No pricings, primary seen done for summer; new KIK, Oneok notes active; funds gain $111 million

By Paul Deckelman and Paul A. Harris

New York, Aug. 20 – The junk bond primary market began what most observers believe will be its late-summer siesta on Thursday.

With the active forward calendar having been cleared by the new deals that got done on Tuesday and Wednesday, market-watchers said that this likely would be it for new issuance, at least through the Labor Day holiday break in the United States – the traditional end of the summer season – a little more than two weeks from now.

There were no pricings seen on Thursday, nor were there any announcements of upcoming bond deals, or even any news about longer-range deals that have been in the pipeline for weeks or sometimes even a couple of months.

Looking at the deals that came to market earlier this week, traders saw relatively brisk activity in the new eight-year notes from Canadian pool chemicals and household products supplier KIK Custom Products Inc. and from energy operator Oneok Inc., both trading above their discounted issue prices.

Existing issues in the energy sector such as California Resources Corp. and Halcon Resources Corp. remained under pressure.

Valeant Pharmaceuticals International Inc.’s bonds were seen off in active trading in the wake of the news that the Canadian drug manufacturer has agreed to the $1 billion purchase of Sprout Pharmaceuticals – maker of a controversial new drug that has been called the “female Viagra.”

Statistical measures of junk market performance were lower for a third straight session on Thursday after having been mixed over the previous three sessions and down all around for two consecutive sessions before that.

But another statistical gauge – flows of funds into and out of high-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends – turned positive for the first time in four weeks, showing a $111 million net inflow in the week ended Wednesday.

Adverse environment

No new issues were priced, and no deals were announced during the Thursday primary market session.

Market watchers continued to say that new issue activity has likely wrapped up for summer 2015.

“We’re lower today than we were yesterday, a syndicate banker said.

“And yesterday we were lower than the day before.

“These conditions won’t favor issuers.”

In addition to volatility, some of the big accounts are not around right now, the source added.

“Any opportunistic issuer is going to wait.”

Asked about the post-Labor Day deal pipeline, the banker said that so far it does not seem huge.

In addition to expected megadeals from Charter Communications Inc. ($3.5 billion) and Frontier Communications, Corp. ($6.5 billion), that pipeline presently comes to $12 billion to $15 billion of new issue business, sources say.

New KIK notes move up

In the secondary market, traders saw considerable activity in the new KIK Custom Products 9% notes due 2023.

A market source said that over $18 million of the bonds had traded, making it one of the busiest issues in Junkbondland on Thursday.

He saw the notes at 91.25 – which he called down ½ point from their early highs, but still well up from where they had priced on Wednesday.

A second trader saw the bonds moving around in a bid context between 91 and 91 ¾.

The Toronto – based distributor of swimming pool chemicals and personal care and other household products priced $390 million of those notes on Wednesday at a hugely discounted 89.57 to yield 11% in a regularly scheduled forward calendar offering via special purpose financing vehicle Kronos Acquisition Holdings Inc.

The bonds had come to market too late on Wednesday for any substantial aftermarket activity.

Oneok keeps busy

There was also busy activity in Oneok’s 7½% notes due 2023.

A trader quoted them bid in the high 98 area, calling that up a little from the 98.522 level at which the Tulsa, Okla.-based natural gas company’s $500 million forward calendar offering had priced on Tuesday to yield 7¾%.

However, at another desk, a trader saw those bonds “about unchanged” around 98½.

Yet another trader called them down 3/8 point from previous highs around 99, with the bonds going out Thursday around 98 5/8 bid, on volume of more than $14 million.

Hill-Rom quiets down

A trader said that the new Hill-Rom Holdings Inc. 5¾% notes due 2023 “have been trading well,” and he saw that strength continuing on Thursday, with the bonds moving up to a 101½ to 101¾ context from the 101¼ to 101½ range at which he had seen them ending on Wednesday.

But activity in the new deal dropped off after two straight sessions in which the new deal had been the most actively traded purely junk-rated issue, with over $43 million having changed hands after the bonds’ pricing on Tuesday and another $32 million on Wednesday.

In contrast, only around $10 million of the notes traded Thursday one of the traders said – not even enough to make it into the Trace market-data service’s top 20 most actives.

“It wasn’t very active,” another market source agreed.

The Chicago-based medical technology company priced $425 million of the notes on Tuesday at par in a regularly scheduled deal; the new bonds immediately began moving up when they were freed for aftermarket dealings, ultimately settling in the lofty levels above 101½ bid.

