Outlook 2019: Energy to stabilize; retailers to divide online market; telecom weakness eyed

By James McCandless

San Antonio, Dec. 31 – The distressed debt space in 2018, comprised of the securities of underperforming companies trading at a baseline of 1,000 basis points above low-risk corporate bonds, was focused on retail, energy, telecommunications, and health care in a continuation of 2017’s overarching trend.

The S&P U.S. High Yield Corporate Distressed Bond index, as of Dec. 13, was on track to finish the year with a return of minus 0.84%.

Traders and market professionals interviewed by Prospect News indicated that global uncertainty and the potential for slowdown in the domestic economy would result in a non-uniform distressed market for 2019.

Energy sees a late dive

For most of 2018, crude oil prices were relatively stable, which resulted in a resurgence for companies that deal in oil and petroleum products.

Companies that were waiting for the end of a downturn in 2017 started to see more production and more corporate transactions as the price for a barrel of West Texas Intermediate crude oil hovered in the high 60’s.

Exemplifying the high was California Resources Corp., which is widely seen as a sector benchmark with its 8% senior secured second-lien notes due 2022.

While WTI was flirting with $70 per barrel in May, the company reported a surprise first-quarter profit of 18 cents per share.

Its production of 123,000 barrels of oil per day also surpassed expectations.

The 8% notes were trading with a 90 context and would shuffle in that space through the summer.

But in October, futures hit $76 per barrel and topped out. The 8% notes pushed past 98 bid.

News broke early that month that president Donald Trump, imposing sanctions against Iran, set a November deadline for all customers of Iranian oil to cease buying.

Though some buyers would eventually be granted a waiver to continue, this was the catalyst that sent WTI down to $50 per barrel. The 8% notes slid to the 70 context.

“I wouldn’t call it a bust,” a trader said. “This is a correction. Everyone seems comfortable at where we are now, but it gets messy if we go any lower.”

But an underlying problem in the oil markets was also a contributing factor, according to a November report from the Wells Fargo Investment Institute.

“Global supply growth has been outpacing demand growth throughout 2018,” John LaForge said. “Oil’s supply/demand growth balance has been softening throughout 2018, signaling that oil prices would eventually have to soften, too.”

For the coming year, most of the sentiment pegs WTI floating in the 50 context, which could open up increased risks for underperforming names.

“I think a prime example of that is Sanchez,” a trader said.

Sanchez Energy Corp. has spent most of the year missing expectations.

The Houston-based producer missed earnings and production targets, finally opting for a review of strategic alternatives in December.

Its 6 1/8% notes due 2023, in turn, spent the year falling from a 90 context to the 20’s.

“I think that next year you’ll see some of the more underperforming names like Sanchez go under if there’s another price shakeup,” the trader said.

Retailers to weaken

For 2018, 16 retailers went bankrupt, the most high-profile being Sears Holdings Corp., Inc., Nine West Holdings and Bon-Ton Holdings Inc.

“It’s not that the whole sector is weak,” a trader said. “It’s more the case that the ones that are slow to adapt are setting themselves up for a fall.”

In a Dec. 13 report, S&P Global Ratings said that Sears’ bankruptcy could see as much as $14 billion in revenue up for grabs.

“The whole ordeal really brought more attention to retail,” a trader said. “I think once results of the holiday sales season are fully realized in the first quarter is when we can start picking winners and losers.”

The sector is seeing stumbles in Neiman-Marcus Group, Rite Aid Corp., J.C. Penney Co., Inc. and PetSmart, Inc. that could extend into next year.

Neiman Marcus and PetSmart are both tied up in creditor disputes over private equity transfers of profitable e-commerce arms that could extend into next year and further decrease market sentiment.

Rite Aid’s botched merger with Albertson’s resulted in a smudge to its reputation.

Amazon.com, Inc. continues to make strides into each retailer’s market share, offering lower prices and more convenient modes of delivery.

A bright spot is widely seen in Revlon, Inc., the New York City-based cosmetics producer.

“They’ve really recovered since the beginning of the year,” a trader said. “They’ve been under new management for a while and it’s paying off.”

Telecoms set to drop

One of the most heavily traded distressed names of 2018 was Luxembourg-based satellite operator Intelsat SA.

Its distressed securities have spent most of the year improving on the back of positive news and hedge fund investment.

“Hedge funds have really been pumping a lot of money into this one,” a trader said. “They’re just starting to pull some of it out.”

A combination of favorable regulatory treatment and an expansion of potential revenue streams have sent many of its securities higher, namely its Intelsat Jackson Holdings SA 5½% notes due 2023, which hit a year-high of 94 bid in September.

However, a sell-off of the entire structure has sent the notes to the high 80’s context.

“I think there’s going to be more selling come the new year,” the trader said. “It’s going to be slow and systematic.”

Domestic and international peers alike have taken a steady negative direction in the last half of the year.

Norwalk, Conn.-based Frontier Communications Corp. and Little Rock, Ark.-based Windstream Corp., both wireline service providers, continue to struggle in adapting to the cordless shift.

Health care weaker

At the start of the year, Community Health Systems, Inc. announced that it was going to solve its debt problem through a series of corporate layoffs and hospital divestitures.

The issue with the plan is that the Franklin, Tenn.-based hospital operator reported $13.5 billion in debt in the third quarter, meaning not much of a dent had been made.

“They’ve made an effort to show that they’re serious,” a trader said. “But it just hasn’t come across to everyone. Since health care seems to be a pretty stable sector going into 2019, there shouldn’t be much rocking the boat, at any rate.”

Mallinckrodt plc and Teva Pharmaceutical Industries Ltd., active generic drug makers, were both on a negative trend moving into 2019.

Mallinckrodt, a Staines-Upon-Thames, U.K.-based drug maker, announced recently that it would spin off its generic drug business, which Moody’s has said would be credit negative.

“The pharma space is poised for growth next year,” a trader said. “It would be easy for those two to be caught up in that wave if they remain steady enough.”

© 2015 Prospect News.
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