Distressed bonds find a footing; Chesapeake ends slightly higher; Peabody looks to regain ground

By Stephanie N. Rotondo

Seattle, Sept. 15 – Strength began to seep back into the distressed debt market on Thursday.

“Things in general felt better,” a trader said, adding that equities also rebounded.

A modest bounce in domestic crude oil prices was helping to lift some energy credits, according to traders. Oil improved almost half a percent, trading up to $43.79 a barrel, as gasoline futures rose amid production outages.

For Chesapeake Energy Corp., that meant a “marginal” gain for the day, a trader said, seeing the 8% second-lien notes due 2022 hit a 98¼ to 98 3/8 context.

Another trader called the issue up a shade at 98 1/8.

The Oklahoma City-based oil and gas producer was also in the news on Thursday, as it was reported that a panel of the 2nd U.S. Circuit Court of Appeals in Manhattan upheld a lower court’s ruling that would require the company to pay holders of the 6.775% senior notes due 2019 approximately $439 million, including interest.

The bondholders had sued the company after the issue was redeemed six years prior to maturity, alleging that they were entitled to a “make-whole” premium and that the company failed to give them adequate notice of the call.

Elsewhere in the oil and gas space, Legacy Reserves LP’s 6 5/8% notes due 2021 increased a point to 51¼, a trader said. He also saw Stone Energy Corp.’s 7½% notes due 2022 adding almost a point, closing at 58.

Not all oil and gas-linked debt was following the trend, however.

A trader said Key Energy Services Inc.’s 6¾% notes due 2021 dipped nearly a point to 28½.

The oilfield services company said on Aug. 24 that it planned to file a prepackaged bankruptcy plan by Nov. 8. Under the plan, senior noteholders would receive about 95% of the equity in the reorganized company. Existing stockholders would get the remaining 5% of equity.

California Resources Corp. was another name that traded off during the session. A trader said the 5½% notes due 2021 fell a point to 51.

More moves for Peabody

Peabody Energy Corp. continued to be on the radar on Thursday, with the bonds looking to recoup its losses from earlier in the week.

However, a trader noted that there has been no fresh news on the bankrupt coal producer to push the name in either direction.

The trader saw the 10% notes due 2022 trading up to 36½, which compared to opening levels around 32. He called the unsecured paper – such as the 6¼% notes due 2021 – up “about a point” at 23½ bid.

At another desk, the 10% notes were deemed “pretty active, though unchanged” at 34. The 6¼% notes were pegged at 23¼, up over a point.

The 6% notes due 2018, however, were seen down a touch at 22¼.

Fannie, Freddie rally

The recent massive declines in Fannie Mae and Freddie Mac preferreds brought investors back to the table on Thursday, which helped the GSE-linked issues regain some ground.

A market source commented that the day’s gains – and highly active trading – were likely due to investors taking advantage of the depressed prices.

“There’s no real substantive news” to cause the improvement, he said.

Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) traded nearly 4 million times on Thursday, moving up 17 cents, or 5.52%, to $3.25. The variable rate series O noncumulative preferreds (OTCBB: FNMFN) meantime gained 24 cents, or 4.95%, to close at $5.09.

The latter issue saw just a fraction of trading volume the former, however, trading just over 432,000 times.

Freddie’s 8.375% fixed-to-floating rate noncumulative preferreds were also better, rising 18 cents, or 5.94%, to $3.21. Those securities were exchanged nearly 3 million times.

The mortgage giants’ preferreds started to really take a beating on Friday, when it was learned that U.S. District Court Judge Karen Caldwell had dismissed yet another shareholder lawsuit. That lawsuit alleged that the Federal Housing Finance Agency, as conservator, had failed to rehabilitate the companies and that by allowing the net worth sweep, it was effectively nationalizing the entities.

But Caldwell claimed that the Homeownership and Economic Recovery Act of 2008 gave the FHFA “extraordinary” powers, which “exceeds the normal bounds of a conservatorship.” Shareholder groups have decried the ruling as essentially giving a government body the ability to “plunder” a private company.

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