Storm stills junk but energy rise rolls on; Rite Aid recovers; funds gain $186 million

By Paul Deckelman and Paul A. Harris

New York, Jan. 4 – A monster winter “bomb cyclone” storm wrapped much of the eastern part of the United States in a in a cold white blanket on Thursday, stilling junk market activity in New York and other major business centers.

But the energy sector remained red hot, fueled by a continued rise in crude oil prices to levels not seen since at least early 2015. That in turn pushed up oil and natural gas sector benchmark California Resources Corp., as well as peers such as EP Energy Corp., MEG Energy Corp., Denbury Resources Inc. and \drillers Noble Holding International Ltd and Ensco plc.

Away from the energy realm, Rite Aid Corp. – whose bonds fell on Wednesday after the retailer released quarterly numbers that fell short of analysts’ expectations – was on the rebound.

Other sector names also seen better included J.C. Penney Co. Inc. and PetSmart Inc.

Another gainer was Canadian drug manufacturer Valeant Pharmaceuticals International Inc.

The primary market meantime remained quiet, surprising some onlookers who had expected a quicker start to 2018’s new issuance. But they noted that the technical conditions were right for issuance to finally get under way in the upcoming week.

Statistical market performance measures were meantime higher across the board for a fourth consecutive session on Thursday.

Another numerical indicator – flows of investor cash into or out of high-yield mutual funds and exchange-traded funds, which are considered a reliable barometer of overall junk market liquidity trends – moved to the plus side after having remained squarely in negative territory in the closing weeks of 2017. Some $186 million more came into those weekly-reporting-only domestic funds than left them in the form of investor redemptions during the week ended Wednesday, in sharp contrast to the three consecutive weeks of net outflows, totaling $2.27 billion, with which the funds had closed out 2017.

Slower than expected

For a third consecutive session, the primary market remained dormant on Thursday.

Year-to-date new deal volume in the high-yield market ended the session at zero.

Issuance has been slower than expected, a New York-based syndicate banker said shortly after the Thursday close.

People were expecting a slow week, but not a goose egg, said the banker, who added that there was no word in the market about anything being moved back due to the severe winter weather in the Northeastern United States on Thursday.

The investment-grade market has also made a conspicuously slow start to the new year, the banker added, reckoning that high-grade deal volume is around one fifth that of its opening week in January 2017.

Whatever the reasons for the sluggish starts to the U.S. bond markets, things are apt to change soon, sources say.

Green signals ahead

A calendar for the Jan. 8 week is taking shape, although issuer names were still hard to come by on Thursday, a high-yield bond investor said.

Look for a pair of energy deals: an exploration and production company is expected to bring an offer via BMO and a master limited partnership is expected to bring a deal via RBC, the source added.

Those are in addition to the previously reported Arby’s Restaurant Group/Buffalo Wild Wings offer, and possibly a bond deal from Meredith Corp. which launched a $1.8 billion seven-year covenant-light term loan on Thursday.

High yield started the year straight up, the investor said, relating news of a large high-yield ETF trade contained in a report from the Goldman Sachs macroeconomics desk. A single investor recently bought six million shares of JNK and 12 million shares of HYG at or near market price, the biggest trade since early November, said the investor, citing the report.

HYG, ending Thursday at $87.92 per share, is at an all-time high, based upon certain metrics, the investor said.

That’s the technical picture.

The fundamentals underlying high yield also appear supportive in early 2018, sources say.

Take the Lonestar Resources US Inc. 11¼% notes due January 2023, a deal that came with lots of extra yield – initial conversations were said to take place in the 8% to 9% range – and investor-friendly tweaks to the structure and covenant package when it priced at par in a $250 million issue in mid-December.

Those bonds were at 103 bid, Thursday morning.

The noteworthy performance of the Lonestar 11¼% notes came alongside a robust move in crude oil prices. The barrel price of West Texas Intermediate crude oil, which was $57.46 on Dec. 19, the day Lonestar priced its deal, had soared to $61.76 by midmorning Thursday, up 7½% during that 16 day interval.

And energy, representing more than 15% of the high yield universe, is the biggest single component in junk indexes, a trader recounted.

Stronger energy prices and stronger equities should open the way for a healthy 2018 high-yield market, he added.

s say.

Storm stills market activity

In the secondary arena, a trader – not located in New York – said not much was going on during the day with the major East Coast storm.

Noting that many desks were only lightly staffed, if they were open at all, and that many people were working from their homes or made an early exit as the storm worsened on Thursday afternoon, he said that the blizzard “certainly played a role.”

Despite a fall-off in activity, though, he said “the market certainly feels strong,” building upon the upside momentum generated in the first two trading days after the New Year’s holiday break.

Energy leadership continues

For a third consecutive session, oil and natural gas exploration and production names were among the most active issues, in many cases posting solid gains.

