Commodity names help drive distressed bond market higher; Fannie, Freddie preferreds remain in focus

By Stephanie N. Rotondo

Seattle, June 9 – The distressed debt market closed with a positive tone yet again on Thursday, with commodities leading the way.

AK Steel Holdings Corp. continued to post sizeable gains in trading, with one market source seeing the 7 5/8% notes due 2020 jumping 3½ points to 87.

The issue was up over 2 points on Wednesday.

On Thursday, the West Chester, Ohio-based steel manufacturer said in a regulatory filing that reducing its debt burden was its “top financial priority.” As such, the company is aiming to reduce its debt by $700 million through a combination of refinancings and debt repurchases.

AK also said that it would continue to look for opportunities to sell additional equity.

In the energy space, Chesapeake Energy Corp.’s 6 5/8% notes due 2020 ticked up half a point to 77 bid – even as oil prices dropped over 1% and S&P cut the company’s rating to SD.

For its part, oil prices came down from their recent highs over the $51 mark, as global growth concerns pushed investors into safer investment options.

As for S&P’s rating change, the agency said it was due to Chesapeake’s recently announced debt exchange of issues maturing or becoming putable in 2018 through 2022. S&P also noted that the Oklahoma City-based oil and gas company could face liquidity issues in the face of upcoming maturities in 2017.

Fannie, Freddie mixed

Trading in Fannie Mae and Freddie Mac preferreds continued to be busy in Thursday trading.

Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) were slightly better at $4.7323, with nearly 1.7 million of the shares trading. Freddie’s 8.375% fixed-to-floating rate noncumulative perpetual preferreds (OTCBB: FMCKJ) were steady at $4.65, on about 1.27 million shares trading.

The GSEs’ preferreds have nearly dominated every trading session for the last couple of weeks, as ongoing lawsuits have brought out more information about the government’s decision to commandeer a majority of the mortgage agencies’ profits. The information has been viewed as positive for plaintiffs that allege the so-called “net worth sweep” was unlawful.

In the wake of that information, Democrats and Republicans alike have been calling for a renewed focus on GSE reform, some even going so far as to say that Fannie and Freddie should be allowed to hold more of their profits in order to build up a cushion to protect themselves – and taxpayers – in the event of another downturn.

And while groups like the Community Home Lenders Association, the Community Mortgage Lenders of America and the Independent Community Bankers of America have been pro-capital cushion, others have not been.

In a letter sent Wednesday to the Federal Housing Finance Agency, the American Bankers Association, the National Association of Realtors, the National Association of Home Builders, the Mortgage Bankers Association and the National Housing Conference urged that the GSEs must be reformed from congressional action.

“Policymakers need to continue to focus on the paramount objective of fixing the structural flaws that led to the breakdown of the housing finance system — the only outcome that will protect taxpayers, preserve access to credit, and ensure a stable housing finance system,” the letter said. “Absent reform, we run the risk of continuing to kick the can down the road without ensuring ongoing access to mortgage credit for millions of future homeowners.”

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