Morning Commentary: Junk edges higher; Vantage Drilling bonds slide as Petrobras ends contract

By Paul A. Harris

Portland, Ore., Sept. 2 – High-yield bonds opened slightly higher on Wednesday, retracing some of the ground they gave up on Tuesday, according to a trader in New York.

Payroll numbers reported Wednesday by the ADP Research Institute, showing that private American companies added 190,000 workers to payrolls in August, came more or less in line with economists' expectations of 200,000 additional jobs, the trader remarked.

The iShares iBoxx $ High Yield Corporate Bd (HYG) was trading at $85.74 per share, ups 16 cents heading into midday on the East Coast of the United States.

The SPDR Barclays High Yield Bond ETF (JNK) was trading at $36.74, which was 8 cents better.

There was no primary market news, as liquidity remains thin with market participants away from work heading into the extended Labor Day holiday weekend in the United States, which gets underway following Friday’s close.

Vantage Drilling slides

West Texas Intermediate crude oil for Oct. 15 delivery rallied modestly at the Wednesday open but gave up those gains and was down 11 cents heading into midday, trading at $45.30 per barrel.

Energy names tended to be trading in line with those price moves, the trader said.

The already distressed bonds of Vantage Drilling Co. were sharply lower on news that Brazil’s Petrobras terminated its contract agreement for the services of Vantage's drillship, Titanium Explorer, alleging that Vantage breached its obligations under the contract.

The Offshore Group Investment Ltd. (Vantage Drilling) 7˝% senior secured first-lien notes due Nov. 1, 2019 were down 6 points on Wednesday, trading at 40˝ bid, 41˝ offered, said the trader, who added that before the news the bonds were 47 bid, 48 offered.

Houston-based Vantage stated in a Wednesday press release that the notice from Petrobras does not provide any explanation as to the facts and conduct that constitute a breach under the drilling contract.

“Vantage strongly disagrees with the allegations of contractual breaches,” the released stated, adding that Vantage has filed for arbitration to challenge the assertions, and asserts that the notice from Petrobras constitutes a wrongful attempt to terminate the contract.

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