Author: Kathryn Bailey

Fund Flows & Issuance: According to Lipper, for the week ended June 7, investment grade funds posted a net inflow of $3.731bn. Per Lipper data, the year-to-date net inflow into investment grade funds was $61.689bn. Per Bloomberg, investment grade corporate issuance for the week topped $18bn. Through the week, YTD total corporate bond issuance was $665.12bn, which is up ~3% from 2016.

Bloomberg Barclays US IG Corporate Bond Index OAS started the day on Friday 113:

• 2017 wide/tight: 122/111
• 2016 wide/tight: 215 (a new wide since Jan. 2012)/122
• 2015 wide/tight: 171/122
• 2014 wide/tight: 137/97
• All time wide/tight back to 1989: 555 (Dec. 2008)/54 (March 1997)

(WSJ) Amazon Fights Wal-Mart for Low-Income Shoppers

• Amazon.com Inc. is dropping its membership price for low-income shoppers, going after a Wal-Mart Stores Inc. stronghold.
• The online retailer giant said Tuesday that it will offer a nearly 20% segment of the U.S. population—people who obtain government assistance with cards typically used for food stamps—a $5.99 monthly Prime membership, less than the $10.99 a month or $99 annual plan for other consumers.
• The new Prime offering takes direct aim at Wal-Mart, which counts on shoppers who receive government assistance for a large percentage of sales. Wal-Mart generated about $13 billion in sales last year from shoppers using the Supplemental Nutrition Assistance Program, or SNAP, accounting for around 18% of the money spent through the program nationwide.
• Those customers also spend additional income while in Wal-Mart stores.
• Amazon will require cards typically used for food stamps as an initial measure to determine participant eligibility, although they can’t yet be widely used for shopping online.

(Bloomberg) U.S. Natural Gas Heads for Weekly Gain on Hot Weather Outlook

• Natural gas for July delivery +1.8c to $3.046 at 9:23am (Friday) on Nymex, setting pace for first weekly gain in four weeks.
• Temperatures may above normal from West Coast to Great Lakes region June 19-23: the Weather Company
• “A little bit of hot weather seems to be providing some support,” says Gene McGillian, manager of market research at Tradition Energy
• The fact “that we’re basically getting ready to enter the prime months of summer cooling season might be putting some hesitation on the minds of the sellers”

(Bloomberg) From ‘King Arthur’ to ‘Mummy,’ Summer Is a Bummer in Hollywood

• Even “Wonder Woman” may not be able to save the summer for Hollywood.
• The acclaimed superhero movie is only the second big hit in an otherwise dismal season for the film industry, which typically counts on May to early September for about 40 percent of the year’s revenue. A rash of box-office disappointments, starting with “King Arthur: Legend of the Sword” and continuing through “Baywatch,” is likely to repeat this weekend, whenUniversal Pictures’ “The Mummy” lurches into theaters.
• Even if the rest of this season’s films perform in line with estimates, summer 2017 is likely to just edge out 2014 — the worst summer for blockbuster films since 1976, by some measures, according to Doug Creutz, a Cowen & Co.
• As some blockbuster films fall short, the market for smaller films is also getting squeezed, Creutz said. “Baywatch,” “Snatched” and “Diary of a Wimpy Kid: The Long Haul” underperformed his estimates by more than 50 percent. Concentration at the box office, with fewer movies sharing a majority of the spoils, has intensified.
• The best solution for the industry is probably just to make better movies, said Wunderlich’s Harrigan. “The movie business is not a zero-sum game,” Harrigan said. “If you get good movies the box office will improve.”

(Bloomberg Intelligence) Chubb’s 9x Fixed-Charge Coverage Is Above Allstate, Hartford

• Chubb and Travelers’ superior fixed-charge coverage, at over 9x, stems from their steady profitability and moderate leverage. Their coverage ratios are about two percentage points above Allstate and Hartford, which operate at a mid-7x level.
• Allstate’s leverage is higher, at 23%, and its results haven’t been as steady as Chubb’s. Hartford’s profitability has suffered from weak results in its personal auto line, which it’s revamping. AIG incurred a loss in 2016 as it boosted reserves repeatedly.
• Peer Comparison: Chubb’s leverage and fixed charge coverage ratios are in-line with Travelers and superior to the other three insurers’. Chubb is rated A3/A/A, similar to Travelers (A2/A/A+) and Allstate (A3/BBB+). AIG is rated Baa1/BBB+/BBB+ negative, and Hartford is rated Baa2/BBB+.

