Primary silent in run-up to break; ATP quiets down, moves lower; funds see $1.18 billion gain

By Paul Deckelman and Paul A. Harris

New York, Aug. 30 - The high-yield primary fell absolutely silent on Thursday. Nothing priced, and no new deals were even announced or surfaced on investors' radar screens in either the domestic or the European markets - the first such complete shutout in nearly two months, the last time being July 6, the Friday after Independence Day.

And secondary market activity on what for all intents and purposes was the last full trading session of this week was not much more lively.

ATP Oil & Gas Corp. - which had dominated the Junkbondland most-actives list for nearly two full weeks - quieted down considerably on Thursday, its volume much less than what it had racked up during those previous sessions. The bonds rose smartly on Wednesday but gave it all back in Thursday's dealings.

Traders said that in general, names standing out were few and far between. Market participants seemed more focused on the upcoming Labor Day holiday break in the United States. Friday is officially a regular-length session, but the reality is that traders and other market participants are expected to make an early exit of it. U.S. financial markets will meanwhile be closed on Monday.

The traders said that statistical measures of junk market performance, which turned stronger across the board on Wednesday, were mixed on Thursday.

However, another numerical indicator - flows of money into and out of high-yield mutual funds and exchange-traded funds, considered a good indicator of overall junk market liquidity trends - notched their 12th consecutive inflow, with over $1 billion of fresh cash having come in.

AMG gains $1.18 billion

As things were grinding to a halt on Thursday, a market source familiar with the weekly AMG high-yield mutual fund flow statistics said that in the week ended Wednesday, $1.18 billion more came into those funds than left them.

It was the 12th consecutive week of such inflows by the junk mutual funds and ETFs - a winning streak that dates back to the week ended June 13.

The number was up from the $583 million gain reported last week by Arcata, Calif.-based AMG, a unit of Thomson Reuters' Lipper/FMI division.

In those 12 weeks, net inflows have totaled about $11.1 billion, according to a Prospect News analysis of the figures, representing a continuing solid turnaround from the pattern of weakness that had been prevalent in late May and early June, when the funds lost some $6.43 billion over the space of four weeks, including two huge cash hemorrhages each in excess of $2 billion, according to the analysis.

On a year-to-date basis, that latest inflow pulled the cumulative net inflow figure up to about $29.8 billion, including the ETFs, according to the Prospect News analysis. The year-to-date figure counts monthly reporting funds as well as the weekly reporters, the company said. Excluding those ETFs and just tallying the mutual funds, the year-to-date net inflow stood at around $22.8 billion.

Inflows have now been seen in 30 out of the 35 weeks since the start of the year against just five outflows.

EPFR sees $1.61 billion inflow

Another fund-tracking service, Cambridge, Mass.-based EPFR Global, whose methodology differs from Lipper's, reported that in the week ended Wednesday, about $1.61 billion more came into those funds than left them.

It was the 12th consecutive week in which the funds showed a net inflow. Those cash infusions total up to about $19.3 billion, according to a Prospect News analysis of that data.

The week before, which ended Aug. 22, EPFR reported a $1.82 billion cash infusion.

On a year-to-date basis, the service has seen inflows in 30 weeks, with just five weeks of outflows, most of them recorded during a stretch from mid-May through early June.

Total 2012 inflows in the latest week come to $53.8 billion, according to the Prospect News analysis. Those figures include the monthly reporting funds as well as strictly weekly reporters and also include the ETFs.

EPFR and Lipper use different methodologies to track fund flows, resulting in significantly different numbers, but the basic direction for the two services is generally the same.

Cumulative fund-flow estimates, whether from EPFR or from AMG/Lipper, may be revised upward or downward or be rounded off and could include unannounced revisions and adjustments to figures from prior weeks.

Analysts say the continued flow of fresh cash into junk - and the mutual funds represent but a small, though observable and quantifiable percentage of the total amount of money coming in - fueled the successive record new-deal borrowing binges seen in both 2009 and then in 2010, as well as the robust secondary market seen both years, and continued to be the driver behind 2011's near-record issuance.

Those fund flows are also seen as the key element behind the high-yield secondary market's strong performance so far this year versus other fixed-income asset classes and its active new-deal pace, running about neck-and-neck with 2011.

$25 billion for September

The primary market remained becalmed on Thursday.

However, the market is set to transform dramatically when activity resumes following the upcoming Labor Day holiday weekend, sources say.

September looks poised to open up with a $25 billion deal pipeline, and that's not counting potential drive-bys from opportunistic issuers, according to a mutual fund investor who was citing information shared by a top-five league table source.

Opportunity is there for opportunistic issuers, the investor asserted, noting that the composite yield to worst of the JPMorgan high-yield index is presently 6.72%, an all-time low.

"People are saying it could still grind tighter by the end of the year," the manager said.

The double-B component is posting a 4.84% yield to worst, the buysider said, adding that the single-B component is yielding 6.73%, a single basis point higher than the composite.

Facing the triple hooks

The triple-C sector of the index remains conspicuously wide at a 11.38% yield to worst.

"Not everybody has gone all-in for triple-Cs," the investor said. "But that could change."

