U.S. primary sees year’s first empty week; CGA CGM, RAC price in Europe; oil slide hits energy

By Paul Deckelman and Paul A. Harris

New York, July 7 – The high-yield market ended the first week of July and the first trading week of the third quarter on Friday with no new dollar-denominated and fully junk-rated paper from domestic or industrialized-country borrowers having priced – the first empty week in Junkbondland since the end of last year.

As has been the case for most of the holiday-shortened week, the non-dollar European primary market was where the action was on Friday, with a pair of deals pricing – a twice-upsized €650 million offering of five-year notes from French container-ship company CMA CGM SA and a £250 million five-year offering from RAC Group, a British provider of roadside assistance and other motorist services.

But both the European and U.S. junk markets also saw planned deals shelved on Friday – Antalis International postponing its €325 million offering of seven-year senior secured notes due to market conditions and Global Ship Lease, Inc. likewise suspending its $400 million offering of five-year senior secured notes, which was to have refinanced an existing debt issue.

Away from the new issues, oil and gas credits and oilfield services companies saw sizable losses – although not always on sizable volumes – in line with a renewed slide Friday in world crude oil prices. Among the bigger losers were familiar sector names such as exploration and production operators California Resources Corp., Chesapeake Energy and driller Transocean Ltd.

Statistical market performance measures were mixed on Friday after being lower across the board on Wednesday and Thursday. The indicators had started the week mostly higher on Monday heading into Tuesday’s holiday break, and had been mixed for the four consecutive sessions before that.

For the week, the indicators were lower all around, after having been mixed last week and lower the week before that.

CMA CGM twice upsized

The primary market remained an all-Europe affair as the July 3 week came to a close.

Marseille, France-based container ship company CMA CGM priced an upsized €650 million issue of five-year senior notes (B3/CCC+) at par to yield 6½% on Friday.

The debt refinancing offering was increased from €600 million, after having been previously upsized from €500 million.

The yield printed on top of talk that was set in the 6½% area.

Bookrunner BNP Paribas will bill and deliver. HSBC was also a bookrunner.

Credit Agricole, SG and UniCredit were joint bookrunners.

Prior to the CMA CGM deal pricing, the market had been watching for a carve-out tranche of seven-year notes, which ultimately did not materialize.

RAC at the wide end

RAC Group priced a £275 million issue of Class B1 secured notes (S&P: B) at par to yield 5%.

The yield printed at the wide end of the 4¾% to 5% yield talk.

The notes have an expected maturity date of Nov. 6, 2022 and a final maturity date of Nov. 6, 2046.

Global coordinator Deutsche Bank will bill and deliver. Barclays was also a global coordinator.

BNP Paribas, Citigroup, HSBC, JP Morgan, Mizuho Securities, NatWest and Santander were the joint bookrunners.

The Walsall, United Kingdom-based motorist services provider plans to use the proceeds to make payments to its shareholders through a payment on shareholder loans, by means of a dividend or otherwise.

Postponed deals

The Friday session also saw postponed deal announcements.

Antalis International cited market conditions as it postponed its €325 million offering of seven-year senior secured notes (B3/B+).

Goldman Sachs had the deal from the issuer attempting to make its debut in the high-yield market.

In the dollar-denominated market, Global Ship Lease announced Friday that it has chosen to suspend its $400 million offering of five-year senior secured notes amid ongoing efforts to identify attractive opportunities to refinance its 10% senior secured bonds due 2019.

Earlier in the week a trader noted that the company had gone with Platou Securities as bookrunner.

It was an interesting choice for a deal that size, the source said.

The buzz in the market was that the company was unable to get the deal it was looking for from a better-known prospective bookrunner, the trader said.

Off-the-run issuers and underwriters routinely face headwinds in a market that strongly favors big liquid issues from well known companies in deals run by bookrunners that hold positions on the upper reaches of the league tables.

Those headwinds picked up a little toward the end of the July 3 week amid some weakness in the high-yield market, a London-based sellside source said.

Will the dollar market awaken?

