Energy names lead the way as battered market rebounds, but fund flows stay negative

By Paul Deckelman and Paul A. Harris

New York, Dec. 17 – After having been pretty much beaten to a pulp over the previous week, the junk bond market got off the canvas on Wednesday to post strong gains.

Traders attributed the sharp rebound to several factors, including short-covering as well as market perceptions of a dovish Federal Reserve stance toward raising interest rates in the United States, as the central bank said that it would be “patient” about doing so.

The comeback was led by the oil and natural gas sector, which has recently been battered and beleaguered in line with sliding world crude oil prices. With those crude prices also coming off their recent bottoms on Wednesday, sector names such as California Resources Corp., Sand Ridge Energy, Inc., Halcon Resources Corp. and Meg Energy Corp. – the latter a Canadian oil sands energy producer – were among the big gainers on the day.

One sector name not seen bouncing back, though, was Forest Oil Corp., whose bonds had plunged more than 30 points on Tuesday on the news that the company – which was in the process of being merged with and into Sabine Oil & Gas LLC – would not be doing a change-of-control buyback of that paper. The Forest notes traded in the same mid-40s context to which they had fallen on Tuesday.

Away from the energy space, Sprint Corp.’s bonds were seen better in busy trading, as the wireless provider seem to shrug off several pieces of bad news that included a ratings downgrade as well as pending government regulatory action against the company for allegedly allowing third-party providers to improperly bill its customers for hundreds of millions of dollars of supposed services the customers had not requested.

There was little activity in the primary sphere, other than reports of possible new deals taking shape for after the new year, including names such as Global Cash Access Holdings Inc.

Market sources in both the primary and the secondary realms meantime noted the heavy withdrawals of investor cash from high-yield mutual funds and exchange-traded funds over the past few days and were predicting that official fund-flow numbers due out Thursday from the major tracking services – a key barometer of overall Junkbondland liquidity trends – would likely show big outflows for the latest reporting week.

Statistical indicators of junk market performance were higher across the board on Wednesday for the first time after having been lower all around during the five previous sessions and in seven sessions out of the previous eight.

Negative flows for Tuesday

While the high-yield market brightened on Wednesday – with Fed policy-makers sounding what was perceived to be a dovish tone with respect to future interest rates and buyers reportedly stepping in front of some notably beaten-up bonds in the energy sector – the most recent news on the fund-flow front remained negative, according to a portfolio manager.

The cash flows of the dedicated high-yield funds for Tuesday, the most recent session for which data was available at press time, had high-yield ETFs seeing $395 million of outflows and actively managed funds seeing $195 million of outflows, the manager said.

Eyes on January

Meanwhile the primary market spent another day in the deep freeze, with no issues pricing and no announcements made.

However, given a modicum of stability, January 2015 could be a big month, according to a trader who added that dealers are at work on an early 2015 calendar.

Global Cash Access Holdings is expected to return in January with a $700 million two-part offering of high-yield notes, market sources said on Wednesday.

The deal, which ran an investor roadshow in early December, has been sidelined by market volatility that has shut down the primary market for over a week and is expected to push most, if not all, pending new issuance off into the new year, sources say.

When it was rolled out, the deal featured a $350 million tranche of senior secured notes due March 15, 2021 (B1/B+) and a $350 million tranche of senior unsecured notes due Jan. 15, 2022 (Caa1/CCC+).

No new details or price talk have surfaced, sources said on Wednesday.

However, early guidance on the deal had the secured notes whispered in the low-7% context and the unsecured paper coming with a high 10% yield, according to a trader.

BofA Merrill Lynch and Deutsche Bank Securities Inc. are the joint bookrunners.

Proceeds will be used to help fund the acquisition of Austin, Texas-based gaming technology company Multimedia Games Holding Co. Inc. and to repay bank debt.

Bonds show some bounce

In the secondary market, a trader said that “things were firming up,” particularly in the recently beaten-down energy sector.

He stopped short of actually calling it a dead-cat bounce, merely saying that “after everything has been going down the last couple of days, things are starting to inch back up, as people tried to buy things.”

He cited gains in crude oil prices and stocks as positive factors lending junk some strength.

Crude pieces – whose steep slide since Thanksgiving on OPEC’s failure to take action to rein in supply has been the key driver of recent carnage in the high-yield energy sector – were better in their Wednesday dealings. The January contract for the benchmark U.S. crude grade, West Texas Intermediate, settled up 54 cents, or 1%, at $56.47 a barrel on the New York Mercantile Exchange.

Stocks meanwhile were broadly higher, buoyed by the seemingly accommodative interest rate language coming out of the Federal Open Market Committee meeting. The bellwether Dow Jones Industrial Average gained 288 points, or 1.69%, to close at 17,356.87.

He also noted the more than 1½-point jump in the Markit CDX index, calling that “the big move.”

“With oil having rallied by as much as $2 [intraday] during the session,” a second trader said, “energy bonds caught a bid, up 1, 2, 3 points or more in some cases.”

He said that short-covering in particular was a catalyst for the day’s gains.

“The market in general had a bid to it today, for the first time in a good week.”

