Junk slides to end week as oil prices plunge to 12-year lows; energy issues hardest hit

By Paul Deckelman and Paul A. Harris

New York, Jan. 15 – The high-yield market closed out a tumultuous second week of 2016 on Friday with most issues moving lower, in line with a slide in equities and in oil prices.

The latter fell to their lowest levels in over 12 years.

That, in turn, was definitely a drag on the important energy component in the junk market; such names as Midstates Petroleum Co., Inc., Memorial Production Partners, LP, Oasis Petroleum Inc., California Resources Corp. and Halcon Resources Corp. were all multiple-point losers on the day in heavy trading.

The energy names weren’t the only losers; traders saw such non-energy credits as Frontier Communications Corp., United Rentals, Inc. and Men’s Wearhouse Inc. also retreating in active trading.

The slide even extended to recently priced issues such as Pinnacle Foods Inc. and Microsemi Corp., which were trading off from the peak levels both had hit earlier in the week.

It meantime did not look as though they would be joined by any other new issues in the short term; one prospective deal is currently on a roadshow, while other would-be issuers were said to be waiting for the market to show some stability before putting their owns deals out there.

Statistical measures of junk market performance were lower across the board on Friday after having mixed on Thursday. It was their second lower session in the last three trading days.

The indicators were also lower all around versus where they had finished last Friday.

It was their second consecutive lower week, after two straight weeks before that of having finished higher, and one mixed, and was the indicators’ third lower week in the last six.

One on the road

As extreme volatility rocked the global financial markets, the high-yield primary market remained sidelined during Friday’s session.

Heading into the extended holiday weekend set aside to commemorate Dr. Martin Luther King, Jr., there is just one high-yield deal on the road.

GCP Applied Technologies Inc., which is to be spun off from W. R. Grace & Co., is marketing a $525 million offering of seven-year senior notes (B1/B+) on a full roadshow.

The deal, via left bookrunner Goldman Sachs, travels to Boston on Tuesday, for an investor lunch scheduled to get underway at noon.

The Columbia, Md.-based provider of specialty construction chemicals, building materials and packaging technologies plans to use the proceeds to fund a $500 million distribution to W. R. Grace & Co.–Conn., a direct subsidiary of W.R. Grace, and for general corporate purposes.

Awaiting stability

The holiday abbreviated week ahead could be an extremely quiet one in the new issue market, a New York-based syndicate official said on Friday afternoon.

The primary market is not necessarily shut down, the official said.

However in the secondary market a lot of names are trading at significant discounts.

“As we saw with Microsemi, if you price a deal at a significant concession people will buy it,” the sellsider said, referring to Microsemi’s 9 1/8% senior notes due April 15, 2023 (B2/B+), which came at par in a $450 million issue on Jan. 7, and traded to a handsome premium (earlier this week they were 104 bid, 105 offered, according to a trader, but were lower with the market late in the week).

However companies seeking to borrow in high yield tend to be disinclined to price deals at rates that make significant concessions to market volatility, the banker pointed out.

“In these circumstances, if you don’t have to come you will probably wait.”

Alluding to the fact that the week ahead is a four-session post-holiday week, this sellsider professed no visibility on either drive-by deals or roadshow starts.

Likewise in the European new issue market, the week ahead figures to be a quiet one, according to a London-based debt capital markets banker.

Cash outflows from the European accounts are not as dire as those seen by accounts in the United States, where dedicated high yield bond funds sustained $2.11 billion of outflows for the week to Wednesday’s close, according to Lipper-AMG.

Canvassing European accounts, the banker said that they probably saw €300 million to €500 million of outflows during the past week.

“Accounts have cash to put to work,” the banker said.

“And there are deals that are ready to go, or close to being ready.”

Given some stability it probably won’t take long for the European high-yield primary market to regenerate the banker said.

Thursday outflows

In the wake of news that dedicated high-yield bond funds sustained big outflows on the week to Wednesday’s close ($2.107 billion), daily cash flows remained decidedly negative on Thursday, the most recent session for which data was available at press time, a portfolio manager said.

High yield ETFs saw $155 million of outflows on the day.

Actively managed funds saw $305 million of outflows on Thursday.

Dedicated bank loan funds, meanwhile, saw $110 million of outflows on the day.

