Junk jumps as stocks, oil rally; energy credits biggest gainers; funds plunge by $1.6 billion

By Paul Deckelman and Paul A. Harris

New York, Aug. 27 – The high-yield market was sharply and broadly higher on Thursday, given wings by big gains in stocks and oil prices.

Equities saw their second big gain in a row after second-quarter GDP figures were revised sharply higher, an indicator of better-than-expected U.S. economic growth.

Meanwhile, oil – which earlier this week fell to new six-year lows – saw its biggest one-day gain also in the last six years.

Those factors helped to push junk credits higher, particularly oil and natural gas exploration and production company names such as California Resources Corp., Sand Ridge Energy, Inc., Comstock Resources Inc., Energy XXI and Halcon Resources Corp., all of which were up by multiple points in active trading.

Statistical measures of junk market performance were better all around on Thursday after having turned mixed on Wednesday. Thursday’s advance was the second in the last three days. On Tuesday, the indicators had broken a losing streak of five straight lower sessions. But counting in all of the mixed sessions that saw no real trend as well as sessions in which the indicators were lower all around, Thursday’s upturn was only the second unambiguously higher day in nearly a month, since July 29.

Another numerical indicator –flows of investor cash in to or out of high-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends, turned negative for the fourth week out of the last five as $1.6 billion more left the funds than came into them during the latest trading week.

New-deal sphere remains muted

The primary market remained quiet on Thursday, with no deals pricing and no deals announced.

More than a week has passed since the last issue cleared the market, when KIK Custom Products Inc. (Kronos Acquisition Holdings Inc.) priced $390 million of 9% senior notes due Aug. 15, 2023 (Caa2/CCC) at 89.57 to yield 11% on Aug. 19.

The new issue market may remain closed until Sept. 8, when business resumes following the three-day Labor Day holiday weekend in the United States, sources say.

Energy in the lead

In the secondary market, a trader succinctly said that “outsize moves in junky energy names” was the dominant feature of Thursday’s session.

He also said that the day’s dealings were “very hectic.”

“There was a huge rally in oil,” a second trader said, “taking anything oil-related along with it for the ride.”

The benchmark U.S. crude oil grade, West Texas Intermediate, saw its biggest one-day jump since March 2009. The October contract zoomed 10% on the day, by $3.96 per barrel, to end at $42.56 on the New York Mercantile Exchange. It had fallen by 71 cents during Wednesday’s session.

The trader said that the energy sector “was clearly the outperformer of the day.”

For instance, he saw Los Angeles-based exploration and production operator California Resources’ 6% notes due 2024 jump to 74 bid on Thursday, a four-point gain from Wednesday’s close.

Another trader, who also saw the notes finishing at 74 bid, called that a 4½-point improvement, with over $24 million having changed hands, making it one of Junkbondland’s busiest issues during the day.

At another desk, a market source saw the notes finishing at 73 5/8 bid, 74 5/8 offered, versus Wednesday’s levels in a 70-to-71 context.

Other energy credits benefitting from the big rise in oil prices included Frisco, Texas-based energy operator Comstock Resources’ 10% notes due 2020; those bonds were seen up 1½ points at 78¾ bid, on volume of more than $22 million.

Houston-based Energy XXI’s 11% notes due 2020 advanced nearly 4½ points to 61 bid, with over $15 million traded.

Cross-town rival Halcon Resources’ 8 5/8% notes due 2020 shot up by 1½ points to end at 86¾ bid, with more than $14 million traded.

And Oklahoma City-based oiler SandRidge Energy’s 8¾% notes due 2020 were among the big winners, up 3¼ point at 65½ bid, also on more than $14 million of volume.

“The E&P space saw moves of 1 or 2 points or even 3 or 4 points,” a trader said.

“They had underperformed, bigtime,” but with oil back up over the $40 mark, they were solidly better on Thursday.

“That is the major story [of the day]. It’s where the volume was and the focus.”

Indicators show improvement

Statistical measures of junk market performance were better all around on Thursday after having turned mixed on Wednesday. Thursday’s advance was the second in the last three days. On Tuesday, the indicators had broken a losing streak of five straight lower sessions. But counting in all of the mixed sessions that saw no real trend as well as sessions in which the indicators were lower all around, Thursday’s upturn was only the second unambiguously higher day in nearly a month, since July 29.

The KDP High Yield Daily index rose by 6 basis points on Thursday to end at 67.69 after having eased by 2 bps on Wednesday; Thursday was the index’s second gain in the last three days, including Tuesday, when it had jumped by 33 bps, which had been its first gain after five straight sessions on the downside.

However, even with those two gains, the index has still now been lower in six sessions out of the last eight and, going back a little farther, in 12 sessions out of the last 17 and in 14 sessions out of the last 19 trading days.

Its yield, meanwhile, came in by 4 bps, going home at 6.44%, its second narrowing in the last three sessions. On Wednesday, though, it had risen by 2 bps, marking its seventh rise in the previous eight sessions, in eight sessions out of the previous 11 and in 11 sessions out of the prior 14.

The Markit Series 24 CDX North American High Yield index notched its third consecutive gain Thursday, firming by 25/32 point to go out at 105 1/16 bid, 105 3/32 offered. On Wednesday it had recorded one of its biggest advances of the year, surging by 1 1/8 point, on top of Tuesday’ rise of 5/32 point. Tuesday had marked the index’s first rise after six successive setbacks, after nine losses in the previous 10 sessions and 12 losses in the 15 prior trading days.

The Merrill Lynch North American Master II High Yield index – which had also ended a lengthy slump on Tuesday, only to retreat on Wednesday – was back on the upside on Thursday with a 0.466% gain, in contrast to Wednesday’s 0.073% loss. On Tuesday, it had zoomed by 0.529%, its biggest one-day rise on the year so far, breaking a five-session swoon before that which had also seen the index down in six out of the previous seven sessions and, over the longer term, in 14 of the 16 prior trading days.

The index’s year-to-date loss narrowed to 0.223% on Thursday from 0.686% on Wednesday and from 1.136% on Monday, which had been the biggest year-to-date loss seen so far this year as well as the biggest year-to-date deficit the index has seen since Oct. 11, 2011, when the red ink totaled 1.745%.

All of those levels are well down from the 4.062% reading recorded on May 29, the index’s peak level for the year so far.

Funds fall by $1.6 billion

While the indicators were up across the board, another market performance measure – flows of money into or out of high-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends – returned to their recently negative pattern, posting a loss for this week after an upturn last week, as $1.6 billion more had left those weekly-reporting-only funds than had come into them during the week ended Wednesday.

This week’s outflow was the funds’ fourth in the last five weeks, including three consecutive weeks of billion-dollar-plus cash losses. (See related story elsewhere in this issue.)

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