Windstream bonds push up on ISDA ruling; Puerto Rico’s G.O. debt hammered; GSE paper wanes

By Stephanie N. Rotondo

Seattle, Oct. 4 – The distressed bond market continued to focus on recently topical names on Wednesday.

Windstream Holdings Inc. was again notable, as has been the case of late. The company’s debt traded up as it was ruled that the transferring of assets and spinoff of what became Uniti Group Inc. did not trigger a payout on the credit-default swaps.

A trader also noted that Fresh Market Inc.’s 9¾% notes due 2023 remained active. However, he called the debt “unchanged to maybe a smidge higher” at 63½.

As to the broader distressed space, a trader said Puerto Rico’s 8% general obligation municipal bonds were “getting beat up on some of the comments from Trump. They really got hit hard today.”

He saw the G.O. bonds closing in the mid-30s, adding that paper had traded as high as a 36 to 37 context and as low as 32.

That compared to Tuesday’s level of 44. The trader also noted that the bonds were in the low-50s just last week.

In an interview with Fox News on Tuesday, Trump intimated that the island’s debt would have to be written off in the wake of Hurricane Maria.

“You know they owe a lot of money to your friends on Wall Street,” Trump said. “We’re gonna have to wipe that out. ... You can say goodbye to that. I don’t know if it’s Goldman Sachs, but whoever it is, you can wave goodbye to that.”

Trump also pointed out how Puerto Rico’s catastrophe was upsetting the status quo.

“I hate to tell you, Puerto Rico, but you’ve thrown our budget a little out of whack,” he said during his visit to the island on Tuesday.

When questioned about Trump’s comments, Mick Mulvaney, director of the Office of Management and Budget, remarked that no bailout for the U.S. territory was planned and that perhaps Trump’s statement shouldn’t be taken literally.

Puerto Rico is already in bankruptcy, with over $70 billion in debt. Maria’s blasting of the island didn’t do much to help matters.

“Addressing the island’s debt burden should absolutely be part of the broader recovery discussion, but threats to wipe out bondholders appear more bombastic than actionable,” Compass Point policy analyst Isaac Boltansky said in a note. “Our sense is that President Trump's comments were meant to empathize and possibly catalyze, but we do not believe his statements represent an actual threat to extrajudicially wipe out bondholders.”

Windstream wins

Windstream debt ticked up on Wednesday, after the International Swaps and Derivatives Association ruled that the transferring of assets and spinoff of what became Uniti Group did not trigger a payout on the CDS.

A trader said the shorter-dated Windstream issues were “up a little bit,” while Uniti Group’s bonds firmed about 1½ points.

He pegged the 8¼% notes due 2023 “around 92½” and the 7 1/8% notes due 2024 “around 99.”

The ISDA ruling was unanimous across its 15-bank panel.

Last week, Windstream was slapped with a default notice from Aurelius Capital, a holder of more than 25% of the 6 3/8% notes due 2023. The noteholder alleged that a transfer of assets, as well as other activities surrounding the spinoff of what became Uniti, was a violation of the indenture, or a default.

However, the company has denied that a default occurred and has even asked a court to issue an injunction on Aurelius’ default filing.

The case for GSE capital

Fannie Mae and Freddie Mac preferreds were trading mostly lower in the midweek session, following comments made by Mel Watt, head of the Federal Housing Finance Agency, on Tuesday.

Fannie’s 8.25% series S fixed-to-floating-rate noncumulative preferreds (OTCBB: FNMAS) were off 4 cents at $6.95, on over 1.84 million shares traded. The variable-rate series P noncumulative preferreds (OTCBB: FNMAH) were also weaker, falling 12 cents, or 2.15%, to $5.46.

About 1.32 million of those preferreds changed hands.

Fannie’s variable-rate series O noncumulative preferreds (OTCBB: FNMFN) meantime declined a nickel to $11.00. Nearly 694,000 of those preferreds traded.

Freddie’s 8.375% fixed-to-floating-rate noncumulative preferreds (OTCBB: FMCKJ), however, managed to trade up, adding 7 cents, or 1.02%, to close at $6.90.

About 962,000 of those preferreds were traded.

On Tuesday, FHFA head Watt reiterated to the House Financial Services Committee that the government-sponsored entities need to be allowed to retain capital in order to avoid another taxpayer bailout.

Under the current agreement with the Treasury Department, Fannie and Freddie must send a majority of their profits to the government by way of a dividend payment. The agencies’ capital cushion has also been steadily decreased, with it set to hit zero in 2018.

“Like any business, the enterprises need some kind of buffer to shield against short-term operating losses,” Watt said in his testimony. “In fact, it is especially irresponsible for the enterprises not to have such a limited buffer because a loss in any quarter would result in an additional draw of taxpayer support and reduce the fixed dollar commitment the Treasury Department has made to support the enterprises.”

Furthermore, Watt urged Congress to act faster on housing finance reform.

In a commentary posted on realclearmarkets.com, James C. Miller III – a former director of the U.S. Office of Management and Budget and former chairman of the Federal Trade Commission – said that Watt could move to stop Fannie and Freddie’s quarterly payments, thereby allowing them to rebuild their coffers. Doing so would not prohibit further action on reform, he said, but would instead hedge the bet, so to speak.

“In the short term, the GSEs would be liberated from uncertainty and could go about their important mission of providing liquidity in the home lending market,” Miller wrote. “In time, Congress and the [Trump] administration could develop new ways to spur more competition in securitizing mortgages and other changes they see fit to reduce government’s role and bring more private capital into the home finance system.”

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