Peabody Energy, coal space continue to surge as prices improve; Fannie, Freddie preferreds drive higher

By Stephanie N. Rotondo

Seattle, Oct. 5 – Coal names were in focus in the distressed debt market on Wednesday, according to market sources.

“Coal stuff [went] to the moon,” a trader said. “Coal just keeps ripping.”

Peabody Energy Corp. improved the most of its sector peers, adding 8 to 9 points on the day.

“Peabody continues to surge,” a trader said, calling the 6¼% notes due 2021 up “another 8½ points” at 36.

He also said there was “heavy volume” in the issue.

As for the 6% notes due 2018, it rose 9 points to 36½, while the 10% notes due 2022 firmed 8½ points to 55¾.

A second trader deemed the unsecured notes up 8 points, trading around 35. He said the 10% notes were up a like amount, trading at 55.

Murray Energy Corp.’s 11¼% notes due 2021 were also increasing on the day.

One trader pegged the issue at 65 3/8, up 3 points. Another trader said the bonds were “up a couple more [points]” at 64½.

Coal prices have been under pressure in the years after the financial crisis. To combat that, many miners have curbed production. A fair few – including Peabody – ultimately had to enter Chapter 11 protections in order to weather the storm.

However, in the last few months, coal prices have been recovering, recently hitting four- or five-year highs, depending on whom you asked and what variety of coal you were looking at. As such, coal bonds have been steadily climbing higher.

As for other sector news, Arch Coal Inc. emerged from its bankruptcy case on Wednesday with a reduced debt profile.

The company filed for bankruptcy on Jan. 11.

Fannie, Freddie jump

Fannie Mae and Freddie Mac preferreds got a sizeable pop on Wednesday, as investors reacted – or “way overreacted,” as one source put it – positively to news that Judge Margaret Sweeney of the Court of Federal Claims had sided with shareholders fighting the government’s net worth sweep.

In early trades, Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) were up 16 cents, or 4.28%, at $3.90. By the bell, the paper had jumped 48 cents, or 12.83%, to $4.22.

Fannie’s 8.25% series T noncumulative preferreds (OTCBB: FNMAT) were meantime up 56 cents, or 15.38%, at $4.20.

As for Freddie’s 8.375% fixed-to-floating rate noncumulative preferreds (OTCBB: FMCKJ), they improved 48 cents, or 13.26%, to $4.10.

All of the issues were among the day’s biggest percentage gainers.

Sweeney’s decision was unsealed late Monday. In it, she ordered the U.S. Treasury Department to turn over 11,000 documents that had previously been held back.

The agency attempted to keep the documents away from the court, invoking various privilege arguments.

The documents in question are in relation to the government’s 2012 decision to commandeer nearly all of the GSEs’ profits. Allegedly, the documents explain why the Treasury, the Federal Housing Finance Agency and the White House chose in favor of the net worth sweep.

Bruce Berkowitz of Fairholme Funds – and one of the plaintiffs in the case – hailed the decision, saying that Sweeney “astutely recognized” that the public had the right to know what its government was doing.

Still, one market source said he believed the massive gains seen in the GSEs was an overreaction, though he did concede that it was modestly positive for shareholders.

He also noted that the gains came “not on the heaviest volume.

“We’ve definitely seen more [volume] on less news,” he said.

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