CAM Bond Funds – Page 5 – Cincinnati Asset Management

Fund Flows & Issuance: According to Wells Fargo, flows week to date were $0.3 billion and year to date flows stand at $1.1 billion. New issuance for the week was $1.2 billion and year to date HY is at $1.4 billion.

(Business Wire) Williams and Williams Partners Announce Financial Repositioning for Long-Term, Sustainable Growth

Williams and Williams Partners L.P. announced an agreement to permanently waive payment obligations under the incentive distribution rights held by Williams and convert Williams’ economic general partner interest into a non-economic interest for 289 million newly issued Williams Partners common units
The estimated transaction value is approximately $11.4 billion. Following the IDR Waiver, Williams will hold approximately 660 million Williams Partners common units, representing approximately 72% of the common units outstanding
Williams also announced that it expects to purchase newly issued common units of Williams Partners at a price of $36.08586 per unit. Williams expects to fund the unit purchase with equity. With respect to units issued to Williams in the private placement, Williams Partners will not be required to pay distributions for the quarter ended December 31, 2016 and the prorated portion of the first quarter of 2017 up to closing of the private placement
As a result of the measures announced today, Williams expects that Williams Partners will not be required to access the public equity markets for the next several years. In addition, the Transactions result in debt reduction at Williams Partners and a meaningful increase in its cash coverage ratio to approximately 1.2x in 2017 and maintenance of strong coverage in excess of 1.1x thereafter
Strengthening Williams Partners’ coverage and credit profile through the Transactions will benefit stakeholders in Williams Partners, including Williams. In addition, maintaining Williams Partners as a strong, separate entity provides on-going strategic and financial flexibility to Williams, enabling it to capitalize on future opportunities to grow both organically and inorganically

(Business Wire) Parsley Energy Buys Permian Properties for $607 Million

Parsley Energy Inc. is buying oil and gas properties in America’s hottest shale play for $607 million as it seeks to boost production by almost 60 percent this year
The acquisition comprises 23,000 net acres of land adjacent to the company’s existing operations in the Midland and Southern Delaware portions of the Permian Basin
The Permian shale formation straddling West Texas and New Mexico has been a hot spot for deals and the center of a revival in U.S. oil drilling as producers have managed to make a profit in the region even during the worst price crash in a generation

Sabine Pass Liquefaction was recently upgraded to BBB- by Fitch. This makes the Sabine bonds rated investment grade by two of the three major rating agencies.

(Bloomberg) Valeant Sells $2.1 Billion in Assets to Ease Debt Burden

Valeant Pharmaceuticals agreed to sell about $2.1 billion in assets in two deals, an important first step in the struggling drugmaker’s endeavor to get cash and begin easing its debt burden
L’Oreal SA, the Paris-based cosmetic giant, will pay Valeant $1.3 billion for three skin-care brands. Valeant will also sell its Dendreon Pharmaceuticals unit to closely held Chinese conglomerate Sanpower Group Co. for about $820 million. Valeant’s shares and bonds jumped after the news
The agreements mark Valeant’s biggest divestitures in almost three years, and a start to its efforts to pay down about $30 billion in debt. It’s a significant break for Chief Executive Officer Joe Papa, who took over in May to help turn around a company that had been embroiled in scandals about high prices and accounting that led to legal and regulatory investigations
Proceeds from both sales will be used to permanently repay term-loan debt under Valeant’s senior credit facility, according to the company. The Sanpower transaction is expected to close in the first half of this year, while the sale to L’Oreal should close in the first quarter

(Bloomberg) Sprint Debt Upgraded by Moody’s on Better Performance, Liquidity

“Despite the heavy promotional activity, profitability has remained stable due to Sprint’s cost-reduction initiatives,” Moody’s said, adding that annual savings could top $2 billion. The more solid footing “has reduced Sprint’s refinance risk and its dependence upon the often-volatile high-yield bond market,” Moody’s said. Sprint also benefits from implicit support of its parent, SoftBank Group Corp., the report said.
Sprint has struggled to improve its finances under Chief Executive OfficerMarcelo Claure. The unprofitable carrier, based in Overland Park, Kansas, has had to borrow money using assets including airwave licenses as collateral to help finance the business. Through promotions such as half-off pricing, it has curbed subscriber defections and turned in its first annual increase in seven years.

