Morning Commentary: Occidental bonds slide post-downgrade; junk spreads top 1,000 bps

By Paul A. Harris

Portland, Ore., March 19 – High-yield bonds continued to sell off on Thursday, according to a New York-based trader, who reported to work despite the Covid-19 pandemic, which has largely emptied the streets of New York and other major American cities.

The upper tier of the junk bond market, credits with double-B ratings, was not faring too badly, said the trader, who marked such bonds ¼ point to ½ point lower on the morning.

Single-B and lower rated paper was for sale, said the source, who specified that volume was thin apart from “trades in the hole,” in which the need to raise cash prompts an investor to sell well below the level at which a bond in question might be quoted.

The iShares iBoxx $ High Yield Corporate Bd (HYG) was 1.75% lower at mid-morning, down $1.28 at $71.71 per share.

And the composite spread to Treasuries on the Bloomberg Barclays Global High Yield Total Return Index topped 1,000 basis points early Thursday, according to a source, who reported a spread of 1,016.5 bps versus 946.3 bps at Wednesday's close.

A spread of 1,000 bps is the threshold beyond which a bond is customarily understood to be distressed.

Occidental Petroleum eyed

The formerly high-grade bonds of Occidental Petroleum Corp. sustained substantial price drops following Moody's Investors Service's downgrade of the Houston-based oil producer's credit ratings, the trader said.

The ratings agency downgraded Occidental Petroleum's senior unsecured rating to Ba1 from Baa3 and also assigned a corporate family rating of Ba1. The ratings were placed on review for further downgrade.

Moody's cited Occidental Petroleum's acquisition of Anadarko Petroleum Corp. last August, which “continues to burden the company’s balance sheet with over $35 billion of debt and $10 billion of preferred stock, significantly compromising its financial flexibility to confront the collapse in oil prices.”

The Anadarko Petroleum 5.55% senior notes due March 2026, which the trader described as “the belly of the curve,” were down 15 points Thursday morning at 64 bid.

Elsewhere in the energy sector, the Tallgrass Energy Partners LP 6% unsecured notes due March 2027 (B1/BB-/BB), one of the most recent energy deals to price in the now-dormant high-yield primary market, were unchanged on Thursday, the source said.

That paper last traded on Tuesday at 69.

The $430 million issue priced at 98.591 to yield 6¼% on Feb. 18.

The debt of companies with exposure to the economic impacts of coronavirus remain under acute pressure, said the trader.

With news outlets in the San Francisco Bay area – now under a shelter-in-place order – reporting that Tesla, Inc. may be defying a ruling by the Alameda County, Calif., sheriff that the company's Fremont car factory is not an essential business, and therefore could only maintain minimum basic operations, not including car manufacturing, Tesla's bonds were among the most actively traded issues on Thursday, the trader said.

The Tesla 5.3% senior due August 2025 were down ½ point at 80 bid, said the trader.

Late Wednesday, after the sheriff's ruling, NBC Bay Area TV interviewed an assembly line worker who – speaking on condition of anonymity, with his voice disguised – told the station's reporter that he felt under pressure to report for work despite working conditions not in accordance with social distancing guidelines.

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