Primary market falls silent as mid-summer lull likely begins; Tesla trades up, but Staples still struggles

By Paul Deckelman and Paul A. Harris

New York, Aug. 21 – As millions of Americans from coast to coast watched the rare solar spectacle of the moon blotting out the sun on Monday, the high-yield primary market entered into a sort of total eclipse of its own, with no new U.S. dollar-denominated and fully junk-rated offerings from domestic or industrialized-country borrowers even announced or emerging unannounced on the radar screens, let alone having priced.

And unlike Monday’s celestial show, which saw full sunshine restored within an hour or two and a totality darkness phase lasting only about four minutes at the most, Junkbondland’s primary darkness may well last for the rest of August and right up to the Labor Day holiday in the United States, according to market sources.

In the meantime, two of the existing new deals that recently priced were holding the center stage in the secondary market on Monday.

Electric car manufacturer and energy storage systems developer Tesla, Inc.’s huge new eight-year deal was the most actively traded credit of the day; those bonds, which have struggled in the aftermarket since pricing 10 days ago, were seen by traders having firmed a little off their recent lows.

But another recent megadeal – office supply retailer Staples, Inc.’s eight-year issue – while also busy, continued to lose ground, with no real end in sight.

Elsewhere, traders saw continued brisk activity in specialty retailer PetSmart Inc.’s several series of bonds, all seen on the downside despite a lack of fresh news about the company.

Statistical market performance measures were mixed for a second consecutive session on Monday; those indicators had turned mixed on Friday after having been lower across the board on Thursday. Monday marked the fourth mixed session in the last five trading days.

The primary market failed to produce news on Monday, amid thin overall market liquidity.

It is possible, although by no means certain, that the new issue market will remain dormant during the nine sessions remaining before it closes ahead of the extended Labor Day holiday weekend in the United States, which gets underway following the Friday, Sept. 1 close, sources say.

A sizable September calendar appears to be taking shape, traders and sellside sources say.

The month ahead, starting when the market reconvenes after Labor Day – the traditional summer-fall terminus in the junk bond market – could see $15 billion to $20 billion of business, a trader said on Monday.

One name came up during a Monday conversation with a trader.

United Rentals Inc. is likely to appear with new debt to help fund its acquisition of Neff Corp. for $25.00 per share in cash, representing a total purchase price of $1.3 billion, in a deal expected to close in the fourth quarter.

Last week United Rentals outbid H&E Equipment Services, Inc. for Neff.

H&E Equipment had in place an $825 million senior unsecured bridge loan to help fund that proposed acquisition for $1.2 billion, including about $690 million in debt currently on Neff's balance sheet.

The high-yield bond market had anticipated an $825 million bond offer to replace the bridge loan.

However when H&E Equipment's bid fell to United Rentals' bid, H&E Equipment abandoned the bridge, and instead sold $750 million of new 5 5/8% senior notes due 2025 (B2/BB-), a deal that it priced last week in order to refinance debt.

Friday outflows

News on the cash flows of the dedicated high-yield bond funds has lately been negative, as was the case of the daily cash flows on Friday, the most recent session for which data was available at press time.

High-yield ETFs sustained $364 million of outflows on Friday. That follows a $408 million outflow on Thursday, according to market sources.

Actively managed funds sustained $180 million of outflows on Friday. They were essentially flat on Thursday, with $5 million of inflows on that day.

The dedicated high-yield bond funds sustained $2.19 billion of net outflows on the week to last Wednesday's close, according to Lipper US Fund Flows. That data appeared in a weekly report that routinely appears on Thursday afternoons.

Hence the Thursday and Friday fund flow numbers above represent a weak start on the fund flows front for the first two sessions of the new reporting period.

Away from the junk bond funds, the dedicated bank loan funds were slightly positive on Friday, with $15 million of inflows on the session, the trader said.

Enova deal little seen

In the secondary market, a trader said that he had seen “nothing really” on Monday in the way of trading in the most recently priced junk market offering, Enova International Inc.’s 8½% notes due 2024.

He said that about $4 million of the Chicago-based online financial services provider’s new issue had traded on Friday after that $250 million regularly scheduled forward calendar offering had priced at par, but he had seen no additional dealings on Monday.

At another desk, a trader quoted the bonds as having been around 100½ bid on Monday morning, in line with Friday’s initial aftermarket finish in a 100¼-to-100½ bid context.

H&E holds steady

Elsewhere among recently priced junk issues, a trader said that that the new eight-year issue from H&E Equipment Services, Inc. was holding steady in a 100¼-to-100 5/8 bid context.

