Junk market’s oil-fueled surge continues, ends week higher, though Halcon plunges on exchange

By Paul Deckelman and Paul A. Harris

New York, Aug. 28 – The high-yield market moved higher for a second consecutive session on Friday, propelled by a surge in crude oil prices – which, in turn, pushed most oil and natural gas issues higher.

There was one exception to that rule – Halcon Resources Corp.’s notes slid badly as the Houston-based exploration and production company announced a distressed exchange for several issues of its existing bonds, an action which caused Standard & Poor’s to cut its ratings.

But otherwise, it was all upside for such energy credits as California Resources Corp., SandRidge Energy, Inc. and Range Resources Corp.

Apart from the oils, traders said that the junk market generally was firmer, given a lift by the boost in the oilers, but said that activity was muted, befitting a summer Friday – the last in the month of August.

Although there wasn’t much activity in them, some of the recently priced issues such as Hill-Rom Holdings Inc. and Infor (US), Inc., were seen solidly higher from where they had been a week earlier.

Statistical measures of market performance were mixed on the day versus where they had been on Thursday, their second mixed session in the last three sessions.

However, all of those indicators were up from where they had closed out last Friday – their first weekly gain after three straight weeks on the downside.

Primary slower than expected

The high-yield primary market remained dormant on Friday, as it has been since Aug. 19 when KIK Custom Products Inc. (Kronos Acquisition Holdings Inc.) priced the most recent deal to clear the market, a $390 million issue of 9% senior notes due Aug. 15, 2023 (Caa2/CCC).

Liquidity has been thin and volatility has been considerable, sources say.

Both factors appear to have conspired to bring the shutters down on the new issue market during a time period that had already been expected to be slow, but perhaps not altogether dormant.

As to the ultra-thin liquidity, a bond investor offered this by way of example: of nine traders at one of the big investment banks, seven were away from the office late in the past week.

As to the volatility, high-yield ETFs sustained $1.765 billion of outflows for the week to Wednesday’s close, according to a hedge fund manager.

However the following day, Thursday, ETFs were back as “massive buyers, reaching for stuff,” according to a trader who tracks them closely.

Although primary market activity is expected to resume following the three-day Labor Day holiday weekend, specific issuer names have yet to surface, sources say.

“People are starting to ask about Frontier and Charter,” a trader said Friday, referring to Frontier Communications Corp. and Charter Communications Inc.

Although both prospective issuers are expected to bring super-sized deals after Labor Day, specifics remain to be announced.

Frontier had been expected to come with $8 billion of bonds to help finance its acquisition of Verizon Communications Inc.’s wireline operations in California, Florida and Texas.

However in mid-August the company announced that it obtained a new $1.5 billion senior secured delayed-draw term loan facility for the planned acquisition, and added that the loan will reduce the amount of public high-yield debt that will be raised.

J.P. Morgan is expected to lead the Frontier bond deal, a market source said.

Charter, meanwhile, is expected to bring $3.5 billion of senior notes via Credit Suisse, to help fund its acquisition of Time Warner Cable Inc.

On July 9 Charter priced $15.5 billion of senior secured notes (Ba1/BBB-) in a six-tranche high grade execution, backing the acquisition.

The straight junk-rated unsecured portion of the financing was initially expected to follow close on the heels of the secured deal, sources say.

However volatility related to Greece, China, a potential hike in the Fed Funds rate and the phenomenal price swings in crude oil – with energy representing 14% of the high yield index – prompted dealers to rethink timing on the market’s anticipated mega-deals.

Energy surge leads the way

A trader said that “things were pretty much better today overall,” with energy names serving as the focus for a second straight session, helped by a big jump in crude oil prices.

The benchmark U.S. crude grade, West Texas Intermediate for October delivery, rose by $2.70 per barrel on the New York Mercantile Exchange, ending a $45.26 – on top of Thursday’s even more substantial $3.96 per barrel price rise.

“All of these E&P names, especially the lower-rated type ones that had really gotten slammed” recently “were gapping up points again today.”

For example, Los Angeles-based exploration and production operator California Resources’ 6% notes due 2024 were up about 1 to 1¼ points on the day, a trader said.

A second trader said they advanced to 75¼ bid, after having gone home Thursday at 74¼.

Other energy names moving up on the day included Tulsa, Oka.-based SandRidge Energy, whose 7½% notes due 2023 rose by 2¼ points to 29 bid, and Fort Worth, Texas-based Range Resources, whose 5% notes due 2023 were up 2 points on the session, ending at 64 bid.

Halcon gets hit on exchange

A trader said that “one outlier that did not” share in the rest of the energy sector’s relative strength was Halcon Resources, on the news of its distressed exchange; he saw its bonds off around 12 or13 points.

Halcon said late Thursday that it was exchanging $1.57 billion of notes for $1.02 billion of new 13% third-lien senior secured notes due 2022.

