Fed takes focus; Xerox falls into junkbondland; Micron under pressure; Bausch drops

By Paul A. Harris and Abigail W. Adams

Portland, Me., Dec. 19 – The eyes of the financial markets were on the Federal Reserve on Wednesday with the much anticipated fourth rate increase of 2018 announced.

While the market largely expected the rate increase and was thought to respond favorably to a dovish tone for 2019, equities plummeted following the meeting.

Meanwhile, the high-yield secondary space remained under pressure with credit spreads continuing to widen and losses mounting in the final weeks of the year.

Xerox Corp.’s senior notes were active in the secondary space after the company achieved falling angel status with a downgrade by Moody’s and S&P to junk.

The notes were mixed with some down more than 2 points and others posting gains.

Micron Technology Inc.’s 5½% senior notes due 2025 were also down in high-volume activity after the company released its first-quarter earnings report.

Its projections for a pullback in revenue and a slowdown in demand for memory chips helped drag down other names in the tech universe.

Western Digital Corp.’s 4¾% senior notes due 2026 were also trading off in above average trading volume due to the projection.

Bausch Health Cos. Inc.’s 6 1/8% senior notes due 2025 dropped to an 89 handle on Wednesday after trending lower for much of the month.

However, the secondary space continued to be dominated by California Resources Corp.’s 8% senior notes due 2022, which continued to lose ground.

While there was a bounce in crude oil futures on Wednesday, they remain well below the closely watched $50 threshold.

Rate hikes eyed

The notable fall in stock prices following the Federal Open Market Committee’s announcement of its decision to raise the Fed Funds rate to 2½% from 2¼% on Wednesday was somewhat perplexing to a high yield investor who took a late Wednesday call.

The move, and the accompanying signal that the Fed would be inclined to hike rates twice in 2019 rather than three or four times as had been expected earlier in the year, was pretty much “baked in,” the investor said, meaning that neither the rate move nor the moderated outlook should have taken the markets by surprise.

“Only people who live in white houses thought this wasn’t coming,” the investor quipped, referring to president Donald Trump’s tweet prior to the FOMC meeting that a rate move would be “incredible” given that “the outside world is blowing up around us.”

Although anticipated, Wednesday’s Fed decision loomed over the high yield new issue market, making the run-up to mid-December even more forbidding than it already was, sources say.

Mid-December is a period during which the primary market has demonstrated that it can operate. For example, the Dec. 15 to Dec. 20 interval in 2017 generated $1.5 billion of the month’s overall $17.77 billion of issuance. Issuers including Lonestar Resources, Fortress Transportation and Mattel, Inc. came with deals late in the run-up to Christmas 2017.

However, the looming Fed decision made mid-December 2018 even more uninviting than it already was, given continuing turmoil in the global financial markets, the autumn crash in the price of crude oil (energy representing 15% of the junk index) and continued negative news on the technical front, sources say.

Hence, December 2018 will almost certainly become the first month in many many years to see absolutely no new junk-rated, dollar-denominated issuance clear the market.

Xerox mixed

Xerox’s senior notes were active but mixed in the secondary space after the company reached falling angel status with both a Moody’s and S&P downgrade.

Xerox’s 3 5/8% notes due 2023 saw a slight bounce in high-volume activity. The notes were up about 5/8 point to close the day at 89¼, a market source said.

More than $30 million of the bonds were on the tape by the late afternoon.

Xerox’s 4½% senior notes due 2021 dropped about ¾ point to 96¼ with more than $20 million of the bonds on the tape, a market source said.

While less active, Xerox’s 6¾% senior notes due 2039 dropped 2½ points to 77.

The recent rating downgrades sparked a sell off with investment grade accounts no longer able to hold the notes, a market source said.

S&P downgraded Xerox’s issuer credit rating and debt issue-level ratings to BB+ from BBB- on Monday, Prospect News reported.

S&P said it expected the company will continue to face operational and business challenges.

