Primary stays quiet in run-up to holiday; Momentive sees more movement; funds gain $672 million

By Paul Deckelman and Paul A. Harris

New York, Aug. 28 – The recent status quo prevailed again on Thursday in the primary market. No new deals priced for a ninth consecutive session, and no prospective issues joined the forward calendar.

Overall, traders saw only low activity levels on this, the last full trading session of the week as well as the month of August.

The junk bond market will technically be open for business on Friday, which in theory will be a regular full day. The Securities Industry and Financial Markets Association has not formally recommended an early close. Participants nonetheless expect a short, uneventful and only lightly staffed session heading into the three-day Labor Day holiday break in the United States.

A primary market that has been put on hold and a secondary market recently running at the lowest idling speed are both expected to heat up once that holiday break has come and gone.

In the meanwhile, though, things remained fairly quiet on Thursday.

Momentive Performance Materials Inc.’s first-lien notes were again the most actively traded credit in Junkbondland, firming a little bit further from the levels they reached on Wednesday when the bonds – badly battered over the previous several sessions – staged a solid comeback to regain some of their lost ground. However, Thursday’s volume in that name paled in comparison to Wednesday’s very heavy trading.

Statistical market performance indicators remained mixed on Thursday for a third straight session and for their sixth session in the last seven.

Another indicator – the flow of cash in to or out of high-yield mutual funds and exchange-traded funds, considered a good barometer of overall junk market liquidity trends – saw its third straight weekly positive number after four straight weeks of large losses before that.

Junk funds gain $672 million

As Thursday’s session was winding down, market sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said that $672 million more came in to those funds than left them in the week ended Wednesday.

It was the third consecutive weekly inflow and followed first the $680 million cash injection reported in the week ended Aug. 13 by Arcata, Calif.-based AMG, a unit of the Lipper analytics division of Thomson Reuters Corp., and then the $2.22 billion improvement in the seven-day period ended last Wednesday, Aug. 20.

According to an analysis of the figures by Prospect News, the latter inflow was by far the largest inflow seen so far this year, easily surpassing the $1.45 billion that had come into the funds during the week ended Feb. 12, and it was the largest inflow, period, since the $3.1 billion liquidity injection recorded during the week ended Sept. 25, 2013.

The three latest inflows, totaling $3.58 billion, represent a rebound from the toxic pattern of huge outflows seen over the four-week stretch before that beginning July 16 and running through Aug. 6. During that time, outflows topped $12.6 billion, according to the analysis – including the massive $7.07 billion cash hemorrhage recorded during the week ended Aug. 6, the largest such outflow on record since the company began tracking fund flows back in 1992. That super-outflow had easily eclipsed the previous record-large drop of $4.63 billion that occurred during the week ended June 5, 2013.

That huge outflow had followed – and dwarfed – a trio of other cash losses that could all be considered pretty huge in their own right: $1.68 billion in the week ended July 16, $2.38 billion in the week ended July 23 and $1.48 billion in the week ended July 30.

On a longer-term basis, although inflows to the weekly-only reporting funds have still now been seen in 24 of the 34 weeks since the start of the year, according to the analysis, against just 10 outflows, the recent four-week nosedive tipped the year-to-date balance far into the red. The latest three weeks of inflows have brought that year-to-date cumulative net outflow down somewhat to an estimated $6.17 billion from $6.85 billion last week and the $9.75 billion 2014 cash outflow seen by market sources in the Aug. 6 week.

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.

In 2013 – which had 53 reporting weeks due to a statistical quirk – inflows were seen in 33 weeks, versus 20 weeks of outflows, with total net inflows for the year tallying up to about $1.27 billion, the analysis indicated.

Another fund-tracking service, Cambridge, Mass.-based EPFR Global, meantime, saw an inflow “roughly a third larger” than the AMG/Lipper number, according to a market source. It was the second straight inflow that service had seen following five straight weeks of massive outflows.

EPFR’s methodology differs from AMG/Lipper’s as its fund universe includes many non-U.S.-domiciled mutual funds and ETFs, including strictly European junk funds and broader global funds, versus AMG/Lipper’s strictly domestic orientation.

While the two services’ respective weekly results usually point pretty much in the same direction, that has not always been the case. In some weeks in which AMG/Lipper showed outflows, EPFR saw overall inflows, or vice versa. EPFR thus has recorded inflows in 26 out of the 34 weeks since the start of the year, against eight weekly outflows during that time.

Although the mutual funds and ETFs represent only a relatively small percentage of the total amount of investor money coming in to or leaving the more than $1.5 trillion junk market, their flows are very observable and quantifiable – more so than those of other, larger cash sources – and thus are suited to act as a fairly reliable proxy for overall junk market liquidity trends.

Analysts said that the sustained flows of fresh cash into junk have been a key catalyst behind the relatively strong performance seen by both the junk primary and secondary markets over the past several years and which had mostly continued on into this year as well.

Investment-grade bond funds saw a net inflow this week of $922 million, compared with the previous week’s $1.02 billion.

Primary stays silent

With the Dog Days of August winding down, the primary market remained dormant on Thursday.

Many syndicate officials, especially the senior ones, were away from their desks heading into the extended Labor Day weekend in the United States.

People who were reachable reiterated the expectation that September should be a big month in the new issue market, with forecasts calling for $30 billion to $40 billion of issuance, and perhaps more, by the end of the month ahead.

