Author: Rich Balestra - Portfolio Manager

07 Feb 2020

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.1 billion and year to date flows stand at $1.2 billion.  New issuance for the week was $12.5 billion and year to date issuance is at $48.2 billion.

 

(Bloomberg)  High Yield Market Highlights 

  • New issues have been well-received
  • Yet it’s looking like a risk-off day as stock futures slide on renewed fears of the spread of the coronavirus
  • Junk- bond yields have fallen 24bps in the past week. At 5.28%, they’re just 30bps off the 5.5-year low hit on Jan. 21
  • Spreads have tightened 34bps over the same period to 356bps over Treasuries
  • Even riskier debt has rallied with yields on CAAs falling below 10% for the first time in two weeks to 9.95%
  • Junk- bond investors are pouring money back into exchange-traded funds again
  • HYG and JNK, the two biggest high-yield ETFs, reported a combined inflow of $325m yesterday after $630m the previous day

 

(New York Times)  Some Takeaways From Trump’s State of the Union Address

  • President Trump framed his third year in office as an unmistakable success and his fourth as more of the same.
  • A partisan atmosphere loomed over the House floor from the very start of Mr. Trump’s speech, when Republican lawmakers chanted “four more years” after the president stepped up to the rostrum. The hostility carried through to the end, when House Speaker Nancy Pelosi ripped up a copy of the address after he finished delivering it.
  • He proclaimed that the economy was setting records, that American enemies were on the defense, and that the American spirit had been renewed.
  • “In just three short years, we have shattered the mentality of American decline and we have rejected the downsizing of America’s destiny,” he said. “We are moving forward at a pace that was unimaginable just a short time ago and we are never going back.”
  • Trump dived into the state of the economy at the top of the speech, making broad declarations about tax cuts, deregulation and the renegotiation of the North American Free Trade Agreement, the new version of which he signed into law last week.
  • Trump addressed two pieces of potential health care legislation that remain a top priority for both parties in the coming months: surprise billing and prescription drugs.
  • After signing an initial trade deal with China last month, Mr. Trump pointed on Tuesday to the tariffs he has imposed on the country in order to take on its “massive theft of America’s jobs.” He said that “our strategy has worked.”
  • Trump’s attention on foreign policy later swung to the Middle East, when he highlighted two people his administration killed in recent months: Abu Bakr al-Baghdadi, the leader of the Islamic State, and Maj. Gen. Qassim Suleimani, the powerful Iranian commander.

 

(Wall Street Journal)  Ford’s Operating Income Plunges

  • Ford Motor Co. said fourth-quarter operating income sank by two-thirds, and it issued a lower-than-expected profit outlook for 2020, the latest signs of trouble for Chief Executive Jim Hackett’s turnaround plan.
  • Ford said operating income for the October-to-December period was $485 million, down from $1.5 billion a year earlier. Earnings per share adjusted for one-time items were 12 cents, well short of analysts’ estimate of 17 cents.
  • The company’s financial standing has continued to weaken under Mr. Hackett, who was brought in nearly three years ago to revive the auto maker’s profit growth and give it a stronger vision for the future.
  • Revenue for the full year dropped 3% to $155.9 billion.
  • “Financially, it wasn’t OK,” finance chief Tim Stone said of the 2019 results during a discussion with reporters at Ford’s headquarters. “Strategically. . .I think we made strong progress.”
  • Ford pinned the shortfall in part on lower production volumes in North America stemming from problems with launches of key models, including the redesigned Explorer and Escape sport-utility vehicles and its Super Duty pickup truck. It also cited higher warranty costs and a bonus payout to United Auto Workers that totaled about $600 million.
  • The auto maker forecast operating profit this year of $5.6 billion to $6.6 billion, compared with $6.38 billion last year. That equals an earnings-per-share range of 94 cents to $1.20, which is lower than the average analysts’ estimate of $1.30, according to S&P Global Market Intelligence.
  • Hackett’s strategy to revitalize Ford — which includes a multiyear, multibillion-dollar restructuring — hasn’t returned the company to earnings growth or restored profitability overseas, where Ford is closing plants and shedding thousands of workers to cut costs.
  • “Financially, the company’s 2019 performance was short of our original expectations, mostly because our operational execution — which we usually do very well — wasn’t nearly good enough,” Mr. Hackett said. “We recognize, take accountability for and have made changes because of this.”
  • In a bright spot for the year, Ford trimmed its losses in overseas markets. It halved its China loss, to $771 million from $1.55 billion, which it attributed to cost cutting. In Europe, the company had a $47 million loss for the year, down from a $398 million loss a year earlier.
31 Jan 2020

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$2.7 billion.  New issuance for the week was $8.2 billion and year to date HY is at $35.7 billion.

