Primary lull continues as players eye September; Sears busy after financials; funds jump $2.22 billion

By Paul Deckelman and Paul A. Harris

New York, Aug. 21 – The high-yield primary was again shooting blanks on Thursday with no new deals announced or pricing. This marked the fourth consecutive session with no new paper coming to market.

Participants bided their time, getting themselves ready for what promises to be a busy start to September, with at least one deal thought to be officially on tap. An add-on of an undetermined size to New York-based global live events producer SFX Entertainment, Inc.’s 2019 second-lien notes is slated and a number of other rumored offerings is in the growing “shadow pipeline.”

Away from the new deals, traders saw busy activity in Sears Holdings Corp.’s bonds, after the underperforming department store chain operator reported another quarter of disappointing financial results.

Also in the retailing sector, there was not much activity seen in Bon-Ton Department Stores Inc.’s bonds, which ironically had been active on Wednesday, ahead of the regional retailer’s second-quarter results. The company’s bonds declined on Wednesday, even though the actual numbers turned out to be relatively favorable, giving its shares a big boost on Thursday.

Statistical market performance indicators were mixed for a second consecutive session on Thursday, after having been higher across the board for two sessions before that.

Another indicator – the flow of cash into or out of high-yield mutual funds or exchange-traded funds, considered a good barometer of overall junk market liquidity trends – saw its second big weekly positive number at $2.22 billion. This was the biggest tally in almost a year, after four straight weeks of large losses before that.

Junk funds gain $2.22 billion

As Thursday’s session was winding down, market sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said that some $2.224 billion more came into those funds than left them in the week ended Wednesday.

It was the second consecutive weekly inflow, following the $680 million cash injection reported last week by Arcata, Calif.-based AMG, a unit of the Lipper analytics division of Thomson Reuters Corp., for the seven-day period ended Aug. 13.

According to an analysis of the figures by Prospect News, it was by far the largest inflow seen so far this year, easily surpassing the $1.453 billion that had come into the funds during the week ended Feb. 12, and was the largest inflow since the $3.1 billion liquidity injection recorded during the week ended Sept. 25, 2013.

The previous week’s $680 million inflow, meanwhile, had been the first such inflow seen in five weeks, following four consecutive weeks before that of massive outflows totaling $12.605 billion, according to the analysis.

This included the massive $7.068 billion cash hemorrhage recorded during the week ended Aug. 6, the largest such outflow on record since the company began tracking fund flows back in 1992. That super-outflow had easily eclipsed the previous record-large drop of $4.63 billion recorded during the week ended June 5, 2013.

That huge outflow had followed – and dwarfed – a trio of other cash losses that could all be considered pretty huge in their own right: $1.677 billion in the week ended July 16, $2.384 billion in the week ended July 23 and $1.476 billion in the week ended July 30.

Analysts said the four weeks of giant-sized cash exits from Junkbondland paralleled a broader market downturn in mid-to-late July and early August that could be interpreted as a sign of deteriorating investor confidence in the junk bond market, in the face of fears of rising interest rates and other potential headwinds.

Only just recently did that downturn apparently bottom out, making for stronger market levels over the past week or so.

On a longer-term basis, although inflows to the weekly only reporting funds have now still been seen in 23 of the 33 weeks since the start of the year, according to the analysis, against just 10 outflows, the recent four-week nosedive tipped the year-to-date balance far into the red.

The latest two weeks of inflows have brought that year-to-date cumulative net outflow down somewhat to an estimated $6.846 billion, versus $9.07 billion last week and the $9.75 billion 2014 cash outflow seen by market sources the week ended Aug. 6.

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

In 2013, which had 53 reporting weeks due to a statistical quirk, inflows were seen in 33 weeks, versus 20 weeks of outflows, with total net inflows for the year tallying up to about $1.274 billion, the analysis indicated.

