Junk rally continues as Fed hikes rates, primary market remains quiet; Valeant extends gains

By Paul Deckelman and Paul A. Harris

New York, Dec. 16 – The high-yield market was broadly higher for a second consecutive session on Wednesday, with some credits up by multiple points.

The rise came even as the Federal Reserve voted to raise the benchmark U.S. interest rate for the first time since 2006, a widely expected action that seemed to have no immediate negative impact on Junkbondland – even though in the past, fears of higher interest rates had been considered to be a bearish factor. Analysts said the Fed move was an indicator of the strengthening economy overall.

For a second straight session, Valeant Pharmaceuticals International, Inc.’s bonds were better in busy trading, although the follow-up gains were smaller than those seen in Tuesday’s big advance. The beleaguered drug manufacturer – which on Tuesday had announced plans for a new distribution agreement with pharmacy giant Walgreens – unveiled downwardly revised guidance for 2016 but expressed confidence in its business plan and reiterated its focus on deleveraging.

Another sizable gainer, in active trading, was Frontier Communications Corp.

The junk primary sphere remained quiet, with more market participants now believing that it is done for the year.

Statistical measures of junk market performance were higher across the board for a second consecutive session on Wednesday.

Primary remains quiet

The primary market stayed quiet on Wednesday, as no deals were announced and no deals priced.

New issue business appears to have concluded for the remainder of 2015, sources continued to say on Wednesday.

However Kraton Polymers, LLC remains in the market with a $425 million offering of eight-year senior notes (B3/CCC+) via Credit Suisse Securities (USA) LLC, Nomura and Deutsche Bank Securities Inc.

There was news on Wednesday that Kraton firmed pricing on its $1.35 billion term loan B. Commitments were due at the end of the day.

The loan appears on a trajectory to price soon, a trader said.

However, the bonds appear to be 2016 business, the source added.

“It looks like the calendar is shot,” the trader remarked.

Sizable outflows on Tuesday

In spite of a notable rally that pushed the junk bond market higher on Tuesday, the dedicated high-yield bond funds reported sizable outflows on the day, a trader said.

High-yield exchange-traded funds saw $108 million of outflows on the day.

Actively managed funds saw a whopping $1.15 billion of outflows on Tuesday.

“Those number don't jibe with anything we saw yesterday,” the trader said, adding that bond prices were firm throughout the Tuesday session.

Better market seen

In the junk bond secondary realm, a trader said that “high yield had a bid to the market.”

He said that there had been an extension of the recent trend of “a rally in the higher-quality BB-type paper,” especially relative to lower-quality, CCC-type credits, which he said “have not had the same lift as the higher-quality paper.”

He said the trend “has been an ongoing theme for a while.”

He also described the activity level, particularly following the mid-afternoon Fed rate hike announcement, as “somewhat muted,” although at another desk, a trader opined that he thought Wednesday’s market was “pretty busy.”

Yet another market source said volume was a little more restrained versus Tuesday’s levels, seeing $3.18 billion of turnover on the Trace system, versus Tuesday’s $3.4 billion.

No Fed fallout seen

One of the traders said that “our market didn’t react one way or the other differently than how they were earlier in the day” on the mid-afternoon announcement by the policy-setting Federal Open Market Committee that it would push up the benchmark federal funds rate by ¼ point to a target range of 0.25% to 0.50%.

It will be the first time since December 2008 that the rate for uncollateralized overnight trading between depository institutions such as banks and credit unions of balances held at the Fed will be above the rate of zero to 0.25% and the first time since June 2006 that the central bank will have raised its rates.

The Fed communique announcing the rate boost cited the strengthening U.S. economy and stressed that rates would be raised gradually in line with economic signals.

The lack of any real junk market reaction to the long-awaited and widely expected rate boost is notable, given the market’s history in recent years of reacting negatively to investor speculation – or official announcements – that the Fed would be tightening up its expansive monetary policy, which was put in place during the Great Recession of 2007-2009.

