Junk notes broadly lower as stocks, oil prices fall; energy sector trades off; Sprint slides

By Paul Deckelman and Paul A. Harris

New York, Jan. 20 – The high-yield market was broadly lower on Wednesday, taking its cue from falling equities and the continued slide in world crude oil prices.

The latter helped to weigh down bonds of oil and natural gas exploration and production companies such as Whiting Petroleum Corp., Chesapeake Energy Corp., Oasis Petroleum Inc., WPX Energy Inc., EP Energy Corp. and Memorial Production Partners, LP., among others.

However, the carnage was not limited to the energy space.

The single worst-performing issue among the most actively traded credits was Sprint Corp.’s 7% notes due 2020, down more than a dozen points on the day. The No. 3 U.S. wireless carrier’s other bonds across its capital structure were all also seen down multiple points in very active dealings, and its stock slid badly as well.

Other non-energy names, also from the communications sphere, posting sizable losses on the day included Frontier Communications Corp., Charter Communications, Inc. and T-Mobile USA, Inc. Steelmaker ArcelorMittal SA was another big loser.

Among the rare upsiders was hospital operator Tenet Healthcare Corp.

Primary market activity remained quiet, although GCP Applied Technologies Inc.’s planned seven-year note offering moved into the final phase of its roadshow, which is scheduled to conclude on Thursday.

Statistical measures of junk market performance turned lower across the board on Wednesday after having been mixed on Tuesday. It was their second lower session in the last three trading days.

Primary stays quiet

The new issue market remained sidelined by volatility in the global capital markets on Wednesday, sources said.

No deals were priced.

There were no new deal announcements.

Only one high-yield transaction is presently on the active calendar. GCP Applied Technologies, which is to be spun off from W. R. Grace & Co., has been marketing a $525 million offering of seven-year senior notes (B1/B+) on a full roadshow.

The deal, via left bookrunner Goldman Sachs & Co., was scheduled to begin two days of presentations to accounts on the West Coast of the United States on Wednesday.

The roadshow wraps up on Thursday.

Guidance began around 8½%, a source said, but added that with the sell-off in high-yield bonds that has ensued since the deal was announced on Jan. 12, pricing is bound to have moved higher, with price discovery afoot.

There have also been covenant changes, a market source said on Wednesday.

The Columbia, Md.-based provider of specialty construction chemicals, building materials and packaging technologies plans to use the proceeds to fund a $500 million distribution to W. R. Grace & Co.–Conn., a direct subsidiary of W.R. Grace, and for general corporate purposes.

Outflows on Tuesday

The cash flows of the dedicated high-yield funds continued to be negative on Tuesday, a trader said.

High-yield exchange-traded funds saw $182 million outflows on the day.

Asset managers sustained a whopping $850 million of daily outflows on Tuesday.

Dedicated bank loan funds, meanwhile, saw $335 million of outflows on the day.

Market broadly lower

Back in the secondary realm, a trader characterized Wednesday’s session as “a wild day,” with most of the focus on the oil and gas names, which he said “just got decimated.”

At another desk, a trader said that junk prices were on the slide early on, although “things kind of found a little floor around mid-day, then they were off the lows into the afternoon. So we finished up stronger than how it felt in the morning,” though still “definitely” down on the day.

Junk bonds were seen following the lead of stocks, which finished sharply down on the session, although in that market too, shares managed to bounce off the mid-day bottoms to at least cut their losses somewhat, helped by technical factors.

The bellwether Dow Jones industrial average was in the red all day and plummeted as much as 565 points during the session before trimming its losses and closing down 249.28 points, or 1.56%, at 15,766.74. Other broader market indexes exhibited similar trajectories.

Energy issues lead retreat

“Oil was definitely the market’s area of most focus,” a trader said, pointing to the broad sell-off in the E&P space, in line with continually sagging world crude oil prices.

The February contract for the benchmark U.S. crude oil grade, West Texas Intermediate – which expired at the settlement Wednesday – saw its third consecutive loss on the New York Mercantile Exchange after two straight gains and its 10th loss in the last 12 trading days, sliding as low as $26.41 per barrel intraday before settling at $26.55 – still down $1.91, or 6.75%, its lowest level since May 2003.

