Distressed investors eye new Puerto Rico G.O. bonds; Walter ends weaker; Fannie, Freddie drop

By Stephanie N. Rotondo

Phoenix, March 11 - Activity in straight distressed bonds was limited Tuesday, as investors looked toward Puerto Rico's $3.5 billion sale of 8.7% general obligation bonds.

One trader said he saw "a lot of crossover buying," meaning distressed and high-yield investors were taking a look at the municipal debt. There was a lot of demand for the paper, however, which increased the deal from $3 billion.

The deal was said to receive orders for $16 billion worth of paper. Investors like to grab debt from the area, given that it is exempt from federal, state and local taxes.

The trader said the issue was priced at a discount around 93 and quickly headed up to at least 95. Another trader quoted the bonds at 951/4-953/4.

"Muni guys were trading it, and high yield guys and high yield street brokers. Everybody was getting involved," he said post-pricing.

A little later on, he said the bonds had moved up to 953/4-96.

The sale was the first the U.S. territory has done in two years. Recently, the island was reduced to junk status amid a declining economy.

Puerto Rico plans to use at least $900 million of proceeds to refinance outstanding debt.

Back in the world of distressed corporate bonds, recently topical names remained on top.

Walter Energy Inc. continued to decline, just one day after the company said it was seeking amendments on a credit facility to allow it to refinance the debt.

A trader pegged the 9 7/8% notes due 2020 at 721/2, down 2½ points. Another trader said the issue was "down a few" around 73.

In that same sector, Forest Oil Corp.'s 7¼% notes due 2019 were "rebounding smartly," a trader said, seeing the debt climb up over 2 points to 54.

NII Holdings Inc. was again unchanged to weaker, depending on the issue. However, liquidity in the name was down significantly from Monday, when the company said it had hired Rothschild and UBS Investment Bank to review its strategic alternatives.

A trader saw the 10% notes due 2016 holding around 501/2, while the 7 5/8% notes due 2021 dropped 1½ points to 341/4.

Another trader said both the 10% notes and the 8 7/8% notes due 2019 were "slightly higher" around 50, though the 7 5/8% notes came in to trade around 34.

Fannie, Freddie tumble

Fannie Mae and Freddie Mac preferreds initially turned upward on word that a bipartisan Senate group was putting forward a plan to wind down the agencies.

However, as the news was digested, the "market finally got their cup of wake-up coffee," a market source said, and the preferreds began to get hit.

The source said there was "high, high volume" in the agencies' preferred shares, which ended the session down 7% to 8.5% on average.

"The rhetoric with [the new proposed legislation] is that there is more bipartisan support [than the previous plans put forth]," the source said. He said that support increased the probability that the plan could get approved, though he would not go so far as to say it was "probable."

Freddie's 8.375% fixed-to-floating rate noncumulative perpetual preferreds (OTCBB: FMCKJ) ended the day off 50 cents, or 3.92%, at $12.25. Fannie's 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) lost 40 cents, or 3.25%, closing at $11.90.

The proposal was preceded by a report out Monday about the GSEs and their potential to bring in nearly $180 billion for taxpayers over the next 10 years if the government chooses to reform the agencies instead of winding them down.

Paul Deckelman contributed to this article

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