Worries about Greece, Puerto Rico weaken distressed bonds; CalRes debt remains under pressure

By Stephanie N. Rotondo

Phoenix, June 29 – A looming Greek default – and possibly one in Puerto Rico – weighed heavily on distressed debt on Monday.

“Plenty of the dicier names were down 1-plus points,” a trader said.

One such name was Verso Paper Corp., whose 11¾% notes due 2019 dropped over 3½ points to 57 1/8.

Those bonds have been softening of late, though there hasn’t been any fresh news since earlier in the month when the Memphis-based papermaker appointed a new chief financial officer.

As for the day’s notable news, debt talks between Greece and the E.U. fell apart over the weekend. Greek Prime Minister Alexis Tsipras called for a referendum vote on July 5, closed banks for the week and limited cash machine withdrawals as Tuesday’s deadline fast approaches.

Though the talks failed to bring about any deal, several European leaders, including German Chancellor Angela Merkel, indicated that they were still open to negotiations.

Greece has a €1.6 billion payment due to the International Monetary Fund on Tuesday, the same day the terms of its E.U. bailout expire. If the country fails to pay, it will constitute a default and could result in an E.U. exit.

One other big story of the day was Puerto Rico. Over the weekend, the U.S. territory’s governor, Alejandra Garcia Padilla, said the island is unable to repay debt to the tune of $72 billion. That news sent the territory’s benchmark bonds – the 8% notes due 2035 – down into the high-60s from the high-70s, a trader reported.

Meanwhile, news out of China was also weighing on the markets, as the country cut interest rates over the weekend in order to outweigh a huge market loss on Friday.

In trading, California Resources Corp.’s bonds “continued their slide,” according to a trader. The debt began to drift down on Friday, after a well-known short-seller deemed the company’s stock as worthless and said a debt restructuring was needed.

However, the coal sector was getting a boost after the Supreme Court ruled that the Environmental Protection Agency needed to take financial implications into account when handing down new emissions rules.

Puerto Rico’s problems

The Puerto Rican commonwealth is seeking to restructure its debt as the close of its fiscal year approaches in just two days.

Prices on Puerto Rico G.O. debt tumbled on the news.

Trading on Puerto Rico G.O.s 8% of 2035 blew up Monday. By midday, the bonds were trading at 69.25, 12.11% yield-to-maturity. Prints were seen Friday at 76.75, a 10.87% YTM. At market close, the 8% 2035s were at 69.75 or 12.028% YTM, backing off from a high yield of about 12.255%.

The commonwealth’s 6% of 2016 public improvement bonds were also actively traded Monday with the yield closing the day at 6.368% coming off a session high of 7.192%. The debt ended Friday’s modest trading session at 3.084%.

The most pressing matter for the troubled commonwealth is a $416 million debt service payment for Puerto Rico Electric Power Authority, which is due July 1. Negotiations continue on the payment, but the outlook remains grim.

“We view the probability of non-payment as high,” said Alan Schankel, managing director with Janney Montgomery Scott LLC, on Monday morning.

Fitch Ratings took no time downgrading the commonwealth’s G.O. bonds to CC from B after the governor’s announcement.

“The downgrade of the ratings to CC, which indicates Fitch’s belief that default of some kind appears probable, is based on public comments by the governor supporting the broad debt restructuring strategy included in an external report released this morning by GDB [Government Development Bank],” the Fitch report said in part.

“Fitch no longer believes that the commonwealth views G.O. debt as worthy of the higher level of protection that to date has been assumed due to the very strong legal pledge and repeated public statements to this effect. As it is difficult as this point to predict the course that the commonwealth will take from here in pursuing debt restructuring, Fitch does not believe it is meaningful to distinguish among the various securities and with today’s rating action brings all of the commonwealth debt that is rated by Fitch to CC Rating Watch Negative.”

Moody’s Investors Service made no immediate action Monday, but the ratings agency slashed Puerto Rico G.O.s to Caa1 from B2 back in February.

Standard & Poor’s also refrained from any ratings action, but Puerto Rico’s G.O. debt was downgraded to CCC+ from B in April.

CalRes in retreat

CalRes debt remained under pressure on Monday, following a negative report put out by short-seller BlueMountain Capital Management LLC on Friday.

A trader said the 6% notes due 2024 – part of a $5 billion three-tranche issue that priced Sept. 11 – slid another 1¼ points to 86¼.

The paper had dipped about 3 to 4 points on Friday.

A second market source quoted the 6% notes at 85¾ bid, 88 offered.

“CalRes was down again,” another trader said, seeing the 6% noes trade around 86½.

In its report – which was published Thursday – BlueMoutain said CalRes was dealing with high overhead and shrinking output. As such, there is not enough to cover the company’s debt obligations, the firm said.

“We believe that the company’s common stock is worthless and that its bonds are worth around 23 cents on the dollar taking into account coupons and ultimate recovery upon default,” BlueMountain said in the report.

So far this year, CalRes has cut its capital expenditure budget by 80% and closed almost 90% of its drilling rigs as oil prices declined.

On March 25, company executives at the Scotia Howard Weil 43rd Annual Energy Conference in New Orleans said that a review of options was underway as the company looked to spin-off debt. The options included joint venture agreements and/or asset sales.

That announcement came just days after Moody’s Investors Service downgraded the company to Ba2 from Ba1, citing high leverage and a drop in oil prices.

As of the end of 2014, CalRes had about $6.4 billion in debt.

Coal up on EPA ruling

The Supreme Court ruled Monday that the EPA needed to take financial impacts to a company into account when laying down new regulations that seek to limit emissions of harmful toxins.

The coal sector in particular was upset by the new regulations, which industry groups estimated would cost $9.6 billion per year for companies to remain in compliance. Those groups also projected that it would save only $6 million per year in public health and environmental benefits.

The EPA, for its part, has said that the benefits would be in the billions of dollars.

Despite the ruling, the new rules – written as part of the Clean Air Act – will not be disposed of completely. Instead, the EPA will need to review the rules, taking into account the financial impact of compliance, and rewrite them for final approval.

But the news did bode well for coal names such as Peabody Energy Corp. and Alpha Natural Resources Inc.

One trader saw Peabody’s 6% notes due 2018 rising over a point to 50¾, while the 10% notes due 2022 put on half a point to 63¼.

However another market source deemed the 6½% notes due 2020 off 1½ points at 35½ bid. That same source called Alpha Natural’s 6¼% notes due 2021 nearly 2 points higher at 8½ bid.

The news also gave coal stocks quite a leg up.

“The stocks had more of a rebound than the bonds,” one trader said.

Peabody stock (NYSE: BTU) improved by 22 cents, or 9.61%, to $2.51. Alpha’s equity (NYSE: ANR) put on 2.76 cents, or 8.59%, to 34.9 cents.

Sheri Kasprzak contributed to this article

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