The March contract, which now becomes the front month, was off by $1.22, or 4.1%, settling at $28.35 per barrel.

The March contract for the benchmark international grade, Brent crude, also saw its third straight downturn, falling as low as $27.10 per barrel before settling at $27.88, down 88 cents on the session.

Crude prices slid after the International Energy Agency warned on Tuesday that the oil market could “drown in oversupply,” especially once Iran returns to the world oil market now that international sanctions against the Tehran regime have been lifted. The Iranians could add another 500,000 barrels per day to what is already a heavily glutted market.

Against that sobering backdrop, junk-rated oil producers’ bonds were once again taking a pounding.

One of Tuesday’s big losers, Whiting Petroleum, was again in that uncomfortable role on Wednesday. A market source said that its 5¾% notes due 2021 swooned by 8¼ points on the day, going out at 51 bid, on volume of over $18 million, while the Denver-based E&P company’s 5% notes due 2019 did almost as badly, off 7¾ points on the session to close at 52 bid, as over $16 million changed hands.

Whiting was hardly alone. Houston-based Oasis Petroleum’s 7¼% notes due 2019 were seen by a trader finishing at 45 bid, down 4¼ points, with over $11 million traded. Its 6 7/8% notes due 2023 lost 1½ points, finishing at 39 bid, on volume of over $13 million.

WPX Energy’s 5¼% note due 2017 was one of the most actively traded energy credits on the day, with over $22 million moving around, and those notes, almost alone among the energy bonds, have managed to hold onto most of their value, finishing at 93 1/8, down 5/8 point on the day.

A trader noted that the issue is very short – scheduled to mature in slightly under a year, on Jan. 15, 2017.

“Obviously, [investors] figured there’s still enough money there” that the bonds will be paid off on schedule when they mature next year.

However, he said that other investors might not be so sure of that, electing to “take the 7-point hit [from their par value] now.

“A bunch of people sold out, but somebody had to buy ’em.”

He also pointed out that the rest of the company’s longer paper was trading down in the 50s.

Its 6% notes due 2022 got chopped up to the tune of almost 5 points on Wednesday, falling to just over 51 bid, with over $10 million traded.

Also among the busier oil and gas names, Chesapeake Energy’s 8% notes due 2022 “traded fairly actively today,” a trader said, generating over $21 million of turnover while losing 1 point to end at 43 bid.

Memorial Production Partners’ 7 5/8% notes due 2021 eased by 5/8 points, closing at 25 1/8 bid, with over $16 million traded.

Elsewhere in the oil and gas world, Energy Transfer Equity LP’s 5 7/8% notes due 2024 fell 5¾ points to 64¾, with over $10 million traded. Williams Cos. Inc.’s 4.55% notes due 2024 dropped more than 4 points to 54 5/8 bid, on over $13 million of volume. Williams’ board issued a statement Wednesday indicating that it is “unanimously committed” to completing the pending merger transaction with Energy Transfer Equity, which was announced back in September.

A trader, looking generally at the carnage in the junk oil space, opined that “the distressed levels in oil [prices] is going to continue to pressure these E&P names further than they already have been.”

He continued that “I don’t see any kind of firming unless we get a floor put into where oil is, or even more of an uptick in the price” – something seen unlikely in the short term barring any unexpected geopolitical developments in the always volatile Middle East or decisions by oil producers to finally start reining in production.

Sprint gets slaughtered

Away from the energy sector, one of the biggest losers Wednesday was Sprint, whose bonds, along with those of its Sprint Capital Corp. and Sprint Nextel Corp. subsidiaries, were lower across the whole capital structure.

“Sprint was definitely underperforming their space,” a trader declared.

Analysts have recently expressed skepticism about Sprint’s announced plans to cut costs by transferring much of its transmission equipment to government lands and right-of-ways rather than renting space on commercial cellphone towers and also questioned the company’s overall financial health because of its massive debt load.

For instance, analyst David Hamburger of Morgan Stanley said in a research note that the Overland Park, Kans.-based No. 3 U.S. wireless carrier seems to have no clear path to a turnaround that could lead to realizing the full value of its bonds or to recover that value in a restructuring or bankruptcy.

