Discretionary credits losing value quickly; NewPage bonds falter; Fannie, Freddie downgraded

By Stephanie N. Rotondo and Sara Rosenberg

Portland, Ore., Aug. 8 - Distressed debt also took a hit in Monday trading as the equity markets plummeted, with the Dow Jones Industrial Average losing more than 600 points, traders reported.

"Everything is down 5 points," a trader said of distressed credits, adding that bid/ask spreads were widening throughout the day, as bids kept getting lowered and offers were chasing bids.

Discretionary credits like Caesars Entertainment Corp. and Rite Aid Corp. took their whacks, as the threat of a double-dip recession loomed. Another recession, combined with current unemployment rates, would likely mean another decline in discretionary spending, which would not be beneficial to barely-recovered retailers and casinos.

Meanwhile, NewPage Corp.'s second-lien notes inched closer to single-digit territory, though there was no fresh news out on the papermaker. Standard & Poor's meanwhile downgraded rival Catalyst Paper Corp. during the session, but there was not too much reaction in the bonds.

In distressed preferred stocks, Fannie Mae and Freddie Mac paper dropped as much as 25% on the day following a downgrade from S&P.

Caesars, Rite Aid tumble

A trader said Caesars Entertainment's 10% notes due 2018 were "just getting clobbered," having lost about 10 points in the last week and a half.

He saw the notes closing around 76 on Monday, calling the issue "one of the biggest movers."

Another market source saw the paper falling nearly 5 points to 76½ bid.

Among retailers, Rite Aid's 8 5/8% notes due 2015 lost 4 points to close at 841/2, the source said.

NewPage, Catalyst weaken

NewPage's 10% notes due 2012 dropped to 12 bid, 13 offered, according to a trader.

There was no fresh news out on the Miamisburg, Ohio-based papermaker, but the bonds have been falling in recent trading. Just last week, the notes were trading closer to 20.

However, the trader said there wasn't much action in Catalyst paper, despite S&P downgrading the Richmond, B.C.-based company on Monday.

"They use to be a large trader," he said. "It's kind of gone away."

He saw the 11% notes due 2016 offered around 73.

S&P said it dropped its long-term corporate credit rating on Catalyst to CCC from CCC+ due to the company's deteriorating liquidity and the belief that a distressed debt exchange could be on the horizon.

Fannie, Freddie downgraded

Following the United States' sovereign debt downgrade, agencies like Fannie Mae and Freddie Mac also saw their ratings knocked down a peg.

Standard & Poor's placed the new ratings at AA+, down from AAA. The agency said the change reflected the agencies' exposure to economic volatility, as well as the fact that its credit quality is heavily dependant upon the government being able to service its debt.

With Fannie and Freddie preferreds already trading in the low-dollar range, the news didn't do much to help although a market source noted, "The damage was done way before now."

Freddie's 6.55% preferreds (OTCBB: FMCKI) fell 25 cents, or 12.82%, to $1.70. Fannie's preferreds (OTCBB FNMAS) decreased 50 cents, or 25%, to $1.50.

Dynegy debt dips

Dynegy Inc. debt was lower, but volume was light, according to a trader.

The losses came as the company reported a narrower loss for the second quarter.

The trader pegged both the 8 3/8% notes due 2016 and the 7½% notes due 2015 at 67 bid, 68 offered.

Dynegy's new term loans came under pressure on Monday,

Dynegy's recently allocated GasCo and CoalCo terms loans are trading well below their original issue discount prices as the market in general weakened by about 2 points on the day, according to traders.

Both term loans were quoted at 95 bid, 96 offered, down from 97½ bid, 98½ offered on Friday, one trader said, while a second trader had the debt at 95 bid, 96 offered, down from 97 bid, 98 offered. When the loans broke last Thursday, they were quoted at 98¼ bid, 98¾ offered.

The $1.1 billion five-year GasCo term loan (B2) and the $600 million five-year CoalCo term loan are priced at Libor plus 775 basis points with a 1.5% Libor floor, and were sold at an original issue discount of 98. They are non-callable for two years, then at 102 in year three and 101 in year four.

Credit Suisse Securities (USA) LLC and Goldman Sachs & Co. led the $1.7 billion deal, the completion of which was announced on Monday.

Proceeds from the GasCo loan were used to repay Dynegy Holdings Inc.'s existing senior secured credit facility, repay existing debt relating to Sithe Energies Inc., make a distribution and fund cash collateralized letters of credit and cash collateral for existing collateral requirements.

During syndication, the GasCo term loan was downsized from $1.3 billion, the CoalCo loan was upsized from $400 million and maturities on both were shortened from six years. Also, pricing on GasCo was increased from Libor plus 650 bps, the discount widened from 99, and call premiums were sweetened from 103 in year one, 102 in year two and 101 in year three. Pricing on CoalCo came in line with talk.

The distribution, sized at $400 million, was split into $200 million from GasCo and $200 million from CoalCo, as opposed to the entire amount coming from GasCo, as was originally planned. Additionally, the CoalCo loan was used to fund cash collateralized letters of credit and cash collateral for existing collateral requirements and for general working capital and general corporate purposes.

With the new financing, Dynegy reorganized to form GasCo and CoalCo, with GasCo being a subsidiary that owns eight primarily natural gas-fired intermediate and peaking power generation facilities, and CoalCo being a subsidiary that owns six primarily coal-fired baseload power generation facilities.

"The completion of our internal restructuring and the successful closing of the new separate credit facilities were designed to facilitate and give us the operational and financial flexibility to be able to seize value whenever the opportunity presents itself," Robert C. Flexon, president and chief executive officer of Dynegy, said in a news release.

"We will now turn our efforts to determining what additional restructuring steps we can take to improve our overall leverage and to improve stockholder value," Flexon added.

On Monday, Dynegy came out with second-quarter results that showed a net loss of $116 million, or $0.95 per diluted common share, compared with a net loss of $191 million, or $1.59 per diluted common share, in the prior year.

Operating loss for the quarter was $106 million, compared with an operating loss of $229 million in the 2010 quarter.

Revenues for the quarter were $326 million, up from $239 million in the previous year.

And, adjusted EBITDA for the quarter was $102 million, down 18% from $124 million in the second quarter of 2010.

Dynegy is a Houston-based producer and seller of electric energy, capacity and ancillary services.

Cengage, TXU loans decline

Among other distressed loans, Cengage Learning's term loan B took a significant fall in Monday's weak session, with levels quoted by one trader at 78½ bid, 79½ offered, down from 83 bid, 84 offered.

The term loan B has been declining since late July when the Stamord, Conn.-based provider of teaching, learning and research services for the academic, professional and library markets reported disappointing earnings for the company's fourth quarter of fiscal year 2011.

Prior to the July 29 earnings news, the debt was seen in the low-90s context.

Another example of a non-new issue name to see levels soften by a few points was Texas Competitive Electric Holdings Co.

The company's extended term loan was quoted at 68½ bid, 69½ offered, down from 71 bid, 72 offered, the trader said - giving up a bit more ground than the estimated average two points that guys were seeing loans in general fall.

Texas Competitive is a Dallas-based energy company.

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