The exchange was privately negotiated and involved $497.2 million of the 9¾% notes due 2020, $774.7 million of the 8 7/8% notes due 2021 and $294.3 million of the 9¼% notes due 2022.

As for the leftover chunks of debt, they took a hefty hit come Friday trading.

A trader said the notes traded down to the mid-30s from the mid-40s, noting that the paper “got primed.”

Another market source placed the 9¾% notes in a 34½ to 34¾ context, down from 46 to 47 on Thursday. The 8 7/8% notes meantime fell to 33½ bid, 33¾ offered from 45 bid, 47 offered.

The 9¼% notes traded as low as 32½, which compared to previous trades in a 45 to 46 ZIP code.

The swap will reduce the company’s annual interest expense by about $12 million.

On the news, Standard & Poor’s took action, dropping Halcon’s corporate rating to SD from B- previously.

Meanwhile, S&P cut the notes to D from CCC.

Such a rating change is typical when an exchange is categorized as a “distressed exchange.”

Recent issues better

A trader said that, as had been the case on Thursday, most of the day’s activity took place in the energy space, particularly the exploration and production component.

He said that while the market tone generally was better, flows were fairly light, noting that “it was another summer Friday,” with many market participants leaving their offices early, perhaps to head for the beach or the golf course.

Another market source noted that recently priced deals were higher on the week, although he said that there was not much trading in them.

Chicago-based medical technology provider Hill-Rom’s 5¾% notes due 2023 were going home quoted at 101¾ bid, 102¼ offered, calling that unchanged on the day but up ¾ point from where they had begun the week.

He saw New York-based business software provider Infor’s 5¾% notes due 2020 at 100¼ bid, 101 offered, up ¼ point on the day and up 5/8 point from where they had closed out last Friday.

Hill-rom priced $425 million of its notes at par on Aug. 18.

Infor priced $500 million of its notes at 99 to yield 5.986% on Aug. 11.

Indicators mixed on day, up on week

Statistical measures of junk market performance turned mixed on Friday, after having been higher all around on Thursday.

Friday was their second mixed session in the last three, as they had also been mixed on Wednesday after gaining on Tuesday, which had broken a losing streak of five straight lower sessions. But counting in all of the mixed sessions which saw no real trend as well as sessions in which the indicators were lower all around, Thursday’s upturn was only the second unambiguously higher day in nearly a month, since July 29.

The indicators were meanwhile higher all around versus where they had finished last Friday – their first weekly upturn after three straight weeks and six weeks out of the previous eight weeks on the downside.

The KDP High Yield Daily Index shot up by 17 basis points on Friday to end at 67.86. It was the index’s second straight gain, including a 6-bps rise on Thursday, and its third gain in the last four sessions; on Tuesday, it had jumped by 33 bps, which had been its first gain after five straight sessions on the downside.

Its yield, meanwhile, came in by 8 basis points on Friday, going home at 6.36%. It was the index’s second straight narrowing and its third such decline in the last four sessions. On Thursday, it had tightened by 4 bps.

Those levels compared favorably with last Friday’s 67.82 index reading and 6.43% yield.

The Markit Series 24 CDX North American High Yield Index, though, posted its first loss after three straight improvements, losing 9/32 point to end at 104 25/32 bid, 104 13/16 offered. It had firmed by 25/32 point on Thursday, which had followed one of its biggest advances of the year, when it surged by 1 1/8 points on Wednesday. The index had also been up on Tuesday, by 5/32 point – the index’s first rise after six successive setbacks, after nine losses in the previous 10 sessions and 12 losses in the 15 prior trading days.

On the week, however, the CDX was up from last Friday’s 103 17/32 bid, 103 19/32 offered.

The Merrill Lynch North American Master II High Yield Index was up by 0.175% on Friday, its second straight improvement and third in the last four sessions, including Thursday’s 0.466% gain. While the index had been off by 0.073% on Wednesday, it had zoomed by 0.529% on Tuesday, its biggest one-day rise on the year so far, breaking a five-session swoon before that, which had also seen the index down in six out of the previous seven sessions and over the longer term, in 14 of the 16 prior trading days.

The index’s year-to-date loss narrowed to 0.048% on Friday from 0.223% on Thursday. That loss was well down from 1.136% on Monday, which had been the biggest year-to-date loss seen so far this year, as well as the biggest year-to-date deficit the index has seen since Oct. 11, 2011, when the red ink totaled 1.745%.

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

For the week, the index gained 0.276% – its first weekly gain after three straight weeks of losses, including last Friday’s 0.764% retreat, which had left it with a 0.325% year-to-date deficit.

With 34 weeks on the books since the start of the year, this week was the 20th in which the index ended on the upside, versus 14 weeks on the downside.

-Stephanie N. Rotondo contributed to this review

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