Sprint’s 7% notes due 2020 were the biggest losers among the day’s actively traded credits, free-falling by 12¼ points to end at 60¾ bid, on volume of over $21 million.

Its other bonds were not much better off.

Sprint’s 7 7/8% notes due 2023 dropped 8 5/8 points to 60 3/8 bid, also on $21 million of turnover.

Its 7 1/8% notes due 2024 finished at 60 5/8 bid, down more than 6 points on the day, with over $16 million traded.

Its shorter 8 3/8% notes due 2017 went home at 89¼ bid, down 3½ points, with over $13 million traded.

Sprint’s New York Stock Exchange-traded shares tumbled 19 cents, or 7.20%, to $2.45, on volume of 48 million shares, nearly three times the norm.

Communications credits crushed

Other communications credits getting whacked down amid the generalized market retreat included Frontier Communications’ 10½% notes due 2022 and 11% notes due 2025 – big, liquid issues that a trader noted were “always a high-beta benchmark” for the overall junk market.

He saw them finishing “down ¾ point, 1 point, a barometer of the market.”

The 10½% notes were off by 7/8 point on Wednesday at 93¼ bid, with over $33 million traded, while the 11% notes eased by ¼ point to 93 bid, with $28 million traded – the two-busiest purely junk-rated credits in the market.

Another market source saw Stamford, Conn.-based wireline operator Frontier’s considerably less busy 8½% notes due 2020 gain 1 point on the day – one of the few credits in Junkbondland actually firming – to go home at 98½ bid.

Other communications-sector names included Charter Communications’ 5¾% notes due 2026, off 1 point, at 96¾ bid, with over $21 million changing hands.

T-Mobile’s 6½% notes due 2026 ended down 1¾ points at 96¾ bid, on volume of over $13 million.

Away from telecom and cable names, Luxembourg-based steel behemoth ArcelorMittal’s 6¼% notes due 2020 lost 3½ points, ending at 71¼ bid, with over $11 million traded.

Dallas-based hospital operator Tenet Healthcare’s 8 1/8% notes due 2022 were among the rare gainers on the session, ending up 1 point at 95¼ bid, with over $20 million traded.

Also on the rise were drugstore giant Rite Aid Corp.’s 6¾% notes due 2021, seen by a trader up 5/8 point at 103½ bid.

Indicators turn lower

Statistical measures of junk market performance turned lower across the board on Wednesday after having been mixed on Tuesday. It was their second lower session in the last three trading days, the third loss in the last five sessions and the fifth such downward session in the last 10 trading days.

The KDP High Yield Daily index nosedived by 76 basis points on Wednesday, ending at 61.41 – its seventh straight loss and eighth such downturn in the last nine sessions. It had eased by 1 bp on Tuesday and before that had suffered another 76 bps loss on Friday. The index was not published on Monday due to the Martin Luther King Jr. holiday market close.

Wednesday’s level was its fourth straight new low of 2016 and new 52-week closing low, surpassing the old mark of 62.17 that was set on Tuesday.

It was the index’s lowest close since May 27, 2009, when it finished at 61.36.

Its yield, meantime, shot up by 23 bps to 7.73% after having been unchanged on Tuesday at 7½%; before that, it had widened over five consecutive sessions, including on Friday, when it had ballooned out by 22 bps.

The Markit Series 25 CDX North American High Yield index eased by 1/32 point on Wednesday, going home at 97 21/32 bid, 97 11/16 offered, its second consecutive loss and third loss in the last four days. It had declined by 1/8 point on Monday and had swooned by 1 3/32 points on Friday.

The index was unchanged on Monday, when it was published despite the holiday close, holding the same level at which it had finished on Friday.

The Merrill Lynch North American High Yield Master II index resumed its losing ways on Wednesday after having posted gains on Monday – when it was published despite the holiday – and Tuesday.

It plunged by 1.416% – its biggest one-day loss for the year so far and one of the biggest one-day retreats ever recorded – after having gained 0.08% on Tuesday and 0.063% on Monday; those gains came after five successive losses.

Wednesday’s swoon swelled the index’s year-to-date loss to 4.095%, its worst level for the year so far, topping Friday’s 2.787% cumulative deficit. On Tuesday, the year-to-date red ink had been reduced slightly to 2.718%.

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