Distressed bonds gain on oil’s rise, Fed comments; commodity-linked names rebound in trading

By Stephanie N. Rotondo

Phoenix, July 29 – The distressed debt market was “a sea of green” on Wednesday, according to one trader.

“Better equity markets, better crude, better everything,” he said.

“A lot of stuff was a lot better,” another trader commented. He speculated that short covering – particularly on more volatile names – might have played a role.

What was definitely playing a role, particularly in the commodity space, was a nearly 2% gain in benchmark crude oil prices. That rally came as the Energy Information Administration reported a 4.2 million barrel drawdown of inventories, which was more than 20 times what analysts were expecting.

On top of that, it was reported that Saudi Arabia planned to reduce production after the summer.

In addition to rising oil prices, the market was also reacting positively to a statement from the Federal Reserve after its latest two-day policy meeting.

The central bank continued to be optimistic about the current state of the economy, but held current interest rates at zero.

Popular opinion is that the Fed will opt to raise interest rates in September. But with the recent weakness in the markets and new economic data being disappointing, some have begun to speculate that the increase might not occur until December.

Commodity bonds rebound

Distressed oil and gas bonds were rallying in midweek trading, as West Texas Intermediate crude oil closed up 81 cents, or 1.69%, at $48.79.

California Resources Corp.’s 6% notes due 2024 were the day’s biggest trader, according to one source who saw the issue rising over 2 points to 82¼.

Consol Energy Inc.’s 5 5/8% notes due 2022 also put on a deuce, ending at 78. Those notes had been under pressure since last week when the company warned it would report a loss for the second quarter.

The company’s earnings came out on Tuesday.

Keeping with the 2-plus-point trend, Key Energy Services Inc.’s 6¾% notes due 2021 were pegged at 55¾, up almost 3 points on the day.

Linn Energy LLC’s 7¾% notes due 2021 jumped nearly 3 points as well, finishing at 57¾, according to a market source.

But the oil and gas space wasn’t the only commodity-related area to see improvement.

In the coal sector, Peabody Energy Corp.’s 6¼% notes due 2020 were deemed up over a point at 25 by one trader.

A second source placed the issue at 26½ bid, up 2¾ points. Yet another trader said the unsecured paper was trading in a 25 to 26 context.

In the metal-mining arena, a trader saw FMG Resources’ 9¾% notes due 2022 rising 2 points to 93¾, while the 8¼% notes due 2020 inched up 1½ points to 73½.

At another desk, FMG’s 6 7/8% notes due 2022 were placed at 58¾ bid, up 1½ points.

As for AK Steel Holding Corp. bonds, a trader said the 7 5/8% notes due 2020 put on 3½ points, ending at 68 5/8.

But another source said the issue was up only 1¼ points at 68.

A third trader gave yet another version, seeing the paper up “a few more points” at 71.

The latter trader said that the debt had “rallied a good bit yesterday,” when the steel producer reported earnings that beat expectations.

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