CAM High Yield Weekly Insights

CAM High Yield Market Note

5/3/2019

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $0.07 billion and year to date flows stand at $16.9 billion. New issuance for the week was $5.0 billion and year to date HY is at $77.9 billion, which is +1% over the same period last year.

(Bloomberg) High Yield Market Highlights

• U.S. junk bond returns turned negative across all ratings yesterday, with the index falling most since March 8 as stocks and oil prices fell. Equity futures rose this morning as bright spots appeared in corporate earnings ahead of jobs data.
• Yields jumped across the risk spectrum, marking the biggest increase in eight weeks as oil closed at a 4-week low
• Yields had been at 12-month lows
• Energy sector yields hit a 3-week high and returns were negative for 6 straight sessions, for the first time since mid-December
• Despite this, investors made a beeline to new bonds in the primary market
• U.S. high-yield funds reported a modest inflow this week ended
• Flows turned negative last week, for the first time time in seven weeks
• Junk bond returns dropped to 8.69% YTD, still the best since 2009 for the comparable period
• Energy returns dropped below 10% to close at 9.61% after six consecutive sessions of negative returns
• CCC were still on top of the pack, with 9.175%
• BBs stood at 8.75% and single-Bs at 8.378%
• Loans at 5.746% and IG at 5.367% 

• (Bloomberg) The Junkiest Corporate Bonds Divide Wall Street

• Bank of America sees a further “melt-up” in triple-C debt, while Citigroup urges caution.
• Triple-C debt has returned 9 percent this year, according to Bloomberg Barclays data, compared with a 2.8 percent gain for the aggregate bond index. At first glance, that seems pretty good. But the broad high-yield index, which includes less risky borrowers, is up almost the same amount, at 8.6 percent.
• Ordinarily, such a return on the broad index would equate to gains of close to 15 percent for triple-C debt, according to strategists at Citigroup Inc. “The inability of triple-C credits to materially outperform has puzzled many investors,” Michael Anderson and Philip Dobrinov wrote. This means one of two things: Either triple-C securities are cheap, or bond traders aren’t fully buying into the risk-on environment.
• Bank of America Corp in an April 26 report, strategists Oleg Melentyev and Eric Yu made a bold proclamation: “A further CCC melt-up still appears inevitable to us.”
• The two sides: Those who favor triple-C debt argue that there’s a bit more juice left to squeeze out of this high-yield rally, even if the rebound from last year looks extreme and unsustainable. The bearish strategists are cautious about wading into triple-C debt and break down which kinds of companies make up the index. According to Citigroup, about half is health-care, energy, retail and communications companies — precisely those that have too much leverage or face a much-changed business climate from even a few years ago.

(Company Filing) Western Digital Announces Financial Results for Third Quarter Fiscal Year 2019

• Western Digital Corp reported revenue of $3.7 billion for its third fiscal quarter ended March 29, 2019. The operating loss was $394 million with a net loss of $581 million. Excluding certain non-GAAP adjustments, the company achieved non-GAAP operating income of $186 million and non-GAAP net income of $49 million. Both the GAAP and non-GAAP results include lower of cost or market inventory charges of approximately $110 million in cost of revenue, primarily related to certain flash memory products that contain DRAM components.
• In the year-ago quarter, the company reported revenue of $5.0 billion, operating income of $914 million and net income of $61 million. Non-GAAP operating income in the year-ago quarter was $1.3 billion and non-GAAP net income was $1.1 billion.
• The company generated $204 million in cash from operations during the third fiscal quarter of 2019, ending with $3.8 billion of total cash, cash equivalents and available-for-sale securities. The company returned $146 million to shareholders through dividends. On February 14, 2019, the company declared a cash dividend of $0.50 per share of its common stock, which was paid to shareholders on April 15, 2019.
• “Market conditions have generally been consistent with our expectations, and while the business environment remains soft, there are initial indications of improving trends,” said Steve Milligan, chief executive officer, Western Digital. “Our expectation for the demand environment to further improve for both flash and hard drive products for the balance of calendar 2019 is largely unchanged. We are executing well on enhancing our product portfolio, driving technology advancements, rightsizing our factory production levels and lowering our cost and expense structure, all of which position us to emerge stronger as market conditions improve.”

(Business Wire) The GEO Group Reports First Quarter 2019 Results

• GEO reported first quarter 2019 net income attributable to GEO of $40.7 million compared to $35.0 million for the first quarter 2018. GEO reported total revenues for the first quarter 2019 of $610.7 million up from $564.9 million for the first quarter 2018. First quarter 2019 results reflect a $1.5 million loss on real estate assets. Excluding this loss, GEO reported first quarter 2019 Adjusted Net Income of $42.2 million.
• GEO reported first quarter 2019 Normalized Funds From Operations (“Normalized FFO”) of $60.3 million compared to $52.6 million in the first quarter 2018. GEO reported first quarter 2019 Adjusted Funds From Operations (“AFFO”) of $80.3 million, compared to $69.8 million in the first quarter 2018.
• George C. Zoley, Chairman and Chief Executive Officer of GEO, said, “We are pleased with our strong quarterly financial and operational performance, as well as, our improved outlook for the balance of the year. We have taken important steps to reactivate our idle capacity, and we are proud of the continued success of our GEO Continuum of Care enhanced rehabilitation and post-release programs. We remain focused on effectively allocating capital to enhance long-term value for our shareholders, and we believe we will continue to have access to cost-effective capital to support the growth and expansion of our high-quality services.”