Distressed oil and gas bonds eyed as crude continues to gain; Fannie, Freddie preferreds firm again

By Stephanie N. Rotondo

Seattle, July 25 – Distressed debt once again took a backseat to high-yield names on Tuesday, given earnings reports from HCA Healthcare Inc. and Seagate Technology plc.

Both results were less-than-stellar. For its part, HCA’s weak showing pressured the broader hospital space, while Seagate saw its bonds declining about 5 to 6 points, according to a trader.

But as for distressed issues, oil and gas bonds remained in focus, even as the sector ended with a mixed tone.

“Oil was up, but it really didn’t do much for the downtrodden” sector, one trader said.

However, another trader commented that “with oil moving up, some of those names were higher.”

Domestic crude oil prices firmed nearly 3.5% on the day as Saudi Arabia pledged to roll back production in an effort to further stem the global oversupply of the commodity.

The announcement came after members of the Organization of the Petroleum Exporting Countries and non-OPEC producers met in St. Petersburg, Russia, to discuss its previous production cut agreement. One of the topics discussed in said meeting was the importance of compliance with the agreement – or lack thereof, as the case may be.

For its part, Russia said it would reduce its own output even more if 100% compliance could be reached.

EP Energy LLC paper characterized the sector’s mixed tone, as a trader saw the 9 3/8% notes due 2020 holding at 85, while the 8% notes due 2025 ticked up a quarter-point to 78¾.

Denbury Resources Inc. was another name that was mixed on the day.

A trader said the 4 5/8% notes due 2023 were off nearly a point at 50¼, though the 5½% notes due 2022 firmed half a point to 53½.

A second source saw the 6 3/8% notes due 2021 dipping a quarter-point to 58¼.

Another trader said California Resources Corp.’s 8% notes due 2022 benefitted from the gain in crude, rising a point to a 65 to 65½ context.

At another desk, the 8% notes were deemed 1½ points higher at 65 ¼ bid.

A third source pegged the notes at 65, also calling that 1½ points better.

GSEs remain strong

Fannie Mae and Freddie Mac preferreds continued to climb upward in active trading, though the preferred space as a whole continued to weaken.

Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) were up 25 cents, or 3.65%, at $7.10. The 8.25% series T noncumulative preferreds (OTCBB: FNMAT) were up a dime, or 1.52%, at $6.70.

Freddie’s 8.375% fixed-to-floating rate noncumulative preferreds (OTCBB: FMCKJ) were meantime up 33 cents, or 5.20%, at $6.68.

A market source noted that there was again no fresh news out, or at least “nothing substantive.”

However, there have been reports of new documents released as part of a shareholders lawsuit against the government that seemed to show that the Treasury knew Fannie and Freddie were about to return to a profit before they enacted the so-called “net worth sweep” in 2012.

Shareholders have argued that the sweep – which takes a majority of the GSEs’ earnings each quarter in lieu of a dividend payment – has hurt their recovery and that it was done so illegally. The documents – as well as the fact that both Fannie and Freddie have both repaid the bailout funds given to them in 2008, and then some – appear to give the shareholder argument weight.

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