Two-day junk rally ends; oils lower; Valeant mixed, Navistar up; funds plunge $3.81 billion

By Paul Deckelman and Paul A. Harris

New York, Dec. 17 – The high yield market’s two-session rally – after its long recent slide – came to an abrupt end on Thursday, with junk names generally lower, some by multiple points.

Energy names such as Oasis Petroleum Inc. and Chesapeake Energy Corp. were seen leading the way downward, in line with a fall in crude oil prices that took them to their lowest levels in nearly seven years.

The big winner on Tuesday and again on Wednesday, Valeant Pharmaceuticals International, Inc. was seen mixed, with its most widely traded bond seen lower but other credits in its capital structure extending their gains.

Navistar International Corp.’s bonds were better after the truck, bus and diesel engine manufacturer posted fiscal fourth quarter and full-year results. It announced a cash position of over $1 billion at the quarter- and the year-end, aided by a term loan refinancing deal it did back in August.

The high yield primary remained quiet and, in the opinion of many participants, likely done for the year.

Statistical measures of junk market performance turned lower across the board on Thursday.

Another numerical indicator – flows of investor cash into or out of high-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends – was decidedly negative for a second straight week. Some $3.811 billion more left those funds than came into them in the week ended Wednesday – the biggest outflow seen so far this year and third-biggest of all time.

The new issue market remained dormant on Thursday, as it has been all week.

The primary market is likely to be shuttered for the remainder of 2015, sources say.

Although announced deals from Kraton Polymers, LLC and NGL Energy Partners LP remain in the market, it is unlikely that either will price before 2016, sources say.

Mixed flows

The cash flows of dedicated high yield funds were mixed on Wednesday, according to an investor.

High yield ETFs saw sizable inflows of $732 million on the day.

However, actively managed funds sustained $305 million of outflows on Wednesday.

The split did not surprise an investor who remarked that actively managed funds don't move as quickly as ETFs.

Also, ETFs had been trading at a discount to net asset valuations (NAVs), the investor said.

Meanwhile, dedicated bank loan funds also saw outflows of $505 million on Wednesday, the source added.

Market in retreat

In the secondary market, after two straight sessions of solid gains seen in Junkbondland, that momentum died out on Thursday, with a generally easier tone seen in most sectors.

“It feels like a lot of people have kind of shut down after yesterday [Wednesday] afternoon, maybe for the year” a trader opined, adding that “overall the market was weaker,” with key performance indices lower, among them the Markit CDX index, seen down 1 point on the session.

However, he said that while the junk market was generally weaker on Thursday, “there were still names that were unchanged – shorter-dated, BB-quality names were hanging around the unchanged levels,” while the lower-quality CCC-type names and longer-dated paper struggled.

A second trader suggested that “stuff was trading around, depending on the way the flow was going.”

He pointed out that “there were a lot of redemptions, guys taking money off the table and freaked out” over last week’s news that troubled Third Avenue Focused Credit Fund was barring redemptions while it prepared to liquidate, meaning it may be months before investors can get their money.

As a result, he said, “everyone were sellers on Friday and again on Monday, prices were determined by whomever showed a bid, so things traded lower.”

Then, things were strongly higher on Tuesday “and everything traded higher.

“And now, we’re just moving sideways.”

Energy names under pressure

Among specific credits, Oasis Petroleum’s bonds were busy, at lower levels, pushed down by continued weakness in crude oil prices. The benchmark West Texas Intermediate for January delivery fell by 74 cents a barrel, or 1.6%, to $34.95 in trading on the New York Mercantile Exchange – its lowest level since February 2009.

A trader saw the Houston-based oil and natural gas exploration and production company’s 6 7/8% notes due 2022 plunge by 5 points, to 65 bid, adding that “their whole capital structure was weak.”

A second trader saw those Oasis bonds more than 5 points lower, at 64¾ bid, with over $23 million changing hands, putting it high up on the Most Actives list.

Oasis’ 7¼% notes due 2019 eased by “several points” to end at 75 bid, he said, with over $15 million traded, while its 6½% notes due 2021 swooned by 7 7/8 points, ending at 6 2 5/8 bid, on volume of more than $12 million.

“Anything oil and gas was definitely under pressure,” the first trader said, seeing Chesapeake Energy’s paper on the downside; the Oklahoma City-based oiler’s 6½% notes due 2017 were down a deuce on the day to 50 bid, with over $12 million traded.

“Commodity names generally were weaker,” the trader said, “but oil and gas seemed to have borne the brunt of it.”

Valeant surge moderates

Elsewhere, the two-day surge in Valeant Pharmaceuticals bonds seemed to dissipate on Thursday; its benchmark 6 1/8% notes due 2025 were down ¾ point on Thursday to end at 89½ bid, with over $31 million having traded, tops in the junk bond market.

Those bonds had jumped some 5 points in heavy trading on Tuesday on the news that the troubled Laval, Que.-based drug manufacturer had inked a new distribution pact with U.S. pharmacy giant Walgreens and had moved up another 1 point on Wednesday, again on heavy trading.

That was also the trajectory that the company’s 5 7/8% notes due 2023 had followed – up 5 points on Tuesday and another point on Wednesday.

On Thursday, the bonds were up by about 7/16 point, closing at 91 bid, with over $17 million traded.

Navistar firms after numbers

Navistar International’s 8 ¼% notes due 2021 zoomed by some 3 3/8 points on Thursday, closing at 60 7/8 bid. Volume was over $13 million

The Lisle, Ill-based bus, truck and diesel engine manufacturer - continuing to improve its finances after struggling earlier in the decade with quality issues, problems with government environmental regulators and lagging sales for some of its key products – ended its 2015 fiscal fourth quarter with over $1 billion of cash on its balance sheet.

Company executives on their conference call noted the role in this played by a term loan refinancing the company did in August, adding a net of $314 million to its liquidity (see related story elsewhere in this issue).

Indicators trade down

Statistical measures of junk market performance turned lower across the board on Thursday after two straight sessions of having been higher and one mixed session before that, which followed five straight losing sessions.

The KDP High Yield Daily Index lost 8 basis points on Thursday to end at 63.53, its first loss after two straight gains, including Wednesday’s 20 bps surge. It had also risen on Tuesday after eight straight losing sessions.

Its yield moved up by 3 bps, to 7.49%, its first widening after two straight sessions during which it had narrowed, including having come in by 7 bps on Wednesday. The yield had also tightened on Tuesday, which broke a string of eight straight widenings before that.

The Markit Series 25 CDX North American High Yield Index plummeted by 1 full point on the day, going home at 99 ¾ bid, 99 25/32 offered. It had improved by 13/32 point on Wednesday, its third straight gain after five straight losing sessions.

And the Merrill Lynch North American Master II High Yield index was back on the downside Thursday after two straight advances on Tuesday and Wednesday, which had followed eight straight losing sessions before that.

The index eased by 0.04%, in contrast to Wednesday’s 0.30% rise.

Thursday’s retreat raised the index’s year-to-date loss to 4.945% from 4.907% on Wednesday, though it remained below Monday’s 5.957% loss, 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.

Cash flees from funds

Flows of investor cash into or out of high-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends, were decidedly negative for a second straight week. Some $3.811 billion more left those funds than came into them in the week ended Wednesday – the biggest outflow seen so far this year and third-biggest of all time (see related story elsewhere in this issue).

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