Junk bonds rebound strongly after Monday meltdown, aided by Fed move; names up 1 to 5 points

By Paul Deckelman and Paul A. Harris

New York, Aug. 9 - After getting smacked around for the last several of days, the high-yield market came roaring back with a vengeance on Tuesday, lifting a majority of its issues anywhere from 1 to 5 points, traders said.

Whether it was simply the inevitable snapback after an overdone bout of selling that occupied most of the past week or the market enjoying a "Bernanke Bounce" after the Federal Reserve announced plans to keep interest rates at their present super-low levels for the next two years and remove a key source of economic uncertainty, or some combination thereof, traders said that the buyers came out of their foxholes and took most names points higher, in many cases on heavy volume.

One of the biggest winners was Caesars Entertainment Corp. - the gaming company formerly known as Harrah's Entertainment - whose bonds, notably its widely traded 10% notes due 2018, had been one of the biggest losers over the past few sessions. The 10s were the most heavily traded Junkbondland issue.

The traders also saw some healthy recovery in hospital operator HCA Inc.'s new 8.5- and 10.5-year bonds, which also traded pretty heavily.

But the rising tide did not lift all boats. Energy operator ATP Oil & Gas Corp.'s bonds continued to lose ground, even though the company reported relatively decent quarterly numbers.

Statistical market performance indicators, down across the board on Monday, were seen mixed on Tuesday.

In the primary market, medical products maker Immucor Inc. was heard by syndicate sources to be hitting the road starting Wednesday to market its $400 million offering of bonds in connection with the company's pending leveraged buyout.

Immucor starts Wednesday

The primary market remained sidelined on Tuesday, and no new issues priced.

However, there was news on the new issue front. Immucor will begin a roadshow on Wednesday for its $400 million offering of eight-year senior notes (expected ratings Caa1/B-).

The deal, which is part of the funding for the leveraged buyout of Immucor by TPG Capital, is expected to price on Aug. 16.

J.P. Morgan Securities LLC, Citigroup Global Markets Inc. and UBS Investment Bank are the joint bookrunners.

No news surfaced on the three deals that were already on the calendar at Tuesday's open.

As previously reported, Jeld-Wen, Inc. is in the market with a $575 million offering of seven-year senior secured notes (B3/CCC+) via Bank of America Merrill Lynch, Wells Fargo Securities LLC, Barclays Capital Inc. and KeyBanc Capital Markets Inc.

Rock Ohio Caesars LLC plans to sell $380 million of seven-year second-lien notes (/B/) via Credit Suisse Securities (USA) LLC and Deutsche Bank Securities Inc.

And M&G Finance Corp. completed the marketing of a $500 million offering of seven-year senior notes (expected ratings B3//BB) during the past week. That JPMorgan-led deal is day-to-day, market sources said.

Four straight days of outflows

Evidence indicates that cash continues to be moved out of high-yield bonds, according to a hedge fund manager who pointed to daily fund flow numbers reported by EPFR Global.

The most recently reported flow number, Monday's $390 million outflow, caps four consecutive days of negative flows, the manager said.

That outflow trailed Friday's more substantial $570 million outflow. Thursday saw a $420 million outflow, and Wednesday saw a $90 million outflow.

In all, the four market sessions leading up to Monday's close saw a total of $1.47 billion of outflows.

The last positive daily flow that EPFR reported was a $40 million inflow on Tuesday, Aug. 2.

The negative sentiment reflected in those fund flow numbers continued to play out full force during Tuesday's market session, according to a trader from a high-yield mutual fund.

High-yield bonds largely did not benefit from the tailwinds that propelled stocks persuasively into positive territory on Tuesday, trailing Monday's rout in the global equity indexes.

"On Monday, there were simply no buyers to be found," said the trader. "We were marking things down five points.

"Today, you saw a little bit of bargain shopping, but there did not seem to be very much conviction. And the liquidity of the market remains very low."

Ballarpur - August's only deal

As of Tuesday's close, August's sole issue remains the $200 million of 9¾% subordinated perpetual preferred notes priced by Ballarpur International Paper Holdings BV in a non-rated issue on Thursday.

