Distressed bond market broadly lower; energy names off across the board; Sprint bonds battered

By Paul Deckelman

New York, Jan. 20 – Bonds of troubled companies were lower on Wednesday, distressed-debt traders said, part of an overall retreat by the broader high-yield bond market, which was seen taking its cues from falling equities and the continued slide in world crude oil prices.

The latter helped to weigh down the already battered bonds of oil and natural gas exploration and production companies such as Whiting Petroleum Corp., Chesapeake Energy Corp., Oasis Petroleum Inc., WPX Energy Inc., EP Energy Corp. and Memorial Production Partners, LP, among others.

In the convertibles market, E&P credits such as WPX and Stone Energy Corp. were under pressure.

And the same was true in the emerging markets space for such names as Petroleos Mexicanos SAB de CV and Petroleos de Venezuela SA.

The latter oil-dependent nation’s sovereign debt was down as well.

The carnage was not limited to the energy space.

Back among the junk bonds, the single worst-performing issue among the most actively traded credits was Sprint Corp.’s 7% notes due 2020, down more than a dozen points on the day. The No. 3 U.S. wireless carrier’s other bonds across its capital structure were all also seen down multiple points in very active dealings, and its stock slid badly as well.

The convertibles market meantime saw Fluidigm Corp.’s paper and that of Navistar International Corp. having been whacked down from Tuesday’s levels.

Market broadly lower

A trader characterized Wednesday’s session as “a wild day,” with most of the focus on the oil and gas names, which he said “just got decimated.”

At another desk, a junk bond trader said that junk prices were on the slide early on, although “things kind of found a little floor around mid-day, then they were off the lows into the afternoon. So we finished up stronger than how it felt in the morning,” though still “definitely” down on the day.

Junk bonds, and their ever-growing distressed-debt component, were seen following the lead of stocks, which finished sharply down on the session, although in that market too, shares managed to bounce off the mid-day bottoms to at least cut their losses somewhat, helped by technical factors.

The bellwether Dow Jones industrial average was in the red all day and plummeted as much as 565 points during the session before trimming its losses and closing down 249.28 points, or 1.56%, at 15,766.74. Other broader market indexes exhibited similar trajectories.

Energy issues lead the retreat

“Oil was definitely the market’s area of most focus,” a trader said, pointing to the broad sell-off in the E&P space, in line with continually sagging world crude oil prices.

The February contract for the benchmark U.S. crude oil grade, West Texas Intermediate – which expired at the settlement Wednesday – saw its third consecutive loss on the New York Mercantile Exchange after two straight gains and its 10th loss in the last 12 trading days, sliding as low as $26.41 per barrel intraday before settling at $26.55 – still down $1.91, or 6.75%, its lowest level since May 2003.

The March contract, which now becomes the front month, was off by $1.22, or 4.1%, settling at $28.35 per barrel.

The March contract for the benchmark international grade, Brent crude, also saw its third straight downturn, falling as low as $27.10 per barrel before settling at $27.88, down 88 cents on the session.

Crude prices slid after the International Energy Agency warned on Tuesday that the oil market could “drown in oversupply,” especially once Iran returns to the world oil market now that international sanctions against the Tehran regime have been lifted. The Iranians could add another 500,000 barrels per day to what is already a heavily glutted market.

Against that sobering backdrop, junk-rated oil producers’ bonds were once again taking a pounding.

One of Tuesday’s big losers, Whiting Petroleum, was again in that uncomfortable role on Wednesday. A market source said that its 5¾% notes due 2021 swooned by 8¼ points on the day, going out at 51 bid, on volume of over $18 million, while the Denver-based E&P company’s 5% notes due 2019 did almost as badly, off 7¾ points on the session to close at 52 bid, as over $16 million changed hands.

Whiting was hardly alone. Houston-based Oasis Petroleum’s 7¼% notes due 2019 were seen by a trader finishing at 45 bid, down 4¼ points, with over $11 million traded. Its 6 7/8% notes due 2023 lost 1½ points, finishing at 39 bid, on volume of over $13 million.

