Fed’s language change boosts distressed debt; energy names rise on oil rally; Forest Oil weak

By Stephanie N. Rotondo

Phoenix, Dec. 17 – A language change on the Federal Reserve’s monetary policy helped push up distressed bonds on Wednesday.

After its monthly two-day meeting, the central bank announced that it had changed language in regards to when it would raise rates. It switched “considerable time” to “patient,” leaving some to speculate that rates could rise sooner than expected.

In a press conference following the release, Janet Yellen, Fed chairman, said the language change was consistent with the previous policy and that there would likely be no overtures to increase rates for at least a few more meetings.

On the heels of the Fed announcement, oil prices rallied, helping to push up some oil and gas names that had previously been on the decline.

“Crude was up, I guess that helped the market a little,” a trader said. “There was a major bond grab in the afternoon” prior to the Fed releasing its statement.

“Oil and gas was the big mover today,” another trader said.

For its part, West Texas Intermediate crude gained 23 cents, ending at $56.16 per barrel. Brent crude improved by 71 cents, or 1.18%, to $60.72.

Despite the gains in that space, Forest Oil Corp. continued to be weak, following news out Tuesday regarding revised terms of the company’s merger agreement with Sabine Oil & Gas LLC.

More pain for Forest Oil

A trader said Forest Oil paper was “trying to rebound this morning,” but eventually ended the day softer yet again as investors remained nonplussed about revised merger terms with Sabine Oil.

The trader said the 7¼% notes due 2019 lost another 3 points, closing around 46½.

The paper had lost as much as 40 points in the previous session when the new terms were released.

Forest Oil first announced its combination with Sabine in May. But since then, “market dynamics have changed considerably but the logic for combining these two complementary companies has not,” said David Sambrooks, the combined company’s chief executive officer, in the statement.

As such, terms were revised so that no change of control would occur, allowing both companies to avoid triggering a change-of-control provision.

That provision would have required Forest Oil to buy back its bonds at 101% of par.

Leaving the debt outstanding will save the companies at least $100 million in transaction and interest expenses over the next three years, according to the statement. It also meant that the entities could forgo an $850 million loan from Barclays plc and Wells Fargo & Co.

Energy surges

Away from Forest Oil, oil and gas names were responding positively as oil prices recovered a little ground.

California Resources Corp.’s 6% notes due 2024 inched up a touch to 83, according to a trader. The 5½% notes due 2021 put on over a point, closing around 84 5/8.

The 5% notes due 2020 increased a deuce to 85¾, the trader said.

All three issues priced Sept. 11.

Linn Energy LLC was also rebounding, as a trader deemed the 6¼% notes due 2019 up 5½ points at 78½. He pegged the 8 5/8% notes due 2020 at 81 7/8, up nearly 3 points on the day.

Another market source saw Linn’s 7¾% notes due 2021 rising almost 5 points to 76¾.

In SandRidge Energy’s 7½% notes due 2021, a source placed that issue at 60½ bid, up 6½ points.

Not every oil and gas name was improving, however. A trader saw Goodrich Petroleum Corp.’s 8 7/8% notes due 2019 at 50, down almost 4 points from mid-last week.

Vimpel wobbles

VimpelCom Ltd’s 7.504% notes due 2022 gained “almost 9 points,” according to a trader who pegged the issue at 71.

Earlier in the day, the issue had been off about 17 points, trading with a 62 handle.

Credit default swaps on the Amsterdam-based company meantime jumped 103 basis points to 829 bps.

The day’s gyrations came as the Russian ruble slid the most it has in 16 years. The largest portion of VimpelCom’s revenue comes from that country and the currency’s decline has raised concerns that the company might not be able to service its debt.

Ackman betting on Fannie, Freddie

Fannie Mae and Freddie Mac preferreds were busy in midweek trading as activist investor Bill Ackman said he had been “meaningfully” increasing his position in the agencies over the last couple of weeks.

Fannie’s 6.75% series Q noncumulative preferreds (OTCBB: FNMAI) rose 24 cents, or 9.2%, to $2.85, while the8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) improved 6 cents, or 1.71%, to $3.57.

Freddie shares, however, were a little weaker on the day.

The fixed-to-floating rate noncumulative perpetual preferreds (OTCBB: FMCKJ) fell 9 cents, or 2.39%, to $3.67, as the 5% noncumulative perpetual preferreds (OTCBB: FMCKK) – a $50-par issue – declined 19 cents, or 3.61%, to $5.08.

Ackman is betting that a Sept. 30 court ruling allowing the government to take nearly all of Fannie and Freddie’s profits will be shot down on appeal. The previous ruling dismissed cases brought by investors such as Pershing, Perry Capital LLC and Fairholme Funds Inc.

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