Asbestos-linked loans trade as Supreme Court rejects appeal; Sea Containers choppy

By Sara Rosenberg and Paul Deckelman

New York, May 1 - Loans of asbestos names, such as Owens Corning and W.R. Grace & Co., saw a rash of trading activity late in the day Monday as news emerged that the U.S. Supreme Court wouldn't even hear the appeal of substantive consolidation on the Owens bankruptcy case, according to a trader.

Meanwhile the bonds of Sea Containers Ltd. were heard gyrating around at lower levels in line with a sharp decline in the Bermuda-based railroad and maritime container company's shares, after the company said that it would delay the filing of its annual report with the Securities and Exchange Commission - and warned that its auditors will likely raise a "substantial doubt" about its ability to keep operating as a going concern.

Owens Corning's bank debt rose by about three quarters of a point on the Supreme Court news to 155½ bid, 156 offered, the trader said.

Meanwhile, W.R. Grace's bank debt was active in the 144½ bid, 145½ offered context, unchanged on the day, the trader added.

The U.S. Court of Appeals for the Third Circuit had previously overturned Owens Corning's proposed substantive consolidation, calling it "a ploy to deprive one group of creditors of their rights while providing a windfall to other creditors."

The company had obtained approval from the U.S. Bankruptcy Court for the District of Delaware in October 2004 to treat the parent and subsidiaries as a single unit. At the time, judge John Fullam described it as "a virtual necessity."

After that ruling, Credit Suisse First Boston, the agent bank for the company's lenders group, appealed, saying the decision was a big setback to the group of 43 banks, led by CSFB, which fought against consolidation in pressing their claim that their approximately $1.6 billion in loans to the parent company and its units had priority over the claims presented by the bondholders and other creditors.

It argued that Owens Corning's subsidiaries "agreed explicitly to maintain themselves as separate entities," to keep separate books and financial records and to prepare separate financial statements.

But Fullam had said there was no basis for a finding that, in extending credit, the banks relied on the subsidiaries being separate.

Fullam also said the consolidation would greatly simplify and expedite the case.

Owens Corning is a Toledo, Ohio, building materials company. W.R. Grace is a Columbia, Md., provider of chemicals and materials.

Movie Gallery loan better

Movie Gallery Inc.'s term loan B felt stronger during Monday's session as levels moved up to 92¼ bid, 93¼ offered from 92 bid, 93¼ offered, according to traders.

Over the course of last week, Movie Gallery spent every day, other than Friday (during which levels came in by about half a point), heading upwards as positive earnings were released by both Netflix Inc. and Blockbuster Inc.

No credit specific news was released on Monday to cause the slight rise in Movie Gallery's term loan B levels, however, the sector as whole felt pretty good with Blockbuster's term loan also quoted higher by about a quarter of a point at par ¼ bid, 101 offered, on trader added.

Movie Gallery is a Dothan, Ala.-based movie rental company. Blockbuster is a Dallas-based movie rental company

Sea Containers bonds volatile

On the downside, Sea Containers was "all over the place," a bond trader said, quoting the company's 10½% notes due 2012 going home two points lower, at 85.5 bid, 86.5 offered.

However, even though he noted that Sea Containers' New York Stock Exchange-traded shares sank $1.76 (25.07%) to end at $5.26, on volume of two million, about nine times the usual turnover, the company's other series of bonds - its 10¾% notes due 2006 and 7 7/8% notes due 2008 "came back to almost unchanged." While the 103/4s dipped to 94 during the session, they rebounded to 95 bid, 96 offered, while the 7 7/8s plunged to 85, but bounced off that low to finish at 86.5 bid, 87.5 offered, both little changed.

As for the 101/2s, which did not bounce back, he opined that "that's the one that people are a little nervous on.

"What's happening," he said, "is that people are questioning whether [Sea Containers] is a going concern or not. That's going to hammer the stock - but a lot of high yield research," including that done by the analysts of his own shop, "is saying that the assets basically cover the bonds. So the stock got crushed, down nearly $2 on a $6 stock, but the bonds came back," with the exception of the 101/2s.

Another trader saw the 101/2s down two points at 84.5 bid, 85.5 offered, while the 7 7/8s were also two points lower at 86 bid, 87 offered, while the 103/4s were perhaps half a point lower at 95 bid, 96 offered.

The first trader said that volume in the name, which he normally watches, "was the heaviest I've ever seen."

He said part of the high volume and increased volatility in the name was due to the emergence of hedge funds as sizable market players.

"It's not just holders" who are buying the bonds as an investment, "but you've got the hedge funds that can short the bonds - or conversely, short the stock and buy the bonds. It goes both ways."

He said that "some of the hedge funds were shorting the 10¾% '06, because it's the higher dollar-price bond.

"That's why it's so wild," he continued, adding that "this business has changed so dramatically in the last three or four years. The hedge funds are running it. They've got tons and tons of money - with no regulation."

He said that he must have traded as least $30 to $40 million of Sea Container bonds - with "no idea" whether the buyers were traditional investors who would likely hold onto a bond for a while, or speculators looking for quick in-and-out action on a volatile name.

"Welcome to the Brave New World - bond trading in the 21st Century."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.