Post-holiday junk market ends mixed, some energy names rebound; Grace/GCP remains on road

By Paul Deckelman and Paul A. Harris

New York, Jan. 19 – The high yield market saw a relatively quiet post-holiday session on Tuesday, after re-opening following Monday’s market close for the Martin Luther King Jr. holiday.

Traders said that junk began the day on a firm note, in line with early gains in the equity markets, but then backed off its peak levels as stocks retreated around them middle of the session, only to come back to end the day somewhat higher.

All told, the traders said, the junk market was a mixed bag.

There was considerable activity in telecommunications and related sectors, with communications antenna-tower operator Crown Castle International Corp.’s paper firmer, on market-leading volume, in line with its shares, which bounced on Monday after having lost ground Friday on an industry website report that No. 3 U.S. cellular company Sprint Corp. plans to save as much as $1 billion annually over the next few years by relocating some of its transmission equipment to government-owned properties and rights-of-way, which would have lower rents.

But analysts expressed skepticism about the plan, allowing tower stocks like Crown Castle to rebound; that skepticism also pushed Sprint’s own bonds and shares sharply lower, with its 2025 notes probably the biggest loser in Junkbondland among the actively traded issues.

And as usual, wireline operator Frontier Communications Corp.’s big, liquid bond issues were among the market’s busiest, seen ending mixed.

Crude oil prices were mixed on the day, with benchmark U.S. crude grade West Texas Intermediate falling to intraday lows below $28 per barrel not seen since September of 2003, before finally cutting their losses bust still ending down on the day, while international benchmark Brent crude firmed slightly on the day.

That pushed and pulled oil and natural gas bonds in every direction.

Among the higher finishers were credits such as WPX Energy Inc., Memorial Production Partners, LP, California Resources Corp. and EP Energy Corp.

But downsiders within the sector included Chesapeake Energy Corp., Concho Resources Inc. and, particularly Whiting Petroleum Corp.

Recently beleaguered iron-ore miners like FMG Resources PTY Ltd. and Cliffs Natural Resources Inc. were higher on the day.

Primary market activity remained quiet, with sources noting that GCP Applied Technologies Inc.’s planned seven year-noting offering – the proceeds of which will help finance the spinoff of the company from W.R. Grace & Co. – was continuing its roadshow on Tuesday, with pricing anticipated later in the week.

Statistical measures of junk market performance were mixed on Tuesday, after having turned lower across the board on Friday. It was their second mixed session in the last three trading days and the fifth such session in the last seven trading days.

Quiet primary

There was no news in the primary market as the holiday-shortened week got underway.

Only one high yield transaction is presently on the road.

GCP Applied Technologies has been marketing a $525 million offering of seven-year senior notes (B1/B+) on a full roadshow.

The deal, via left bookrunner Goldman Sachs, was scheduled to be presented in Boston on Tuesday and is set to finish up the roadshow by presenting to investors on the West Coast of the United States on Wednesday and Thursday.

The market awaits price talk.

The Columbia, Md.-based provider of specialty construction chemicals, building materials and packaging technologies plans to use the proceeds to fund a $500 million distribution to W. R. Grace & Co.–Conn., a direct subsidiary of W.R. Grace, and for general corporate purposes.

It is possible that there will be other deal announcements later in the week, sources said on Tuesday.

There are bridged merger and acquisition financings out there, and it is possible that one of those will be announced before the end of the week, a portfolio manager said.

Friday outflows

The cash flows of the dedicated high yield bond funds were essentially flat on Friday, the most recent session for which data was available at press time, a trader said, relating numbers that were reported by Lipper-AMG.

High yield ETFs saw $65 million of outflows on the day, the trader said.

Actively managed funds saw $10 million of outflows on Friday.

However EPFR reported much more substantial outflows on Friday, according to a portfolio manager.

Friday flows were negative $957 million, said the manger, relating EPFR's daily fund flows number for the most recent market session.

Of that amount, the ETFs saw $557 million of outflows, while non-ETF accounts sustained $400 million of outflows on the day.

Early gains moderate

A trader said that “the market came out of the gate this morning stronger, along with the equity market when [stocks] were rallying,” bouncing back from big losses recorded on Friday.

However, those early gains on both the stock and bond side faded as shares fell around midday, although stocks did come back later on in the session.

For instance, the bellwether Dow Jones Industrial Average – which had ended Friday with a nearly 400-point loss – jumped by 183 points in early trading, then slid to an 88-point midafternoon deficit, before bouncing off those lows to end with a modest gain of 27.94 points, or 0.17%, at 16,016.02. Other, broader indexes had similar trajectories on the day.

Those gyrations were felt in junk bonds, which gave up their early gains to mostly end about unchanged or “a little worse,” the trader said, although he allowed that there were significant exceptions to the rule.

Tower bonds trade up

A market source said that the most actively traded pure junk issue of the session was Crown Castle International’s 5¼% notes due 2023, with over $24 million changing hands.

The Houston-based communications antenna tower operator’s New York Stock Exchange-traded shares – which had declined on Friday– ended Tuesday up 38 cents, or 0.48%, at $79.50. Volume of 4.5 million shares was about twice the norm.

The bonds and shares of antenna-tower companies gained as analysts expressed skepticism about a purported Sprint Corp. plan to save $1 billion annually by lessening its dependence on commercial antenna-space providers.

The technology website Re/code reported Friday that Overland Park, Kan.-based Sprint, the third largest wireless provider in the United States, would seek to move many of its transmission antennas to government-owned property and rights-of-way, which would potentially be less expensive.

