Valeant bonds fall despite company’s presentation; Chesapeake chopped on gas price weakness

By Paul Deckelman and Paul A. Harris

New York, Oct. 26 – Valeant Pharmaceuticals International, Inc. – last week’s favorite punching bag in both the junk bond and the equity markets after a short-seller unleashed a report making devastating allegations about the company – tried to go on the offensive on Monday – but it did not succeed in restoring much investor confidence in the beleaguered Canadian drug maker.

Valeant held a conference call on which senior executives offered a detailed rebuttal of the charges of fraudulent dealings with a specialty pharmacy company and attacked the motives of the report’s issuer. But at the end of the day, its bonds and shares, which had moved higher on Friday on expectations the company might put the matter to rest on Monday, resumed their recent slide, in heavy trading.

Elsewhere, oil and natural gas-related issues were once again being beaten down in line with lower commodity prices, with Chesapeake Energy Corp. – one of the biggest gas producers – being especially punished in very active dealings as gas prices hit a new three-year low. Gas sector peer Consol Energy Inc.’s bonds were also pushed lower.

Oil issues meantime remained under pressure as crude oil prices continued to erode.

Power producer Dynegy Inc. – which actually is a big energy user that would normally get a boost from lower fuel costs – was seen down on Monday in line with a fall in its stock after a brokerage house lowered its equity price target on Dynegy.

Primary market activity was zero, with American Energy-Permian Basin, LLC’s $560 million five-year offering the sole dollar-denominated junk deal currently being shopped around and no new developments were seen on the energy producer’s pending transaction.

Statistical measures of junk market performance turned lower across the board on Monday after having been higher all around on Friday and mixed for three straight sessions before that

Monday’s downturn was its first universally lower session in nearly two weeks, going back to Oct. 14.

Primary quiet

The primary market remained quiet on Monday, with no deals announced and no issues priced.

Two offers remain in the market.

American Energy – Permian Basin has the sole dollar-denominated deal on the active calendar, a $560 million offering of five-year senior secured first lien notes which was scheduled to price during the middle part of last week but was subsequently pushed into the present week and which continues to be shrouded in “radio silence,” according to sources.

On Monday American Energy – Permian Basin began a consent solicitation to amend its 8% senior secured second-lien notes due 2020.

The amendments would correct cross-references in the definition of junior-lien debt, and provide the company with the ability to exchange the notes with new junior-lien debt, as well the ability to repurchase notes in consideration of new equity interests or under change of control provisions or certain asset sales.

Goldman Sachs, the left bookrunner on the company’s new offering of five-year senior secured first lien notes, is the agent for the solicitation, which expires at 5 p.m. ET on Wednesday.

There is also a euro-denominated offering presently on the road.

France-based Autodistribution Group was scheduled to start a roadshow on Monday for a €237 million offering of five-year senior holdco pay-if-you-can notes (confirmed B3/expected CCC+).

The roadshow wraps up on Thursday and the deal is set to price subsequently.

Global coordinator JPMorgan will bill and deliver for the buyout financing. Credit Suisse is also a global coordinator. BNP Paribas is the lead manager.

Better backdrop for deals

Beyond those two offers, the primary market is likely to generate some new business during the final week of October, a syndicate banker said shortly after Monday’s close.

Junk bonds were flat on Monday but cash flows for dedicated high-yield funds have been positive, the banker remarked.

Last week it was reported that dedicated high-yield funds saw a whopping $3.34 billion of inflows for the week to Wednesday’s close, sources said.

Cash flows remained positive on Friday, the most recent session for which data was available at press time, according to a trader.

High-yield ETFs saw a robust $504 million of inflows on that day.

Asset managers, meanwhile, saw $155 million of inflows on Friday.

Given reasonably supportive market conditions the final week of October could see as many as three to five deals, the trader said.

Valeant off despite presentation

In the secondary market, all eyes were on Valeant Pharmaceuticals International on Monday as the Laval, Quebec-based drug manufacturer held a conference call during which it sought to address issues raised last week when short-seller Citron Research issued a report that explicitly compared Valeant’s use of a specialty pharmacy company, Philidor RX Services LLC, as a distribution channel for its drugs to the corporate chicanery that resulted in the collapse of energy giant Enron a decade ago.

Valeant’s information counter-offensive explained its relationship with Philidor and contended that no inappropriate treatment of revenues had occurred. It said that whatever sales had been generated through this channel were not material to the company’s overall operations. And it likened Citron to someone shouting “fire’ in a crowded theater and announced that it had requested that securities regulators investigate whether Citron profited from last week’s fall in its securities.

However, Valeant’s gambit failed to accomplish its primary goal of restoring investor confidence in its bonds and shares.

“They spun,” a trader said, “and the stock’s down 6 points. [Investors] did not like the spin today.”

