Morning Commentary: PG&E bonds hammered on bankruptcy news; funds see big Friday inflows

By Paul A. Harris

Portland, Ore., Jan. 14 – The junk index opened the week unchanged to down 1/8 point, a New York-based trader said.

Against a backdrop of weaker stock prices and flat crude oil prices, the high-yield ETFs were lower at mid-morning. The iShares iBoxx $ High Yield Corporate Bd (HYG) was down 0.15%, or 13 cents, at $83.76 per share.

The bond prices of troubled San Francisco-based power generator Pacific Gas & Electric Co. plummeted trailing an announcement from the company and its parent, PG&E Corp., that its respective boards of directors plan to file for Chapter 11 bankruptcy on or about Jan. 29.

Pacific Gas & Electric bonds entered the high-yield universe last week as fallen angel debt when ratings agencies slashed its corporate credit ratings to B2/B from Baa3/BBB-.

Across the capital structure those bonds dropped on Monday morning, the New York-based trader said, noting that longer-dated bonds fell about 1¼ points, while shorter maturities dropped 5 points to 7 points.

The Pacific Gas & Electric 4.3% senior notes due March 2045 traded at 75½ on Monday morning, down 1¼ points.

The shorter maturity Pacific Gas & Electric 3.85% senior notes due November 2023 were 77½ bid, down 7½ points on the morning.

In Monday’s press release the company stated that it is facing “extraordinary challenges relating to a series of catastrophic wildfires that occurred in Northern California in 2017 and 2018,” and went on to say that if the utility’s facilities are determined to be the substantial cause of one or more fires it could be liable for property damage, business interruption, interest and attorneys’ fees.

It also stated that PG&E does not intend to make the interest payment of approximately $21.6 million on its 5.4% senior notes due January 2040; the payment is due on Jan. 15, 2019, and there is a 30-day grace period before triggering a default.

New Targas hold in

Away from headline news, the first junk issue of 2019 continues to perform well in the secondary market, the trader said.

Targa Resources Partners LP and became the first issuer to price a junk deal in five weeks of utter silence in the high-yield primary market when it priced an upsized $1.5 billion amount of senior notes (Ba3/BB) in two tranches late last Thursday.

On Monday the bonds in both tranches were slightly better on the morning, with the 6½% notes due July 2027 at 101¼ bid, 101¾ offered and the 6 7/8% notes due January 2029 at 101¾ bid, 102¼ offered.

Both tranches priced at par.

Demand was huge and allocations were dear, an investor told Prospect News.

All told the $1.5 billion deal played to $8 billion of demand from more than 240 accounts, the investor said – with $5.7 billion of orders in the book for the 2027 notes and $2.3 billion for the 2029 paper.

In the wake of last Thursday's Targa deal the new issue market has once again gone silent, although a deal pipeline is forming, sources say.

Meanwhile the euro-denominated primary market is expected to reopen for 2019, once there is clarity on Brexit, a London-based syndicate official said on Monday morning.

British prime minister Theresa May’s plan for the United Kingdom to leave the European Union comes up for a vote in Parliament on Tuesday, with political pundits professing expectations that the plan will fail to pass.

Big Friday inflows

The dedicated high-yield bond funds saw daily cash inflows on Friday, a trader said.

High-yield ETFs saw $607 million of inflows on the day.

Actively managed funds saw a whopping $1.35 billion of inflows on Friday, the trader said.

Flows were broad-based and likely driven by expectations that the Federal Reserve Bank has backed off the hawkish interest rate increase plan it warned of in the second half of 2018 and by improvements in stock and oil prices.

© 2015 Prospect News.
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