Distressed Debt Trading Overshadows Corporate Bond Market

A sharp rally in the bonds of three distressed companies—

McDermott International
Inc.,


MDR 22.47%

California Resources
Corp.


CRC 11.27%

and

PG&E
Corp.


PCG -5.90%

—dominated trading in the corporate bond market Friday. The surge marks a rebound after earlier selloffs in the debt, showing how volatile trading in riskier bonds has become amid investor uncertainty about geopolitics, interest rates and economic growth.

McDermott’s 10.625% bond due 2024 more than doubled in price today and was the most actively traded corporate bond, with about $245 million face value changing hands, according to MarketAxess. That, in part, reflects the bonds’ deeply discounted prices.

An infrastructure contractor for offshore oil and gas producers, McDermott is one of the growing number of high-yield bond issuers in the energy industry that are struggling with their debt loads amid weak oil and gas prices. The company’s bonds were already trading at distressed levels—around 70 cents on the dollar—before The Wall Street Journal reported Wednesday that it had hired restructuring adviser AlixPartners LLP, and by Thursday prices had plummeted to a low of 16 cents on the dollar. The bonds partially recovered to 35 cents on the dollar Friday morning after McDermott announced unsolicited purchase offers for its Lummus Technology subsidiary, before sliding back to 31 cents when the Journal reported it had also hired a restructuring law firm, Kirkland & Ellis. Exploration and production company California Resources has also taken bondholders on a roller-coaster ride in recent days. The firm’s 8% bond due 2022 jumped about 15% to 64 cents on the dollar Monday after attacks on Saudi Arabian production facilities lifted global oil prices before falling about 25% to 48 cents on the dollar Thursday, following a media report that the company was also hiring a restructuring adviser. The debt rebounded to 58 cents on the dollar Friday after the company denied the report. Bankrupt California electric utility PG&E Corp. was the second-most actively traded name in corporate bond markets Friday after a group of bondholders including Elliott Management Corp. announced an alliance with victims of wildfires caused by the company’s power lines. The agreement boosted prices of PG&E’s 6.05% bond due 2034 to about 113 cents on the dollar from 110 on Thursday, according to MarketAxess. U.S. government bond yields dropped Friday morning as U.S. stocks gained on optimism about the domestic economy. The yield on the benchmark 10-year Treasury note recently traded at 1.772%, down from a high of 1.795% in overnight trading and from Thursday’s 1.777% close, according to data from Tradeweb. Yields fall as bond prices rise. Write to Matt Wirz at matthieu.wirz@wsj.com

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