As investors bunch up at the higher-quality end of the high-yield credit spectrum - where the crowd clamoring for bonds lately includes such non-regulars as high-grade investors and insurance fund managers - returns on double-B bonds could shrink further, creating a situation in which high-yield investors may have to face triple-C credit risk in order to realize acceptable returns.

"Triple-C deals are coming," the investor forecasted and added that the autumn will also bring some dividend deals, never preferred by junk investors but hard to ignore when so many deals are debt refinancings in which investors are simply rolled out of old bonds into new bonds.

With the market in the throes of a technical rally that has driven yields to record lows, staying invested in the run-up to year-end will remain a challenge, the buysider said.

Secondary slows down

A trader in the secondary market ironically quipped on Thursday, "If you think it's busy today, wait until tomorrow [Friday]," which is widely expected to be even quieter.

Although the Securities Industry and Financial Markets Association officially lists it as a regular trading session - having done away with the traditional pre-Labor Day holiday early close several years ago - the reality is, according to traders, that anyone who is going to be in on Friday is going to do whatever they have to do and then make a radically early exit - if they come in at all. Many are not even planning to do that.

On Thursday, the trader said, "People were just sitting here, planning vacations."

At another shop, a trader opined that "the whole world is quiet, even the big names. Volume is pretty low."

ATP gives up gains

The biggest name in the junk world over the past eight sessions, ATP Oil & Gas, was more subdued on Thursday.

The Houston-based offshore energy company's 11 7/8% second-lien senior secured notes due 2015 had dominated the most-actives list ever since Aug. 20, the first trading session after it sought Chapter 11 protection via a filing with the federal bankruptcy court in that Texas city. The notes knocked down more than $70 million of turnover that session and continuing to top the actives list; last Friday, more than $40 million of the bonds changed hands.

Even this week, between $20 million and $30 million traded each of the first three days of the week, but on Thursday, that number dwindled. At mid-afternoon, maybe $5 million of the bonds had changed hands, although activity picked up toward the close and finally finished at around $14 million. A number of other names generated more volume.

The traders saw ATP's bonds considerably lower on the day, giving up whatever gains had been notched on Wednesday, when the bonds had risen between 2 and 3 points on a mixture of short-covering after having been knocked around for several sessions, as well as investor relief that Tropical Storm Isaac, which roared through the Gulf of Mexico before making landfall in Louisiana, had apparently not damaged the company's drilling operations in the gulf.

After trending as high as 29 bid and closing at 28½ on Wednesday, a trader on Thursday saw the bonds trading between 26 and 27, finally going home around the 27 level.

At another shop, a trader pegged the bonds down 2¾ points at 26 bid.

DaVita edges up

Away from ATP, a trader said, "It's been so long since we had a pricing that I've almost forgotten what priced!" The last pricing was Aug. 20, to be exact, when VWR Funding, Inc. came to market with $750 million of new 7¼% notes due 2017.

He did see DaVita Inc.'s 5¾% notes due 2022 continuing to move up, quoting the bonds 1/8 point higher at 104½ bid, on "a couple of million" having traded.

The Denver-based provider of kidney health products and services priced its $1.25 billion drive-by offering at par on Aug. 14 after upsizing it from the originally announced $1 billion size.

The bonds quickly moved above 101 bid when they began trading later that same session, then they moved above 102 bid in the days that followed and continued to move up to their current levels, including Wednesday's gain of nearly 1 point, as the bonds moved up to 104 3/8 bid from Tuesday's 103.

Elsewhere among the newbies, Franklin, Tenn.-based hospital operator Community Health Systems Inc.'s 5 1/8% senior secured notes due 2018 were seen having firmed a little to between 103 1/8 bid and 103 3/8 offered.

The company had priced $1.6 billion of the bonds at par on Aug. 8 after upsizing the quick-to-market deal from an originally announced $1.25 billion.

And VWR Funding's bonds were quoted up 1/8 point at 101½ bid, 101¾ offered.

The Radnor, Pa.-based laboratory supplies distributor's quickly shopped deal priced at par last week.

Indicators turn mixed

Statistical indicators of junk market performance turned mixed on Thursday after having firmed across the board on Wednesday; before that, they had again been mixed the previous two sessions.

The Markit Group CDX North American Series 18 High Yield index lost 5/16 point on Thursday to close at 97¾ bid, 98 offered; on Wednesday, it rose by 1/16 point.

The KDP High Yield Daily index eased by 1 bp Thursday to finish at 73.89. On Wednesday, it had risen by 6 bps.

Its yield was unchanged at 6.18% after having come in by 4 bps on Wednesday.

But the widely followed Merrill Lynch U.S. High Yield Master II index made it an even 10 consecutive sessions on the upside Thursday, gaining 0.033% on top of Wednesday's 0.059% rise.

That lifted its year-to-date return to 10.39% - an eighth consecutive new high for the year, eclipsing the old peak level of 10.354% that had been set on Wednesday. The index is now at its highest level since the last session of 2010, when it closed that year with a 15.19% return.

Its yield to worst meanwhile stood at 6.678%, versus 6.687% on Wednesday.

Thursday's yield marked a new low for the year, versus the old low set on Wednesday.

© 2015 Prospect News.
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