Month opens with junk market lower; energy names off as crude slides; big Frontier deal ahead

By Paul Deckelman and Paul A. Harris

New York, Sept. 1– September opened up in Junkbondland on Tuesday quite unlike the way high yield had ended August the day before.

Market sources said that after several sessions in which it held its own, junk had a softer tone, taking its cue from a broad stock market retreat.

Energy names such as California Resources Corp., Halcon Resources Corp. and SandRidge Energy Inc., which had been helped by the recent strong upturn in crude oil prices, all ended lower on Tuesday as crude fell sharply after three sessions on the rise.

However, W&T Offshore Inc.’s paper was up on news the Houston-based exploration and production company is doing an asset sale, with the proceeds slated for debt paydown and liquidity enhancement.

Away from the energy realm, the primary remained quiet, with no new deals expected to price before the upcoming Labor Day holiday.

Statistical measures of junk market performance started the new month on the downside, moving lower across the board on Tuesday after having been mixed over the previous two sessions.

Frontier expected to lead

Once again on Tuesday there were no deal announcements in the primary market, and no deals were priced. Liquidity remained thin, volatility was high, and numerous market participants were away from their offices.

However, what is expected to be an active post-Labor Day calendar began to take shape.

Frontier Communications Corp. is expected to kick off a $6.5 billion multi-tranche bond deal on Sept. 9, the Wednesday after Labor Day, according to a market source.

The deal, which will be led by J.P. Morgan Securities LLC, was downsized from $8 billion in mid-August when the company announced it would get a $1.5 billion senior secured delayed-draw term loan facility.

Details on the tranching of the bond deal remain to be announced.

Proceeds will be used to acquire Verizon’s wireline operations in California, Florida and Texas.

The Frontier deal is expected to lead off what is shaping up to be a $25 billion to $35 billion deal pipeline for September, pending market conditions, sources say.

Mixed flows on Monday

Cash flows to the dedicated high-yield funds were mixed on Monday, the most recent session for which data was available at press time, according to a buyside source.

High-yield exchange-traded funds saw $186 million of inflows on the day, the source said, citing numbers reported by Lipper.

Asset managers, meanwhile, saw $193 million of outflows, the source added, again citing the Lipper report.

Fund-tracker EPFR saw substantially more cash come into ETFs, the source said, adding that EPFR reported $581.2 million of net inflows for Monday.

The breakdown saw ETFs getting inflows of $626 million, while other accounts sustained $44.8 million of outflows on Monday, the source said.

Elsewhere on Monday a large money manager put out a bid wanted in competition list (BWIC) containing $200 million in names, according to a trader based on the East Coast of the United States.

Pretty much all of it traded, the source added.

Energy names off as oil slides

For the first time in four sessions, crude oil prices were sharply lower, and energy credits, which had been catching a bid on the strength of surging crude, were also mostly easier.

The benchmark U.S. crude oil grade, West Texas Intermediate for October delivery, slid by $3.79 per barrel, or 7.7%, on the New York Mercantile Exchange, settling at $45.41. Concern about the continued sluggish economy in China – the world’s No. 2 oil user after the United States, as well as expectations that U.S. demand will fall due to seasonal reasons were the key factors in the downturn.

That swoon was in sharp contrast to gains of $3.96 on Thursday, $2.70 on Friday and $3.98 on Monday – the strongest three-day price surge the oil market had seen since Iraq’s invasion of Kuwait back in 1990.

But while crude was going through its gyrations, a trader said that “things were weaker, but not just wildly.”

He did see California Resources’ widely traded 6% notes due 2024 down 1½ to 2 points on the day, noting “that trades very much highly correlated to oil.”

Other names in the sector, he said, “were not as badly hit.”

At another desk, a trader saw the Los Angeles-based oil and natural gas operator’s notes retreat to 73 7/8 bid, 74 5/8 offered on Tuesday from Monday’s close around 75½ bid, 76½ offered.

Yet another market source pegged the 6s off 1¾ points at 73¾ bid, on volume of over $17 million, putting it high up on the day’s Most Actives list.

The company’s 5½% notes due 2021 were down nearly 2½ points on the day at 78 3/16 bid.

Among other energy names, a trader saw Oklahoma City-based SandRidge Energy’s 8¾% notes due 2020 down 2¾ points at 65½ bid.

Houston based E&P operator Halcon Resources’ 8 5/8% notes due 2020 lost slightly more than 1 point to end at 86 5/8 bid, on over $9 million traded.

W&T up on asset sale

One energy credit seen doing better, bucking the overall trend, was W&T Offshore, whose 8½% notes due 2019 were seen by a trader having moved up to around 51¾ bid late Tuesday from its previous close around 48 bid.

The bonds got a boost after the E&P company announced plans to sell all of its interest in the Yellow Rose field in the Permian Basin region of Western Texas to Ajax Resources LLC.

W&T plans to use the roughly $376 million that it expects to get from that transaction to pay down its secured revolving credit facility debt and to provide additional liquidity for future operations and acquisitions.

Here and there, other energy names also managed to buck the trend, even if there was no fresh news attached to them.

Houston-based Energy XXI Ltd.’s 11% secured notes due 2020 gained 1 point to end at 63 bid with over $22 million traded, making it one of the day’s busiest credits.

EXXI’s 7½% unsecured notes due 2021 were also seen up 1 point at 20¼ bid, with over $8 million having changed hands.

Overall market softer

With falling crude prices pretty much taking the wind out of the sails of the recently robust high-yield energy sector and with equities lower, a trader said Tuesday that junk bonds overall were softer, seeing them generically off by ¼ to ½ point.

But he said that “given the weakness of overall markets in general” – stocks slid, with the bellwether Dow Jones industrial average plunging 469.68 points, or 2.84%, to 16,058.35 – “our market kind of hung in there for most of the day anyway.”

He called volume “on the lighter side.”

Indicators head south

Statistical measures of junk market performance started the new month on the downside, moving lower across the board on Tuesday after having been mixed over the previous two sessions and in three sessions out of the prior four. It was the first time the indicators had been lower all around since last Monday, Aug. 24, which had been their fifth consecutive downturn.

The KDP High Yield Daily index dropped by 16 basis points on the day Tuesday to end at 67.84 after having been higher the previous three sessions, including Monday’s 14-bps advance, and in four sessions out of the prior five.

Its yield, meanwhile, rose by 8 bps on Tuesday to 6.43% after having come in for three successive sessions, including Monday’s 3 bps decline, which had also been the fourth such downturn in five sessions.

The Markit Series 24 CDX North American High Yield index, which had been down over the previous two sessions while all of the other indicators were up, made it three sessions in a row in the loss column on Tuesday, retreating by 21/32 point to close at 103 13/16 bid, 103 27/32 offered. It had lost 11/32 point on Monday.

The Merrill Lynch North American Master II High Yield index saw its first loss on Tuesday after three straight improvements and four sessions on the upside out of the previous five. It backtracked by 0.121%, in contrast to Monday’s 0.117% advance.

Tuesday’s loss put the index back in the red on a year-to-date basis, with a 0.053% deficit. On Monday, it had shown a cumulative return of 0.069%, the first such positive reading since Aug. 19, when it had finished at 0.184%, only to slide into the red after that.

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

© 2015 Prospect News.
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