Should issuance clear the $40 billion mark, it would be only the fourth month in market history to do so and the third consecutive September to do so. The standing record for monthly issuance was set last September, which saw $46.9 billion in 67 junk-rated, dollar-denominated tranches.

A reasonably priced market

The junk bond market now appears to be reasonably priced, according to an asset manager whose portfolio includes high-yield bonds.

Since the late-July/early-August correction, the composite yield of the Merrill Lynch index has gone up by 70 basis points, the buysider said.

The manager chalked up the correction mostly to “meaningless short-term trading” but added that junk broke through a threshold that always seems to bring investors up short.

“You saw the index get as low as 4.99%,” the investor recounted. “That's where the sell-off came. When you get to 5%, there are various reasons why people back away.”

In the sell-off, the yield rose to 5.69%, the buysider said. Now it has come back down to 5.29%.

The downdraft prompted this investor to do as other institutional high-yield players did: go shopping.

“You had the market down 2 to 3 points when there was no change in fundamentals. There was good quality paper available, and people stepped in to buy,” he said.

Heading into autumn, high yield looks reasonably priced to this manager.

“Defaults are low. Treasuries are low. And there is not a lot of apparent inflation risk,” the investor said.

“We should see the new issue machine ramp up.”

Momentive most active, again

In the secondary market, Momentive Performance Products’ 8 7/8% first-lien senior notes due 2020 were once again the most active junk credit. Market sources saw more than $40 million of those notes – officially issued by Momentive’s MPM Escrow LLC subsidiary – having changed hands during the session.

A trader called the notes up ¼ to ½ point on the day from Wednesday’s finishing levels.

The trader acknowledged that the volume was maybe only a quarter of the more than $160 million that was seen moving around on Wednesday, “but they still traded. They were pretty active.”

At another desk, a trader pegged those bonds at 93 5/8 bid, 94 1/8 offered but said that he “did not see a whole lot of anything in them.

“The pictures on these things look pretty much the same today, from this morning till now. They were about [in] the same place,” around 93½ to 94½ offered, during the morning, and “right now [in the afternoon], they’re inside of that.” However, later on, he said, the bonds moved up to 94 1/8. He called that “virtually unchanged” on the day.

Another market source quoted the 8 7/8% notes at 94 1/8 bid, up 3/8 point, on $40 million of volume.

One of the traders saw the company’s 10% senior secured 1.5-lien notes due 2020 quoted at the end of the day at 91¾ bid, 92¾ offered, “where they were traded all day.”

He said that only $6 million of the notes changed hands on the session, “so not a whole lot of volume on that one,” versus the more than $100 million that was traded on Wednesday.

The 8 7/8% notes – trading at or even above the 101 level a week ago – had gotten crushed over the previous few sessions on investor fears that the federal court judge presiding over the Waterford, N.Y.-based silicon and specialty chemical products manufacturer would deny the investors’ claim that they should get a substantial make-whole interest payment on the notes since they are scheduled to be taken out early under the company’s plan of reorganization.

U.S. Bankruptcy Court judge Robert Drain in fact denied that claim in a ruling Tuesday, causing the bonds to slide as much as 6 or 7 points, down to around the 90 bid level, in heavy trading that session.

But on Wednesday, after a little initial weakness, the downside momentum had halted and the bonds were up by more than 3 points on the day to a mid-93ish context on heavy volume.

The 10% notes, part of that same failed investor effort to get some extra interest, had also fallen over 6 points on Tuesday when the judge shot down the extra interest payment but had come back on Wednesday, rising nearly a point to around 91¾% bid.

Slow session ahead

Overall, said a trader on Thursday, “I didn’t see much at all. It’s just this summer-end stuff.”

A second market source agreed that things were “extremely slow, extremely dead. There’s just no volume.”

He said that it was the kind of market where “if you have a buyer, there’s definitely no sellers around and vice versa. If you do have a seller and you have a buyer around, negotiate real quick because that person’s running for the door because he doesn’t want to be around.”

Bad as Thursday was, the traders said, Friday’s unofficial early-close session will be “even worse,” as one put it.

“Anybody that can be out tomorrow [i.e., Friday] will be out tomorrow.”

And sure enough, at another desk, a trader said, “I’m not even coming in tomorrow, it’s going to be so slow. If it’s going to be another day like today, I just can’t deal with it.”

Statistical indicators mixed

Statistical indicators of junk market performance remained mixed on Thursday for a third consecutive session and a sixth mixed session in the last seven trading days, a streak broken only by Monday’s higher-across-the-board session.

The KDP High Yield Daily index eased by 1 bp on Thursday to finish at 74.02 after having risen by 3 bps on Wednesday.

Its yield rose by 1 bp for a second straight session, going out at 5.02%. It had also been up by 1 bp on Wednesday – an unusual occurrence given the higher index reading since the yield normally moves inversely to the index reading, falling as the index rises and vice versa.

The Markit CDX Series 22 index was off for a third straight session, retreating by 1/8 point to end at 108 3/32 bid, 108 1/8 offered. It had also declined marginally on both Tuesday and Wednesday.

The widely followed Merrill Lynch High Yield Master II index put up its 14th consecutive gain on Thursday, improving by 0.12% on top of Wednesday’s 0.23% advance.

The latest upturn boosted the index’s year-to-date return to its third consecutive new peak level for 2014, 5.791%. That was up from Wednesday’s 5.778%, the previous high point, and well up from its recent low point of 3.683% reached on Aug. 1 during the junk market’s big late-July/early-August correction.

© 2015 Prospect News.
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