Overseas Shipholding lower; AMR firm despite DOJ delay request; Nokia mixed after warning

By Paul Deckelman

New York, Aug. 27 - Overseas Shipholding Group Inc.'s bonds and shares encountered rough seas for a second straight session on Tuesday as investors remained worried about the possibility that the bankrupt tanker operator might have to pay $463 million to the Internal Revenue Service to settle a tax case - leaving that much less to satisfy creditor claims.

AMR Corp.'s bonds were seen continuing the firming trend they have been on since starting to bounce back from big losses suffered earlier this month when the Justice Department filed suit to block the bankrupt airline operator from merging with sector peer US Airways Group, Inc.

The feds, meantime, asked the court hearing that case to set a trial date in March - a delay the two airline companies strenuously object to.

Away from the bankrupt names, Nokia Corp.'s bonds were mixed, with its 2019 notes among the most heavily traded junk issues, while its share lost ground after a Deutsche Bank analyst put out a negative research note about the underperforming Finland-based wireless phone manufacturer.

There was not too much reaction among bond investors as news on J.C. Penney Co. Inc. was released just as financial markets were closing down on Monday. Reports stated that J.C. Penney's largest shareholder, the hedge fund controlled by activist investor William Ackman, has decided to cash out its entire position in the troubled retailer's stock, which declined on the news.

More turbulence for OSG

For a second straight session, Overseas Shipholding's bonds were trading lower, hurt by investor fears that the bankrupt New York-based tanker operator may have to cough up as much as $463 million to the IRS in back taxes and penalties.

A trader said that the 8 1/8% notes due 2018 "traded down a bit" at 87½ bid, 88½ offered, on about $%4 million of turnover.

He estimated that was down 1¼ points.

A second trader called the bonds down 1½ points, at 87½ bid, on volume of over $4 million.

On Monday, those bonds were seen having lost 2 points, from an 89-90 beginning, on volume of more than $6 million traded.

The 7¼% notes due 2024 were seen unchanged on light volume Tuesday. On Monday, those bonds sank by 3½ points to 87 bid, but on only one or two large trades.

The company's over the counter-traded shares, meanwhile, lost 21 cents, or 6.27%, on Tuesday to end at $3.14. Volume of 188 million shares was 1½ times the normal activity level. On Monday, the shares had nosedived by 11.84%, on volume of 227,000 shares, about twice the norm.

The paper got pounded as the company said that it is now in a position to begin negotiating with the IRS after completing a review and restatement of its financial statements for the past 12 years.

"The company believes, based on its analysis and its interactions with the IRS to date, that the actual amount of tax that the company ultimately will be required to pay to the IRS in respect of the potential deemed dividends and other adjustments discussed above will be significant and could be as high as $460 million, or potentially higher, for all periods ending on or before December 31, 2012, not taking in account any potential penalties but including interest," the company wrote in a form 10-K filed Aug. 26 with the Securities and Exchange Commission.

However, the company says it "has several defenses available to mitigate its liability and intends to assert those defenses vigorously."

The IRS has filed proofs of claims totaling $463.01 million in the Chapter 11 bankruptcy case. Its attorney said during an Aug. 26 hearing in the U.S. Bankruptcy Court for the District of Delaware that the completion of the financial review provides the basis for negotiations to begin on that claim.

Nokia mixed despite report

Nokia's bonds were mixed on the session despite a negative research report on the Finnish wireless phone manufacturer.

A trader said that the company's 5 3/8% notes due 2019 were "pretty active," although he added that "that's always the active ones" in the company's capital structure.

He saw those bonds trading between 95 and 95¾ bid, calling them up "maybe a half-point."

But that was down around a half-point from where the bonds had opened up in morning dealings.

There was "decent volume," he said, estimating it at between $17 and $18 million, counting the odd-lot trades along with the larger transactions.

Nokia "looks like they were fairly active," a second trader said, although he characterized the bonds as "maybe on the margins a little weaker."

But he added that "they were trading with a [95] handle [on Monday], so it's not dramatically different."

Yet another trader saw the bonds up five-eighths of a point, at 95¾ bid, on round-lot volume of over $12 million.

Nokia's 6 5/8% notes due 2039, on the other hand, were quoted down as much as 1 3/8 points, one of the traders said, pegging the bonds at 85¾ bid.

Volume was about $4 million.

Nokia's NYSE-traded shares lost 18 cents, or 4.32%, to go home at $3.99. Volume f 21.1 million shares was a little below the usual turnover.

