Junk quiet as Treasuries slide after jobs gain; Constellation, Nokia off; funds up $384 million

By Paul Deckelman

New York, July 5 -The junk bond market's return to work following Thursday's Independence Day holiday was largely a non-event, as primaryside sources and secondary traders alike reported a mostly quiet market - even as Treasuries slid and their yields shot up after an unexpectedly large gain in non-farm payroll numbers for June.

Among the few credits seen moving around in Junkbondland, Constellation Brands, Inc.'s recently priced eight-year notes were seen down more than 1 point in round-lot dealings and 2½ points overall. While there was no fresh news out on the alcoholic beverage company, which reported earnings earlier in the week, the notes were thought to have suffered because of their very low coupon, tying them closely to Treasuries.

Nokia Corp.'s bonds lost several points in vigorous odd-lot dealings, although large trades were rare. The Finland-based wireless phone manufacturer's debt retreated after Standard & Poor's cut its ratings in response to the company's plans to buy out its partner in a joint venture.

While there wasn't much trading, market participants continued to characterize the market as relatively firm.

Statistical indicators of secondary market performance were mixed for a third consecutive session and for a second straight week versus their week-earlier performance.

And flows of money into or out of high-yield mutual funds and exchange-traded funds - a key barometer of overall junk market liquidity trends - were seen by one of the major fund-tracking agencies to have turned positive in the most recent week, snapping a five-week losing streak that saw investors pull many billions of dollars out of those junk funds.

EPFR sees $384 million inflow

EPFR Global said on Friday that in the week ended Wednesday, it had seen a net inflow to the junk bond mutual funds and ETFs of $384 million.

It was the first inflow reported by Cambridge, Mass.-based EPFR after five consecutive weeks of outflows, dating back to late May, including the $6.82 billion cash hemorrhage that the agency reported last week for the seven-day period ended June 26.

During that five-week losing streak, net outflows from the funds had totaled about $22.3 billion, according to a Prospect News analysis of the EPFR figures.

On a year-to-date basis, those losses caused what had been a sizable cumulative net inflow of over $16 billion to slide into the red, although the latest week's inflow cut that red ink for the year slightly to about $5.22 billion, according to the analysis. With 27 weeks in the book for 2013 so far, EPFR has now seen inflows in 19 of those weeks versus outflows in the other eight.

EPFR - whose overall fund-flow universe includes both U.S.- and non-U.S.-domiciled funds - said that among just the U.S. funds, a $485 million net inflow was seen in the latest week - in contrast to the $3.71 billion that flowed out of those domestic funds the week before, the fifth straight outflow seen among the domestic funds.

Fund-flow numbers generally circulate in the high-yield market on Thursday, but that schedule was altered this week because fixed-income markets in the United States were closed on Thursday for the Fourth of July holiday.

As of press time on Friday evening, fund-flow totals from the other major tracking company, AMG Data Services, had not emerged, although the company had said the totals would be released late Friday.

As of last week, Arcata, Calif.-based AMG - a unit of Thomson Reuters Corp.'s Lipper analytics unit - had also seen big outflows from the junk funds it follows over the previous five weeks, totaling about $12.2 billion in that period, with a year-to-date net outflow of about $9 billion, according to a Prospect News analysis of its figures.

AMG/Lipper's methodology differs from EPFR's in that its high-yield universe is strictly oriented toward the domestic funds, rather than EPFR's more international focus. But though the two services' numbers often vary widely as a result of their differing methodology, their weekly results tend to point in the same direction more often than not.

Cumulative fund-flow estimates, whether from EPFR or AMG/Lipper, may be revised upward or downward or be rounded off and could include unannounced revisions and adjustments to figures from prior weeks.

The sustained flows of fresh cash into junk as well as the mutual funds and ETFs - which represent but a small, though very observable and quantifiable percentage of the total amount of investor money coming into or leaving the roughly $1 trillion junk market - have been seen by analysts as a key element behind the high-yield secondary sphere's strong performance last year, versus other fixed-income asset classes, and its record active new-deal pace, which easily topped the $350 billion mark.