However, he saw only around $7 million of those 5 5/8% notes due 2025 having traded Monday, in contrast to the more than $23 million of the notes which had changed hands in Friday’s dealings, on top of the more than $35 million which traded on Thursday, putting the issue high up on the Most Actives list both days.

H&E, a Baton Rouge, La.-based heavy equipment manufacturer and services provider, priced $750 million of those notes at par Thursday in a quick-to-market transaction, and the bonds had moved up to around the 101½ bid level by Friday.

Tesla turns northward

Tesla’s 5.3% notes due 2025 appeared to be moving on the upside on Monday, after having been pounded down over the previous few sessions.

A market source saw that paper in a 97½-to-97 7/8 bid range, which he called up 3/8 point on the session.

At another desk, a trader pegged those bonds going out at 97 5/8 bid, which he called up 1/8 point on the day.

Over $32 million of the notes traded on Monday, topping the junk market’s Most Actives list on an otherwise generally sleepy session.

Tesla has been actively traded, with over $28 million of volume on Friday and more than $86 million of turnover on Thursday, when it was again the most active issue.

The Palo Alto, Calif.-based electric car manufacturer and energy storage products company had priced $1.8 billion of those notes at par on Aug. 11 – the biggest junk bond deal since satellite broadcaster Sirius XM Radio Inc.’s $2 billion two-part offering priced back on June 26.

The regularly scheduled forward calendar transaction had been upsized from an originally announced $1.5 billion.

However, new Tesla bonds were treading water virtually from the get-go, seen trading below their par issue price pretty much from the time they hit the aftermarket and gradually losing ground to come down to their current 97-handle levels.

Staples still struggles

But while Tesla was firming in Monday’s dealings, Staples Inc.’s 8½% notes due 2025 continued to struggle, as they have ever since that $1 billion issue priced last Monday.

One trader quoted the notes Monday at 96 7/8 bid, calling them down 7/8 point on the session, with over $28 million having traded.

A second agreed that “that one was active today.”

While he saw the notes trading between 96 3/8 and 97¼ bid on Monday, he declared that “all of the last prints had a 96 handle,” putting them down from Friday’s closing levels.

The Framingham, Mass.-based office supplies retailer priced its regularly scheduled forward calendar deal at par last Monday after first downsizing it from an original $1.6 billion, and then downsizing it again from $1.3 billion to its eventual $1 billion size.

As was the case with the Tesla megadeal, those new Staples bonds also lost ground throughout last week, coming down to a 97ish context by Friday and continuing their retreat on Monday.

As to why some of the recent new deals like Tesla and Staples have had such a hard time of it, primary market sources said Monday that although there might be name-specific reasons for such poor secondary market performances, others suffer from being done in executions where pricing left little room for improvement in the aftermarket, and from allocations that came near to or equaled total orders, weakening secondary market demand.

Enter the hedge funds, which have been selling and shorting some of the deals in question, a trader said on Monday.

PetsSmart pounded down

Away from the new deals, traders saw active trading at lower levels Monday in PetSmart’s paper, despite a lack of fresh news about the Phoenix-based specialty retailer.

Its 7 1/8% notes due 2023 lost ¾ point to end at 84 bid, with over $14 million having traded.

And its 8 7/8% notes due 2025 swooned by more than 2 points on the day to end at 84¼ bid, with over $12 million of volume.

Indicators stay mixed

Statistical market performance measures were mixed for a second consecutive session on Monday; those indicators had turned mixed on Friday after having been lower across the board on Thursday. Monday marked the fourth mixed session in the last five trading days.

The KDP High Yield Daily Index was down by 2 basis points on Monday to end at 71.81, its fourth consecutive loss, including having declined by 7 bps on both Thursday and again on Friday.

Its yield rose by 1 bp on Monday, to 5.31%, its fourth straight widening, including Friday’s 2 bps rise; the yield had last tightened this past Tuesday, when it had declined by 1 bp – the first time the yield had come in after six consecutive days before that during which it had widened out.

The Markit CDX Series 28 High Yield Index was unchanged on Monday at 106 15/32 bid, 106½ offered, after having edged upwards by a little over 1/32 point on Friday; it had lost more than 17/32 point on Thursday. It had also recently been unchanged on Wednesday and up for a third consecutive session last Tuesday, after breaking out of a six- session slump before that.

But the Merrill Lynch North American High Yield Index firmed by 0.037% on Monday, its first gain after two straight losses, including Friday’s 0.135%, downturn. On Thursday, it had backpedaled by 0.094%, versus its 0.082% gain on Wednesday.

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