Distressed debt begins 2012 firm; ResCap boosted as Ally says no bankruptcy; Dynegy bonds gain

By Stephanie N. Rotondo and Paul Deckelman

Portland, Ore., Jan. 3 - Distressed bond were "strong," a trader said Tuesday, as the broader markets posted gains for the first trading session of 2012.

"Everything is looking better," the trader said, calling distressed issues up 1 to 2 points on average.

Residential Capital LLC got an above-average boost during the session on news that its parent company, Ally Financial Inc., would not force the money-losing mortgage unit into bankruptcy. Market sources deemed the company's debt up by 5 to 6 points on the day.

Dynegy Holdings LLC was also "a bit better," according to a trader. The power producer's bonds climbed up 1 to 2 points.

Meanwhile, Sears Holding Corp. was holding in there after getting "clocked" the week before on bad numbers and news of store closures. One trader noted that while the debt was "basically unchanged," the notes were actively traded.

ResCap gets a break

Residential Capital, the money-losing mortgage lending unit of Ally Financial, saw its bonds rise as much as 6 points on chatter the company's parent had no desire to force it into bankruptcy.

One market source saw the 9 5/8% notes due 2015 trade as high as 76, going out 75 bid, 76 offered.

That was up 5 to 6 points.

At another desk, a trader said that the 9 5/8% junior secured guaranteed notes were up about 4 points on Tuesday, on volume of about $10 million. He said the company's bonds had closed out the year on Friday trading at 70½ bid, and were trading on Tuesday at 741/2.

A second trader said that the bonds got as good as 76¼ on "decent volume," before ending at 74½ bid, 75½ offered, which he still called up about 3 points.

The New York Post reported that Ally was not considering a bankruptcy filing for ResCap, due to potential lawsuits by creditors. The report cited unidentified sources.

ResCap is based in Minneapolis.

Sears active, steady

Hoffman Estates, Ill.-based Sears Holding were holding steady after taking a beating last week on poor numbers and the announcement of store closures.

A trader said the 6 5/8% notes due 2018 were trading actively around 761/4. He called that "basically unchanged from last week."

Another trader also saw the notes trading around 76, adding that the debt had fallen to those levels during the previous week.

He said the bonds had been trading around 80 before the news that came out Dec. 27.

But other traders saw the bonds falling.

One trader quoted the 6 5/8% notes around the 75 bid level on over $23 million of turnover, although he said that on a round-lot basis, the bonds were at the 76¾ bid level. He saw activity anywhere between 75 and 77, and pronounced the bonds down around 2 to 2¼ points, bucking the market's generally positive trend.

A second trader said the 6 5/8s began the day around 76, but he figured that "they're going to be under pressure," and they were going home around 76 bid, which he called down 3 points from year-end levels around 79. He said the latter level was on a small trade Friday and thus not representative. Looking only at round lots, he said that the bonds were unchanged from recent levels in the mid-70s.

On Dec. 27, the retailer posted comparable store sales for the fourth quarter and for the year. For the quarter, sales were down 5.2%. For the year, sales slipped 2.6%.

Given that the company has been struggling to recover from the economic downturn, Sears then said it was planning to cut costs.

"Given our performance and the difficult economic environment, especially for big-ticket items, we intend to implement a series of actions to reduce ongoing expenses, adjust our asset base and accelerate the transformation of our business model," Lou D'Ambrosio, chief executive officer, said in the press release.

"These actions will better enable us to focus our investments on serving our customers and members through integrated retail."

Among the cost cutting endeavors were plans to shutter some 120 stores under both the Sears and Kmart monikers. Investors reacted negatively to the closures, pushing the bonds lower.

Dynegy powers up

Dynegy Holdings' debt was "a bit better," a trader reported.

He saw the 8 3/8% notes due 2016 trading up 1 to 1½ points from "pre-holiday levels" to end in a 67-68 context.

Another trader called the issue up as much as 2½ points, at 68, in "pretty active" trading.

At another desk, a market source called the 7¾% notes due 2019 up over a point at 66½ bid.

On Dec. 29, the judge overseeing the subsidiary's bankruptcy case signed an order to appoint an examiner to the case. The appointment comes after a bond trustee claimed an investigation into parent company Dynegy Inc.'s restructuring efforts last year was needed.

Bondholders are alleging that the parent stripped them of assets in the restructuring. The judge gave the examiner "unfettered" access in order to determine if the parent company acted fraudulently.

Dynegy is a Houston-based power producer.

MBIA jumps up

A trader said that "at the end of the day," MBIA Inc.'s 14% surplus notes due 2033 had jumped to a 59-61 context, which he said was up 4 or 5 points from its year-end level on Friday, following a favorable ruling in the Armonk, N.Y.-based bond insurer's protracted legal battle with lending giant Bank of America.

"That's a big move on those surplus notes," he said.

MBIA's New York Stock Exchange-traded shares were meantime up by 94 cents, or 8.11%, at $12.63, on volume of 5.3 million, more than twice the norm.

A New York state judge issued a ruling that may make it easier to prevail in its securities fraud lawsuit against Bank of America, growing out of the 2008 financial industry meltdown.

MBIA said that Countrywide Financial Corp., then an independent mortgage originator but now a part of Bank of America, misled it about the credit quality of some 368,000 loans that were the collateral on mortgage-backed securities MBIA insured. When those loans were revealed to be of not good quality and the MBS securities tumbled, MBIA was forced to make good on its guarantees.

In Tuesday's ruling, New York State Supreme Court Justice Eileen Bransten, did not rule on the merits of MBIA's case against Countrywide and its new parent, but said that the insurer would only have to show that Countrywide misled it about the $20 billion of securities it insured - not that the misrepresentations actually caused its losses.

Bank of America said it was studying the judge's ruling.

Broad market strong

Among other market mainstays, a trader said Caesars Entertainment Corp.'s 10% notes due 2018 were the day's most actively traded bonds, calling them "up a couple" to 71.

Another market source saw the paper rising over 3 points to close at 72 bid.

Sprint Nextel Corp.'s 8¾% notes due 2032 were also firmer, gaining a point to end at 82.

The 6% notes due 2016 were up 1½ points at 85 bid.

Also, Momentive Specialty Chemicals Inc.'s 9% notes due 2021 jumped 2 to 3 points, finishing up around 79.

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