A market source at another shop said that “today there was a lot of short-covering in the energy names, and that spilled over into the other names as well,” which had managed to hold their ground even as energy fell until about a week or so ago, when those names too started to feel heavy.

Improvement in energy

Among specific energy credits doing better after having been whacked around over the previous few days, a trader saw California Resources’ 6% notes due 2024 up 2½ points on the session, going home at 85¼ bid on volume of over $37 million.

The Los Angeles-based exploration and production company’s 5½% notes due 2021 gained 2½ points to end at 85½ bid on volume of over $30 million.

Its 5% notes due 2020 were seen ½ point better at 84¼ bid, with over $13 million having changed hands.

Oklahoma City-based E&P company Sand Ridge Energy’s 8 1/8% notes due 2022 jumped 7½ points to close at 61½ bid, with over $10 million having traded.

Its 7½% notes due 2023 firmed to 60½ bid, well up from the wide 51-to-55 bid context seen on Tuesday. More than $6 million of the bonds traded.

“A lot of guys were trying to cover their shorts” on those credits, one of the traders said.

He saw Houston-based Halcon Resources’ 8 7/8% notes due 2021 trading around 70¼ bid, up from Tuesday’s levels in a 64-66 bid context. Its 9¾% notes due 2020 gained 5¾ points to end at 73.

Canada’s Meg Energy’s 7% notes due 2024 climbed by more than 11 points to end at 89 bid, while its 7¼% notes closed at 84½ bid, up 71¼ points, with $6 million having traded.

Forest stays near lows

One sector name failing to gain ground was Denver-based Forest Oil, whose 7¼% notes due 2019 and 7½% notes due 2020 had plunged between 35 and 40 points apiece down to the mid-40s on Tuesday after the company – which was in the process of being acquired by Sabine Oil & Gas – announced that the transaction had been completed but that the terms of the combination of the two companies had been changed so that privately held Sabine’s investors would only hold a 40% stake in the combined company, with publicly held Forest’s investors holding the other 60%. Originally, Sabine investors were to have 73.5% voting control and Forest investors 26.5%.

Because of the change, the merger would not be considered a change-of-control event under Forest’s bond indentures – saving the combined company from having to buy back the $800 million of bonds that bondholders would have been likely to put back to the company at 101, as well as saving them an estimated $100 million of transaction and interest costs over the three-year life of a loan they were going to take out to finance that buyback.

A trader said that Forest Oil was one of the rare energy companies “whose bonds had not been getting killed lately, staying rough in the mid-80s – people were holding onto them figuring they would be taken out with the Sabine transaction.”

On Wednesday, the 7¼s stayed around the 46-47 context they had fallen to on volume of around $17 million. Its 7½s stayed on either side of 46 bid, with about $9 million traded.

Sprint holds its own

Away from the energy names, Sprint’s bonds shrugged off the news that Moody’s Investors Service had downgraded the Overland Park, Kan.-based wireless provider, and the news that federal consumer regulators had filed suit against the company, alleging that it had allowed third-party providers to improperly bill its customers for unwanted and unordered services like ringtones and text messages.

Sprint’s 7 7/8% notes due 2023 gained 2½ point to finish at 97 bid on volume of more than $11 million.

Indicators back in the black

Statistical indicators of junk market performance were higher across the board on Wednesday for the first time after having been lower all around during the five previous sessions and in seven sessions out of the previous eight.

The KDP High Yield Daily index posted its first gain after eight consecutive losses, jumping by 33 basis points to end at 69.34. On Tuesday, it had plunged by 39 bps to end at 69.01, its lowest close since Oct. 5, 2011.

Its yield came in by 8 bps to 6.35%, its first tightening after eight straight widenings including Tuesday, when it had ballooned upward by 13 bps.

The Markit CDX North American High Yield Series 23 index decisively snapped a five-session losing streak on Wednesday as it zoomed by some 1 11/16 points, one of the biggest one-day increases on record, to end at 105 5/8 bid, 105¾ offered. On Tuesday it had retreated by 5/32 points, its eighth such downturn in the previous nine sessions.

And the Merrill Lynch U.S. High Yield Master II index got back in the black for the first time in nine sessions, putting up a 0.644% gain. That offset Tuesday’s 0.619% downturn, its eighth straight loss.

Wednesday’s improvement lifted the index’s year-to-date return back into the black, at 0.385%; on Tuesday, it had dipped into the red with a 0.258% cumulative loss – its first time in negative territory since Oct. 13, 2011, when it had ended down 0.429%.

Several other index components posted better levels on Wednesday, after having notched new marks for weakness for the year on Tuesday.

Its yield-to-worst declined to 7.096%, after having risen to a seventh consecutive new high for the year on Tuesday at 7.259%.

Its spread-to-worst came in to 555 bps over comparable Treasuries; on Tuesday, it had widened to 576 bps, its seventh consecutive new wide point of the year.

And its average price per covered issue rose to 97.10057, after having fallen to 96.48666 on Tuesday, its eighth straight new low for the year.

According to the Finra/Bloomberg high yield bond index, junk bond volume rose to $5.622 billion on Wednesday from $5.044 billion on Tuesday.

© 2015 Prospect News.
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