Gymboree mixed post-earnings; coal sector continues to weaken; Fannie, Freddie preferreds drop

By Stephanie N. Rotondo

Phoenix, June 10 – The distressed debt market on Wednesday did not fare as well as the equity markets, which were experiencing a bit of a rebound.

The rally came as oil producer BP reported that the U.S. had beaten Russia as the top oil and gas producer and OPEC said the current oversupply of the commodity was easing.

However, OPEC also noted in a report out Wednesday that its members had increased production in May.

Additionally, the Energy Information Administration reported a large drawdown of U.S. crude stockpiles. The news sent oil prices upward, though profit-taking brought them down from the day’s highs.

Of the day’s dealings, Gymboree Corp. put out its numbers late Tuesday. Come Wednesday trading, the bonds were unchanged to slightly weaker.

In the commodity space, coal continued to dive, just one day after federal circuit court judges dismissed a lawsuit aimed at preventing the implementation of new rules from the Environmental Protection Agency.

Gymboree’s loss widens

Gymboree’s 9 1/8% notes due 2018 were “pretty much in line with where they had been,” a trader said Wednesday, following the company’s earnings release.

He quoted the issue at 45½ bid, 46 offered.

However, another trader called the notes a quarter-point weaker at 45¾.

Late Tuesday, the San Francisco-based children’s clothing retailer reported the results of its first fiscal quarter. For the quarter ended May 3, Gymboree saw net sales improve to $276.1 million from $272 million the year before. Same-store sales, however, were flat.

Adjusted EBITDA came to $15.6 million, which compared to $22 million for the same quarter of 2014.

Despite the improvements in sales and EBITDA, net loss widened to $23 million from $13.4 million.

Looking toward the remainder of 2015, Gymboree said it expects adjusted EBITDA for the full year to be $95 million to $105 million. The company believes it will have sufficient liquidity through the year and will be able to service its debt as well as handle growth.

And speaking of growth, the company intends to shutter 30 to 40 stores over the course of the year, while opening 12 new ones.

Coal trades weak

Investors continued to have no love for coal bonds in Wednesday trading.

A trader said Murray Energy Corp.’s 11¼% notes due 2021 slipped a quarter-point to 89½.

In Alpha Natural Resources Inc. paper, the trader saw the 6¼% notes due 2021 dipping a like amount to 11¼, as the 9¾% notes due 2018 dropped almost a point to 15¼.

The trader deemed the 7½% notes due 2020 unchanged at 19.

In Peabody Energy Corp. debt, the trader saw the 7 7/8% notes due 2026 at 41¾, a gain of about half a point, he said. But the 6¼% notes due 2021 declined a deuce to 44 and the 6½% notes due 2020 weakened 1½ points to 45½.

The 6% notes due 2018 meantime closed off over 2 points at 58 3/8, the trader reported.

At another desk, a source pegged Peabody’s 6½% notes at 45½, a loss of nearly 2 points on the day.

And, yet another trader said Alpha Natural’s 7½% second-lien notes “continued to drift lower,” falling to an 18½ to 19 context.

On Tuesday, three circuit court judges deemed a lawsuit brought by Murray and other coal companies – as well as 14 coal-producing states – against the government premature, given that the EPA rules have yet to be finalized.

The EPA first proposed the rules back in June. Once they go into effect, the rules – aimed at reducing greenhouse gas emissions – could close plants, hinder the construction of future plants and slow U.S. coal demand.

That news came on the heels of reports out on Monday that sector peer Walter Energy Inc. could file for bankruptcy as soon as this month.

Fannie, Freddie busy

Fannie Mae and Freddie Mac dominated trading in an otherwise muted volume day, according to a preferred stock market source.

The GSEs’ preferreds closed softer as new research reports were circulating, indicating that a potential housing downturn could mean the need for another bailout.

However, the source said the reports didn’t hold “a lot of new information.”

Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) declined 2.4 cents to $3.766, while Freddie’s 8.375% fixed-to-floating rate noncumulative perpetual preferreds (OTCBB: FMCKJ) slipped 3 cents to $3.77.

In a report out Wednesday, analysts at SNL Financial warned that a decline in profits, combined with a winding down of their portfolios and capital reserves, could place Fannie and Freddie back where they were at the height of the financial crisis.

But as the source noted, that in and of itself is not new information. In 2012, the Treasury Department made an amendment to its conservatorship agreement with the mortgage giants, effectively taking most of their profits. In doing so, the government took away the agencies’ ability to save for a rainy day, as it were.

Several investors have sought to fight the amendment and lawsuits are currently pending.

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