Investment Grade Weekly 02/12/2018

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week of February 1-February 7 were $4.0 billion. While IG flows remain resilient, the front end of the curve has benefitted at the expense of longer duration flows with $3.7 billion this week going to intermediate funds and $1.4 billion going to short duration funds while long duration IG funds suffered a $1.8 billion outflow, mostly driven by one large ETF. IG fund flows are up +0.90% YTD. Per Bloomberg, investment grade corporate issuance for the week was $17.85bn. The volatile week started with the Bloomberg Barclays US IG Corporate Bond Index trading at an OAS of 85 and the index finished the week with an OAS of 92. The index started 2018 at an OAS of 93.

(Bloomberg) IG Primary Ekes Out Double-Digit Week Despite Market Volatility

• Despite a volatile week in equities, some high-grade borrowers braved the debt markets this week to price almost $18b of new deals. This follows last week’s resurgence of corporate deals, when more than $20b of new supply flooded the market.
• Monday saw the largest corporate deal of the year so far via MPLX’s five-tranche deal for $5.5b, while Celgene brought another jumbo bond Thursday to raise $4.5b for its Juno acquisition
• Marked by wild swings in Treasury yields, equity indices and the VIX, Tuesday only saw Harley-Davidson Financial in the high-grade primary
  • The issuer wound up paying an elevated concession with some investors pointing to the parent’s 4Q earnings miss as a cause for concern
• Some infrequent issuers moved forward Wednesday and fared better than HOG the day before
  • Orderbooks were about 7.5 times covered, compared to the year-on-year average of 2.5-3 times; dealers were able to compress spreads about 23bps on average
• On Thursday, borrowers had to navigate falling primary equity indices and a rising volatility index
  • Almost half of the tranches sold that day didn’t price at the tight end of guidance as issuers including Celgene and Senior Housing Properties opted for size over price
• Despite broader market weakness, high-grade technicals remain strong with Lipper reporting $4.7b of additions into corporate IG funds for the week; IG bonds in three of the most actively traded sectors are trading mixed
  • Issuance Totals
    • Weekly volume: $17.85b
    • February volume: $27.5b

(Bloomberg) High-Grade Bonds Display Resiliency Amid Broader Market Weakness

• Investment-grade bonds in the three most actively traded sectors – financials, healthcare, and consumer discretionary – are trading mixed as the high-grade market remains largely immune to the broader market shocks.
  • Bank 10y paper is dominating financials, trading 1-4bps wider
  • Recent new issues from Celgene and McKesson are straddling their clearing levels
  • Consumer discretionary bellwethers Amazon, Ford and General Motors are 2-3bps wider; Newell Brand’s spread widening is largely name specific

(Bloomberg) Four of Top-10 Highest IG Volume Days Ever Have Been This Year

• Just as January saw extraordinary secondary trading volume for IG corporates, February is following suit.
• Feb. 6 saw $23.9b change hands, that’s the 8th highest volume session back to 2005 when the series began
• Now, just one of the top-10 has occurred before 2017. November 30, 2016 holds the #2 spot at $25.2b

(TST) Teva Nailed With S&P Downgrade

• S&P Global Ratings on Thursday, Feb. 8, lowered its ratings on Teva Pharmaceutical Industries Ltd. as the drugmaker continues to face challenges including a competitive generic drug market in the U.S.
• After the market close, New York-based S&P cut its long-term corporate credit rating on Teva to BB from BBB-. The outlook is stable.
• Teva’s American depository receipts plunged 10.6% on Thursday after the Petah Tikva, Israel, company reported fourth-quarter results that surpassed analysts’ expectations but issued guidance that came in below estimates. On Friday morning, shares were down another 2.6% to $18.15. Shares are down nearly 44% over the past 12 months and 4.6% in 2018.
• In its ratings action, S&P also lowered its issue-level rating on Teva’s senior unsecured debt to BB and gave a “3” recovery rating to the debt. The recovery rating “reflects our expectation for meaningful (50%-70%; rounded estimate 50%) recovery in the event of a payment default,” S&P said.
• Teva had total debt of $34.7 billion as of Feb. 8, according to FactSet Research Systems Inc. The massive debt load was created largely by Teva’s $40.5 billion purchase of Allergan plc’s generic business in 2016.

(Bloomberg) QVC’s Plan to Survive Amazon and Escape the Cable TV Death Spiral

• Amazon hadn’t just invaded the home turf of the home-shopping channel QVC. As it has done with food delivery, travel and online payments, the Seattle giant had more or less recreated a rival’s entire approach. In this case, the weapon was an online show, “Style Code Live,” staffed with bubbly millennials promoting beauty and fashion products you could buy on Amazon.
• “They tried to copy everything about our show,” QVC Chief Executive Officer Mike George said in an interview.
• Usually, this is the moment that foreshadows doom for a rival. But QVC didn’t bend to Jeff Bezos’s iron will. In May 2017, a little more than a year after introducing “Style Code Live,” Amazon canceled the show. The retreat proved that QVC’s formula—unscripted hosts demonstrating products to an audience of mostly women on live television—isn’t as easy as it looks. (Amazon declined to comment.)
• QVC hasn’t been immune to the ongoing struggles in retail and television. It had four straight quarters of sales declines before posting an increase last quarter. Sales in some categories, such as hair care and jewelry, have continued to struggle. Like many other pay-TV networks, QVC’s main channel has lost subscribers as more consumers drop their cable subscriptions.
• But QVC isn’t just another channel trying to adapt to the rise of cord-cutting or a retail brand looking for a toehold online. About half of QVC sales already happen online, and two-thirds of those purchases come from mobile devices. In January, after completing a $2.1 billion purchase of its rival, the Home Shopping Network, QVC Group became the third largest e-commerce retailer in North America, according to Internet Retailer. That means the combined cable channels trail only Amazon.com Inc. and Walmart Inc. among companies selling products in multiple categories.

(Bloomberg) Abbott Labs May Blow Through Rater Targets by Cutting Leverage

• Abbott Labs may achieve leverage metrics well below S&P’s and Moody’s current targets if it cuts debt by $4 billion, as the company plans and achieves profit expectations in 2018. Full access to its $11 billion of cash, plus expectations of about $2 billion of cash flow after dividends will likely provide the sources for balance-sheet repair. Though Abbott has just $500 million of 2018 bond maturities, it does have $3.8 billion in 2019 in two issues, both of which have make-whole provisions.