Corporate bonds stuck in the mud

There’s a somewhat smoother tone to debt markets as investors await the outcome of a summit of European finance officials. Dealers no longer expect the worst and indeed sentiment has reversed with most expecting a positive outcome. The progress U.S. lawmakers are making towards a debt-reduction strategy appears to be also easing the risks in global markets where stresses and strains have kept downside pressure on yields recently. Benchmark bond yields rose as equity traders paused for thought.

Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/p.php?f=daily_analysis

NON-INVESTMENT GRADE:

OPTI Canada Inc. (OPTI) – Trudging through the Athabasca Basin using steam to extract bitumen from sand must be a frustrating challenge. But not nearly as frustrating as running out of cash to do so, which is exactly what happened to OPTI Canada forcing it to seek bankruptcy protection earlier in July. The company reckons it could extract up to 430,000 barrels of bitumen each day from its 195 million barrel proven reserves in Alberta. Bonds issued by Calgary-based OPTI soared midweek after China’s Cnooc Ltd. said it would buy the stuck-in-the-mud energy producer offering $34 million for its shares and $1.18 billion for its bonds. Cnooc will also assume $825 million in debt. Two issues were actively purchased following the announcement. OPTI has two tranches coming due in December 2014 carrying yields of 7.875% and 8.25%. Prices jumped on the bid with the bonds trading up to around 65 cents on the dollar in hope that bonds would be settled at maturity. Buyers possibly include bidding on behalf of the Chinese company. Yields rose to around 40% on the Canadian company’s Ca-rated paper following its slide into bankruptcy but today’s advance saw its yield drop back to 23%.

INVESTMENT GRADE:

DirecTV. (DTV) – A week ago shares in the digital provider of television entertainment to U.S. and Latin American audiences reached a 52-week high at $53.40. As they dip by just 0.6% midweek, at $52.50 they have fallen by a mere 1.7%. Meanwhile demand still appears intact for its 30-year issue with 2.5 buyers showing up compared to each seller according to Trace data. Buyers depressed the yield by 22 basis points to 5.77% as investors raised the price they were willing to pay for its March 2041 issue by almost $3.00 as they stretched out along the yield curve.

Philip Morris International (PM) – One day ahead of earnings, the tobacco-distributor’s 10-year deal appears to be in decent demand. At the end of May its stock hit its 52-week high at $71.75 although trading 5.5% lower at $67.85 today in anticipation of a second quarter progress update. Investors traded $40mm of its May 2021 issue rated A2 by Moody’s. Yields rose as they did on benchmark treasuries with price marked down by 43 cents per $1,000 investment. Since the end of June the basis between Philip Morris and benchmark government notes has narrowed from 100 basis points to 94 points.

MUNI-BOND CORNER:

Yesterday Morgan Stanley priced $416.8 million of Ohio general obligation refunding bonds. The debt was assigned an Aa1 rating by Standard & Poor’s and AA- at Fitch Ratings. Yields ranged from 0.85% in 2014 to 3.63% in 2024 or 48bps over the AAA scale. Most serial bonds were adjusted 10bps cheaper from retail scale in order to attract sufficient interest. Piper Jaffray priced $259.4 mm of Houston Convention Center and Entertainment Facilities Department hotel occupancy tax and special revenue refunding bonds (A2/A- by Moody’s and S&P). Yields for the first series of $119.2 mm range from 1.05% in 2013 (+65bps) to 5.24% (+1.21bps) in 2033.

On Tuesday, Moody’s placed on review for possible downgrade the triple-A ratings of Maryland, New Mexico, South Carolina, Tennessee, and Virginia. This follows its July 13 action placing the Aaa government bond rating of the U.S. on review for downgrade. On the table today is a $232mm State of Washington GO (Aa1/AA+) competitive deal being priced today at a spread of +31bps to the AAA curve. Also pricing is a tranche of $337mm State of Wisconsin’s (Aa2/AA) competitive deal.

NOTE: Andrew will be taking time off over the next week. This will be the last Corporate Bond update until Wednesday July 27.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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