Market broadly lower; Oasis, other energy credits hit especially hard; primary quiet

By Paul Deckelman and Paul A. Harris

New York, Jan. 13 – The high-yield market was broadly lower on Wednesday, following the lead of equities, which slid amid investor worries about weak energy prices, lackluster U.S. corporate earnings and continued stagnation in the global economy.

As has been the case so often in recent weeks and months, the downside ride was led by energy credits – even though domestic crude oil prices seemed to steady after a long drop, posting their first gain for the year, albeit a small one.

That was not enough to help the likes of Oasis Petroleum Inc., whose 2022 notes were both the most active issue and the biggest loser of the day in Junkbondland.

Other familiar downside names from that same oil and natural gas exploration and production company sector included Chesapeake Energy Corp., California Resources Corp. and EP Energy Corp.

Companies providing services to the E&P companies, such as Weatherford International plc and Transocean Inc. were also lower.

The weakness carried over into non-energy names as well. One such loser was metals mining company FMG Resources Pty. Ltd.

Even away from energy and commodities names, weakness was widespread. American Axle & Manufacturing Inc.’s bonds and shares plunged after the automotive components manufacturer released disappointing earnings guidance.

Traders also noted lower prices among healthcare names such as hospital operators Community Health Systems Inc., Tenet Healthcare Corp. and HCA Inc., as well as drug manufacturer Valeant Pharmaceuticals International Inc.

Primary activity remained muted, with no new U.S. dollar-denominated deals seen having been announced or priced.

Statistical measures of junk market performance turned lower across the board on Wednesday, after having been mixed over the previous three sessions. It was the third lower session out of the last six; the indicators had turned mixed on Friday and stayed that way on Monday and Tuesday, after having been lower all around last Wednesday and Thursday.

Telecom Italia prices

As on Tuesday, the sole speculative-grade deal to clear on Wednesday came from a European issuer.

Telecom Italia SpA priced a €750 million issue of 3 5/8% eight-year senior notes (Ba1/BB+/BBB-) at a 305 basis points spread to mid-swaps on Wednesday.

The spread came on top of final spread talk which had been revised from earlier talk of 305 to 310 bps.

The drive-by deal was launched into the market earlier Wednesday at benchmark size with initial guidance of mid-swaps plus 320 bps.

At the time final talk circulated it was playing to €2 billion of demand, according to a market source.

The reoffer price was 99.632 and the notes yield 3.679%

Deutsche Bank, RBS, SG CIB and UniCredit were the joint bookrunners.

Ongoing capital markets volatility does not appear to have impeded executions on the first two euro-denominated deals of 2016.

Telecom Italia came one day after France-based Atalian priced an upsized €150 million add-on to its 7¼% senior notes due Jan. 15, 2020 (B2/B) at 104.75 to yield 5.896%.

The Tuesday deal size was increased from €125 million.

The reoffer price came in the middle of the 104.5 to 105 price talk.

In a Wednesday press release the Paris-based company stated that the upsized €150 million deal played to more than €400 million of demand from major French and foreign investors.

Big Tuesday outflows from ETFs

High-yield ETFs sustained big daily cash outflows of $684 million on Tuesday, the most recent session for which data was available at press time, a trader said.

Actively managed funds saw $290 million of outflows on Tuesday.

Dedicated bank loan funds saw $80 million of outflows on the day.

High-yield ETFs were sellers on Wednesday, a trader said, but added that ETFs outperformed the stock market on the day.

The SPDR Barclays High Yield Bond ETF (JNK) fell 1.34% on Wednesday whereas the S&P 500 fell a whopping 2.5%.

There was no Wednesday news in the dollar-denominated primary market.

GCP Applied Technologies Inc., which is to be spun off from W. R. Grace & Co., was scheduled to start its roadshow in New Jersey for a $525 million offering of seven-year senior notes (B1/B+).

The Goldman Sachs-led deal, to fund a distribution to W. R. Grace & Co.–Conn., a direct subsidiary of W.R. Grace, and for general corporate purposes, is set to run a full roadshow and price in the week ahead.

Color in the early going has been scarce, traders said on Wednesday.

Recent issues steady, quiet

In the secondary market, traders saw little real activity in either of the two recently priced new issues.

For instance, one trader said that the new Pinnacle Foods Inc. 5 7/8% notes due 2024 were “not much traded – in contrast to Tuesday’s session, when the paper was the most actively traded junk issue on the day and firmed smartly from its issue price.

He saw the “last real trade” go off at 102¼ bid, about where the bonds had gone home on Tuesday.

