Junk market extends post-Brexit losses amid continued volatility; primary seen shuttered near-term

By Paul Deckelman and Paul A. Harris

New York, June 27 – The high yield market saw its second straight lower session on Monday in the wake of the increased volatility following the surprising outcome of last Thursday’s “Brexit” referendum in the United Kingdom, with voters there stunning the political and economic worlds by endorsing Britain’s withdrawal from the European Union.

Junkbondland continued to follow the lead of such other risk assets as equities, which were hammered down on both sides of the Atlantic and in Asia as well on Monday for a second straight session, building on the negative momentum seen on Friday in the immediate aftermath of the vote.

As was the case on Friday, while junk prices were clearly lower, traders did not see wild fire-sale selloff action.

That having been said, large, liquid credits such as Sprint Corp., Western Digital Corp., Frontier Communications Corp. and Numericable SFR SA were off in busy trading.

Energy names were also taking it on the chin, hurt at least in part by the stronger dollar, which has been helped by the safe-haven flight of capital out of Britain’s pound and other relatively risky assets. Among the energy losers Monday were Freeport McMoRan Copper & Gold, Inc., Oasis Petroleum, Inc. and Continental Resources, Inc.

In the primary market, activity remained at a standstill, with participants speculating that no new deals are likely to emerge in the current June-to-July crossover week, which will lead into the extended Independence Day holiday in the United States, further reducing the chances of anything getting done any time soon.

Statistical market performance measures were lower across the board for a second consecutive session on Monday; they had turned lower on Friday after having been higher on Thursday and mixed during the two sessions before that. Including three straight lower sessions around the middle of the month – the last previous lower sessions – Monday was the market’s fifth downside session in the last 12 trading days.

Primary quiet

The new issue market remained quiet, as expected, on Monday, with no deals pricing and no new deal announcements made.

Volatility related to last week's historic Brexit vote could keep the new issue market shuttered until after the extended Independence Day holiday weekend in the United States, which is scheduled to get underway with a recommended 2 p.m. ET early close on Friday, sources say.

Prospective issuers would pay a premium for doing a deal amid the post-Brexit volatility, they add.

Friday inflows

In the face of last Friday's volatility, the cash flows of the dedicated high yield bond funds were positive on the day, a trader said.

High yield ETFs saw $303 million of inflows on the day, while asset managers saw $110 million of daily inflows on Friday, said the source.

In part those numbers could reflect the late-Thursday period, when markets in the United States rallied hard on the expectation – which later proved incorrect – that UK voters would elect to remain in the EU, the trader explained.

A weaker tone prevails

In the secondary market, a trader said that “we began the day at our weakest point, with many names down anywhere from 2 to 4 points.”

He said that those issues came off their lows to end around 1 to 2 points lower, “with stuff in-between.”

Overall, he said that the junk market had “a fairly weaker tone,” with things ending down between 1 and 3 points.

Junk credits broadly weaker

A market source said that among the names that were seen points weaker were both halves of Western Digital’s giant-sized bond deal, which came to market at the end of March and which has been an active fixture in Junkbondland ever since.

He saw the Irvine, Calif.-based computer hard-disk drive manufacturer’s split-rated (Ba1/BBB-/BBB-) 7 3/8% senior secured notes due 2023 down 1 1/8 point at 103¼, with over $31 million having changed hands, while its purely junk-rated (Ba2/BB+/BB+) 10½% senior unsecured notes due 2024 closing at 103 bid, down 1¾ points, on volume of over $30 million.

In the communications sphere, Stamford, Conn.-based wireline telecom company Frontier’s 11% notes due 2025 were among the day’s most active issues, the market source said, pegging those bonds at 100½ bid, down 1 point on the day, with over $31 million traded.

Overland, Park, Kan.-based wireless operator Sprint’s 7 7/8% notes due 2023 lost nearly ½ point on the day to end at 77½ bid – one of the day’s smaller losses, and thus, better performances. More than $16 million of those notes traded.

