Meltdown continues; Occidental rebounds; Tupperware active post downgrade; HCA improves

By Paul A. Harris and Abigail W. Adams

Portland, Me., March 20 – While the high-yield secondary space opened Friday in the green, fortunes shifted midday and the market closed out a difficult week with steep losses, sources said.

Credit spreads continued to blow out throughout the week with the spreads now the widest they have been since 2009.

WTI crude oil futures got crushed after Thursday’s rebound, further dragging down the embattled energy sector.

However, Occidental Petroleum Corp.’s senior notes were trading off their lows on Friday following the oil company’s downgrade to junk.

Fellow fallen angel Tupperware Brands Corp.’s 4¾% senior notes due 2021 were trading down after Moody’s Investors Service again downgraded the company and questioned its ability to refinance the notes.

While the overall market continued to struggle, HCA Inc.’s 3½% senior notes due 2030 improved on Friday although the notes posted losses on the week.

Credit spreads

What's dramatic about the widening of high-yield bonds in the financial crisis sparked by the Covid-19 pandemic is its fast pace, a syndicate banker said on Friday.

Five of the six largest daily widenings in the history of the market have taken place during the past two weeks, the source said, citing data from the JP Morgan high-yield index.

These include 101 basis points on March 9, 78 bps on March 12, 86 bps on March 16, 62 bps on March 18 and 69 bps on March 19.

“Some recessions take hold gradually,” said the syndicate official.

“Not this one.”

The magnitude of the widening, thus far, remains eclipsed by that seen during the financial crisis of 2008, set in train by the subprime mortgage crisis and climaxing with the spectacular collapse of Lehman Brothers, the source said.

High-yield spreads closed at 1,040 bps on Thursday, still deep inside of the subprime/Lehman peak of 1,929 bps, on Dec.16, 2008, the source said.

Whether it will be days, weeks or months until the high-yield new issue market regenerates is difficult to ascertain in the midst of the present circumstances, the banker said.

“My gut feeling is that once the markets stabilize it won't take too long,” the banker said.

The energy sector

After a bruising few weeks, the high-yield index erased all of its gains dating back to January 2017, according to a BofA Global Research report.

The energy sector has been the hardest hit with losses of 18% in the past week and accumulated losses of 40% year to date, according to the report.

Thursday’s rebound in crude oil futures proved to be short-lived with the barrel price of WTI crude oil for April delivery trading below $20 in intraday trading before settling at $22.43, a decrease of 2.79% or 11.06%.

Trading remained light among energy names with most now squarely in distressed territory and widespread defaults expected from the sector, sources said.

Occidental rebounds

While most names in the energy sector were quiet on Friday, Occidental Petroleum’s senior notes remained active with the notes bouncing off their lows.

After a more than 13-point drop on Thursday, Occidental’s 2.9% senior notes due 2024 pared their losses.

The notes regained 5 points to close Friday at 60, according to a market source.

Occidental’s 2.6% senior notes due 2021 also traded up 5 points to 67¼ late Friday afternoon after dropping more than 20 points in the previous session.

While volume was light on Friday, Occidental’s 6.2% senior notes due 2040 remained flat at 61½ after plunging more than 10 points in the previous session.

Occidental Petroleum became the latest fallen angel to enter junkbondland after Moody’s Investors Service downgraded the company to junk on Thursday.

Tupperware active

Tupperware’s 4¾% senior notes due 2021 were active after Moody’s again downgraded the company and questioned its ability to refinance the notes.

The 4¾% notes closed Friday at 63½. They were trading in the low 70s heading into Friday’s session.

The notes were changing hands on an 89-handle at the end of February.

The 4¾% notes have been under pressure since late February when the company announced it would delay its earnings report due to an accounting probe of one of its units.

Moody’s downgraded the kitchen and household products company’s corporate credit rating to B3 from Ba3 and senior unsecured rating to Caa2 from B1 on Friday.

Moody’s also increased its probability of default. (See related article in this issue)

S&P Global Ratings downgraded Tupperware to junk in 2019.

HCA improves

HCA’s 3½% senior notes due 2030 were bid up on Friday. The notes rose 2¼ points to close the day at 83.

While the notes were up on the day, they were still down on the week. The 3½% notes were trading on a 94-handle last Friday.

$53 million Thursday inflows

The dedicated high-yield bond funds saw $53 million of net inflows on Thursday, a market source said.

High-yield ETFs saw $453 million of inflows on the day.

However, actively managed high-yield funds sustained $400 million of outflows on Thursday, the source said.

News of Thursday's daily cash flows trails a Thursday afternoon report that the combined high-yield funds sustained $2.9 billion of outflows in the week to the Wednesday, March 18 close, according to Lipper U.S. Fund Flows.

Those outflows took place as part of an epic exodus of cash from the corporate bond market, with U.S.-based taxable bond funds seeing $55.9 billion of outflows on the week, the largest weekly outflows on record, the market source said.

In the three-week period that ended at Wednesday's close, the combined high-yield funds saw $14.3 billion of net outflows, the biggest over that time-span since records have been kept, the source said.

Year-to-date net outflows of the combined funds were $11.75 billion to Thursday's close.

During the entire year of 2019 the combined junk funds saw $18.8 billion of net inflows.

Indexes close week with steep losses

Indexes closed Friday in the red and suffered steep losses on the week.

The KDP High Yield Daily index was down 22 points on Friday with the yield now 10.02%.

The index dropped 190 bps on Thursday, 194 bps on Wednesday, 10 bps on Tuesday and 218 bps on Monday.

The index posted a cumulative loss of 634 bps on the week.

The ICE BofAML US High Yield sank further into negative territory.

The index dropped 41.8 bps with year-to-date returns now negative 18.727. The index dropped 216.2 bps on Thursday, 303.4 bps on Wednesday, 80.1 bps on Tuesday and 317.1 bps on Monday.

The index plummeted 958.6 bps on the week

It was in positive territory as recently as a week and a half ago.

The CDX High Yield 30 index dropped 217 bps to close Friday at 87.46.

The index dropped 157 bps on Thursday, plunged 305 bps on Wednesday, gained 90 bps on Tuesday and plummeted 452 bps on Monday.

The index posted a cumulative loss of 1,041 bps on the week.

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