Fed worry takes toll as market, recent deals retreat, primary stills; funds lose $333 million

By Paul Deckelman and Paul A. Harris

New York, June 20 - The high-yield market closed out what ended up being a woeful spring on Thursday as it surrendered a big chunk of the gains notched earlier this year. That left reeling investors clinging forlornly to the hope that summer - which opens with Friday's solstice - might offer them a little refuge.

Junkbondland had not seemed to be too badly affected on Wednesday, when stocks and Treasuries swooned after Federal Reserve chairman Ben Bernanke indicated that the U.S. central bank might finally begin winding down its QE3 monetary stimulus policy at some point, depending on economic data - but Thursday was another matter.

As equities and Treasuries continued their free-fall, junk began a steady retreat in morning trading, with some names already down 2 or 3 points by midday.

Things only got worse as the day wore on. A long list of issuers ended down multiple points on the session; they were especially hurt by exchange-traded funds selling off positions in many well-known, liquid credits, according to traders. Big losers included such familiar names as Ally Financial Inc., Clear Channel Communications, Inc., Chesapeake Energy Corp. and B/E Aerospace Inc.

Also taking a drubbing were some of the newly priced junk market issues, including this week's deals from Rite Aid Corp. - struggling despite favorable earnings and debt-reduction news - and Brookfield Residential Properties, Inc. as well as last week's offering from Barry Callebaut Services NV and junk's favorite whipping boy among the recent primary transactions, Ball Corp.

While those recent deals were getting whacked around, new-dealers battened down the hatches. Syndicate sources saw exactly zero going on in the dollar-denominated market segment, although there was some price talk out on Greek gaming technology company Intralot SA's euro-denominated deal, which could price through a financing subsidiary during Friday's session.

Statistical measures of junk market performance plunged across the board on Thursday after having been mixed on Wednesday.

And flows of money into or out of high-yield mutual funds and ETFs, considered a key barometer of overall junk market liquidity trends, posted their fourth consecutive weekly decline - although the outflow numbers, while sizable, were not nearly as bad as the massive cash hemorrhages that both major fund-tracking agencies had reported last week.

AMG sees $333 million outflow

As Thursday's activity was closing down, junk market participants familiar with the fund-flow statistics generated by AMG Data Services said that during the week ended Wednesday, $332.88 million more left those funds than came into them.

It was the fourth consecutive weekly outflow reported by Arcata, Calif.-based AMG, a unit of the Lipper analytics division of Thomson Reuters Corp. - but it was only a small fraction of the $3.28 billion cash loss that the service had seen last week, which ended June 12.

During that four-week skid - which began with an $874.68 million outflow in the week ended May 29 and then escalated dramatically with a record-huge $4.63 billion cash exodus the following week, which ended June 5 - cumulative net outflows have totaled around $9.11 billion, according to a Prospect News analysis of the AMG/Lipper figures.

Those losses swung what was previously a positive year-to-date cumulative net inflow figure deeply into the red. With 25 weeks in the books since the start of the year, there have now been 14 weeks of inflows versus 11 weeks of outflows, and cumulative net outflows have amounted to just under $6 billion, according to the analysis.

EPFR sees $2.2 billion outflow

Meanwhile, rival fund-tracking service EPFR Global of Cambridge, Mass., whose methodology differs from AMG/Lipper because it includes some non-U.S. funds in the universe it tracks, said the junk funds lost $2.2 billion in the week ended Wednesday, including $698 million just from the U.S.-based funds that it follows.

As was the case with the AMG/Lipper numbers, the latest week's outflow was the fourth consecutive downturn, and while certainly sizable, was not as bad as the giant-sized outflows seen the previous two weeks. These included cash losses of $6.47 billion in the week ended June 12, including $4.33 billion from the U.S.-only funds, and the record $6.59 billion cash hemorrhage seen in the week ended June 5, including $4.72 billion flowing out of the U.S. funds.

Over the past four weeks, EPFR's net outflows have totaled about $15.5 billion, according to a Prospect News analysis of the EPFR figures. On a year-to-date basis, what was once a great multi-billion-dollar inflow bulge has now been whittled down to a slender $1.24 billion cumulative net inflow. Inflows have been seen in 18 weeks this year versus seven weeks of outflows, the analysis said.

