Morning Commentary: High yield catches a bid amid big demand from ETFs; Valeant bonds up 5 points

By Paul A. Harris

Portland, Ore., Dec. 15 – The high-yield market opened substantially higher on Tuesday, with high beta names up 2 points to 3 points and better quality paper up 1½ points to 2 points, according to a trader based on the East Coast of the United States.

The upward move was taking place amid “tons of ETF buying,” the trader said.

Indeed, ETFs were substantially higher on the morning.

The iShares iBoxx $ High Yield Corporate Bd (HYG) was up $1.23 (1.57%) at $80.06 per share. The SPDR Barclays High Yield Bond ETF (JNK) was up 40 cents (1.18%) at $33.81 per share heading into mid-morning.

Valeant rallies

The bonds of Valeant Pharmaceuticals International, Inc. were up 4 points to 5 points on news that Valeant plans to distribute certain branded products through Walgreens at generic prices, the trader said.

The Valeant 5½% senior notes due March 1, 2023 were 87½ bid heading into the mid-morning, the trader said. They were 82 bid, 83 offered on Monday.

Valeant announced new fulfillment agreements with Walgreens in a Tuesday press release.

Valeant will reduce prices of its branded prescription-based dermatological and ophthalmological products by 10%, and enable consumers to access these products at a lower cost from more than 8,000 Walgreens U.S. retail pharmacy locations, as well as participating independent retailers.

The 20-year agreement takes effect the first quarter of 2016.

Valeant bonds came under pressure in October when short seller Citron Research called into question Valeant's business and accounting practices, as well as Valeant’s business relationship with Philidor Rx Services, LLC.

The issues, which were raised in a Citron report titled “Valeant: Could this be the Pharmaceutical Enron?” published on Oct. 21, sent Valeant bond prices tumbling.

Elsewhere on Tuesday Sprint Nextel Corp.’s 6% notes due Nov. 15, 2022 were up 3 points at 72 bid. They were 68½ bid, 69½ offered on Monday.

Primary remains quiet

Meanwhile the primary market remained quiet on Tuesday as some market watchers expect that new deal activity in the run-up to 2016 may have concluded.

Amid such forecasts, however, Kraton Polymers, LLC remains in the market with a $425 million offering of eight-year senior notes (B3/CCC+) via Credit Suisse, Nomura and Deutsche Bank.

On Tuesday Kraton said it secured the needed majority of consents to amend its $350 million of outstanding 6¾% senior notes due 2019 co-issued with Kraton Polymers Capital Corp.

As a result, Kraton executed a supplemental indenture to the notes on Monday.

Kraton is soliciting consents to eliminate or modify most of the covenants, events of default and other provisions of the notes indenture.

Holders had tendered 71.25% of the 6¾% notes as of 5 p.m. ET on Dec. 14, the consent payment date.

The tender offer will end on Dec. 29.

The company said it expects to fund the offer using proceeds of a debt financing, along with cash on hand.

The tender offer is being made in connection with Kraton’s proposed acquisition of Arizona Chemical Holdings Corp.

Meanwhile, in the absence of any hard news to the contrary, NGL Energy Partners LP remains in the market with a $300 million offering of five-year senior notes (B2/BB-/BB-), although the deal went silent early in December.

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