Junk market tone better on equity surge, though names mixed; Abengoa up on capitalization plan

By Paul Deckelman and Paul A. Harris

New York, Aug. 26 – The high-yield market seemed to have a better tone to it on Wednesday, traders said. Junkbondland seemed to be taking its cues from the equity world, which turned solidly positive after six consecutive losing sessions, including Tuesday, when strong early gains ultimately evaporated late in the day.

But they said that individual issues seemed all over the map, with some seen having firmed up, others seen down and still others seen little changed – in other words, as one said, “there was no clear trend.”

The biggest mover on the day was the Spanish renewable energy company Abengoa SA, whose bonds jumped as much as 8 points on the news that the company will be getting liquidity through a recapitalization transaction lined up by a trio of European banks.

On the other hand, the news that Peabody Energy Corp. had hired Lazard Ltd. to advise it on restructuring its more than $6 billion of debt did not help its bonds – they were down solidly on the session.

Wednesday’s renewed fall in oil prices, which followed Tuesday’s big surge, was seen hurting energy names like Halcon Resources Corp., California Resources Corp. and maritime energy driller Transocean Ltd., despite the latter’s plans to shore up its liquidity by cancelling its third- and fourth-quarter dividend payments.

Statistical market performance measures turned mixed on Wednesday after having been higher across the board on Tuesday after five straight lower sessions; Tuesday had been the first unambiguously higher day in nearly a month.

The new-deal market meanwhile continued its mid-summer snooze.

No issues priced, and no deals were announced.

Absent the present volatility there might have been some European new issue business in the week ahead, a London-based investment banker said on Wednesday.

However, it now seems likely that – as with the American market – the European primary market will remain shuttered until at least the week of Sept. 7, the source added.

‘A mixed bag’

In the secondary market, a trader characterized Wednesday’s session as “kind of a mixed bag today, actually.”

He said that the overall market seemed to have firmed up along with equities. The bellwether Dow Jones industrial average, for instance, posted its biggest gain since November 2011, skyrocketing by 619.07 points, or 3.95%, to end at 16,285.51, after New York Federal Reserve Bank president William Dudley said that the prospect of a September interest rate hike by the Fed “seems less compelling” than it did only a few weeks ago, before the latest bout of market volatility.

With that kind of wind in the market’s sails, the trader said, “there were names that were unchanged, and there were names that were up ½ to 1 point.”

Gainers outnumbered losers by a wide margin – but “some of the better-quality BB and BB+ names in our space were unchanged or maybe slightly weaker with the sell-off in Treasuries.”

But he reiterated that “you had some other names that were better on the day.”

Abengoa moves up

One of the key gainers was Abengoa. A market source said that its 8 7/8% notes due 2017 were “up quite a bit, up 8½ points,” firming to 69 bid, on the news that “they’re raising capital, getting liquidity.”

At another desk, a trader who saw the bonds going home at 68 bid opined that “there were very few scant trades, but it was nonetheless positive.”

The gains came as it was reported that three banks – Credit Agricole SA, Banco Santander SA and HSBC Holdings plc – agreed to underwrite a €650 million capital increase.

On Aug. 7, Abengoa said it wanted to raise €650 million of new capital. Additionally, it wants to divest itself of about €500 million in assets.

It also recently reported that expected 2015 free cash flow would be about €800 million lower than previously forecast.

Those announcements did little to appease investors, and the company’s bonds dropped over 10 points in two days.

Peabody is punished

While Abengoa was clearly one of the winners of the day, other names were being pushed lower.

A trader noted that Peabody Energy’s 10% notes due 2020 “traded a fair amount” on the news that the St. Louis-based coal mining company “is talking to Lazard about a possible restructuring.”

He saw those notes fall 1 point or so to around 40½ bid on Wednesday from 41½ on Tuesday and pointed out that the bonds are trading at their currently deeply distressed and discounted levels even though they are second-lien secured paper of relatively recent vintage. The company brought $1 billion of the paper to market just in March, when they had priced at 97.566 to yield 10½%.

