Junk breaks out of two-day Brexit slump, though primary remains on hiatus; energy names up as oil climbs

By Paul Deckelman and Paul A. Harris

New York, June 28 – After two days on the downside following the surprising outcome of Britain’s “Brexit” vote, the junk bond market was aching for a turnaround – and that’s exactly what it got.

Following the lead of stocks and other risk assets, high yield broke out of its two-session slump on Tuesday and moved decisively higher.

In a reversal of the pattern seen over the previous two days, most issues were seen up at least ½ point or so, and some of the larger, more liquid names gained multiple points.

Sizable gainers on the day included such names as Western Digital Corp., First Quantum Minerals Ltd., Calumet Specialty Products Partners LP and Tronox Inc.

Energy issues – hard hit over the previous two sessions as oil prices slid in line with a stronger dollar – were seen solidly on the upside in line with improved crude prices, including California Resources Corp. and Freeport McMoRan Copper & Gold, Inc.

Statistical market performance measures turned higher across the board on Tuesday, after having been lower all around for a second consecutive session on Monday. It was their second stronger session in the last four trading days.

The new issue market remained becalmed on Tuesday by the fallout from last week's historic Brexit vote.

However the tone of the overall high yield market was improved on Tuesday, sources said.

Although the primary market is expected to remain quiet during the run-up to the coming Independence Day holiday weekend, should the stability seen on Tuesday continue, new issue activity could rekindle by the middle part of the week ahead, a syndicate official said shortly after the session's close.

Meanwhile, amid volatility sparked by Brexit, investors can be expected to extract premiums from companies attempting to raise money in the new issue market, sources say.

Outflows on Monday

The cash flows of the dedicated high yield bond funds were negative on Monday, the most recent session for which data was available at press time, according to a portfolio manager who related information contained in a daily report from JP Morgan.

High yield ETFs sustained $18 million of outflows on the day.

Actively managed funds saw $120 million of outflows on Monday.

Dedicated loan funds, meanwhile, saw $140 million of outflows on Monday, the largest outflow from the loan funds over the past three weeks.

Better tone seen

A trader said that “overall, the market was definitely better today,” in contrast to the downside movement seen over the previous two sessions as investors tried to assess what the meaning of last Thursday’s Brexit vote in favor of Britain dropping out of the European Union might mean.

For instance, he said, “the CDX index was up 1 point, and we did see bid-wanteds outpace OWICs (i.e., offer-wanted requests) by at least 2-to-1.”

He estimated that generically, most Junkbondland issues were better “by around ½ point or so,” in contrast to the roughly ½ to-1 point generic weakness seen in each of the previous two sessions.

“People were in there buying some stuff,” a second trader said.

“There was a lot of movement on the upside – a lot of names looked like they were moving up.”

As had been the case on both Friday, and again on Monday, junk bonds seemed to be moving in tandem with equities – except that where stocks had been uniformly lower on Friday and Monday, they too were seen rallying on Tuesday – the bellwether Dow Jones Industrial Average, for instance, rebounded on Tuesday from its previous losses to the tune of 269.48 points, or 1.57%, ending at 17.409.72, while other, broader indices showed similar gains.

“Equities definitely had a lot to do with it,” one of the traders said. “There was a relief rally in store.

“And the correlation between oil and all the markets seemed to be pretty high still.”

Energy names climb

After two straight sessions on the slide, oil prices were seen higher across the board, and they brought high yield energy credits up as well.

One of the most active names in the sector was California Resources’ 8% notes due 2022; the Los Angeles-based oil and natural gas exploration and production company’s paper was seen by one trader to have gained 2 whole points on the day, to end at 67½ bid, while another trader who also saw the bonds going home at that level called it a 1¾ point gain on the day, on volume of over $23 million.

Another gainer from that sector was Freeport-McMoRan, with operations in both energy and in metals mining. Its 3.55% notes due 2022 gained 2 points on the day, ending at 86½ bid, with over $34 million having changed hands.

“Any E&P names that had underperformed [on Friday and/or Monday], outperformed today,” a trader opined.

