California Resources, Teck weaken on downgrade; Energy XXI paper dwindles after reserve report

By Stephanie N. Rotondo

Phoenix, Sept. 15 – The distressed bond market remained weak Tuesday, though yet again, investors were more focused on Frontier Communications Corp.’s three-part $6.6 billion new issue.

But away from recently priced deals, rating cuts were putting pressure on a couple names. Moody’s Investors Service cut California Resources Corp. on Tuesday, in part because of weak oil prices. Moody’s also dropped its ratings on Teck Resources Ltd. on Monday, which resulted in lower trades come Tuesday.

In terms of the latter name, the new rating pushed the company into junk status.

Meanwhile, Energy XXI debt took a hit after the company reported that its proved reserves at the end of fiscal 2015 were lower than the previous year.

Moody’s downgrades CalRes, Teck

California Resources had its corporate family rating and senior unsecured notes cut by Moody’s on Tuesday, due to dwindling financial performance amid the weak commodity price environment.

As such, a trader said the 6% notes due 2024 fell “almost 2 points” to 69 1/8.

A second trader said the debt was “down 3 to 4 points after the downgrade, trading in the high-60s.”

CalRes’ overall rating was dropped to B1 from Ba2 and the senior unsecured notes were cut to B2 from Ba2.

Among other downgrades, Teck Resources was lowered to junk status on Monday by Moody’s. Come Tuesday, the bonds were feeling it.

A trader said the 4½% notes due 2021 lost 3 points, closing at 80½.

Moody’s cut the Vancouver, B.C.-based metals and mining company to Ba1 from Baa3, citing the softer pricing in the metals markets.

Evan Mann, an analyst with Gimme Credit LLC, said in a comment published Tuesday, that the downgrade was not a big surprise, although the timing did come sooner than expected.

Mann noted that Standard & Poor’s and Fitch Ratings still rank the company as investment grade, though both have negative outlooks and are expected to follow Moody’s path in the near- to intermediate-term.

Mann also said that spreads on the 3¾% notes due 2023 have widened by 40 basis points in the last week. Should S&P and Fitch elect to cut their ratings, spreads could widen further, he wrote.

Energy XXI loses ground

Energy XXI bonds were down a fair bit Tuesday, with one trader attributing the decline to the company’s latest reserve update report.

The trader said the 11% notes due 2020 were “down a few points,” at 59. A second trader also placed the issue at 59, off 6 points “from the end of last week.”

The trader also noted that the paper was “very active.”

The Houston-based oil and gas company said late Monday that its proved reserves at the end of fiscal 2015 were lower than the previous year, at 75%. The company attributed the dip to the year’s production, as well as non-core asset sales, price-based adjustments and a reduced capital expenditure program.

Last week, Energy XXI announced that it was delaying filing its latest 10-K as it needed to restate financials for the last four years. The restatement is due to changes in derivative accounting.

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