Junk on the rise, though 'window-dressing' seen dominant; volume picks up; holiday break looms

By Paul Deckelman and Paul A. Harris

New York, Aug. 30 - The high-yield market turned in another mostly positive performance on Tuesday, its second in a row.

However, traders said that the dominant feature of the day, such as it was, would probably be end-of-the-month "window-dressing" transactions by accounts looking to pretty up their books - and apart from that, there was no real theme.

Junk and stocks - which normally tend to mostly move in the same direction but which notably diverged last week - were on the same page for a second consecutive session, with equities helped by the revelation that Federal Reserve officials had discussed another round of Treasury bond-buying, among other options for helping the economy, when they met earlier this month, even though that step was not actually adopted.

With the market mostly up, the "usual suspects" were seen among the gainers - the familiar names like HCA Inc., Community Health Systems Inc., Caesars Entertainment Corp. and NewPage Corp.

Volume was considerably improved over the very anemic levels seen on Monday, which had been blamed in large part on the logistical difficulties in getting around the New York metropolitan area in the wake of Hurricane/Tropical Storm Irene over the weekend.

Even with transit service pretty much back to normal and roadways and bridges re-opened, the traders said that many participants were out anyway, having scheduled vacations for the pre-Labor Day week, which traditionally is one of the slowest weeks on the annual high-yield calendar.

The primary continued its summertime siesta, although a few participants began looking past the upcoming three-day holiday break, anticipating a resumption of issuance by such prospective buyers as medical technology company Kinetic Concepts Inc. and packaging maker Sealed Air Corp.

No 'conviction out there'

The primary market did not generate any news on Tuesday.

A trader said that this "will probably be a rather difficult week to get new issuance done, I would believe. It could happen, but it would be a one-deal thing, if even that, and I wouldn't be surprised if there is none."

Once again, market sources sounded cautious notes with respect to the September new issue market during conversations with Prospect News.

There are some bridged deals that could come, a syndicate banker said, acknowledging a general expectation in the market that Kinetic Concepts will undertake the placement of $2.15 billion of notes via Bank of America Merrill Lynch, Credit Suisse and Morgan Stanley and Sealed Air will bring $1.5 billion equivalent of senior notes via Citigroup during the month ahead.

"We're not expecting anyone to bring an opportunistic refinancing deal to the market, at least not in early September," the banker added.

"The opportunistic issuers have already refinanced, or else levels have moved away from where it makes sense to do a deal."

Meanwhile, a portfolio manager, noting illiquid conditions in the present market, said that even though the post-Labor Day period is just one week away, it is simply too early to tell what Fall in the primary market will look like.

Daily cash flows have been mixed, not uniformly negative, the buysider added.

"Right now, you just don't get the sense that there is any conviction out there," the manager said, pointing to an unusual prevalence of two-point bid-offer spreads in both the high-yield bond and bank loan markets.

Market indicators gain ground

Statistical indicators of market performance, which had turned positive on Monday following their uneven showing the week before, including Friday's downturn, posted another day of gains on Tuesday.

A trader saw the CDX North American Series 16 High Yield index up 5/8 of a point on Tuesday to end at 94 1/16 bid, 94 5/16 offered. This was on top of the handsome gain of almost 2 points notched on Monday.

The KDP High Yield Daily index moved up by 21 basis points on Tuesday to 71.95 on top of its 29 bps jump on Monday. Its yield declined by 7 bps to 7.91% after having come in by 12 bps on Monday.

The Merrill Lynch U.S. High Yield Master II index was up by 0.268% on Tuesday, after having gained 0.276% on Monday. That lifted the year-to-date return to 1.336% from Monday's 1.065%. However, the cumulative return remained well below the peak level for the year of 6.362%, which was set on July 26.

Stocks and junk bonds continued to travel down the same path for a second straight session, restoring the usual trend that had been interrupted most days last week. Although hurt by a plunge in the Conference Board's Consumer Confidence index, equities bounced back from their early losses to end on a mildly positive note following the release of the minutes of the Federal Reserve's Aug. 9 meeting, which showed some of the central bank's officials pushing for a third round of quantitative easing, or Fed buying of Treasuries. Even though the step was not adopted, the fact that it was even being discussed was seen as a hopeful sign that the central bank could enact further measures aimed at helping the economy when its policy committee meets in September.

The bellwether Dow Jones Industrial Average ended up by 20.70 points, or 0.18%, at 11,559.95, and broader indexes were also modestly higher. The S&P 500 was up 0.23% on the day, and the Nasdaq Composite was up 0.55%.

A lot of 'window-dressing'

A trader said that he was hearing the market was "very quiet."

He elaborated that "if anybody is out, they're going to be out this week, whether it be because of the hurricane or they're on vacation or even the U.S. Open," referring to the pro tennis championships that got underway on Tuesday in Flushing, Queens, just a short subway ride from Wall Street. "There's always a reason not to come in."