HSBC and RBS ran the books for the specialty paper company, which is based in Gurgaon, India.

All but 2% of that deal went into Asia and Europe, according to a market source who said that 77% of Ballarpur's new perpetuals were taken down by Asian accounts, while European accounts took 21% of the deal.

Sixty accounts played, building a $350 million order book for the $200 million offering.

Private banks comprised 77% of the accounts in the deal. Most of the rest was taken down by fund managers, the source said.

The perpetual notes are scheduled to settle on Thursday.

A wild ride

In the secondary market, a trader saw junk bonds - which had been decimated pretty much across the board during Monday's bloodbath of a session - bouncing around "all over the place" on Tuesday.

"Stuff in general is off the bottom anywhere from a point to two points," such as Franklin, Tenn.-based hospital operator Community Health Systems, Inc., whose 8 7/8% senior secured notes due 2015 were one of the most heavily traded bonds on Tuesday. More than $35 million changed hands.

He saw the bonds gyrating around on Tuesday between a low of 97¾ bid and a high - admittedly only a small piece - at 99 3/8 bid. More of the trades were in a 98-99 range.

He saw the bonds going out at 98½ bid after having gotten as low as 97 on Monday and pegged them up 1 to 2 points.

He also saw Community Health's sector peer and neighbor just a few miles up Tennessee's I-65, Nashville-based HCA, "a lot better" on Tuesday after looking positively sickly on Monday.

He saw its 6½% senior secured first-lien notes due 2020 having moved up around 3 points on the day to 96½ bid, versus their Monday lows at 933/4.

"Holy smokes!" he exclaimed.

But the $3 billion issue - which HCA priced at par back on July 26 as part of a $5 billion, two-part mega-deal - still held well below the 98¾ bid, 99 level seen on Friday afternoon. About $21 million of the bonds were traded on Tuesday.

The other half of that deal - the $2 billion of 7½% senior unsecured notes due 2022, which also priced at par on July 26 - was even busier on Tuesday, with turnover of nearly $32 million.

Like the 6½% bonds, these bonds had improved solidly, moving up to a range of 923/4-93½ bid from Monday's close at 91 bid. However, this issue too fell sharply on Monday, well down from Friday's 98¾ level.

Ford Credit firms up

Another recent big deal seen trading heavily on Tuesday at higher levels versus Monday was Ford Motor Credit Co. LLC's 5¾% notes due 2021. A market source saw $16 million of the bonds trading at 98 5/8 bid.

A trader pegged them a little lower on Tuesday at around 97, which he said was up from the day's low at 95¾ bid. He said this was actually not too much changed from Monday's 96 level.

On Friday, the bonds were trading at par - the same level at which the Dearborn, Mich.-based auto-loan financing arm of the second-largest domestic carmaker, Ford Motor Co., had priced its $1 billion of new paper in a drive-by deal that came to market on July 27.

A trader meantime saw parent Ford's benchmark 7.45% bonds due 2031 at 107½ bid, 109½ offered, not too far from their levels on Monday, when the paper had fallen 4 points from prior levels around 111-112.

Caesars conquers market

A trader said that while the standard on-the-run names in the junk space were mostly up by 1 to 2 points on Tuesday, "the more volatile names," including the bonds of Caesars Entertainment - the former Harrah's Operating Co. - were up in a range of as much as 5 points.

He saw the Las Vegas-based casino giant's 10% notes due 2018 - which on Monday had fallen as low as 76¾ bid from prior levels in the 80s - having moved back up to 81¼ bid.

A market source at another desk saw the bonds at 79½ but called them up at least 3 points or so on the day, with over $53 million changing hands, making it the most heavily traded junk bond of the day.

Besides being helped by the overall rise in the market, Caesars reported better second-quarter numbers versus a year ago. For the quarter, the company posted a net loss of $255.5 million, down from $274 million of red ink for the same quarter of 2010.

Net revenues were 0.4% higher at $2.3 billion. Higher hotel revenues and revpar - revenue per available room, a key performance metric for lodging companies and casino operators who have hotel operations - offset declines in visits as well as the temporary shuttering of five Midwest properties due to flooding.