 

(Bloomberg)  High Yield Market Highlights

  • S. junk-bonds are heading for their second weekly loss amid fears about the spreading coronavirus from China. Investors pulled $2.7 billion from high-yield retail funds, the biggest cash withdrawal in almost six months, and exchange-traded funds are continuing to leak cash.
  • Junk-bond returns turned negative for the second time this week posting a loss of 0.16% Thursday. The CAA index posted losses of 0.17% and is also set for its second weekly declines
  • Those falls may extend Friday with stock futures lower. Oil prices are higher this morning, but fell to an almost six-month low on Thursday, weighing on the high-yield energy index
  • Junk bond yields rose 9 basis points to 5.49%, the biggest weekly jump since October, while spreads widened 11 basis points to 382 basis points over Treasuries
  • Single-B yields jumped 10 basis points to 5.46%, while CAA yields rose 9 basis points to 10.32%
  • The two biggest high-yield ETFs — HYG and JNK — saw a combined outflow of $547 million in the last session as outflows continue

 

(Business Wire)  Arconic Reports Financial Results

  • Arconic Inc. reported fourth quarter 2019 and full year 2019 results. The Company reported fourth quarter revenues of $3.4 billion, down 2% year over year. Organic revenue was up 1% year over year on growth in the aerospace, packaging and industrial markets and favorable product pricing, largely offset by weakness in the automotive, commercial transportation, and building and construction markets.
  • Operating income excluding special items was $444 million, up 37% year over year, driven by net cost reductions, favorable product pricing, and favorable aluminum and raw material costs, partially offset by lower volumes in automotive and commercial transportation. Full year 2019 operating income was $1.0 billion versus $1.3 billion in the full year 2018. Operating income excluding special items for full year 2019 was $1.8 billion versus $1.4 billion in the full year 2018, driven by favorable product pricing; net cost reductions; volume growth in aerospace, packaging and commercial transportation markets; and favorable aluminum and raw material costs. These impacts were partially offset by unfavorable product mix.
  • Arconic Chairman and Chief Executive Officer John Plant said, “In 2019, the Arconic team delivered improved revenue, adjusted operating income, adjusted operating income margin, adjusted free cash flow and adjusted earnings per share. Arconic’s 2019 return on net assets improved by 450 basis points year over year to 13.7%.”

 

(Bloomberg)  Fed Holds Main Rate as Powell Stresses Need to Hit 2% Inflation

  • The Federal Reserve kept its key interest rate unchanged and continued to signal policy would stay on hold for the time being, while stressing the importance of lifting inflation to officials’ target.
  • The central bank also made a technical adjustment to the rate it pays on reserve balances and said it would extend at least through April a program aimed at smoothing volatility in
    money markets.
  • “We believe monetary policy is well positioned to serve the American people by supporting continued economic growth,” Chairman Jerome Powell told a press conference Wednesday in Washington.
  • Officials kept the target range of the benchmark federal funds rate at 1.5% to 1.75% and called that stance “appropriate to support sustained expansion of economic activity.”
  • S. stocks erased gains while yields on the 10-year Treasury note declined and the dollar fluctuated. Traders extended bets the Fed would cut rates toward the end of this year.
  • “The Fed has made it clear that the barriers to move in either direction are quite high,” said said Daniel Ahn, the chief U.S. economist at BNP Paribas. “But we believe the wall
    for a cut is lower than the wall for a hike.” He detected a “dovish tilt” in Powell’s efforts to stress the Fed was uncomfortable with inflation running persistently too low.
  • Policy makers changed their statement to say that the current stance of monetary policy is appropriate to support “inflation returning to the committee’s symmetric 2% objective.” Previously they had said policy was supporting inflation “near” the goal.
  • Powell explained in his press conference that the change was made to send “a clearer signal” that the committee was not comfortable with inflation running persistently below target. “We wanted to underscore our commitment to 2% not being a ceiling,” he said.
  • Their preferred gauge of price pressures — the personal consumption expenditures price index — rose 1.5% for the 12 months ending in November. Powell said inflation was expected to move closer to 2% over the next few months thanks to so-called base effects, “as unusually low readings from early 2019 drop out of the calculation.”

 

24 Jan 2020

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.9 billion.  New issuance for the week was $13.2 billion and year to date HY is at $27.4 billion.

 

(Bloomberg)  High Yield Market Highlights

  • S. junk bonds posted a third straight day of losses as issuance neared $32 billion, the most for a January in more than a decade.
  • Borrowers are rushing to take advantage of low rates before the window closes
  • Markets may see support today as stock futures climb on economic data and investors set aside concerns about a deadly virus from China hampering growth
  • Yields rose 8bps to 5.17%, a three week high, as stocks fluctuated and oil dropped to an eight-week low
  • Spreads widened 8bps to +340, a six week high
  • Energy yields jumped 30bps to 8.56%, the biggest increase in more than five months
  • Energy index posted a loss of 0.675%, the biggest loss since October,
  • CAA yields were back at 10%, returns were negative for a third day
  • Retail funds have reported three straight weeks of inflow, the longest streak in almost three months

  

(Wall Street Journal)  Glut Pushes Natural Gas Prices Below $2 

  • The price of natural gas typically rises this time of year as temperatures plunge and homeowners dial up their thermostats. Instead, the price of the heating and electricity-generating fuel has dropped to multiyear lows.
  • On Tuesday, natural-gas futures fell below $2 per million British thermal units to their lowest level in nearly four years, highlighting how a persistent glut has buffeted energy investors and producers. This winter’s mild weather has joined an oversupply of the commodity to push natural-gas prices down to levels not seen since March 2016. On Tuesday, futures fell 5.4% to $1.895 per MMBtu.
  • The shale boom, spurred by horizontal drilling and hydraulic fracturing techniques, has transformed the U.S. energy industry and flooded the market with oil and natural gas in recent years. The decline in prices has hit shares of energy companies, raising calls for them to curtail production. But few analysts see signs of the glut abating soon: The U.S. Energy Information Administration predicts dry natural-gas production in the U.S. will rise by 2.9% in 2020.
  • The fall in prices has come faster than analysts and traders had predicted. Colder winter temperatures typically drive up prices as homeowners demand more fuel to heat their houses. However, warmer-than-expected weather this season has helped drive prices down, adding to investors’ grim outlook.
  • On Tuesday, oil-field services company Halliburton Co. said it swung to a loss in 2019 on a decline in revenue that it blamed on diminished drilling onshore in North America, which in turn was due to low commodity prices.
  • “Gas prices in the U.S. are below break-even levels,” Chief Executive Jeffrey Miller told analysts and investors. Mr. Miller said that he expects a 10% reduction in spending among the oil-field services company’s customers in North America, with the bulk of those cuts coming in gas-producing regions. Halliburton has been idling equipment to match customers’ reduced needs, he said.

