Junk market quiets ahead of holiday, moves lower after negative jobs report but up on week

By Paul Deckelman and Paul A. Harris

New York, Sept. 2 - The high-yield market went through the motions on Friday, although traders said there really was next to nothing going on, as activity wound down ahead of the three-day Labor Day holiday break.

The primaryside remained on hiatus, completing its second straight week with not a single pricing in the dollar-denominated domestic market.

The secondary was almost as quiet, with very little trading seen, even in normally busy names such as Community Health Services Inc.

What little trading did take place - with many market participants either leaving early or out altogether - was mostly on the downside, as Junkbondland reacted negatively to a very bearish August jobs report from the federal government.

However, participants said that the negative response was muted by the general inactivity of the market, although they said that a stronger downside response might be seen when dealings resume on Tuesday.

Statistical market performance indicators remained mixed, although with a downside bias on the day. However, they were solidly improved on the week.

No deals since Aug. 16

The primary market remained motionless on Friday, with syndicate desks and trading desks skeletally staffed.

With no issues pricing on Friday, the week heading into the Labor Day weekend put up another goose egg, as had the week before.

The most recent junk deal to price was IVD Acquisition Corp. (Immucor, Inc.)'s issue of 11 1/8% senior notes due 2019 which priced at 98.714 to yield 11 3/8% on Aug. 16.

Year-to-date issuance remains at $211.2 billion in 471 junk-rated, dollar-denominated tranches.

That total is far ahead of the $162.2 billion in 376 tranches which priced prior to Labor Day weekend in the record-setting year of 2010.

Spooked by jobs numbers

Although liquidity in the market had been extremely low throughout the pre-Labor Day week, junk had been getting some traction up until Friday, according to a trader from a high yield mutual fund.

Chrysler Group LLC's 8¼% notes due 2021, which were at 80 bid, 81 offered on Monday and rose to 87 bid, 88 offered by Thursday's close, fell on Friday to 85 bid, 86 offered. The $1.7 billion issue priced at par in May.

Up until Friday, outflows from the junk bond funds moderated and turned slightly positive, the trader said (Lipper-AMG's weekly report on the flows of the high yield mutual funds came in relatively flat at negative $96.44 million in the week to Wednesday's close).

That scenario likely changed on Friday when the U.S. Labor Department reported that non-farm payrolls failed to grow in August, said the trader, who anticipated that the bleak jobs report would spark some risk aversion, resulting in cash flowing out of high yield.

"Most things which rallied this week are holding in pretty well," said the trader, heading into the quiet New York Friday afternoon.

"The risky stuff is down a point or two.

"But the desks are thinly staffed, and the jobs report spooked everybody."

Mum's the word

One result from Friday's negative market sentiment was that primary market activity became more uncertain, the trader said.

"We've been hearing that the dealers have a bunch of deals ready to go," the trader said.

"But no one wants to go out with a deal and see it swamped by market conditions."

A syndicate banker said that the dealers are weighing strategies for the week ahead, and added that there is a fair amount of uncertainty as to what will happen in the primary market during the post-Labor Day week.

"It's even possible that we could see a burst of deal announcements on Tuesday," the banker said.

"I don't think anyone wants that, and I don't think it would be a good thing, but if people see an opportunity to move a deal through the market they might not wait just in the name of an orderly calendar.

"Everybody expects the calendar to pick up.

"Right now I think people want to see two or three days of stability in the secondary market before they bring a deal."

Committed financings ahead

Market sentiment notwithstanding, there is a pipeline of committed financing LBO deals which are expected to be rolled out in the September-October period.

Among them is Sealed Air Corp.'s $1.5 billion equivalent of senior notes via Citigroup, which is expected September business and might come in the week ahead, market sources say.

Another LBO deal which could come sooner rather than later is Emdeon Inc.'s $750 million of senior notes via Barclays, Bank of America Merrill Lynch and Citigroup.

Kinetic Concepts Inc. is expected to undertake the syndication of its $900 million senior unsecured bridge loan and its $1.25 billion senior secured second-lien bridge loan in September. Bank of America Merrill Lynch, Credit Suisse and Morgan Stanley are the leads.

All told, the committed financing pipeline for September and October is believed to be $11 billion to $12 billion, according to an official who works on a high yield syndicate desk in New York.

Should the bond deals fail to materialize, bridge loans, some of which have been syndicated in part to high yield accounts, as is the case with Sealed Air, would have to be funded. Thus bridge loan participants, already up to speed on the respective credits, are expected to be big players in the bond deals, somewhat irrespective of market conditions.

Early in the pre-Labor Day week the market heard news from Europe that the bridge loan backing a portion of the LBO of France's SPIE has already been funded, as the leads - Morgan Stanley, HSBC, SG, Credit Agricole and Deutsche Bank - await a more opportune time to bring to market €300 million to €400 million of notes.