ATP angst continues

While most high-yield names were bouncing back from Monday's debacle, a trader said that "one bond that just can't get out of its own way" was ATP Oil & Gas' 11 7/8% second-lien senior secured notes due 2015.

He saw the Houston-based energy acquisition and production operator's bonds hit a low on Tuesday of 83 bid, down from 85½ on Monday. On Friday, he said that the bonds had been "all over the place" in a range of 87 to 90 before going out at 89 bid, 90 offered.

He noted that the company had quarterly earnings out, but "the big story was not the numbers - which weren't too bad, relative to expectations - but that they'll have more delays on production in the Gulf of Mexico."

ATP reported a net loss attributable to common shareholders of $56.9 million, or $1.11 per basic and diluted share, for the second quarter of 2011, versus an $82.9 million loss, or $1.63 per share, a year ago. Revenues from oil and gas production were $172.9 million for the 2011 second quarter, compared with $101.1 million for the second quarter 2010.

ATP sold $1.5 billion of its bonds in April 2010, pricing them just a day before the disastrous BP oil rig fire and explosion in the Gulf of Mexico off the Louisiana coast, which led to a federally ordered shutdown of all deepwater drilling, including ATP's. That helped cause its bonds to swoon as low as the 60s in the weeks following the accident, even though the company had no part in the mishap. The bonds began to creep back up in June 2010 and strengthened when ATP was allowed to resume drilling at its wells late last year. Last Monday, the trader said, the bonds had gotten as good as 102 bid, 102¾ offered before being dragged lower by market turmoil.

He also noted that ATP's Nasdaq-traded stock was down 56 cents, or 6.36%, to end at $8.25, and on July 20, it had been trading around $16, "so they've been cut in half" in that time.

Fed fires up market

"We had a really strong rally at the end of the day," said a trader who saw issues jump multiple points.

That coincided with a late rally in stocks. The bellwether Dow Jones Industrial Average, after losing more than 600 points on Monday, got 429.92 of them back on Tuesday, or a 3.98% rise, to end at 11,239.77. The risky asset classes got a big boost from the mid-afternoon announcement from the Federal Reserve that the nation's central bank will leave the interest rates it controls - the discount borrowing and federal funds target rates - right where they are at historic near-zero levels for the next two years, at least until the summer of 2013, in an effort to aid the economy and encourage lending.

A trader exulted that "this is huge!" He added, "I don't think that people appreciate just how huge that statement is."

He said that for the next two years, anyone borrowing money - or lending it for that matter - will have certainty about where interest rates will be, removing the whole category of interest-rate risk from the equation for any calculations they would have to make.

And with the Fed's target rates near zero, it means "practically free money for two years" for many borrowers whose rates are linked to those Fed rates.

He further declared that "this is much, much more powerful than any kind of QE3 [quantitative easing] would be," since, he said, "as soon as QE2 was announced, people started anticipating when it would go away and started hedging around and doing all kinds of things," limiting its effectiveness.

He noted the sharp rise in Treasury prices and the accompanying decline in yields on the government paper.

Market indicators turn mixed

Market statistical indicators, which were down sharply on Monday, tuned mixed on Tuesday.

A trader saw the CDX North American Series 16 High Yield index zoom by 2 points on the day to end at 94 5/8 bid, 95 offered, regaining half of the 4 points the index lost on Monday.

But among the other statistical measures, the KDP High Yield Daily index continued its slide. It gave up early gains and plummeted by another 36 bps on Tuesday to 72.15 on top of its loss of 52 bps on Monday. Its yield rose by 12 bps on Tuesday to 7.92% after having ballooned upward by 22 bps on Monday.

And the Merrill Lynch High Yield Master II index showed its sixth consecutive daily loss, retreating by 0.805%, although this was about half the magnitude of Monday's 1.664% plunge, by far the largest downturn of the year and one of the largest declines ever.

That dropped its year-to-date return to 1.718%, down from the 2.543% return at Monday's close and well down from its peak level for the year so far, the 6.362% return seen on July 26.

Monday's close was the lowest since the 1.681% recorded on Jan. 24.

© 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.