 

(Bloomberg)  Junk Bond Volume Nears $30 Billion in Refi Frenzy

  • The U.S. junk-bond market is on track for its busiest January in at least a decade with volume poised to exceed $30 billion as companies rush to refinance at cheap rates.
  • At least seven issuers are looking to sell debt on Thursday after an already hectic pace. Those deals will potentially take new issue volume to $30.8 billion, the most for any January since 2006, according to data compiled by Bloomberg
  • Companies are mostly selling debt to refinance. Some of those issuers are replacing loans with bonds
  • Garda World Security, owned by private-equity firm BC Partners, is marketing $400 million 7 year senior secured notes to take out a term loan
  • It’s at least the third company to do so this month amid more favorable pricing — in some cases — for bonds
  • Another BC Partners portfolio company, Presidio, priced secured bonds at a cheaper rate than loans last week
  • Grocer Albertsons also sold $2.35 billion of bonds on Wednesday to refinance loans
  • The primary market appears open to the deals in the lowest CAA junk rating tier. Community Health and Altice are in market with bonds that have at least one rating in that range
  • Junk-bond spreads widened to a two-week high on Wednesday, and may weaken more as stocks fall and oil prices fall to an almost eight-week low of $55.51 a barrel
23 Jan 2020

2019 Q4 HIGH YIELD QUARTERLY

In the fourth quarter of 2019, the Bloomberg Barclays US Corporate High Yield Index (“Index”) return was 2.62% bringing the year to date (“YTD”) return to 14.32%. The CAM High Yield Composite gross total return for the fourth quarter was 2.37% bringing the YTD return to 16.31%. The S&P 500 stock index return was 9.06% (including dividends reinvested) for Q4, and the YTD return stands at 31.48%. The 10 year US Treasury rate (“10 year”) drifted higher throughout the quarter finishing at 1.92%, up 0.26% from the beginning of the quarter. During the quarter, the Index option adjusted spread (“OAS”) tightened 37 basis points moving from 373 basis points to 336 basis points. During the fourth quarter, each quality segment of the High Yield Market participated in the spread tightening as BB rated securities tightened 33 basis points, B rated securities tightened 46 basis points, and CCC rated securities, tightened 22 basis points. 

The Banking, Finance, and Basic Industry sectors were the best performers during the quarter, posting returns of 3.56%, 3.54%, and 3.25%, respectively. On the other hand, REITs, Communications, and Other Financial were the worst performing sectors, posting returns of 1.30%, 1.74%, and 2.00%, respectively. At the industry level, autos, wirelines, pharma, and oil field services all posted the best returns. The automotive industry (4.97%) posted the highest return. The lowest performing industries during the quarter were tobacco, retail REITs, leisure, and cable. The tobacco industry (-3.08%) posted the lowest return. 

During the fourth quarter, the high yield primary market posted $81.4 billion in issuance. Issuance within Consumer Discretionary was the strongest with 18% of the total during the quarter. The 2019 fourth quarter level of issuance was much more than the $16.9 billion posted during the fourth quarter of 2018. Wall Street strategists are calling for slightly less overall issuance in 2020. However, the issuance is likely to remain focused on refinancing. 

The Federal Reserve held two meetings during Q4 2019, and the Federal Funds Target Rate was reduced 0.25% at October meeting and held steady at the December meeting. The rate reduction marked the third move lower of the Target Rate in 2019. While the past four Fed meetings had dissenting members, the vote to hold steady was unanimous among the voting members. Chairman Powell commented, “our economic outlook remains a favorable one despite global developments and ongoing risks. As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy likely will remain appropriate.” Although Chair Powell’s comments point to the Fed continuing to hold rates flat; as of this writing, investors are pricing in a 54% probability of a cut by the FOMC during 2020.i While we are interest rate agnostic and do not attempt to time interest rate movements, we are very aware of the impact Fed policy has on the markets. Therefore, we will continue to monitor this very important theme throughout 2020. 

While the Target Rate moves tend to have a more immediate impact on the short end of the yield curve, yields on intermediate Treasuries increased 26 basis points over the quarter, as the 10-year Treasury yield was at 1.66% on September 30th, and 1.92% at the end of the quarter. The 5-year Treasury increased 15 basis points over the quarter, moving from 1.54% on September 30th, to 1.69% at the end of the quarter. Intermediate term yields more often reflect GDP and expectations for future economic growth and inflation rather than actions taken by the FOMC to adjust the Target Rate. Inflation as measured by core CPI has been testing the upper bound of the last several years. The most recent print was 2.3% as of the December 11th report. The revised third quarter GDP print was 2.1% (quarter over quarter annualized rate). The consensus view of economists suggests a GDP for 2019 around 1.8% with inflation expectations around 2.1%. 