That slide followed a negative research note on the company from Deutsche Bank analyst Kai Korschelt, who cautioned that Nokia's main profit driver, its Nokia Solutions and Networks division, could see declining revenues and profit margins going forward, especially due to a slowing of sales in Asia and limited growth prospects in more mature markets.

He warned that if the trend were not reversed, Nokia was likely to burn through its cash reserves, currently at €3.6 billion, but on pace to decline to less than €1 billion by the end of 2014.

The analyst said that the division might have to be restructured, which could cost the company as much as €600 million.

He rates the shares a "sell."

Penney quiet after sale

Elsewhere, traders saw little real activity in J.C. Penney's bonds, with not much apparent investor reaction to the news that the troubled Plano, Texas-based retail chain's largest shareholder - hedge fund manager and activist investor Bill Ackman's Pershing Square Capital Management -- had decided to cash out of its nearly 18% stake and sell its 39.1 million JCP shares with an estimated worth of over half a billion dollars.

A trader said that J.C. Penney paper "was maybe marginally better," but he added that "nothing traded that much."

Penney's 5.65% notes due 2020 opened at 76 bid, up 1½ points from Monday's closing levels and a point higher than its most recent prior round-lot transaction several days ago, a market source said.

But the bonds had come back down to around 75¼ bid by mid-morning on volume of over $2 million and pretty much stayed around there later on.

The 7.95% notes due 2011 ended up losing a quarter-point, going out at 87 bid, on volume of just around $2 billion.

None of the company's other bonds, like its 7.65% notes due 2016, quoted around 88 bid, and its 6 7/8% notes due 2015, seen around the 91 mark, were seen having traded in anything other than smallish odd-lot transactions.

Penney's NYSE-traded shares ended off by 18 cents, or 1.35%, at $13.17. Volume of over 99 million shares traded was almost eight times the norm.

Late Monday, the Ackman-controlled Pershing Square Capital filed a 424B7 with the Securities and Exchange Commission announcing plans to sell its roughly 39.1 million shares of J.C. Penney common stock, which is a 17.7% ownership stake in the company.

On Tuesday morning, the stock sale priced at $12.90 per share. On Aug. 23, J.C. Penney's stock was $13.50 per share.

The offering is expected to close on Friday, and J.C. Penney will not receive any of the proceeds from the sale.

Ackman's exit from J.C. Penney's stock comes on the heels of his Aug. 12 resignation from J.C. Penney's board of directors amid a contentious boardroom battle over choosing a chief executive officer to lead the nation.

AMR strengthening continues

In the convertibles market, AMR Corp.'s 6.25% convertibles due 2014 were seen little changed in active trade around par bid.

Those converts had moved up all last week from lows of about 90 to 92 as investors become "more comfortable" with the standalone valuation of the company if its merger doesn't go through, a Connecticut-based trader said.

At another shop, a trader pegged the 6.25s at 100¼ bid, up from 99½ on Monday, on volume of over $7 million.

The bonds had fallen as low as the 90 level from levels above 115, where they had traded before the Aug. 12 announcement that the Justice Department and the attorneys general from six states were suing to stop the planned merger of Fort Worth, Texas-based AMR, the parent of American Airlines, and sector peer US Airways Group.

The merger is considered key to AMR's ability to emerge from bankruptcy .

On Tuesday, the Justice Department asked the court hearing its lawsuit to set a trial date for next March.'

The airlines, which have been seeking a November trial date and hope to get AMR's reorganization plan approved by the bankruptcy court before then, denounced the government motion, saying it was important for investors and creditors alike to get the legal issues resolved and the combination carried out as quickly as possible.

DFC converts steady

Also in the converts market, DFC Global Corp.'s convertibles continued to trade, but steadied on Tuesday following weakness related to a disappointing earnings and outlook reported by the Berwyn, Pa.-based financial services company last week.

DFC's 3% convertibles due 2028 traded at 97 bid, 98 offered on Tuesday, which was "relatively unchanged from the other day," a trader said.

DFC shares were up and down, but ended the session down three cents at $11.02 in active trading.

The DFC 3% convertibles trade on about a 25% delta and hadn't really moved since poor earnings sent shares lower. But the 3.25% convertibles, which trade on about a 50% delta, have lost a couple of points since the earnings report.

Sara Rosenberg and Rebecca Melvin contributed to this review

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