XPO Logistics in focus, drops on short-seller report; Frontier under pressure; funds lose $2 billion

By Paul A. Harris and Abigail W. Adams

Portland, Me., Dec. 13 – The domestic primary market remained dormant on Thursday with December poised to be the first December with no new deal activity in at least a decade.

Meanwhile, the high-yield secondary space continued to firm on Thursday, staging a mid-month rally that may push returns from the red to the black before the year comes to a close.

While several names were seen sharply higher, trading volume remained light with activity driven by end-of-year cleanup and adjustments, sources said.

XPO Logistics, Inc.’s junk bonds were in focus in the secondary space with the notes trading down after the release of a short-seller report that questioned the company’s accounting practices.

Refinitiv’s junk bonds, which were issued in a closely watched LBO financing deal, were trading lower in high-volume activity.

Frontier Communications Corp.’s junk bonds were under pressure with the soon-to-mature 7 1/8% senior notes due March 15, 2019 dropping as much as 4 points in intraday trading.

Meanwhile, high-yield mutual funds and exchange-traded funds – considered a reliable barometer of overall liquidity trends in the junk market – saw outflows of $2.06 billion for the week ended Dec. 12, according to fund-flow statistics generated by AMG Data Services Inc.

The week marked the fourth consecutive week of substantial outflows further widening the gap in what has been a record-setting year for outflows.

The cumulative outflow for the year now totals $31.15 billion, according to a Prospect News analysis of the reports by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division.

The sidelines

The new-issue market remained shuttered on Thursday and is not expected to reopen until January, which is presently expected to see a modest $10 billion to $15 billion of issuance, most of it likely to emerge from a thin pipeline of committed financings.

Ongoing capital markets volatility and a pending rate decision from the Fed have sidelined the new deal market as investors seem generally inclined to put 2018 in the book, sources say.

XPO Logistics eyed

XPO Logistics’ junk bonds were in focus in the secondary space and trading lower after a short-seller report questioned the company’s business practices.

The company’s 6 1/8% senior notes due 2023 were the most active issue in the secondary space with more than $24 million on the tape.

The bonds traded down 2¼ point with the notes set to close the day around 97¾. The bonds closed Wednesday at par, a market source said.

The transportation and logistics company’s 6½% senior notes due 2022 were down about 1¼ point to par ¼ after closing Wednesday at 101½, a market source said.

More than $14 million of the bonds were on the tape by the late afternoon.

Spruce Point Management released a 70-page research report on Thursday alleging the company was employing dubious accounting practices.

The report highlighted the $6.1 billion in capital deployed to complete 17 acquisitions since 2011 and alleged it had only generated $73 million in cumulative adjusted free cash flow.

Investors were giving credence to the report with XPO Logistics stock dropping 26% and the bonds trading off, a market source said.

Frontier under pressure

Frontier’s junk bonds remained under pressure in the secondary space with its soon-to-mature senior notes down 4 points in intraday trading.

The 7 1/8% senior notes due March 15, 2019 traded as low as 93 5/8 on Thursday but stood poised to close the day at 95 after closing Wednesday at 98, a market source said.

More than $20 million of the bonds were on the tape by the late afternoon.

Frontier’s 11% senior notes due 2025 also continued to lose ground in active trading. The notes dropped 2 points to close the day at 65½ with more than $14 million on the tape.

The notes have been under pressure in active trading throughout the week with the notes now down 3 points on the week, a market source said.

Frontier’s 10½% senior notes due 2022 were down 1½ points to close the day at 73 7/8 with more than $13 million of the bonds on the tape. They were also down 3 points on the week.

With more than $400 million in the 7 1/8% notes coming due in three months, investors may be getting nervous, a market source said.

Refinitiv slides

Refinitiv’s junk bonds continued to slide on Thursday with both dollar-denominated tranches from the closely watched LBO financing deal trading sharply below their issue price.

Both tranches dropped about ½ point on Thursday, according to a market source.

Refinitiv’s 6¼% senior notes due 2026 were quoted at 98 bid, 98¾ offered on Thursday and closed the day at 98, sources said.

More than $16 million was on the tape by the late afternoon.

Refinitiv’s 8¼% senior notes due 2026 were quoted at 94 5/8 bid, 95 5/8 offered and closed the day at 95.

Refinitiv priced a $1.25 billion tranche of the 6¼% notes and a $1.58 billion tranche of the 8¼% notes at par on Sept. 18.

The dollar-denominated tranches were part of a four-tranche offering that included two euro-denominated tranches totaling €1.23 billion.

The deal was one of several closely watched LBO financing deals to price in 2018, with the bonds pricing alongside $9.25 billion in term loans.

Proceeds were used to help fund the acquisition of a 55% stake in Thomson Reuters Financial & Risk by Blackstone, Canada Pension Plan Investment Board and GIC.

While the unsecured 8¼% tranche dropped below par soon after pricing, the secured 6¼% tranche held above par until the blowout of credit spreads in late October.

Losses in both tranches widened throughout November and early December.

ETFs see $465 million inflow

The daily cash flows of the dedicated high-yield bond funds were mixed on Wednesday, an investor said.

Following three consecutive days of heavy outflows, high-yield ETFs saw a solid $465 million of inflows on Wednesday.

Actively managed high-yield funds remained negative, sustaining outflows of $130 million, the investor said.

That marks the fourth consecutive daily outflow of a magnitude greater than $100 million, according to market sources.

News of Wednesday's daily cash flows surfaced ahead of the Thursday afternoon report stating high-yield funds sustained $2.06 billion of net outflows in the week to Wednesday's close, an amount that came generally in line with the market's expectations.

Indexes gain

Indexes gained for their second consecutive trading day after a mixed week that started with losses.

The KDP High Yield Daily index gained 3 basis points to close Thursday at 68.30 with the yield now 6.62%.

The index rose 14 bps on Wednesday after dropping 1 bps on Tuesday and 8 bps on Monday.

The index was down 15 bps on the week last week.

The ICE BofAML US High Yield index climbed further into positive territory on Thursday after moving in to the black on Wednesday.

The index rose 4.8 bps with the year-to-date return now 0.069%.

The index gained 27.1 bps on Wednesday and 18.3 bps on Tuesday after dropping 23.9 bps on Monday.

The index was down 11.9 bps on the week last week.

The index had been in negative territory since Dec. 6 after briefly popping back to the black on Dec. 3. Prior to that, the index had posted negative returns since Nov. 15 after seeing positive returns since June.

The CDX High Yield 30 index gained 22 bps to close Thursday at 103.86. The index was up 41 bps on Wednesday and 17 bps on Tuesday after a 14 bps drop on Monday.

The index was down 127 bps on the week last week.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.