Primary quiet; junk turns broadly higher as Fed meets; Valeant jumps on Walgreens arrangement

By Paul Deckelman and Paul A. Harris

New York, Dec. 15 – The high-yield market broke out of its recent rut on Tuesday, moving broadly higher, with some credits up by multiple points.

The upturn built on momentum seen in the latter part of Monday’s trading, when opportunistic buying at lower levels emerged following several previous sessions of pronounced weakness.

Multiple factors helped to spur Tuesday’s upturn, including a second straight session of stronger stocks and higher oil price as well as bullish comments by investment guru Bill Gross, who indicated this is a good time to take advantage of bargains in the oversold junk market.

The gains occurred as the Federal Reserve opened its final two-day meeting of the year, with the central bank widely expected to start gently bumping interest rates higher for the first time in nearly 10 years.

Among specific issues, Valeant Pharmaceuticals International, Inc.’s bonds were points higher across the drug maker’s capital structure on the news that Valeant has inked a distribution deal with pharmacy industry behemoth Walgreens.

Primary activity meantime remained calm, with no new deals either announced or priced and a pair of prospective issues still in the market, although some participants believe new-deal activity is done for the year.

Statistical measures of junk market performance turned higher across the board on Tuesday after having been mixed on Monday and lower all around for five consecutive sessions before that. Tuesday’s rise was the first since Dec. 1.

No deals price

No deals priced during the Tuesday primary market session.

No new deals were announced.

New issue activity, in the run-up to 2016, may have concluded, market sources continued to say on Tuesday.

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 Securities (USA) LLC, Nomura and Deutsche Bank Securities Inc.

On Tuesday Kraton said it secured the needed majority of consents to amend its $350 million of outstanding 6¾% senior notes due 2019.

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, some events of default and certain 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 deadline.

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. (See related story in this issue.)

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 that deal went silent early in December.

Valeant is victorious

In the secondary realm, Valeant Pharmaceuticals was the day’s stand-out performer, firming smartly on the news that the Laval, Quebec-based drug manufacturer had inked a distribution pact with Walgreens Boots Alliance, Inc., whose eponymous chain of more than 8,000 pharmacies is the largest drugstore operation in the United States.

Valeant had recently come under intense critical scrutiny over its drug-pricing policies and its use of a controversial specialty mail-order pharmacy chain, Philidor, as a distribution outlet.

The new distribution pact with Walgreens includes provisions for lowering the price of branded medications the company makes and is expected to restore some of Valeant’s tarnished credibility with investors.

“Their whole structure was up today,” a trader said, adding that it was “among the most active bonds today.”

He saw Valeant’s most widely traded issue, its 6 1/8% notes due 2025, “up 4 to 5 points” to 89¼ bid.

Another trader called the bonds up 4¾ points at that same 89¼ price, with volume of over $63 million easily topping the junk bond Most Actives list.

He also saw its 5 7/8% notes due 2023 jump 5½ points to close at 89 bid, on volume of over $20 million, while the company’s 6¾% notes due 2018 gained 2½ points to finish at 98½ bid, with over $14 million having changed hands.

Oakville, Ont.-based sector peer Concordia Healthcare Corp.’s 9½% notes due 2022 were up 2 points at 96 bid, on over $20 million of volume.

The company announced plans to pay down $11.25 million of its $45 million senior bridge loan and $33.75 million of its $135 million senior bridge loan. The repayment, which is scheduled for this coming Friday, represents a total payment of $45 million.

Better market tone

Overall, a trader said that “the market had a good bid to it today.

“There were better buyers across the board.”

He saw high yield up generically around 1 to 2 points.

One of the day’s big winners was ArcelorMittal SA’s 6½% notes due 2021, which rose 5½ points on the day to end at 81½ bid. Over $12 million of the Luxembourg-based steel giant’s bonds were traded.

A vote of confidence

Among the factors seen helping to push junk higher after its recent slide were comments from widely respected fixed-income investment guru Bill Gross, who runs the $1.3 billion Janus Global Unconstrained Bond Fund.

Gross said during an interview on Monday on CNBC that junk’s recent price slide has made this the “perfect time” to take advantage of what he called “an illiquidity discount” that sees junk bonds on average yielding 3½ points more than S&P 500 equities.

He said the market is “just loaded with bargains.”

Indicators turn higher

Statistical measures of junk market performance turned higher across the board on Tuesday after having been mixed on Monday and lower all around for five consecutive sessions before that. Tuesday’s rise was the first since Dec. 1, with the intervening nine sessions a combination of mixed and lower sessions.

The KDP High Yield Daily index jumped by 46 basis points Tuesday to end at 63.41, its first upturn after eight straight losses, including Monday’s 87-bp plunge, which had taken the index to its seventh consecutive new low for the year at 62.95, a new 52-week low and its lowest level since July 2009.

Its yield came in by 11 bps on Tuesday, ending at 7.43%. That followed successive sessions of widening out, including Monday, when it had gapped upward to 7.64%, its sixth consecutive new high for 2015.

The Markit Series 25 CDX North American High Yield index rose by 19/32 point Tuesday to finish at 100 11/32 bid, 100 13/32 offered, its second straight gain after five straight losing sessions. It had firmed by 11/32 point on Monday.

And the Merrill Lynch North American Master II High Yield index posted its first gain after eight sessions in a row on the downside.

It rose by 0.183%, in contrast to Monday’s 1.348% swoon, its second consecutive largest one-day loss of 2015 and one of its biggest one-day losses ever.

Tuesday’s gain cut the index’s year-to-date loss to 5.192% from Monday’s 5.957%, which had been its fifth straight cumulative deficit of 2015 and its lowest level seen since Dec. 31, 2008, when it ended with a 30% cumulative loss on the year.

Several of the index components – its yield to worst, its spread to worst and the average price of a tracked bond –improved modestly on Tuesday after having hit new record high or low levels for the year on Monday.

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