While overall volume levels improved on Tuesday, with a few issues actually racking up more than $10 million in trades, he said that it was still mostly small-sized transactions taking place.

"It's not someone looking for $1 million or $2 million, it's someone looking for [$845,000] of this or [$920,000] of these - like they're trying to round out positions. You've got a kind of window-dressing going on right now."

A second trader agreed that "not much" was happening. He saw the market "very lightly staffed across the entire desks, not only here, but across the board. A lot of junior guys are in."

He called Monday's anemic session "a non-event" and said that while Tuesday had some "decent volume, it was more or less month-end clean-up-type-scenario stuff. Window dressing - clean up the books before the end of the month."

He saw nothing standing out.

He also predicted that although there are several days remaining in the week and although Friday, the last session before the three-day holiday break, is officially a full session - the Securities Industry and Financial Markets Association did away with the traditional pre-Labor Day early market close recommendation several years ago - for all intents and purposes, "[Wednesday] is your last day of the week. After that, everyone moves on."

He opined that at this point, "I think everybody's sick and tired of it [the choppy, uncertain market]. Let's be honest, there's more volatility down the road. You know that, I know that, and the whole world knows it. It's just that nobody wants to deal with it right now."

A lack of supply

Another trader said that "it doesn't feel like there's a lot of supply around right now. Whether that's because of vacations or because inventories are really light, I'm not sure, but it doesn't feel like there's a lot around."

He continued that it "would not be surprising for that to be the case. Guys have been whipsawed pretty good here" within the past couple of weeks. He said many players in the market "were fairly long and got hurt really badly in August, so I think there were a number of desks that were tapped on the shoulder and told to get out of positions. That's the great irony in this market - everybody that was told to get down definitely creates the next rally."

He said part of the wave of selling seen over the last few weeks was "mutual funds selling in anticipation of needing to raise cash. But part of that was clearly dealer inventories being liquidated as well. As you take dealer inventories down to lean levels, that happens to be one of the catalysts for the next rally."

Familiar names firm up

Among specific credits, a trader said that Miamisburg, Ohio-based coated-paper manufacturer NewPage's 11 3/8% senior secured first-lien notes due 2014 "were one of the top volume guys," with over $20 million traded.

He saw the bonds going out at 87 bid, calling that up 1 point on the day.

Another active issue, he said, was ATP Oil & Gas Corp.'s 11 7/8% senior secured second-lien notes due 2015, which had "some decent volume." He said the Houston-based energy acquisition and production company's bonds were about unchanged, still trading around the 87½ bid level.

He also saw Nashville-based health-care company HCA's 6½% first-lien senior secured notes due 2020 up 1¼ points on the day, trading at par, while Reston, Va.-based student loan finance company SLM Corp.'s 8.45% notes due 2018 were the exception to the generally positive rule, down ¼ point, trading at 105¼ bid.

He said all of those bonds were knocking down between $13 million and $20 million of trading volume Tuesday - unlike Monday, when none of the real junk issues even made it into double-digits, a market source said.

But the trader said that once you got past that handful of names, "the volume just started to drop off on everything else."

At another desk, a trader also saw the HCA 6½% notes firmer at 99½ bid, 100½ offered, while its 7½% notes due 2022 were also improved at 97½ bid, 98½ offered.

HCA sector peer Community Health Systems' 8 7/8% second-lien senior secured notes due 2015 firmed to 100¼ bid, 100¾ offered, versus the par level where the Franklin, Tenn.-based hospital operator's paper had been seen on Monday.

Ford Motor Co.'s 7.45% bonds due 2031 were seen up by 2 points Tuesday at 108¼ bid, 109 offered.

Las Vegas-based gaming giant Caesars Entertainment's 10% notes due 2018 were a point better at 76½ bid.

On the downside, a market source said Detroit-based mortgage and automotive lender and online banking operator Ally Financial Inc.'s 8% bonds due 2031 were being quoted as much as 2¾ points lower on the day at 96¼ bid, although the company's 6 7/8% notes slated to mature next month were holding steady at par.

Canadian names seen quiet

From north of the border came word that bonds of such Canada-based companies as Cara Operations Ltd., Videotron Ltd., Viterra Inc. and Precision Drilling Corp. found more "people looking to buy them," as one trader put it.

Even so, a trader said that the market in those issues was mostly quiet, with "not a whole lot going on. Nobody's around, there's not a lot of trading."

Vaughan, Ont.-based restaurant operator Cara Operations' 9 1/8% senior secured second-lien guaranteed notes due 2015 were seen having traded unchanged on Tuesday, though they were more active than they had been on Monday. A trader quoted the bonds at 102 bid, 103 offered, adding that "we traded a small amount."

Regina, Sask.-based Viterra's 6.406% notes due 2021 traded "up about a half a point" to the area of 104½ bid, 105½ offered, a trader said.

The company, a provider of agricultural ingredients to global food manufacturers, sold C$200 million of the notes at par on Feb. 10.

Cristal Cody contributed to this report

© 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.