Although the mutual funds and ETFs represent only a relatively small percentage of the total amount of investor money coming into or leaving the more than $1.5 trillion junk market, their flows are very observable and quantifiable – more so than those of other, larger cash sources – and thus are suited to act as a fairly reliable proxy for overall junk market liquidity trends.

Analysts said that the sustained flows of fresh cash into junk have been a key catalyst behind the relatively strong performance seen by both the junk primary and secondary markets over the past several years. These flows mostly continued on into the first half of this year as well.

Investment-grade bond funds saw a net inflow this week of $1.02 billion, versus the previous week’s $1.133 billion.

SFX details to be determined

Although market sources are expecting a big September and a big post-Labor Day week, only one name has surfaced thus far as official September business.

SFX Entertainment is expected to launch a to-be-determined amount of add-on notes to its outstanding issue of 9 5/8% second-lien senior secured due Feb. 1, 2019 (existing ratings Caa1/B-) following the Aug. 29 expiration of a current consent solicitation for an amendment to the outstanding 9 5/8% notes.

Barclays, which is leading the consent, is expected to be lead left for the add-on.

Elsewhere, deal timing remains to be announced on a big and growing “shadow calendar,” sources say.

Pending market conditions, most of that shadow calendar will come in September, a portfolio manager predicted on Thursday.

Right now, September is shaping up as a month that could top $40 billion of issuance, a debt capital markets banker asserted.

And even though the post-Labor Day week will be a holiday-abbreviated four-session week, issuance forecasts are ranging from $8 billion to $12 billion.

Same old, same old

In the secondary market, a trader characterized Thursday’s market as “extremely more of the same,” meaning nothing perking in the primary, and not a whole lot happening on the secondary side either, outside of a handful of bonds which could be considered “story” issues that had news attached to them.

And characteristic of this market, he said, even some of the “story” bonds from the previous session or two proved themselves to be just one-day wonders, having their moment in the spotlight and then fading back into the wings by the next session.

For instance, even though Hertz Corp.’s 6¼% notes due 2022 had been right at the top of the high-yield most-actives list on Wednesday, trading down several points on over $30 million of volume after the Naples, Fla.-based car-rental giant’s corporate parent, Hertz Global Holdings, Inc., said that it was withdrawing its full-year guidance and warning that earnings would likely come in “well below the low end” of that previously announced projection, the trade said, “I’m not seeing it anywhere near the top of the most actives.”

He said the bonds, which had fallen to 105¼ bid, down a deuce, on Wednesday, “were maybe down 1/8 [of a point] on small volume” on Thursday.

Another trader agreed that he couldn’t remember things being this slow, even in the dog days of August “within the past 10 years. I know it’s always slow, but this is just awful.”

That having been said, he added, “I definitely do believe that the tone of the market is a little firmer, but again, the same things as [Wednesday] – light volume.”

“There were a lot of quotes going on out there – not a lot of trading, just a lot of quotes,” he said.,

“If you look at my account list, out of all of the guys on the list, I would say that 50% were red-dotted [indicating logged off their Bloomberg terminals] all day. That’s not a good rate of accounts being in.”

Sears on the slide

Amid that generally quiet environment, the second trader said that “one name that did grab our interest was Sears,” whose 6 5/8% notes due 2018 were trading around in the 89½ to 90 level. Within that context, “more paper traded closer to the 89½ level,” he said, pegging that down between ½ of a point and ¾ of a point.

He said that the Hoffman Estates, Ill.-based operator of the Sears and Kmart store chains had disappointing earnings, “but it goes to show you that even if you disappoint in this market, you’re not going to get punished too badly.”

He did not see “a lot of trading” in the bonds of such retailing sector peers as Bon-Ton or The Limited. “There was just a lot of trading in Sears; it was pretty active.”

A trader at another desk quoted the notes down ¼ to ½ of a point, around the 90 bid level, on volume of over $17 million.

Equity holders weren’t nearly as forgiving as the company’s Nasdaq-traded shares slid by $2.57, or 7.15% to end at $33.38, on volume of 4.6 million shares, more than five times the norm.

