Junk bonds sell off as credit spreads widen, crude oil plummets; Intelsat, Avantor, Staples, Frontier down

By Paul A. Harris and Abigail W. Adams

Portland, Me., Dec. 20 – With the high-yield primary market closed since late November, all eyes are on January and the deals it will bring, especially given the current market conditions.

The European primary market is poised to outpace the domestic market, which is expected to start to the new year slow, sources said.

Meanwhile, it was another brutal day for the secondary space with losses widening as credit spreads again blew out and crude oil futures sank further below the closely watched $50 threshold.

The secondary space was active under the deteriorating conditions with several names trading down amid a broad selloff, a market source said.

High-yield ETFs hit on 52-week lows in 10x their average trading volume.

California Resources Corp.’s bellwether 8% senior notes due 2022 remained the most actively traded issue in the secondary space with the notes dropping to a 65 handle.

The energy space continued to lead the secondary market lower but the pain was felt across sectors.

Intelsat’s junk bonds dropped 1½ to 2 points; Avantor Inc.’s 9% senior notes due 2025 dropped 2½ points; Frontier Communications Corp.’s junk bonds dropped 2 to 3 points; and Staples, Inc.’s 8½% senior notes due 2025 dropped more than 3 points.

High-yield mutual funds and exchange-traded funds – considered a reliable barometer of overall liquidity trends in the junk market – saw outflows of $789 million for the week ended Dec. 19, according to fund-flow statistics generated by AMG Data Services Inc.

The cumulative outflow for the year now totals $31.939 billion, according to a Prospect News analysis of the reports by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division.

European primary eyed

The new issue market closed at the end of November with December being the first month in at least a decade to come and go with no new issuance clearing the market.

January, especially early January, is a question mark, sources say.

The environment for issuing speculative grade debt could hardly be less hospitable, with ongoing volatility in the global financial markets, a precipitous and ongoing decline in the price of crude oil, and cash flowing out of the dedicated high-yield bond funds at an average clip of $800 million per week, in the year to last Monday's close, sources say.

The one ray of light may be Europe, a London-based source said.

Europe has three distinct advantages, the banker said.

First, the high-yield market decline got underway in Europe before it did so in the United States, and Europe appears positioned to come out of the stall earlier than the U.S.

Second, European investors watching from the sidelines are seeing a selloff that's overdone. Prices in Europe are starting to look attractive, and investors are poised to take advantage, the banker said.

Finally, global issuers, including issuers headquartered in the U.S., will continue to take advantage of opportunities to raise cash by means of euro-denominated offerings, as happened in 2018, especially as rates in Europe are expected to rise at a more stately pace than that expected in the U.S.

Below $50

Credit spreads widened and panic spread on Thursday as crude oil futures sank further below the $50 threshold.

California Resources 8% senior notes dominated trading activity in the secondary space with the notes dropping almost 3 points to a 65 handle.

The notes traded in a range of 65 to 65¾ and stood poised to close the day at 65½, a market source said. More than $78 million of the bonds were on the tape by the late afternoon.

The notes closed last Friday at 76 and were as high as 97 heading into October when the sell off in crude oil futures began.

The barrel price of WTI crude oil for February delivery continued to plummet on Thursday.

After a slight reprieve on Wednesday, crude oil slid to settle at $45.88, a decrease of $2.29, or 4.75%.

The level spells trouble for the high-yield market with most oil and gas credits underwritten at $50, sources said.

52-week low

Thursday marked a new low for high-yield ETF funds with investors scrambling for the exit.

The SPDR Bloomberg Barclays High Yield Bond ETF closed Thursday at $33.4, a decrease of 1.01%.

More than 47 million shares traded during Thursday’s session versus the 90-day average of 4 million.

The iShares iBoxx $ High Yield Corporate Bond Fund ETF closed Thursday at $80.63, a decrease of 0.87%.

More than 68 million shares traded versus the 90-day average of 4 million.

The sell-off

The run on ETFs sparked a broad selloff in the market on Thursday, which drove several names from across sectors lower, a market source said.

Triple C credits appeared the hardest hit.

Intelsat’s junk bonds were under pressure in the high-volume activity.

Intelsat Jackson Holdings’ 8½% senior notes due 2024 dropped 1½ point to 95¾ with about $32 million of the bonds on the tape by the late afternoon.

Intelsat Luxembourg’s 8 1/8% senior notes due 2023 dropped 3½ points to 75½ with more than $28 million of the bonds on the tape.

Intelsat Jackson Holdings’ 9¾% senior notes due 2025 dropped 2 points to 99½ with more than $16 million of the bonds on the tape.

Specialty chemicals supplier Avantor’s 9% senior notes due 2025 dropped 2½ points to 97 with more than $31 million of the bonds changing hands.

Frontier’s 10½% senior notes due 2022 dropped 2¼ point to 67¾ with more than $30 million of the bonds on the tape.

Frontier’s 11% senior notes due 2025 dropped 3½ points to 61.

However, Frontier’s 7 1/8% senior notes due March 15, 2019 remained relatively stable at 97.

A run on the notes last Thursday pushed the bonds down 4 points to the 94 to 95 range, raising speculation there may be some trouble around their redemption.

However, the notes pared the majority of their losses in the following session.

Staples 8½% senior notes due 2025 dropped 2¼ points to 89¼ with more than $15 million of the bonds trading hands.

Wednesday outflow

The daily cash flows of the dedicated high-yield bond funds were negative on Wednesday, the most recent session for which data was available at press time, an investor said.

High-yield ETFs sustained $320 million of outflows on the day.

Asset managers saw $10 million of outflows on Wednesday.

The news of Wednesday's daily flows preceded a Thursday afternoon report that the combined funds sustained $789 million of outflows in the week to Wednesday's close, according to Lipper US Fund Flows.

Indexes widen losses

Indexes marked their fifth consecutive trading day of losses on Thursday, widening the descent into negative territory as the end of the year approaches.

The KDP High Yield Daily index dropped 67 basis points on Thursday to close the day at 66.99 with the yield now 7.01%.

The index dropped 13 bps on Wednesday, 30 bps on Tuesday, 15 bps on Monday and 6 bps last Friday.

The ICE BofAML US High Yield index saw its losses increase by more than 100 bps with the index crossing the negative 2% threshold on Thursday after crossing the negative 1% threshold the day before.

The index dropped 109.2 bps with the year-to-date return now negative 2.138%.

The index dropped 30.3 bps on Wednesday, 38.6 bps on Tuesday, 24.5 bps on Monday and 18.1 bps last Friday, when it dropped into the red.

The index had been wavering between positive and negative territory over the past two weeks.

The CDX High Yield 30 index dropped 84 bps to close Thursday at 101.43. The index was down 61 bps on Wednesday, 6 bps on Tuesday, 48 bps on Monday and 44 bps last Friday.

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