Occidental sinks on downgrade; Tesla active; Charter mixed; funds lose $2.9 billion

By Paul A. Harris and Abigail W. Adams

Portland, Me., March 19 – The domestic high-yield primary market remained shuttered on Thursday as the turmoil continued in the secondary space.

While the primary market has been closed since March 4, there may be business on the horizon with T-Mobile USA Inc.’s announcement that it is financially prepared to close its merger with Sprint Corp. with commitments for bridge loans still expected to be honored.

Meanwhile, credit markets continued to struggle on Thursday with spreads widening even as equities rallied and crude oil futures recouped their losses from the previous session.

Occidental Petroleum Corp.’s senior notes were in focus and plummeted on Thursday after the oil producer became the latest fallen angel to enter junkbondland.

Tesla Inc.’s 5.3% senior notes due 2025 were volatile in active trading with the notes closing the day with gains.

Charter Communications Inc.’s senior notes remained active on Thursday with some gaining and others losing.

Meanwhile, high-yield mutual and exchange-traded funds continued to hemorrhage cash with $2.9 billion leaving the space for the week ending on Wednesday, according to Refinitv Lipper US Fund Flows.

On the horizon

The first day of spring 2020 generated a slight thaw in equities but left the junk bond market iced in, sources said.

A syndicate banker, working from home, was focused on the speed with which the current turmoil took shape.

Of particular interest to this banker was the unusual recent concurrent sell-off in stocks and Treasuries.

The 10-year Treasury yield hit an intraday low of 0.35% a little over a week ago, the banker recounted.

It closed Thursday at 1.19%, a huge shift up for the benchmark rate in such a brief amount of time, and one that appears counter to the efforts of the Federal Reserve Bank to hold rates ultralow, the source said.

With the ensuing free-fall of stock prices, Treasuries were expected to go up in price because they are a traditional safe haven for investor cash.

That would push the yield lower, the banker said.

Instead, the sell-off in Treasuries concurrent with that of stocks implies that the Federal Reserve Bank's efforts to keep rates low may not be getting sufficient traction, the banker said.

It possibly signals forced selling on the part of investors such as repo funds and hedge funds, in need of short-term capital, the source added.

Upcoming new business

The high-yield new issue market generated no news on Thursday, as expected.

There was, however, news of business expected to ultimately play out in the primary market.

T-Mobile USA announced that it is currently financially prepared to close its planned merger with Sprint Corp.

The company has been in communication with all sixteen banks involved in the committed financing and has not received any notification that any of the banks are unprepared to fund their commitments.

Those commitments include a $19 billion 364-day senior secured covenant-light bridge facility and $8 billion of credit facilities.

And Cincinnati Bell Inc. has received a commitment for $493 million of senior bridge loans and $1.6 billion of credit facilities to help fund its acquisition by Macquarie Infrastructure Partners (see related stories in this issue).

Occidental Petroleum plummets

Occidental Petroleum became the latest fallen angel to enter junkbondland after Moody’s Investors Service slashed the company to junk.

Occidental’s senior notes plummeted in high-volume activity in response, a market source said.

The 2.9% senior notes due 2024 dropped more than 13 points to close Thursday at 55.

The 2.6% senior notes due 2021 traded down to 62¼ by the late afternoon. The notes were trading in the low 90s heading into Thursday’s session.

The 2.7% senior notes due 2022 plunged 20 points to 56 by the late afternoon, a source said.

Occidental Petroleum’s 6.2% senior notes due 2040 dropped 10¾ points to 61½.

Moody’s downgraded the Houston-based oil company’s unsecured debt to Ba1 from Baa3 and assigned the company a corporate family rating of Ba1. (See related article in this issue)

The downgrade was due to Occidental’s acquisition of Anadarko in 2019, which quadrupled the company’s debt.

The company still has $35 billion in debt on its balance sheets, according to a market source.

Tesla volatile

Tesla’s 5.3% senior notes due 2025 were volatile in active trading on Thursday.

However, the notes were able to close the day with gains.

The 5.3% notes traded as low as 79 early in the session but rallied to close the day at 84, according to a market source.

The notes have been volatile throughout the week.

The notes were trading as high as 88 on Tuesday but sank to 80 in Wednesday’s bloodletting.

While the electric car manufacturer recently began delivery of its Model Y vehicle six months ahead of schedule, it has been the subject of negative media coverage with its northern California factory remaining open despite not being classified as an essential business.

The continued operation of the factory defies a shelter-in-place order that went into effect this past week.

However, Tesla’s stock spiked on Thursday following an analyst upgrade and a rally in tech stocks.

Charter mixed

Charter’s junk bonds were mixed in active trading on Thursday.

The company’s 4½% senior notes due 2030 hit their lowest level since pricing in early February.

The 4½% notes due 2030 traded off 3½ points to close the day at 84½, according to a market source.

In one of the final deals to clear the primary market before volatility began to rear its head, Charter priced a $1.1 billion add-on to the 4½% notes at 102½ on March 4.

While volume was light, Charter’s 4½% notes due 2032, which priced at par on March 4, also traded down to an 84-handle on Thursday.

After a more than 11-point drop on Wednesday, Charter’s 5% senior notes due 2028 saw a minor rebound.

The notes traded up almost 2 points to 85½.

Charter’s 5¾% senior notes due 2026 dropped 1 point to 92½.

Charter has also been the subject of negative publicity in recent days due to its policy prohibiting remote work despite the coronavirus outbreak.

$114 million Wednesday inflows

The dedicate high-yield bond funds experienced $114 million of net inflows on Wednesday, the most recent session for which daily fund flows data was available, according to a market source.

High-yield ETFs had $99 million of inflows on the day.

Actively managed high-yield funds had $15 million of inflows on Wednesday, the source said.

The combined high-yield funds sustained $2.9 billion of outflows on the week to Wednesday's close, according to data posted on the Internet by Lipper US Fund Flows.

U.S.-based taxable bond funds sustained $55.9 billion on the week, the largest weekly outflow on record, the source said, adding that Corp-Investment Grade funds had $35.6 billion of outflows during the period.

Indexes extend losses

Indexes again suffered steep losses on Thursday.

The KDP High Yield Daily index dropped 190 basis points to close Thursday at 56.79 with the yield now 9.92%. The index was down 194 bps on Wednesday, 10 bps on Tuesday and 218 bps on Monday.

The ICE BofAML US High Yield sank further into negative territory.

The index dropped 216.2 bps with year-to-date returns now negative 18.309%.

The index sank 303.4 bps on Wednesday, dropped 80.1 bps on Tuesday and plummeted 317.1 bps on Monday.

It was in positive territory as recently as a week and a half ago.

The CDX High Yield 30 index dropped 157 bps to close Thursday at 89.63.

The index plunged 305 bps on Wednesday, gained 90 bps on Tuesday and plummeted 452 bps on Monday.

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