Sears reported a loss of $573 million, or $5.39 per share, in its fiscal second quarter. That was considerably worse than its year-ago red ink of $194 million, or $1.83 per share.

On an adjusted basis excluding one-time items, the loss was $313 million, or $2.87 per share, versus $78 million, or $1.56 per share a year ago. Revenue fell by $858 million, to $8 billion in the quarter.

Numbers don’t move Bon-Ton

Also in the retailing sector, a trader noted the anomaly that although Bon-Ton Stores reported fiscal second-quarter numbers on Thursday, there didn’t seem to be much activity.

“Bon-Ton was active [on Wednesday],” he said, when over $13 million of the York, Pa.-based regional department store chain operator’s 8% senior secured notes due 2021 had traded ahead of the earnings falling about 1 point to 93 bid.

As for Thursday, the trader said, only the company’s 10 5/8% senior secured notes due 2017 were really seen trading around – even though that’s a considerably smaller and less-liquid issue, with only $57 million outstanding, versus $350 million of the 8% paper.

He said the 10 5/8s were hanging “right around par,” down maybe ¼ to ½ of a point, on “not a lot of volume” – only about $3 million or $4 million having changed hands.

A market source did see some late-day trading in the 8% notes, but said it was strictly small-to-medium odd-lot transactions, with not a round-lot deal in the bunch. He called the bonds up 7/8 of a point from their Wednesday closing lows, to 93 7/8 bid.

For the quarter, the company posted a net loss of $36.2 million, or $1.86 per diluted share -- a little narrower than the year-earlier red ink of $37.3 million, or $1.95 per diluted share.

On the conference call following the earnings release, company executives noted that total sales rose to $563.5 million, up by 1.1% from $557.1 million in the year-earlier period.

Meanwhile, comparable-store sales – i.e., sales at stores open at least one year, thus eliminating both newly opened stores and older stores closed in the interim, a statistic considered a key retailing industry performance metric – rose 1.6% year-over-year.

Chief executive officer Brendan L. Hoffman enthused, “We were pleased to achieve positive comparable store sales growth for the first time in five quarters – particularly given the challenging promotional environment and continuation of soft traffic trends.”

The company’s chief financial officer, Keith E. Plowman, also indicated that Bon-Ton was studying possible options for refinancing a $215 million CMBS mortgage facility loan scheduled to come due in early 2016.

Despite the continued red ink, Bon-Ton equity holders were encouraged by the tone of the conference call. The Nasdaq stock bounced back from early lows to close up $1.16, or 12.82%, at $10.21. Volume of 1.2 million shares was more than four times the usual turnover.

Market indicators stay mixed

Statistical indicators of junk market performance remained mixed for a second straight day on Thursday after having been mostly higher over the two previous sessions before that and over four of the prior five sessions.

Thirteen proved to be an unlucky number for the KDP High Yield Daily index, which been higher over the previous 12 consecutive sessions but fell short of number 13 on Thursday. It eased by 6 basis points to end at 74.07, its first loss since Aug. 4. On Wednesday, it had risen by 8 bps.

But its yield, which normally moves inversely to the index reading, rising when the index falls, continued to tighten for a 13th straight session, coming in by 2 bps to end at 5.03%, on top of Wednesday’s 4 bps narrowing.

The Markit CDX Series 22 index rose by 9/32 of a point on Thursday to end at 108 3/16 bid, 108 5/16 offered. It had eased by 1/32 point on Wednesday after having been virtually unchanged on Tuesday.

The widely followed Merrill Lynch High Yield Master II index posted its ninth consecutive winning session, gaining 0.037%, on top of Wednesday’s 0.056% advance.

The latest upturn lifted the index’s year-to-date return to 5.623% from the 5.583% level seen on Wednesday, although it still lagged the 5.751% return recorded on July 7, the peak level so far for 2014.

© 2015 Prospect News.
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