Primary stays quiet in pre-holiday session; Arch up on exchange news; funds plunge $3 billion

By Paul A. Harris and Paul Deckelman

New York, July 2 – The high-yield market saw a quiet session Thursday leading into the Independence Day holiday break.

Although Thursday’s session was ostensibly a regular full session, traders said that the reality was that many desks were only lightly staffed, if at all, and many market participants had already wrapped things up and had hit the exits by early afternoon heading into the three-day weekend. With July 4th actually falling on a Saturday this year, the Securities Industry and Financial Markets Association had recommended a full shutdown of the fixed-income markets in the United States on Friday in observance of the holiday.

As had been the case on Wednesday, no new deals priced during Thursday’s session, and none were announced. Primaryside players were looking forward to a big deal in the upcoming week from cable operator Charter Communications Inc. and possibly from wireline telephone service provider Frontier Communications Corp.

Four offerings, sized from $180 million to $265 million, remain in the market; however, no news as to the timing or pricing of these deals surfaced during the week leading up to the holiday weekend, sources said.

In existing issues, Arch Coal Inc.’s battered bonds got a lift – though only on relatively light volume – on the news that the coal mining company will be doing a pair of private debt exchanges for its existing notes.

Notes of Arch Coal sector peer Peabody Energy Corp., which had fallen by multiple points on Wednesday after the big coal producer revised its previously issued earnings guidance downward, seemed to steady at those lower levels on Thursday.

Iron ore producer Fortescue Metals Group Ltd.’s bonds were lower, hurt by a big drop in the ton price of iron ore.

Statistical market-performance measures were higher across the board for a second consecutive session on Thursday; they had turned better all around on Wednesday after having been mixed on Tuesday and lower for three consecutive sessions before that.

However, those indicators were closing out the trading week down from where they had finished at the end of last week, their first lower week after two mixed weeks before that.

Flows of money into or out of high-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends, turned sharply lower this week, posting a $3 billion net outflow – their biggest cash loss of the year so far.

The week ahead

Some market watchers are looking for activity to pick up in the July 6 week, pending some stability in the global financial markets.

A pair of megadeals are in the July pipeline and could surface during the week ahead, sources say.

Charter Communications is expected to start a roadshow for at least a portion of the bonds backing its $13.8 billion of bridge loan financing for the acquisition of Time Warner Cable Inc. and Bright House Networks, market sources say.

The anticipated overall size of the bond offering is between $8 billion and $15 billion, a sellside source said.

As previously reported, the bridge facility consists of a $6 billion secured bridge loan, a $3.5 billion unsecured loan from Charter Communications Operating and a $4.3 billion unsecured loan from CCO Holdings.

Credit Suisse Securities (USA) LLC, Goldman Sachs & Co., BofA Merrill Lynch, Deutsche Bank Securities Inc. and UBS Securities LLC are the underwriters for the financing.

Meanwhile, Frontier Communications could hit the leveraged markets with $8 billion of new debt – all of it possibly coming in the form of high-yield bonds – as early as the July 6 week, sources say.

J.P. Morgan Securities LLC will lead the deal, a buyside source said, adding that the Frontier bridge loan was not syndicated and the financing is therefore on JPMorgan's books.

Whether or not the deal hits the market in the week ahead will likely hinge on the level of stability in the financial markets, an investor said, adding that it will be “a game-time decision.”

Pre-holiday quiet

In the secondary market, traders agreed that, in the words of one of them, “not too much was going on.”

He said that all told, only a little more than $1 billion of bonds traded, roughly one-third the amount seen on Wednesday.

Trading, he said during the afternoon, had been “pretty much over since around 2 p.m. [ET].”

“To say things are pretty quiet is an understatement,” another trader noted.

Fortescue among the actives

Numerous issues of General Motors Co.’s split-rated (Ba1/BBB-/BBB-) paper dominated the high-yield Most Actives list, mostly on the strength of high-grade buyers looking for a little crossover yield.

Apart from the GM issues, traders saw Fortescue Metals Group’s 8¼% notes due 2019 as probably the most active purely junk issue.

The bonds fell by 1¼ points to 82 7/8 bid, on volume of over $18 million, on the heels of Australia’s government having earlier this week cut its price forecast for iron ore this year by 10% to A$54.40 a ton, citing a weak outlook for the commodity's main market, China's steel sector.

That forecast by Canberra’s Department of Industry and Science is well down from the A$60.40 a ton that it projected three months ago. As the year opened, the department was predicting A$94.00 a ton as a feasible iron ore price.

The company’s FMG Resources senior secured notes due 2022 had fallen 1½ points to 101½ bid, 102½ offered, while its 6 7/8% notes due 2022 were seen down a deuce at 68 bid, 69 offered.

