Energy sector losses intensify; Endeavor gains on possible buyout; payday lenders under pressure

By Paul A. Harris and Abigail W. Adams

Portland, Me., Dec. 18 – The primary market remained dormant and the secondary space soft on Tuesday as plummeting crude oil futures sparked a selloff in the energy sector.

All eyes will be on the primary market in January. However, given current market conditions the new deal volume may be lighter than previously anticipated.

The junk bonds of California Resources Corp., EP Energy Corp., Chesapeake Energy Corp., Transocean Ltd. and Whiting Petroleum Corp. saw multipoint declines in high volume activity as crude oil futures slid more than 7% to settle around $46 – a level dangerous for the junk bond market, sources said.

While the broader energy sector was down, Endeavor Energy Resources’ junk bonds saw minor gains on news Shell was discussing a buyout of the company.

While volume was light, payday lenders were also under pressure with TMC Finance LLC’s, formerly TitleMax, junk bonds seeing a significant drop during Tuesday’s session.

Dean Foods’ junk bonds were again down in high-volume activity on Tuesday. The notes have been active and trending lower since Monday.

Downcast forecast

Seasonal travel and holiday plans began to supplant talk of new issue activity, as the junk market continued to be hammered on Tuesday, dragged further down, in part, by a phenomenal fall in crude oil prices.

The par-weighted average price for the junk bond index decreased a further 30 cents, day-over-day on Monday, to $93.90, down $4.63 from the October high of $98.53, and at a low since July 2016, a trader said.

Primary market talk has shifted to January, and perhaps a back-loaded January at that, a syndicate banker said, noting that the month ahead almost certainly won't come roaring off the starting line.

And January almost certainly won't be a big month, the source asserted, adding that whatever does happen, new issue-wise, is likely to happen mostly in the back half of the month.

Hearing forecasts from earlier in December of $15 billion to $20 billion of January 2019 issuance, this syndicate official – perhaps under the light of intervening events – was inclined to think that $5 billion might come nearer to the mark.

Energy drops

The energy sector continued to crater on Tuesday as crude oil futures plummeted to well below the closely watched $50 threshold.

Several junk bonds from the sector saw multi-point declines with equities of oil and gas companies marking their worst performing day since the height of the financial crisis in 2008, sources said.

California Resources’ 8% senior notes due 2022 dominated trading activity in the secondary space with the notes down 3¾ points to close the day at 69¾, a market source said.

More than $68 million of the bonds were in play during Tuesday’s session.

The notes were down 2¾ points on Monday. They closed Friday in the 76 range and were as high as 97 before the sell-off in energy began, sources said.

Transocean’s 9% senior notes due 2023 were the next most actively traded issue in the secondary space with the notes dropping 1 point to 99½, according to a market source.

More than $30 million of the bonds were on the tape by the late afternoon.

While not as active, Transocean’s 6.8% notes due 2038 were down almost 3 points to 69.

EP Energy’s 8% senior notes due 2024 were down almost 5 points to 78. The company’s 9 3/8% notes due 2024 were down 3¾ point to 45½ and the 8% notes due 2025 were down 3½ points to 42.

Chesapeake Energy’s 7% senior notes due 2024 dropped 1¾ points to 90¼ after a 1 point drop on Monday.

Chesapeake Energy priced an $850 million tranche of the 7% notes at par in late September.

Chesapeake’s 8% senior notes due 2025 traded down 3¼ point to 92½.

However, Whiting Petroleum’s 6 5/8% senior notes due 2026 posted the largest losses with the notes sinking 5 points to close Tuesday at 90.

More than $24 million of the bonds changed hands during Tuesday’s session.

The already brutal selloff in crude oil futures took a turn for the worst on Tuesday with the barrel price of WTI crude oil for January delivery plummeting.

Crude oil futures settled at $46.24 on Tuesday, down $3.64 or 7.29%.

The selloff in crude oil futures intensified on Tuesday alongside fears of a supply glut, which has largely been responsible for the reversal in crude oil prices.

With many energy names underwritten at $50, a sustained drop below that threshold would spell trouble for the high yield markets, sources said.

Endeavor gains

Endeavor Energy’s 5¾% senior notes due 2028 was one of the few bright spots in the energy sector on Tuesday with the notes seeing nominal gains on news shell was considering a buyout.

The 5¾% notes were up ¼ point to 104¾ in active trading on Tuesday, a market source said.

More than $18 million of the bonds were on the tape by the late afternoon.

Shell is eyeing a buyout of Endeavor for $8 billion, Bloomberg reported Monday afternoon.

Payday lenders under pressure

Payday lenders were under pressure on Tuesday with TitleMax’s 11 1/8% senior notes due 2023 seeing a marked decline.

While volume was light, the notes traded down 4 points to close the day at 83, according to a market source.

More than $5 million of the bonds were on the tape by the late afternoon.

TitleMax priced a $450 million issue of the 11 1/8% senior notes at par in May.

Payday lenders ACE Cash Express, Inc. and CURO Group Holdings also saw their notes decline on Tuesday, a market source said.

The Trump administration was in the process of dismantling the Consumer Financial Protection Bureau’s regulations that were intended to curb predatory aspects of the payday lending business.

However, resistance to that dismantling is anticipated with Democrats gaining control of the House of Representatives.

Dean Foods down

Dean Foods’ 6½% senior notes due 2023 were again trading down in high-volume activity on Tuesday.

The notes dropped 1½ point to 83¼ with more than $20 million of the bonds on the tape, according to a market source.

The notes were also active and trending lower on Monday. The notes dropped 5/8 point to 84¾ on Monday with more than $12 million in volume.

There did not appear to be any news that was driving the trading activity, a market source said.

Monday outflows

The daily cash flows of the dedicated high-yield bond funds were negative on Monday, the most recent session for which data was available at press time, a trader said.

High-yield ETFs sustained $249 million of outflows on the day.

Actively managed high yield funds saw $300 million of outflows on Monday, the trader said.

Indexes

Indexes marked their third consecutive trading day of losses on Tuesday.

The KDP High Yield Daily index dropped 30 basis points to close Tuesday at 67.79 with the yield now 6.76%.

The index was down 15 bps on Monday and 6 bps last Friday although it still gained 2 bps on the week last week.

The ICE BofAML US High Yield index extended its losses on Tuesday. The index dropped another 38.6 bps with the year to date return now negative 0.743.

The index dropped 24.5 bps on Monday and 18.1 bps on Friday, when it returned to the red.

However, the index still posted a gain of 8.2 bps on the week last week.

The index had been wavering between positive and negative territory over the past two weeks.

The CDX High Yield 30 index dropped 6 bps to close Tuesday at 102.88.

The index was down 48 bps on Monday and 44 bps on Friday, while still posting a gain of 22 bps on the week last week.

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