Primary remains dormant; California Resources, Whiting Petroleum drop; funds lose $829 million

By Paul A. Harris and Abigail W. Adams

Portland, Me., Dec. 6 – The domestic primary market remained dormant on Thursday and may remain so for the remainder of the year with optimism diminishing about new issue activity in the run up to the holidays.

Meanwhile, the secondary space was volatile with most names trading down early in the session but paring their losses in the afternoon, a market source said.

The energy sector remained under pressure with few answers regarding future production levels following the closely watched OPEC meeting on Thursday in Vienna.

California Resources Corp.’s 8% senior notes due 2022 continued to be the most actively traded issue in the secondary space with the notes dropping 3 points in the high-volume activity as crude oil futures resumed their downward momentum.

Whiting Petroleum Corp.’s 6 5/8% senior notes due 2026 were second only to California Resources in trading activity with the notes also on the decline.

While the notes were largely trading sideways, Tesla Inc.’s 5.3% convertible notes due 2025 were among the volume movers on Thursday with the company’s stock passing the conversion price on its soon-to-mature convertible notes.

Avantor Inc.’s 9% senior notes due 2025 were down slightly in active trading on Thursday, giving back some of the gains seen in late November after news broke New Mountain Capital was considering an IPO for the specialty chemicals maker.

Mallinckrodt plc’s junk bonds were also losing ground on Thursday after the pharmaceutical company announced it would spin off its specialty generics business.

Meanwhile, high-yield mutual funds and exchange-traded funds – considered a reliable barometer of overall liquidity trends in the junk market – marked their third consecutive week of outflows.

Funds saw outflows of $829 million for the week ended Dec. 6, according to fund-flow statistics generated by AMG Data Services Inc.

The cumulative outflow for the year now totals $29.09 billion, according to a Prospect News analysis of the reports by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division.

Conclusion at hand

The primary market remained dormant on Thursday, trailing the Wednesday market holiday called to commemorate the death of George H.W. Bush, the 41st president of the United States.

The new issue market is all but certain to remain dormant until 2019, according to a senior syndicate banker who said that high-yield investors, in particular, would prefer to call it a year.

A lot of investors have realized returns ranging from 0% to 2%, according to the banker who added that there are also some investors ending the year with negative returns.

With volatility rocking the markets, new issue activity in the time remaining before the markets close for the holidays is unlikely to meaningfully improve those returns, the source added.

Given the choice between locking in meager returns or playing a calendar amid the present volatility, which could just as easily erode those meager returns as improve them, investors are almost certain to choose the former over the latter, the source suggested.

Accounts have plenty of cash, the official specified.

But they don't want to make commitments until they have a handle on what level of redemptions might lie in store in the early part of the new year.

Also, issuers appear prepared to wait until the new year, the source noted.

With December poised to put up a goose egg for new issuance, what about January?

It depends on the market, but January is not likely to be huge, the official said, adding that the first month of 2019 might be expected to generate $10 billion to $15 billion of new issue volume.

There is not much of a committed calendar, heading into the new year, the source said.

Energy under pressure

The energy sector remained under pressure on Thursday with the OPEC meeting in Vienna providing few answers about future production levels.

California Resources 8% senior notes due 2022 were again the most active issue in the secondary space, as they have been for much of November as crude oil futures plummeted.

The 8% notes dropped more than 3 points. They were quoted at 73½ bid, 74¼ offered with most trades between 73¾ and 74, sources said.

More than $34 million of the bonds were on the tape by the late afternoon.

Whiting Petroleum’s 6 5/8% senior notes due 2026 were also major volume movers with the notes down more than 2 points.

The 6 5/8% notes traded as low as 94 but rose as the session progressed to 95, a market source said. The notes closed Tuesday at 77.

More than $27 million of the bonds were on the tape by the late afternoon.

The barrel price of WTI crude oil slid to $50.68, a decrease of $2.21 or 4.18%, shortly before 11 a.m. ET. However, crude oil futures pared their losses and settled at $51.64, a decrease of $1.24 or 2.36%.

The OPEC meeting ended with no clear decision regarding production cuts.

Non-OPEC members, including Russia, are set to meet on Friday with doubts lingering about Russia’s willingness to support a cut.

Tesla active

Tesla’s 5.3% senior notes due 2025 were active in secondary trading although the notes were largely flat, a market source said.

The 5.3% notes closed the day just shy of 87 with more than $25 million of the bonds in play.

Tesla’s senior notes were active as stock continued to post gains despite the downturn in equities.

With stock now above the conversion price on the company’s 0.25% convertible notes due March 1, 2019, the company has the ability to issue stock as opposed to pay the maturing bonds.

There was speculation throughout 2018 about the company’s ability to repay the $920 million outstanding amount of the 0.25% convertible notes.

Tesla’s entire capital structure will improve if the notes are converted out, a market source said.

Avantor drops

Avantor’s 9% senior notes due 2025 dropped about ¾ point in active trading on Thursday, giving back some of their gains since news broke about a potential IPO for the for the specialty chemicals maker.

The 9% notes were down to par ¾ on Thursday after closing out Tuesday at 101½.

More than $17 million of the bonds were on the tape by the late afternoon.

Avantor jumped to between 101½ and 101¾ in late November after New Mountain Capital announced it was considering an IPO for Avantor, which is one of the private-equity firm’s portfolio companies.

Mallinckrodt’s spin-off

Mallinckrodt’s junk bonds dropped on Thursday after the pharmaceutical company announced it would spin off its specialty generic drug business.

The 5 5/8% senior notes due 2023 dropped 4 points to 82. The 5¾% senior notes dropped more than 4 points to 87¼.

Mallinckrodt announced prior to the market open that it would separate its specialty generic business from its innovative specialty pharmaceuticals business.

The specialty generics business would maintain the Mallinckrodt name with the specialty pharmaceutical company to be renamed.

The deal is expected to close in the second half of 2019.

Mixed Tuesday flows

With Wednesday's market close, the most recent data points regarding the daily cash flows of the dedicated high-yield bond funds were those generated on Tuesday, a trader said.

On that day flows were mixed, but essentially flat.

High-yield ETFs saw $58 million of inflows on Tuesday.

However actively managed high yield funds sustained $5 million of outflows on the day.

On the week to Wednesday's close the combined dedicated junk funds sustained $829 million of outflows, according to information posted Thursday afternoon on the Internet by Lipper US Fund Flows.

It was a heavier than expected weekly outflow, according to the trader who closely tracks fund flow data.

Indexes drop

Indexes continued to lose ground on Thursday after all declined on Tuesday after opening the week on strong footing.

The KDP High Yield Daily index was down 28 bps to close the day at 68.25 with the yield now 6.61%. The index was down 4 bps on Tuesday after rising 20 bps on Monday.

The index gained 21 bps on the week last week.

The ICE BofAML US High Yield index returned to the red on Thursday after briefly popping back to the black earlier in the week.

The index dropped 63.3 bps with the year-to-date return now negative 0.411.

The index dropped 18.3 bps on Tuesday but remained in the black.

The index was up 48 bps on Monday after a 40.6 bps gain on the week last week.

The index returned to positive territory on Monday after sinking into the red on Nov. 15 for the first time since June.

The CDX High Yield 30 index dropped 18 bps to close Thursday at 103.71.

The index was down 90 bps on Tuesday after a 32 bps gain on Monday. The index jumped 104.12 bps on the week last week.

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