(New York Times) Senate Takes Major Step Toward Repealing Health Care Law

In a 51 to 48 vote, the Senate took their first major step toward repealing the Affordable Care Act, approving a budget blueprint that would allow the health care law to be gutted without the threat of a filibuster.

Fund Flows & Issuance: According to Lipper, for the week ended January 11th, investment grade funds posted a net inflow of $4.029bn. The total year-to-date net inflow into investment grade funds ended the week at $6.215bn. Per Bloomberg, investment grade corporate issuance through Thursday was $38.8bn. Thus far, $92.8bn of investment grade corporate bonds have been issued in January, while consensus estimates call for $112bn for the full first month of the year.

(Bloomberg) Teflon Chemical Cases Face Uncertain Fate If Dow, DuPont Merge

Uncertainty cloaks DuPont Co.’s liability for 3,500 toxic tort lawsuits over a Teflon-related chemical as the company proceeds toward a merger with Dow Chemical Co.
PFOA has been found in drinking water in West Virginia and Ohio, near the Parkersburg plant. In the first three of those 3,500-plus cases, DuPont lost to residents of that area who claimed DuPont’s PFOA was responsible for their cancer.
DuPont’s spinoff, Chemours Co., will defend the PFOA cases although DuPont has been the named defendant.
Tom Claps, litigation analyst at Susquehanna Financial Group LLLP, said his company estimates DuPont will be liable for about $550 million for settlement of the current 3,500-plus PFOA cases. Chemours is required to reimburse DuPont for that amount, as the companies agreed in 2015.
“However, DuPont must write the initial PFOA checks to plaintiffs in these cases, and will then go after Chemours for reimbursement,” Claps said.
According to the Environmental Protection Agency, PFOA was found in blood serum in 99 percent of the U.S. general population between 1999 and 2012, but that percentage has been decreasing as domestic companies phase out production of the chemical.
The agency issued a health advisory in 2016 limiting PFOA exposure to 0.07 parts per billion after studies in test animals showed the chemical has adverse health effects, including cancers and impacts on development and the immune system.

(Moody’s, CAM notes) Constellation Brands Raised to Investment Grade by Moody’s

The rating upgrade reflects Constellation’s strong brand portfolio and favorable category trends, and its commitment to manage its net debt/EBITDA leverage to around 3.5x compared to a historical targeted range of 3x to 4x.
Moody’s expects that Constellation will maintain strong liquidity, characterized by over $1.4 billion in annual operating cash flow and $1.15 billion in revolving credit facilities with substantial borrowing availability.
With this Moody’s upgrade, Constellation is now rated investment grade by all three rating agencies.

(Bloomberg) ‘End of Covenants’ Sparks Revolt Over Erosion of Bond Safeguards

The first time Adam Cohen’s Covenant Review sounded the alarm in October about a new passage creeping into bond offerings, it described the junk-rated deal from Rackspace Hosting Inc. as “outrageous” and “unprecedented.” Investors bought it anyway.
To Cohen, it seemed no one was paying attention to the fine print. So he blasted out a report titled “The End of Covenants,” ultimately fingering 18 deals with the disputed passage.
“I had to do something dire,” said Cohen, founder and chief executive officer of his New York-based firm. “By sending out something with the ridiculous title of ‘The End of Covenants,’ people figured out, ‘Wait, something’s going on here.’”
Bonds typically come with a lengthy array of standard covenants that protect bondholders by requiring company managers to maintain certain financial ratios, limit asset sales and meet certain deadlines. If they don’t, it can be deemed a voluntary default that entitles bondholders to penalty payments. The “no premium on default” passage casts doubt on those payments, according to Cohen’s firm.
Such language may be less jarring to junk-bond owners, who accept more risk and allow corporate managers more leeway in return for higher yields. Mainstream investors weren’t so forgiving.
Chatter about the covenants spread through buy-side e-mail chains and chatrooms Monday and Tuesday, with some investors urging others to contact banks to oppose the language.
The firestorm that erupted by the middle of this week pushed issuers including Marsh & McLennan, GM and Broadcom Ltd. to drop the idea. The report had struck a nerve with buyers of high-grade bonds, who already have fewer protections and aren’t eager to go down the path that led to five years of eroding protection for junk-bond covenants, as tracked by Moody’s Investors Service.

Author: CAM Bond Funds

CAM High Yield Weekly Insights

CAM Investment Grade Weekly Insights