Junk market again firm, led by energy surge; Rite Aid off after results; Hovnanian gyrates amid re-fi news

By Paul Deckelman and Paul A. Harris

New York, Jan. 3 – For a second consecutive session, oil and natural gas credits propelled the high-yield bond market higher on Wednesday, with volume much improved from Tuesday’s relatively sedate first session back after the long New Year’s holiday break.

Traders saw sharp gains in the likes of oil and natural gas exploration and production operators California Resources Corp., Denbury Resources Inc., EP Energy Corp., MEG Energy Corp. and driller Noble Holding International Ltd.

Those energy names, in turn, were fueled on their upward climb by a sharp spike in crude oil futures prices, which hit their highest levels since early 2015 on Wednesday, pushed upward by a combination of supply concerns in the wake of continued anti-government protests in key global oil producer Iran, as well as a falloff in U.S. crude oil inventories.

Natural gas provider Chesapeake Energy Corp.’s bonds also firmed solidly for a second straight day on expectations of increased natural gas demand throughout much of the United States, as a monster “bomb cyclone” winter storm approached the Northeast, and frigid temperatures prevailed throughout much of the country.

Away from the energy sphere, traders saw Rite Aid Corp.’s notes slide after the drugstore chain operator reported quarterly results that included a drop on comparable-store sales and lower-than-expected revenues.

K. Hovnanian Enterprises, Inc.’s bonds retreated from their recent highs in the aftermath of the homebuilder’s recent announcement of a planned refinancing transaction.

Primaryside activity meantime remained muted for now, although participants speculated on the size of the likely new-deal pipeline once issuance returns in earnest to Junkbondland.

Statistical market performance measures were higher across the board for a third consecutive session on Wednesday; they had firmed on Friday, and after the market close on Monday for New Year’s Day, had continued to gain on Tuesday and then again Wednesday, after having been mixed before that.

The first two sessions of 2018 failed to generate new issue news, sources said on Wednesday.

It is possible that the 2018 new deal machine might not reactivate until early in the Jan. 8 week, they added.

There seems to be a growing consensus that January will not be a huge month.

Forecasts range between $15 billion and $30 billion.

Either end of that range would make for a far bigger January than that of 2016, which saw just $7.2 billion in 12 junk-rated, dollar-denominated tranches.

Average January issuance in the past half decade is $20.1 billion, according to Prospect News data.

Average deal volume, during the same time period, is 38 tranches.

However, should January 2017 come in at the high end of the recent forecasts, $30 billion, it would draw very near to record territory: January 2013, the biggest January in the history of the market, saw $30.5 billion price in 64 tranches.

Mixed Tuesday flows

The cash flows of the dedicated high-yield bond funds were mixed on Tuesday, the most recent session for which data was available at press time, according to a bond investor.

The high-yield ETFs saw $363 million of daily cash inflows on the day.

However actively managed high-yield funds were negative, sustaining $205 million of outflows on Tuesday.

Dedicated bank loan funds were also negative on Tuesday, posting $95 million of outflows on the day.

A busier session seen

In the secondary realm, a trader opined that “the whole market was better today – when you look at the ones that went down, their change was a lot smaller than the ones that went up.”

He characterized Wednesday’s market as “busy today – about $4.9 billion” of total volume, as opposed to the roughly $2 billion of junk paper which changed hands on Tuesday, the first session of the new month, first quarter and indeed, the brand-new year.

The trader said that “most of it was energy today – maybe because it’s so cold” in much of the U.S.

Oil rise fuels energy advance

Another trader declared that “anything energy related was obviously outperforming today.”

He noted that crude oil prices traded up by as much as $1.50 per barrel during the session before coming off those peak levels, but still ending up handsomely on the day.

He continued that the key domestic benchmark crude grade, West Texas Intermediate “is just under $62 now, giving another leg up on these names.”

February-delivery WTI ended up $1.26 per barrel on the New York Mercantile Exchange, settling at $61.63, after having hit an intraday high point of $61.97.

Those levels were the highest that light, sweet crude has traded at since early in 2015, when prices were around there on their way lower as part of the great slide in crude seen in 2014-2015 and beyond.

The key international crude grade – March delivery North Sea Brent crude – closed up by $1.27 per barrel on Wednesday in London futures trading, settling at $67.84.

Both WTI and Brent were recovering from minor losses seen on Tuesday – a nickel per barrel for WTI and 30 cents per barrel for Brent – which had followed three straight better sessions for both crude grades.