The bond deal was initially expected to surface during July, but was sidelined by volatility related to uncertainties surrounding European sovereign debt, market sources say.

A snoozer of a session

A trader said that "you're not missing a thing," and that dealings were so low as to be "ridiculous."

In terms of dollar volume, activity in the junk market plunged about 71% from Thursday's levels.

A look at the Trace list of most-active issues showed only a handful of names knocking down over $10 million in trading - and most of those were, in fact, long-dated hybrid issues from such investment-grade financial entities as Wells Fargo Capital.

Jobs numbers weigh on market

A trader said that "the market hasn't fallen out of bed" the way stocks did in response to poor job-creation numbers released Friday morning by the government, although he did say that "we'll really see on Tuesday" when the market re-opens after the holiday break.

The Labor Department announced that in August, there were no new non-farm payroll jobs created on a net basis in the economy. Economists on average had been forecasting job creation in the 40,000 to 60,000 range, with other estimates outside those parameters on either side.

While the private sector accounted for a net gain of 17,000 jobs - figuring in a 45,000-job loss in the technology sector due to Verizon workers being temporarily idled by their strike - public sector jobs decreased by a net of 17,000, leaving the jobs picture unchanged on the whole.

Washington also cut its previous estimates of job creation in June, to 20,000 from 46,000 originally reported, and in July, down to 85,000 from the original estimate of 117,000 - an unexpected loss of a total of 58,000 more jobs.

The jobs figures - considered a key driver of the economy, especially with a Federal Reserve policy meeting coming up shortly - caused a stock market selloff, with the bellwether Dow Jones Industrial Average, which fell on Thursday, ending down another 253.31 points, or 2.20%, at 11,240.26. Broader indexes were also down, with the Standard & Poor's 500 off 2.53% on the day and the Nasdaq Composite 2.58% weaker.

Treasuries were meantime going the other way, with the yield on the 10-year government bond dropping below 2%, to 1.89% from 2.13% at the close on Thursday, and the 30-year yield tightening by 20 basis points to 3.30%.

"There's a definite flight to Treasuries and gold here," the trader said.

Back in the junk realm, he saw Community Health's benchmark 8 7/8% senior secured notes due 2015 "just down a quarter," and then reassessed that estimate, ultimately declaring the Franklin, Tenn.-based hospital operator's bonds about unchanged at 101½ bid, 102 offered.

Familiar issues in retreat

While Community Health Services hung in there with little real change, other familiar names were seen lower on the session as the junk market, if not in full rout as stocks were, took a step back after the bad jobs numbers.

Community Health's hospital sector peer HCA Inc.'s 6½% senior secured first-lien notes due 2020 were being quoted down 2 points on the day at 100½ bid. The Nashville-based healthcare facilities operator's 7½% notes due 2022 were off by 1 7/8 points on the day at 101¼ bid.

Las Vegas-based gaming giant Caesars Entertainment Corp. - the old Harrah's - 10% notes due 2018 were down a deuce at 75½ bid.

Reston, Va.-based student loan company SLM Corp.'s 6¼% notes due 2016 fell by 1 3/16, to end at par.

Ally Financial, Inc. - the Detroit-based automotive and mortgage loan lender - was on the downside, with its 6¾% notes due 2014 off by 2½ points at par bid.

Looking at the relatively long list of downsiders, a trader opined that "I don't think you're going to see any financings for a while here, of any substance. It's a crazy market."

Market indicators stay mixed

Statistical measures of market performance, which on Thursday had been mixed, stayed that way on Friday.

A trader saw the CDX North American Series 16 HY Index down by 15/16 point on Thursday at 93¼ bid, 93¾ offered, after having lost 5/8 point on Thursday.

But the index was up solidly from the 91 5/8 bid, 91 7/8 offered seen at the close of the preceding week, ended Aug. 26.

The KDP High Yield Daily Index fell by 9 bps on Friday to end at 72.64, after having risen by 16 bps on Thursday. Its yield rose by 3 bps Friday to 7.67%, after coming in by 7 bps on Thursday. However, on the whole, the index compares favorably with its week-ago levels - a reading of 71.45 and a yield of 8.10%.

The Merrill Lynch U.S. High Yield Master II Index was up - albeit barely - for a fifth consecutive session, edging forward by 0.002%, on top of Thursday's 0.319% advance.

Friday's gain raised the year-to-date return to 2.30%, up from 2.298% on Thursday, although the cumulative return remained well below the peak level for the year of 6.362%, set on July 26.

On the week, the index rose by 1.501%, its first weekly gain following a weekly loss in the previous week. The index has shown a weekly gain in two weeks out of the last three.

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