Junk’s post-Brexit rebound continues; primary remains quiet; Alcoa jumps on split-up details

By Paul Deckelman and Paul A. Harris

New York, June 29 – The high-yield market made it two-for-two on Wednesday, posting its second straight strong session as it continued to rebound from the market turmoil initially seen Friday and again on Monday in the wake of Britain’s surprise popular vote last week to leave the European Union.

As had been the case on Tuesday, Junkbondland moved in tandem with other risk assets such as equities in snapping back from their two-session decline.

However, there was no primaryside activity to speak of, and the new-deal market is expected to remain in a holding pattern until after the upcoming extended Independence Day holiday weekend in the United States.

In the secondary arena, traders said the clear standout performer on Wednesday was Alcoa Inc., several of whose issues firmed smartly in active trading after the big aluminum producer revealed the long-awaited details of its previously announced plan to split itself into two companies, one an upstream producer of aluminum and the other a value-added manufacturer of aluminum products.

Big, liquid higher-beta credits such as Frontier Communications Corp. and Western Digital Corp. were among the key gainers.

So were such energy issues as Oasis Petroleum Inc., Chesapeake Energy Corp. and California Resources Corp.

Statistical market performance measures were higher across the board on Wednesday for a second consecutive session. They had turned sharply upward on Tuesday, after having been lower all around for two straight sessions on Friday and Monday. It was their third improved session in the last five trading days.

Primary shuttered

The primary market remained dormant on Wednesday, as it has been throughout the week.

No deals priced, and there were no new deal announcements.

However, given the dramatic recovery seen in the past two days, should the market remain stable dealers are expected to restart the new issue market in the week ahead, following the extended Independence Day holiday weekend, sources say.

Big Tuesday outflows

Although junk rallied throughout the day on Tuesday, the cash flows of the dedicated high-yield bond funds were negative, a trader said.

In the case of actively managed funds, they were dramatically negative.

Asset managers, or actively managed funds, saw a whopping $1.3 billion of outflows on the day.

High-yield exchange-traded funds sustained $490 million of outflows on Tuesday.

“It did not feel like that,” the trader commented on Tuesday's negative daily flows. “The market has cash.”

Better tone continues

A trader said that the day’s activity followed along the lines of Tuesday’s session, with junk names generically up ½ to ¾ point on the day.

However, he did note that “it felt like there was limited supply on the offer side today.”

He said that while “obviously there were trades going on, it was a lot more difficult to get offers, for sure.”

The trader further noted that “there had been some talk of maybe a drive-by deal before the end of the week,” given the market’s improved tone over the past two sessions, but none materialized.

He suggested that if anything is going to happen on that front, it’s got to happen on Thursday, since Friday heading into the July 4th weekend “is an early close.”

Alcoa unveils separation plan

On a day when just about everything was up and some credits were up by multiple points, one of the session’s best performers was Alcoa, which got a boost after the New York-based aluminum company released the details of its previously announced plan to unlock its value by splitting into two separate companies.

“That structure was up anywhere from 2 to 4 points,” a trader said, pegging the company’s 5 1/8% notes due 2024 at 100½ bid, which he said was up by just over 4 points on the day.

At another desk, a trader saw the notes finishing at 101 bid, which he said was up by 4¾ points, with over $35 million traded.

He saw the company’s 5.4% notes due 2021 likewise improved by 1¾ points, at 106¼ at bid, with over $12 million traded.

Alcoa climbed after it publicized the details of its pending split into two companies, which was first announced last fall and which is expected to be completed during the upcoming second half of the year.

Alcoa said that its existing bauxite, alumina, aluminum, cast products and energy and rolling mill operations that will serve the North American packaging market will be renamed Alcoa while its engineered products and solutions, global rolled products and transportation and construction solutions segments, which provide multi-material solutions to markets including aerospace structures, jet engines, automotive and commercial transportation, will be renamed Arconic. Existing Alcoa shareholders will own the stock of both new standalone companies.

According to published reports, the company’s existing $7.7 billion of net debt is expected to stay with Arconic, while the new Alcoa is expected to issue as much as $1 billion of new debt and transfer the proceeds to Arconic.

Energy names up

Elsewhere, energy-related names were seen posting sizable gains in active dealings, helped by a second straight session of oil-price gains, their third better session out of the last five.

Houston-based exploration and production company Oasis Petroleum’s 6½% notes due 2021 gained nearly 3 points on the day to close at just under 92 bid, a trader said, seeing more than $12 million having traded.

He saw Los Angeles-based California Resources’ 8% notes due 2022 having jumped by 4 points on the day, ending at 71½ bid, with about $11 million traded.

Oklahoma City-based Chesapeake’s floating-rate notes due 2019 moved up by several points to close at 75¾ bid, with over $11 million changing hands.

Oil prices rose for a second straight session, helped by the news that U.S. crude inventories declined by 4.1 million barrels last week, more than the 2.4 million-barrel drop analysts had anticipated.

West Texas Intermediate crude for August delivery and August-contract Brent crude each soared by $2.03 per barrel Wednesday, with WTI closing at $49.88 on the New York Mercantile Exchange and Brent settling at $50.61 on the London ICE Futures Exchange.

Other names also improve

Apart from Alcoa and the energy names, traders saw the big, liquid high-beta names that usually dominate the Most Actives list doing so again on Wednesday.

Irvine, Calif.-based computer hard-drive manufacturer Western Digital’s 10½% notes due 2024 gained 1 7/8 points, a market source said, ending at 106 7/8 bid, with over $28 million traded.

Stamford, Conn.-based wireline telecom company Frontier Communications’ benchmark 11% notes due 2025 rose by 1¼ points to 103 bid, with over $42 million having changed hands.

Indicators extend gains

Statistical market performance measures were higher across the board on Wednesday for a second consecutive session. They had turned sharply upward on Tuesday, after having been lower all around for two straight sessions on Friday and Monday. It was their third stronger session in the last five trading days.

The KDP High Yield index climbed by 40 basis points on Wednesday to finish at 87.53, after having edged up by 2 bps on Tuesday – the first gain 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 12 bps on Wednesday to 6.18% after having tightened by 3 bps on Tuesday. Before that, the yield had ballooned out by 15 bps on Friday and then widened by another dozen bps on Monday.

For a second consecutive session, the Markit Series 26 CDX index shot up by 7/8 point on Wednesday to finish at 102 11/16 bid, 102¾ offered, a market source said, matching the size of Tuesday’s gain. It was the index’s third advance in the last five 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 put up its second gain in a row on Wednesday and its fourth upturn in the last six sessions, advancing by 0.76%, on top of its 0.273% rise on Tuesday. Those improvements followed two straight losses – the index had nosedived by 1.092% on Friday and then retreated by another 0.576% on Monday.

Wednesday’s continued rebound raised its year-to-date return to 8.98% from 8.158% on Tuesday. On Monday, the cumulative return had dipped to 7.864% – its first finish below the psychologically significant 8% marker since June 1, when it had closed 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 short-lived market surge powered at least in part by the ultimately incorrect expectations that the Brexit vote would end with Britons voting to keep their nation’s long-time ties to the European Union.

© 2015 Prospect News.
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