Oversupply, soft pricing continue to pressure distressed commodity bonds; volume muted

By Stephanie N. Rotondo

Phoenix, March 31 – It was all commodities, all the time in the distressed debt arena on Tuesday.

“A lot of commodity names were getting hammered,” a trader said. Perhaps most notably was the iron ore space.

“There’s more chatter about how soft the market is for pricing,” the trader said. “Oversupply, weak demand, China’s peaked.”

Underscoring that point was a research report that was circulating. The report speculated that iron ore prices could soon fall below $40 per tonne.

In the iron sector, it was FMG Resources that was taking some of the biggest hits, with traders seeing the company’s debt dropping as much as 4 points on the day.

The coal sector was also under pressure, hurting companies like Peabody Energy Corp.

That company recently wrapped a tender offer.

In the oil and gas space, Breitburn Energy Partners LP’s debt gave back some of the gains incurred on Monday when the company announced a new $1 billion investment. A decent dip in oil prices likely didn’t help matters.

Though the market remained focused on commodities, a trader did note that liquidity was thinning out ahead of the Good Friday holiday.

“We’re winding down pretty quickly this week,” he said.

FMG weakens

FMG Resources’ debt turned south Tuesday, as analysts predict that iron ore prices would continue to plummet.

One trader said the 6 7/8% notes due 2022 fell 1½ points to 74 5/8, while the 6% notes due 2017 slipped half a point to 99¼.

He called the 8¼% notes due 2019 “down a point or two” at 85.

Another trader deemed the 6 7/8% notes down 3½ points, trading in a 73 to 74 context. The 8¼% notes were off 4 points at 84, he added.

Oversupply and weak demand has been plaguing the iron industry for several years now. Despite attempts to weather the storm – assets sales, refinancings and the like – many names in the sector have yet to find any relief.

And relief may soon become even harder to find, as prices have yet to show any signs of improvement. On Monday alone, the price per tonne fell to a record low, trading under $53.

For its part, FMG put off plans to issue new debt and extend maturities on its term loans. The company cited current market conditions as its reason for pulling the deals.

Peabody ‘beaten up’

Like iron, the coal sector – and for that matter, oil and gas – has also been laboring in a weak environment, with demand scaling back and prices dwindling.

Also like iron, the concern is that there is no end in sight for the current downward cycle. And while attempts to shore up financial resources have initially resulted in good cheer, it doesn’t tend to last.

Take, for instance, Peabody Energy. On Monday, the company said that it had received 87% of tenders for its 7 3/8% notes due 2016. With the company slated to redeem the remaining 13% next month, the news was taken reasonably well.

But come Tuesday, all of that seemed forgotten as the company’s debt ended weaker.

One trader said the company’s “new second-lien deal” – $1 billion of 10% second-lien notes due 2022 that came at 97.566 to yield 10½% on March 5 – got “beaten up,” falling to an 88½ to 89 context.

He also saw the 6% notes due 2018 sliding to 78 from 81 previously.

Another trader called the 6% notes off 2½ points at 78, while the 6½% notes due 2020 dropped 5 points to 60¾.

A third market source pegged the 6½% notes at 63½ bid, down 2¼ points.

Breitburn erases gains

After moving up in the previous session on news of a $1 billion investment, Breitburn Energy Partners’ bonds ended Tuesday’s session in the red.

A trader said the 7 7/8% notes due 2022 declined over a point to 72¼.

Meanwhile, the company’s 8.25% series A cumulative redeemable perpetual preferred units (Nasdaq: BBEPP) ended down 61 cents, or 2.95%, to $20.07.

The move came as oil prices took a decent hit. West Texas Intermediate crude dropped $1.18, or 2.42%, to $47.50 per barrel for May delivery. Brent crude lost $1.14, or 2.03%, to $55.15.

On Monday, Los Angeles-based Breitburn said an investor group led by EIG Global Partners was investing $1 billion into the oil and gas company.

Under the investment agreement, the investor group will buy $650 million of 9¼% senior secured notes due May 2020, as well as $350 million of convertible preferred units.

Proceeds will be used to reduce credit facility borrowings.

© 2015 Prospect News.
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