Analysts said that crude prices were being pushed up on speculation that the current political turmoil in major producer Iran – the third-biggest producer in OPEC – might disrupt its flow of crude onto the world market.

They also noted that U.S. crude oil inventories fell by 5 million barrels in the week to Dec. 29, according to industry group the American Petroleum Institute, declining to 427.8 million barrels – a statistic seen as bullish for replacement sales.

The commodities markets will get further domestic supply data to mull over on Thursday, when the official U.S. Energy Information Administration storage and production data is scheduled for release.

Energy names dominate

Against that backdrop of surging crude prices, a trader said that the widely followed oil and gas sector bellwether issue – Los Angeles-based E&P operator California Resources Corp.’s 8% senior secured second-lien notes due 2022 – continued to stand out.

“The CRCs were up 1½ points [Tuesday], and again [Wednesday] they were trading up, by almost 2 points at 86½ bid.”

A second trader confirmed those levels, adding that the CalRes bonds had firmed “on heavy volume,” with more than $39 million of turnover on the day.

“They were followed directly by EP Energy,” he said, with the Houston-based oil and gas company’s

8% notes due 2025 zooming by 4½ points, to 79½ bid. He estimated volume in the credit at over $33 million.

Its 6 3/8% notes due 2023 also saw huge gains, ending up 4¾ points on the day at 59 bid, but on not-so-huge volume of only around $3 million, a market source said.

Calgary, Alta.-based MEG Energy’s 6 3/8% notes due 2023 were up almost 3¾ points at 89¾, a trader said, but on only “a handful” of transactions.

A trader saw Oklahoma City-based oil and gas company Continental Resources, Inc.’s 4 3/8% due 2028 were up 1 point at 100¼.

Plano, Texas-based sector peer Denbury Resources’ 5½% notes due 2022 soared by nearly 5 points on the day, to just over 73 bid, with over 12 million having changed hands.

Among the energy drilling companies, whose success is directly tied to that of the E&P companies who hire them, a trader said that Cayman Islands-based Noble Energy’s 7¾% notes due 2024 traded up 3¼ points, to 89½, on “heavy volume” of more than $32 million, while its 8.70% notes due 2025 were up 2¾ points at 83 on $12 million of volume.

London-based driller Ensco plc’s 5.20% due 2025 were up more than 3 points to 89 bid, with $16 million of that paper having moved around.

Lonestar holds gains

A trader said that at his shop, “we traded some [Lonestar Reources US Inc.] today, seeing those 11¼% notes due 2023 in a range of 103¼ to 103½ bid on the 144A portion of that recently priced deal, with the Regulation S piece “a little bit below that.”

But he said that trading volume “was small – in total, it was $4 million, maybe $8 million that traded.”

The Fort Worth-based oil and gas operator priced $250 million of those notes at par on Dec. 19 in a regularly scheduled forward calendar offering that turned out to be the last junk bond pricing of 2017.

The notes gradually firmed in relatively thin aftermarket dealings over a period of some days to their current levels.

Apart from Lonestar, the trader said that “I don’t see much volume on any of the new deals.”

Chesapeake firming continues

Also in the energy sector, Oklahoma City-based natural gas and oil exploration company Chesapeake Energy’s 8% notes due 2027 saw another strong day, a trader seeing them up 1½ points at par, matching the gain notched on Tuesday.

The issue rose even as natural gas prices came down from the highs at which they had closed on Tuesday, finishing off by just under 5 cents per 1 million British Thermal Units, equivalent to 1,000 cubic feet of gas.

Those gas prices still held above $3 per MMBtu, well up from their recent low close of just below $2.60, recorded Dec. 21.

Analysts said that expectations of a continued colder-than-anticipated winter in the Northeast and other parts of the U.S. were the key driver behind the recent gas price rise.

Non-energy credits firm

A trader said that the story of the day was “all pretty much energy – up, up, up.”

“Energy names were the top two, three, four most active names,” and dominated the rest of the Most Actives list as well.

He added outside of [energy], nothing really moved significantly, either way.”

Among the non-energy credits, he said that “Frontier is the first non-E&P you get in there” on the Actives list. He saw the Stamford, Conn.-based wireline telecommunications company’s 11% notes due 2025 up almost 2 points on the day at 75 3/8, with over $31 million traded.

And he saw “some activity” in Canadian drug manufacturer Valeant Pharmaceuticals International Inc. – its 6 1/8% notes due 2025 were up 1 point, to 23, with over $26 million traded.