It was also seen as one of the major drivers behind the robust patterns of primary activity and secondary strength that had continued for much of this year's first half, before fading in recent weeks on Federal Reserve-related investor worries.

Goose egg for the week

Those worries over whether the Fed would throttle back on its expansive QE3 quantitative easing monetary stimulus policy - and once it had actually announced plans to do so, what impact that might have on interest rates - have served to largely put a damper on what up till late May had been robust high-yield new issuance, running well ahead of last year's record-setting pace.

With a holiday during this week serving to cut sharply the number of junk market participants who would be active on the days when the market was technically open, this week produced the first complete lack of any issuance, with no dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers pricing by the close Friday.

That goose egg left this past week as the slowest of the year so far, beating even the first week of the year, which saw just one pricing worth $800 million come to market during that period, according to data compiled by Prospect News.

And it was far slower than the previous week, ended June 28, during which some $5.93 billion of new paper came to market - the busiest recent week in Junkbondland, as it broke out of a four-week rut during which new issuance was averaging just $2 billion to $3 billion during that time, dating back to late May.

Year-to-date junk market activity of $172.15 billion in 381 tranches continued to run 23.8% ahead of the pace seen last year, when $139.03 billion of new paper had priced in 298 tranches by this point on the calendar, according to the data.

Little doing in the primary

During the session, several syndicate sources queried by Prospect News said that their investment banks, certainly, had nothing on tap for the day, and they had not heard of anything else happening on the new-deal front.

That left just two prospective junk deals bobbing around on the near-term horizon.

Falcon (BC) Germany Holding 3 GmbH was shopping a €240 million issue of senior secured notes due 2020 (confirmed B1/expected B) to potential investors, having begun a roadshow for its offering this past Tuesday, with pricing on the 144A/Regulation S deal expected around the middle of the upcoming week via bookrunner Morgan Stanley & Co. LLC and co-manager Bank of Ireland.

The company is a financing vehicle for FTE Automotive, an Ebern, Germany-based producer of hydraulic actuation systems for passenger cars and commercial vehicles that plans to use the deal proceeds to refinance both its buyout by Bain Capital and its existing debt and for general corporate purposes.

The other deal on the radar screens also originates in Europe - a $330 million offering of senior secured notes due 2020 (expected ratings B3/B) from Technicolor, a Paris-based media and entertainment technology company that will bring its Rule 144A and Regulation S deal to market through its Tech Finance & Co. SCA funding subsidiary via joint bookrunners J.P. Morgan Securities LLC, Goldman Sachs & Co. and Morgan Stanley.

The company is doing the bond deal, along with a concurrent €250 million and $645 million pari passu term loan offering, to refinance existing debt via its pending tender offer and consent solicitation.

Technicolor hit the road in June to pitch its deal to investors. It has not yet priced, although the roadshow has wrapped up, but the deal was said by a market source to still be alive and considered to be July business.

Quiet secondary session

In the secondary market, a trader said that "it was so dead today that it was ridiculous."

He said that his message board - which would ordinarily be humming, particularly on a major news day with the June jobs data out - instead showed "25 minutes to a half an hour in between messages from dealers."

He said that he had seen only a "short-lived 'rally'" after the jobs numbers came out, while a second trader reported the market unchanged but firm on very light volume.

The U.S. Labor Department reported that non-farm payrolls grew by 195,000 jobs in June, topping Wall Street's expectations of a rise of around 165,000. The overall jobless rate held steady at 7.6%.

News of the more-robust jobs growth caused Treasury issue prices to slide and yields to hit their highest levels in nearly two years, with the yield on the benchmark 10-year note zooming by 22 basis points on the day to 2.725%, its highest closing yield in 23 months.