The chart above shows that two year to ten year Treasury spread has reached the highest level in over a year. It seems like ages since a main theme was yield curve inversion. The dip in the ratio through August was “driven by deepening pessimism over the global outlook amid rising trade tensions and a string of weak manufacturing data.”ii Since that time, China and the U.S. have reached agreement on Phase 1 of a trade deal, the Fed has begun lowering rates for the first time in over a decade, and investor sentiment has improved.

President Trump was impeached by the House of Representatives in December. The market shrugged off the news fully expecting the Senate to provide an acquittal. Meanwhile, the agreed upon Phase 1 trade deal “will see lower U.S. tariffs on Chinese goods and higher Chinese purchases of U.S. farm, energy and manufactured goods.”iii Additionally, intellectual property protections are to be increased by the Chinese. Across the Atlantic, Brexit is looking more and more likely. Britain’s exit from the European Union still has some hurdles to jump, but U.K. Prime Minister Boris Johnson is pressing to deliver by the January 31, 2020 cutoff.

Being a more conservative asset manager, Cincinnati Asset Management is structurally underweight CCC and lower rated securities. This positioning has served our clients well in 2019. As noted above, our High Yield Composite gross total return has outperformed the Index over the YTD measurement period. With the market remaining robust during the fourth quarter, our cash position remained the largest drag on our overall performance. Further, our structurally underweight of CCC rated securities was a headwind as that group saw a pop in Q4 after lagging in Q2 and Q3. Additionally, our underweight positioning in the energy exploration & production and oil field services industries were a drag on our performance. Further, our credit selections within the consumer non-cyclical sector and wireline industry hurt performance. However, our underweight in the cable industry and our overweight in the consumer cyclical sector were bright spots. Further, our credit selections within the midstream and automotive industries were a benefit to performance. 

The Bloomberg Barclays US Corporate High Yield Index ended the fourth quarter with a yield of 5.19%. This yield is an average that is barbelled by the CCC-rated cohort yielding 10.43% and a BB rated slice yielding 3.63%. Equity volatility, as measured by the Chicago Board Options Exchange Volatility Index (“VIX”), remained fairly muted ending the quarter just under 14 down about 2 points. The fourth quarter had seven issuers default on their debt. The twelve month default rate was 2.63% and has been driven by default volume in the energy and metals & mining sectors. Excluding those two sectors from the data, the default rate would fall to only 1.26%.iv Additionally, fundamentals of high yield companies continue to be mostly good. From a technical perspective, supply has increased from the low levels posted in 2018, and flows have been positive relative to the negative flows of 2018. Due to the historically below average default rates, the higher yields available relative to other spread product, and the diversification benefit in the High Yield Market, it is very much an area of select opportunity that deserves to be represented in many client portfolio allocations. 

With the High Yield Market remaining very firm in terms of performance, it is important that we exercise discipline and selectivity in our credit choices moving forward. With the market seemingly tight on a yield and spread basis relative to the last couple of decades, we are on the lookout for pitfalls as well as opportunities for our clients. The market needs to be carefully monitored to evaluate that the given compensation for the perceived level of risk remains appropriate on a security by security basis. It is important to focus on credit research and buy bonds of corporations that can withstand economic headwinds and also enjoy improved credit metrics in a stable to improving economy. As always, we will continue our search for value and adjust positions as we uncover compelling situations. 

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The index is unmanaged and does not take into account fees, expenses, and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.

i Bloomberg January 2, 2020, 4:00 PM EDT: World Interest Rate Probability (WIRP)
ii Bloomberg December 19, 2019: “Yield Curve Hits Steepest Since 2018 as Inflation Risks Eyed”
iii Reuters December 19, 2019: “China says in touch with U.S. on signing of Phase 1 trade deal”
iv JP Morgan January 2, 2020: “Default Monitor”

17 Jan 2020

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $2.0 billion.  New issuance for the week was $8.1 billion and year to date HY is at $14.2 billion.

 

(Bloomberg)  High Yield Market Highlights

  • Triple C-rated debt is leading the rally in high-yield as returns for the year jump to 1.23% and yields on the lowest tier of junk fall below 10% for the first time in seven months.
  • Triple C spreads tightened 10bps to 823bps over Treasuries, according to Bloomberg Barclays index data. That’s a more than five-month low and extends a recovery from over 1,000 bps in November
  • Energy is powering CCC. The energy index yield fell to 7.99%, a new six-month low
  • Junk-bond yields dropped to 5.01%, just 5bps off the 5.5-year low of 4.96%. They may fall further as stock futures rise amid easing trade tensions and a solid start to the earnings season. Oil is also up this morning to almost $59 a barrel

 

(Bloomberg)  Encompass Health Boosts Fiscal Year Operating Revenue View

  • Encompass Health boosted its operating revenue forecast for the full year; the guidance midpoint met the average analyst estimate.
  • Encompass sees FY operating revenue $4.59 billion to $4.61 billion, saw $4.5 billion to $4.6 billion, estimate $4.59 billion (range $4.57 billion to $4.61 billion)
  • Encompass sees FY adjusted EPS from continuing operations $3.90 to $3.94, saw $3.71 to $3.85
  • Encompass sees FY adjusted Ebitda $962 million to $967 million, saw $940.0 million to $960.0 million, estimate $952.2 million (range $942.0 million to $957.0 million)
  • Encompass sees 2020 Adjusted EPS Continuing Operations $3.50 to $3.72, Est. $3.68