WPX Energy’s 5¼% note due 2017 was one of the most actively traded energy credits on the day, with over $22 million moving around, and those notes, almost alone among the energy bonds, have managed to hold onto most of their value, finishing at 93 1/8, down 5/8 point on the day.

A trader noted that the issue is very short – scheduled to mature in slightly under a year, on Jan. 15,

2017.

“Obviously, [investors] figured there’s still enough money there” that the bonds will be paid off on schedule when they mature next year.

However, he said that other investors might not be so sure of that, electing to “take the 7-point hit [from their par value] now.

“A bunch of people sold out, but somebody had to buy ’em.”

He also pointed out that the rest of the company’s longer paper was trading down in the 50s.

Its 6% notes due 2022 got chopped up to the tune of almost 5 points on Wednesday, falling to just over 51 bid, with over $10 million traded.

Also among the busier oil and gas names, Chesapeake Energy’s 8% notes due 2022 “traded fairly actively today,” a trader said, generating over $21 million of turnover while losing 1 point to end at 43 bid.

Memorial Production Partners’ 7 5/8% notes due 2021 eased by 5/8 points, closing at 25 1/8 bid, with over $16 million traded.

Elsewhere in the oil and gas world, Energy Transfer Equity LP’s 5 7/8% notes due 2024 fell 5¾ points to 64¾, with over $10 million traded. Williams Cos. Inc.’s 4.55% notes due 2024 dropped more than 4 points to 54 5/8 bid, on over $13 million of volume. Williams’ board issued a statement Wednesday indicating that it is “unanimously committed” to completing the pending merger transaction with Energy Transfer Equity, which was announced back in September.

A trader, looking generally at the carnage in the junk oil space, opined that “the distressed levels in oil [prices] is going to continue to pressure these E&P names further than they already have been.”

He continued that “I don’t see any kind of firming unless we get a floor put into where oil is, or even more of an uptick in the price” – something seen unlikely in the short term barring any unexpected geopolitical developments in the always volatile Middle East or decisions by oil producers to finally start reining in production.

EM energy bonds hit

In the emerging markets space, bonds of some of the Latin American state-operated oil companies were lower, in line with generalized weakness in energy issues, and sovereign bonds from the region were also seen having widened out on Wednesday.

For instance, a trader said that bonds of Mexico’s state oil monopoly, Petrobras, traded lower and saw only sellers on Wednesday.

A trader saw the 2017 notes of Venezuela’s PDVSA closing at 40, down from 42.60.

He saw that country’s sovereign bonds sagging on oil prices, with the 2027s trading at 33, down from 34.30.

Other sovereign credits from the oil-dependent region that trade on a spread basis were seen having widened out on Wednesday.

Late in the day, one of the traders said, Latin American sovereign credit was wider but off the wides and lows of the session.

A trader said that notes from Peru moved “lower and wider, but cash prices are getting a bit of a cushion from the U.S. Treasury rally.”

Brazil’s five-year credit default swap spreads ended the day at 506 basis points, up from 504 bps, after trading as wide as 515 bps. Mexico’s closed at 213 bps, up from 210 bps, after trading at 226 bps, he said.

“Cash prices are only slightly lower on the day as a U.S. Treasury rally helps to cushion spread-widening.”

Another trader said that “flows continue to see better sellers of EM paper, with the selling rarely subsiding, even when we do get a bounce,” he said. “The trend seems to be selling into rallies, and dip buyers are becoming increasingly scarce.”

Colombia’s notes widened as much as 20 bps on Wednesday before finishing the session about 5 bps to 10 bps wider, yet another trader said.

Energy converts trade lower

The energy-driven weakness spilled over from the junk space into the convertibles space, traders in that market said Wednesday.

They said that convertibles traded down on the session, citing the latest hard sell-off in the crude oil and equity markets. The general tone in convertibles was “pretty sour,” and market players were marking the bonds on their books down on little to no trading, a New York-based sellsider said.