(Bloomberg BNA) Dow-DuPont Merger Inches Toward Finish Line With Australian OK

• DuPont Co. and the Dow Chemical Co. are one step closer to closing their $78.5 billion merger after Australia cleared the deal on June 8, but they still face three important hurdles.
• The deal is still being weighed by a few major merger review authorities — the U.S. Justice Department, India, and Canada. The tie-up is the first stage in a planned division of the combined Dow-DuPont business into three separate companies in agriculture, materials science, and specialty products.
• Under the companies’ agreement, the deadline to complete the merger is Aug. 31. Dow’s Director of Public Affairs, Rachelle Schikorra, confirmed to Bloomberg BNA that companies expect the merger is on track to close in August with the intended spin-offs completed 18 months thereafter.
• The deadline for public comment in India was April 10. Following public comment, the Competition Commission of India as a standard operating procedure asks for information from the parties and must generally reach a final determination 45 days after it receives the companies’ submissions.
• Because the process in the U.S. and Canada is confidential, information on where the companies stand in those merger reviews is unavailable. Canada’s antitrust agency publicly announces its merger decisions on a monthly basis only, but a spokeswoman confirmed that the bureau is still reviewing the merger.

Fund Flows & Issuance: Corporate bond issuance for the week topped $25bn, which is higher than most market participants had expected in a holiday-shortened week. Through the end of this week, YTD total corporate bond issuance was $646bn+ (Source: Bloomberg).

(NYP) Cable giant Charter snubbed a buyout bid from Verizon

• Verizon boss Lowell McAdam, his company facing slowing sales of mobile phones, made a proposal to acquire cable-TV giant Charter Communications in recent months, three sources told The Post.
• The offer — valued at between $350 and $400 a share, and well over $100 billion, according to two of the sources familiar with the move — was rejected by Liberty Media-controlled Charter because it was too low — and because Charter was not ready to sell.
• Verizon, whose archrival AT&T has moved to expand beyond the wireless world by buying DirecTV and Time Warner, also recently expressed interest in another Liberty Media property, Sirius XM Holdings, sources said.
• Verizon’s interest in SiriusXM didn’t get as far as a bid, the sources said.
• Also standing in the way of Liberty Media agreeing to a deal for any of its units is the tax implications, which would be unpalatable to its billionaire chairman John Malone, sources said.

(Business Wire) Chevron Highlights 2016 Performance and Future Plans at Annual Meeting of Stockholders

• Chevron Corporation (NYSE: CVX) today provided an overview of the company’s 2016 operational and social performance and future growth plans for the company at its 2017 Annual Meeting of Stockholders in Midland, Texas.
• “2016 was a transition year for Chevron and the industry,” said John Watson, chairman of the board and chief executive officer. “We took significant actions to reduce costs, limit cash consumption and protect the balance sheet. As oil prices improved, recovery in earnings was evident in the second half of the year. This progress has continued into 2017.”
• Watson reiterated that he is confident about the company’s future. “We are well positioned with a strong portfolio and the right business model, including a profitable downstream and chemical business and an upstream portfolio of shorter cycle opportunities, highlighted by our enviable position in the Permian Basin,” said Watson. “Our long-term strength is also underpinned by projects in Kazakhstan, Australia, the deepwater Gulf of Mexico, and attractive future options in West Africa, South America, Asia and North America.”

(Fortune) State Street Takes On Wall Street’s Gender Gap

• The financial services industry has long faced a pipeline problem in recruiting and promoting women—and its culture is one of the biggest obstacles. In the 1980s and ’90s, as asset management became a dominant branch of the economy, the sector earned a reputation as a particularly frat-house-like branch of the corporate boys’ club.
• State Street wasn’t immune to such behavior. Since the early 1990s, 30 gender discrimination complaints have been filed against the firm at the Massachusetts Commission Against Discrimination. Most have been dismissed or settled, but a few have attracted embarrassing publicity.
• Company veterans say such incidents were overblown in the press and involved just a few bad apples. Still, such history may be reflected in the fact that there are few women among State Street’s top leaders, most of whom began their careers at least 20 years ago. At the time, “the image of the industry was so tarnished,” notes Evelyn Murphy, former lieutenant governor of Massachusetts and founder of the WAGE Project, a campaign to end the gender pay gap. “For women who were graduating from business schools and colleges, [finance] was not an inviting place to go work.”
• Despite the reputational troubles, ­financial services companies have largely caught up with corporate America when it comes to women in management. The problem is that women stall at the vice presidential rank. Imagine State Street’s 35,000 employees as a pyramid. At the bottom, there are roughly 17,000 associates and fund accountants, of whom 53% are women. A couple of levels up are assistant vice presidents—middle managers, essentially—and again, there’s a relatively high share of women, at 42%. But the numbers keep declining as you climb. At the top of the pyramid—senior vice presidents and above—only 27% of the positions are filled by women.
• In 2012 the company announced its first explicit gender-parity goals. Aiming for fifty-fifty at the top right away seemed entirely unrealistic. Instead, State Street aimed for 27% women in senior management roles within three years, up from 24% at the time. They raised the target to 28% in 2015; they’re due to raise it again this year. The percentage of women at the SVP level and higher has steadily risen, and there are now three women on the firm’s 15-­person management committee, up from just one in 2010.
• Earlier this year, State Street promoted six people to the executive vice president ranks, of whom three were women—the first time in company history that women accounted for 50% of executive-level promotions. The milestone brought Hooley satisfaction. “It’s been eight frustrating years, but I think we’re finally starting to make some traction,” he says.

