Primary dormant; secondary space soft; healthcare, energy sectors under pressure; Tenet drops

By Paul A. Harris and Abigail W. Adams

Portland, Me., Dec. 17 – The week began with continued silence from the domestic primary market – silence, which is expected to persist into the new year, making December the first month in more than a decade to see $0 in new issuance.

Meanwhile trading volume was light in the secondary space, which is also a trend that is expected to persist for the remainder of December.

While volume was light, the space was heavy on Monday with equity markets sinking further into the red and crude oil futures settling below $50.

Energy names continued to dominate trade in the secondary space with junk bonds from California Resources Corp., Chesapeake Energy Corp., EP Energy and Diamond Offshore Drilling trading down during Monday’s session.

While the overall market was soft, the health care sector was particularly heavily hit with investors nervous following a ruling from a federal judge in Texas which found the Affordable Care Act unconstitutional.

Tenet Healthcare Corp.’s 6¾% senior notes due 2023 were the most actively traded issue in the secondary space with the notes down 2 points.

Community Health Systems’ 6¼% senior notes due 2023 and Hospital Corp. of America’s 6½% senior notes due 2020 were also under pressure in active trading.

The primary

It is all but a fact that the 2018 primary market has run its course, with the last new issue pricing in late November, rendering December the first month in more than a decade to post zero new issuance, sources say.

There is an expectation that January will see a regeneration of the new issue market, sources say.

The new year will get underway with a thin pipeline of committed financings that were intended to result in junk issuance.

Meanwhile, opportunistic issuers are always looking in from the wings, ready to bring a deal if more appealing market conditions present themselves.

Euro-denominated new issue activity could be robust in January, a senior syndicate banker said.

Investors there believe that the selloff is now overdone and that prices in high yield are once again attractive.

However, in Europe, as well as in the United States, the primary market remains susceptible to the sometimes inhibiting forces of headline news, for example Brexit – the banker said.

Energy names trade down

Monday marked another brutal day for the energy sector with crude oil futures dropping to below $50 – a level that could mean trouble for the high-yield market, sources said.

Several energy names were active on the tape and trading off amid the weakness in crude oil futures.

California Resources Corp.’s 8% senior notes due 2022 dropped 2¾ point to close Monday at 73½, according to a market source.

More than $14 million of the bonds were on the tape by the late afternoon.

The 8% notes were quoted Friday at 76 bid, 76½ offered.

EP Energy’s 8% senior notes due 2025 traded down 2 points to close Monday at 45½, according to a market source. More than $14 million of the bonds were in play by the late afternoon.

Chesapeake Energy’s 7% senior notes due 2024 traded down 1 point to 92, according to a market source. More than $13 million of the bonds were on the tape by the late afternoon.

While less active, Chesapeake Energy’s 7½% senior notes due 2026 were down 1¼ point.

The notes were quoted at 91¼ bid, 92¼ offered after closing Friday at 92½ bid, 93½ offered, according to a market source.

Chesapeake Energy priced an $850 million issue of the 7% notes and $400 million issue of the 7½% notes at par in a two-tranche offering in late September.

Diamond Offshore Drilling’s 7 7/8% senior notes due 2025 dropped 1½ point to close Monday at 88 with more than $12 million of the bonds on the tape.

Whiting Petroleum’s 6 5/8% senior notes due 2026 were down about 5/8 point to close Monday at 95 with about $11 million of the bonds on the tape.

Crude oil futures saw another brutal sell-off on Monday with the barrel price of WTI crude oil for January delivery trading as low as $49.01 before settling at $49.88, a decrease of $1.32 or 2.6%.

Mexico announced on Sunday it was planning to boost crude oil production by 45% by 2025.

Many energy names are underwritten with oil at $50 and a meaningful shift below that level would signal trouble for the market, sources said.

Healthcare under pressure

The market was heavy across the board on Monday.

However, healthcare names were particularly heavy hit following a Texas federal judge’s ruling that the Affordable Care Act was unconstitutional.

Tenet Healthcare’s 6¾% senior notes due 2023 were among the most actively traded issues in the secondary space with more than $18 million on the tape by the late afternoon.

The notes from the Dallas-based healthcare services company dropped 2 points to close Monday at 94¾, a market source said.

HCA’s 6½% senior notes due 2020 were down about ¼ point in active trading to close Monday at 102½. More than $12 million of the bonds had changed hands during Monday’s session.

Community Health Systems’ 6¼% senior notes due 2023 dropped 1 point to close Monday just north of 92, a market source said.

More than $12 million of the bonds changed hands during Monday’s session.

Investors were nervous about the impact a repeal of the ACA would have on the sector, a market source said.

Friday outflows

The cash flows of the dedicated high-yield bond funds were moderately negative on Friday, the most recent session for which data was available at press time, a trader said.

High-yield ETFs sustained $78 million outflows on the day.

Actively managed high-yield funds saw $60 million outflows on Friday, the trader said.

The combined funds had seen a record $40.2 billion of outflows on the year to Friday's close, the trader said.

Indexes down

Indexes opened the week as they closed the last – with losses.

The KDP High Yield Daily index dropped 15 basis points to close Monday at 68.09 with the yield now 6.68%.

The index was down 6 bps on Friday but gained 2 bps on the week last week.

The ICE BofAML US High Yield index sank further into negative territory on Monday. The index dropped 24.5 bps with the year date return now negative 0.357.

The index, which had been wavering between positive and negative territory over the past two weeks, returned to the red on Friday.

However, the index still posted a gain of 8.2 bps on the week last week.

The CDX High Yield 30 index dropped 48 bps to close Monday at 102.94. While down on Friday, the index gained 22 bps on the week.

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