Last Tuesday, July 4, was a market holiday in the United States, which celebrates its independence on that date.

A lot of market participants took the preceding Monday, July 3, off as well, even though the market was open.

Others took vacation time around the holiday and were out through the entire July 3 week, sources said.

Hence the pervading sound in the U.S. high-yield market during the past week was that of crickets, sources said.

Things could pick up in the week ahead, however no one had any issuer names to put forth on Friday.

One dollar-denominated tranche is in the market.

British performance automobile manufacturer McLaren Automotive is set to start the American leg of its international roadshow on Monday for a £525 million equivalent two-part offering of five-year senior secured notes, being sold in dollar- and euro-denominated tranches.

Early guidance on the dollar-denominated notes is in the 6% area, 75 basis points behind guidance on the euro-denominated notes, a trader said on Friday.

McLaren roadshowed the euro-denominated tranche during the past week in Europe.

Apart from McLaren there was not a lot of visibility on what the week ahead holds for European junk issuance, an investment banker said.

Morgan Stanley issued a save-the-date memo for Monday call featuring a first-time issuer from the debt collection sector seeking to sell secured paper, the source added.

Mixed Thursday flows

The daily cash flows for dedicated high-yield bond funds were mixed on Thursday, the most recent session for which data was available at press time.

High-yield ETFs saw $96 million of inflows on the day.

However actively managed funds sustained $80 million of outflows on Thursday.

Thursday’s flows follow a report that the dedicated junk bond funds sustained $1.155 billion of outflows during the week to Wednesday’s close, according to Lipper US Fund Flows.

It was the third consecutive negative weekly flow.

First empty week of the year

With no new dollar-denominated and fully junk rated domestic or industrialized-country issues having priced, this week was the first this year to see a market shutout.

The last empty period was the week ended Dec. 30, 2016 during the traditional year-end market lull.

This week’s lack of new deals stood in stark contrast with the week before, ended June 30, during which $7.26 billion of new junk-rated dollar paper from domestic or industrialized-country issuers had priced in 14 tranches – the biggest new-issuance week in the junk market in more than a month, since the week ended May 26, when $9.69 billion of new paper had priced in 18 tranches.

The lack of deals this week left year-to-date issuance for 2017 steady at $146.2 billion in 271 tranches, running about 28% ahead of the $114.21 billion which had priced in 164 tranches by this point on the 2016 calendar, the Prospect News data indicated.

Little activity in new deals

A trader saw relatively little action going on in new or recently priced credits.

For instance, he said that Intelsat Jackson Holdings SA’s 9¾% notes due 2025, which had topped the junk market’s Most Actives list on Thursday with over $25 million having traded, only generated around $7 million of turnover on Friday, not enough to land it among the volume leaders.

He saw the notes in a 99¾ to 99 7/8 context, calling them little changed on the session.

That $1.5 billion offering by the Luxembourg-based communications satellite company’s wholly owned Intelsat Jackson Holdings subsidiary priced at par on June 19 in a quick-to-market transaction and has orbited around that issue price ever since.

Crude crushes energy issues

Away from the little activity in new or recently priced issues, a key feature of Friday’s secondary market was the slide in oil and natural gas credits and related sectors such as oilfield services, the skids greased under those names by a renewed downturn in crude oil prices.

Crude fell badly on world commodity markets for the second time in three days, following a slight uptick on Thursday.

The benchmark U.S. crude grade, West Texas Intermediate for August delivery, nosedived by $1.29 per barrel Friday on the New York Mercantile Exchange, settling in at $44.23, while key international grade North Sea Brent crude for September delivery did even worse, plunging by $1.40 per barrel on the London ICE Futures market.

Not surprisingly, that threw oil and gas credits for a big loss in Friday’s trading.

Los Angeles-based exploration and production operator California Resources’ 8% notes due 2022 – considered a benchmark for the whole energy sector – were down a deuce on the day at 60½ bid, with over $14 million of the bonds changing hands.

Houston-based Halcon Resources Corp.’s 6¾% notes due 2025 surrendered 2½ points on the day to end at 88 bid, with over $14 million having traded.