The Federal Reserve's policy-making committee will analyze the June jobs numbers when it meets later this month, but the Fed is not expected at this point to change course from the planned winding-down of QE3. The central bank is expected to begin tapering off on its $85 billion per month purchase of Treasury securities and mortgage-backed securities later this year, gradually moving in stages until the program has been completely closed down by the middle of next year.

Low-coupon notes at risk

One of the trader said that the takeaway from the better-than-anticipated numbers is that with rates expected to climb still higher as qualitative easing recedes, "anything that's interest-rate sensitive is going to have some problems."

One such credit that the market has been watching carefully in this regard has been Ball Corp.'s 4% notes due 2023, which have been battered down in tandem with rising Treasury rates almost since the $1 billion issue priced at par on May 9. From that level, the notes climbed a little in initial aftermarket dealings but within days had begun their long slide, bottoming in an 88 to 89 bid context last week before rebounding a little from those lows in line with recent signs of strength in junk.

On Friday, the bonds were seen clinging to the around 93 bid levels to which they had risen back to from their recent lows, rather than sliding anew.

However, trading in the Broomfield, Colo.-based packaging company's issue was called very light, consisting only of some odd-lot trades.

Another recently priced deal with a low coupon that has been taking its lumps along with Treasuries has been Constellation Brands' 3¾% notes due 2021, which priced at par on April 30 but which had been steadily falling since then.

The Victor, N.Y.-based wine, spirits and beer manufacturing, importing and marketing company's bonds tumbled to 92½ bid on Friday from Wednesday's close at just over 95, although throwing out the numerous smallish odd-lot trades seen during the day and just sticking with round-lot transactions, the drop was only around 1 point. Volume was over $4 billion, making the issue one of the busier of the day's junk credits.

In contrast, Constellation Brands' 4¼% notes due 2023 - which priced at par along with the 2021 notes during that $1.55 billion two-part deal - were not seen trading at all on Friday. They had last traded earlier in the week at 94¼ bid.

Nokia knocked lower

Away from the low-coupon, interest-rate-sensitive deals, market participants saw Nokia's two outstanding issues trading lower after Standard & Poor's downgraded the company by one notch, from BB- to B+.

The ratings agency warned that Nokia could see strains on its net cash after the Finnish wireless phone producer announced plans earlier in the week to acquire joint-venture partner Siemens AG's 50% stake in Nokia Siemens Networks.

Nokia's 5 3/8% notes due 2019 dropped to about 94½ bid versus Wednesday's close at 97¾ bid. However, there was no round-lot trading in the issue, although there was a busy barrage of odd-lot trades going on.

Nokia's 6 5/8% notes due 2039 dropped to around 88½ bid from prior levels above 90, though on many fewer trades than the 2019 bonds.

Market indicators stay mixed

Statistical junk market performance indicators were mixed for a third straight session on Friday, and were also mixed versus their week-earlier levels for a second consecutive week.

The Markit Series 20 CDX North American High Yield index fell by 5/16 point Friday, ending at 102 13/16 bid, 102 15/16 offered. On Wednesday, it had edged up by 1/16 point.

But the index was up from the 102 5/8 bid, 102 7/8 level seen at the close the previous Friday, June 28.

The KDP High Yield Daily index saw its second straight loss Friday, dipping by 1 bp to 73.01, while its yield was unchanged at 6.36%. On Wednesday, the index reading dipped by 4 bps, while its yield rose by 2 bps.

But that compared favorably with the week-earlier index treading of 72.86 and yield of 6.41%.

The widely followed Merrill Lynch High Yield Master II index lost 0.23% on the session Friday, versus Thursday's 0.02% gain.

Friday's loss dropped the index's year-to-date return back to 1.455% from 1.689% on Thursday, although it remained well up from last Tuesday's 0.384% reading - its lowest level for the year.

Despite stronger showings earlier in the week, the index ended the week down 0.006% - its eighth straight weekly loss. The week before, it had lost 0.118%, for a year-to-date return of 1.46%.

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