XPO Logistics prices, firms solidly; new Gulfport, American Eagle rise; funds gain $680 million

By Paul Deckelman and Paul A. Harris

New York, Aug. 14 – The revived high-yield primary market showed some vigor on Thursday, starting to build momentum after its slow start to the week.

Syndicate sources said that XPO Logistics, Inc., a Greenwich, Conn.-based transportation logistics service provider, came to market with a $500 million offering of five-year notes. Traders said the new deal was well-received, firming smartly once it hit the aftermarket.

The traders also saw some upside in the two junk issues that priced on Wednesday, Gulfport Energy Corp. and American Eagle Energy Corp.

Away from the new issues, some of the most actively traded paper of the day came out of the distressed sector.

For instance, Getty Images, Inc.’s bonds were seen down about 4 points on the day in the low 80s and topped the volume leaders’ list. Market scuttlebutt said the provider of stock picture images to newspapers and magazines was out with disappointing earnings results.

It was another tough day for NII Holdings Inc., which provides wireless services to customers in Mexico and elsewhere in Latin America. Its bonds have been on the slide now for several days since its recent warning that it will probably end up having to file for bankruptcy.

Statistical market performance indicators were higher across the board for a second consecutive session after having been mixed on Tuesday.

Another indicator – the flow of cash into or out of high-yield mutual funds and exchange-traded funds, considered a good barometer of overall junk market liquidity trends – saw its first positive number after four straight weeks of large losses before that.

Junk funds gain $680 million

As Thursday’s session was winding down, market sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said that about $680 million more came into those funds than left them in the week ended Wednesday.

It was the first such inflow seen following four consecutive weeks before that of massive outflows totaling $12.61 billion, according to an analysis of the figures by Prospect News.

None of those outflows was more massive than the $7.07 billion cash hemorrhage reported last week by Arcata, Calif.-based AMG, a unit of the Lipper analytics division of Thomson Reuters Corp., for the seven-day period ended Aug. 6. It was the largest such outflow on record since the company began tracking fund flows back in 1992, easily eclipsing the previous record-large drop of $4.63 billion recorded during the week ended June 5, 2013, according to the data.

That huge outflow had followed – and dwarfed – a trio of other cash losses that could all be considered huge in their own right: $1.68 billion in the week ended July 16, $2.38 billion in the week ended July 23 and $1.48 billion in the week ended July 30.

Analysts said the four weeks of giant-sized cash exits from Junkbondland could be considered a sign of deteriorating investor confidence in the junk bond market in the face of fears of rising interest rates and other potential headwinds.

A source at one of the actively managed mutual funds told Prospect News that of the $680 million inflow, about $220 million of that went into the ETFs and the remaining roughly $460 million went into the actively managed funds.

He saw big inflows on both Tuesday and Wednesday, although he also noted that short-dated maturity ETFs were still seeing outflows during the early part of the week.

On a longer-term basis, although inflows to the weekly-only reporting funds have still now been seen in 22 of the 32 weeks since the start of the year, according to the analysis, against just 10 outflows, the previous four weeks tipped the year-to-date balance far into the red, with year-to-date net outflows at a swollen $9.07 billion, although that is a little bit better than the $9.75 billion 2014 cash outflow seen the week before by market sources.

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

In 2013 – which had 53 reporting weeks due to a statistical quirk – inflows were seen in 33 weeks, versus 20 weeks of outflows, with total net inflows for the year tallying up to about $1.27 billion, the analysis indicated.

Another fund-tracking service, Cambridge, Mass.-based EPFR Global, saw more than $2 billion of outflows in the latest week – EPFR’s fifth straight outflow and fourth consecutive week of cash losses topping the $4 billion mark, according to the source. That included the record $11 billion of outflows seen last week.

EPFR’s methodology differs from AMG/Lipper’s, as its fund universe includes many non-U.S.-domiciled mutual funds and ETFs, including strictly European junk funds and broader global funds, versus AMG/Lipper’s strictly domestic orientation.

The source said that in the latest week, the U.S.-based funds saw $750 million pulled out, with the remainder of the $2 billion coming from funds focused elsewhere.

That stood in contrast to the week before, when of the $11 billion of outflows EPFR recorded for that week, the market source attributed $8 billion of the overall outflow figure to U.S.-domiciled funds, about $2 billion to global-oriented high-yield funds and $1 billion to specifically Europe-centered funds.

While the two services’ respective weekly results usually point pretty much in the same direction, that has not always been the case. In some weeks in which AMG/Lipper showed outflows, EPFR saw overall inflows, and this week was the reverse of that. EPFR thus has recorded inflows in 24 out of the 32 weeks since the start of the year, against eight weekly outflows during that time.

