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04 Mar 2019
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CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.2 billion and year to date flows stand at $11.0 billion.  New issuance for the week was $2.2 billion and year to date HY is at $31.4 billion, which is -10% over the same period last year.

 

(Bloomberg)  High Yield Market Highlights 

  • U.S. junk bond supply has revved up, with $21 billion priced in February making it the busiest month since March 2018. It was the highest-volume second month in four years.
  • 30 deals priced, all oversubscribed multiple times, most priced at lower end of talk
  • About 26% of the supply was to fund LBO suggesting strong demand for risk
  • About 25% was rated CCC, some funding dividend distributions to equity sponsors
  • About 54% of total supply was drive-by offerings
  • S. high yield returned most YTD since 2001, up 6.26% after the best January since 2009
  • Triple-Cs led the gains in junk bonds with 6.96%, also best since 2001
  • CCCs January performance was best in almost 3 years, at 5.28%
  • Junk bond yields dropped across ratings closing February near 4-month lows, with the exception of BBs, which closed at a 10-month low of 5%
  • CCC yields and spreads dropped most for the month, closing at 10.52% and +780bps, respectively
  • CCC spreads fell below +800 for first time since early December
  • Low default, better-than-feared corporate earnings, firm oil and above all a dovish Fed boosted risk assets

 

(Globe Newswire)  Windstream Holdings, Inc. Files for Voluntary Reorganization Under Chapter 11 of the U.S. Bankruptcy Code Following Judge Furman’s Decision

  • The Company intends to use the court-supervised process to address debt maturities that have been accelerated as a result of the recent decision by Judge Jesse Furman in the Southern District of New York against Windstream Services, LLC, a subsidiary of the Company.
  • “Following a comprehensive review of our options, including an appeal, the Board of Directors and management team determined that filing for voluntary Chapter 11 protection is a necessary step to address the financial impact of Judge Furman’s decision and the impact it would have on consumers and businesses across the states in which we operate,” said Tony Thomas, president and chief executive officer of Windstream. “Taking this proactive step will ensure that Windstream has access to the capital and resources we need to continue building on Windstream’s strong operational momentum while we engage in constructive discussions with our creditors regarding the terms of a consensual plan of reorganization. We acted decisively to secure the long-term financial stability of Windstream, and we are confident that, upon completion of the reorganization process, we will be even better positioned to invest in our business, expand our speed and capabilities for our customers and compete for the long term.
  • As previously announced on February 15, 2019, Judge Furman ruled that Windstream Services, LLC’s 2015 spinoff of certain telecommunications network assets into a real estate investment trust (REIT) violated its agreements with bondholders. The decision arose from challenges by Aurelius Capital Management (“Aurelius”) and U.S. Bank National Association that the spinoff was invalid under the terms of those agreements.
  • The effect of Judge Furman’s decision was that an event of default under the relevant indenture had occurred that had not been cured or waived. The acceleration of the obligations outstanding under such indenture gave rise to a cross-default under the indentures governing Windstream’s other series of secured and unsecured notes. In addition, the decision gave rise to a cross-default under the credit agreement governing Windstream’s secured term and revolving loan obligations.

 

(PR Newswire)  S&P Global Ratings Upgrades Equinix to Investment Grade (‘BBB-‘) On Improving Credit Quality

  • Equinix, the global interconnection and data center company, announced that S&P Global Ratings (“S&P”) has upgraded all of Equinix’s ratings with S&P by one notch to the investment grade rating of “BBB-“, including its issuer credit rating, its global multi-currency credit facility and term loan ratings, and all of the company’s senior unsecured notes.
  • “We are very pleased to have received an investment grade credit rating from S&P, which reflects increased confidence in improving leverage levels and our demonstrated commitment to fund expansion in a disciplined and balanced manner,” said Keith Taylor, Chief Financial Officer, Equinix.

 

(PR Newswire)  Huntsman Receives Investment Grade Ratings from Moody’s and Fitch

  • Huntsman Corporation announced that Moody’s Investors Service, Inc. has upgraded our senior unsecured rating from “Ba1” to “Baa3” with a “stable outlook”.  In addition, Fitch Ratings, Inc. published an initial Long-term Issuer Default Rating for the Company of “BBB-” with a “positive outlook”.
  • Peter Huntsman, Chairman, President and CEO commented: “We are pleased to receive today the formal recognition of Investment Grade.  This has been our objective for many years and reflects the significant transformation of our balance sheet and downstream portfolio of businesses. This action will further strengthen our shareholder base, provide greater flexibility with our balance sheet and allow us to continue to expand our downstream businesses.”
22 Feb 2019
High Yield Weekly Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

CAM High Yield Market Note

2/22/2019

 

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.6 billion and year to date flows stand at $10.7 billion.  New issuance for the week was $2.1 billion and year to date HY is at $29.1 billion, which is -12% over the same period last year.

