December marks record-setting month of non-issuance; secondary trading light; ETF selloff continues

By Paul A. Harris and Abigail W. Adams

Portland, Me., Dec. 24 – The primary market was again dormant and the high-yield secondary market slowed to a practical standstill in the truncated session prior to the Christmas holiday.

While no new-issue activity is customary in the last week of December, the primary market closed the month with no new issuance, which is anything but customary.

December 2018 marked the first December where no new deals priced in over a decade.

Meanwhile, trading volume was almost at a standstill in Monday’s truncated session with $233 million of bonds on the tape by mid-morning and a little under $400 million on the tape shortly before the early close, according to market sources.

Few names saw concentrated trading activity.

California Resources Corp.’s 8% senior notes due 2022, which has been a mainstay of activity in the secondary space for the past month, remained among the most active with $5 million on the tape, according to a market source.

The energy sector remained under pressure with crude oil futures continuing to plummet.

The selloff of in high-yield ETFs continued on Monday with both hitting a new 52-week low in high-volume activity, as they have for the previous two trading sessions.

Frontier Communications Corp.’s junk bonds were again dropping on Monday after seeing a slight rebound on Friday.

HCA Inc.’s 5½% senior notes due 2047 and United Rentals Inc.’s 5 7/8% senior notes due 2026 were also down more than 1 point in light volume.

Primary looks to 2019

As is customary, the primary market remained dormant on Christmas Eve.

However, the month of December in the new issue market was anything but customary.

December 2018 became the first month in over a decade to post no new high-yield issuance.

In the dollar-denominated primary market, a thin pipeline of committed financing deals, some of which had been expected to materialize in December, will probably come in January, syndicate sources say.

There are always a few opportunistic debt refinancing deals waiting in the wings, sources add, specifying that opportunistic issuers are very unlikely to appear until volatility, which has rocked the global capital markets since early November, subsides.

If there is a ray of sunlight in the winter 2018 high-yield market it shines from Europe, where the selloff began earlier than it did in the United States, sources say.

And some European high-yield investors believe it has gone far enough, and that bonds are oversold, according to a senior syndicate official in London.

Investors are beginning to see bargains, and are preparing to take advantage of them, the source claimed.

The month of January 2019 could turn out a meaningful amount of issuance in Europe, the banker said.

Global corporations with access to the European high yield, even those headquartered in the United States, will continue to take advantage of comparative low European rates in 2019, and issue in euros, as they did in 2018, the source added.

However just as in the dollar-denominated market, volatility could be a mitigating factor in the regeneration of the European high yield market, the banker advised.

Energy losses continue

The volume was light but the losses continued to mount for the energy sector on Monday.

California Resources 8% senior notes due 2022 remained among the most active in the secondary space with $5 million on the tape, a market source said.

The notes dropped 1¼ point to close Monday at 64¾.

Crude oil futures saw another brutal decline on Monday. The barrel price of WTI crude oil for February delivery sank to settle at $42.68, a decrease of $2.91 or 6.38%.

The steep decline on Monday was part of a downward trend that has seen crude oil futures sink from the high $70 range in early October to well below the closely watched $50 threshold.

If crude oil futures continue under the $50 threshold, it will spell trouble for the high-yield market with many energy names underwritten with crude oil futures at $50.

ETF selloff continues

The selloff in high-yield ETFs continued for a third consecutive session on Monday.

The iShares iBoxx $ High Yield Corporate Bond Fund ETF and SPDR Bloomberg Barclays High Yield Bond ETF again set new 52-week lows on Monday.

The iShares iBoxx $ High Yield Corporate Bond Fund ETF closed Monday at $79.63, a decrease of 60 cents or 0.75%.

The ETF continued to see higher than average trading volume with almost 19 million of the shares trading hands as opposed to the 90-day average of 4 million.

The SPDR Bloomberg Barclays High Yield Bond ETF closed Monday at $32.95, a decrease of 25 cents or 0.75%.

More than 12 million of the shares traded hands as opposed to the 90-day average of 4 million.

The selloff in the ETFs began last Thursday when both ETFs initially hit on their 52-week lows.

ETFs sustained a near-record daily outflow of $1.6 billion last Thursday.

Frontier down

After a rebound on Friday, Frontier’s junk bonds were again on the decline on Monday, albeit in light trading volume.

Frontier’s 10½% senior notes due 2022 dropped 1¼ point to close Monday at 68½, according to a market source.

The notes have wavered between gains and losses since Thursday’s selloff.

The notes were previously up 2 points on Friday after a 2¼ point drop on Thursday.

The 11% senior notes due 2025 sank 2 points to close Monday at 60. The 11% notes jumped 1 point on Friday after dropping 3½ points on last Thursday.

Trading off

HCA’s 5½% senior notes due 2047 and United Rentals’ 5 7/8% senior notes due 2026 were trading off during Monday’s truncated session, according to a market source.

HCA’s 5½% senior notes were down 1¼ point to close Monday at 94¼, according to a market source.

United Rental’s 5 7/8% senior notes were down 1¾ point to close Monday at 92.375.

Indexes widen losses

Indexes marked their seventh consecutive trading day of losses on Monday after all saw a substantial cumulative drop last week, widening the descent into negative territory as the end of the year approaches.

The KDP High Yield Daily index was down 7 basis points to close Monday at 66.71 with the yield now 7.12%. The index dropped 146 bps on the week last week.

The CDX High Yield 30 index dropped 46 bps to close Monday at 100.6.

The index saw a cumulative drop of 236 bps on the week last week.

The ICE BofAML US High Yield index dropped 22.5 bps on Monday with the year-to-date return now negative 2.718.

The index dropped 202.6 bps on the week last week, which included a more than 100 bps drop last Thursday.

The index crossed the negative 2% threshold last Thursday after crossing the negative 1% threshold the day before.

The index had been wavering between positive and negative territory over the past two weeks but has been in the red since Dec. 14.

© 2015 Prospect News.
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