A second trader saw then moving around in a 101¾ to 102¼ bid range.

Pinnacle, the Parsippany, N.J.-based producer of such familiar consumer foods brands as Duncan Hines cake mixes, Vlasic pickles and Mrs. Paul’s and Van de Camp frozen seafood, had priced its $350 million quick-to-market issue at par late in the session on Monday.

While there was little initial aftermarket dealings right after the pricing, it was a different story on Tuesday, when the bonds got as good as 102½ bid on market-leading volume of over $54 million, a trader said.

The other new deal in the market – last Thursday’s offering of 9 1/8% notes due in April 2023 from Microsemi Corp. – saw only one trade all session, a trader said. He pegged the bonds at 104¼ bid, about the same level that they had finished at on Tuesday.

“It was pretty much where they left off yesterday.”

Another trader said the bonds were being quoted as high as a 104 to 105 bid context in early dealings, before narrowing to around 103¾ bid to 104¾ offered.

Microsemi, an Aliso Viejo, Calif.-based producer of semiconductors and other high-tech electronic and computer components, priced its drive-by offering at par on Thursday; the deal had seen considerable reverse inquiry from potential investors and was two times over-subscribed.

The new bonds had moved up to 101½ bid in initial aftermarket dealings later that same session, with some $9 million changing hands by the close, setting the stage for Friday’s busier session – over $15 million traded – when the bonds had moved up to around 103½.

The price gains continued on Monday and again on Tuesday, though on greatly reduced volume, as indicated, before steadying on Wednesday.

Oasis gets burned

Away from the new issues, the overall junk bond market was lower on Wednesday, in line with a steep fall in equities – the bellwether Dow Jones Industrial Average plummeted by 364.81 points, or 2.21%, to close at

16,151.41 – nearly 1,300 points below where it had finished out 2015 two weeks ago. It was the Dow’s first loss after two straight gains, but also its fourth in the last six sessions. Other, broader market indexes were seen moving in the same trajectory.

Against that somber backdrop, junk was in retreat.

A trader said that “as far as the big movers go, it was all energy.”

Houston-based exploration and production operator Oasis Petroleum in particular “took it on the chin.”

He saw its 6 7/8% notes due 2022 fall by as much as 13½ points in intraday dealings, bottoming at the 43½ bid level, “and they were one of the volume leaders, very heavy trading.”

He saw the company’s 6½% notes due 2021 down between 9 and 10 points on the day at 48 bid.

A second trader saw the Oasis 2022s later in the day down 7½ points on the session at 50¼ bid.

At another desk, a market source pegged the bonds at 49 bid, down 8¾ points on the session, with a market-leading volume of more than $31 million.

Oasis’ 7¼% notes due 2019 finished at 60¼ bid – down more than 4 points from Tuesday’s last odd-lot trading level, but down over 10 points on a round-lot basis. Over $13 million of the notes traded.

Oasis 6 7/8% notes due 2023 nosedived 13 points to 44½ bid, but with only a handful of large-sized trades.

Traders did not see any particular negative news out about Oasis that would account for the credit falling further and faster than other energy-sector peers.

Its New York Stock Exchange-traded shares finished off by 47 cents, or 7.91%, at $5.47. Volume of over 17 million shares was nearly double the norm.

Energy on the slide

Oasis was not the only energy issue to be falling on Wednesday, though its plunge was the most pronounced.

“All of the oil and gas guys were down,” a trader said, – even though crude oil prices, which had been the key driver of the sector’s fall over the past week, seemed to be a little better on Wednesday.

While the February contract for international benchmark crude grade Brent oil suffered its eighth consecutive decline and its ninth loss in the last 10 sessions, falling by 74 cents per barrel, or 2.4%, to settle in at $30.12, its U.S. domestic counterpart, West Texas Intermediate crude for February delivery finally broke out of its slump after seven straight losses. WTI ended up by 4 cents per barrel, settling at $30.48 on the New York Mercantile Exchange. It was WTI’s first gain of 2016.

But that improvement had little impact on the bonds of energy E&P names, such as Oasis Petroleum, or California Resources Corp.

The trader saw Los Angeles-based California Resources’ 6% notes due 2024 down 1 1/8 points on the session, ending at 26 3/8 bid.

Another trader saw those bonds at around that same level, on volume of more than $15 million.

He saw the company’s 8% notes due 2022 down 2½ points, ending at 45¼ bid, with over $22 million of the notes changing hands.