 

(Bloomberg)  High Yield Market Highlights

 

  • S. junk bond spreads and yields were resilient amid wavering stocks as oil prices held steady and funds reported more cash inflows. Spreads continued to tighten after falling below 400 basis points for the first time since mid-November and yields were flat to little changed.
  • This was the fourth straight week of inflows and the seventh of the last eight weeks
  • Junk bond index rose for eighth straight day to new record high
  • Return is 5.7% YTD, making it the best fixed income performer
  • CCCs turned negative yesterday, have returned 6.03% YTD
  • High yield beats IG, which returned 2.44% YTD, and leveraged loans which are up 3.53%
  • Supply continued to trickle in, with a drive by offering from USAC
  • Size was increased by $250m after receiving orders of more than $2b for a $500m offering
  • Priced at lower end of talk
  • Several deals have priced this week, all were drive bys, had orders more than 3x size of offering, suggesting risk appetite is strong
  • Supply expected to remain light overall as there has been no big acquisitions or buyouts recently and a good part of refinancing has already been done
  • S. junk bonds operate against the backdrop of strong technicals as reflected in slow issuance activity, net cash inflows, low default rate, steady corporate earnings

 

15 Feb 2019
High Yield Weekly Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.3 billion and year to date flows stand at $8.6 billion.  New issuance for the week was $7.2 billion and year to date HY is at $26.9 billion, which is -10% over the same period last year.

 

(Bloomberg)  High Yield Market Highlights

  • Yields on U.S. speculative-grade bonds are set to decline for the fifth week, even as the rally was tempered a bit on Thursday. Fund managers, meanwhile, had their straight week of inflows.
  • AVOL priced its drive-by offering amid drifting stocks after boosting its total size by $350m to $1.1b
  • Two CCC rated credits priced, one of them to fund a dividend distribution to equity sponsors
  • S. high yield continued to operate against the backdrop of strong technicals as reflected in the slow issuance activity and net cash inflows into high-yield retail funds, low default rate, and steady corporate earnings
  • Junk bonds, with 5.25% returns YTD, continue to outperform other fixed income assets
  • CCCs were leading high yield with 5.85% returns YTD
  • Junk bonds leaped ahead leveraged loans this year, which have returned 3.09% YTD

 

(Bloomberg)  Return of the Junk-Bond Dividend Deal Shows It’s Risk On Again 

  • Need more proof that investor appetite for risk-taking is returning in the U.S. junk-bond market? Take a look at the debt being offering by Ascend Learning, the educational software maker acquired two years ago by Blackstone Group and the Canada Pension Plan Investment Board in a leveraged buyout.
  • The $300 million high-yield offering is the first since July that will be used to fund a dividend to a company’s owners, a purpose that’s typically seen by investors as riskier than other types of deals. It was the first such deal to launch since Bruin E&P Partners sold $600 million of notes in July to, among other things, fund a payout to its equity sponsors, data compiled by Bloomberg show.
  • It’s just the latest sign that investors have returned to the market with a vengeance after fleeing for safer asset classes at the end of 2018.

 

(Bloomberg)  Fear Goes Missing in the Biggest U.S. Junk Rally in a Decade 

  • Traders are going all-in on the best new year rally in U.S. junk bonds since 2009, cutting hedges that help cushion nasty shocks like hawkish monetary moves and weak
    corporate earnings.
  • At-the-money implied volatility in the $14.9 billion iShares iBoxx High Yield Corporate Bond ETF has more than halved since the December maelstrom and now sits below historic averages.
  • While a resurgence in risk appetite and benign technical have powered a 4.9 percent return this year alone, the rally’s staying power is in question.

 

(Fortune)  T-Mobile CEO to Congress: We Won’t Use Huawei Equipment After Sprint Acquisition 

  • T-Mobile US Chief Executive Officer John Legere says his company doesn’t use equipment from Huawei Technologies Co., and won’t after buying Sprint Corp. to form a bigger No. 3 in the U.S. wireless market.
  • “Let me be clear—we do not use Huawei or ZTE network equipment in any area of our network. Period. And we will never use it in our 5G network,” Legere said in written testimony prepared for a hearing Wednesday before the House communications subcommittee.
  • The statement is in response to critics who’ve raised the issue of the Chinese equipment maker as a risk to national security to build opposition to the proposed $26.5 billion merger.
  • Sprint parent SoftBank Group has “significant ties” to Huawei, as does T-Mobile parent Deutsche Telekom AG, according to Carri Bennet, general counsel for the Rural Wireless Association that represents smaller competitors to the merging parties.
  • “Allowing a Japanese-influenced company and German-influenced company to merger when both have significant 5G ties to Huawei appears to run counter to U.S. national security concerns,” Bennet said in testimony submitted for the hearing.
08 Feb 2019
High Yield Weekly Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $4.0 billion and year to date flows stand at $8.2 billion.  New issuance for the week was $3.7 billion and year to date HY is at $19.7 billion, which is -27% over the same period last year.

