CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week were $3.5bln. This brings the YTD total to +$239.6bln in total inflows. According to Bloomberg, investment grade corporate issuance for the week was $15.845bln, and YTD total corporate bond issuance was $1.04t. Investment grade corporate bond issuance thus far in 2017 is down 4% y/y when compared to 2016.

(Bloomberg) China’s Credit Rating Cut as S&P Cites Risk From Debt Growth

• S&P Global Ratings cut China’s sovereign credit rating for the first time since 1999, citing the risks from soaring debt, and revised its outlook to stable from negative.
• The sovereign rating was cut by one step, to A+ from AA-, the company said in a statement late Thursday. The analysts also lowered their rating on three foreign banks that primarily operate in China, saying HSBC China, Hang Seng China and DBS Bank China Ltd. would be unlikely to avoid default should the nation default on its sovereign debt.
• “China’s prolonged period of strong credit growth has increased its economic and financial risks,” S&P said. “Although this credit growth had contributed to strong real gross domestic product growth and higher asset prices, we believe it has also diminished financial stability to some extent.”

(Bloomberg) Teva Pharmaceutical Downgraded to ‘BBB-‘ From ‘BBB’ By S&P

• Teva announced that it had obtained amendments to restrictive financial covenants under its credit facilities, S&P Global Ratings says.
  
  • Although the amendments enable the company to more easily satisfy its leverage covenant requirement, it also leads S&P to reexamine its previous view that Teva will be able to reduce leverage to below 4x by 2018
  • In light of the revised covenants, S&P revised its forecast for 2017 and 2018
    
    • “While we continue to recognize the company’s commitment to reducing leverage, we believe it will take longer than previously expected due to ongoing pricing pressures in the generics industry that we project will continue well into 2018. We now expect 2018 leverage of about 4.6x, in contrast to our prior expectation that it would decline below 4x next year”
  • S&P cut all of its ratings on the company, including corporate credit rating to ’BBB-’ from ’BBB’. The outlook is stable.
  • The stable outlook reflects S&P’s expectation the company will reduce leverage more slowly than previously anticipated, with adjusted leverage of well over 4x over the next two years given continued generic pricing pressure and the introduction of generic competition to Copaxone in 2018.

(Reuters) Teva sells rest of women’s health business for $1.4 billion

• Teva Pharmaceuticals said on Monday it would sell the remaining assets in its specialty women’s health business for $1.38 billion in two separate transactions.
• The company, Israel’s biggest and the world’s largest maker of generic drugs, said it would use proceeds from the sales, along with those from its recently announced sale of contraceptive brand Paragard, to repay debt.
• Monday’s announcement, coupled with Teva’s announcement last week that it would sell Paragard to a unit of Cooper Companies for $1.1 billion, demonstrates the company’s commitment to delivering on its promise to generate net proceeds of at least $2 billion from the divestitures, Teva acting CEO Yitzhak Peterburg said. “With these initial divestitures we have exceeded expectations,” he added.
• Teva last week poached Lundbeck’s Kare Schultz as its new CEO, handing the industry veteran the urgent task of convincing investors of the struggling Israeli firm’s future.
• Teva has said it plans to pay down $5 billion of debt by year-end and is selling off businesses such as its women’s health business and European oncology and pain unit.

(Bloomberg) Clicks Likely Derail Bricks That Fail to Evolve

• Retailers focusing on a fast flow of goods and unpredictable inventory finds at lower prices are taking share from traditional stores.
• The rise of online shopping, information sharing and social media have created transparency in the retail marketplace. This has consumers opting for treasure hunts and values, in-store and online, and forgoing browsing stores.
• TJX, Ross, Burlington Stores, Costco, Wayfair, Overstock.com, Hayneedle and Zulily are sellers that use treasure hunts and value in their business model.