Junk quietly opens 2014 with no pricings; Chrysler busy on Fiat news; funds lose $643 million

By Paul Deckelman and Paul A. Harris

New York, Jan. 2 - It was back to work for the high-yield market on Thursday after Wednesday's break for New Year's Day. But even though there was a fresh new page on everybody's calendar, it was still the same old, same old in Junkbondland, at least in terms of what the market had been doing over the days headed into the holiday break.

The primary realm remained shuttered, just as it has been every day since a few days before Christmas, with no new deals pricing or even being introduced during the session.

However, there was some chatter among the new-deal denizens indicating that things should start picking up notably next week, as part of what is expected to be robust January issuance.

In the secondary sphere, traders reported that activity was very light, noting that some market participants hadn't even bothered showing up in view of the fact that many were still on vacation for the week or they figured the week was pretty much over and nothing would be going on.

Others were there, they said, but made an early exit, hoping to get home ahead of the expected winter snowstorm and deep freeze that was barreling towards New York and other business centers in the Northeast.

Still, there was some relatively active trading in Chrysler Group LLC's bonds, which were given a jump-start by the news that Italian automaker Fiat, already Chrysler's majority owner, has agreed to buy the rest of the No. 3 U.S. carmaker in a more than $4 billion deal.

And there was continued brisk trading in NII Holdings Inc.'s notes, which remained under pressure despite a lack of fresh news about the global wireless service seller.

Statistical measures of market performance turned mixed on Thursday after having been higher on Tuesday.

Meanwhile, the flow of cash into and out of high-yield mutual funds and exchange-traded funds, considered a key barometer of junk market liquidity trends, got dipped back into the red in the final week of 2013 after having recovered from a loss and gotten back in the black the week before.

Funds lose $643 million

As Thursday's market activity was winding down, market sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said that $643 million more left those funds than came into them during the week ended Wednesday.

That more than offset the modest $103 million inflow that had been seen the week before, which ended Dec. 25.

And that gain, in turn, had been a partial rebound from the week ended Dec. 18, when a net outflow of $876 million had been recorded by Arcata, Calif.-based AMG, a unit of the Lipper analytics division of Thomson Reuters Corp.

The latest week's loss was thus the second outflow seen in the past three weeks, with a net outflow total during that timeframe estimated at $1.42 billion, according to a Prospect News analysis of the figures.

However, the overall trend for the last one-third of the year was overwhelmingly positive, with 13 inflows seen in 17 weeks and only four outflows, including this past week's downturn. Net gains during that stretch, which dates back to the week ended Sept. 11, added up to $8.26 billion, according to the analysis.

But the year as a whole was considerably less lopsided, with inflows seen in 33 weeks, against 20 weeks of outflows, according to the analysis.

After having peaked at a cumulative net inflow total of a little above $2.8 billion in mid-May, flows turned negative, and by early June they were even showing deficits on a cumulative basis due to a sizable losing streak seen during late May and in June that included several multi-billion-dollar outflow numbers, which was prompted by investor worries over whether the Federal Reserve would end its accommodative monetary policy. At one point in late June, the red ink topped the $9 billion mark, according to the analysis.

However, encouraged by subsequent indications that the central bank would not be trimming its bond-buying policies as quickly or as steeply as originally feared due to a still-shaky economy, inflows began to mount up after that, with the negative number for the year gradually whittled down week by week. By mid-October, the year-to-date fund-flow number had swung back into the black, according to the analysis, and it stayed there for the rest of the year.

Market sources said that the latest weekly outflow dropped the final year-to-date net inflow total for 2013 down to an estimated $1.27 billion.

Cumulative fund-flow estimates may be revised upward or downward or may be rounded off and could include unannounced revisions and adjustments to figures from prior weeks.

Liquidity fuels market gains

Analysts said that the sustained flows of fresh cash into junk - and the mutual funds and ETFs represent but a small, though very observable and quantifiable percentage of the total amount of investor money coming into or leaving the more than $1 trillion junk market - has been a key catalyst behind the high-yield market's strong performance over at least the last two years, both in the primary arena and on the secondary side.

In 2012, easy liquidity carried the primary to a new-issuances record of just over $327 billion of fresh dollar-denominated, junk-rated paper from domestic or industrialized-country issuers, according to data compiled by Prospect News, while the secondary realm easily cruised to a return on the year of more than 15%, easily topping other fixed-income asset classes. At one point in September 2012, cumulative net inflows to the funds got as high as $32.46 billion, according to the analysis, before moderating a little towards the end of that year, although they finished 2012 at a still-robust $28.7 billion.

And in 2013, comfortable levels of liquidity, as exemplified by the fund flows, were also seen as one of the major drivers behind the robust patterns of primary activity and secondary strength that had continued for much of this year's first half.

While things turned choppy over several months around the middle of the year, they then picked up again starting in September, when the recent run of mostly consecutive net inflows coincided with the explosive expansion of junk primary activity that ultimately carried 2013's issuance to a near-record $324 billion, according to revised Prospect News data, and the surge in the secondary market's return to above the 7% mark.

Primary dormant

Although the high-yield market reopened on Thursday, the primary market remained dormant.

Behind the scenes, issuers and dealers are prepping what promises to be a busy week ahead in the new issue market, although no deals were announced.

With 10-year Treasuries having spent the past several days near or above the 3% mark, potential issuers' expectations regarding junk bond yields will need to be addressed as the primary market moves into 2014, a syndicate source said on Thursday afternoon.

Investors are almost certainly going to demand more, in the way of interest, than had been the case in the waning weeks of 2013, the source added.

