Distressed debt weakens amid falling crude prices, Fed decision; oil retreats; AK Steel gains

By Stephanie N. Rotondo

Phoenix, Sept. 18 – The distressed bond market was negative as the week came to a close, driven in large part by a hefty decline in crude oil prices.

On Thursday, the Federal Reserve decided to keep short-term interest rates steady for the time being, citing global economic concerns and recent volatility in domestic markets. The uncertainty then leaked into the broader markets, including commodities.

Oil prices also took a hit, given the Fed’s concern about the global markets – which could put even more pressure on oil demand.

Domestic crude prices dropped 4.26% in Friday trading, even as new data showed that active U.S. drilling rigs had declined for the third week in a row.

The decline of the commodity then put pressure on oil and gas names, which have already been struggling amid the weak price environment.

Energy XXI Ltd.’s 9¼% notes due 2017 slipped 1½ points to 26, according to a trader. The trader also saw the 6 7/8% notes due 2024 dipping a quarter-point to 19.

Halcon Resources Corp. was also weaker, as a trader pegged the 8 7/8% notes due 2021 at 34¾, off half a point. The 9¾% notes due 2020 fell almost a point to 37¾, the trader said.

Linn Energy LLC’s 6 3/8% notes due 2022 were likely one of the day’s biggest losers, as a trader said the bonds ended at 37½. He said that was down 18 to 20 points from previous trades, though he noted that the slide occurred “in a month’s time.

“They traded in the mid-50s [a month ago] then they disappeared,” he said. Upon resurfacing, they were much lower.

Among oil and gas preferreds, Goodrich Petroleum Corp.’s 10% series C cumulative preferreds (NYSE: GDPPC) ended down 18 cents, or 10.4%, at $1.55. The shares were off 11 cents, or 6.4%, at $1.62 at mid-morning.

The 9.75% series D cumulative preferreds (NYSE: GDPPD) were initially down 11 cents, or 6.5%, at $1.58 at mid-morning, but recovered to end unchanged at $1.69.

Magnum Hunter Resources Corp.’s 8% series D cumulative preferred stock (NYSE: MHRPD) meantime dropped $5.75, or 36.28%, to $10.10. That company, however, has failed to deliver news on pending asset sales, making already-nervous investors a little twitchy.

A sale of the company’s Eureka Hunter asset was expected to be announced in late August. There has been no word of how the potential deal is going.

AK Steel outlook improves

AK Steel Holding Corp. managed to buck the day’s trend, ending with a firmer tone after the company upwardly revised its third-quarter outlook.

The name “rebounded,” a trader said, seeing the 7 5/8% notes due 2020 rising half a point to 60½. However, he saw the 7 5/8% notes due 2021 down “almost 2½ points” from trades a week ago.

The issue closed at 58¼.

At another desk, a market source pegged the 2020 paper up over half a point, trading in the 60½ area.

For the third quarter, the West Chester, Ohio-based steel producer said it expects to report a net loss of 2 cents to 7 cents per share. Should that prove accurate, it will be a much narrower loss than the 36-cents-per-share loss seen in the second quarter.

The company said the improvement is attributed to higher shipments – expected to be about 3% higher than the previous quarter – lower material costs, cost cutting efforts and higher operating rates.

“Over the intermediate term, adjusted EBITDA and credit ratios are expected to improve,” wrote Gimme Credit LLC analyst Evan Mann in an afternoon comment published Friday. “With capital spending and pension contributions decreasing, free cash flow should turn positive next year, enable [the company] to begin reducing debt.”

But while AK Steel bonds were better on the day, optimism about the name might have been somewhat dampened by comments from U.S. Steel Corp.’s top executive regarding the state of the steel market.

In an interview with Fox Business Network on Friday, Mario Longhi, chief executive of U.S. Steel, said that the U.S. steel industry is “under severe attack.

“China has been dumping material into this country for a long time and what we are seeing right now is a ripple effect because other countries are being recipients of Chinese material and therefore with America remaining the most open country for trade all of that is funneling into the United States primarily,” he said.

Moreover, current trade laws put the sector at a disadvantage, he opined.

“What we want is a fair playing field,” he said in the interview. “And if trade is going to really help society to evolve trade has to be done under the rule of law and that’s all that we are looking for.”

The U.S. International Trade Commission is currently conducting an investigation into cheaper cold-rolled steel products from seven countries, including the United Kingdom and China. In the coming weeks, the commission is expected to announce whether or not it believes duties should be imposed on such imports.

© 2015 Prospect News.
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