 

(Bloomberg)  WSP Is Said to Approach Engineering Firm Aecom About Deal

  • Canada’s WSP Global Inc. has approached rival engineering services firm Aecom about a possible deal, according to people familiar with the matter. There’s no guarantee that the overture will lead to a transaction, said the people, who asked to not be identified
    because the matter isn’t public.
  • Aecom, which had been targeted by activist investor Starboard Value last year, agreed in October to sell its management services division to a group of private equity firms
    for $2.4 billion.
  • The potential acquisition would give WSP more exposure to the U.S. and could lead to cost savings of about $200 million, Deutsche Bank analyst Chad Dillard wrote in a note to clients Tuesday.
  • Aecom’s services include consulting, planning, architecture, engineering and construction management, according to its website. While it has a growing backlog thanks to a steady stream of government and infrastructure contracts, profits have stagnated in recent years due to inefficiencies and construction contract
    losses, according to a Bloomberg Intelligence report in December.

 

(Wall Street Journal)  MGM, Blackstone Strike Casino Deal

  • MGM Resorts International said a joint venture that includes Blackstone Group Inc. would buy the real estate of the MGM Grand and Mandalay Bay resorts and casinos on the Las Vegas Strip, in a deal valuing the properties at $4.6 billion.
  • The deal values MGM Grand’s real-estate assets at about $2.5 billion and Mandalay Bay’s at just over $2 billion.
  • Blackstone will own slightly less than half of the properties through the private-equity and real-estate giant’s nonlisted real-estate investment trust, while MGM Growth Properties LLC, a publicly traded REIT, will own the remainder.
  • MGM Resorts spun off MGM Growth Properties in 2016 and still controls the REIT, which owns some MGM real estate including Mandalay Bay’s.
  • MGM Resorts expects to receive cash proceeds of about $2.4 billion from the deal, as well as $85 million in MGM Growth partnership units.
10 Jan 2020

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.9 billion and new issuance for the week $6.1 billion.

 

(Bloomberg)  High Yield Market Highlights

  • S. high-yield bonds are set for the longest streak of weekly gains since the first half of 2019 as the global hunt for yield continues to bolster the market.
  • The Bloomberg Barclays U.S. high-yield index has posted gains each day this week as yields held steady at 5.11% through Thursday, one basis point lower on the week.
  • The high-yield energy index weighed on performance as oil prices lost steam earlier in the week. The securities posted losses for the second consecutive day on Thursday, losing 0.13%; yields on energy bonds ended at 8.12%.
  • Even while oil prices dropped back to levels before the Mideast tensions began, issuance activity was driven by energy borrowers.

 

(Reuters)  Fed focuses on repo market exit strategy after avoiding year-end crunch 

  • Wall Street’s worst fears of a year-end funding squeeze never materialized thanks in large part to the quarter-trillion dollars the Federal Reserve stuffed into the market to ensure nothing became gummed up.
  • The question now, though, is what it will take for the U.S. central bank to withdraw from its daily liquidity operations in the $2.2 trillion market for repurchase agreements, or repos – after it became a dominant player in a short three months.
  • “The repo operations are a band-aid, but the wound isn’t healed fully,” said Gennadiy Goldberg, an interest rate strategist at TD Securities.
  • The New York Fed began injecting billions of dollars of liquidity into the repo market in mid-September, when a confluence of events sent the cost of overnight loans as high as 10%, more than four times the Fed’s rate at the time. A month later, the Fed moved to expand its balance sheet – and boost the level of reserves – by snapping up $60 billion a month in U.S. Treasury bills.
  • The Fed will continue pumping tens of billions a day into the repo market through at least the end of January. Its ability to exit from the repo market after that time will depend on how long it takes the central bank to make the balance sheet large enough so there are adequate reserves in the banking system – and the repo operations are no longer needed.
  • “It seems implausible to me that the Fed will be able to stop their repo operations by the end of January,” said Mark Cabana, head of U.S. rates strategy at Bank of America Merrill Lynch.

 

(Company Report)  Tenneco Inc. plans to streamline its leadership structure

  • The Company announced that Brian Kesseler, Tenneco’s Co-Chief Executive Officer and a member of the Board of Directors, will assume the newly consolidated role of Chief Executive Officer of Tenneco. Kesseler will oversee the operations of the New Tenneco business, in addition to continuing to oversee the DRiV business. Roger Wood will no longer serve as Tenneco’s Co-Chief Executive Officer and is stepping down as a Director of the Company, effective immediately.
  • Jason Hollar will continue to serve as Executive Vice President and Chief Financial Officer of Tenneco overseeing the financial organizations of both DRiV and New Tenneco.
  • “On behalf of the Board of Directors, I would like to thank Roger for his dedication to Tenneco during a critical time for our company,” said Gregg M. Sherrill, Chairman of the Tenneco Board. “We appreciate his service and contributions in leading the New Tenneco business as we began the integration of the Federal-Mogul acquisition. As we pursue the separation of our businesses, the Board determined that consolidating our leadership structure now will help improve Tenneco’s operational efficiency and achieve our near-term financial performance objectives. We wish Roger the very best in his future endeavors.”
  • During 2020, Tenneco will be focused on the execution of its accelerated performance improvement plan to facilitate the expected separation of the businesses.
  • As previously discussed in the Company’s third quarter release on October 31, 2019, current end-market conditions are affecting the Company’s ability to complete a separation in the mid-year 2020 time range. The Company expects that these trends will continue throughout this year. The Company is ready to separate the businesses as soon as favorable conditions are present.
29 Nov 2019

CAM High Yield Weekly Insights

CAM High Yield Market Note

11/29/2019

 

This is an abbreviated Note due to the Thanksgiving holiday. Happy Thanksgiving!

