Primary stilled, secondary lower as Brexit shock takes toll; Sun Products jumps on company sale

By Paul Deckelman and Paul A. Harris

New York, June 24 – The high-yield market fell in line with financial markets worldwide on Friday, moving lower on the surprising outcome of Britain’s long-awaited Brexit referendum, asking citizens whether they wanted to see their nation leave the European Union, thus severing political and financial ties dating back to the early 1970s.

Those voters shocked the United Kingdom’s political and financial establishment by voting “Yes” to a dissolution, setting in motion a disengagement process that will consume much of the next several years.

That widely unexpected outcome caused financial markets to react with shock, particularly equity markets in Asia, in Europe and in the United States.

The high-yield market took its cue from the other markets and also moved lower, with many issues down multiple points.

However, unlike the free-falling equities, the junk market’s retreat was considerably more orderly – in fact, many high-yield credits came off the lows they hit in early trading to end only somewhat lower.

Major downsiders included such familiar names as Sprint Corp., Freeport-McMoRan Copper & Gold, Inc. and Chesapeake Energy Corp.

Credits posting gains were few and far between – but one name which stood out was Sun Products Corp., whose bonds shot up solidly on the news that the maker of detergents and other consumer products had agreed to be acquired by German multinational company Henkel AG & Co., KGaA in a transaction valued at about $3.6 billion, including assumed debt.

Statistical market performance measures were lower across the board on Friday after having been higher on Thursday and mixed during the two sessions before that.

Those indicators meantime ended mixed versus where they had closed out last Friday after having been lower all around the week before.

A step back

An “exit” decision on the part of voters in the United Kingdom, who decided the time has come to leave the European Union behind, took many investors by surprise and brought down the shutters on the new issue market on Friday, sources said.

The session got underway to an empty active calendar.

No deals were announced and none priced.

The primary market might not reactivate until after the extended Independence Day holiday weekend in the United States, which gets underway following next Friday’s close, a syndicate official said.

Characterizing the U.S. high-yield market as “resilient,” the official said that dealers are apt to “take a step back,” in order to evaluate the Brexit decision’s impact.

The market would extract a premium from any issuer who chose to come too soon after Friday’s big selloff, the official pointed out.

Also there will be some repricing in the wake of Brexit, with investors likely to demand more compensation for high-yield bond risk amid the volatility.

Early issuers will likely be price-takers, the source added.

Earlier in the day a trader, characterizing trading in U.S. high yield as “orderly chaos,” said the fact that the Brexit news surfaced on a quiet summer Friday may have served to soften the blow.

Had the news surfaced on a Tuesday or a Wednesday, selling might have been more aggressive, the trader said.

In Europe, where the Brexit decision is apt to have a much greater impact, spreads were off their post-ballot wides in the London afternoon on Friday, according to a debt capital markets banker based there.

The iTraxx Euro Crossover index was 72 basis points wider, well off its post-Brexit wides of 110 bps, the source said.

“It’s still a big move,” the banker noted, marking the index at 397 bps bid, versus 320 bps bid on Thursday.

At its tightest the present series of the index was at 291 bps bid in mid-April, the source added.

Meanwhile the European primary market is also sidelined by post-Brexit volatility, the banker said, adding that there had been six to 10 deals in the pipeline awaiting the results of the historic vote.

With the “exit” vote having materialized the market will now have to wait and see, the source said.

Mixed Thursday flows

Dedicated high-yield bond funds saw mixed cash flows on Thursday, the most recent day for which data was available at press time, according to a sellside source.

High yield ETFs saw a hefty $599 million of inflows on the day.

Asset managers were flat to slightly negative, sustaining $5 million of outflows on Thursday.

Thursday’s daily flows trailed news, earlier in that session, that the dedicated junk funds saw $766 million of outflows on the week to Wednesday’s close, according to a report from Lipper US Fund Flows.

The Thursday cash flows of the dedicated bank loan funds were positive, with the loan funds seeing $20 million of inflows on the day, the sellsider said.

A retreat – but not a rout

In the secondary market, prices on most issues were lower and some were multiple points lower.

However, traders said that there was no sense of any panic selling there.

“Things were pretty quiet,” one of the traders said, adding that “the market was more orderly than I expected.”

He said that “some of the higher-beta go-go names were down 3 points or more but then later they finished down 1½ points or so.

“Other stuff was down as little as ¼ to ½ point.

“Given the moves that stocks made” – for instance, the bellwether Dow Jones industrial average plunged 610.32 points, or 3.39%, to 17,400.75 – “you’d think that there would be more losses,” he said.

“It wasn’t like people were hitting bids across the board – not by any means.”

At another desk, a trader said that “the market was down – some things by 3 or 4 points. We saw a lot of that on Trace.”

He opined that “a lot of the sellers were dealers” looking to lighten inventory.

He too saw some issue initially post large-sized losses only to trim them later on.

For instance, he said, Luxembourg-based communications satellite company Intelsat SA’s 8% notes “first fell as low as 97 – but after that, they were around 99 to 99½.”

Many names lower

A market source said that Sprint’s 7 7/8% notes due 2023 “was one of the big losers on the day,” seeing the Overland Park, Kan.-based wireless company’s debt fall 4¾ points to just under 78 bid, on volume of over $32 million.

Oklahoma City-based oiler Chesapeake Energy’s 8% notes due 2022 lost 3 points on the day, ending at 84½ bid, with over $16 million changing hands.

Also in retreat was Phoenix-based metals mining and energy concern Freeport-McMoRan’s 3.55% notes due 2022 – the busiest high-yield credit of the day, with over $77 million traded. Those bonds were seen down 2¼ points at 86¾ bid.

Sun shines on acquisition

With most junk names lower on the day, Sun Products stood out, a trader said, noting that its 7¾% notes due 2021 jumped 6½ points on the session to 103 7/8 bid, with over $39 million traded.

The bonds firmed on the announcement that Wilton, Conn.-based Sun, a privately held maker of detergents and other household products, had agreed to be acquired by German conglomerate Henkel in a $3.6 billion transaction, including debt.

Indicators turn lower

Statistical market performance measures were lower across the board on Friday after having been higher on Thursday and mixed during the two sessions before that.

Those indicators meantime ended mixed versus where they had closed out last Friday after having been lower all around the week before.

The KDP high yield index swooned by 51 basis points on Friday to end at 67.45 after gaining 21 bps on Thursday.

Its yield ballooned out to 6.21% after having come in by 7 bps ion Thursday.

Friday’s levels compared favorably with the 67.38 index reading and 6.23% yield seen last Friday, June 17.

The Markit Series 26 CDX index lost 1 5/8 points on Friday, closing at 101 11/16 bid, 101¾ offered in contrast with Thursday’s 9/16 point gain.

For the week, theindex was down from last Friday’s 102 bid, 102 1/16 offered close.

The Merrill Lynch High Yield Index dropped by 1.092% on Friday versus Thursday’s 0.334% gain.

Friday’s loss dropped its year-to-date return to 8.49% from Thursday’s 9.688%, its peak level for the year to date.

On the week, the index gained 0.134%, versus last week’s 0.724% loss on the week.

© 2015 Prospect News.
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