School Specialty in active trade; Chiquita improves since financing; Chesapeake adds

By Rebecca Melvin

New York, Jan. 30 - School Specialty Inc. was a market focus on Wednesday with the convertibles of the bankrupt school supplies company trading first lower, then higher amid speculation about the possibility bondholders might provide debtor-in-possession financing contrary to what was initially planned.

The School Specialty bonds dipped a point or so to as low to 28.5 and then traded up to 33.

"Bondholders are trying to provide a competing DIP," a Connecticut-based analyst said.

Chiquita Brands International Inc.'s convertibles extended gains and were still active after the Charlotte, N.C.-based produce company announced pricing Tuesday of its planned $425 million of senior straight notes.

Also in the distressed arena, but no longer looking very distressed, AMR Corp.'s 6.25% convertibles due 2014 traded up again to 95.25, which was up a quarter point or so, following reports Tuesday that a planned merger with US Airways Group Inc. was looking likely.

The two companies and AMR creditors are in advanced talks over the merger, but it's not a done deal, however. How much of the combined company would belong to AMR creditors is still being decided.

People familiar with the discussions told the Associated Press on Tuesday that a group of bondholders has decided to support the merger rather than a rival plan for AMR to emerge from bankruptcy on its own.

Elsewhere, the convertibles of Chesapeake Energy Corp. were active and were better outright and on a dollar-neutral, or hedged, basis by about a point, a New York-based trader said.

Chesapeake shares were higher for a second straight day after news of the retirement of embattled chief executive Aubrey McClendon.

Otherwise, it was fairly quiet in the convertibles market Wednesday as this week's raft of economic data continued and a meeting of the Federal Reserve policy makers wrapped up.

The U.S. gross domestic product shrank for the first time in 3.5 years during the fourth quarter, declining at an annual rate of 0.1%, between October and December, the Commerce Department said Wednesday.

The contraction reversed 3.1% growth of GDP in the third quarter and was largely due to a drop in federal government spending and fears related to the fiscal cliff.

Superstorm Sandy also likely hampered fourth-quarter output. But there was no estimate as to its effect.

For all of 2012, gross domestic product expanded 2.2%, an improvement compared with 1.8% growth in 2011.

The Federal Open Market Committee said Wednesday it will stick with its current program of buying $85 billion in assets a month and will keep interest rates near zero until unemployment falls to at least 6.5%.

School Specialty rises

School Specialty's 3.75% convertibles due 2026 traded initially at 29.95 and slipped to 28.5 before rising back up to 33.

School Specialty's shares slipped 5.5% to $0.1449.

Trading in School Specialty convertibles was active and was the name of the day in the distressed space, a trader said.

The paper was initially under pressure as market players speculated whether the term lender or a competing bid would win approval to provide DIP financing.

"It was different than originally thought," a trader said.

The Greenville, Wis.-based education company, which develops curricula and provides supplies for elementary, middle and high school educators, said initially that a $50 million DIP would be provided by Bayside Capital Inc., an affiliate of global private investment firm H.I.G. Capital.

"There's a lot of uncertainty, and bondholders say that they can provide the financing at better terms for the company," the trader said.

Bayside is also the stalking horse bidder in an auction that the company is trying to pull together for court approval Feb. 8.

Bayside can walk away from its agreement if the bid rules are not approved by Feb. 8, the auction isn't commenced by March 24 and the court hasn't approved the sale by March 27, court papers say.

Chiquita extends gains

Chiquita's 4.25% convertibles due 2016 traded at 90 bid, 90.375 offered, which was higher compared to 89.375 bid, 89.625 offered on Monday, when they jumped 2.5 points.

Chiquita shares ended at $8.01, which was down 13 cents, or 1.6%.

The Cincinnati-based produce company priced $425 million of 7.875% eight year senior notes at 99.274 to yield 8%. The spread was 645 basis points.

The straight bonds have three years of call protection. But there is a special call provision that allows the issuer to redeem 10% of the notes annually at 103 during the non-call period.

The last debt the company sold was the convertible bonds in February 2008.

Chesapeake gains

Chesapeake's 2.25% convertibles due 2038 traded at 88 bid, 89 offered, which was up more than 2 points outright and better by about a point on a dollar-neutral basis, a New York-based trader said.

Chesapeake's 2.5% convertibles were at 96.75 bid, 97.75 offered, a second New York-based trader said at the end of the session, and Chesapeake's 2.75% convertibles were at 99.5 bid, 100.5 offered.

Chesapeake shares extended gains, trading up $1.14, or 6%, to $20.11.

"The whole cap structure trades," the first trader said, adding that they trade on deltas in the 30% range, but that can vary.

The Oklahoma City-based natural gas company announced after the market close Tuesday that he will step down, and McClendon said in a statement that philosophical differences with the new board led to his decision.

Some of McClendon's business dealings raised questions about Chesapeake's corporate governance and had worried investors for some time.

Mentioned in this article:

AMR Corp. Pink Sheets: AAMRQ

Chiquita Brands International Inc. NYSE: CQB

Chesapeake Energy Corp. NYSE: CHK

School Specialty Inc. Nasdaq: SCHS

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