Junk Bond Investors Had Nightmares Over These Trades in 2018
The debt may still eke out positive returns for 2018, but any gains now are coming after losses in October and November.
(Bloomberg) -- High-yield investors are on track to end the year close to where they began, but it’s been a terrifying ride.
The debt may still eke out positive returns for 2018, but any gains now are coming after losses in October and November. Those declines, along with a rout in stocks and oil prices, were triggered by rising trade tensions and jitters about slowing economic growth. Many investors are on the sidelines now, even if some securities are starting to look cheap by the standards of the last few years.
“Right now, nobody wants to be a hero,” said Randall Parrish, a senior portfolio manager at Voya Investment Management, which manages $209 billion. He’s hoping yields that have spiked to more than 7 percent -- the highest in two-and-a-half years -- will lure some investors back into the market in January.
Read more in the Credit Brief: Western Asset Cautious on High-Grade Debt
If the securities finish in the red this year, it will be the first negative year since 2015, and only the third since 2008. But amid the volatility, some bonds stood out as the worst performers. Here’s a look at what went wrong.
American Tire Distributors
Selling replacement tires generated reliable revenue for this company for years, which is part of why private equity firms TPG Capital and Ares Management LP loaded it up with so much debt and launched an acquisition spree. Then, in the first half of the year it started losing key suppliers: Goodyear Tire & Rubber Co. and Bridgestone Corp. backed away. In another blow, Sears Holdings Corp.’s auto centers began installing tires that customers bought on Amazon.com, effectively creating a formidable new competitor. In October, the company filed for bankruptcy.
American Tire’s bonds plunged in April, falling to around 40 cents on the dollar from par in a matter of days. Over the rest of the year, they declined further, and now trade at about 15.75 cents on the dollar.
Sanchez Energy
The Houston-based oil explorer has been missing production targets after spending over $1 billion last year to acquire new acreage in Texas’s Eagle Ford Shale region. A complicated capital structure stemming from the acquisition means much of the money the company is making can’t be used to pay down existing debt. Weak output, combined with free-falling oil prices, sunk the company’s bonds by about 70 cents on the dollar to record lows. Sanchez said earlier this month that it hired Moelis & Co. as it weighs strategic alternatives, and debtholders are also hiring up for restructuring talks.
Ultra Petroleum
Natural gas driller Ultra Petroleum emerged from bankruptcy in 2017 only to be pummeled by low gas prices and weak production levels. It entered a bond exchange agreement with noteholders in October that would let it reduce its debt load by around $250 million, and give it until 2024 to pay back debt that would have otherwise matured in 2022. That bought it some time to avoid another bankruptcy. But the existing bonds have been hit by the exchange, which creates new secured debt that is ahead of bondholders in getting repaid if the company actually does file for court protection.
High Ridge Brands
High Ridge focuses on lower-priced products, but Walmart Inc. is no longer selling some of its key products, which has pressured its revenue. Price cuts from bigger competitors like P&G and Unilever also weighed on sales. Amid these woes, High Ridge’s $250 million bond lost more than half its value between February and June.
Jupiter Resources
The Canadian natural gas company backed by Apollo Global Management LLC struggled this year to navigate weak energy prices and service debt that it took on in 2014 to purchase natural gas assets in Alberta. It faces an earnings cliff next year as most of the gas hedges that cover about 75 percent of its production are due to end. The company reached an agreement in October to convert about $1 billion of its debt to equity, which noteholders approved on Wednesday. The notes now trade around 35 cents, from about 62 cents in January.
--With assistance from Allison McNeely.
To contact the reporter on this story: Claire Boston in New York at cboston6@bloomberg.net
To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Dan Wilchins
©2018 Bloomberg L.P.