Alpha Natural loss drags down debt, sector peer; Edison gains; Fannie, Freddie preferreds firm

By Stephanie N. Rotondo

Phoenix, Aug. 8 - Strength remained in the distressed debt arena Wednesday.

"The market was pretty firm still for the most part," a trader said.

However, he noted that it was a "big day for new issues," which kept investors focused elsewhere.

Despite the firm tone of the marketplace, Alpha Natural Resources Inc.'s dismal second-quarter results not only weighed on its debt, but on the debt of its sector peer.

But the positive environment did prove helpful to Edison International Inc. paper. Traders saw the bonds up about a point on the day across the board.

Alpha loss weighs on sector

Alpha Natural Resources reported weak results for the second quarter. As a result, the company's debt ended the day lower.

A trader called the 6¼% notes due 2021 down over a point at 87, while the 6% notes due 2019 fell "about 2 [points]" to 87.

Another market source deemed the 6¼% notes down over a point also, at 87¼ bid.

The declines didn't stop there, as rival Arch Coal Inc. was also slipping.

The 7% notes due 2018 lost 1½ points to 88, the 7¼% notes due 2021 dipped a point to 87¼ and the 7¼% notes due 2020 dropped a point to 87 1/8, according to a trader.

For the quarter, Alpha Natural reported a loss of $2.23 billion, or $10.14 per share, due to $2.5 billion in various impairment charges. That compared to a loss of $50.1 million, or 32 cents per share, the previous year.

Analysts polled by Thomson Reuters had been expecting a loss of just 33 cents per share.

Revenues, however, gained 16% to $1.85 billion, helped in part by an 11% gain in coal revenue, which was attributed to a 40% increase in Eastern coal thermal revenue.

Additionally, Alpha Natural reduced its full-year shipment outlook again. The company now expects shipments of 20 million to 23 million tons, versus a top end of 24 million ton previously.

Edison rises with market

Edison International's Edison Mission Energy linked debt was inching higher Wednesday.

A trader opined that the gains were due to a "firming in power plant type stuff."

He saw the 7 5/8% notes due 2027 gain "a point or so" to end at 52½ bid, 53 offered. He pegged the 7.9% notes due 2019 around 54.

Another trader said the name was "better, but I didn't see a lot of volume."

He called the 7½% notes due 2013 "up a couple" at 58, as the 7% notes due 2017 rose just half a point to 541/4. He called the 7.9% notes unchanged around 54.

Edison International is a Rosemead, Calif.-based power producer. In its most recent earnings release, the company said its Edison Mission unit was not faring as well as hoped and that the unregulated subsidiary could soon be facing bankruptcy.

Fannie, Freddie run-up continues

Fannie Mae and Freddie Mac preferreds continued to be actively traded Wednesday, as the securities remained on an upward course following second-quarter profits.

On Tuesday, Freddie reported a $3 billion profit for the second quarter. Fannie followed that up on with a reported profit of $5.1 billion on Wednesday. The trader said that some investors were "betting on the lottery ticket" again, as there was renewed hope that the two companies could potentially be in a position to start repaying the government, assuming that the profits continue to churn out.

Freddie's 8.375% fixed-to-floating rate noncumulative perpetual preferreds (OTCBB: FMCKJ) were up 42 cents, or 18.03%, to $2.75. The variable rate noncumulative preferreds (OTCBB: FMCCG) climbed up 45 cents, or 16.07%, to $3.25.

Fannie's 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) meantime rose 35 cents, or 17.5%, to $2.35. The 8.25% series T noncumulative preferreds (OTCBB: FNMAT) gained 40 cents, or 18.18%, to $2.60.

Though the market seems to be enthusiastic about the latest round of results from Fannie and Freddie, one market source was not as convinced.

"The world's a rosy place again," the source said sarcastically. While he conceded that the agency preferreds have had "quite the run-up in the last few days," he also pointed out that the action is a bit overblown.

In terms of market value, he explained, the most active of the Fannie and Freddie issues had about $7 million in turnover. That compared to BB&T Corp.'s 5.625% series E noncumulative perpetual preferreds - the day's most active issue among paying securities - turnover of about $29 million, he said.

He did note that the preferreds would not necessarily be a bad move for risk-taking investors. It is reasonable, he remarked, that the preferreds could continue to rise to as much as $4.00 in the next year, assuming that Fannie and Freddie continue to have stellar earnings.

But, the likelihood that either company will be in a position to start paying dividends again, or even exchange preferred securities, in the near term remains low.

Distressed market firms

In the rest of the distressed space, a trader said Supervalu Inc.'s 8.7% notes due 2030 were up 1½ points to 641/2.

Travelport LLC's 9 7/8% notes due 2014 meantime increased a point to 75, he said.

And, Axtel SAB de CV's 7 5/8% notes due 2017 were also a point higher at 54.

At another shop, a trader said ATP Oil & Gas Corp.'s 11 7/8% notes due 2015 hit a high of 38½ before settling back in to 371/2.

NewPage Corp.'s 11 3/8% first-lien notes due 2014 were pegged at 67¾ ahead of Verso paper Corp. expected earnings release on Thursday.

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