Distressed oil and gas names rise as crude prices jump over 3%; Fannie, Freddie preferreds trade lower

By Stephanie N. Rotondo

Seattle, Aug. 18 – Distressed energy bonds were modestly better on Thursday, as domestic crude prices improved over 3% for the day.

Crude’s gains came amid hopes that OPEC can reach a production limit agreement at an informal meeting to be held next month. Those hopes have increased in recent days as energy ministers from Russia and Saudi Arabia have expressed a willingness to negotiate.

West Texas Intermediate closed at $48.29 a barrel, up 3.21% for the day.

Chesapeake Energy Corp.’s 8% second-lien notes due 2022 continued to be busy, trading up to a 92¾ to 92 7/8 context, according to a market source. That compared to 92½ to 92 5/8 on Wednesday.

That issue has been active all week as the company announced a $1 billion cash tender offer for 10 series of notes and two series of convertible debt.

Elsewhere in the oil and gas space, Linn Energy LLC’s 7¾% notes due 2021 were pegged at 20¼ bid, up a point.

Overall, the distressed debt market was mostly steady, even as equities rose on chatter the Federal Reserve could hold rates at current levels until December. The buzz came after the central bank released the minutes from its latest policy meeting on Wednesday.

Fannie, Freddie pressured

A trader said he was “seeing some selling pressure” in Fannie Mae and Freddie Mac preferreds on Thursday.

However, he was not sure why the paper was softening.

“I’m assuming it’s a court thing,” he said, referring to the myriad stakeholder lawsuits filed against the government in relation to its 2012 “net worth sweep.”

But another market source said the weakness was more benign than that.

“There have been a couple of negative media stories out there over the past day or [so],” the source said. “But really there was no new information in those stories.

“Obviously, it is a volatile situation,” he added.

Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) retreated a nickel, or 1.15%, to $4.28. Freddie’s 8.375% fixed-to-floating rate noncumulative preferreds (OTCBB: FMCKJ) waned 2 cents to $4.18.

Common and preferred shareholders alike are hoping the Court of Appeals will overturn a previous ruling that said the groups had no standing to sue the government over the decision to take virtually all of the GSEs’ profits, leaving them not only without any funds to pay dividends to those stakeholders, but also without any ability to build up any capital cushion.

The lack of a cushion has worried investors and legislators, as the mortgage giants could need another bailout should the economy tank yet again.

From a legislative standpoint, many proposals have come forth regarding what to do with Fannie and Freddie, which have operated under conservatorship since the financial crisis took them down the drain. But so far, Congress has been unable to agree on any GSE reform measures. In all likelihood, the issue will be passed on to the next president, but neither the Democratic nor the Republican nominee has broached the subject.

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