Owens Corning's 7 1/2% '18 bonds dropped 12 points to 53 before rebounding to 57 last week as investors sold ahead of a pending rights offering in which certain bondholders would have to buy additional shares in the reorganized company. Current bonds will be turned into equity when the company emerges from bankruptcy, expected in October. JPMorgan is leading a backstop facility and has committed to buy from Owens Corning at $30 a share, any of the 72.9 million shares of its common stock that are outstanding after the rights offering.
A dealer noted certain bondholders that are obligated to buy shares under the backstop facility are selling bonds to hedge equity in case they get hit by the rights offering. "People are selling the bonds because they think they are going to own a lot more stock than they thought they would," said another dealer. Bondholders vote Sept. 1 on whether they want to participate in the rights offering. Note holders and other general unsecured creditors will have the right to buy additional shares of the 72.9 million shares of the reorganized company's common stock at $30 a share.
In connection with the equity commitment agreement, JPMorgan has entered into a syndication agreement with certain backstop participants. Therefore, under the agreement, each backstop participant agreed to buy its pro rata of any shares in Owens Corning common stock purchased under the equity commitment agreement. It is unclear, which bondholders are obligated to participate. According to an Owens Corning release, it is anticipated JPMorgan would syndicate that commitment to certain interest holders led by DE Shaw Laminar Portfolios. The backstop facility is designed to ensure that a trust for asbestos creditors, from whom the stock will be bought in the rights offering, will be fully funded.
Dealers said bondholders are worried about the performance of Owens Corning equity when it emerges from bankruptcy. The stocks of many homebuilders, many of which Owens Corning is a supplier to, have dropped over the past couple of months because of a slowdown in the housing market. Concerns about the housing slowdown have caused Owens Corning bonds to fall from a high of 123, where they were trading in May, when Owens Corning reached a plan of reorganization with its creditors.
Owens Corning's bonds rebounded, however, because of new buyers attracted to the debt, said a dealer. The interest from new buyers pushed the bonds up to 57. A company spokesman declined to comment on the bond trading.
Toledo, Ohio-based Owens Corning reached an agreement with its creditors May 10 on a consensual plan of reorganization. Under the plan, bondholders with aggregate claims of $1.389 billion will receive 26.6 million shares of the reorganized company's common stock. Bank creditors will receive a full cash recovery, plus interest, amounting to $2.279 billion.