Moody’s downgraded Xerox’s unsecured debt rating to Ba1 from Baa3 on Friday.

Moody’s was concerned about the issuer’s ability to stabilize and grow its revenue base in coming years.

Tech sector under pressure

Micron’s 5½% senior notes due 2025 were trading down on Wednesday after the company released its first-quarter earnings report.

The notes were down 1½ points to close the day at 98 with more than $17 million of the bonds on the tape, according to a market source.

Micron reported non-GAAP earnings per share of $2.97 for the first quarter, which were largely in line with analyst expectations.

Micron missed with revenue of $7.91 billion versus analyst expectations for revenue of $8.02 billion.

The semiconductor company announced there would be a pullback in revenue in the current quarter with sales estimates of $5.7 billion to $6.3 billion, thestreet.com reported.

Micron’s projections for decreased demand for memory chips dragged down other names in the tech sector.

Western Digital’s split-rated 4¾% senior notes due 2026 (Baa3/BB+) were also trading off in high-volume activity.

The notes dropped ¾ point to 87½ on Wednesday, a market source said. More than $20 million of the bonds were on the tape by the late afternoon.

Bausch down

Bausch Health, formerly Valeant Pharmaceuticals International, continued to see its 6 1/8% senior notes due 2025 trade down, as they have for much of December.

The 6 1/8% notes dropped to an 89 handle on Wednesday. They were down 1 point to close the day at 89, a market source said.

More than $17 million of the bonds were on the tape by the late afternoon.

The notes were trading on a 93 handle in late November but have trended downward since. Bausch recently called its 7½% senior notes due 2021 and 5 5/8% senior notes due 2021.

Bausch announced on Wednesday that it plans to pay down $76 million of its senior secured term loans during the week of Dec. 24.

The reduction in debt load was largely seen as a positive for the company. However, a large seller in the market may have driven down the price of the notes, a source said.

Energy losses continue

While crude oil futures improved on Wednesday, the downward momentum in the energy sector continued.

California Resources 8% senior notes again dominated activity in the secondary space. The notes dropped another 1 5/8 points to close the day at 68½.

More than $50 million of the bonds were on the tape by the late afternoon.

While the notes are generally believed to rise and fall alongside crude oil futures, they continued to fall on Wednesday despite improvement in the barrel price of WTI.

WTI crude oil for February delivery settled at $47.20, an increase of 96 cents or 2.08%. However, it is still well below the $50 threshold many credits were underwritten with.

Tuesday outflows

As to the technical front, the news remains negative for junk.

The daily cash flows of dedicated high-yield bond funds were negative on Tuesday, the most recent session for which data was available at press time, a trader said.

High-yield ETFs sustained $249 million of outflows on the day.

Actively managed high-yield funds saw $100 million of outflows on Tuesday, the source added.

Entering the final day of the present weekly fund flow reporting period, the combined funds were tracking about $367 million of outflows since last Thursday’s open, the trader said.

Indexes down

Indexes marked their fourth consecutive trading day of losses on Wednesday with losses deepening as the end of the year approaches.

The KDP High Yield Daily index dropped 13 basis points to close Wednesday at 67.66 with the yield now 6.81%.

The index dropped 30 bps on Tuesday, 15 bps on Monday and 6 bps last Friday although it still gained 2 bps on the week last week.

The ICE BofAML US High Yield index crossed the negative 1% threshold on Wednesday. The index dropped 30.3 bps with the year-to-date return now negative 1.046%. The index was down 38.6 bps on Tuesday, 24.5 bps on Monday and 18.1 bps on Friday, when it returned to the red.

However, the index still posted a gain of 8.2 bps on the week last week.

The index had been wavering between positive and negative territory over the past two weeks.

The CDX High Yield 30 index dropped 61 bps to close Wednesday at 102.27.

The index was down 6 bps on Tuesday, 48 bps on Monday and 44 bps on Friday, while still posting a gain of 22 bps on the week last week.

© 2015 Prospect News.
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