Junk market ends week, opens July with better tone in shortened pre-holiday trading

By Paul Deckelman and Paul A. Harris

New York, July 1 – The high-yield market saw a relatively quiet session as expected on Friday, with activity wrapping up early ahead of the extended Independence Day holiday break in the United States, which will see the fixed-income markets closed on the Fourth of July itself, on Monday.

Junkbondland opened the new month of July on Friday pretty much the same way it had closed out June on Thursday – most names had a firmer bias as high yield, along with equities, continued to put Great Britain’s shocking Brexit vote last week to leave the European Union further in the rear-view mirror.

Among the names seen trading higher on fairly decent volume – only a handful of names could actually be characterized as pretty active – were such credits as Sprint Corp., Sprint rival T-Mobile USA Inc. and Intelsat SA.

Energy names such as Freeport-McMoRan Copper & Gold, Inc. – which drills for oil and natural gas besides mining for precious and industrial metals – and Chesapeake Energy Corp. also continued the pattern they had followed all week, following crude oil prices higher.

Downsiders were few and far between, but one name which stood out trading in the red was Micron Technology, Inc.; its bonds retreated and its shares were hammered down after the computer-chip maker reported mediocre third-quarter earnings, offered weak guidance and said it would have to make workforce reductions in response to underperforming sales.

Statistical market performance measures were trending higher on Friday, their fourth consecutive stronger session. They had turned sharply upward on Tuesday, after having been lower all around for two straight sessions, last Friday and Monday, and then added to those gains on Wednesday and again on Thursday and Friday. It was the indicators’ fifth improved session in the last seven trading days.

The indicators were also ending higher on the week versus where they had been last Friday, when they had ended mixed after having been down across the board the Friday before that.

Primary restart expected

Counting the run-up to the United Kingdom’s historic Brexit vote and its volatile aftermath, the new issue market will have lain dormant for a fortnight when capital markets in the United States reopen following the extended Independence Day holiday weekend.

The last deal to clear was the AmeriGas Partners, LP $1.35 billion two-part bullet transaction on Monday, June 20.

The primary remained dormant on the holiday foreshortened Friday session, as expected, with no deals pricing and no deals announced.

However the abbreviated post-Independence Day week should see some new issue action, sources said on Friday.

Heading into the bond market’s recommended 2 p.m. ET early close the market had a good tone, a trader said, adding that ETFs were vigorous buyers on Friday.

The ETFs saw big a daily cash inflow of $728 million on Thursday, the trader noted.

Asset managers were also strongly positive, with $150 million of inflows on Thursday, the source added.

The news follows Thursday’s report from Lipper US Fund Flows that dedicated high-yield bond funds saw $1.63 billion of outflows during the week to Wednesday’s close, a reporting period encompassing the day of the vote, July 23, and the first four market sessions in Brexit’s aftermath.

European primary possible

In spite of bearing the brunt of Brexit-related volatility, a regeneration of the European high-yield primary market in the week ahead is not out of the question, a London-based syndicate banker said on Friday.

“The secondary market is basically back to where it was before the vote,” the banker commented.

“It feels as though there is still an awful lot of uncertainty out there,” the source remarked, adding that a regeneration of the primary market would be headline dependent.

Given continued stability there could be a drive-by deal in the European market next week or the week after, the London-based banker said.

Perhaps a handful of deals – opportunistic dividend and repricing deals, mostly – were sidelined by Brexit, the official said.

The underwritten pipeline has virtually nothing that must come before September, the source added.

“There is almost no overhang on the market if things remain remain choppy,” the banker said.

Light volume but trades happen

A trader characterized volume in Friday’s market as “very dead,” noting that even before midday people were already heading for the exits ahead of the official 2.p.m. ET market close.

However, a second trader said that even though it seemed like nothing was happening, “stuff is getting done.”

He said that the market was higher, although overall volume was muted.

“The ETFs are pushing higher, wanting to get into things,” he said.

He noted that the large liquid names, “the go-go names,” he said – that rise and fall with the ups and downs of the market because they are a convenient place to park money when the market is going up or to withdraw cash from when it is going down, “were up at least another ½ point on the day and 4 or 5 points on the week.”

In that category, he said, were such credits as Frontier Communications Corp., Sprint and Western Digital Corp.

He also saw energy names such as California Resources Corp. and Oasis Petroleum Inc. continuing to trade higher after having been hammered down last Friday and again on Monday in the wake of the oil price slide following the Brexit vote in Britain.

The trader said that offhand he could not think of any issues straying to the downside.

Volume was light, he reiterated, “but people were getting things done.”

Go-go names trade up

At another desk, a trader, when asked how things were going, replied that they were “going as you would expect on the morning of the session before the Fourth of July.”

He agreed with the other trader that ETFs “were trying to dominate things, and pushing things higher” with their buying.

“But actual trade vol. was way lower.”

Among specific credits, he said that Irvine, Calif.-based computer hard-drive maker Western Digital’s 10½% notes due 2024 “have emerged as a big go-go name” ever since the more than $3 billion issue had priced at par back at the end of March.

