PDVSA paper trades actively

By Paul Deckelman

New York, March 24 - The new week opened on a quiet note on Monday in the distressed debt market. Traders said that bonds of Momentive Performance Materials. Inc., which dominated the most-actives listings on both Thursday and Friday, traded in far more restrained dealings on Monday.

They saw the bonds from the Albany, N.Y-based manufacturer of specialty materials for high tech manufacturers ending mixed compared to where they had finished on Friday.

Things were also quieter in Walter Energy, Inc.'s established bonds, which had gyrated around in active dealings, and these too were a mixed bag.

The Birmingham, Ala.-based metallurgical coal producer's recently priced PIK toggle notes remained well down from last week's par issue price. An energy analyst cited several likely reasons for the slide in the PIKs and the continued weakness in the established bonds.

There was little additional trading seen in Global Geophysical Services, Inc.'s bonds, which had bounced around at lower levels last week after the Missouri City, Texas-based provider of seismic data services to the energy industry announced that it would have to re-state its financial results for the past few years due to accounting irregularities.

Away from the domestic names, traders saw activity in Petroleos de Venezuela SA's various bond issues, seen firmer in very brisk trading. PDVSA was meanwhile reported to have found a legal escape hatch, allowing it to avoid paying hundreds of millions of dollars in penalties arising from an abortive joint venture arrangement with its Brazilian counterpart.

Momentive calms down

A trader said that Momentive Performance Materials' 9% notes due 2021 were trading in a context of 81-82, which looked to be about unchanged from last week's closing levels.

While more than $24 million of those notes had changed hands on Friday, he saw "just a couple of million trading [on Monday]," with none of its issues making the most-actives list that it had dominated for much of last week.

"I guess they just ran out of steam from last week," he theorized, seeing only one transaction "of size."

"There were all kinds of trades on Friday in that name, but it doesn't look like it was a popular name today."

He saw its 11½% notes due 2016 racking up just 1 large trade at 31 bid, which was "a lot different than it was on Friday," when over $34 million of the notes had changed hands, while the bonds slid below the 30 mark to end at 29¾ bid.

Another trader said: "There was not nearly as much activity" In Momentive on Monday as at the end of last week.

He quoted the 9s down a little to around the 82 bid level, after having been around 82½ bid on Friday and 84½ last Wednesday, its most recent peak level.

While those unsecured issues continued to struggle, the company's secured 10% notes due 2020 continued to rise on Monday, getting up to 107¼ bid versus 106½ on Friday and its recent low point of 104½ bid, traded last Tuesday.

Walter less volatile

Traders saw restrained activity in Walter Energy's new and established bonds, which gyrated around last week as the coal producer brought a two-part issue to market.

"There was not a tremendous amount of activity" in the coal producer's bonds, one said, seeing its 8½% notes due 2021, which he called "about in line" with recent levels around 65.

A market source at another shop saw those notes down½ point at 64¾ bid, with about $6 million traded. The deal, which had been trading above 70 earlier last week, dropped to around as low 64 bid, but then seemed to recover some lost ground on Friday.

He saw its 11%/12% second-lien senior secured PIK toggle notes due 2020 "creeping back up" to around the 95 bid level - still down from the par level at which those notes had priced last Wednesday, but up from the lows they hit around 94 almost as soon as they began trading last Thursday.

What's wrong with Walter?

The steep drop in those bonds surprised many in the market and had people scratching their heads about that precipitous decline.

An industry analyst theorized that "there were a couple of things that happened."

For one, he said that "a number of players," who held some of the company's term loan A debt that is being taken out using the proceeds from the new bond deal, "rolled into the PIK notes, not necessarily as long-term holders."

He said that they, in an effort to be supportive of the deal and get themselves cashed out from their current holdings, rolled into the PIK notes as well as the other half of that new deal, the 9½% senior secured add-on notes due 2019.

The analyst said that they went into the transaction "with the belief that in a normal market, they could sell [the PIK notes] at or near the new-deal price."

He said that there were also some investors "who wanted to own the 91/2s and were told that they needed to take a slug of the PIK or they wouldn't get a decent allocation of 91/2s."

Again, he said, some people went into the deal thinking that while they didn't like especially like the PIKs as much as the 91/2s, they could always find a buyer for their position in the PIK after the deal was priced.

"So you had a less-than-strong investor base in the PIK."

On top of that, he said, there had been "a steady drumbeat" of negative news and analyst opinion about the near-term prospects for the metallurgical coal business, culminating with a negative report on the industry last week BofA Merrill Lynch, "calling into question the pricing profile of met coal over the next two years" and setting a drastically reduced equity price target for Walter Coal.

"So that made all of those people probably rush for the exits sooner than they had planned and drove away any potential near-term buyers of it on the break."

Coal continues to struggle

Even amid all of the turmoil surrounding Walter Energy, other coal producers were also getting pushed around.

A market source quoted Alpha Natural Resources, Inc.'s 6¼% notes due 2021 down about ¾ of a point at 76 bid. He saw Arch Coal Inc.'s 7¼% notes due 2020 lose 1 point to close at 77 bid.

Even the more secure Peabody Energy Corp. 6% notes due 2018 lost nearly 3 points on the day, going home around 1051/4.

Global Geophysical little moved

A trader said that Global Geophysical's 10½% notes due 2017, which had gyrated wildly last week, "weren't that active today."

He saw the notes trading in a 58 to 60 context in the morning, about where they had been, "on very low volume of a couple of million"

He said that the bonds were ending up trading between 57½ and 59½ "on no volume to speak of."

Those bonds, trading around 75 bid a week ago, skidded down as low as 50 bid early last week, after the company warned investors on Tuesday that its financial reports for each of the fiscal years ended Dec. 31, 2012, 2011, 2010 and 2009 and for the first, second and third quarters of 2013 "should no longer be relied upon because of accounting errors resulting from material weaknesses in the company's internal controls."

After that, volume dwindled, although the priced did come back up to around the 57 level by the end of last week.

Busy day for PDVSA

Elsewhere, a trader said that Petroleos de Venezuela SA, the South American nation's state-run oil monopoly, was one of the most actively traded names on the day.

"Out of the seven names [on Trace], they are the six with the most volume," he said.

He said representative late-afternoon volume figures for its various issues were $85 million, $57 million, $14 million, $12 million, $10 million and $9 million on those six issues, "so it looks like that name was trading all day long.".

The busiest of them was PDVSA's 8½% notes due 2017. He pegged the bonds "up a couple of points" at 85½ bid.

He did not know what might have caused such activity in the name on Monday, although a Brazilian newspaper, O Estado de Sao Paulo, reported that PDVSA, which went into partnership in 2007 with its Brazilian counterpart Petroleo Brasileiro SA, on the construction of the latter's big Abreu e Lima oil refinery at the port of Suape, near Recife, Brazil, is apparently off the hook for hundreds of millions of dollars it might have had to pay in connection with the project.

According to the report, PDVSA, with a 40% share in the joint venture, was facing the prospect of having to pay the money as punishment for not having put up 40% of the construction costs on the project, now estimated to carry a final price tag of as much as $16 billion, well up from original estimates of about $4 billion.

After several years of disputes between the two state oil companies over PDVSA not contributing what it was supposed to and other issues, Petrobras finally took full control of the project in late 2013, saying it had the funds on hand to complete it, even without PDVSA.

However, the newspaper reported that Petrobras will not pursue its case for monetary sanctions against its former partner because they would only be obligatory if the two parties had actually signed a final agreement.

The paper said that they had not - that two had only been working under a partnership contract, a provisional agreement lacking the full legal protections of a duly ratified final agreement.

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