Junk opens 2015 quietly, primary still; Linn gains on investor update; funds lose $960 million

By Paul Deckelman and Paul A. Harris

New York, Jan. 2 – The high-yield market opened a new trading year on Friday pretty much the same way the last few sessions of the old year had played out: very quietly. Anyone who was expecting a quick resumption of meaningful activity will have to wait until next week – the first full trading week of 2015 – at the earliest.

Although the first session after the New Year’s holiday was ostensibly a regular trading session, the reality was that most desks were lightly staffed, it they were staffed at all, and many market participants took advantage of the lack of overall activity to make an early exit.

High-yield syndicate sources said there was no news out of the primary arena, although here and there were rumblings that the week ahead could see some level of new-deal activity; if that turns out to be the case, it would be the first such action since Real Alloy Holding, Inc. surprised market participants with the last junk pricing of 2014 – an opportunistically timed $305 million issue of four-year secured paper that got done on Dec. 23. That deal had been shopped around to investors earlier in the month, was thought to have been shelved for the year amid the extreme mid-month market volatility, but was quickly revived when market conditions appeared to steady.

In the secondary realm, traders saw little real activity, and most of that was pegged to news announcements.

Perhaps the most notable name was Linn Energy LLC, whose bonds firmed – though mostly on smallish odd-lot trades – in line with a gain in its shares, after the oil and natural gas exploration and production company updated investors on the company’s capital spending plans for the new year, including a prospective deal with an affiliate of Blackstone Group LP to provide up to $500 million in funding for Linn’s drilling program. It also assured the investors that Linn had sufficient liquidity of more than $2 billion and is adequately hedged to ride out the current “challenging” commodity price environment.

Statistical market performance indicators were mixed on the day Friday, after having been higher during the previous session.

They also ended the week mixed versus where they had been last Friday, after having been up across the board for the two previous weeks.

Another statistical indicator, though – the flow of money into and out of high-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends – posted its fifth consecutive weekly net outflow.

Primary thin

High-yield desks were thinly staffed on Friday, according to the few market sources who picked up telephones or answered email messages.

As expected, the first market session of 2015 – a Friday trailing Thursday’s New Year’s Day market holiday – came and went with no deals pricing and no deals announced.

Friday was in essence the second day of a four-day weekend for many market participants, a trader said.

The active forward calendar remained empty at Friday’s close.

The week ahead could see activity in the new issue market, a sell-side source said.

However possible issuers for the week ahead have yet to be identified.

A dull start

In the secondary sphere, a trader succinctly summed up the day’s activity, or lack thereof, by characterizing Friday’s session as “a real nothing day.”

At another desk, a trader observed that very little was going on,” adding that “Thursday is probably the worst day” for the year-end Christmas and New Year’s holidays to fall on “because you essentially get two three-day holidays, leading into weekends, in a row.”

While Friday was ostensibly a regular day – the early close recommended by the Securities Industry and Financial Markets Association had already taken place on Wednesday, heading into Thursday’s full market close for New Year’s Day – the reality was that many market participants were only in for part of the day, or were not in at all, the trader said.

Linn climbs after call

With overall activity thin, even the day’s busier names only saw a few million dollars’ worth of trades go down, with most of the activity coming in smaller odd-lot transactions.

One such name as Linn Energy, whose 6½% notes due 2019 firmed to 88¼ bid, up more than 2 points from their last previous round-lot levels in mid-to-late December, on volume of more than $3 million.

Its 6¼% notes due 2019 did even better, rising to 88 bid from previous levels around 83½, on more than $3 million of turnover.

Its 8 5/8% notes due 2020 gained more than 4 points to end at 91½, though on only about $1 million of round-lot activity, as well as numerous smaller trades.

Its 7¾% notes due 2021 and 6½% notes due 2021 also moved up, but with only smallish odd-lot trades seen.

Linn’s New York Stock Exchange-traded shares meantime jumped by $1.22, or 12.04%, finishing at $11.35, on volume of 17 million shares, more than four times the norm.

The bonds and shares improved as the Houston-based E&P company announced its capital spending plans for 2015 – and in light of currently weak energy prices, Linn chose to cut its oil and natural gas capital expenditures to $730 million – a 53% reduction from the $1.55 billion it spent in 2014.