French cable, broadband and telecom company Numericable’s 7 3/8% notes due 2026 were seen down 1¼ point on the day at 95¼ bid, also on volume of over $16 million.

Intelsat trends down

Luxembourg-based communications satellite company Intelsat SA saw its Intelsat Jackson Holdings SA unit debt declining in Monday trading.

A trader said the unit’s 8% senior secured notes due 2022 were “active and a good bit lower,” trading around 96. That was “down about 3 points,” he said.

Another trader saw the 5½% notes due 2023 losing 3½ points to close at 60.

Yet another source pegged the 6 5/8% notes due 2022 at 65 bid, off 3 points for the day.

In a regulatory filing on Monday, Intelsat said that it has been engaged in financing talks with some unaffiliated investment funds. Intelsat is currently in the process of tendering for three series of notes at the Jackson unit, for cash up to $625 million.

The tender – which was extended for the third time on Friday to this coming Wednesday – is contingent upon the company securing additional financing.

Intelsat said the talks were ongoing and that no deal had yet been reached.

Energy names trading off

Back on terra firma, traders said that energy credits were among the losers on Monday, pulled down by sagging oil prices.

The benchmark U.S. crude grade, West Texas Intermediate for August delivery, slid by $1.31 per barrel in trading on the New York Mercantile Exchange, settling at $46.33 – its second big loss in a row, following Friday’s $2.47 plunge.

International benchmark Brent crude for August delivery likewise fell by $1.25 per barrel to $47.16 on the London ICE Futures Exchange, on top of Friday’s $2.50 per barrel nosedive.

Oil prices swooned as the British pound hit 31-year lows and the dollar soared to a 3½ month high. The greenback's rally made oil and other dollar-denominated commodities less attractive to holders of other currencies

Among junk energy credits, Phoenix-based metals mining and oil and gas company Freeport McMoRan’s 3.55% notes due 2022 were down more than a deuce on the day to end at 84½ on what one trader called “pretty good” volume on the day – more than $50 million of turnover, topping the junk Most Actives list.

Continental Resources’ 4½% notes due 2023 lost nearly 2½ points to end at just over 90½ bid, while its 5% notes due 2022 closed at 93¾ bid, down 3 points on the day, with about $15 million of each of the Denver-based oil and natural gas company’s bonds traded.

Houston-based oiler Oasis Petroleum’s 6 7/8% notes due 2022 lost over 3½ point on the day to end at just under 89 bid, on volume of over $13 million.

Indicators turn lower

Statistical market performance measures were lower across the board for a second consecutive session on Monday; they had turned lower on Friday after having been higher on Thursday and mixed during the two sessions before that. Including three straight lower sessions around the middle of the month – the last previous lower sessions – Monday was the market’s fifth downside session in the last 12 trading days

The KDP High Yield index plunged by 34 basis points on Monday to end at 67.11, its second straight loss and fourth downturn in the last five sessions. It had swooned by 51 bps on Friday, after having gained 21 bps on Thursday.

Its yield ballooned out by a dozen bps on Monday to 6.33%, its second straight widening and fourth widening in the last five sessions; the yield had shot up by 15 bps on Friday, after having come in by 7 bps on Thursday.

The Markit Series 26 CDX index slid by nearly ¾ point on Monday to 100 15/16 bid, 101 offered, its second loss in a row and third in the last four sessions. It had lost 1 5/8 points on Friday, in contrast with Thursday’s 9/16 point gain.

The Merrill Lynch High Yield index suffered its second successive setback on Monday as it retreated by 0.576%, after having plummeted by 1.092% on Friday, versus Thursday’s 0.334% gain.

Monday’s loss dropped its year-to-date return to 7.864% from Friday’s 8.49% – the first time the cumulative return has been under the psychologically significant 8% marker since June 1, when it closed at 7.487%.

The index was well down from its peak level for the year-to-date of 9.688%, set just this past Thursday amid a market surge powered at least in part by the ultimately unjustified and incorrect expectations that the Brexit vote would end with Britons voting to keep their nation’s long-time ties to the EU.

Stephanie N. Rotondo contributed to this review.

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