Junk heads quietly into holiday break with firmer tone; post-holiday primary revival expected

By Paul Deckelman and Paul A. Harris

New York, Sept. 2– The high-yield market closed out the week on Friday on a very quiet note, traders said, heading into the extended Labor Day holiday break in the United States with a generally firmer tone.

Friday was officially a full, regular session, with no early pre-holiday close scheduled – although as a practical matter, desks were lightly staffed, and many participants hit the exits early.

The holiday hiatus includes a scheduled full-day close on Monday for high yield and other U.S. fixed-income markets.

As has been the case throughout the week, and really for most of the past two weeks, no activity was seen in the dollar-denominated domestic junk bond market.

However, market sources said that once the holiday break is history it should be back to business with a vengeance in the junk primary sphere.

Some of those sources anticipate a quick and intense return of new-deal activity, theorizing that issuers will want to get their deals done sooner rather than later against the possibility that the Federal Reserve might choose to raise interest rates at its policy committee’s September meeting – even though August jobs-creation numbers released by the government Friday morning were below expectations, leading some other observers to question whether the Fed will, in fact, pull the trigger on a September rate hike.

With world oil prices spiking upward after several straight days of large losses – an upturn propelled by the prospect that major producers Russia and OPEC might agree on limiting production – oil and natural gas names such as Chesapeake Energy Corp., Continental Resources, Inc., Whiting Petroleum Corp. and SM Energy Co. were all seen improved.

Statistical market performance measures turned higher across the board on Friday, after having been lower all around on Thursday – the first such downside session in more than a month, since July 28 – and two straight mixed sessions before that.

Friday was second stronger session in the last five trading days.

The indicators were also trending higher on the week after having been mixed last week, which followed three consecutive weeks before that of Friday-over-Friday gains.

Busy ahead

There’s a pipeline of deals headed to the market in September – $25 billion of issuance in the dollar-denominated market alone, syndicate sources forecast – being driven by a hunger for yield and an issuance window subject to abbreviation by the central bank, sources say.

Good color on the yield hunger came Friday from Europe on a high-rated euro-denominated junk issue from an Italian oilfield services company that priced on Thursday.

Saipem SpA’s new 3¾% senior notes due 2023 were at 102¾ bid, 103¼ offered on Friday, a market source said.

The deal, the issuer’s debut in the high-yield market, rocketed in secondary trading as it was chased by investors despite being “priced on the screws,” 50 basis points below the tight end of initial guidance of 4¼% to 4½% on Thursday, the source added.

The €500 million tranche priced at par in an upsized €1 billion two-part deal (Ba1/BB+) that also included €500 million of 3% 4.5-year senior notes that also came at par. The total deal size was increased from €750 million.

The €1 billion two-part deal was said to play to €6 billion of orders, with the split between the evenly sized tranches said to be approximately 50-50.

As to the abbreviated time window for issuance, a rate increase from the Federal Reserve is still seen as possible, even though Friday’s non-farm payroll numbers were a miss, a trader said.

The weak payroll report from the Bureau of Labor Statistics – stating that payrolls increased in August by 151,000 jobs, versus the 180,000 jobs that were expected – may not be weak enough to stay the Fed’s hand.

When the Federal Reserve’s Federal Open Market Committee meets on Sept. 20 and 21 it could still yield to the rate hawks and raise the Fed Funds rate for the first time in eight months and the second time in eight years.

Volatility could ensue from such a rate hike, and prospective high-yield issuers would prefer to get deals done ahead of it, sources say.

Hence the September deal pipeline is apt to be front-loaded, with the post-Labor Day week getting off to a running start, rather than a trot.

Issuance continues to lag

As for this week, no new U.S. dollar-denominated and fully junk-rated paper from domestic or industrialized-country borrowers priced, according to data compiled by Prospect News.

That was off from the two tranches totaling $670 million principal amount of new paper – $328 million of proceeds that priced last week, ended Aug. 26, from magazine and tabloid newspaper publisher American Media, Inc.

This week was the first week so far this year in which absolutely no dollar paper had come to market, even surpassing the week ended July 1, which had seen just one single-tranche deal totaling $250 million, for Flagstar Bancorp, Inc., get done as a private placement.

The lack of any new-issue activity for the week kept the year-to-date issuance total at $149.56 billion in 224 tranches.

That was running some 26.8% behind the new-deal pace seen at this time last year, when $204.34 billion had priced in 331 tranches by this point on the calendar, the Prospect News data indicated.

Secondary quietly firmer

When asked whether anything was happening in the market on Friday, a trader quipped “the short answer is ‘no.’

“And the long answer is also ‘no’.”

He said that “everybody was just sitting around, waiting for the [August jobs] number – they got the number and that was kind of it.

