Junk broadly lower as stocks dive on recession fears; new Avis down further; funds gain

By Paul Deckelman and Paul A. Harris

New York, Sept. 22 - The high-yield market was anywhere but flying high on Thursday, pulled broadly lower by overall financial market angst brought on by investor fears of a new global recession. Stocks led the way downward with junk following along.

Traders saw bonds down sometimes by multiple points, stating that the big high-beta names that everyone actively trades, such as Caesars Entertainment Corp.'s 2018 issue, probably got hit worse than most other credits.

Other familiar names moving to the downside included such market benchmarks as Community Health Systems Inc. and Ford Motor Corp.

Among the recently priced issues, Avis Budget Car Rental LLC's new paper, which was already struggling to stay above its issue price in dealings after it came to market on Wednesday, continued to travel in reverse on Thursday.

New issues Iron Mountain Inc. and Bill Barrett Corp. were at the same time quoted as having completely given up the gains those two issues had notched after they priced on Tuesday.

Traders saw Rite Aid Corp. paper down about a point on the day, following the drugstore chain's release of somewhat better-than-expected quarterly results. The sources said that decline was actually a pretty decent showing, given the market's overall bearish tone.

Statistical measures of Junkbondland performance were lower across the board.

However, there was one positive indicator, as high-yield mutual funds, considered a key barometer of overall market liquidity trends, notched their third straight upturn in the week ended Wednesday.

AMG sees $517 million gain

As Thursday's session was finishing up, market participants familiar with the weekly AMG high-yield mutual fund flow statistics generated by Lipper/FMI said that in the week ended Wednesday, $517 million more came into those weekly reporting funds than left them.

It was the third consecutive weekly inflow, following the $209.8 million cash infusion seen the week ended Sept. 14.

Those three weeks of gains, during which net inflows have totaled $1.303 billion, broke a five-week losing streak dating to the week ended Aug. 3. In that period, the funds tallied a net loss of some $4.854 billion, according to a Prospect News analysis of the numbers.

For the year as a whole, inflows have been seen in 24 weeks versus 14 outflows, according to the analysis.

While at one point year-to-date net inflows had totaled as much as $7.82 billion, which was recorded in the week ended May 25, the recent string of sizable outflows eventually erased that bulge and drove that year-to-date total into the red for a time, although it's now back in the black. With the latest weekly gain, the 2011 cumulative inflow total moved up to an estimated $728 million, according to the analysis.

While fund flow patterns began the year on a roll with cash infusions totaling more than $8 billion seen over a 14-week stretch from early December through mid-March, including the more than $6 billion taken in during the first 10 weeks of this year, they turned choppy for several months after that with a couple of weeks of declines, This was followed by several weeks of inflows, going back and forth. After a seeming break to the upside in July, when four straight inflows were recorded, August was a complete wipeout, with the five downturns while September has so been on the positive side.

The market downturns the past two sessions, however, may have provoked a surge of redemptions, which could turn next week's figure negative.

Cumulative fund flow estimates may be revised upward or downward or be rounded off and could include unannounced revisions and adjustments to figures from prior weeks.

Analysts say the continued flow of fresh cash into junk - and the mutual funds represent but a small, though observable and quantifiable percentage of the total amount of money coming in - fueled the record new deal borrowing binges seen in both 2009 and then in 2010 as well as the robust secondary market seen both years.

Those trends had pretty much continued into 2011 as well, although the market hit something of a dry patch in June, then seemed to recover in July - only to run into a brick wall for all of August, from which the junk market has been only now just starting to recover.

Primary stalled

Volatility in the global capital markets, trailing announcements emanating from the Wednesday meeting of the Federal Reserve Bank's Federal Open Markets Committee, sidelined the high-yield primary market on Thursday, sources said.

Cash bonds and synthetics underwent significant declines, with cash bonds down a point early Thursday afternoon, according to a debt capital markets banker.

Late in the European session, the Markit iTraxx Crossover S16 index was 855 basis points bid, 54 basis points wider on the European session, according to an email message from Markit.

The index, which is a widely followed measure of risk aversion among European investors focused on junk bonds and other risky assets, was 396 bps bid at the end of June, according to a London-based investment banker.

This past Monday, the index rolled into the S16 from the previous S15 incarnation, the banker added. In the roll, 10 more names were added to the index.

The S15 continues to trade but is no longer liquid, according to the banker, who added that it was trading at 760 bps bid heading into the London close.

