Distressed bonds calm; J.C. Penney firms; Verso warns on swap offer; Fitch wary of Detroit

By Paul Deckelman

New York, Jan. 28 - The market for bonds of distressed or under-achieving companies was relatively quiet and uneventful on Tuesday, traders said, taking its cue from the larger junk bond market, which was largely focused on new issues, albeit with an overall firmer tone.

The traders said that market dynamics were additionally impacted by the sideline sitting of many accounts that were waiting for some visibility on what the Federal Reserve plans to do about its quantitative easing program - information that is expected to emerge on Wednesday at the end of the central bank's two-day meeting. They were also seen idle ahead of Tuesday evening's presidential State of the Union address.

Among the individual credits, J.C. Penney Co. Inc.'s recently sagging bonds were seen having firmed on Tuesday. The company meantime strengthened its defenses against activist investors by lowering the threshold at which its poison-pill share plan is triggered.

Other retailing names like Sears Holding Co. - fairly active on Monday - were seen as quiet on Tuesday, but holding at recent trading levels.

There was some trading activity - but little real movement - in Verso Paper Corp. bonds, even as the company warned that tepid bondholder response to its pending exchange offer for two series of its outstanding notes could jeopardize its concurrent efforts to acquire sector peer NewPage Corp.

NII Holdings Inc.'s recently busy bonds were seen as relatively inactive for a second consecutive session.

And municipal debt investors remained wary of the latest developments in Detroit, as Fitch Ratings cast a skeptical eye over Governor Rick Snyder's proposal for state assistance to shore up the bankrupt city's underfunded municipal pension system; it suggests that it is a possible negative for bondholders who are battling with the public employee unions over how to divvy up the city's scarce resources as each side presses its respective claims against Detroit.

J.C. Penney paper firms

A trader said that "J.C. Penney paper actually seemed to be a little bit better," as he pegged the beleaguered Plano, Texas-based department store operator's 5¾% notes due 2018 somewhere between 74 and 75 bid, calling that up by more than 1 point on the day.

That was a change from Monday, when those bonds were seen down by as much as 2½ points in fairly brisk trading.

Penney's paper has recently been on the slide, market participants said, with investors apparently not mollified by the company's optimistic assertion earlier in the month that it was pleased with its performance during the just-concluded holiday sales period, or by Penney's announcement a week later that it would close 33 under-performing stores and cut headcount by 2,000, in hopes of saving $65 million this year.

Against that backdrop, the retailer announced that it had made changes to its stockholder rights plan that would make it more difficult for an investor to take a major stake in the company.

J.C. Penney lowered the threshold for its "poison pill" plan to 4.9% from the current 10% and also extended the plan, which was to have expired in August, until January of 2017.

The lower threshold now requires investors to receive board approval to purchase more than 4.9% of the company's shares. Penney said this is being done to protect its valuable net operating loss carry-forwards tax benefit, the use of which to offset income could be limited in the event of an ownership change under Internal Revenue Service rules.

The change might also be an attempt to prevent a repeat of the debacle that saw activist investor William Ackman accumulate an 18% stake in the company several years ago and then use that clout to force management changes that ultimately turned out to make Penney's competitive situation worse rather than better as the new management's marketing initiatives fell flat. The situation was resolved last year with new management changes, as Ackman stepped down from the board and sold his stake.

Failure to get management's okay for an increased share purchase would activate the "poison pill" and flood the market with new shares of the company, diluting investors' interest.

Sears quiet but firmer

Elsewhere in the retailing space, a trader said that there was "not really much of anything going on today" in Sears Holdings' bonds; the Hoffman Estates, Ill.-based department store operator's 6 5/8% notes due 2018 had been actively traded on Monday around the 89 to 90 bid level.

While not seeing much trading, he said that Sears "was definitely holding up."

"But there was not a lot of activity today," he reiterated.

He said that Sears was among a number of retailers - another, he said, was Bon-Ton Department Stores Inc. - whose bonds "have already pretty much taken their lumps and now they're holding up."

Verso busy but unchanged

Away from the retailing sector, Verso Paper's 11¾% second-priority senior secured notes due 2019 were among the busier bonds on the day, with round-lot volume of over $8 million, on top of numerous smaller trades.

The notes went home at 107½ bid, down about ½ point on the day.

That activity came as Memphis-based Verso warned the board of directors of NewPage Holdings Inc. - which Verso is trying to acquire in a $1.4 billion deal announced several weeks ago - that it may fall short of obtaining the needed threshold in the exchange offers and consent solicitations related to those acquisition plans.

Verso subsidiaries Verso Paper Holdings LLC and Verso Paper Inc. began exchange offers on Jan. 13 for their $396 million of outstanding 8¾% second-priority senior secured notes due 2019 and $142.5 million of outstanding 11 3/8% senior subordinated notes due 2016.

Each exchange offer is conditioned on obtaining tenders for at least 85% of each outstanding note series, and the closing of the merger is conditioned on completion of the exchange offers. But Verso advised NewPage that "in light of substantially less participation by the early tender time as compared to the minimum participation thresholds, and based on the large disparity between what a group of non-participating noteholders has requested and what Verso is able to offer under the merger agreement governing the pending merger, Verso is concerned about its ability to consummate the exchange offers as required under the merger agreement," according to an 8-K filing with the Securities and Exchange Commission.

A trader said that "despite the news, there was not a lot going on, trading-wise," noting that apart from the 11¾ notes, there was virtually no real trading seen in any of the company's other bonds, including those that are the subject of the exchange offer.

And he said that "when you look at where the stuff is trading," relative to the exchange offer terms that Verso is offering its noteholders, "I don't know why anyone would think that a lot of people would participate in the tender [exchange offer]. I think people were buying the bonds because they thought they could get a much better deal," by forcing Verso to offer sweetened terms for its exchange offer in order to complete that offer and go through with the merger.

Fitch wary of Detroit plan

In the municipals market, investors mulled over a Fitch Ratings report released Monday, which expressed reservations about Michigan Governor Rick Snyder's proposal to contribute $350 million towards Detroit's unfunded pension liabilities.

The Fitch analysis warned that Snyder's initiative demonstrates "continued weak support for bondholder security and repayment stemming from Detroit's bankruptcy."

The money Snyder is offering up is contingent upon labor unions agreeing to drop their legal actions aimed at stopping Detroit's current Chapter 9 bankruptcy case.

"In Fitch's opinion, action that suggests pensions' claim on limited resources should be given priority to that of bondholders could establish a troubling precedent, at least in Michigan and perhaps beyond, given the paucity of significant municipal bankruptcy filings historically and the resulting focus on the Detroit case," said the report from managing directors Amy Laskey and Richard Raphael and director Arlene Bohner.

"Moreover, the governor's comment that state funds will not bail out bondholders or Wall Street but are going to Michiganders suggests an 'us versus them' orientation to debt repayment that undermines a willingness to pay public debt in Michigan," the report concluded.

Sheri Kasprzak and Susanna Moon contributed to this review.

© 2015 Prospect News.
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