To further conserve cash, Linn said that it had reduced the distribution it pays to its unit holders and the dividend that its LinnCo pays to its shareholders to $1.25 per unit or share, from the previous level of $2.90 per unit or share, on an annualized basis.

Linn also announced that it has signed a non-binding letter of intent with private capital investor GSO Capital Partners LP, the credit platform of Blackstone Group, to fund its oil and natural gas development. Subject to final documentation, funds managed by GSO and its affiliates have agreed to commit up to $500 million with five-year availability to fund drilling programs on locations provided by Linn.

Under the terms of the deal – subject to adjustments depending on asset characteristics and return expectations – GSO will fund 100% of the costs associated with new wells drilled under the two companies’ agreement and is expected to receive an 85% working interest in those wells until it achieves a 15% internal rate of return on annual groupings of wells. Linn, meanwhile, is expected to receive a 15% carried working interest during this period. Once its internal rate of return target is achieved, GSO’s interest in those wells will be reduced to 5%, while Linn’s interest will increase to 95%.

Linn also updated its investors on its liquidity and hedging status.

It said that it is about fully hedged on its expected natural gas production in 2015, 2016 and 2017, net of expected natural gas consumption related to its heavy oil operations in California. For expected oil production, Linn is about 70% hedged for this year and 65% hedged for 2016.

It also said that it has current liquidity of about $2.2 billion, with lenders having approved an increase in its credit facility borrowing base last month.

Linn said that it believes its decreased 2015 capital budget, its reduced distribution, its “significant” hedge portfolio, its approximately $2.2 billion of liquidity and its proposed strategic alliance with GSO position it “to regain its cost-of-capital advantage in the marketplace.”

Indicators mixed on day, week

Statistical indicators of junk market performance turned mixed on Friday from where they had finished on Wednesday, when they had moved higher after three mixed sessions before that.

They were mixed versus where they had ended up the previous Friday, Dec. 26 – the first mixed week after two straight weeks of having been higher all around week over week.

The KDP High Yield Daily Index fell by 3 basis points on Friday to close at 70.82. It had closed out 2014 on Wednesday unchanged at 70.85, after having suffered three consecutive losses before that. The index was not published on Thursday due to the New Year’s Day holiday.

Its yield held steady at 5.56% for a fourth straight session.

Those levels compare unfavorably with the 70.87 index reading and 5.55% yield recorded last Friday.

The Markit Series 23 CDX North American High Yield Index was down 5/32 point on the day Friday to finish at 106 1/32 bid, 106 1/16 offered. On Wednesday, the index had gained 3/32, its first advance after two straight losses, finishing out 2014 at 106 3/16 bid, 106 7/32 offered. It was unchanged on Thursday, when the index was published despite the holiday.

The CDX index was down from the previous Friday’s 106 25/32 bid, 106 27/32 offered.

But the Merrill Lynch U.S. High Yield Master II Index posted its 11th successive advance on Friday, gaining 0.022%, on top of Wednesday’s 0.001% rise. The index was not published on Thursday.

Its year-to-date return after the first session of 2015 was an identical 0.022%.

The index had finished out 2014 having returned 2.503% on the year – well below its peak level for the year of 5.847%, recorded on Sept. 1.

For the week, the index rose 0.123%, its third straight weekly gain.

During the week ended Dec. 26, it had risen by 0.48%, finishing with a year-to-date return of 2.40%

Funds lose $960 million

Meanwhile, high yield mutual funds and exchange-traded funds – considered a reliable barometer of overall junk market liquidity trends – posted a net outflow in the latest reporting week, ended Wednesday, Dec. 31 -- their fifth consecutive weekly downturn and the sixth such retreat seen over the last seven weeks.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said Friday that some $960 million more left those weekly-reporting-only funds than came into them during the week, which followed the $335.5 million outflow reported for the week ended Dec. 24.

For 2014, inflows were seen in 31 weeks, versus 21 weeks of outflows, according to a Prospect News analysis of the figures.

However, despite that roughly 3-to-2 numerical edge for the inflows, cumulative fund flows for the year were negative, finishing the year $6.266 billion in the red.

In 2013 – which had 53 reporting weeks due to a statistical quirk – inflows were seen in 33 weeks, versus 20 weeks of outflows, with total net inflows for the year tallying up to about $1.274 billion, the analysis indicated.

© 2015 Prospect News.
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