Arch Coal on a roll

In the coal space, a trader said that Arch Coal’s bonds were up by multiple points on the news that the St. Louis-based coal operator had announced a pair of private exchange transactions for its existing bonds.

However, he cautioned that those gains came on “not much volume.”

Probably the busiest was Arch’s 9 7/8% notes due 2019. Over $6 million of those notes were seen having traded on a round-lot basis, with the bonds jumping around 4½ points to just over 24½ bid. Those notes had last traded in any appreciable size around mid-June.

Its 7% notes due 2019 rose 3 points on the day to 18 bid on volume of over $4 million, although a trader said that the bonds had actually “whooshed up to as high as 23 during the morning after opening around 19, then came mostly back down.”

Arch’ s 7¼% notes due 2020 shot up by 5 points to end at 32¾ bid, though only on volume of $2 million.

Arch announced plans to swap new debt for its 7% notes due 2019, its 9 7/8% notes due 2019 and its 7¼% notes due 2021.

It also announced a separate note exchange for its 7¼% notes due 2020.

Peabody calms down

The bonds of Arch’s crosstown St. Louis rival, Peabody Energy, were seen settling in around the lower levels to which they had plunged on Wednesday after the company had released new updated earnings guidance for the second quarter, predicting lower adjusted EBITDA and a wider per-share loss than the company’s previous forecasts.

Volume was further reduced from the already sedate levels seen during Wednesday’s nosedive, with several of the issues seeing no round-lot dealings at all on Thursday.

Of those that did trade, Peabody’s 6¼% notes due 2021, which on Wednesday had slid by 3 3/8 points on volume of over $9 million, lost another 3/8 point on Thursday, ending at 30½ bid with about $3 million changing hands.

Its 6½% notes due 2020 were actually up ½ point at 31½ bid on $2 million of volume. On Wednesday, those bonds had dropped by 4 points with more than $7 million traded.

And traders saw no round-lot activity in the company’s 10% second-lien secured notes due 2022, which had fallen 2½ points on Wednesday to close at 59½ bid. The bonds moved up to 65¾ bid, a market source said, but only on a few smallish odd-lot trades.

Indicators stay strong

Statistical market-performance measures were higher for a second consecutive session on Thursday; they had turned higher across the board on Wednesday after having been mixed on Tuesday and lower all around for three consecutive sessions before that. Wednesday had been the first higher session seen since June 22.

While higher on the day, the indicators were ending the trading week lower versus where they had gone home at the end of the previous week on Friday, June 26 – their first lower week after two consecutive mixed weeks. It was the third such lower week in the last five weeks.

The KDP High Yield Daily index posted its second successive gain on Thursday, edging up by 2 basis points to close at 70.26. On Wednesday, it had broken out of its slump, rising by 6 bps, its first winning session after five straight trading days on the downside.

Its yield, meanwhile, came in by 1 bp on Thursday to 5.69% after having declined by 4 bps on Wednesday, its first narrowing after four consecutive sessions of having widened out.

But those levels compared unfavorably to the 70.52 index reading and the 5.65% yield at which the index had closed out last week.

The Markit Series 24 CDX North American High Yield index saw its third gain in a row on Thursday after two straight losses before that. It improved 1/16 point to close at 106 9/16 bid, 106 19/32 offered after having risen by 9/32 point on Wednesday, risen by 15/32 point on Tuesday and massively nosedived by 1 3/32 points on Monday.

For the week, though, the index closed below last Friday’s 106 27/32 bid, 106 29/32 offered.

The Merrill Lynch North American Master II High Yield index also rose for a third straight session on Thursday, advancing by 0.047%, after Wednesday’s 0.208% advance and after having edged up by 0.044% on Tuesday, its first gain after five successive setbacks.

That improvement raised its year-to-date return to 2.755% on Thursday from Wednesday’s 2.707%, although those returns remain well down from the 4.062% reading recorded on May 29, the index’s peak level for the year so far.

For the week, the index retreated by 0.328%, its second successive weekly setback and its fourth weekly loss in the last five weeks. It had declined by 0.248% last week, ending with a 2.901% year-to-date gain.

Funds nosedive by $3 billion

Another numerical indicator – flows of money into or out of high-yield mutual funds and ETFs, considered a reliable barometer of overall junk market liquidity trends – turned sharply lower this week, posting their biggest outflow of the year so far.

That $3 billion cash hemorrhage from those weekly-reporting-only funds during the week ended Wednesday was a sharp reversal from the $621 million inflow reported for the seven-day period ended June 24. (See related story elsewhere in this issue.)

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