Cliffs Natural Resources bonds drop on downgrade; coal sector still soft; Fannie, Freddie fall

By Stephanie N. Rotondo

Phoenix, Oct. 7 – Distressed debt was declining with the broader markets on Tuesday.

The Dow Jones industrial average saw a drop of more than 272 points during the day’s session, fueled by concerns over a slowing European economy and how that might impact third quarter results in the United States.

Back in the distressed space, the mining sector remained under pressure.

Cliffs Natural Resources Inc. was downgraded by Standard & Poor’s on Tuesday over concerns of “several adverse factors,” including the current depressed price of iron ore.

The company’s credit rating was dropped to BB- from BBB-.

The senior notes were given a BB- rating as well.

The outlook is negative.

“The negative outlook reflects the possibility of a downgrade within the next 12 months if iron ore prices are sustained at about $85/ton or lower and credit measures continue to deteriorate,” said S&P’s credit analyst Amanda Buckland in a statement.

“The negative outlook also reflects our forecast that Cliffs will need to seek covenant relief from bank lenders in the first half of 2015.”

Following the news of the rating change, Cliffs’ debt dropped 2-plus points on the day.

A trader deemed the 6¼% notes due 2040 off nearly 3 points at 66½. The 4 7/8% notes due 2021 fell 2½ points to 73½, in just a single trade, he said.

Coal slide continues

Coal miners also continued to be on the weaker side – at least, for the most part.

Walter Energy Inc. was mixed in Tuesday trading, with the 8½% notes due 2021 slipping half a point to 30½ and the 9% notes due 2020 rising half a point to 34½.

In Arch Coal Inc. paper, the 7% notes due 2019 were deemed down 5 points “from mid-last week” to 48, according to a trader. The 7¼% notes due 2020 lost a point to 51¾.

However, the 9 7/8% notes due 2019 inched up a quarter-point to 52¾.

A trader also noted that a report was circulating indicating that Alpha Natural Resources Inc. has “ample liquidity to weather the storm,” referring to the continued decline of demand for coal, as well as deeply depressed prices for the commodity.

But as the outlook was allegedly somewhat positive for Alpha Natural, the bonds were trading in mixed fashion.

A trader said the 9¾% notes due 2018 gained 1½ points to end at 71½.

But another market source pegged the 6¼% notes due 2021 at 55 bid, down 2¾ points.

Investors vacillate on Fannie, Freddie

A trader said that investors were still trying to “make heads or tails” of Freddie Mac and Fannie Mae, following last week’s news that a federal judge had slapped down investors’ lawsuits regarding allegations the government’s takeover of a majority of the agencies’ profits was illegal.

When the news came Sept. 30, Freddie and Fannie preferreds took a dive, a trend that continued until Friday, when the shares attempted to recoup some loses.

But as the new week began, the preferreds were declining yet again.

In Tuesday trading, Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) declined 35 cents, or 9.33%, to $3.40 and Freddie’s fixed-to-floating rate noncumulative perpetual preferreds (OTCBB: FMCKJ) dropped 24 cents, or 6.38%, to trade at $3.52.

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