While EPFR's different methodology usually results in the two services' numbers diverging widely, the two companies' results generally point in the same direction more often than not.

Cumulative fund-flow estimates, whether from EPFR or from 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 - and the mutual funds and ETFs 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 Fed-related investor worries.

Intralot sets price talk

With volatility rocking the global capital markets, the high-yield primary market took a header on Thursday, and no deals were priced.

The only forward calendar news came from Greece-based Intralot Finance Luxembourg SA, which talked its €300 million offering of five-year senior notes (B1/B+/BB-) to yield 9¼% to 9½%.

The debt refinancing deal is set to price on Friday.

Citigroup and HSBC are the active bookrunners. Barclays and SG are the passive bookrunners.

'Could have been uglier'

"It was an ugly day," one high-yield investor summarized shortly after the stock market closed in the United States. The major stock indexes each sustained losses of more than 2%.

"But it could have been uglier," the investor asserted.

One positive piece of news came from the fund flows front, where the $333 million weekly outflow that AMG-Lipper reported late Thursday afternoon was 10% of the amount of the previous week's $3.28 billion outflow, the buysider said.

Some of that money must have flowed into bank loans because the bank loan funds saw weekly inflows of $1.4 billion, the third largest inflow on record, the investor said, surmising that loans are a perceived safety play attracting cash away from investment-grade bonds and equities in addition to junk bonds.

Also there appears to be order in the secondary market in that low-ball bids, which reliably appear at times of high volatility when some money managers need to raise cash, are not being hit.

But let's not sugarcoat the picture, the source said, pointing out that of the 50 most active high-yield names on Trace, 20 were off more than two points on Thursday.

Calendar of question marks

Aside from the above-mentioned Intralot euro-denominated deal, there was no news on offerings that, earlier in the week, had been slated as business expected to clear the market by Friday's close, sources said.

Issuers and underwriters are trying to figure out where people care and whether deals contemplated during fairer weather in the high-yield market continue to make sense, with levels continuing to back up.

Some investors who played the spring 2013 calendar are smarting big time, sources say.

Based on how many mentions the deal is meriting, H.J. Heinz Co.'s 4¼% second-lien senior secured notes due October 2020 appear to be the poster child for losses sustained from deals that priced when the high-yield market was white hot in March and April appears.

A buyside source spotted them at 95½ bid, 96 offered after Thursday's close, down from 97 bid, 98 offered 24 hours earlier. They began Wednesday's session at 99 3/8 bid, 99 5/8 offered.

However, a buysider who spoke on Thursday pointed out that the $3.1 billion deal, which priced at par in late March, came at a 297 basis points spread to Treasuries and said that at Thursday's close, based on the price moves, the spread was about 300 bps.

"It's simply moving with Treasuries," the investor said.

"But I don't think we're going to see any more four-handle deals anytime soon."

Asked whether the high-yield primary market might be headed into what used to be a traditional summer, where volume drops off to near zero and the only sound is that made by the crickets, the investor said, "Perhaps. But business won't drop off altogether. There is still a pipeline of deals that need to get done.

"Once the market has finished repricing, they will come."

Names down multiple points

Taking their cue from the continued carnage in the stock and Treasury markets post-Bernanke - the bellwether Dow Jones industrial average nosedived by 353.87 points on Thursday, or 2.34%, to close at 14,758.32, while the 10-year Treasury yield ballooned out to 2.42% - junk bond investors were mostly sellers, taking many familiar names down by multiple points.

One of the worst performers was Ally Financial's 8% bonds due 2031, which were down as much as 6 points on the day before going home at 121½ bid, down 4¾ points on the day. Volume was a fairly active $10 million.

The 8% notes due 2020 issued by the Detroit-based mortgage, auto loan and banking company formerly known as GMAC did almost as badly, falling about 4 points on the day to finish at just over 116 bid, also on $10 million of turnover.

San Antonio, Texas-based diversified media company Clear Channel's 10¾% notes due 2016 were seen by a market source having fallen 4 5/8 points to 86 bid.

The source also saw Oklahoma City-based natural gas operator Chesapeake Energy's 6 7/8% notes due 2020 off 4½ points at 107¾ bid, while its busiest issue, the 6 5/8% notes also due in 2020, lost 4 1/8 points to close at 106½ bid on volume of $14 million.