Houston-based EP Energy Corp.’s 9 3/8% notes due 2020 ended down 1¼ points, closing at 77 bid, while Denver-based oiler Whiting Petroleum Corp.’s 5¾% notes due 2021 lost nearly 1½ points to finish at just under 93 bid, both issues on volume of around $9 million.

Other energy names also saw sizable losses, though on thinner trading volumes. Oklahoma City-based Chesapeake Energy’s 8% notes due 2022 ended at 104 bid, down 1½ points on the day, though only on round-lot volume of around $5 million – the busiest in the company’s capital structure.

Calgary, Alta.-based MEG Energy Corp.’s 6½% notes due 2025 lost 1 7/8 points to close at 89 3/8 bid on volume of about $4 million.

The weakness also extended to oilfield service companies dependent on healthy energy prices, such as offshore drilling contractor Transocean, whose 9% notes due 2023 eased by ¾ point to 102 3/8 bid, with over $11 million traded.

Sounding a warning

Overall, a trader – looking at the paucity of primary and secondary activity this week, suggested that the week ahead “should be an interesting week – you’ve got a lot of earnings coming out. A lot of people have been banking on their being pretty good – so it should be an interesting week.”

With no dollar-denominated deals having priced this week, he said the junk forward calendar likely “is going to beef up. I don’t really have a good read on that, but I would think that it would be [more active].”

However, he raised a caution flag.

“The junk market is kind of in a precarious position here – the Fed is going to report to Congress and basically they’re going to continue to go in the direction they’ve been going, and that’s raising rates. So you just wonder at what point in time does this start affecting the economy – and when does it start affecting these companies?”

Friday’s Labor Department jobs report for June may give the interest-rate hawks some ammunition, with the economy generating some 222,000 non-farm jobs during the month – well above the roughly 178,000 new positions Wall Street was looking for.

However, other voices noted that wage growth was relatively stagnant – perhaps a sign that the central bank should not pull the trigger on a rate hike just yet.

The trader said: “We can say maybe they shouldn’t [raise rates] – but they’re way behind the curve. I think these inflation numbers are tremendously skewed to things that don’t really matter – a lot of them are affected by cellphone subscriptions being lowered and whatnot. So I don’t know.”

Bottom line, he said: “I think the junk market has very little upside. It has a tremendous amount of downside.” But he allowed that “that doesn’t mean it can’t hold these levels that it has for quite a while” before going into a spin – “maybe for longer than you can imagine. Always has and always does.”

Indicators turn mixed

Statistical market performance measures were mixed on Friday after having been lower across the board on Wednesday and Thursday. The indicators had started the week mostly higher on Monday heading into Tuesday’s holiday break and had been mixed for the four consecutive sessions before that.

For the week, the indicators were lower all around, after being mixed last week and lower the week before that.

The KDP High Yield Daily Index lost 10 basis points on Friday to end at 71.91, its third straight loss. The index had plunged by 10 bps on Wednesday and another 5 bps Thursday.

Its yield rose by 4 bps on Friday to 5.05%, its third consecutive widening. It also rose by 2 bps each on Wednesday and again on Thursday.

Friday’s levels compared unfavorably with last Friday’s 72.22 index reading and 4.95% yield.

But the Markit CDX Series 28 High Yield Index improved by 7/32 point on Friday to end at 106 21/32 bid, 106 23/32 offered, its first upturn after three straight losses, including Thursday’s more than 5/16 point retreat.

However, the index closed below last Friday’s 106 7/8 bid, 106 15/16 offered finish.

The Merrill Lynch North American High Yield Index was down for a third straight session Friday, retreating by 0.201%, on top of losses of 0.155% Thursday and 0.009% on Wednesday – its first setback after eight straight advances before that.

Friday’s downturn dropped the index’s year-to-date return to 4.617% from 4.828% on Thursday. Those levels remain below its high point for the year to date of 5.173%, recorded on June 14.

For the week, the index lost 0.28%, its first weekly loss after having gained 0.033% last week.

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