Oklahoma City-based Chesapeake Energy’s 8% notes due 2022 had one of the smaller losses in the sector – less than ½ point on the day. That left the notes at 47 bid, on volume of more than $23 million.

Houston-based EP Energy, on the other hand, “can’t seem to get out of its own way,” a trader said, pegging its 9 3/8% notes due 2020 at 44½ bid, down 7½ points, with over $12 million traded.

“They’ve just been going down by multiple points each day,” he said. “On Monday, they were at 57½, then at 52 yesterday [Tuesday], and now 44½.”

Another part of the energy sector – oilfield services companies – were suffering along with the E&P operators who make up their client base.

Several traders saw Weatherford International’s paper lower; one exclaimed “Yikes,” at the 5 point drop in its 9 5/8% notes due 2019, which took them down to 88 bid. “They were trading a ton of times,” he said.

“A lot of those WFT’s were really off today,” he said, seeing the company’s 4½% notes due 2022 slide by 4½ points to 68 7/8 bid.

Transocean’s 6% notes due 2018 were down 2½ points at 81 bid, with over $11 million traded.

Fortescue bonds beaten down

In the commodities sector, apart from oil, metal mining credits were among the weaker names.

Australia-based iron ore miner Fortescue Metals Group’s 6 7/8% notes due 2022 “were off over 2 points,” ending at 53 bid, a trader said.

He also saw its 9¾% notes due 2022 off 2½ points at 84¼ bid.

“It looks like they were trading pretty heavily,” he said.

American Axle in skid

The trader said that “the non-energy, non-commodity names were generally off ¼ to ¾ point,” although here too, there were exceptions who finished with bigger losses.

One such name was Detroit-based automotive components maker American Axle, which “kind of stood out,” he said – its 6 5/8% notes due 2022 ended off 1¼ points on the day at 101½ bid, with over $19 million traded.

The bonds fell after the company issued less-than-impressive guidance for the upcoming year. It projects full-year 2015 and 2016 sales of about $3.9 billion and $4 billion, respectively, down from Wall Street estimates calling for $3.93 billion and $4.17 billion.

Healthcare is hurting

Elsewhere, there was brisk activity in healthcare names, all of it to the downside.

Franklin, Tenn.-based hospital operator Community Health Systems’ 6 7/8% notes due 2022 lost more than 3 points on the day, a market source said, seeing them end at 86¾ bid on volume of over $27 million, one of the heaviest volumes of the day.

Its 7 1/8% notes due 2020 were down a deuce on the day at 92¾ bid, with over $19 million traded.

Nashville-based rival hospital operator HCA’s 5 3/8% notes due 2025 dropped 1¼ points to end at 99 bid, as over $22 million changed hands.

Dallas-based competitor Tenet Healthcare’s 6¾% notes due 2023 ended off 5/8 point at 89¾ bid, with over $19 million traded.

Canadian drugmaker Valeant International’s 6 1/8% note due 2025 lost 5/8 point to end at 87 1/8 bid, on active volume of over $25 million.

Indicators turn lower

Statistical measures of junk market performance turned lower across the board on Wednesday, after having been mixed over the previous three sessions. It was the third lower session out of the last six; the indicators had turned mixed on Friday and stayed that way on Monday and Tuesday, after having been lower all around last Wednesday and Thursday.

The KDP High Yield Daily Index swooned by 23 basis points on Wednesday to finish at 63.32, its third straight loss and its fourth loss in the last five sessions. The index was down by 7 bps on Tuesday and by 12 bps on Monday.

Its yield rose by 4 bps to 7.18%, its third straight widening out and fourth rise in the last five sessions. The yield had increased by 2 bps on both Monday and Tuesday.

The indicators’ negative overall tone was cast when the Markit Series 25 CDX North American High Yield Index headed south, after having firmed on both Monday and Tuesday. The index plunged by 25/32 point to end at 99 17/32 bid, 99 9/16 offered after having risen by 5/32 point on Tuesday. Wednesday’s loss was its fourth downturn in the last six sessions; before rising on Monday and Tuesday, it had retreated for three straight sessions.

The Merrill Lynch North American Master II High Yield index backpedaled by 0.413% on Wednesday, its third straight loss and its fifth deficit in the last six sessions. It had also fallen by 0.18% on Tuesday and by 0.268% on Monday, in contrast to its 0.110% rise on Friday.

The loss extended its year-to-date decline to 1.129% from Tuesday’s 0.719% downturn.

It was the third straight new biggest year-to-date loss seen so far in 2016, surpassing Tuesday’s red-ink level and marked the first time this year that the cumulative loss had been greater than 1%.

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