Primary window narrows; secondary gives back gains; Digicel jumps; Regional Care drops

By Paul A. Harris and Abigail W. Adams

Portland, Me., Dec. 4 – The domestic primary market was again dormant on Tuesday as equity markets plummeted and the 10-year treasury yield curve continued to flatten.

Many have questioned if new deal activity in 2018 is all but over with the window of opportunity for new issuance continuing to narrow.

However, some remain hopeful new paper will materialize before the books are closed on 2018.

While Tuesday marked a brutal day for equities, the high-yield secondary space weathered the storm.

The market was down 1 point on Tuesday after a 1 point gain on Monday, leaving the market largely unchanged from Friday’s close, a market source said.

Crude oil futures saw a volatile session on Tuesday but ended the day in positive territory with all eyes on the upcoming OPEC meeting and what it will mean for crude oil futures.

California Resources Corp.’s 8% senior notes due 2022 traded down in high volume activity on Tuesday as crude oil wavered between gains and losses.

Digicel Group Ltd.’s junk bonds were among the major gainers of Tuesday’s session after the Kingston, Jamaica-based mobile phone operator amended its exchange offer.

RegionalCare Hospital Partners Holdings, Inc./LifePoint Health, Inc.’s 9 ¾% senior notes due 2026 (Caa1/CCC+) were also major volume movers on Tuesday with the notes again dropping below par after breaking par during Monday’s session.

Deal or no deal

Tuesday saw the wheels come off Monday's robust rally in the stock market, prompting junk market watchers to wonder whether new issue activity has run its course for 2018.

“Not necessarily,” is the response of syndicate officials who say that there is a late-year issuance window that should stay open until at least Friday, Dec. 14.

However, the volatility that continues to rock the world's financial markets will likely motivate prospective issuers who can do so to put off deals until 2019, one syndicate banker conceded.

In addition to the S&P 500 falling 3.24% on Tuesday, crude oil prices, which staged a rally on Monday, were volatile on Tuesday.

With energy comprising 15% of the high yield index, weak oil prices exert an unmistakable corrosive force on the junk market, the banker said.

All of it is taking place against a backdrop of apprehension in the financial markets regarding trade restrictions and Brexit, the source noted.

And to top it all off, the Federal Reserve Bank's Federal Open Market Committee is expected to move the Fed Funds rate 25 basis points higher when the committee meets on Dec. 18 and 19, the banker added.

In any case, no new deals were announced Tuesday. No one professed visibility on any potential December deals. And the active forward calendar remained empty.

Unchanged

The high yield secondary space was holding on Tuesday despite a brutal day for equities.

While the market gave up its 1 point gain from Monday, it was largely unchanged from Friday’s close, a market source said.

After a blow out in credit spread in mid-November, there continued to be some improvement in single B and double B credits.

Spreads were 8 bps tighter week over week in better credits, although there was not much of a change in triple C names, a market source said.

While trade war jitters and the flattening yield on 10-year treasuries sparked a dramatic sell-off in equities, there was no real panic in the high-yield secondary space, the source said.

With the OPEC meeting on Thursday to be followed by employment data, it will be an interesting end to the week, the market source said.

Oil futures

California Resources’ 8% senior notes due 2022 were again the most actively traded issue of Tuesday’s session with crude oil futures volatile.

While crude oil futures closed the day with gains, California Resources’ 8% notes closed the day with losses.

The notes rose as high as 79 early in Tuesday’s session but closed the day at 77½, about a 1 point drop from Monday, a market source said.

The barrel price of WTI for January delivery traded as high as $54.55 and as low as $52.61 before settling at $53.25, a 30 cent or 0.57%.

More than $37 million of the bonds were on the tape by the late afternoon.

California Resources’ 8% notes jumped 2½ points on Monday as crude oil futures rose almost 4% on production cut news.

Russia signaled it would join OPEC in curbing production and the Alberta province in Canada announced a more than 8% oil production cut.

All eyes will be on OPEC on Thursday for clues about future production. Crude oil futures have plummeted throughout October and November on fears of oversupply.

Digicel jumps

Digicel’s junk bonds were among the outperformers of Tuesday’s session with the notes seeing large gains after the mobile phone operator revised the terms of its exchange offer.

Digicel’s 8¼% senior notes due 2020 rose 5 points to 71¾ with more than $17.5 million of the bonds on the tape by the late afternoon, according to a market source.

The 6¾% notes due 2023 were up 1 point to 81½ with more than $19 million of the bonds on the tape.

The 6% notes due 2021 also rose 1 point to close the day at 91.

The bonds were on the rise after Digicel amended its offer to exchange its junk bonds maturing in 2020 and 2022.

The amended exchange offer will push out the maturity on the notes by two years.

The outstanding 8¼% senior notes due 2020 may be exchanged for newly issued 8¼% senior notes due 2022 in two phases.

The 7 1/8% senior notes due 2022 may be exchanged for newly issued 9 1/8% senior PIK notes due 2024 with cash interest to accrue at 7 1/8% and PIK interest to accrue at 2%, according to a company news release.

Digicel is also soliciting consents to amend the indenture to eliminate restrictive covenants and events of default covenants contained in the indenture.

RegionalCare below par

RegionalCare/LifePoint’s 9¾% senior notes due 2026 were active on Tuesday with the notes again dropping below par after staging a quiet rebound in late November.

The notes dropped 5/8 point to close Tuesday at 99 3/8, a market source said. More than $22 million of the bonds were on the tape by the late afternoon.

The notes broke par on Monday for the first time since they hit the secondary space.

RegionalCare priced a $1.425 billion issue of the 9¾% notes at par on Nov. 14. Since RegionalCare, there have only been two dollar-denominated junk bonds to price.

The 9¾% notes have struggled since hitting the secondary space, dropping as low as 97¾ about one week after pricing.

However, the notes slowly gained in the last week of November and broached par on Monday. While weaker on Tuesday, the notes were still improved from their lows.

Monday outflows

While stocks were rallying vigorously on Monday retail money was flowing out of junk, a trader observed.

High-yield ETFs sustained $399 million of outflows on the day.

Actively managed high yield funds saw $225 million of outflows on Monday, the trader said.

With three days of the present five-day reporting period tallied, the combined junk funds were tracking $555 million of outflows in the week to Monday's close, the source added.

Indexes drop

Indexes dropped on Tuesday after opening the week on strong footing.

The KDP High Yield Daily index was down 4 bps to close Tuesday at 68.53 with the yield 6.5%. The index rose 20 bps on Monday after a 21 bps gain on the week last week.

The ICE BofAML US High Yield index gave back some of its gains from Monday while still remaining in the black. The index dropped 18.3 bps with the year-to-date return now 0.222%.

The index was up 48 bps on Monday after a 40.6 bps gain on the week last week.

The index returned to positive territory on Monday after sinking into the red on Nov. 15 for the first time since June.

The CDX High Yield 30 index dropped 90 bps to close Tuesday at 103.89. The index was up 32 bps on Monday after a meteoric rise of 104.12 bps on the week last week.

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