A trader at another desk quoted the bonds at 40 bid, saying that was down by 1½ points on the day, with over $21 million having changed hands, making it one of the day’s busiest high-yield issues.

Energy stays under pressure

Crude oil prices – which on Tuesday had shot upwards, with benchmark West Texas Intermediate for October delivery soaring by more than $1 per barrel – reverted to their more recent weaker status on Wednesday, dropping by 71 cents on the day to go home at $38.60, not too far above their six-year lows.

That, in turn, was seen pushing various oil and natural gas exploration and production operators’ bonds lower, a trader said.

He saw California Resources’ 6% notes due 2024 down nearly 1½ points, at 69½ bid, on volume of more than $12 million. That stood in contrast to Tuesday’s nearly 3-point gain in the Los Angeles-based E&P operator’s notes.

Its 5½% notes due 2021 were ending the day at 71¼ bid.

Houston-based Halcon Resources’ 8 5/8% notes due 2020 dropped 2¼ points on the day to end at 85¼ bid, with over $14 million having traded. The notes had risen by the same amount in Tuesday’s dealings.

Swiss global maritime energy driller Transocean’s 6½% notes due 2020 were seen down more than a deuce at the 80 bid level, on volume of about $10 million, a trader said.

The company said that it wants to suspend its $55 million quarterly dividend for the third and fourth quarters to conserve cash and will ask for shareholder approval at a special meeting on Oct. 29.

The company also said that it is evaluating the value of its investments in light of the continued erosion in oil prices and in the related offshore drilling market, and it expects to take about $2.1 billion equivalent of impairment costs.

Indicators turn mixed

Statistical measures of junk market performance turned mixed on Wednesday after having been higher across the board on Tuesday to break a losing streak of five straight lower sessions. Counting in all of the mixed sessions that saw no real trend as well as sessions in which the indicators were lower all around, Tuesday had been the first unambiguously higher day in nearly a month, since July 29.

The KDP High Yield Daily index eased by 2 basis points to close at 67.63 on Wednesday after having jumped by 33 bps on Tuesday, which had been its first gain after five straight sessions on the downside.

With Wednesday’s loss, the index has now been lower in two sessions out of the last three, in six sessions out of the last seven and, going back a little further, in 12 sessions out of the last sixteen and in 14 sessions out of the prior 18 trading days.

Its yield, meanwhile, rose by 2 bps to 6.48% on Wednesday after having come in by 12 bps on Tuesday, which had been its first tightening after six consecutive widenings.

The yield has now risen in two sessions out of the last three, in seven sessions out of the last eight, in eight sessions out of the last 11 and in 11 sessions out of the last 14.

While the KDP gauge returned to the downside, the Markit Series 24 CDX North American High Yield index saw one of its biggest advances of the year, surging by 1 1/8 point to end at 104 9/32 bid, 104 5/16 offered. It was the index’s second straight success and followed Tuesday’s rise of 5/32 point. Tuesday had marked the index’s first rise after six successive setbacks, after nine losses in the previous 10 sessions and 12 losses in the 15 prior trading days.

But the Merrill Lynch North American Master II High Yield index, which had also ended a lengthy slump on Tuesday, was back in the loss column on Wednesday, retreating by 0.073%. On Tuesday, it had zoomed by 0.529%, its biggest one-day rise on the year so far, breaking a five-session swoon before that which had also seen the index down in six out of the previous seven sessions and, over the longer term, in 14 of the 16 prior trading days.

The index’s year-to-date loss worsened to 0.686% from 0.613% on Tuesday – although that was still an improvement from 1.136% on Monday, which had been the biggest year-to-date loss seen so far this year, as well as the biggest year-to-date deficit the index has seen since Oct. 11, 2011, when the red ink totaled 1.745%.

All of those levels are well down from the 4.062% reading recorded on May 29, the index’s peak level for the year so far.

Stephanie N. Rotondo contributed to this review

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