As had also been the case on Tuesday and again on Wednesday, a trader said that Los Angeles-based E&P operator California Resources’ widely followed sector bellwether issue of 8% senior secured second-lien notes due 2022 was the most actively traded credit on the day, with over $52 million having changed hands.

He saw those notes up slightly more than 1 point on the day at 87½ bid.

Houston-based EP Energy’s 8% notes due 2025 – which had jumped by more than 4 points in Wednesday’s dealings – tacked on another nearly 1 full point Thursday to close at 79 15/16 bid, on volume of more than $25 million.

Plano, Texas-based sector peer Denbury Resources’ 9% notes due 2021 firmed by ¾ point on the day to finish at 105½ bid, as more than $16 million traded.

Calgary, Alta.-based MEG Energy’s 7% notes due 2024 were up by 1 point on the day to end at 90 bid, on turnover of more than $21 million.

Among the energy drillers, a trader said that Noble Energy’s 7¾% notes due 2024 jumped by more than 4 points on Thursday to close at 91 bid, with over $26 million having traded.

However, its 7.7% notes due 2025 eased by ¼ point to 86¾ bid, on volume of more than $32 million.

London-based driller Ensco plc’s 5¾% long bonds due 2044 were up more than 2½ points to 74 bid, with over $26 million of that paper having moved around.

Those oil and oil-related names firmed in line with a second straight day of gains in the price of crude oil, their fifth advance in the last six sessions.

The key domestic benchmark crude grade, West Texas Intermediate for February delivery, rose by 38 cents per barrel on the New York Mercantile Exchange on Thursday, closing at $62.01.

The key international crude grade – March-contract North Sea Brent – closed up by 23 cents per barrel on Thursday in London futures trading, settling at $68.07.

Those levels were the highest that crude has traded at since early in 2015 – the difference being that the prices then were heading lower, not higher, tumbling as part of the great slide in crude seen in 2014-2015 and beyond.

Non-oil names do well

The market strength carried through to credits outside of the oil and gas sector.

St. Clairsville, Ohio-based coal operator Murray Energy Corp.’s 11¼% notes due 2021 were particularly strong, with a market source seeing that issue up nearly 3 points on the day at 55 bid.

More than $26 million changed hands.

Frontier Communications Corp.’s 11% notes due 2025 gained almost 5/8 point to close at 75½ bid, on volume in the Stamford, Conn.-based wireline telecom provider’s paper of more than $16 million.

Laval, Que.-based drug manufacturer Valeant Pharmaceuticals’ 6 1/8% notes due 2025 were seen to have firmed by 5/8 point to 93 5/8 bid.

Its recently priced 9% notes due 2025 swelled by ¾ point to 105 7/8 bid, with volume of around $18 or $19 million of each issue.

Retailers on the rise

The retailing sphere also stood out, a trader said, noting that “J.C. Penney continues to rally, on good seasonal numbers” from the all-important year-end shopping period.

He said the Plano, Texas-based department store operator’s 7.4% notes due 2037 gained more than 2 points on the day to end around 72 bid.

Its 5.65% notes due 2020 “were up by another point” on Thursday, ending in a 97 to 98 bid context.

The trader said that Phoenix-based specialty retailer PetSmart’s 5 7/8% senior secured notes due 2025 “continue to move up,” ending at 80½.

And he saw Camp Hill, Pa.-based drugstore chain operator Rite Aid’s bonds “up from last night’s lows.”

A trader pegged its 6 1/8% notes due 2023 up 1½ points on the day at 91¼ bid, on busy volume of over $47 million.

Its 6¾% notes due 2021 were nearly ½ point better on the day, finishing at just over par, with over $16 million changing hands.

The Rite Aid bonds had fallen on Wednesday against a backdrop of disappointing quarterly same-store-sales and overall revenue numbers.

Indicators stay strong

Statistical market performance measures were meantime higher across the board for a fourth consecutive session on Thursday.

They first firmed last Friday and, after the market close on Monday for New Year’s Day, continued to gain as the week progressed.

The KDP High Yield Daily Index rose for a sixth straight session on Thursday, zooming by 16 basis points to end at 72.16. On Wednesday, it had jumped by 13 basis points to close at an even 72.00 – the first time the index had closed at or above that psychologically potent marker since Nov. 8, when it had finished at 72.07.

Its yield came in by 6 bps to 5.17%, its fourth straight narrowing, having also declined by 3 bps on Wednesday, by 2 bps on Tuesday and by 3 bps on Friday.

The Markit Series 29 high yield index improved by ¼ point on Thursday to finish at 108 25/32 bid, 108 27/32 offered, its third consecutive gain, following one loss.

The Merrill Lynch High Yield Index also rose for a third session in a row, advancing by 0.277%, on top of its gains of 0.284% on Wednesday and 0.133% on Tuesday – the index’s first rise after having been unchanged on Friday.

Thursday’s upturn raised its year-to-date return to 0.697% from Wednesday’s 0.418% level.

The index had closed out 2017 with a cumulative return of 7.483%.

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