Distressed debt pushes higher; casinos helped by market trend; A&P news spurs investor worries

By Stephanie N. Rotondo

Portland, Ore., Oct. 5 - Distressed debt headed upward during Tuesday trading after a slow start on Monday.

"The market was quite firm," a trader said, noting that a 200-plus gain in the equity markets "sucked our market along."

The general market strength helped casino credits like Mohegan Tribal Gaming Authority, Harrah's Entertainment Inc. and MGM Resorts International Inc. There wasn't any name-specific news, though there has been general industry buzz regarding online gambling.

Investors showed concerned about Great Atlantic & Pacific Tea Co. Inc. and news the company has walked away from several stores leases in Michigan as they pushed down the supermarket operator's subordinated debt. Some issues, however, dipped and rallied.

There was no news out on Clear Channel Communications Inc. but the bonds continued to be among the more active names and trended up in line with the rest of the market.

Meanwhile, Dynegy Holdings Inc. recouped a portion of the losses incurred during Monday trading.

Casino debt gets boost

Casino names were generally up 1 to 2 points on the day, though there was little in the way of name-specific news.

One trader saw Mohegan Tribal Gaming's 6 1/8% notes due 2013 at 803/4, up over a point on the day.

He also saw Harrah's Entertainment's 10% notes due 2018 at 81¾ and MGM Resorts International's 6 5/8% notes due 2015 at 86 and the 6¾% notes due 2012 around 96. The trader deemed all of those issues at least a point better.

At another desk, Mohegan's 6 1/8% notes were quoted at 79½ bid, 80½ offered and the 8% notes due 2012 were pegged at 77½ bid, 78½ offered.

There was no news out on any of the casino operators, but there has been chatter about the potential of legalizing online gambling. There is reported to be at least four bills regarding the matter before Congress at this time and the American Gaming Association is said to be reaching out to encourage lawmakers to support the idea.

A&P news worries investors

A trader said that there was "uncertainty" surrounding Great Atlantic & Pacific Tea Co., pushing the Montvale, N.J.-based supermarket operator's unsecured bonds down.

He quoted its 6¾% notes due 2012 as having traded down to 53 bid from prior levels at 56 bid, 57 offered, while its 5 1/8% notes due 2011 dipped to a "69ish" level from 72 3/8 bid, 72 5/8 offered.

The trader said that investors were worried on the news that the company had decided to walk away from the leases on a number of its closed Farmer Jack stores in Michigan, totaling some 2 million square feet of space and $150 million in annual rent payments.

A&P has most of its operations in the Northeast, where it runs the eponymous and iconic A&P store chain, decided in 2007 to get out of the Midwest, selling some of its 66 Farmer Jacks in Michigan and Indiana to Kroger Co. or other operators, but it was unable to find buyers for 27 more stores.

A&P kept paying the rents on the closed stores while it tried to find tenants who could sublease those premises, but was unsuccessful. It notified the landlords that it was returning possession of the leased premises to them, including surrendering the keys to the stores, and would not pay any further rent. A number of landlords have, in turn, filed lawsuits against the retailer.

"A lot of people got nervous and started shorting the bonds," the trader said.

However, while the unsecured paper got pushed down and stayed down, he said that the company's 11 3/8% senior secured notes due 2015 initially dropped as well, "but got stronger later."

He saw those bonds - which had been trading at 77 bid, 79 offered a couple of days ago - fall to 72½ bid on news of the lease problem, reported in Crain's Detroit Business. But after that, he said, they traded back up to stand almost unchanged at 76½ bid.

"But the other two issues definitely were down."

Clear Channel active, higher

Clear Channel Communications' bonds "traded up some," according to a trader.

The trader saw the 10¾% notes due 2016 at 79 bid, 79½ offered and the 11% notes due the same year at 77½ bid, 77¾ offered.

Another trader called the 11% notes "up like a point" around 78.

There was no news out on the San Antonio-based multimedia company.

Dynegy recoups losses

After losing traction in the previous session in reaction to a downgrade from last week, Dynegy Holdings' debt regained some ground, traders reported.

Dynegy's 7¾% notes due 2019 were "back up a touch," a trader said, around 68.

Several other sources echoed that level and one also saw the 7½% notes due 2015 closing around 791/4.

The Houston-based energy producer saw its notes slipping on Monday following a rating downgrade from Moody's Investors Service on Friday. One trader opined that the losses came Monday because the rating change came too late in the day on Friday to have any sort of effect.

Moody's dropped Dynegy to Caa1 from B3, citing the company "fragile" financial profile and its planned $4.8 billion sale to private equity firm, the Blackstone Group.

Broad market strengthens

Among other trading distressed issues, Realogy Corp.'s 10¼% notes due 2014 moved up nearly a point to 861/4, a trader said.

The trader also saw Takefuji Corp.'s 9.20% notes due 2011 around 191/2, which he deemed unchanged.

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