On Friday, he saw the notes up another ½ point on the session at 107 7/8 bid. More than $11 million of the notes traded – a respectably busy volume on a day that saw most issues generating only a few million dollars of trades, if that.

He said that Sprint’s 7% notes due 2020 gained ½ point in Friday’s trading, ending at 90 bid.

The Overland Park, Kan.-based Number-Three U.S. wireless carrier’s issue traded more than $11 million.

Sprint’s 7 1/8% notes due 2024 shot up 1¼ points to close at 80 3/8 bid, with around $7 million traded.

Also in the wireless sector, T-Mobile’s 6½% notes due 2026 were 1¼ points better at 106¾ on volume of over $8 million.

And the trader saw Intelsat’s 8% first-lien notes due 2024 up 1¼ points, closing at 99¼ bid, with volume a relatively active $16 million.

Another market source said that it looked like the Intelsat 8s were “about unchanged” around the 99 bid level.

However, he said that he had seen some activity in the Luxembourg-based communications satellite company’s new 9½% senior secured notes due 2022.

He saw the bonds at 105 bid on Friday, “so obviously, they’ve traded up a good bit” from the 98 price at which the company issued that $490 million of new paper earlier in the week.

Intelsat announced that it had placed the bonds with certain institutional investors under privately negotiated agreements. Proceeds will be used to fund the company’s previously announced tender offers for three series of its existing bonds.

Energy continues climb

The traders saw names in the high-yield energy patch continuing to improve on Friday – a far cry from a week earlier, when those credits “were getting killed,” one of them said, sliding at that time and again on Monday in tandem with plunging oil prices following the Brexit vote.

Oil prices then pulled out of that two-day slump and began moving back upward, occupying the high ground for most of the rest of the week.

The benchmark U.S. crude grade, West Texas Intermediate for August delivery, firmed by 66 cents Friday on the New York Mercantile Exchange, settling at $48.99 per barrel, after having fallen by $1.55 per barrel on Thursday.

The benchmark international grade, Brent crude for August delivery, likewise improved by 64 cents per barrel in Friday dealings on the London ICE Futures Exchange, settling at $50.35, after having lost 93 cents on Thursday.

Friday marked third gain in the last four sessions for both crude grades.

With crude prices providing a lift, energy credits like Chesapeake’s 8% notes due 2022 strengthened, with that paper up ½ point to 86 bid. More than $7 million of the Oklahoma City-based oiler’s notes changed hands.

Phoenix-based Freeport-McMoRan’s 3.55% notes due 2022 finished ¾ point higher at 88¾ bid on volume of over $9 million.

Elsewhere in the oil patch, a trader saw Denver-based exploration and production company Whiting Petroleum Corp.’s 5¾% notes due 2021 finishing at 91½ bid, up 7/8 point on the day, though only on “a handful” of trades.

Micron lower after disappointing results

One of the few credits seen moving around on the downside was Micron Technology’s 5 5/8% notes due 2026, which were down 1¼ points on the session at 82¾ bid.

At another desk, a market source quoted the Boise, Idaho-based computer-chip manufacturer’s 5½% notes due 2025 almost 1 point lower at 84 3/8 bid.

When informed that Micron had reported less-than stellar quarterly numbers, he said “that’ll do it.”

Micron reported a loss for the fiscal third quarter ended June 2 of $215 million, or 21 cents per share, which was down from earnings of $491 million, or 42 cents per share, in the year-earlier quarter. Revenue fell 25% to $2.9 billion.

Excluding items, the company posted an adjusted loss of 8 cents a share. Analysts had forecast a loss of 9 cents per share on revenue of $3 billion.

Micron’s new cost reduction plan will reduce its workforce by about 7.5%, representing cuts of about 2,400 positions from its 32,000 employee workforce.

Indicators extend gains

Among measures of market performance, the KDP High Yield Index climbed by 24 basis points on Friday to finish at 67.98, after having jumped by 40 bps on Wednesday and another 21 bps on Thursday. Friday marked the index’s fourth straight gain and its fifth advance in the last seven sessions.

Its yield came in by 6 bps on Thursday to 6.05% after having tightened by 12 bps on Wednesday and another 5 bps on Thursday. Friday was its fourth straight narrowing.

Those levels compared favorably with the 67.45 index reading and the 6.21% yield seen last Friday.

The Markit Series 26 CDX Index gained 3/32 point on Friday after ending up 7/16 point on Thursday. It had also risen by 7/8 point in each of the two sessions before that.

The index closed on Friday at 103 9/32 bid, 103 5/16 offered.

That was up from last Friday’s 101 11/16 bid, 101¾ offered finish.

The Merrill Lynch High Yield Index posted its fourth gain in a row on Friday and its sixth upturn in the last eight sessions. It improved by 0.382% on Friday on top of Thursday’s 0.311% advance.

The continued rebound raised its year-to-date return to 9.737% from Thursday’s close at 9.319%.

Friday’s finish was a new peak level for the year so far, eclipsing the former mark of 9.688% that had been set last Thursday amid a short-lived market surge powered at least in part by the ultimately incorrect expectations that the Brexit vote would end with Britons voting to keep their nation’s long-time ties to the European Union.

-Rebecca Melvin contributed to this review

© 2015 Prospect News.
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