The Laval, Que.-based company’s recently priced 9% notes due 2025 were up ¾ points, at 105 1/8, on volume of over $20 million.

Rite Aid in retreat

One of the few downsiders on the day was Rite Aid Corp.’s 6 1/8% notes due 2023, which fell by 1¾ points to end at 89¾ bid, on volume of nearly $20 million.

The pullback was in line with an easing in the Camp Hill, Pa.-based drugstore chain operator’s New York Stock Exchange-traded shares, which eroded by 2 cents, or 0.94%, in regular trading, ending at $2.11, and which then lost an additional 14 cents, or 6.64%, in after-hours trading, finishing at $1.97. Volume of 43.6 million shares was almost twice the norm.

The bonds and shares fell after the company’s announcement of its latest quarterly results – which included

smaller-than-expected revenue numbers, which fell 5.6% to $5.35 billion, well below Wall Street’s expectations of nearly $7.5 billion.

Rite Aid blamed the drop on declining reimbursement rates and a drop in comparable-store sales, the key retailing industry performance metric.

Rite Aid's sales in stores open at least one year fell by 2.5%, paced by a 3% decline in retail pharmacy sales and a 12% slide in its pharmacy services revenue.

It was the sixth consecutive quarter of sagging year-over-year comp-store sales results.

Elsewhere among the retailers, though, traders saw Phoenix-based PetSmart, Inc.’s 8 7/8% notes due 2025 up more than 3 points on the day, at 64½ bid, while its 7 1/8% notes due 2023 improved by more than 2½ points, to 63 7/8%.

But both of those rose on “only a handful” of large-sized trades, one trader observed.

Hovnanian paper gyrates

A trader said that Red Bank, N.J.-based homebuilder Hovnanian Enterprises’ paper “was busy, because of the re-fi they announced.”

He quoted its 10½% notes due 2024 ending around 113½-to-114 bid, – “down from 115 and change at the end of the year but up from where they traded on Dec. 26,” when they were at 110½.

He said that about $10 million traded.

“There are a couple of tranches out for sale – I think those are probably from the guys that own them that want to provide the loan to Hovnanian.”

Hovnanian announced on Dec. 29 that it had announced it entered into financing commitments with GSO Capital Partners LP – an affiliate of private-equity powerhouse The Blackstone Group – to refinance some of its debt securities maturing in 2019 and to purchase $25 million of its secured debt.

In connection with this agreement, the company will pay down some debt maturing in the next one to two years, which will be replaced with longer-term financing, most of which will not be due until 2026 and after, according to a company press release.

In addition, GSO and some funds that it manages or advises have committed to provide Hovnanian with a new $125 million senior secured first-lien revolving credit facility.

The company intends to use $75 million of this revolver to refinance its current $75 million first priority secured term loan after that term loan’s no-call period expires in September 2018. The remaining portion of the new facility will be available for general corporate purposes and will give the company more financial flexibility.

Indicators stay strong

A trader said that overall on Wednesday, “the whole market is up – so I guess now they can come and bring more deals and everyone will buy them. It’s probably going to be very busy, as there is a lot of cash out there.”

Statistical market performance measures were meantime higher across the board for a third consecutive session on Wednesday; they had firmed on Friday, and after the market close on Monday for New Year’s Day, had continued to gain on Tuesday and then again Wednesday, after having been mixed before that.

The KDP High Yield Daily Index rose for a fifth straight session on Wednesday, jumping by 13 basis points to close at an even 72.00 – the first time the index had closed at or above that psychologically potent marker since Nov. 8, when it had finished at 72.07%. On Tuesday, it had gained 5 bps, after firming by 4 bps on both Thursday and again on Friday. The index was not tabulated on Monday due to the market’s holiday close.

Its yield came in by 3 bps to 5.23%, its third straight narrowing, having also declined by 2 bps on Tuesday and by 3 bps on Friday.

The Markit Series 29 high yield index improved by 5/16 point on Wednesday to finish at 108 19/32 bid, 108 21/32 offered. On Tuesday, it had edged up by almost 1/16 point Tuesday after having eased by that same amount on Monday, when the index was tabulated despite the market close.

The Merrill Lynch High Yield Index rose for a second session in a row, advancing by 0.284%, on top of its 0.133% rise – the index’s first gain after having been unchanged on Friday,

Wednesday’s upturn raised its year-to-date return to 0.418% from Tuesday’s first-of-the-year 0.133% level.

The index had closed out 2017 with a cumulative return of 7.483%.

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