Kodak earnings, notes turn positive; Sappi debt gets boost on numbers; NewPage gains steam

By Stephanie N. Rotondo

Portland, Ore., Jan. 28 - Traders and other market sources thought Thursday to be a strange day in the distressed debt market, as cash inflows slowed down and some were hesitant to get involved.

"It's kind of reached a point where it is at its high," a trader said. As such, there were some that were concerned the bottom might fall out.

Still, the market continued to feel strong and some positive earnings seemed to help that along.

Eastman Kodak Co. put outs its financials during the session. The improved figures gave the company's bonds a boost, though one market analyst still had some concerns.

Sappi Ltd. also reported quarterly results. In response, the papermaker's debt also trended upward. And, in that same sector, NewPage Corp.'s notes remained active and continued to gain ground.

Elsewhere, Rite Aid Corp. was not much helped by numbers, as the pharmacy chain posted a decline in sales for the month of January. As such, the company's bonds declined as well.

Kodak notes turn positive

Eastman Kodak paper was "pretty active," according to several market sources, following the release of the company's fourth-quarter earnings.

One trader called the 7¼% notes due 2013 "definitely up" at 90 bid, 91 offered, versus 87 bid, 88 offered previously. That market was also quoted at another desk.

Another trader saw the bonds "move to the upside" on "very positive" numbers, ending around 91, a gain of 3 to 4 points.

And, yet another source deemed the issue up 3½ points to 90½ bid.

For the fourth quarter, the Rochester, N.Y.-based company posted earnings of $430 million, or $1.36 per share. For the same period in 2008, the company reported a loss of $914 million, r $3.40 per share.

Sales came to $2.582 billion, a 45% increase form the third quarter of 2009 and a 6% increase year over year.

For the full fiscal year, Kodak saw a net loss of $232 million, or $0.87 per share, versus a loss of $727 million, or $2.58 per share, in 2008. Revenues were 47.606 billion, a 19% decline from the prior year.

"Despite a difficult economic environment, we delivered in 2009," said Antonio M. Perez, chairman and chief executive officer, in the earnings release.

"Our momentum is returning and our strategy is paying off. During 2009, we generated significant traction with our key digital businesses, we achieved sustainable operational improvements across the company, our earnings improved substantially, and we ended the year with more than $2.0 billion in cash on our balance sheet."

Still, even as the quarterly results showed improvement, some in the know continued to have concerns.

"The cash burn has been increasing," wrote Dave Novosel, an analyst with Gimme Credit LLC. He noted that Eastman burned about $300 million over the course of the year. "Liquidity is not a concern presently but could become more critical if recent trends are not arrested."

Sappi boosted by numbers

Sappi, a Johannesburg-based producer of woodfree coated paper, also reported quarterly financials, which resulted in gains for the company's bonds.

A trader said the bonds were "up a good point or so after the numbers," placing the 6¾% notes due 2012 at 98 bid, 99 offered and the 7½% notes due 2032 at 67 bid, with no offers.

Sappi's net loss for the first quarter ending Dec. 27 came to $10 million. That compares to net income of $6 million the year before and a net loss of $20 million for the fourth quarter of 2009.

Sales, however, were much improved at $1.62 billion. In the first quarter of 2008, sales were $1.187 billion.

"The operating results excluding special items for the group improved substantially compared both to the equivalent quarter last year and to the prior quarter," commented Ralph Boėttger, CEO, in a press release. "Demand continued to improve for our major products with a steady improvement in demand for coated woodfree paper. Paper pulp prices and prices for chemical cellulose have continued to rise, driven by improved demand in general and good demand from China. Demand for coated mechanical paper has, however, not recovered and demand conditions in the South African domestic market remained challenging.

"Conditions in our major markets are expected to improve gradually in 2010, resulting in rising demand for our products," he added. "Although we expect demand and our capacity utilisation rates to improve compared to financial 2009, we do not expect demand to return to 2008 levels. We will therefore continue to manage our output to meet customer demand. Current indications are that recovery of coated mechanical paper is lagging coated woodfree paper, which will impact our European business.

"Against this background, we expect the operating profit excluding special items to remain positive in the second financial quarter but to be below the level achieved this quarter," he concluded.

NewPage still gaining steam

Elsewhere in the coated-paper realm, NewPage's bonds continued to be active - and better - during Thursday's session.

A trader quoted the 10% notes due 2012 at 65½ bid, 67, up from 62½ bid, 63½ offered the day before.

But while the bonds have "come off the bottom," he noted that the debt was trading in the high-80s in the first week of January.

At another desk, the notes were pegged at 65½ bid, 66½ offered, up "5-ish" points.

The recent activity in the Miamisburg, Ohio-based papermaker was spurred by news last week regarding the departure of its top executive, as well as weak preliminary quarterly results. The bonds responded by falling rapidly.

But in recent sessions, the bonds have regained some ground. There has been no further news to explain the rebound and some are continuing to express concern about the company's future.

"Even though we think coated paper demand and pricing both will increase in 2010, NewPage is so overleveraged that its capital structure may need revision," Kim Noland, an analyst with Gimme Credit, said in a research report. "The cyclical and secular decline in print media, especially advertising pages, makes it more difficult for NewPage to improve cash flow significantly in the near term."

Rite Aid sales hurt bonds

Rite Aid's debt fell a few points after the company announced its monthly sales report for January.

A trader called the credit "weaker," seeing the 8 5/8% notes due 2015 around 83, compared with 84½ bid, 85 offered on Wednesday.

Another source saw the paper slipping nearly a point to 84 bid.

For the four weeks ending Jan. 23, the Camp Hill, Pa.-based pharmacy chain saw same-store sales decline 2.1% compared with 2009 levels. Total sales dropped 3.3% to $1.913 billion.

Broad market feels firm

In the broader marketplace, Harrah's Entertainment Inc.'s bonds were unchanged to weaker, depending on the issue.

One source said the 10% notes due 2018 fell over 3 points to 80¼ bid, while another said the 5 5/8% notes due 2015 were unchanged and "kind of wide" at 61½ bid, 63½ offered.

Another source also called the 5 5/8% notes - as well as the 11¼% notes due 2017 - unchanged at 61½ bid, 62 offered.

Meanwhile, Blockbuster Inc.'s 9% notes due 2012 continued to be active. In fact, one trader dubbed the name - along with Eastman Kodak - the day's most active distressed credits.

The trader placed the 9% notes due 2012 at 25 bid, 27 offered and the 11¾% notes due 2014 at 74 bid, 76 offered. Another trader said the 9% notes hit a high of 28 before "they gave back some" and ended around 26.

FairPoint Communications Inc.'s 13 1/8% notes due 2018 "traded for the second time this week, but they have only traded three times in January," a trader said. He called the paper "a touch higher than the last trade" at 141/2.

General Motors Corp.'s benchmark 8 3/8% notes due 2033 were also up some, "probably on the back of Ford's earnings," according to a trader. He deemed the debt a half-point better at 28 bid, 28½ offered.

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