Valeant extends gains

Among specific issues, Valeant Pharmaceuticals traded higher for a second straight session in active trading, although its follow-on gains were less than the sharp rise seen in the Laval, Quebec-based drug maker’s bonds on Tuesday, when it announced a new distribution agreement with the largest U.S. pharmacy chain operator, Walgreens, which has more than 8,000 outlets.

“They were one of the more actively traded names today,” one market source said, pegging the company’s benchmark 6 1/8% notes due 2025 “up about a point or so” in a 90-to-90½ bid context, versus Tuesday’s closing level at 89¼, which had represented a nearly 5-point surge.

“Other credits in their structure were also up,” he said.

A second trader said that over $159 million of Valeant’s bonds traded, including $71 million of the 6 1/8% notes, which he saw going out at 90¼ bid, up 1 point on the day.

Its 5 7/8% notes due 2023 gained more than 1½ points on the day to finish at 90½, on volume of more than $22 million; those bonds had also risen more than 5 points on Tuesday.

Its 6¾% notes due 2018 were up 1 1/8 point at 99¾ bid, building on Tuesday’s 2½-point gain. More than $20 million traded.

Valeant held its annual investor day presentation on Wednesday, during which company executives outlined its efforts to recover from the well-publicized recent distribution and pricing issues, including by inking the new distribution pact with Walgreens.

They also release downwardly revised guidance for the coming year, including adjusted EBITDA of between $6.9 billion and $7.1 billion, down from their earlier forecasts of $7.5 billion, and outlined their plans to try to hack away at some of the company’s more than $30 billion of debt in hopes of bringing its leverage ratio down to around 4.0 times by the end of next year. (See related story elsewhere in this issue.)

Gimme Credit senior analyst Vicki Bryan, who estimates leverage for Valeant this year at around 6 times, said in a research note Wednesday, “We remain skeptical, though we think Valeant may have headed off worst-case declines in revenue with the Walgreens distribution agreement announced yesterday.”

Frontier firms up

A number of other high-yield credits were seen having caught a bid in active trading on Wednesday.

One of the most notable was Stamford, Conn.-based wireline telephone company Frontier Communications.

A market source said its 10½% notes due 2022 rose to 96¾ bid, on volume of more than $52 million, while its 11% notes due 2025 finished at 95¾ bid, with over $36 million traded; both issues were up 2 points on the day.

Indicators extend gains

Statistical measures of junk market performance were higher across the board for a second consecutive session on Wednesday. Those market gauges had turned better on Tuesday after having been mixed on Monday and lower all around for five straight sessions before that. Tuesday’s rise had been the first since Dec. 1, with the intervening nine sessions a combination of mixed and lower sessions.

The KDP High Yield Daily index firmed by 20 basis points on Wednesday to end at 63.61, its second successive rise; on Tuesday, it had jumped by 46 bps, its first upturn after eight losses in a row.

Its yield came in by 7 bps on Wednesday to 7.46%, its second straight narrowing; on Tuesday, it had tightened by 11 bps, which broke a string of eight straight widenings before that.

The Markit Series 25 CDX North American High Yield index improved by 13/32 point on Wednesday, closing at 100¾ bid, 100 25/32 offered, its third straight gain; on Tuesday, the index rose by 19/32 point, on top of Monday’s 11/32-point firming, its first upturn after five straight losing sessions.

And the Merrill Lynch North American Master II High Yield index saw its second straight advance after eight sessions on the downside before that; it finished up by 0.30% Wednesday after having risen by 0.183% on Tuesday. That was in sharp contrast to Monday’s 1.348% swoon, its second consecutive largest one-day loss of 2015 and one of its biggest one-day losses ever.

Wednesday’s gain cut the index’s year-to-date loss to 4.907% from 5.192%; on Monday, the index’s year-to-date red ink had stood at 5.957% – its lowest level seen since Dec. 31, 2008, when it ended with a 30% cumulative loss on the year.

Several of the index components – its yield to worst, its spread to worst and the average price of a tracked bond –improved modestly for a second straight session on Wednesday after having hit new record high or low levels for the year on Monday.

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