Sinclair active, comes in; Albertsons lags; oil patch under pressure; Diamond Offshore tanks

By Paul A. Harris and Abigail W. Adams

Portland, Me., Aug. 5 – The domestic high-yield primary market was quiet on Monday as volatility roiled capital markets amid escalating trade war tensions.

New issue activity will most likely be sidelined until a modicum of stability returns to the markets, sources said.

The secondary space was weak on Monday as the sell-off in equities spilled over to high yields with investors seeking out safe havens.

Selling activity was driving the whole market down with the oil patch, in particular, under pressure, sources said.

California Resources Corp.’s bellwether 8% senior notes due 2022, Chesapeake Energy Corp.’s 8% senior notes due 2025 and Antero Resources Corp.’s 5 3/8% senior notes due 2021 were all trading off on Monday.

Diamond Offshore Drilling Inc.’s 7 7/8% senior notes 2025 also sank due to general weakness in the sector and a disappointing second quarter earnings report.

Sinclair Broadcast Group Inc.’s two tranches of senior notes remained active in the secondary space with the notes coming in slightly.

Albertsons’ recently priced 5 7/8% senior notes due 2028 (B3/BB-) were also trading down with the notes lagging their issue price.

Volatility sidelines primary market

Volatility sidelined the new issue market on Monday, sources said.

After President Trump threatened late last week to slap 10% tariffs on $300 billion of Chinese goods imported in the U.S., China fired back on Monday by weakening its yuan against the dollar.

As the trade clash between the two superpowers escalated, the capital markets, including the high-yield bond market, sold off, sources said.

A regeneration of new issue activity will almost certainly await the return of modicum of stability, a debt capital markets banker said on Monday.

The active calendar

Two dollar-denominated deals are on the active forward calendar.

Both carried over from last week.

U.S. Farathane, LLC was scheduled to start a roadshow on Monday for a $600 million offering of five-year senior secured notes.

BofA has the books for the automotive plastics manufacturer's debt refinancing deal.

Meanwhile, Sirius Minerals plc/York Potash Intermediate Holdings plc continues its effort to place $500 million of eight-year senior secured notes (/B-/B).

Guidance in the 13½% area was heard last week, well wide of the 10% to 12% initial talk. However, some conversations on the U.K.-based fertilizer company's project financing deal had taken place as high as 15%, according to a market source.

Project financing and capital expenditures represent a very small portion of the public high-yield bond market, a buyside source recounted.

That's because a lot of project finance requires investors to get up to speed on technical and sometimes arcane aspects of the project in question.

Some investors refer to such transactions, derisively, as “story deals,” because they require investors to tune in and judge what are often a highly specialized aspects – i.e. the “story” – of the project in question.

Institutional investors in the high-yield bond market much prefer a straightforward deal such as a known issuer taking advantage of market conditions to term out higher rate debt or an approaching maturity, or a mergers/acquisitions financing backing a venture undertaken by a high-profile sponsor coming with a solid slice of equity.

In $2.5 trillion of dollar-denominated high-yield bonds that have cleared the market since the beginning of 2010, only 1.18% came with proceeds devoted exclusively to capital expenditures, according to Prospect News data.

Oil patch under pressure

The oil patch was under pressure alongside the broader market on Monday.

While crude oil futures did not see the dramatic dip felt in equities, the market was bracing itself for the prospect of China undermining U.S. foreign policy by buying Iranian oil.

California Resources’ 8% senior notes due 2022 dropped almost 5 points in high-volume activity. The 8% notes were seen at 58 bid, 59 offered early in the session by one source.

The notes traded down to 57¼ towards the market close with more than $23 million in reported volume, another source said.

Chesapeake Energy’s 8% senior notes due 2027 were also trading off. The notes were down 2¾ points to 73 in the late afternoon with more than $21 million in reported volume.

Chesapeake will announce earnings prior to the market open on Tuesday.

Antero Resources’ 5 3/8% senior notes due 2021 were down about 2 points to 95½ with about $15 million in reported volume.

The barrel price of WTI crude oil for September delivery settled at $55.01, a decrease of 65 cents, or 1.17% on Monday.

However, BofA Securities analysts warned of an even sharper drop in oil futures if China begins to buy oil from Iran.

The drop could result in crude and Brent oil futures plunging $20 to $30, according to the analyst, CNBC reported.

Diamond Offshore’s earnings

Diamond Offshore’s 7 7/8% senior notes sank on Monday in response to a broader selloff in the energy sector and weak second quarter earnings.

The 7 7/8% notes dropped 5½ points to trade down to 88 in the late afternoon, according to a market source.

The bonds saw more than $22 million in reported volume.

Diamond Offshore reported a wider than expected loss with revenue of $216.7 million for the second quarter, which was a year-over-year decrease of 19%.

Sinclair active

Sinclair’s dual-tranche offering remained active in the secondary space with the notes coming in amid weakness in the broader markets.

While the notes traded down on Monday, they remained above their issue price.

Sinclair’s 5 3/8% senior notes due 2026 dropped 1 point to close Monday at par 5/8, according to a market source.

The notes saw more than $34 million in reported volume during Monday’s session.

Sinclair’s 6 5/8% senior notes due 2027 dropped a little more than 1 point to close Monday at par ¼. There was about $31 million in reported volume during the session.

Both tranches have performed well in the secondary space since pricing at par in mid-July.

The 5 3/8% notes traded as high as 102¾ and the 6 5/8% notes traded as high as 103¾ before coming in amid weakness in the general market.

Albertsons weakens

Albertsons’ recently priced 5 7/8% senior notes due 2028 weakened on Monday with the notes lagging their issue price.

The 5 7/8% notes dropped about ½ point to 99¾ in high-volume activity on Monday.

More than $32 million of the bonds were on the tape by the late afternoon.

The 5 7/8% notes, which priced at par, traded as high as par ½ after breaking for trade on Aug. 1. However, the notes have trended lower since.

The notes were still trading at a premium to their issue price last Friday, closing out last week at par ¼.

Big ETF outflows on Friday

High-yield ETFs sustained $961 million of outflows on Friday, as the threat of trade war took hold, a market source said.

However, actively managed funds saw $15 million of inflows on Friday.

Indexes tank

Indexes tanked on Monday with the high-yield market selling off amid the intensifying trade war.

The KDP High Yield Daily index dropped 51 basis points to 71.03 with the yield now 5.66%. The index saw a cumulative loss of 15 bps on the week last week.

The ICE BofAML US High Yield index slid below 10% returns on Monday.

The index dropped 77.9 bps with the year-to-date return now 9.522%. The index saw a cumulative loss of 39.6 bps on the week last week.

The CDX High Yield 30 index sank 93 bps to close Monday at 105.82. The index saw a cumulative drop of 129 bps on the week last week.

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