He said that “without a doubt” Valeant was the main name in Junkbondland on Monday

He saw “a boatload” of its 6 1/8% notes due 2025 – more than $72 million by the close – changing hands in an 84¾ to 85¾ bid context, calling them “down a couple of points.”

A second trader pegged the bonds down 2 to 2½ points on the day, ending at 85½ bid.

“The whole structure was down,” he said, noting, for instance, that Valeant’s 5 7/8% notes due 2023 were down a deuce on the day at 81 1/8 bid, with over $43 million traded.

Its 6¾% notes due 2018 lost 1 1/8 points on the session, ending at 93½ bid with more than $38 million having cleared.

Also among the actives was Valeant’s 6 3/8% notes due 2020, which fell 2 points to end at 89 bid on volume of over $19 million.

Meanwhile, equity investors were apparently as unimpressed with the company’s defense as bondholders had been – Valeant’s New York Stock Exchange traded shares plunged $6.12, or 5.27%, ending at $110.4 – after having started last week above $165. Volume of 27.8 million shares was more than four times the norm.

Natural gas knocked down

Away from the Valeant bonds, a trader said that “another theme that I saw today was natural gas – it was off more than 9%, so that took down Chesapeake.” The Oklahoma City-based energy company is the second-largest natural gas producer in the United States behind ExxonMobil Corp.

Natural gas prices fell some 9.8% on the session Monday to $2.06 per MMBtu (one million British thermal units, the benchmark volume measure for natural gas). Gas prices are already down 18% since the beginning of October and a full one-third since the start of the year.

The trader saw Chesapeake’s 5¾% notes due 2023 down 3 points on the day, going home at 64 bid, with more than $25 million traded.

Another trader saw Chesapeake’s 4 7/8% notes due 2022 down nearly 3 points at 63 bid, on volume of more than $25 million.

Its 6 5/8% notes due 2020 eased to 68½ bid, with over $24 million of turnover.

Chesapeake’s NYSE-traded shares fell by 70 cents, or 8.94%, finishing at $7.13. Volume of 25.4 million shares was about 25% above normal levels.

The traders also saw Canonsburg, Pa.-based natural gas producer Consol Energy’s paper lower, in line with the fall in gas prices.

“They’re another one,” one of the traders said, quoting its 5 7/8% notes due 2022 finishing around 70 or 71, a 3 point fall. Some $18 million of the notes traded.

While the gas names were on the slide, oil credits were not doing any better, as that commodity also continued its fall. West Texas Intermediate for December delivery lost 62 cents in Monday trading on the New York Mercantile Exchange, settling at $43.98 per barrel.

A trader saw Comstock Resources Inc.’s 10% notes due 2020 off nearly 2¾ points at 68¼, while SandRidge Energy, Inc.’s 8¾% notes due 2020 lost 1 13/16 points to end just below 62½ bid.

“There you go,” another trader declared – “ugly oil, the slippery slope.”

He saw Linn Energy LLC’s 8½% notes due 2020 finishing around 28½ bid, with $11 million traded. He called the notes pretty much in the range it was Thursday and Friday, so that’s pretty much unchanged.”

Dynegy seen down

Dynegy’s 7 3/8% notes due 2022 slid by 4 points down to par, tracking the Houston-based power producer’s NYSE-traded stock lower. The shares swooned by $1.32 on the day, or 6.44%, ending $19.17, after SunTrust lowered its target price on the shares to $23 from $24 previously,

Indicators head south

Statistical measures of junk market performance turned lower across the board on Monday after having been higher all around on Friday and mixed for three straight sessions before that

Monday’s downturn was its first universally lower session in nearly two weeks, since Oct. 14.

The KDP High Yield Daily Index fell by 7 basis points on Monday to end at 67.39, after having risen by 11 bps on Friday.

Monday’s loss was the index’s second in the last three sessions, and its fourth such downturn in the last nine trading days.

Its yield rose by 7 bps to 6.51%, after having come in by 5 bps on Friday and having been unchanged on Thursday.

Monday’s rise in the yield was its second widening in the last four sessions, and its third in the last eight trading days.

The Markit Series 25 CDX North American High Yield Index lost 3/16 point on Monday to end at 102 31/32 bid, 103 1/32 offered, its first loss after two consecutive gains, including Friday’s 7/16 point rise.

Monday marked the index’s third loss in the last five sessions and its fifth loss in the last 10 trading days.

The Merrill Lynch North American Master II High Yield Index retreated by 0.011% on Monday, after having risen by 0.281% on Friday.

Monday’s decline was its second in the last three sessions and its fifth downturn in the last 10 trading days.

The loss dropped the index’s year-to-date return to 0.207% from the 0.218% cumulative return seen on Friday. However, those modest levels still remained well above the index’s worst 2015 year-to-date deficit, the 3.069% of red ink recorded on Oct. 2 – the index’s lowest level since Oct. 5, 2011, when that market measure had shown a 3.834% year-to-date deficit.

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