Junk market ends August on quiet note; more improvement in energy names as oil rally rolls on

By Paul Deckelman and Paul A. Harris

New York, Aug. 31 – The high-yield market finished out the month of August on a quiet note Monday when, as expected, no new deals were priced.

With Junkbondland’s last pricing having been KIK Custom Products Inc.’s $390 million of 9% notes due 2023, which came to market all the way back on Aug. 19, the month concluded with $13.39 billion of new dollar-denominated, fully junk-rated paper having been priced by domestic or industrialized-county issuers in 24 tranches.

That was well up from both July’s issuance total of $7.93 billion in 15 tranches – the smallest of any month so far this year – and from the $3.18 billion that came to market in 12 tranches in August 2014, according to data compiled by Prospect News. March remains this year’s busiest month, with $39.66 billion pricing in 56 tranches.

With two-thirds of 2015 now history, $205.43 billion has priced in 335 tranches since the start of the year – essentially a statistical dead heat with the $205.52 billion that had gotten done by this time last year, according to the data.

Traders said that the overall market tone was firm, though quiet, and is expected to get even quieter approaching this weekend’s Labor Day holiday in the United States, the traditional unofficial conclusion of the summer season. There is usually an upswing in junk market activity after that.

They said that the energy sphere in particular was better bid for, helped by a third straight session of rallying crude oil prices. Oil and gas credits such as sector bellwether California Resources Corp. moved up, and there was even improvement in Halcon Resources Corp., whose bonds had plunged on Friday in response to news of a distressed exchange for a big chunk of its debt and a subsequent ratings cut.

Statistical measures of market performance were mixed for a second straight session on Monday; they had turned mixed on Friday after having been higher across the board on Thursday. The indicators have now been mixed in three sessions out of the last four.

Liquidity thins

Liquidity was thin in the high-yield market, as were the ranks of participants on the last day of August, sources said.

There was no primary market news, nor is any expected until after the extended Labor Day holiday weekend in the United States, which gets underway following Friday's close.

Inflows

The cash flows of the dedicated high-yield funds were positive on Friday, the most recent session for which data was available at press time, according to a market source.

High-yield exchange-traded funds saw a robust $604 million of inflows during the session.

Actively managed funds saw $96 million of inflows on Friday, the source said.

Oil and gas names improve

In secondary market trading, strengthening oil and natural gas credits in the wake of a third straight session of strong crude oil prices was the dominant theme, just as it had been on Thursday and again on Friday.

Monday saw the October contract for the benchmark U.S. crude oil grade, West Texas Intermediate, finishing the day on the New York Mercantile Exchange up $3.98 per barrel, or 8.8%, at $49.20 – its highest level since July 21.

That rise came on top of improvements of a nearly identical $3.96 on Thursday and $2.70 on Friday, leaving crude up by 24% from its recent lows of around $38 per barrel, seen last Monday. It was the strongest three-session rally the oil market has seen since the late Saddam Hussein’s invasion of Kuwait back in 1990 and was spurred on by a news report suggesting that the Organization of Petroleum Exporting Countries will be cutting its output, undercutting prior expectations that the current oil supply glut will continue. U.S. energy officials meantime said on Monday that domestic oil production this year is lower than previously anticipated.

Against that backdrop, a trader said, crude “did open the day lower but then traded up over $3 [really closer to $4], so it was just another rally in oil. That’s pushing oil-related names higher – the same kind of situation as last week.”

He saw California Resources’ 6% notes due 2024 trading up around the 75½ bid level, or even at 76, which he said was up by perhaps ½ to 1 point.

At another desk, a trader saw two-sided markets in the Los Angeles-based E&P company’s paper around 75½ bid, 76½ offered, which he said was up from around 74¾ bid, 75¾ offered on Friday.

Other energy sector gainers included a trio of Oklahoma City-based credits: Sand Ridge Energy, Inc., whose 8¾% notes due 2020 rose 2½ points to 68¼ bid; Chesapeake Energy Corp., whose 6 7/8% notes due 2020 increased 2 1/8 points to just under 80½ bid; and Seventy Seven Energy Inc. – Chesapeake’s former oilfield services business, since spun off – whose 6½% notes due 2022 jumped 3 points to close at 47 bid.

Another mover was Halcon Resources, which recovered a little of the ground lost on Friday’s announcement that the Houston-based oiler had negotiated an exchange, at distressed levels, of new paper for its existing notes.

A market source said that its 8 5/8% secured notes due 2020 had gained a point to end at 87¾ bid, on volume of over $9 million – enough to put the bonds on the day’s Most Actives list.

Another trader said that the company’s 9¾% unsecured notes due 2020 had gone out on Friday at 35 and that their last print on the day Monday was 36½.

He also noted a jump in the stock.

“With the move up in oil, it’s a case of the rising tide lifting all boats right now.”

Better market tone

Overall in secondary trading, “the market was better bid, for the most part,” one junk participant said.

However, he said that apart from the surge in energy credits, “there were no themes.”

He said that activity – as could be expected during the late-summer pre-Labor Day lull – was “relatively on the quieter side. There were trades happening, but the Street was generally quiet.”

And in the run-up to the start of the three-day holiday break on Friday – with an unofficial but traditional early close on tap that session – “each day that passes is going to be slower than the next.”

Indicators stay mixed

Statistical measures of junk market performance stayed mixed for a second consecutive session Monday. They had turned mixed on Friday after having been higher across the board on Thursday. The indicators have now been mixed in three sessions out of the last four.

The KDP High Yield Daily index gained 14 basis points on Monday to end at an even 68.00, its third straight advance. The index had shot up by 17 bps on Friday and 6 bps on Thursday. Monday’s upturn was its fourth such rise in the last five sessions; last Tuesday, it had zoomed by 33 bps, which had been its first gain after five straight sessions on the downside.

Its yield, meanwhile, came in by 3 bps on Monday, going home at 6.33%. It was the index’s third straight narrowing and its fourth such decline in the last five sessions. It had tightened by 8 bps on Friday and by 4 bps on Thursday.

However, the Markit Series 24 CDX North American High Yield index posted its second straight loss after three straight improvements before that, backtracking by 11/32 point to end at 104 7/16 bid, 104½ offered. It had also retreated by 9/32 on Friday.

The Merrill Lynch North American Master II High Yield index was improved by 0.117% on Monday, its third straight improvement and fourth in the last five sessions, including Friday’s 0.175% rise and Thursday’s 0.466% gain.

Monday’s upturn put the index back in the black on a year-to-date basis, lifting its cumulative return to 0.069%. It was the first time the index was showing a gain for the year so far since Aug. 19, when it had finished at 0.184%, only to slide into the red after that. On Friday, it showed a loss for the year so far of 0.048%, although that was well down from the 1.136% year-to-date loss recorded last Monday, Aug. 24. That was the biggest year-to-date loss seen so far this year as well as 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 well down from the 4.062% reading recorded on May 29, the index’s peak level for the year so far.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.