Market still struggling

Away from the new deals, a trader said that “the market was awful – everything was down and guys were hitting bids.”

“It was lower still,” a second trader said, comparing levels to those seen on Tuesday and Wednesday. “Spreads were really going out.”

Yet another trader saw “more general market weakness, generically down ¼ to ½ point.”

The first trader said that “movement was more pronounced on the downside.”

Against that sort of bearish backdrop, even firmer crude oil prices couldn’t help hard-hit energy names.

Benchmark West Texas Intermediate crude gained 34 cents per barrel on the day to settle at $41.14 – but even that good news did not help California Resources’ 6% notes due 2024, which lost 7/8 point on the day to close at 72¾ bid on volume of over $23 million.

Halcon Resources’ 8 5/8% notes due 2020 did no better, losing ½ point on the day to end at 88½ bid on volume of more than $20 million.

Valeant heads lower

Valeant Pharmaceuticals International’s 6 1/8% notes due 2025 fell more than 7/8 point on the day to end at 103 bid, with volume a busy $14 million.

That fall came as the Canadian drug manufacturer announced plans to buy Sprout Pharmaceuticals – manufacturer of a new drug intended to boost sex drive in women, nicknamed by some wags in the media as “female Viagra” after the popular little blue pills that do the same thing for men.

Valeant plans to pay $1 billion in cash for its acquisition, split into $500 million up front and $500 million early next year.

But Wall Street analysts wondered whether the latest acquisition – which would be Valeant’s sixth such purchase this year – might prove to be too much for the company, which is trying to pare down some of the debt it used to fund that shopping spree, including the $11 billion acquisition of Salix Pharmaceuticals earlier this year.

They also questioned whether Sprout’s new drug, Addyi, would catch on, given concerns about side effects and about its efficacy.

Indicators extend losses

Statistical measures of junk market performance were weaker across the board for a third straight session on Thursday. Those market measures had turned lower on Tuesday and had stayed that way on Wednesday and again Thursday, after having been mixed over the previous three sessions and down all around for two consecutive sessions before that.

The KDP High Yield Daily Index lost 11 basis points on Thursday to end at 68.01, on top of Tuesday’s 22 bps plunge.

It was the index’s third consecutive downturn, as well as its ninth loss in the last 12 sessions and its 11th setback in the last 15 trading days.

It established a new low for the year and a new 52-week low, eclipsing the old mark of 68.12 that had been set on Wednesday. It was also the index’s lowest close since it ended at 67.71 on Sept. 14, 2009.

The index’s yield, meanwhile, rose by 5 bps on Thursday to end at 6.36%, its fourth straight widening out, including increases of 1 bp each on Monday and Tuesday and Wednesday’s 7 bps jump.

It also marked the yield’s fifth such widening in the last seven sessions and its eighth rise in the last 10 sessions.

The Markit Series 24 CDX North American High Yield Index lost 13/32 point on Thursday, ending at 104 3/32 bid, 104 1/8 offered. It was the index’s fourth straight loss, including Wednesday’s 3/16 point dip, as well as its seventh loss in the last eight sessions and its 10th loss in the last 13 trading days.

The Merrill Lynch North American Master II High Yield Index fell by 0.215% on Thursday, its third straight loss, having also eased by 0.203% on Wednesday and by 0.064% on Tuesday.

It was also the index’s fourth loss in the last five sessions and over the longer term, its 12th loss in the last 14 trading days.

Wednesday’s setback dumped the index’s year-to-date return into negative territory for the first time since the start of the year, lowering it to a cumulative loss of 0.031% – down from a 0.184% gain on Wednesday. It was the index’s first time in the red since Jan. 19, when it showed a loss for the year of 0.007%, and its worst showing since Jan. 16, when it showed a 0.064% loss.

All of those levels are far, far from the 4.062% reading recorded on May 29, the index’s peak level for the year so far.

One of the index’s components, its average price of the paper listed within, fell to a second consecutive new low for the year of 94.98612. That was down from the previous low point of 95.21337, set on Wednesday.

Funds post $111 million gain

High-yield mutual funds and exchange-traded funds – considered a reliable barometer of overall junk market liquidity trends – broke out of their recent rut, finally posting a net inflow after three consecutive weeks of billion-dollar-plus outflows, as some $111.3 million more came into those weekly-reporting-only funds than left them during the week ended Wednesday.

That was a turnaround from the $1.214 billion net decline that was reported last week for the seven-day period ended Aug. 12, one of three straight weekly outflows totaling more than $4 billion (see related story elsewhere in this issue).

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