Nevertheless, January primary market activity is expected to be robust, sources reiterated on Thursday. The primary market should regain its legs next week.

The European high-yield market is also preparing for a busy week.

Meanwhile, only one deal is presently positioned on the forward calendar as expected January business.

Houston-based and emerging markets-focused Camac Energy Inc. announced a $300 million offering of senior secured notes, via lead bookrunner Arctic Securities, in early December.

The deal was expected to be the subject of some pre-marketing, with a formal roadshow expected to get underway in early January, according to an informed source.

Activity levels light

A trader declared that there was "not a lot going on today." A second said, "You didn't miss anything. Everybody's leaving early because of the snow and whatnot."

He also mentioned that many people were still out on vacation, having arranged to take the whole week off, or were just playing hooky, figuring that with most of the week already gone and many people out, not much would be going on.

However, he was confident that "it's going to pick up next week. There's no question about it."

The prospective new deal issuers, he said, "are lining up," still drawn by market conditions that include interest rates near historic lows - even if they are 50 or 60 basis points higher than the even lower levels hit in the first part of last year.

"What people forget is that rates are still historically pretty low - even if people can't get a 3½% mortgage anymore," he concluded.

Chrysler goes for a ride

Among specific issues in the secondary arena, a market source said that Chrysler Group's bonds were among the most active issues, fueled by the news that the Auburn Hills, Mich.-based No. 3 American car manufacturer's 58.54% owner, Italian automaker Fiat SpA, will acquire the 41.46% stake it does not currently own. Once that happens, the two carmakers will be fully merged.

Fiat - which bought its controlling stake in the then-troubled Chrysler in 2009 as it languished in bankruptcy - will pay a total of $4.35 billion in cash to a United Auto Workers union retirement trust that owns the rest of Chrysler, just a little more than one-tenth of the nearly $40 billion that German auto giant Daimler-Benz AG paid for it in a 1998 stock-swap transaction.

With that news as a backdrop, Chrysler's 8¼% notes due 2021 topped the junk Most Actives list, with over $12 million having changed hands. The bonds were seen having gone home at 114 bid, a gain of more than ½ point from Tuesday's close but a 5/8 point fall from their most recent previous round-lot level, which was notched last week.

The carmaker's 8% notes due 2019 were a little less busy, with just over $5 million having traded. They closed at 110 7/8, up nearly a full point from Tuesday but down 3/8 point on a round-lot basis from earlier last week.

NII notes off

Apart from Chrysler, a trader said that "the only thing that was moving around" was NII Holdings' 10% notes due 2016.

Those bonds - issued by NII Capital Corp., a unit of the Reston, Va.-based reseller of Nextel phone service in Latin America - "had big volume," at least in relative terms, he said, with over $10 million of turnover.

He quoted the bonds down 1½ points at 53¾ bid.

A second market source, though, pegged them ½ point higher on the day at 53½ bid.

Vanguard Resources a no-show

Elsewhere, a trader saw absolutely no activity on Thursday in Vanguard Natural Resources LLC's 7 7/8% notes due 2020.

"Nothing - no messages, no trades. They were a no-show."

The Houston-based oil and gas acquisition and production company held a conference call on Thursday to outline its planned acquisition of 87,000 gross acres of energy-producing properties in southwestern Wyoming for $581 million.

The company plans to initially fund the acquisition using its reserves-based revolving credit facility, later repaying some of those borrowings by the sale of equity units into the marketplace. It said that even after paying for the transaction, it would have "ample" borrowing availability and liquidity should another acquisition opportunity arise. (See related story elsewhere in this issue.

Market indicators mixed

Overall, statistical junk-market performance indicators were mixed on Thursday after having been higher on Tuesday, the final session of 2013. There was no domestic trading on Wednesday, New Year's Day.

A trader said that the Markit Series 21 CDX North American High Yield index was down by 9/32 point on Thursday, ending at 108 3/16 bid, 108 5/16 offered.

That was down from Tuesday's close at 108 13/32 bid, 108 19/32 offered. But that finish was well up from the 100¼ bid, 100½ offered at which the index had ended 2012, although the levels are not fully comparable since the CDX index "rolls," or begins a new series with somewhat different components, every March and September.

The KDP High Yield Daily index, on the other hand, rose by 2 bps on Thursday to 74.44 after having been unchanged on Tuesday at 7.42.

Its yield came in by 1 bp to 5.61% after an unchanged close on Tuesday at 5.62%.

The index meantime finished 2013 down from its 75.37 reading on the last day of 2012, although unusually, its yield, which generally rises when the index falls and vice versa, closed out 2013 actually tighter than the year-end 2012 reading of 5.70%.

The widely followed Merrill Lynch High Yield Master II index gained 0.117% on Thursday, its ninth consecutive gain, on top of Tuesday's 0.045% rise.

Its 2014 year-to-date return after the first session of the new year was an identical 0.117%.

The index had finished out 2013 on Tuesday with a 7.419% cumulative return, its seventh consecutive new peak level for the year.

That was less than half of the swaggering 15.583% return at which the index had finished 2012.

Its yield to worst finished 2013 at 5.671% - up considerably from its low for the year of 4.986%, set on May 9, but still well down from 6.083% at the close of 2012.

Its spread to worst closed 2013 at 418 bps over comparable Treasury issues - just a little wide of the tight level for the year of 414 bps, set on Dec. 24 and matched on Dec. 26 and Dec. 27. It was also considerably tighter than the year-end 2012 level of 523 bps over.

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