“Things are definitely better for sale today,” the sellsider said.

For instance, WPX Energy’s convertibles underperformed the company’s common shares, with the mandatory convertible paper trading down $2.31, or 10%, to $20.34, while the WPX common shares ended off only 6%.

Also among the oil and gas convertibles, Stone Energy paper fell below 60 after trades earlier in the session above that level.

The Stone Energy 1.75% convertibles due March 2017 were last 54.69 to 55, a trader said.

Shares of the Lafayette, La.-based oil exploration and production company fell 20% to $1.93.

The Stone Energy convertibles don’t trade often, but they were down to 60 in small size and offered at 61 to 62 in larger size, with no bids, a second trader said earlier in the day.

Those Stone convertibles had traded on Jan. 6 at 72 bid, 72.5 offered and back on Dec. 10 at 84.75 to 85, another trader said.

Energy restructuring has suddenly become a busy area for Wall Street, but the range of the affliction has widened from energy, mining, coal and metals to stories like Wal-Mart Stores Inc. closing down stores.

“There is now a systemic issue that was originally all driven by commodities,” a market source said.

About 20% of the high-yield index is energy, and roughly half is lower rated, he continued, adding “it is not so much the volume of debt outstanding but the sheer number of issuers and lower-rated issuers that is troubling.”

Other convertibles trade lower

Away from the energy realm, Fluidigm’s convertibles dropped more than 8 points against a 16% slide in the underlying shares of the San Francisco-based genomics and DNA research company. A small lot of the Fluidigm 2.75% convertibles due 2034 crossed at what looked like 47.5 bid, 48 offered, a trader said. Earlier the market in this name was seen at 42 bid, 52 offered. That compared with Tuesday’s trade at 56 versus an underlying share price of $7.44.

Fluidigm shares ended down $1.22, or 15%, at $6.22. They had been down by more than 30% earlier in the session. Cowen & Co. had downgraded the shares.

A very small lot of Navistar’s convertibles saw a 40 bid hit, a New York-based trader said at the end of Wednesday. The Navistar 4.75% convertibles were trading at 41.5 bid, 44.5 offered on Tuesday and were at least 5 points higher than that previously.

Meanwhile, Navistar shares closed up 47 cents, or 8%, at $6.70.

Sprint gets slaughtered

Back among the distressed junk bonds, one of the biggest losers Wednesday was Sprint, whose bonds, along with those of its Sprint Capital Corp. and Sprint Nextel Corp. subsidiaries, were lower across the whole capital structure.

“Sprint was definitely underperforming their space,” a trader declared.

Analysts have recently expressed skepticism about Sprint’s announced plans to cut costs by transferring much of its transmission equipment to government lands and right-of-ways rather than renting space on commercial cellphone towers and also questioned the company’s overall financial health because of its massive debt load.

For instance, analyst David Hamburger of Morgan Stanley said in a research note that the Overland Park, Kan.-based No. 3 U.S. wireless carrier seems to have no clear path to a turnaround that could lead to realizing the full value of its bonds or to recover that value in a restructuring or bankruptcy.

Sprint’s 7% notes due 2020 were the biggest losers among the day’s actively traded credits, free-falling by 12¼ points to end at 60¾ bid, on volume of over $21 million.

Its other bonds were not much better off.

Sprint’s 7 7/8% notes due 2023 dropped 8 5/8 points to 60 3/8 bid, also on $21 million of turnover.

Its 7 1/8% notes due 2024 finished at 60 5/8 bid, down more than 6 points on the day, with over $16 million traded.

Its shorter 8 3/8% notes due 2017 went home at 89¼ bid, down 3½ points, with over $13 million traded.

Sprint’s New York Stock Exchange-traded shares tumbled 19 cents, or 7.20%, to $2.45, on volume of 48 million shares, nearly three times the norm.

Rebecca Melvin and Christine Van Dusen contributed to this review

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