However, analysts on Monday pointed out that many of the company’s contracts with the antenna companies like Crown Castle, SBA Communications Corp. and American Tower Corp. still have five or six years to run, meaning the move’s impact on those companies would be limited.

The naysayers spooked Sprint investors on Tuesday; its 7 5/8% notes due 2025 plunged by 3½ points to end at 66¼ bid, on volume of over $10 million. It was the largest drop of the day among the most actively traded bonds.

Sprint’s NYSE-traded shares likewise fell by 23 cents, or 8.01%, ending at $2.64. Volume of 20 million shares was about one-fifth above normal levels.

Also among the telecom names, a trader said that Frontier Communications’ 10½% notes due 2022 and its 11% notes due 2025 were both trading well, at least at the start of the day.

The Stamford, Conn.- based wireline telecom operator’s 11% notes , which had ended around 93½ bid on Friday, got as good as a 94 to 94¼ bid context on Tuesday morning, “but then they pulled back” to end around 93, the trader said.

The 10½% notes did a little better, ending the day around 94¼ to 94½ bid – up from 94 on Friday, on “pretty good volume.”

A second trader saw the11s down nearly ½ point, at 93¼ bid, with over $14 million traded.

He said the 10½’s firmed to 94 1/8 bid, up 1/8 on the day, on turnover of more than $17 million.

Energy issues mixed

In the energy arena, one of the traders noted that “some of the ones that got beat up last week were up a little.”

For instance, he said that WPX Energy’s 5¼% notes due 2017 gained more than 1 point on the day, ending at 93½ bid.

Another trader saw the Tulsa, Okla.-based exploration and production company’s paper up 1½ points, at 93¾ bid, with over $14 million traded.

Other energy credits were also better, despite the fall in West Texas Intermediate crude. The February contract – which was expiring on Tuesday – plunged as low as $27.92 per barrel during the session, its lowest level since September of 2003. WTI eventually recovered some, but not all, of its lost ground, settling in at $28.46 on the New York Mercantile Exchange, down 96 cents on the day.

Brent crude was not much better; gaining 21 cents per barrel, or 0.7% to end London ICE Futures Exchange trading at $28.76.

Nonetheless, crude credits like Houston-based Memorial Production Partners’ 7 5/8% notes due 2021 were up 5/8 point on the day to end at 25¾ bid, with over $13 million traded.

EP Energy Corp., also Houston-based, was likewise higher on the day, a trader said, its 9 3/8% notes due 2020 gaining ¼ point, to end at 35½ bid, on “pretty decent volume” of over $9 million.

Los Angeles-based California Resources Corp.’s 8% notes due 2022 finished up ¾ point at 42¼ bid, with about $8 million changing hands.

However, some oil and gas credits continued to hug the downside.

Chesapeake Energy Corp.’s 8 % notes due 2022 dropped by 1½ points on the day to end at 44 bid; more than $10 million of the Oklahoma City oiler’s bonds traded.

Midland, Texas-based Concho Resources’ 5½% notes due 2023 lost ½ point, ending at 86½ bid, with over $9 million moving around.

But the big loser was Whiting Petroleum. The Denver-based E&P company’s 5% notes due 2019 nosedived by 1¾ points to finish at 59¾ bid, with over $9 million trading, while its 6¼% notes due 2023 lost 1½ points, going out at 56½ bid, on volume of over $8 million.

Metals miners move up

The metals-mining sector – which has recently been under pressure due to declining orders from China and other global economies – was solidly higher on Tuesday.

Australia’s FMG Resources, a unit of Fortescue Metals Group, was one of the day’s big winners, with its 9¾% notes due 2022 jumping more than 2 points, to 83¼ bid. Over 412 million of those bonds changed hands.

Cleveland-based Cliffs Natural Resources 8¼% notes due 2020 were up by 11/16 point, ending at 69¾ bid, with over $10 million traded.

Indicators turn mixed

Statistical measures of junk market performance were mixed on Tuesday, after having turned lower across the board on Friday. It was their second mixed session in the last three trading days and the fifth such session in the last seven trading days.

The KDP High Yield Daily Index eased by 1 basis point, ending at 62.17, its sixth straight loss, following one gain last week, and its seventh such setback in the last eight trading days. It had also plummeted by 76 bps on Friday. The index was not published on Monday due to the holiday market close.

Tuesday’s finish was its third consecutive new low for the year so far and 52-week low, surpassing the old mark of 62.18, which had been set on Friday.

It was the index’s lowest close since June 25, 2009, when it closed at 62.04.

Its yield meantime was unchanged at 7.5%, after having widened in five consecutive sessions; on Friday, it had ballooned out by 22 bps, its sixth such rise in the previous seven sessions.

The Markit Series 25 CDX North American High Yield Index declined by 1/8 point on Monday to end at 97 11/16 bid, 97 23/32 offered, its second loss in the last three days. On Friday it had swooned by 1 3/32 points.

The index was unchanged on Monday, when it published despite the holiday close, holding the same level at which it had finished on Friday.

However, the Merrill Lynch North American Master II High Yield Index gained 0.08% on the day, its second straight improvement, following five consecutive losses.

The index was published on Monday, despite the holiday, and it rose by 0.063%, in sharp contrast to its 1.115% plunge on Friday – its biggest one-day fall so far this year.

Tuesday’s rise cut the index’s year-to-date loss to 2.718%, versus 2.725% on Monday and 2.787% on Friday – the latter being its worst level of the year to date.

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