He saw Houston-based E&P operator Oasis Petroleum Inc.’s 6 7/8% notes due 2022 up 1½ points, to 90 bid, partially rebounding from Monday’s 3½-point slide.

He saw Denver-based energy operator Continental Resources, Inc.’s 5% notes due 2022 – 3-point losers on Monday – up by a deuce on the day at 95¾ bid.

Firmer oil prices on Tuesday definitely played a role.

The benchmark U.S. crude grade, West Texas Intermediate for August delivery jumped by $1.52 per barrel to settle at $7.85 in trading on the New York Mercantile Exchange; it had plunged by $2.47 on Friday and lost an additional $1.31 per barrel on Monday.

International benchmark Brent crude for August delivery likewise firmed by $1.42 per barrel on Tuesday on the London ICE Futures Exchange, settling at $48.58, in contrast to Friday’s $2.50 per barrel nosedive, and Monday’s additional $1.25 loss.

Market broadly higher

Away from the energy sphere, traders saw other names rise by multiple points in a generally stronger market.

A trader saw Irvine, Calif.-based computer hard-drive maker Western Digital’s 10½% notes due 2024 gain more than 3 ½ points on the day to end at just over 107 bid.

He said that Vancouver-based mining concern First Quantum, Minerals’ 7¼% notes due 2022 were up by 3 ¼ points, at 77 bid.

Oklahoma City-based chemical pigments maker Tronox, Inc.’s 6 3/8% notes due 2020 were 2-point winners, ending at 72 bid, with over $22 million traded.

Calumet firms on asset sale

Calumet Specialty Products Partners LP’s 6½% notes due 2021 popped over 2 points on Tuesday after the Indianapolis-based refiner and processor of specialty hydrocarbon products said it had sold its 50% interest in a joint-venture refinery.

A trader said the bonds improved 2½ points to 69 5/8.

Calumet sold its stake in Dakota Prairie Refining for $28.5 million in cash to its JV partner, WBI Energy, a subsidiary of MDU Resources Group. MDU also assumed $66 million of debt linked to the refinery.

WBI then sold the entire facility to Tesoro Corp. for an undisclosed sum.

The refinery opened last year, but has been struggling to turn a profit, given the fact that oil and fuel prices have tanked. For its part, MDU reported $7.2 million in losses from the refinery for the first three months of 2016. Calumet posted a net loss of $67.7 million for its first quarter, which prompted management to consider divesting certain assets.

Indicators sharply rebound

Statistical market performance measures turned higher across the board on Tuesday, after having been lower all around for a second consecutive session on Monday. It was their second stronger session in the last four trading days.

The KDP High Yield index edged up by 2 basis points on Tuesday to end at 67.13, after having plunged badly over the previous two sessions – by 51 bps on Friday and then by another 34 bps on Monday.

Its yield came in by 3 bps to 6.30% on Tuesday, after having ballooned out 15 bps on Friday and then widening by another dozen bps on Monday.

The Markit Series 26 CDX index shot up by 7/8 point on Tuesday to finish at 101 13/16 bid, 101 7/8 offered, its second gain in the last four sessions. The index had plummeted by 1 5/8 points on Friday and then had lost another nearly ¾ point on Monday.

The Merrill Lynch High Yield index posted its first gain after two straight losses and its third advance in the last five sessions, rising by 0.273% on Tuesday. The index had nosedived by 1.092% on Friday, and then retreated by another 0.576% on Monday.

Tuesday’s rebound raised its year-to-date return to 8.158% from Monday’s 7.864% – the first time the cumulative return had closed under the psychologically significant 8% marker since June 1, when it finished at 7.487%.

Despite the gain in the latest session, the index remained well down from its peak level for the year-to-date of 9.688%, which had been set just this past Thursday amid a market surge powered at least in part by the ultimately unjustified and incorrect expectations that the Brexit vote would end with Britons voting to keep their nation’s long-time ties to the EU.

Stephanie N. Rotondo contributed to this review.

© 2015 Prospect News.
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