Although the mutual funds and ETFs represent only a relatively small percentage of the total amount of investor money coming into or leaving the more than $1.5 trillion junk market, their flows are very observable and quantifiable – more so than those of other, larger cash sources – and thus are suited to act as a fairly reliable proxy for overall junk market liquidity trends.

Analysts said that the sustained flows of fresh cash into junk have been a key catalyst behind the relatively strong performance seen by both the junk primary and secondary markets over the past several years and which had mostly continued on into the first half of this year as well.

While the junk funds stumbled, a market source said that leveraged loan funds were down by $687 million on the week, continuing a slide that began in April and included last week’s yawning $1.5 billion of losses after a streak of uninterrupted week-over-week gains lasting nearly two years.

Investment-grade bond funds saw a net inflow this week of $1.13 billion, well up from the previous week’s $139 million.

XPO at the tight end

The primary market appeared to snap back during the mid-to-late part of the week.

Although deal volume has been low, executions have tended to be sharp.

Thursday's sole deal was XPO Logistics’ $500 million issue of five-year senior notes (B1/B-), which priced at par to yield 7 7/8%.

The yield printed at the tight end of the 7 7/8% to 8 1/8% yield talk.

Demand for the XPO Logistics bonds was “ridiculous,” according to an investor who played that deal and who added that allocations were not great. This account's allocation was well below 25% of the order.

The deal was 103 bid in the secondary market, the investor said.

Credit Suisse Securities (USA) LLC, Morgan Stanley & Co. LLC, Citigroup Global Markets Inc. and Deutsche Bank Securities Inc. were the joint bookrunners for the acquisition financing.

Rooster Energy ahead

The XPO Logistics deal all but cleared the active calendar.

One deal remains. Rooster Energy Ltd. continues to market its $100 million offering of five-year senior secured notes (Caa1/CCC+), according to an informed source.

Imperial Capital is the bookrunner.

The deal launched in the middle of last month but remains active.

Official price talk and timing have yet to surface.

However, dealers appear to be winding up for a robust post-Labor Day primary market, a buyside source said on Thursday.

Meanwhile, the run-up to Labor Day is expected to see at least a modicum of activity, perhaps a deal here and there, sources say.

XPO excels in secondary

In the secondary market, traders saw generally strong levels in new or recently priced paper.

A trader said that the new XPO Logistics 7 7/8% notes due 2019 had firmed smartly to around 102 7/8 bid, 103 3/8 offered – well up from the par level at which that $500 million deal had priced.

A second trader saw them even better at 103 bid, 103½ offered.

A third trader also saw the bonds at those levels above 103.

Wednesday deals do well

A trader said that Gulfport Energy’s 7¾% notes due 2020 “seemed to be hanging tight” in a 107-to-107½ context, up from the 106 level at which the Oklahoma City-based oil and natural gas exploration and production company had priced its $300 million add-on to its existing 2020 notes after upsizing the deal from the original $250 million.

Another trader saw the bonds even better in a 107¼-to-107¾ offered context.

American Eagle Energy’s new $175 million of 11% senior secured notes due 2019 traded slightly above their 99.059 pricing level.

One trader saw them at 99 1/8 bid, 99 5/8 offered.

But another trader quoted them offered at 100½. However, he said that “it didn’t seem like there was that much interest” in the Denver-based E&P company’s new issue.

One of the traders opined that “the market is better. There’s been better buying all week, including today.”

He pegged the overall market “up ¼ to ½ [point], generically.”

Getty goes lower

Away from the new deals, a trader said that Getty Image’s 7% notes due 2020 were down after the Seattle-based provider of stock photographs to newspapers, magazines and the advertising industry reported earnings.

He saw the bonds go as low as 82 before going out at 84, “so they recovered a little bit from the lows, but they probably finished down 3 points on the day.”

He heard that the privately held company’s numbers were out, but he had not seen those results.

“But clearly, there were some sellers in the market today on that one. They were lower and they were active,” he said.

NII slide continues

A trader noted that “one of the names of the last few days” that has been getting kicked around has been NII Holdings, the Reston, Va.-based provider of wireless service to customers in Mexico and other Latin American markets.

“That continued to get hit a little bit” on Thursday, he said.

He saw its 7 7/8% notes due 2019 ending down around 3½ points on the day at 63 bid, 64 offered. Volume was more than $7 million.

He also saw the company’s 11 3/8% notes due 2019 quoted at similar levels around a 64-to-66 context.

At another desk, a market source saw the latter bonds down 1¼ points at 65¾ bid, on volume of more than $15 million.

