Commodity-linked names drift lower as oil prices sink, analysts predict troubled times ahead

By Stephanie N. Rotondo

Phoenix, March 27 – A distressed debt trader said Friday that “commodity-linked guys were all down again.”

Leading the way was the oil and gas space, as oil prices tanked and Moody’s Investors Service said in a report that the sector was now topping its list of junk-rated securities.

For its part, oil prices fell as investors digested data from Baker Hughes indicating that U.S. rig production was stemming its decline.

In the last week, producing rigs dropped by 21 to 813. However, the count had fallen by 41 in the previous week.

On the heels of that report, West Texas Intermediate crude once again dropped below the $50-mark, losing $2.99, or 5.81%, to $48.44 per barrel for May deliveries.

Brent crude declined $3.08, or 5.2%, to $56.11.

In the Moody’s report, the rating agency noted that of the 28 companies added to the junk space, 43% were energy companies. As of March 1, the sector comprised nearly 14% of the list, the highest percentage seen in that sector ever and currently making up the largest industry on the list.

On average, the space tended to make up about 8%, the report said.

And the glum review didn’t end there.

“While previously a majority of companies left the B3 negative and lower list via positive rating changes or rating withdrawals, this trend has now reversed, with defaults being the main reason why companies are leaving it,” wrote analyst Julia Chursin. “A continuation of this reversal could signal tough times ahead for speculative-grade issuers.”

Given the weakness in the energy arena, SandRidge Energy Inc.’s 7½% notes due 2021 ended a point weaker at 63½.

Coal also in focus

But oil and gas wasn’t the only area to get hit during the session.

“A lot of the coal guys seemed like they were weaker,” a trader said.

Peabody Energy Corp.’s $1 billion of 10% notes due 2022, for instance, fell to 90 from 93, the trader said.

That deal came March 5 at 97.566.

Another market source pegged the 6½% notes due 2020 at 67¼ bid, off almost 3 points on the day.

However, Alpha Natural Resources Inc.’s 6¼% notes due 2021 were seen closing up a deuce at 25 bid.

In the iron ore arena, Fortescue Metals Group Ltd.’s 8¼% notes due 2019 declined to 88 from previous levels around 90, according to a trader.

Another source quoted the issue at 88¼ bid, 88½ offered, down from 90 1/8 bid, 90½ offered.

Fortescue has had its own troubles of late. On March 18, the Australian mining company scrapped a refinancing plan that included a $2.5 billion bond issue and a tender offer, citing current market conditions.

In a recent note from analysts at CBA, Fortescue’s stock was not only deemed worthless, but trouble was predicted for the bonds.

“Although Fortescue correctly points out that it has no debt due until 2017, the 2017 [6%] notes have a first call date in April 2015,” wrote Andrew Hines. “Bond markets price these notes on the assumption that they will be called on the first callable date. If Fortescue does not redeem the 2017 notes next month, then it may find bond markets demand even higher yields for any future bond issues.”

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