Junk lower, less active as market watches equity carnage, crude oil slide; energy names off

By Paul Deckelman and Paul A. Harris

New York, Aug. 24 – The high-yield market began the last full trading week of August on Monday in a wary frame of mind, spooked by the bloodbath going on in equities – first in the overseas markets and later in U.S. stocks, which saw indexes such as the Dow Jones Industrial Average plummeting, then bouncing off those lows in a comeback attempt – but still ending solidly lower on the day.

That and the continued plunge in crude oil prices – which hit their lowest levels in more than six years – combined to push numerous junk issues down multiple points.

Energy names taking it on the chin as a result again included such familiar credits as California Resources Corp., SandRidge Energy, Inc. and Consol Energy Inc.

Traders once again did not see much activity Monday in recently priced bonds such as Hill-Rom Holdings, Inc. – but going back a little further, there were some dealings in names like Owens-Illinois, Inc. and WPX Energy, Inc.

The primary remained bestilled, a condition expected to continue right through the Labor Day holiday in the United States two weeks from now, and even beyond.

Statistical measures of junk market performance were weaker across the board for a fifth straight session on Monday, some market measures hitting new lows for the year amid the struggling market.

Turmoil closes primary

Intense volatility in the global capital markets shuttered the high-yield primary market on Monday.

The last deal to clear the market came on Aug. 19 when Kronos Acquisition Holdings Inc. (KIK Custom Products Inc.) sold $390 million of 9% notes at the steep discount price of 89.57 to yield 11%.

That execution, which was overtaken by the ongoing volatility, breached the bridge caps, according to market sources.

In its wake, and given the fact that volatility has intensified since last week, no issuer is expected to step into the market, a sellside source said.

In all likelihood the new deal market will remain dormant during the run-up to the three-day Labor Day holiday weekend which gets underway following the Sept. 4 close, sources say.

Lower market seen

In the secondary realm, the sight of what was going on over in equities – first the rout in the overseas markets, notably in Shanghai, followed by equal volatility on the downside in the domestic markets, with the Dow plunging more than 1,000 points early on before recovering to end “only” off by 588 points by the close – had a negative impact on junk, as could be expected.

A trader suggested that generically, “things are off by anywhere from 1 to 3 points or so. A lot of stuff was being quoted – not everything was necessarily trading – but things were being quoted in that context.”

Although prices were getting hammered down, he didn’t see much buying in response to the lower levels: “I wasn’t necessarily seeing guys stepping in on the weakness as I’ve seen in the past.”

He said that “there might have been people picking some spots – but my sense was it was a little more of a kind of hands-off approach, to wait and see” how the current financial market volatility finally shakes out.

“There wasn’t an overwhelming sense to try and step in on weakness per se.”

Energy names suffering

Oil prices continued to be pounded lower – West Texas Intermediate for October delivery plunged to an intraday New York Mercantile Exchange low of $37.75 per barrel, its lowest level since February 2009, before closing at $38.24, down $2.21, or 5.5%.

As could be expected, that sent exploration and production company credits reeling.

For instance, California Energy’s 6% notes due 2024, which had closed around 71 on Friday, slid to around 68½ bid on Monday, one trader said, while a second pegged the Los Angeles-based E&P operator’s paper at 69¼ bid, 70¼ offered – down from 70¾ bid, 71¾ offered late Friday.

At another desk, a trader saw those notes at 68 bid, down 3 points, with about $15 million of the notes traded.

California Resources’ 5½% notes due 2021 meanwhile lost 2¼ points, finishing at 71 bid.

Oklahoma City-based SandRidge Energy’s 8¾% notes due 2020 fell to 60 bid, down more than 3½ points, with over $10 million traded.

Canonsburg, Pa.-based coal and natural gas operator Consol Energy’s 5 7/8% notes due 2022 lost 1¼ points to go home at 68¼ bid, with over $10 million traded.

A recently priced energy new deal was also among the big losers on the day.

WPX Energy’s 8¼% notes due 2023 were down more than 2¼ points on the session, ending at 90¾ bid, on volume of more than $14 million.

The Tulsa, Okla.-based oil and natural gas operator priced $500 million of the notes at par on July 17 as part of a $1 billion two-part offering that also included $500 million of 7½% notes due 2020.

Among other recent offerings, Owens-Illinois’ 5 7/8% notes due 2023 lost 1 1/8 points to end at 100¼ bid, with over $12 million traded.

The Perrysburg, Ohio-based glass-bottle producer priced $700 million of the notes at 99.219 to yield 6% on Aug. 11, along with $300 million of 6 3/8% notes due 2025, which also priced at par.

Indicators keep sliding

Statistical measures of junk market performance were weaker across the board for a fifth straight session on Monday, with some of the market measures hitting new lows for the year.

The KDP High Yield Daily Index crashed by 50 basis points on Monday to end at 67.32.

The day’s carnage dwarfed losses of 19 bps on Friday, 11 bps on Thursday and 22 bps on Wednesday.

Monday marked the index’s fifth straight loss, its 11th loss in the last 14 sessions and its 13th downturn in the last 17 trading days.

The closing level was its fourth consecutive new low for the year and a fourth straight new 52-week low, eclipsing the previous intraday mark of 67.69 and the previous closing low of 67.82, both of which had been set on Friday. It was also the index’s lowest close since it ended at 67.00 on Sept. 10, 2009.

Its yield, meanwhile, jumped by 15 bps on Monday to end at 6.58%, its sixth consecutive widening out, including Friday’s 7 bps rise.

It also marked the yield’s seventh such widening out in the last nine sessions and its 10th rise in the last 12 sessions.

The Markit Series 24 CDX North American High Yield Index lost 9/16 point on Monday to close at 103 bid, 103 1/32 offered. It was the index’s sixth successive setback, including Friday’s 17/32 point slide and Thursday’s 13/32 point drop, as well as its ninth loss in the last 10 sessions and its 12th loss in the last 15 trading days.

The Merrill Lynch North American Master II High Yield Index swooned by 0.815% on Monday – its biggest one-day loss for the year so far, eclipsing the previous mark of 0.44% set on June 29.

It was the widely followed market measure’s fifth straight loss, as well as its sixth loss in the last seven sessions and over the longer term, its 14th loss in the last 16 trading days.

The index had been down by 0.293% on Friday, on top of Thursday’s 0.215% dip.

The index’s year-to-date loss deepened on Friday to 1.136% on Monday from 0.323% on Friday.

It was the biggest year-to-date loss seen so far this year, surpassing the previous deficit of 0.59% seen on Jan. 6. It was not only the first time this year’s cumulative loss has exceeded 1%, but was the biggest year-to-date deficit the index has seen since Oct. 11, 2011, when the red ink totaled 1.745%.

All of those levels are a far cry from the 4.062% reading recorded on May 29, the index’s peak level for the year so far.

One of the index’s components – its spread-to-worst versus comparable Treasuries – established a new wide point on Monday, ballooning out to 625 bps. That beat the previous wide point of 612 bps seen on Aug. 13.

Another component, its average price of the paper listed within, fell to a fourth consecutive new low for the year of 93.838956. That was down from the previous low point of 94.68345, set on Friday.

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