Avaya bonds pop on reports of possible asset sale; oil-linked debt rises; Fannie, Freddie gain ground

By Stephanie N. Rotondo

Seattle, May 23 – While it was a generally weaker day for distressed bonds on Monday, the day’s most actively traded issues were heading into higher territory.

Avaya Inc., for instance, saw its debt improving as much as 8 points on the day. The gains came after it was reported late Friday that the private equity owners were considering selling some or all of the company to deal with a hefty debtload.

As for the oil and gas arena, California Resources Corp. and Chesapeake Energy Corp. firmed during the session, despite renewed weakness in domestic crude.

For its part, oil prices waned as wildfires in Canada started to fade, allowing oil workers to come back in. Even though it will take time for local refineries to get back up to pre-fire production levels, the fact that workers are back on the line once again stoked concerns about a supply glut.

Also weighing on oil was a recent report from Baker Hughes, which showed active U.S. drills unchanged week over week. A recent rally in crude prices has caused some to speculate that it will encourage producers to start drilling once again.

A trader said California Resources’ 8% second-lien notes due 2022 were up 4½ points to 69.

In Chesapeake paper, a trader saw the 8% second-lien notes due 2022 ticking up over a point to 74¼, as the 3.878% notes due 2019 increased 1½ points to 66.

Another trader pegged Chesapeake’s 8% notes “around 74,” which was up from “73-ish” on Friday.

“So that was up a little bit,” the trader said.

Avaya bonds jump

Avaya saw its debt bouncing higher Monday after it was reported late Friday that the private equity owners were mulling a possible sale.

A trader saw the 10½% notes due 2021 jumping nearly 8 points to 30. The 7% notes due 2019 finished up over 3½ points at 74, while the 9% notes due 2019 added 1¼ points to close at 75¼.

Another trader said the 10½% notes moved up to 30 from previous levels around 22.

Silver Lake Partners LP and TPG Capital LP are reportedly considering a sale of the telecommunications equipment company in an effort to deal with a $6 billion debt burden. Avaya is said to be working with Goldman Sachs Group Inc. on a sale of the entire company, or potentially just pieces of it.

Avaya has $600 million of debt coming due in late October. In its earnings call on May 16, the company said it was working with Centerview Partners Holdings LLC to explore restructuring options.

More gains for Fannie, Freddie

Fannie Mae and Freddie Mac continued to be in focus on Monday, as investors digested news from last week regarding stakeholders’ lawsuits against the federal government.

The market also continued to take the news as a positive for preferred holders, as paper remained on an upward track.

Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) added a nickel, or 1.21%, to close at $4.19. Freddie’s 8.375% fixed-to-floating rate noncumulative perpetual preferreds (OTCBB: FMCKJ) gained 7 cents, or 1.75%, to close at $4.08.

More court documents in a case challenging the government’s “net worth sweep” of the agencies’ profits were unsealed in response to an out-of-court settlement in a Kentucky case. The documents appeared to show that the White House was more involved with the Treasury Department’s August 2012 decision to take a bulk of the profits earned by Fannie and Freddie while they operated under conservatorship than previously stated. One email, written by a top housing official in the Obama Administration, went so far as to say that the alteration in the 2008 conservatorship plan would ensure that the mortgage giants would not be able to “repay their debt and escape as it were,” according to a report published by The New York Times.

Said email allegedly came not long after a meeting in July 2012 with the Federal Housing Finance Agency, the regulator overseeing the two agencies. In that meeting, the regulator reportedly told officials that Fannie and Freddie were about to enter the “golden years” in terms of profits.

Stakeholders of Fannie and Freddie have taken the government to court challenging the sweep, deeming it illegal under the conservatorship. They have also argued that the government has set up Fannie and Freddie to fail again, as they are not able to build up any capital cushion to fall back on in the event of another financial crisis.

To date, Fannie and Freddie have paid back over $50 billion more than the combined $187.5 billion bailout received in the financial crisis. However, the principal amount of what it owes remains outstanding, as all of those payments have been deemed dividend payments on the Treasury’s holdings.

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