Oversold market eyed; high-yield ETFs lower; Energy names mixed; Frontier rebounds

By Paul A. Harris and Abigail W. Adams

Portland, Me., Dec. 21 – The high-yield primary market remained dormant and the secondary space choppy on Friday after a widespread sell-off on Thursday that drove ETF funds to new 52-week lows.

High-yield ETFs continued their decline on Friday in high-volume trading.

Energy names were mixed in the secondary space as crude oil futures also continued to drop.

California Resources Corp.’s 8% senior notes due 2022 saw slight gains on Friday although the notes remained down on the week.

Whiting Petroleum Corp.’s 6 5/8% senior notes due 2022 were also improved on Friday but also still down on the week.

However, Ensco plc’s junk bonds continued to trade down on Friday after steep losses on Thursday.

Weatherford International Inc.’s 6¾% senior notes due 2040 also saw steep losses during Friday’s session after a ratings downgrade.

Meanwhile, several names were improved on Friday after a brutal decline during Thursday’s sell-off.

Frontier Communications Corp.’s junk bonds were among those with notes rebounding after suffering losses in the preceding session.

Bargain hunting

There was mention of bargains on Friday, a junk bond trader said.

The market seems oversold and people are combing through the wreckage wrought during the destructive month of December, which saw the junk bond index relinquish 2.21% of its value, eating up the meek gains of a lot of portfolios that were not already in the red for the year.

Looking but not really buying, the trader specified.

“No one seems to want to add any risk heading into the end of the year,” the source remarked.

In any case, while early 2019 holds the promise of bargains in the secondary market, there are not likely to be many bargains for issuers attempting to raise cash in the primary market in the early part of 2019, sources say.

Executions appeared to get progressively sloppier throughout late November. Price talk gapped higher. Deals were delayed. Some were postponed.

And in December new issue activity simply disappeared.

The primary market will return in January, syndicate officials assure.

It probably won't get rolling in early January, they add.

And January is unlikely to be a big month, with estimates running from $5 billion to $15 billion.

The high end of that estimate, should it materialize, would render January 2018 a respectable month, in terms of volume.

January issuance, going back to January 2008, has averaged $18.4 billion, according to Prospect News data.

Perhaps all it will take is a single, familiar issuer stepping forward with a sizable deal and walking away with capital at a rate both the buyside and the sellside judge to be fair, one syndicate banker mused.

That may be all the market needs to provide an impulse to begin building a calendar.

Energy names mixed

Energy names were mixed on Friday as crude oil futures continued to descend below the $50 threshold. Some were posting gains as others continued to see steep losses.

California Resources’ 8% senior notes due 2022 gained 1 point on Friday to close at 66, a market source said.

The notes remained the dominant issue in the secondary space with more than $30 million of the bonds on the tape by late afternoon.

While up on Friday, the notes are down 10 points on the week, a source said.

Whiting Petroleum’s 6 5/8% senior notes were also improved in active trading.

The notes climbed 1 point to close the day at 86 with more than $25 million of the bonds on the tape. They were down 9 points on the week.

While California Resources’ and Whiting Petroleum’s bonds improved, Ensco’s and Weatherford’s bond continued to decline.

Ensco’s 5.2% senior notes due 2025 dropped 2 points to 66 in light trading volume, according to a market source.

The U.K.-based offshore drilling contractor’s 4½% senior notes due 2024 were quiet on Friday after the notes dropped almost 6 points to 61.5 on Thursday.

Weatherford’s 6¾% senior notes due 2040 were among the major decliners of Friday’s session with the notes dropping 5¼ points to 49¾, a market source said.

Moody’s Investors Service downgraded Weatherford’s corporate family credit rating to Caa2 from B3 and senior unsecured notes to Caa3 from Caa1 on Thursday, Prospect News reported.

The downgrade was due to the $3 billion of debt maturing through 2021, which Moody’s believes the company will be challenged to refinance.

While some energy names improved on Friday, crude oil futures continued their descent.

The barrel price of WTI crude oil for February delivery was up early in the session but settled at $45.59, a decrease of 29 cents or 0.63%.

Frontier rebounds

Frontier’s junk bonds pared their losses on Friday after several issues declined during Thursday’s sell-off.

Frontier’s 11% senior notes due 2025 jumped 1 point to close Friday at 62 in active trading, a market source said. The notes dropped 3½ points on Thursday.

Frontier’s 10½% notes due 2022 climbed 2 points to 69¾. The notes dropped 2¼ points on Thursday.

ETF sell-off continues

High-yield ETFs continued to sell off on Friday after seeing a near record for daily outflows on Thursday. The ETFs again set new 52-week lows on Friday, after doing the same the day before.

The iShares iBoxx $ High Yield Corporate Bond Fund ETF closed Friday at $80.23, a decrease of 0.5%.

High volume trading continued with 56 million shares trading hands versus the 90-day average of 4 million.

The SPDR Bloomberg Barclays High Yield Bond ETF closed Friday at $33.20, a decrease of 0.6%. More than 21 million of the shares changed hands on Friday versus the 4 million 90-day average.

Massive ETF outflows Thursday

High yield ETFs sustained a near-record daily outflow of $1.6 billion on Thursday, the most recent session for which data was available at press time, according to a market source.

Actively managed high-yield funds saw $75 million of outflows on the day.

Those daily flow numbers followed a Thursday afternoon report that the combined funds sustained $789 million of outflows in the week to Wednesday's close, according to Lipper US Fund Flows.

Despite these numbers which continue to reflect the negative sentiment that has taken hold in high yield, observers in the leverage markets are acutely dialed into the sentiment of the bank loan market, from which cash is lately flowing out at a record pace, sources say.

The combined bank loan funds sustained a whopping $3.3 billion of outflows in the week to Wednesday's close, according to a market source, who was also citing numbers reported by Lipper.

It was the fifth consecutive week in which outflows from the bank loan funds topped $1 billion.

That hemorrhaging continued apace on Thursday, during which the combined loan funds saw daily outflows of $765 million, the source said.

Indexes widen losses

Indexes marked their sixth consecutive trading day of losses on Friday, with a substantial cumulative drop over the past week, widening the descent into negative territory as the end of the year approaches.

The KDP High Yield Daily index dropped 21 basis points to close Friday at 66.78 with the yield now 7.10%. The index dropped 67 bps on Thursday, 13 bps on Wednesday, 30 bps on Tuesday and 15 bps on Monday for a cumulative 146 bps drop on the week.

The ICE BofAML US High Yield index dropped another 35.5 bps on Friday with the year-to-date return now negative 2.493%.

The index saw its losses increase by more than 100 bps with the index crossing the negative 2% threshold on Thursday after crossing the negative 1% threshold the day before.

The index dropped 109.2 bps on Thursday, 30.3 bps on Wednesday, 38.6 bps on Tuesday, 24.5 bps on Monday for a cumulative 202.6 bps drop on the week.

The index had been wavering between positive and negative territory over the past two weeks but has been in the red since Dec. 14.

The CDX High Yield 30 index dropped 37 bps to close Friday at 101.06.

The index dropped 84 bps on Thursday, 61 bps on Wednesday, 6 bps on Tuesday, and 48 bps on Monday for a cumulative 236 bps drop on the week.

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