Morning Commentary: Oil price improvement boosts junk energy names; E&Ps see gains

By Paul A. Harris

Portland, Ore., Aug. 21 – High-yield bonds opened firm on Wednesday, market sources said.

With the U.S. stock indexes well into the green, high-yield ETF share prices were posting solid Wednesday morning gains. The iShares iBoxx $ High Yield Corporate Bd (HYG) was up 0.34%, or 29 cents, at $86.71 per share at mid-morning.

Energy, representing more than 14% of the high-yield index, rallied Tuesday morning, a New York-based trader said.

The barrel price of West Texas Intermediate crude oil for October 2019 delivery was up 0.32%, or 18 cents, at $56.31.

Although energy prices remain volatile, they have seen improvement versus a week ago when the barrel price was around $54.75.

Oil and gas exploration and production names were stronger on the morning.

The California Resources Corp. 8% senior secured second-lien notes due December 2022, a big liquid issue employed by high-yield bond investors for the purpose of tracking crude oil prices in the index, was trading in the 57s on Wednesday, up from 55¼ bid on Tuesday, the trader said.

Bonds of Chesapeake Energy Corp. and Oasis Petroleum Inc. were up about ¾ of a point, the source added.

Away from energy names, the Sinclair Broadcast Group Inc. (Diamond Sports Group LLC/Diamond Sports Finance Co.) 6 5/8% senior notes due 2027 (B2/B) were up ¼ point at 102¼ bid on Wednesday morning.

A $1.83 billion tranche of that paper priced at par in mid-July.

The primary market remained quiet on Wednesday and won't likely reactivate before Labor Day, sources said.

Elanco bonds slip

The existing split-rated bonds of Elanco Animal Health Inc. sustained a sharp drop on news that the Greenfield, Ind.-based animal health company will take on $6.5 billion of debt to acquire Bayer AG's animal health business.

The Elanco Animal Health 4.9% senior notes due August 2028 were trading with a 108-handle on Wednesday, the trader said, adding that a week ago they were 112½ bid, 113 offered.

Elanco expects to pay $5.32 billion in cash and $2.28 billion or about 68 million Elanco Animal Health common shares, according to documents filed Tuesday with the Securities and Exchange Commission.

The additional debt is expected to erode the company's Baa3/BB+ ratings, the trader said, adding that much of the issue of 4.9% notes due 2028 is held by investment-grade accounts that will have to relinquish the paper if and when Elanco becomes a straight speculative grade credit.

Elanco's debt financing for the acquisition includes $2.75 billion of bridge loans, some or all of which will likely be taken out by means of issuing high-yield bonds, sources say.

The debt package also includes $3.75 billion of bank loans.

The acquisition is expected to be completed in the middle of 2020.

Tuesday inflows

The daily cash flows of the dedicated high-yield bond funds were positive on Tuesday, according to an investor.

High-yield ETFs saw $99 million of inflows on the day.

Actively managed high-yield funds, the asset managers, saw $55 million of inflows on Tuesday, the source said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.