High Yield Weekly Insight 12/15/2017

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.4 billion and year to date flows stand at -$18.5 billion.  New issuance for the week was $6.0 billion and year to date HY is at $273 billion, which is up 23% over the same period last year.

(Bloomberg)  Corporate Credit Impacts of Proposed Tax Legistlation

• As Republicans target the passage of tax policy by year-end, high yield issuers may be net losers, while the benefits of accelerated depreciation are irregularly distributed. The potential for a cap on the deductibility of net interest expense will be felt more broadly.
• Capital-intensive industries, including materials and energy, and the highly levered communications sector potentially have the most to lose from tax-reform proposals limiting interest deductibility. Strong cash flow and lower average debt loads vs. revenues leave technology and consumer staples with limited exposure. Carry-forward provisions would benefit more cyclical sectors, allowing companies to apply interest expense not deducted in a low-earnings year to earnings over some future period.
• Issuers such as Sprint and Charter among communications issuers, and Halliburton and Chesapeake within energy, are among those that would lose some interest deductibility under the Senate proposal.
• The percentage of issuers with interest expenses exceeding 30% of operating income, however defined, climbs steadily as ratings fall. While a negligible number of issuers rated between AA and BBB would be unable to deduct the full amount of interest expenses, assuming the use of Ebitda, almost all triple-C issuers would be affected.
• Methodology differences between the House and Senate bills regarding interest deductibility could have wide-ranging effects for issuers. Both Congressional bodies entertain adjusted results, though the House plan to use a measure closer to Ebitda would mean about 25% of all companies would see some effect vs. about 40% under the Senate plan.

(New York Times)  Fed Raises Interest Rates as Focus Turns to 2018

• The Federal Reserve, in a widely expected decision, raised its benchmark rate by a quarter of a percentage point, to a range of 1.25 percent to 1.5 percent.
• The Fed also predicted stronger economic growth over the next three years. It forecast 2.5 percent growth in 2018, well above its previous forecast of 2.1 percent growth in 2018, published in September. Janet L. Yellen, the Fed chairwoman, said the faster growth forecasts reflected an assessment of the $1.5 trillion tax cut moving through Congress.
• Officials did not deviate from their 2018 outlook for interest rates or inflation and continued to signal three interest rate increases next year.

(Business Wire)  T-Mobile announces the acquisition of TV tech pioneer, Layer3 TV, Inc.

• T-Mobile US, Inc. president and CEO John Legere unveiled the next phase in the Un-carrier’s mobile video strategy, announcing plans to launch a disruptive new TV service in 2018. To fuel that, Legere also announced the Un-carrier has signed a definitive agreement to acquire TV technology innovator Layer3 TV, Inc. and will work with Layer3 TV’s leading technology and talent to create T-Mobile’s new TV service.
• “People love their TV, but they hate their TV providers. And worse, they have no real choice but to simply take it – the crappy customer service, clunky technology and outrageous bills loaded with fees! That’s where we come in. We’re gonna fix the pain points and bring real choice to consumers across the country,” said John Legere, president and CEO of T-Mobile. “It only makes sense for the Un-carrier to do to TV what we’re doing to wireless: change it for good! Personally, I can’t wait to start fighting for consumers here!”
• The Un-carrier will build TV for people who love TV but are tired of the multi-year service contracts, confusing sky-high bills, exploding bundles, clunky technologies, outdated UIs, closed systems and lousy customer service of today’s traditional TV providers. And people are tired of all the bull that comes bundled with Big Cable and Satellite TV – America’s #1 most-hated industry. In fact, 8 of the 10 brands with the lowest customer satisfaction scores in America are cable and TV providers1.
• “We’re in the midst of the Golden Age of TV, and yet people have never been more frustrated by the status quo created by Big Cable and Satellite TV,” said Mike Sievert, Chief Operating Officer of T-Mobile. “That’s because the world is changing – with mobile video, streaming services, cord cutting, original content and more — and yet, the old guard simply can’t – or won’t – evolve. It’s time for a disruptor to shake things up and give people real choice like only the Un-carrier can.”

(Bloomberg)  Freeport Returns to Copper Focus, Grasberg Next Hitch

• Resolving its Contract of Work dispute covering its Grasberg mine with the Indonesian government is the key to current operations and Freeport-McMoRan’s future prospects. Grasberg accounted for a third of Ebitda in 2016 and Grasberg Block Cave will be the world’s largest underground mine when developed. Freeport, rated B1/BB-, is on positive outlook from Moody’s, with its bonds trading in-line with Ba2 metals and mining peers.
• Fighting off low commodity prices, Freeport-McMoRan has restructured to return its focus to its leading copper business. Freeport reached its $10 billion net-debt target in 3Q through execution of its operating plans, aided by recovering copper prices. A contract dispute and production shortfalls at its Indonesian Grasberg mine have hampered Freeport’s progress and may affect long-term prospects. Once Grasberg is resolved, the company will evaluate capital allocation among growth projects and dividends.
• Freeport-McMoRan reported 3Q adjusted Ebitda of $1.6 billion as the price of copper increased by 35% vs. 3Q16. This was the company’s best quarter since 4Q14 and put Freeport on pace for its best year since 2014.
• Freeport-McMoRan’s 3Q cash from operations exceeded capital spending and shareholder rewards for the sixth straight quarter as outlays have been significantly reduced. Freeport devoted $314 million to capital expenditures in 3Q and plans to spend $1.5 billion in 2017, down vs. $1.8 billion at the start of the year. This would be the lowest on an annual basis since 2010. Assuming normal operations at Grasberg, Freeport expects 2017 cash from operations of $4.3 billion, based on a copper price of $3 a pound for 4Q.