However, the S15 spread difference from the end of June - 760 bps minus 396 bps for a spread of 364 bps - likely understates the widening that has taken place in the interim, the banker said.

Hence the difference between Thursday's close on the S16 and the end of June levels of the S15, which the banker calculated to be about 385 bps, likely paints a more accurate picture of the increase of risk-aversion since the end of June despite Monday's roll complicating the calculation.

Inflows continue

In spite of market volatility and risk aversion, cash continues to flow into the high-yield asset class.

That's according to numbers reported on Thursday by the two competing fund flow trackers, EPFR Global and Lipper-AMG.

Indications of positive flows, however, don't stop with those reports, according to a high-yield mutual fund manager who saw inflows during the entire week's reporting period up until Wednesday's close.

"People are looking for yield," the manager explained.

"With 1% to 2% GDP growth expected in the U.S. economy, a recessionary scenario in Europe and China's GDP growth forecasts being pared back to 5% to 6%, your best chance for returns will come in the form of a coupon or a dividend."

Not today, maybe tomorrow

Pressed for a report on primary activity heading into Thursday afternoon, a New York-based high-yield syndicate banker turned out empty pockets.

"Nothing is going to price today," said the banker.

"Somebody might try to price a deal on Friday or Monday, but any issuer who does that needs to be rate-insensitive."

The market remains open to familiar issuers with good credit ratings, but even they will pay to bring a deal against the backdrop of volatility that is presently rocking the global markets, sources say.

Recent deals are holding in, the syndicate banker said, but added that all of the recent deals were priced and structured according to the present dynamics of the market. With the volatility priced in, the recently minted bonds might be expected to retain their value, the source said.

Only one dollar-denominated deal remains on the active forward calendar.

Stillwater Mining Co. had aimed to price its $300 million offering of five-year senior notes, via Deutsche Bank Securities, before the end of the week.

There was no news on the deal during the Thursday session.

No official price talk has been released on the Billings, Mont.-based palladium and platinum producer's deal.

Yield conversations in the high-10% range, however, have taken place, according to an asset manager who works for a high-yield mutual fund.

An ugly day

Secondary market traders saw junk down pretty much across the board following the lead of stocks, which slid badly on a combination of investor fears about an onrushing global recession and disappointment with the Federal Reserve's latest plan to bolster the U.S. economy by buying long-term Treasury bonds - "Operation Twist" - carried over from Wednesday's session.

One of the junk traders, echoing a thought that a number of market participants had expressed, opined: "I don't see how flattening the yield curve is going to work - all it does is create a disincentive for lending. This whole plan, to me, is just completely backwards."

"What bank is going to lend me money at 3% in the first place? And now, you're going to make it that much less profitable for them to do it? We're so focused, so stuck on that 'demand' side of lending that we're missing the point that there's no reason for the 'supply' side to be available," the trader added.

With that kind of skepticism running rampant, the bellwether Dow Jones Industrial Average, which had plunged by nearly 284 points on Wednesday - most of it late in the day after the Fed announcement - dropped by as much as 500 additional points on Thursday before pulling out of that nosedive - a little - but still ending down 391.01 points, or 3.51%, at 10,733.83.

Broader indexes, such as the Standard & Poor's 500 and the Nasdaq Composite, likewise were beaten down, with the S&P ending down 3.19% and the Nasdaq closing off 3.25%.

Not surprisingly, that sea of red ink spilled over into the junk precincts, where one trader remarked that "ugly" didn't do the market justice.

"The word should be 'fugly,' " he observed.

It was a "nasty day," another trader agreed. While appreciating the witticism attributed to an anonymous portfolio manger making the rounds that the only two viable positions in the markets on Thursday, other than Treasuries, were "cash and fetal," he added, "it clearly wasn't high yield today."

Junk indicators down again

Junk market statistical performance indicators, which were in retreat on Wednesday, continued along that same downward path on Thursday.

A trader said the CDX North American Series 16 HY Index fell by 7/8 of a point on Thursday to close at 91 7/16 bid, 91 11/16 offered, on top of its plunge of 1 5/16 points on Wednesday.

The KDP High Yield Daily Index swooned by 60 basis points on Thursday to end at 71.44, after having dropped by 10 bps on Wednesday. Its yield ballooned out by 18 bps to 8.05%, after having actually come in by 2 bps on Wednesday.

The Merrill Lynch U.S. High Yield Master II Index slid by 0.924% on Thursday, one of its biggest declines for the year, after having given up 0.06%% on Wednesday.

