End of summer weighs on distressed debt trading activity; oil and gas bonds little changed; market mixed

By Stephanie N. Rotondo

Seattle, Aug. 24 – The summer doldrums continued to weigh on liquidity in the distressed debt market on Wednesday.

“There were no real big movers,” a trader said. “No activity.

“These August days are rough,” he added.

Even distressed oil and gas names were barely moved as domestic crude dropped about 2.72% on the day.

The commodity’s decline came as the U.S. Energy Information Administration said crude stockpiles increased by 2.5 million barrels last week.

Analysts were expecting an 855,000-barrel decline.

Among oil and gas bonds, a trader said California Resources Corp.’s 8% second-lien notes due 2022 were off a quarter-point at 67½. Another trader also pegged the issue at that level, but called it “pretty much unchanged.”

In Chesapeake Energy Corp.’s 8% second-lien notes due 2022, traders deemed the paper steady in a 93¼ to 93½ zip code.

In the broader energy arena, coal producer Peabody Energy Corp. saw its 10% notes due 2022 continuing to rise, adding “another point” to close in a 26½ to 27½ context, according to a trader.

The bonds have been improving in the last week, as the company has announced a string of self-bonding deals.

Market mixed

Away from energy, Intelsat SA’s 7¾% notes due 2021 were “one of the few movers that I saw,” a trader said.

The trader called the debt up “close to a point” at 29¾.

At another desk, a trader said Avaya Inc.’s 7% notes due 2019 dipped a quarter-point to 77¾.

In the chemical space, Calumet Specialty Products Partners LP was seen heading higher, with a trader calling both the 7 5/8% notes due 2022 and 5½% notes due 2021 half a point better.

The notes ended the day at 77 and 77¾, respectively.

GSE paper pressured

Fannie Mae and Freddie Mac preferreds were trading off “modestly,” a trader reported, following a court ruling that said “shareholders don’t have the right to inspect [the GSEs’] books.”

Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) declined 34 cents, or 7.89%, to $3.97. Freddie’s 8.375% fixed-to-floating rate noncumulative preferreds (OTCBB: FMCKJ) fell 17.3 cents, or 4.19%, to $3.957.

Wednesday’s closing levels were the first time since May that the preferreds have traded under $4 a share.

The court ruling contends that under the Housing and Economic Recovery Act of 2008 – the law under which the government took the mortgage giants into conservatorship – shareholders “gave up that right to the [Federal Housing Finance Agency],” the trader said.

“In the end, [the market is saying] that it hurts other shareholder lawsuits on the [net worth sweep] because it reinforces that the government can do whatever they want under HERA,” the trader remarked.

“It doesn’t surprise me,” another market source said of the ruling. He noted that when the GSEs were taken into conservatorship, “the equity was worthless. The only reason it is [currently] worth anything is because it was put into conservatorship.

“So what are the equity [holder] rights for a company that is insolvent?” he posed.

“Should the government have stepped in? That’s a whole other question,” the source said. But without the federal government’s help, the agencies would have been kaput.

“I find it appalling that certain hedge funds were trying to play the federal government and the judicial system for fools,” the source added.

That being said, there may have been a better way for investors to put their case, as there is a “certain argument to be made for transparency,” the source conceded. But given that Fannie and Freddie operate in a “gray area” – they are not quite part of the federal government – even attempts to see the books under the Freedom of Information Act would have likely failed, the source opined.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.