(Bloomberg) American Tower Said to Explore Purchase of Spain’s Cellnex

• American Tower Corp. is exploring a bid for Cellnex Telecom SAto expand in Europe as the Spanish tower operator’s main shareholder considers selling assets as part of a merger, according to people familiar with the matter. Cellnex surged in Madrid trading.
• Any offer from American Tower would hinge on the successful combination of the Spanish company’s largest shareholder, Abertis Infraestructuras SA, with Atlantia SpA, the people said, asking not to be identified as the information is private. Atlantia would determine whether to sell the Abertis assets once the deal is concluded, one of the people said. The Italian company has said it expects the deal to close in the fourth quarter.
• Cellnex shares rose 5.1 percent to $18.84 at 10:33 a.m. in Madrid on Wednesday after earlier gaining as much as 7.3 percent, the biggest intraday jump since 2015. The shares had risen about 31 percent this year through Tuesday, giving the company a market value of about 4.2 billion euros ($4.7 billion).
• American Tower, which has a market value of about $56 billion, has yet to make a formal offer for the Spanish firm, another person said. No final agreements have been reached with any of the parties, and the discussions may not result in a deal, the people said.

(Bloomberg) The Whistleblower Behind Caterpillar’s Massive Tax Headache Could Make $600 Million

• In the the spring of 2008, finance executives fromCaterpillar Inc. gathered for a few days of meetings in the Peoria Civic Center, a few blocks from company headquarters. Early in the proceedings, Eugene Fife, chairman of the audit committee, reminded the attendees that they cradled Caterpillar’s reputation in their hands.
• It would take just one or two wayward stewards to wreak havoc, Fife said, even at a company as mighty as Caterpillar, the world’s largest maker of bulldozers and other construction equipment. Anyone aware of financial malfeasance or trickery was obliged to report it immediately. Later, then-Chief Executive Officer Jim Owens pressed the point, saying he slept well because he couldn’t imagine Caterpillar experiencing the sorts of ethical lapses that had doomed Enron Corp. and other companies.
• Listening with dismay was Daniel Schlicksup, an accountant who’d been with Caterpillar for 16 years. He’d been telling his bosses that the company was engaged in an overseas tax arrangement that, by his reckoning, had helped it illegally avoid more than $1 billion in taxes. Now, as Owens spoke, Schlicksup concluded that no one had passed his warnings to the CEO. “I thought to myself, ‘Jim, it’s happening here,’  ” Schlicksup later said in sworn testimony. “ ‘You just don’t know it.’  ”
• His missives began a chain reaction that’s still in motion. The IRS, aided by documents Schlicksup provided, concluded in 2013 that Caterpillar had employed an “abusive” tax strategy; the agency later demanded $2 billion in back taxes and penalties. In early 2014 a U.S. Senate investigative committee, with input from Schlicksup, grilled executives and concluded the company had avoided taxes on more than $8 billion in revenue.
• Schlicksup, now 55, parted ways with Caterpillar five years ago. The company has portrayed him in court filings as a paranoid, self-righteous employee who buried his own future there. But if the IRS collects what it claims it is owed, Schlicksup might end up the best-paid whistleblower of all time, with a potential paycheck of $600 million, while Caterpillar, the 92-year-old pride of Peoria, will experience something unfamiliar: public humiliation.
• For all its complexity, the basics are easy enough to understand: Caterpillar essentially flipped the parts profit allocation so the new Swiss entity would be credited with 85 percent of the income on those sales. The company then paid taxes on those earnings at rates ranging from 4 percent to 6 percent, as negotiated with the Swiss tax authorities.
• Caterpillar wound up effectively keeping two sets of books. The public one attributed the bulk of parts profits to Geneva, with its puny tax rate. An internal ledger known as “accountable profits” tracked the operating income of the divisions and calculated employee bonuses accordingly, says a 2014 report on CSARL by the Senate Permanent Subcommittee on Investigations. Under former Senator Carl Levin, a Michigan Democrat, the subcommittee scrutinized tax avoidance strategies at Cat, Apple, HP, and Microsoft.
• In court filings, Caterpillar says it took Schlicksup seriously, but he was just wrong. “Caterpillar has investigated every one of Mr. Schlicksup’s complaints and has been satisfied with the investigative process and the conclusions drawn,” the company told OSHA. “Mr. Schlicksup, however, was, and continues to be, unwilling to accept that investigations are initiated, closed, and owned by Caterpillar and that he is not entitled to know the outcomes of investigations.”