Market moves lower

“Everything was lower,” a trader said. “People were going into hiding.

“They didn’t want to buy anything.”

Another trader declared that “today was ugly.”

He said the ugliness was apparent from the get-go, when “there were a couple of really big bid lists around this morning. People were trying to sell whatever they could.”

However, he said that things “settled down around midday and we actually saw some people come in and buy a little at the end of the day in small pieces.”

But overall, it was a down day.

Energy names lead fall

“Energy,” he said, was under real pressure, with some stuff down 3 or 4 points, or more.”

The oil and gas issues were taking their cue from the world crude markets, where prices – which had flirted with levels below $30 per barrel earlier in the week – moved down to those levels for real.

U.S. benchmark crude grade West Texas Intermediate for February delivery lost $1.78 barrel, or 6.5% on the New York Mercantile Exchange Friday, settling in at $29.42, while the international Brent crude benchmark grade plummeted by $2.09 per barrel to $28.94; both were at their lowest levels in more than 12 years.

Among the big losers were Oasis Petroleum’s 7¼% notes due 2019.

The trader noted that the Houston-based oil and natural gas exploration and production company’s notes “were trading around 61 on Wednesday – today they were at a 47-handle.”

In between was Thursday’s session, when he said the bonds had ended around 53¼ bid.

A second trader called those bonds down 6 points on the session at 47¼ bid, with volume of over $18 million putting them high up on the Most Actives list.

He said that probably the most active energy name in Junkbondland on Friday was Midstates Petroleum’s 10% notes due 2020. The Tulsa, Okla.-based operator’s paper lost 6 points on the day, ending at just over 25 bid, on over $28 million having traded.

Houston-based Memorial Production Partners’ 7 5/8% notes due 2021 were almost as busy, with over $26 million traded. The bonds lost nearly 2 points to close at just over 25 bid.

Los Angeles-based E&P credit California Resources Corp.’s 8% notes due 2022 dipped by some 3¾ points on the day, ending at 41½ bid. Over $13 million traded.

Houston-based Halcon Resources’ 8 5/8% due 2020 ended the day down more than 4 points at 56¼ bid, with over $12 million of the notes trading.

Non-energy names off

A trader said that besides the oil and gas credits, “the go-go telecom credits were lower,” particularly Stamford, Conn.-based Frontier Communications’ 11% notes due 2025, which lost 15/16 point on the session to close at 99 5/8. Its volume of $39 million was tops in the junk space.

United Rentals, also Stamford-based, was also lower; its 6 1/8% notes due 2023 were off by 2 5/8 points, closing at 94 bid, with over $23 million traded.

Dallas-based clothing retailer Men’s Wearhouse’s 7% notes due 2022 were off by 3 points at 64¼ bid on turnover of more than $15 million.

Indicators off on day, week

Statistical measures of junk market performance were lower across the board on Friday after having been mixed on Thursday. It was their second lower session in the last three trading days.

The indicators were also lower all around versus where they had finished last Friday.

It was their second consecutive lower week, after two straight weeks before that of having finished higher, and one mixed, and was the indicators’ third lower week in the last six.

The KDP High Yield Daily Index plunged by 76 basis points on Friday, falling to 62.18 – a second consecutive new low for the year so far and a 52-week low, surpassing the old mark of 62.94 which had been set on Thursday.

It was the index’s lowest close since June 26, 2009, when it also finished at 62.18.

Friday’s fall was its fifth straight loss, following one gain last week, and its sixth such setback in the last seven trading days. It had also nosedived by 38 bps on Thursday.

Its yield meantime ballooned out by 22 bps to 7.50%, on top of its 10-bps widening on Thursday.

It was the yield’s fifth straight widening out and its sixth such rise in the last seven sessions.

Those levels compared unfavorably with the 63.74 index reading and 7.10% yield seen last Friday.

The Markit Series 25 CDX North American High Yield Index swooned by 1 3/32 points on Friday, dropping to 97¾ bid, 97 7/8 offered, in contrast with its 11/32 point gain on Thursday.

It was the index’s second loss in the last three sessions.

The index was down from its 99 1/16 bid, 99 1/8 offered level of last Friday.

© 2015 Prospect News.
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