Active post-holiday primary eyed; Mallinckrodt continues slide; PG&E trends up; J.C. Penney better

By James McCandless

San Antonio, Aug. 30 – In the run up to the Labor Day weekend on Friday, an active post-holiday high-yield market was eyed while secondary activity slowed.

When the market reconvenes on Tuesday, following the extended holiday weekend in the United States, primary market is expected to reactivate in relatively short order.

Although volatility might impair 2019 post-Labor Day new issue activity, several factors should embolden issuers, including ultra-low interest rates, sources say.

In Friday’s secondary, Mallinckrodt plc’s notes continued to slide in the pharmaceuticals space as the market continues to react to the company’s drawing down of its remaining capital under its revolving credit facility.

In utilities, PG&E Corp.’s issues capped the week trending higher.

Meanwhile, in retail, J.C. Penney Co., Inc.’s paper gained amid news of several executives making large purchases of common stock.

Though oil futures fell, Valaris plc’s notes ended higher while California Resources Corp.’s and Whiting Petroleum Corp.’s issues varied.

Auto parts name Allison Transmission Holdings, Inc.’s paper diverged.

New issue action ahead

The dormant Friday session was expected to bring to a close the dog days of August, a traditional interval of low activity in the new issue market, sources say.

When the market reconvenes on Tuesday, following the extended Labor Day holiday weekend in the United States, primary market is expected to reactivate in relatively short order.

Tuesday itself might be inactive, as players resume their places, a syndicate banker said.

Soon after the new-deal machine should get cranking, the source added.

The post-Labor Day period is typically an active time for junk bond issuance.

Average post-Labor Day issuance is $87.8 billion, going back to 2010, according to Prospect News data.

The lowest amount of issuance between post-Labor Day and year-end came last year, during which the dollar-denominated primary market generated just $32.3 billion.

Volatility related to trade relations between China and the United States, a pending U.S. government shutdown, Brexit and a Fed that had yet to reveal the accommodative face that would emerge in 2019, created inhospitable conditions in the new-issue market, the syndicate banker said.

Although volatility might certainly impair 2019 post-Labor Day new issue activity, several factors now at play should embolden issuers, sources say.

Ultra-low interest rates should allow issuers to realize notably low yields as they attempt to lock in seven-year to 10-year capital, with the most creditworthy expected to realize yields below 5%, a sellside source said.

That should tempt opportunistic issuers attempting to refinance debt, some of whom were sidelined by early-to-mid August volatility.

The technical forces underlying the market are strong, sources say.

“The accounts have cash to put to work,” an investor asserted late in the pre-Labor Day week.

The latest metric bearing upon market sentiment came late Thursday afternoon when the dedicated high-yield bond funds were reported to have seen $689 million of net inflows in the week to the Wednesday, Aug. 28 close.

There is a $20 billion to $25 billion pipeline of mergers and acquisitions related business, much of it committed and backed by bridge loans, expected to be transacted in the run-up to 2020, a syndicate official said.

With issuers and dealers keen to take out those temporary bridge loans by means of syndicating long-term debt, only the most rugged of market conditions will sideline that business, sources say.

Post-Labor Day 2019 may not be massive, in terms of issuance, a banker said.

It will almost certainly be active.

Mallinckrodt slides

Mallinckrodt’s notes continued to slide, traders said.

The 4¾% senior notes due 2023 dropped 3½ points to close at 35½ bid. The 5½% senior notes due 2025 crashed 10½ points to close at 44 bid.

On Thursday, the 4¾% notes crashed 9¾ points.

The Staines-upon-Thames, England-based drug maker announced on Wednesday that a subsidiary drew down the remaining $95 million of available funds in its revolving credit facility.

The market reacted to the news by sending the company’s structure further into distressed territory.

The week has seen increased scrutiny in the sector as companies reckon with the potential amounts they may have to pay in settlements related to the opioid epidemic.

Earlier in the week, Johnson & Johnson was ordered to pay $572 million to Oklahoma while Purdue Pharmaceuticals was considering a blanket $12 billion to settle all suits against it.

“There aren’t many names that can avoid this,” a trader said. “Most, if not all, will have to pay.”

PG&E up

In utilities, PG&E’s issues shifted higher, market sources said.

The 6.05% senior notes due 2034 added ¼ point to close at 109¾ bid.

On Friday, the San Francisco-based bankrupt electric utility reported $122 million of operating income for July on $1,498,000,000 of operating revenue, Prospect News reported.

The company is on the cusp of filing a restructuring plan in bankruptcy court next month after having won the sole right to do so.

J.C. Penney gains

Meanwhile, in retail, J.C. Penney’s paper was seen gaining, traders said.

The 5.65% senior paper due 2020 picked up ½ point to close at 94½ bid. The 5 7/8% senior secured paper due 2023 improved by 1 point to close at 84 bid.

On Thursday, news broke that several of the Plano, Texas-based department store chain’s executives had made large purchases of its common stock.

Earlier this week, chief executive officer Jill Soltau purchased 500,000 shares at 56 cents a share.

The company’s chief merchant, chief customer officer and a board member also made recent purchases.

The company’s most recent earnings report showed disappointing earnings and a new partnership with a secondhand clothing company.

Oil names mixed

As oil futures fell, distressed energy tranches varied in direction, market sources said.

West Texas Intermediate crude oil futures for October delivery ended the week down $1.61, closing at $55.10 per barrel.

North Sea Brent crude oil futures for October delivery finished at $60.43 after a 65 cent drop.

London-based contract driller Valaris’ notes ended higher.

The 5.2% senior notes due 2025 added 1 point to close at 59½ bid. The 7¾% senior notes due 2026 shot up 1¾ points to close at 65¾ bid.

Los Angeles-based independent oil and gas producer California Resources’ issues varied.

The 6% senior notes due 2024 jumped 6 points to close at 53 bid. The 8% paper due 2022 shed ¾ point to close at 56¾ bid.

Denver-based producer Whiting Petroleum’s paper also saw mixed movements.

The 6¼% senior paper due 2023 tacked on 1 point to close at 79½ bid. The 6 5/8% senior paper due 2026 dipped 1¼ points to close at 74¼ bid.

Allison diverges

Auto parts name Allison Transmission’s notes diverged, traders said.

The 5% senior notes due 2024 lost ¼ point to close at 102¾ bid. The 5 7/8% senior notes due 2029 held level at 107½ bid.

On Thursday, Moody’s Investors Service completed a periodic review of the Indianapolis-based commercial vehicle transmission maker’s ratings.

The agency noted that the company’s liquidity position was strong as it considers a share repurchase and an adaptation to newer technologies.

Indexes better

Three high-yield indexes were positive at the end of the week.

The KDP High Yield Daily index ended the week up 6 basis points on Friday with the yield settling at 5.38%.

The index moved up 11 bps on Thursday, picked up 5 bps on Wednesday and gained by 7 bps on Tuesday.

This week, the index added a cumulative 31 bps.

The ICE BofAML US High Yield index inched up 4.5 bps on Friday with the year-to-date return now at 11.149%.

The index gained 17.4 bps on Thursday, improved by 10.9 bps on Wednesday and tacked on 12 bps on Tuesday.

The CDX High Yield 30 index gained 34.01 bps, finishing the week at 106.7056.

The index shot up 34.04 bps on Thursday, rose 34.84 bps on Wednesday and garnered 36.63 bps on Tuesday.

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