European primary eyed; Refinitiv, Envision trade down; Frontier rebounds; XPO pares losses

By Paul A. Harris and Abigail W. Adams

Portland, Me., Dec. 14 – With the domestic primary market expected to remain closed until 2019, all eyes are on the new deals the new year will bring.

While the U.S. primary market is expected to produce modest new deal volume of $10 to $15 billion in January, the European primary is expected to be busy and is primed to pull out of the current market slump ahead of the United States, sources said.

Meanwhile, the secondary space was soft on Friday with a sell-off in equities that saw the Dow Jones industrial average closing down 459 points.

Refinitiv’s and Envision Healthcare Corp.’s junk bonds, which priced in closely watched LBO financing deals, continued to trade at a deep discount to their issue prices in the secondary space.

Envision’s 8¾% senior notes due 2026 (Caa1/B-) gave back some of the gains seen on Tuesday after the extension of its contract with UnitedHealthcare.

Frontier Communications Corp.’s 7 1/8% senior notes due March 15, 2019 rebounded in active trading on Friday, wiping out the losses from Thursday’s session.

XPO Logistics, Inc.’s junk bonds were mixed in active trading on Friday after dropping on a short-seller report on Thursday.

Europe eyed

The primary market remained closed on Friday, as sources professed near certainty that 2018 high yield issuance has run its course.

Syndicate officials in the dollar-denominated market continued to forecast a weak to moderate January on the new issue front.

However, the European new issue market could be staging for a meaningful regeneration of business in January – in fact, January could be a big month in the euro market, a London-based senior syndicate official said.

Investors in Europe are beginning to take the view that junk is oversold, the source added.

The European market entered correction territory slightly before the dollar-denominated high-yield market did and appears on a trajectory to pull out of the current stall ahead of its American counterpart, the banker said.

Just as in the United States, there are committed financing deals expected to come to market during January.

If those deals go well, January could be a busy month, the banker said.

European investors think that the selloff in high yield has gone too far and believe that the market is now attractively priced, the official asserted.

The banker is also looking for global issuers, more accustomed to appearing with dollar-denominated deals, to continue showing up in the euro market in order to raise cash, a trend that emerged during 2018 as rates in the United States began their ascent.

“For investors, euros are more attractive than dollars right now,” the source remarked.

Also, as in the United States, a big onslaught of negative geopolitical headlines – Brexit, for example – could serve to inhibit or derail the new issue market in Europe, the banker noted.

Risk averse

Junk investors spent the latter portion of 2018 migrating away from risk, high yield market sources say.

Risk aversion has taken hold on both sides of the Atlantic.

One deal that illustrates this migration is Refinitiv, a merger and acquisition trade that came in four tranches – dollar-denominated and euro-denominated secured tranches and dollar-denominated and euro-denominated unsecured tranches – in mid-September.

On Friday, the dollar-denominated 6¼% first-lien notes due May 2026 (B2/B/BB+) were at 98 bid, 99 offered, according to a trader in New York.

However, the dollar-denominated 8¼% senior notes due November 2026 (Caa2/B-/B+) were at 95 bid, 95¾ offered on Friday morning.

Generic prices on the euro-denominated Refinitiv bonds point to the same dichotomy between the secured and unsecured tranches and illustrate a preference among European investors for secured paper over unsecured.

The Refinitiv 4½% first-lien notes due May 2026 (B2/B/BB+) were generically at 97 7/8 bid, 98 7/8 offered on Friday morning, the trader said.

However, the 6 7/8% senior notes due November 2026 (Caa2/B-/B+) were at 93¼ bid, 94 1/8 offered.

Envision gives back gains

Envision’s 8¾% senior notes due 2026 gave back some of their gains from earlier in the week after the settlement of its contract with UnitedHealthcare.

The 8¾% notes were down about 1 point to close the day at 90½, according to a market source.

The notes were among the major volume movers in the space with more than $19 million in play during Friday’s session.

The 8¾% notes began the day at 91 bid, 91½ offered, a source said.