That left the index's year-to-date return at 0.60% on Thursday, down from 1.538% on Wednesday, and well below the peak level for the year of 6.362%, set on July 26.

Market activity levels, measured by dollar volume, rose by around 21% on Thursday, after having dropped by 13% Wednesday versus the session before.

High-beta names get hit

A trader said that "Sprint [Nextel Corp.] paper looked to be down 3 or 4 points in spots today, everything got hit pretty good." For instance, the 6 7/8% notes due 2028 issued by the Overland Park, Kan.-based wireless carrier's Sprint Capital Corp. funding unit was hammered down by some 4½ points on the day to close at 79½ bid.

"But there were a number of credits that were down by that much. [For] a lot of your more-liquid high-beta names, 3 to 4 is not an unusual number to be in use today," he said.

Another name he saw in that category was the Las Vegas-based gaming giant Caesars Entertainment Corp. - the old Harrah's Operating Co. Inc. - 10% notes due 2018. He saw those bonds going home trading around 67 bid, versus 71¼ on Wednesday, so "that gives you a high-beta barometer of the market in general."

A second trader agreed that "Harrah's took it on the chin, but you would expect that in a market like this," also seeing those bonds fall to around 661/2-67 from recent levels above 70.

"The higher-beta names are down more, obviously."

Familiar names get flayed

Other well-known and well-traded names finding themselves lower on Thursday included Nashville-based hospital operator HCA Inc., whose 6½% first-lien senior secured notes due 2020 were going home at 98½ bid, 98¾ offered, which a trader said was down 1½ points from Wednesday's late-session levels around par.

HCA's sector peer from neighboring Franklin, Tenn., Community Health Systems, had its 8 7/8% senior secured notes due 2015 quoted by a market source down three-eights of a point at 100½ bid. Although at another desk, a trader saw the bonds off by one-quarter point on the day and pegged them at 99¾ bid, 100¼ offered.

The trader also saw Ford Motor Co.'s benchmark 7.45% bonds due 2031 a half-point lower at 113 bid, 114 offered.

White Plains, N.Y.-based lodging operator Starwood Hotels & Resorts Worldwide's 7 7/8% notes due 2012 lost nearly a point to close at 103, although its 6¼% notes due 2013 were about unchanged at just under 104.

Rite Aid numbers aid bonds

A trader said that Rite Aid's bonds were down about a point on the session after it released its results for the fiscal second quarter and said that the bonds "outperformed the market in general," aided by positive same-store sales numbers, a key operating metric for the retail industry. Its 9 3/8% notes due 2015 were off by around a point at 88¼ bid.

Another trader agreed that the quarterly results were "a little bit better than expected and a little bit better than last year," helping the bonds sort of hold their own on the session with relatively smaller losses.

He said that the 9 3/8s traded around 89 early in the day and then were in an 88-to-88¼ context later on, "so they were off a little bit, but that was probably more the market than their results, I would guess."

Rite aid said that its net loss for the quarter improved to $92.3 million, or 11 cents per diluted share, compared with its year-ago second-quarter net loss of $197 million, or 23 cents per share, crediting the improvement to lower interest expense and a gain on debt repurchases, as well as higher adjusted EBITDA of $184.3 million, up from $181.2 million a year ago.

It was the third consecutive quarter that the key earnings measure had risen year over year, as well as the third consecutive quarter that same-store sales - up 2.2% - had risen year over year.

Avis skid continues

Among the recently priced issues, a trader said that Avis's new 9¾% notes due 2020 had fallen to 97½ bid, 98½ offered, down from the 99 bid, 99½ offered area at which those bonds traded late Wednesday. The Parsippany, N.J.-based vehicle-rental giant had priced that $250 million issue at par earlier Wednesday.

Another trader, however, quoted the new bonds at 98 bid, 98½ offered, which he said was not far from where they had finished on Wednesday and suggested that "while they're still not doing well, they really didn't get any worse."

"I don't think it's going to make a lot of people very happy to be down 2 points on the first day after pricing - but at least there's no more blood on the upholstery," the source added.

Among other recently priced issues, the second trader was quoting both Denver-based oil and gas operator Bill Barrett Corp.'s 7 5/8% notes due 2019 and Boston-based document management, storage and disposal service Iron Mountain's 7¾% senior subordinated notes due 2019 around par, noting that both $400 million issues, after pricing at par on Tuesday and then moving up by between a half-point and a full point in the aftermarket, "have given up all of their gains."

Another trader saw both credits having moved still lower, to a 99½ to 99¾ context as trading ended Thursday.

© 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.