Wellington, Fla.-based aircraft interior components maker B/E Aerospace's 5¼% notes due 2022 lost about 3½ points of altitude as it dropped to 99 bid. Volume of $19 million put it among the day's busiest.

ETFs seen active

"There was a lot of activity involving the ETFs and ETF positions," a trader said, noting that "obviously, Caesars and Reynolds are big in the ETFs, Chrysler is big in the ETFs, and B/E Aerospace."

Las Vegas-based gaming giant Caesars Entertainment Corp.'s 10% notes due 2018 were seen down a deuce at 56 bid with over $20 million traded.

New Zealand-based consumer packaging products maker Reynolds Group Holdings Ltd.'s 5¾% notes due 2020 lost 2 1/8 points to end at 98 1/12 bid.

And Auburn Hills, Mich.-based automotive manufacturer Chrysler Group LLC's 8¼% notes due 2021 were down more than 2 points at 108 bid on volume of more than $32 million, the most of any junk issue.

Recent deals in retreat

Recently priced deals fared no better.

Rite Aid's 6¾% notes due 2021 were seen by a trader to have fallen to 96½ bid, 97¼ offered, which he called down 2 points on the session.

Another trader saw the Camp Hill, Pa.-based No. 3 U.S. drugstore chain operator's new bonds lower on the day at 97 bid, 97½ offered, although he said that he "didn't see a lot of markets in them."

On Tuesday, Rite Aid had priced $810 million of those bonds at par after having upsized the quick-to-market deal from an originally planned $400 million.

But the new bonds struggled from the get-go, spending the rest of Tuesday and all day Wednesday in a 99ish bid context.

On Thursday, the bonds seemed to move downward with the market, little helped by the company's results for its fiscal first quarter. During that period, Rite Aid posted its third consecutive quarterly profit, versus a year-ago loss, and reported good progress in bringing down debt, as its ratio of debt to adjusted EBITDA improved by 1.5 turns year over year. The company also increased its estimate of projected interest-expense savings following its bond deal earlier in the week as well as a June bank loan deal. (Please see related story elsewhere in this issue.)

However, even with that good news, a trader opined that "the call was OK but not that great."

Among other recent deals, Brookfield Residential Properties' 6 1/8% notes due 2022 lost 2¾ points, a trader said, pegging the bonds at 97¼ bid, 98¼ offered. The Calgary, Alta.-based land developer and homebuilder priced $500 million of the notes at par on Tuesday after upping the deal from $400 million.

Swiss chocolate manufacturer Barry Callebaut's 5½% notes due 2023 were seen down 1½ points, with a trader quoting them at 99½ bid, 100½ offered.

The company had priced $400 million of the bonds last Thursday at 98.122 to yield 5¾% after downsizing the issue from $600 million originally. The bonds had immediately firmed, ultimately getting up to around 101 bid, 101½ offered, the trader said.

Going back a little further, Ball Corp.'s 4% notes due 2023 were down by 2 points to 92 bid. The Broomfield, Colo.-based packaging manufacturer's $1 billion deal priced at par on May 9 after having been upsized from $600 million.

However, the deal started moving downward from there, with traders saying the low-coupon, interest-rate sensitive issue was being dragged down in tandem with Treasury paper as the latter's yields steadily rose.

Market indicators fall sharply

Statistical junk market performance indicators had one of their worst days of the year on Thursday as all of them plunged badly. They had turned mixed on Wednesday.

The Markit Series 20 CDX North American High Yield index nosedived by 1 1/8 points to end at 101 7/16 bid, 101 9/16 offered, its second straight large loss. On Wednesday, the index had plummeted by 1 5/8 points.

The KDP High Yield Daily index got hammered down by 96 bps on Thursday to finish at 73.37. That broke a four-session winning streak, including Wednesday's gain of 3 bps.

Its yield meantime widened out drastically by 34 bps, closing at 6.19%. That too broke a four-session string on yield declines, including Wednesday's 2 bps improvement.

And the widely followed Merrill Lynch High Yield Master II index saw its second straight loss on Thursday - its biggest downturn of the year so far - as it slid by 1.281% to go home at a year-to-date return of 1.817%. That was its lowest finish since Feb. 27, when the return was 1.696%.

On Wednesday, it had broken a three-session winning streak, retreating by 0.032% to end at 3.139%.

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