“They are all trading flat,” or without their accrued interest, the first trader said.

He also saw all of the company’s other paper “in the teens.” Those were the 10% notes due 2016, the 8 7/8% notes due 2019 and the 7 5/8% notes due 2021.

“They’re all anywhere from 14 to 18,” he said.

For instance, he said the 10% notes were trading in a 17-to-17½ range, “pretty much where they were [Wednesday],” with $6 million or $7 million traded.

He saw the 7 5/8% notes in a 15-to-16 neighborhood, with $7 million or $8 million having changed hands. At 15½ to 16½, he said, “that’s pretty much where they were yesterday.”

The company noted in its earnings release Monday that its declining financial performance combined with the likelihood that it will not be able to meet its debt obligations make a bankruptcy filing foreseeable in the near future. In a 10-Q filed with the Securities and Exchange Commission, the company said that it has been speaking with interested parties in regards to acquiring some or all of its assets.

The company has also engaged in talks with bondholders.

As of June 30, NII Holdings was not in compliance with several of its indentures, including on Nextel Brazil’s local bank loans.

On Wednesday, Standard & Poor’s dropped its credit rating on the company to CC from CCC. That followed a downgrade from Moody’s Investors Service on Tuesday.

Penney pops on earnings

A market source said that J.C. Penney Co., Inc.’s bonds firmed in response to good quarterly numbers put up by the Plano, Texas-based department store chain operator.

He saw Penney’s 5.65% notes due 2020 up as much as 5½ points on the day at 95¼. More than $11 million of the notes traded hands.

Penney reported late Wednesday that it lost $172 million, or 56 cents per share, during the period. Excluding one-time items, it lost 75 cents per share – less than the 98 cents to $1.00 of red ink Wall Street had been expecting and considerably improved from a year ago, when earnings had plunged by $586 million, or $2.66 per share.

Total revenue in the latest quarter rose 5% to $2.8 billion, beating Wall Street forecasts of $2.79 billion.

Caesars seen active

Elsewhere, Caesars Entertainment Corp. paper “always has decent volume,” a trader said, quoting the Las Vegas-based gaming giant’s 9% notes due 2020 turning over more than $15 million bonds, putting it high up on the Junkbondland Most Actives list.

He saw those bonds trading all day in an 80-to-81 context but said the last few trades of the day went off between 80 and 80¼, calling that down ½ to 1 point.

Quicksilver gets quashed

A trader said that Quicksilver Resources, Inc. – under pressure since the Denver-based oil and gas exploration and production company reported below-expected results last week – remained in the crosshairs on Thursday, continuing to lose ground

He saw the 7 1/8% notes due 2016 trading right around 60 to 61 at the end of the day after having begun the day at 63.

He said that left the bonds down about 1½ points on the session.

Its 11% notes due 2021 were moving around 86½ to 87½, with “the last decent-sized trade at 86¾,” which he called pretty much unchanged from Wednesday’s level.

Last week, the company reported a second-quarter loss of 7 cents per share, worse than the 5 to 6 cents per share that Wall Street had been expecting. Its revenue fell by 9.3% from the year-ago quarter to $107 million, down from analysts’ estimates around $109 million.

Market indicators stay strong

Statistical indicators of junk market performance were higher across the board for a second consecutive session on Thursday after having been mixed on Tuesday.

It was also the third session in the last four in which the indicators were showing strength all around. On Monday they had recorded their first universally higher session since July 23. Before that, they had been lower for six straight sessions and then mixed for five consecutive sessions.

The KDP High Yield Daily index rolled on to its eighth straight gain on Thursday, soaring by 16 basis points to end at 73.74. That advance followed gains of 20 bps on Wednesday, 23 bps on Tuesday and 16 bps on Monday.

Its yield meanwhile tightened by 7 bps for a second straight session Thursday, falling to 5.24% – its eighth consecutive narrowing. It had also come down by 5 bps on both Monday and Tuesday.

The Markit CDX Series 22 index improved by 5/32 point on Thursday, its second straight gain, finishing at 107¾ bid, 107 13/16 offered. It had risen by 13/32 point on Wednesday.

And the widely followed Merrill Lynch High Yield Master II index strengthened for a fourth session in a row, tacking on 0.215% on top of Wednesday’s 0.262% rise and Monday’s 0.317%.

Thursday’s upturn lifted the index’s year-to-date return to 5.111% – its first time over the psychologically potent 5% mark since July 29, when it had finished at 5.064%. Thursday’s finish was up from 4.885% on Wednesday, although it still remained down from the 5.751% return recorded on July 7, the peak level so far for 2014.

Stephanie N. Rotondo contributed to this review

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