Distressed market quiet heading into holiday; Arch Coal gains; Peabody eases; Puerto Rico firms

By Paul Deckelman

New York, July 2 – The distressed-debt market saw a quiet session on Thursday ahead of the three-day Independence Day holiday break in the United States.

That holiday pause includes a full shutdown of U.S. fixed-income markets on Friday.

Consequently, trading was light in the high-yield, convertible and municipals market on Thursday, with many market participants making an early exit.

Before they left, however, they took Arch Coal Inc.’s battered bonds up – though only on relatively light volume – on the news that the coal mining company will be doing a pair of private debt exchanges for its existing notes.

The notes of Arch Coal sector peer Peabody Energy Corp., which had fallen by multiple points on Wednesday after the big coal producer revised its previously issued earnings guidance downward, seemed to steady around those lower levels on Thursday.

Iron ore producer Fortescue Metals Group Ltd.’s bonds were lower, hurt by a big drop in the ton price of iron ore.

And Puerto Rico’s bonds were better for a second consecutive session, buoyed by Wednesday’s news that the troubled island U.S. commonwealth had averted a possible default by making a total of $1.9 billion of scheduled July 1 payments on its own general obligation bonds and bank debt as well as on Puerto Rico Electric Power Authority debt.

Arch Coal on a roll

In the coal space, a trader said that Arch Coal’s bonds were up by multiple points on the news that the St. Louis-based coal operator had announced a pair of private exchange transactions for its existing bonds.

However, he cautioned that those gains came on “not much volume.”

Probably the busiest was Arch’s 9 7/8% notes due 2019. Over $6 million of those notes were seen having traded on a round-lot basis, with the bonds jumping around 4½ points to just over 24½ bid. Those notes had last traded in any appreciable size around mid-June.

Its 7% notes due 2019 rose 3 points on the day to 18 bid on volume of over $4 million, although a trader said that the bonds had actually “whooshed up to as high as 23 during the morning after opening around 19, then came mostly back down.”

Arch’s 7¼% notes due 2020 shot up by 5 points to end at 32¾ bid, though only on volume of $2 million.

Arch announced plans to swap new debt for its 7% notes due 2019, its 9 7/8% notes due 2019 and its 7¼% notes due 2021.

It also announced a separate note exchange for its 7¼% notes due 2020.

Peabody calms down

The bonds of Arch’s crosstown St. Louis rival, Peabody Energy, were seen settling in around the lower levels to which they had plunged on Wednesday after the company had released new updated earnings guidance for the second quarter, predicting lower adjusted EBITDA and a wider per-share loss than the company’s previous forecasts.

Volume was further reduced from the already sedate levels seen during Wednesday’s nosedive, with several of the issues seeing no round-lot dealings at all on Thursday.

Of those that did trade, Peabody’s 6¼% notes due 2021, which on Wednesday had slid by 3 3/8 points on volume of over $9 million, lost another 3/8 point on Thursday, ending at 30½ bid with about $3 million changing hands.

Its 6½% notes due 2020 were actually up ½ point at 31½ bid on $2 million of volume. On Wednesday, those bonds had dropped by 4 points with more than $7 million traded.

And traders saw no round-lot activity in the company’s 10% second-lien secured notes due 2022, which had fallen 2½ points on Wednesday to close at 59½ bid. The bonds moved up to 65¾ bid, a market source said, but only on a few smallish odd-lot trades.

Peabody’s 4.75% convertibles were meantime trading again and seen at 13 and 14.5, which was lower compared to 14.75 bid, 15 offered on Wednesday.

“There were a couple of trades in BTU,” a convertibles trader said.

“I think effectively things got ahead of themselves, and energy-related issues are repricing again. But with oil at $57 per barrel and Brent at $63, it is not a panic type of environment. It’s healthy that valuations are taking a breather,” he said.

Fortescue bonds fall

In the iron-ore sector, a high-yield market source said that Fortescue Metals Group’s 8¼% notes due 2019 were probably the most active purely junk (i.e., not split-rated or a financial hybrid) issue.

The bonds fell by 1¼ points to 82 7/8 bid, on volume of over $18 million, on the heels of Australia’s government having earlier this week cut its price forecast for iron ore this year by 10% to A$54.40 a ton, citing a weak outlook for the commodity's main market, China's steel sector.

That forecast by Canberra’s Department of Industry and Science is well down from the A$60.40 a ton that it projected three months ago. As the year opened, the department was predicting A$94.00 a ton as a feasible iron ore price.

The company’s FMG Resources senior secured notes due 2022 had fallen 1½ points to 101½ bid, 102½ offered, while its 6 7/8% notes due 2022 were seen down a deuce at 68 bid, 69 offered.

Puerto Rico bonds better

For a second straight session, Puerto Rico’s bonds were seen trading better on Thursday, helped by Wednesday’s news that the island’s government had staved off a possible default by making $1.9 billion of scheduled debt payments.

Earlier in the week, the bonds had been under pressure after the island’s governor announced that the $72 billion of total public debt was “unpayable” and said he wanted to restructure the debt and get bondholders to agree to stretched-out payments.

Its 5.125% general obligation bonds of 2037 were seen trading Thursday afternoon at 59.449 for a 9.579% yield to maturity after trading as high as 62.75 earlier in the day.

Its 8% G.O. bonds of 2035 were very actively traded throughout the week, although volume on those bonds backed off significantly Thursday, market sources reported.

About $17 million of the bonds changed hands, roughly half the turnover seen on Wednesday.

A trader quoted them going home at 70¼ bid, up 1¾ points on the day from Wednesday’s closing levels.

Rebecca Melvin and Sheri Kasprzak contributed to this review

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