“Nobody reacted to it, for the most part.”

At another desk, a trader said that the junk market was “very quiet and with a pretty good tone.”

He said that the 151,000 non-farm payrolls number “was good for the market – not too hot and not too cold.”

But he said there was “very little volume – there’s a lot of people out.”

Reached around midday, the first trader agreed with that assessment, saying that “officially, [the market] is not closed – but unofficially, it’s pretty much shut down.”

He saw no issues standing out, with trading volume “pretty limited, if any.”

Energy names on the upside

With not much standing out general in Junkbondland on Friday, oil and natural gas exploration and production names were seen mostly better, pushed up by a gain in world crude oil prices.

Probably the most active credit in the sector was Chesapeake Energy’s 8% notes due 2022, which gained nearly ½ point on the day to 95 5/8 point – but only around $4 million of the Oklahoma City-based oiler’s notes changed hands.

Also up – though on less volume, in keeping with the overall market’s extremely quiet dealings – were Continental Resources’ 4½% notes due 2023, which gained 7/8 point to finish at 95½ bid.

Another sector peer, Whiting Petroleum’s 5¾% notes due 2021 – were likewise up by 7/8 point, going out at an even 90 bid.

SM Energy’s 5 5/8% notes due 2025 gained ¾ point on the session, a market source said, to finish at 93 bid.

The energy names were on the rise in line with an upturn in world crude oil prices on Friday.

The benchmark U.S. crude oil grade, West Texas Intermediate, shot up by $1.28 per barrel on Friday, with the October contract settling at $44.44 in New York Mercantile Exchange trading; it was WTI’s first gain after four straight losing sessions, including Wednesday, when it plunged by $1.65 per barrel, and Thursday, when it had fallen an additional $1.54.

The key international oil grade, Brent crude, was also sharply higher on the London ICE Futures Exchange on Friday, with the November contract settling at $46.83, a jump of $1.38 per barrel on the day. That was in sharp contrast to the losses seen over the three previous sessions, including Thursday’s $1.44 swoon.

Black gold gained ground in early trading after Russian president Vladimir Putin said he was ready to act on a production freeze with the Organization of Petroleum Exporting Countries – between them, Russia and OPEC produce about half of the world’s oil.

Putin said that he would consider an exception to such a deal for Iran, whose refusal to go along with any production-freeze proposals as it aims to get back to pre-sanction output levels has so far doomed any efforts to strengthen oil prices by reining in aggregate production.

Oil prices also got a boost from a weakening in the dollar, which was pressured by the new August jobs report showing nonfarm payrolls increasing by just 151,000 – below the 180,000 gain analysts had expected.

Indicators turn higher

Statistical market performance measures turned higher across the board on Friday, after having been lower all around on Thursday – the first such downside session in more than a month, since July 28 – and two straight mixed sessions before that.

Friday was the second stronger session in the last five trading days.

The indicators were also trending higher on the week after having been mixed last week, which followed three consecutive weeks before that of Friday-over-Friday gains.

The KDP High Yield Index gained 2 basis points on the session on Friday to go home at 70.66, after losing 3 bps on Thursday – the first downturn after four straight gains before that. Friday was the index’s fifth gain in the last six sessions.

It ended just shy of the new year-to-date and 52-week closing highs of 70.67, set on Wednesday, and down as well from the intraday year-to-date and 52-week highs of 70.73, reached during Tuesday’s session.

Its yield came in by 1 bp to 5.20%, after having risen by 2 bps on Thursday. Friday was the yield’s third narrowing in the last four sessions.

The Markit Series 26 CDX Index rose by 13/32 point on Friday, closing at 104 17/32 bid, 104 19/32 offered. It was the first gain after three consecutive losses, including Thursday’s setback of more than ¼ point.

It compared with last Friday’s close of 104½ bid, 104 17/32 offered.

And the Merrill Lynch High Yield Index improved by 0.72% on Friday, its first upturn after two straight retreats, including Thursday’s 0.059% loss.

Friday was the index’s fourth rise in the last six sessions.

That advance increased its year-to-date return to 14.592%, up from Thursday’s 14.51%, although it remained below Tuesday’s 14.651% finish, which had been its third straight new year-to-date high for 2016.

For the week, the index rose by 0.11% – its fifth straight weekly gain after one weekly loss, and its 10th weekly gain in the last 11 weeks.

Last week, the index rose by 0.261% on the week, leaving the year-to-date return at 14.466%.

The latest weekly gain was the 27th such stronger performance seen in the 35 weeks since the start of the year, with downturns having been recorded in the other eight weeks of this year so far.

-Stephanie N. Rotondo contributed to this review

© 2015 Prospect News.
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