RadioShack debt blindsided by Q2 losses, pushed down 9 points; AMR says U.S. Airways desperate

By Stephanie N. Rotondo

Phoenix, July 25 - The distressed debt market was again on soft during Wednesday trading, according to market sources.

"The market was a little heavy today, especially some of the crappier issues," a trader said. "I didn't see too much on the upswing in the junkier stuff."

RadioShack Corp. was topical as the company reported an unexpected loss for the second quarter. The bonds dropped about 9 points on the earnings release and the stock got trampled in kind.

Bankrupt airline AMR Corp. meantime dipped as scuttlebutt between the company and potential merger partner U.S. Airways ramped up. Though AMR has recently said that it would consider possible mergers, U.S. Airways is said to be skeptical that a fair evaluation would occur.

AMR's head executive then went so far as to say that the idea for a combination of the two airlines was initially his idea - before AMR filed for Chapter 11 protections - and that U.S. Air's overtures were turning desperate.

Over in the coal space, Patriot Coal Corp. paper remained depressed following the release of poor quarterly results from sector peer Peabody Energy Corp. on Tuesday.

Loss pressures RadioShack

RadioShack's debt took a tumble Wednesday, after the Fort Worth-based electronics retailer reported a surprise second-quarter loss.

"The numbers looked pretty bad," one trader said, deeming the 6¾% notes due 2019 down 8 to 9 points around 65.

Another trader called the issue 9 points weaker at 661/4.

"RadioShack traded down a good bit," another trader said. The notes got as low as 65, he said, leaving them 65½ bid, 66½ offered at the close.

The stock (NYSE: RSH) meantime dropped $1.05, or 28.77%, to $2.60.

RadioShack reported its largest quarterly loss in 16 years for the second quarter of 2012, when analysts had been expecting a profit of 3 cents per share.

Net loss was $21 million, or 21 cents per share, versus a profit of $24.9 million, or 24 cents per share, the year before.

Net sales, however, were 1.2% higher at $953.2 million. Selling costs increased 16%, due in large part to sales of higher-end mobile phones.

Gross margins declined to 37.8% from 45.9%.

Along with the weak results, the company also said that it was suspending its dividend and that it was planning on refinancing at least half of about $375 million in debt that matures in 2013.

Cutting the dividend alone will save the company about $50 million per year.

Following the report, Fitch Ratings took action, downgrading the company to CCC from B-. The rating agency cited declined profitability and unstable operational management as reasons for its alteration.

Moody's Investors Service followed suit, downgrading the company to B3 from B1.

AMR, U.S. Air trade barbs

Continued back and forth between the top executives at AMR and U.S. Airways might have played a role in pushing the former's bonds down, a trader said Wednesday.

"Some airlines reported, and Delta specifically had a very large fuel hedging loss," he said. However, he was not sure that the loss could have had any real effect on AMR, as AMR cannot hedge while in bankruptcy.

He placed the 6¼% benchmark convertible bonds due 2014 at 66.

Another trader called the notes down a point to 65.

In recent weeks, AMR's chief executive Tom Horton said that he had reevaluated his plan to keep the parent company of American Airlines independent and that he would therefore being looking at possible merger options.

U.S. Airways, which has been pushing for a combination with the airline, has called into question whether or not Horton will in fact fairly evaluate such proposals.

In an interview with the Associated Press, Horton pushed back, stating that he - not U.S. Air's CEO Doug Parker - was the first to suggest the idea, back before AMR filed for bankruptcy and Horton was made CEO. He claims that U.S. Air's overtures are desperate, because a merger would be more beneficial to them than to AMR.

Horton cited U.S. Air's looming contract negotiations, saying that Parker needs to increase revenues before having to pay out higher salaries.

"Apparently Mr. Horton thinks such posturing will signal that he is the master of his domain, but we would observe that if he really did raise the idea of a merger last September with Mr. Parker (suspending disbelief for the moment of how he would even pull that off - as our work showed even then bankruptcy seemed imminent) he obviously failed to sell the deal and save his company from a massive failure which has created devastating harm to all its stakeholders," wrote Gimme Credit LLC analyst Vicki Bryan in an afternoon report. "That's really nothing to brag about."

Patriot sinks again

Worries over the state of the coal industry - further fueled by a disappointing earnings report from Peabody Energy on Tuesday - weighed again on Patriot Coal paper.

One trader saw the 8¼% notes due 2018 down "almost 3 [points]" at 461/2.

A second trader called the debt "weaker" at 48, while a third source deemed the issue down 2½ points at 46½ bid.

On Tuesday, Peabody posted a narrower profit for the second quarter.

For the quarter, the St. Louis-based company reported net income of $204.7 million, or 75 cents per share. That compared to a profit of $284.8 million, or $1.05 per share, the year before.

Revenues gained a bit to $2 billion.

The company blamed the weaker profits on declining demand and the low price of natural gas - something that the industry as a whole has had to reckon with.

ATP falls, Edison rises

In other energy names, ATP Oil & Gas Corp.'s 11 7/8% notes due 2015 were down 1½ points at 39, according to one trader.

Another trader said the bonds traded all the way down to 381/2.

There was no fresh news out on the Houston-based oil exploration company.

Meanwhile, Rosemead, Calif.-based Edison International Inc. was one of the day's few gainers, a trader said.

The 7% notes due 2017 moved up a point to 56, as the 7 5/8% notes due 2027 rose half a point to 541/2.

Supervalu hitting bargain bin

Supervalu Inc. paper was again losing ground during the midweek session.

A trader said the 8% notes due 2016 fell nearly a point to 613/4, while the 7.45% notes due 2029 declined 2½ points to 53.

There has been no fresh news out on the Minneapolis-based grocery store chain since the company reported weak quarterly results on July 11. Along with the earnings report, Supervalu also announced plans to "enhance shareholder value."

Dex loans firm

Dex West, Dex East and R.H. Donnelley Inc. all saw their term loans strengthen as parent company, Dex One Corp., released quarterly results that showed an improvement in net income from the prior year, according to a trader.

Dex West's term loan was quoted at 59 bid, 61 offered, up from 58 bid, 60 offered; Dex East's term loan was quoted at 51 bid, 53 offered, up from 50 bid, 52 offered; and R.H. Donnelley's term loan was quoted at 44 bid, 46 offered, up from 43 bid, 45 offered, the trader said.

For the quarter, Dex One reported net income of $52.9 million, or $1.05 per share, compared to a net loss of $602.1 million, or $12.01 per share, in the previous year.

Net revenue for the quarter was $334.5 million, versus $377.3 million in the second quarter of 2011.

And, adjusted EBITDA was $141.2 million, compared to $157.1 million last year.

Also on Wednesday, Dex One tightened its full-year 2012 guidance for net revenue, adjusted EBITDA and free cash flow.

Net revenue for the year is now expected to range from $1.25 billion to $1.3 billion, compared to previous estimates of $1.225 billion to $1.3 billion.

Adjusted EBITDA for the year is anticipated to range from $525 million to $575 million, instead of from $500 million to $575 million.

And free cash flow for the year is now guided at $310 million to $360 million, compared to prior estimates of $300 million to $375 million.

Dex One is a Cary, N.C.-based marketing services provider.

Sara Rosenberg contributed to this article

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