 

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $0.2 billion and year to date flows stand at $23.5 billion. New issuance for the week was $12.8 billion and year to date HY is at $251.1 billion, which is +55% over the same period last year.

 

 

(Bloomberg) Single and Double B Junk Bond Returns Hit 2019 Peak Amid Rally

 

  • Junk bond returns are creeping back to record highs after three consecutive days of gains.
  • Junk bond year-to-date returns rose to 11.928%, inching closer to the highs of just over 12% reached earlier this month. Index yields were unchanged, closing at a two-week low of 5.64%
  • BB returns hit a year-to-date peak of 13.944%, while single B returns set a new high at 12.553%
  • CCCs are also catching a bid, boosted by a lift in energy bonds, after posting gains for three straight sessions to take year-to-date returns to 4.101%. That comes less than a week after CCC spreads jumped above 1,000bps over U.S. Treasuries for the first time in more than three years 
08 Nov 2019

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $1.6 billion and year to date flows stand at $24.4 billion.  New issuance for the week was $3.8 billion and year to date HY is at $219.3 billion, which is +37% over the same period last year.

  

(Bloomberg)  High Yield Market Highlights 

  • S. junk bonds rebounded as equities rallied to a record high and the 10Y UST yield jumped. The debt may open on a softer note as stock futures declined and oil prices dropped amid uncertainty over supply cuts.
  • The debt’s returns turned positive on Thursday after a two-day losing streak as equities climbed to a new high. Year-to-date returns were 12.01%, just 9bps off the 2019 peak
  • Gains were across ratings, with single-Bs posting the most at 0.1% and YTD at 12.39%
  • Junk bond yields were little changed. Single-Bs dropped 6bps to close at 5.68% and BBs closed at 3.88%, down 2bps
  • Spreads held firm across ratings moving in tandem with UST yields
  • There was lull in the primary market with just two drive-by deals for $1.1b pricing yesterday
  • Yesterday’s deals took the November volume to $4.98b
  • As investors turned cautious of weaker credits, Wesco’s $2.18b bond offering faced some resistance and its pricing was delayed

 

(Reuters)  U.S. may not need to impose auto tariffs this month 

  • The United States may not need to impose tariffs on imported vehicles later this month after holding “good conversations” with automakers in the European Union, Japan and Korea, U.S. Commerce Secretary Wilbur Ross said in an interview published on Sunday.
  • The United States must decide by Nov. 14 whether to impose threatened U.S. national security tariffs of as much as 25% on vehicles and parts. The tariffs have already been delayed once by six months, and trade experts say that could happen again.
  • “We have had very good conversations with our European friends, with our Japanese friends, with our Korean friends, and those are the major auto producing sectors,” Ross said.
  • “Our hope is that the negotiations we have been having with individual companies about their capital investment plans will bear enough fruit that it may not be necessary to put the 232 (tariffs) fully into effect, may not even be necessary to put it partly in effect,” he added.

 

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

  • GEO reported third quarter 2019 net income attributable to GEO of $45.9 million, compared to $39.3 million, for the third quarter 2018. GEO reported total revenues for the third quarter 2019 of $631.6 million up from $583.5 million for the third quarter 2018.
  • GEO reported third quarter 2019 Normalized Funds From Operations (“Normalized FFO”) of $70.3 million, compared to $62.9 million, for the third quarter 2018. GEO reported third quarter 2019 Adjusted Funds From Operations (“AFFO”) of $85.6 million, compared to $77.9 million, for the third quarter 2018.
  • George C. Zoley, Chairman and Chief Executive Officer of GEO, said, “We are pleased with our strong quarterly financial performance, which reflect strong fundamentals and growing earnings. During the quarter, we reactivated 4,600 previously idle beds, which are expected to drive future cash flow growth. We are proud to have published our first-ever Human Rights and ESG report in September, highlighting our long-standing commitment to respecting the human rights of all those in our care, as well as, the continued success of our GEO Continuum of Care enhanced rehabilitation and post-release programs. We believe that our current dividend payment is supported by stable and predictable cash flows, and we expect to continue to apply our growing excess cash flow towards paying down debt.”
  • During the third quarter 2019, GEO repurchased approximately $34 million of senior unsecured notes due 2022. GEO also closed on a $44 million, 15-year real estate loan bearing interest at 4.22 percent annually. At the end of the third quarter, GEO had approximately $395 million in available borrowing capacity under its $900 million revolving credit facility, which matures in May 2024.

