Capital Destruction Rages Beneath S&P 500 Tranquility

Friday, November 20, 2015
By Paul Martin

by Wolf Richter
November 20, 2015

Monday, junk bonds languished after a brutal uninterrupted selloff that had lasted eight trading days. Tuesday and Wednesday, junk bonds rallied. But on Thursday, that rally came to “an abrupt end,” as S&P Capital IQ LCD put it, without an “obvious catalyst.”

Energy junk bonds got broadly hammered. But Chesapeake Energy saw its $11.6 billion in junk bonds collapse on heavy volume, while its Credit Default Swaps (CDS) — which investors buy to protect against defaults — jumped to the highest level ever, signaling that the company is distressed far beyond its credit rating (BB, two notches into junk), and that a big downgrade is due.

Its shares plunged 10% to $5.40, a 13-year low.

“Market sources were divided over whether investors were capitulating on the credit or fast-money shorts were just taking advantage of the situation, S&P Capital IQ’s LCD HY Weekly reported.

Chesapeake’s 6.5% notes due 2017 plunged 10 points to around 70 cents on the dollar, yielding about 30%, according to LCD. A months ago, they were still trading at 96.5 cents on the dollar, yielding 8.7%. Its 5.75% notes due 2023 plunged six points to about 42 cents on the dollar, down from 71 a month ago. Its $1.5 billion of floating-rate notes due 2019 fell about 4 points to 47. Its 5.375% unsecured notes due 2021 dropped the most, down 9 points to 41 cents on the dollar.

Picking up energy junk bonds for cents on the dollar – that “lifetime opportunity” hedge funds have been promoting – has been a bloody trade. And now investors fear the worst.

The Rest…HERE

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