While the notes traded down on Friday, they are still ½ point above their level at the start of the week, a market source said.

Envision’s notes rose 2 points to a 91 handle on Tuesday after UnitedHealthcare and Envision extended their contract.

The insurer and the physician staffing service were engaged in an extended public dispute with UnitedHealthcare threatening to drop Envision care providers from its network.

The 8¾% notes have been under pressure since hitting the market in late September.

Envision priced a $1.225 billion offering of the 8¾% notes at par on Sept. 28.

Proceeds from the LBO financing deal were used to help fund the buyout of the company by KKR for about $9.9 billion.

The deal was weakly allocated and had poor covenants, a market source previously said.

Frontier rebounds

Frontier’s 7 1/8% senior notes due March 15, 2019 rose as quickly as they fell at the end of the week. The notes gained 4 points to close Friday at 98½, a market source said, wiping out the losses from the previous session.

They remained a focus of trading activity with more than $23 million on the tape.

The notes were under pressure on Thursday, trading down 4 points to 94½, which raised speculation that there was concern about the company’s ability to pay off the notes, sources said.

There is about $400 million of the notes outstanding, according to Trace data.

However, sources were surprised by Thursday’s movement as there had been no previous concerns about the notes’ repayment.

The company announced it would be making its coupon payment in December, a market source said.

The other notes in Frontier’s capital structure were largely unchanged on Friday after all dropped alongside the 7 1/8% notes on Thursday.

Frontier’s 8½% notes due 2026 were largely unchanged at 88¾, a market source said.

Frontier’s 11% senior notes due 2025 were also unchanged at 65½ with the notes down 3 points on the week.

XPO mixed

XPO Logistics’ junk bonds were mixed on Friday after a short-seller report sparked a sell-off in the notes on Thursday.

XPO’s 6 1/8% senior notes due 2023 gained ½ point to close Friday at 98¼, according to a market source.

The notes remained active with more than $18 million on the tape by the late afternoon.

XPO’s 6½% senior notes due 2022 shaved off about ¼ point to close Friday at par.

About $17 million of the notes were on the tape by the late afternoon.

The 6 1/8% notes traded down 2¼ point and the 6½% notes traded down 1¼ point on Thursday after the release of a short-seller report from Spruce Point Capital Management, which alleged nefarious accounting practices.

ETFs see inflows

For the second consecutive day, high-yield ETFs saw positive cash flows on Thursday, a trader said.

The ETFs saw $335 million of inflows on Thursday, trailing $465 million of inflows on Wednesday.

Those back-to-back inflows into the junk ETFs come on the heels of three consecutive big outflows, the trader said.

Those big ETF outflows were reflected in the combined weekly outflows from the dedicated high-yield bond funds of $2.06 billion in the week, ending with Wednesday's close.

While the ETFs saw positive flows on Thursday, the actively managed high-yield funds did not, according to the trader.

The actively managed funds sustained $200 million of outflows on the day, the source said.

Indexes down

Indexes were down on Friday although all posted modest gains for the week.

The KDP High Yield Daily index dropped 6 basis points to close Friday at 68.24 with the yield at 6.65%.

The index rose 3 basis points on Thursday and 14 bps on Wednesday after dropping 1 bp on Tuesday and 8 bps on Monday.

The index was up 2 bps on the week after a 15 bps drop on the week last week.

The ICE BofAML US High Yield index dropped back into the red on Friday, ending the week with a year-to-date return of negative 0.112%. That was a loss of 18.1 bps.

The index had risen on Thursday by 4.8 bps for a year-to-date return of 0.069% after moving into the black on Wednesday.

It had previously been in negative territory since Dec. 6 after briefly popping back to the black on Dec. 3. Prior to that, the index had posted negative returns since Nov. 15 after seeing positive returns since June.

The CDX High Yield 30 index dropped 44 bps to close Friday at 103.42. The index gained 22 bps on Thursday, 41 bps on Wednesday and 17 bps on Tuesday after a 14 bps drop on Monday.

The index gained 22 bps on the week after a 127 bps drop on the week the previous week.

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