 

(Business Wire)  Arconic Reports Third Quarter 2019 Results

  • The Company continues to target the completion of the separation in the second quarter 2020. We expect the Form 10 filing to be available in the fourth quarter 2019. The Engineered Products and Forgings businesses (engine products, fastening systems, engineered structures and forged wheels) will remain in the existing company (Remain Co.), which will be renamed Howmet Aerospace Inc. at separation. The Global Rolled Products businesses (global rolled products, aluminum extrusions and building and construction systems) will comprise Spin Co. and will be named Arconic Corporation at separation.
  • Arconic Inc. reported third quarter 2019 results, for which the Company reported revenues of $3.6 billion, up 1% year over year. Organic revenue was up 6% year over year on strong volumes across all key markets and favorable pricing in the Engineered Products and Forgings segment, and volume growth in packaging, industrial, and aerospace markets as well as favorable pricing in the Global Rolled Products segment.
  • Third quarter 2019 operating income was $326 million, versus operating income of $345 million in the third quarter 2018. Operating income excluding special items was $475 million, up 36% year over year, as favorable product pricing, higher volume, favorable aluminum prices, and net cost reductions more than offset operational challenges in the aluminum extrusions business and unfavorable product mix.
  • Arconic Chairman and Chief Executive Officer John Plant said, “In the third quarter 2019, the Arconic team delivered improved quarterly revenue, adjusted operating income, adjusted operating income margin, adjusted free cash flow and adjusted earnings per share on a year-over-year basis. Arconic’s third quarter 2019 return on net assets improved by 550 basis points year over year. We expect this positive year-over-year trend to continue in the fourth quarter. Based on our performance through the first nine months of 2019 and our outlook for the remainder of 2019, we are increasing our full-year adjusted earnings per share guidance for the third time in 2019.”
  • Arconic ended the third quarter 2019 with cash on hand of $1.3 billion. Cash provided from operations was $52 million; cash used for financing activities totaled $202 million, reflecting the impact of the accelerated share repurchase program of $200 million; and cash provided from investing activities was $117 million. Adjusted Free Cash Flow for the quarter was $154 million.
01 Nov 2019

CAM High Yield Weekly Insights

CAM High Yield Market Note

11/1/2019

 

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $1.1 billion and year to date flows stand at $22.9 billion. New issuance for the week was $5.9 billion and year to date HY is at $215.4 billion, which is +36% over the same period last year.

 

 

(Bloomberg) High Yield Market Highlights

 

  • U.S. junk bonds are set to rebound from a three-day decline to open higher this morning as stock futures advance on the heels of better-than-expected manufacturing data from China and as oil prices rise after a four-day losing streak.
  • Junk bonds fell for the third straight session and reported a loss of 0.15%, the longest losing streak in almost five weeks. Spreads are 38bps wider in the past four days at 392bps over U.S. Treasuries
  • CCCs posted a loss of 0.29%, the most across high yield yesterday, taking year-to-date returns down to 5.38%. CCC yields surged to a nine-month high of 11.25% and spreads widened the most in 10 months to 969bps
  • Investors, though cautious, continued to allocate cash to high-yield for the week
  • Supply has ground to a halt with no new deals announced or priced in the past two days but there are some in the pipeline that could emerge soon.  

 

  • (Bloomberg) Extended Junk Rally Squeezes Spread Between BBB and BB to Record 
  • The difference between BBB and BB U.S. corporate bond spreads collapsed further as investors continued chasing yield in the highest-rated junk bonds
    • The differential between the best high yield and worst investment grade hit a fresh post-credit crisis low amid continued inflows to bond funds and negative yielding debt
      overseas
    • The compression is making it so investors may have to start reaching even further down the ratings spectrum to find value
    • The differential between BBB and BB was 49 basis points Monday morning, a new record

     

(Business Wire)  Western Digital Announces CEO Succession Plan

 

  • Western Digital Corp. announced that Steve Milligan, chief executive officer and a member of the Western Digital Board of Directors (“the Board”) since January 2013, has informed the Board that he intends to retire as the Company’s CEO. Milligan will continue to serve as CEO until the Board has identified and appointed a successor, and then will remain with the Company in an advisory role until September 2020 to ensure a smooth transition. He will also remain a director on the Company’s Board for a transition period after his successor is appointed.
  • The Board has initiated a search to identify Western Digital’s next CEO, and has engaged Heidrick & Struggles, a leading executive search firm, to assist in the process. In order to facilitate a comprehensive process, the Board will evaluate both internal and external candidates.
  • “The Board and management team are committed to ensuring a smooth transition, and we are grateful that we’ll continue to benefit from Steve’s experience and perspective throughout this process,” said Matthew Massengill, chairman of the Board. “As the Board conducts its search for Steve’s successor, we are focused on identifying a strong leader with a proven track record of operating successfully at scale while defining and executing a growth strategy driven by innovation, operational excellence, and world-class talent development.”

 

(PR Newswire)  Tenneco Reports Third Quarter 2019 Results

 

  • Tenneco Inc. reported third quarter 2019 revenue of $4.3 billion, versus $2.4 billiona year ago, including $1.8 billion from acquisitions.  On a constant currency pro forma basis, total revenue increased 3% versus last year, while light vehicle industry production declined 3% in the quarter.
  • Third quarter EBIT was $148 millionincluding the acquired Federal-Mogul business, versus $112 million last year.  EBIT as a percent of revenue was 3.4% versus 4.7% last year.   Cash generated from operations was $164 million.
  • Light vehicle production in the fourth quarter is expected to be lower year-over-year by 6%, and the commercial truck market is showing signs of softening in the quarter. In this environment, Tenneco expects fourth quarter revenue in the range of $3.95 billionto $4.05 billion.  Further, the company expects its fourth quarter adjusted EBITDA to be in the range of $295 million to $315 million, including year-over-year margin improvement of approximately 50 basis points in the DRiV division. The company expects the GM labor stoppage to have a negative impact on EBITDA of approximately $35 million.
  • The company has made significant progress on the administrative separation of the two business divisions into two independent companies
  • Tenneco remains committed to the separation of the businesses and continues to execute its plan for the spin off. Additionally, the company is evaluating multiple strategic options to deleverage and facilitate the separation.  Certain of these options could help mitigate the impact of challenging market conditions, which, if current trends were to continue, would likely affect the company’s ability to complete a separation in the mid-year 2020 time range.

 

Reuters)  U.S. Fed cuts interest rates, signals it is on hold

 

  • The Federal Reserve on Wednesday cut interest rates for the third time this year to help sustain U.S. growth despite a slowdown in other parts of the world, but signaled there would be no further reductions unless the economy takes a turn for the worse.
  • “We believe that monetary policy is in a good place,” Fed Chair Jerome Powell said in a news conference after the U.S. central bank announced its decision to cut its key overnight lending rate by a quarter of a percentage point to a target range of between 1.50% and 1.75%.
  • “We took this step to help keep the economy strong in the face of global developments and to provide some insurance against ongoing risks,” he said. “We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook.”
  • In his news conference, Powell ticked off an extensive list of reasons why he feels the economy is doing well, and likely to continue to do so under the current stance of monetary policy – from robust consumer spending, strengthening home sales, and asset prices he considered healthy but not to a level of excess.
  • The outlook for the U.S. economy continues to be for “moderate” growth, a strong labor market and inflation rising back to the Fed’s 2% annual goal, he said, and only “a material reassessment” of that outlook could drive the central bank to cut rates further from here.

 

25 Oct 2019

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $1.7 billion and year to date flows stand at $21.7 billion.  New issuance for the week was $5.6 billion and year to date HY is at $209.4 billion, which is +33% over the same period last year.

 

(Bloomberg)  High Yield Market Highlights

  • S. junk bond returns hit a new peak of 11.853% this year, the highest since 2016, amid a hunt for yield by investors. Junk bonds have rallied for 11 straight days, the longest winning streak since April, according to Bloomberg Barclays index data.
  • BB bond returns also rose to a high of 13.433%
  • Junk bond yields also fell to 5.56%, approaching a 20-month low of 5.55% hit on Sept. 23
  • BB yields are 3.85%, near the record low of 3.82% reached on Oct. 21
  • Spreads were largely unchanged moving in tandem with 5Y UST
  • Investors are pouring cash into the asset class.
  • The rally may run out of steam Friday as oil prices are lower and stock futures mixed

 

(Bloomberg)  Cracks in Leveraged Credit Are Widening

  • S. leveraged credit markets are coming under increasing pressure amid price swings, ratings downgrades and selling by CLOs, according to a report from Morgan Stanley.
  • Strategists led by Srikanth Sankaran identified the increased frequency of big price moves in loans and bonds even outside stressed credits, amid a number of pockets of weakness
  • In loans, about $48b of notional debt representing 4.2% of the leveraged loan index now trades below 80 cents, compared to $14b and 1.3% a year ago
  • The sub-90 cash price bucket also increased to 9.8% from 3.2% in the same period, according to the report
  • “Beneath the veneer of relative spread resilience and muted realized defaults, the weak links in the leveraged credit markets are coming under pressure,” the strategists wrote in the report
  • Selling pressure from CLOs has exacerbated the loan price swings, and willingness to sell is particularly high in CCCs
  • “CLO managers are net sellers of large price moves, especially in lower-rated names,” the strategists wrote

 

(Wall Street Journal)  Wave of Financial Stress Hits Low-Rated Companies

  • An array of business challenges are hitting low-rated companies across the U.S. economy, driving selling in the bottom tier of the corporate-debt market that contrasts with gains in stocks and other riskier assets.
  • In recent months, consumer demands for wireless phones and high-speed internet have helped push one landline telecom company, Windstream Holdings Inc., into bankruptcy protection and another, Frontier Communications Corp., into restructuring talks with its creditors.
  • Meanwhile, competition from cheap natural gas and renewable-energy sources has caused at least seven coal producers to file for chapter 11 protection over the past year. Opioid lawsuits and the threat of legislation that would curb surprise medical bills have exposed vulnerabilities at some highly leveraged health-care companies. Retailers continue to be pressured by the shift to online shopping. And a wave of financial distress has again hit the oil patch due in part to persistently low commodity prices.
  • Taken together, these developments have caused yields, which rise when bond prices fall, to climb for months on the lowest-rated group of corporate bonds. Unusually, that has happened even as yields have fallen on higher-rated junk bonds.
  • Investors and analysts closely watch junk bonds because companies with subpar credit ratings tend to be affected by economic problems sooner than others. Right now, many remain confident that the problems befalling certain companies aren’t symptomatic of broader economic challenges. Still, others worry that cracks at the very bottom of the market shouldn’t be taken lightly and could ultimately spread to a larger group of assets.
  • “There are specific names and specific subsectors where things are not working,” said Oleg Melentyev, a credit strategist at Bank of America Corp.
  • Melentyev doesn’t think the problems facing the lowest-rated businesses will spill over into the broader market. Still, he said, it is difficult to know for sure because “you have too many yellow signs, warning signs, around.”