 

(Bloomberg)  High Yield Market Highlights

  • Funds reported the highest weekly cash inflows since mid-2016.
  • Investor exuberance was evident as CCC rated Clear Channel priced at lower end of talk after receiving orders of more than $5b for a $2.2b deal, which grew to $2.235b
  • Price talk tightened from the initial whisper of 10%.
  • CommScope priced a 3-part offering at the tight end of talk after receiving orders of ~$8b
  • Yields and spreads came under pressure, as the supply surge combined with tumbling stocks and lower oil
  • Yields and spreads rose across ratings and saw the biggest jump in almost seven weeks
  • Junk bond returns turned negative across the risk spectrum for first time in almost 2 weeks
  • High yield still is the best- performing asset in fixed income, with 4.93% return YTD
  • CCCs remains on top, with YTD return of 5.73%
  • High yield also ahead of leveraged loans, which have returned 2.84% YTD

 

(Bloomberg)  Arconic Replaces CEO Again, Extending Tumult After Apollo Snub 

  • Arconic Inc. named current Chairman John Plant to serve as chief executive officer, ousting Chip Blankenship just a little more than a year after he took the helm at the embattled manufacturer.
  • Plant, the company’s fourth CEO in less than two years, is expected to serve in the top post for a year, the company said in a statement Wednesday. Elmer Doty, a director, was named chief operating officer, while Arthur Collins Jr., also on the
    board, becomes lead director.
  • The management overhaul comes about two weeks after Arconic backed out of late-stage talks to sell itself to Apollo Global Management, an announcement that sent the shares tumbling the most in eight months.
  • Arconic plans to provide an update on its strategy and portfolio review when it reports earnings on February 8th.

 

(Bloomberg)  Arconic to Split Into Two Companies, Slash Dividend in Revamp 

  • Arconic Inc. plans to break into two separate companies and will slash its dividend by two-thirds, marking a dramatic overhaul of the aerospace manufacturer in the wake of its failed sale to a private equity firm.
  • The company will separate into Engineered Products & Forgings and Global Rolled Products businesses, one of which will be spun off, Arconic said Friday in a statement.
  • The parts maker will consider a sale of any operations that don’t fit into one of those businesses.

 

(Verdict Foodservice)  Aramark reports $4.3bn revenue in Q1 2019 

  • US-based foodservice company Aramark has reported revenue of $4.3bn in the first quarter of 2019 ending 28 December 2018, an 8% increase from the same period in the previous year.
  • The catering company has also reported operating income of $373.36m, a 72% rise from $216.87m for the same period in the previous year.
  • Aramark chairman, president and CEO Eric J Foss said: “2019 is off to a good start, with broad-based momentum across the portfolio, driven by strong base business performance and progress in our integration of Avendra and AmerPride.
  • “We continue to elevate the consumer experience by enhancing our product offerings, obsessing on service excellence, and innovating with new technologies.”
  • “Aramark benefits from an advantaged business model and excellent financial flexibility. As we look ahead to the full year, we expect to deliver solid financial performance that will drive sustainable shareholder value.”
  • Furthermore, the foodservice company has received $293m of proceeds from the sale of its Healthcare Technologies business. It used a majority of the proceedings to reduce debt.

 

(PR Newswire)  Suburban Propane Partners, L.P. Announces First Quarter Results

  • In announcing results, President and Chief Executive Officer Michael A. Stivalasaid, “Positive momentum from fiscal 2018 carried into the fiscal 2019 first quarter.  The first quarter of fiscal 2019 was characterized by colder-than-normal temperatures early in the quarter followed by significantly warmer temperatures during the month of December as compared to the prior year.  Despite this inconsistent weather during the quarter, we were very pleased to deliver another solid performance with results that were flat to the prior year first quarter. Our operations personnel continue to do an excellent job delivering outstanding service to our customers and the communities we serve, adapting our business plans to the weather-driven demand and executing on our customer base growth and retention initiatives.”
  • Stivala continued, “There is still a significant amount of the heating season in front of us.  Our business is extremely well-positioned to meet the needs of our customers while, at the same time, pursuing growth through new market expansion and strategic acquisitions.”
  • Revenues in the first quarter of fiscal 2019 of $377.1 million increased $3.8 million, or 1.0%, compared to the prior year first quarter, primarily due to higher average retail selling prices. Cost of products sold for the first quarter of fiscal 2019 of $182.6 million increased $17.4 million, or 10.5%, compared to the prior year first quarter.
  • Combined operating and general and administrative expenses of $115.9 million for the first quarter of fiscal 2019 increased a modest $0.7 million, or 0.6%, compared to the prior year first quarter, primarily due to higher vehicle maintenance and fuel costs.
29 Jan 2019
High Yield Quarterly, Insight Rich Balestra - Portfolio Manager 0 comment

2018 Q4 High Yield Quarterly

In the fourth quarter of 2018, the Bloomberg Barclays US Corporate High Yield Index (“Index”) return was -4.53%, and the CAM High Yield Composite gross total return was -3.41%. For the year, the Index returned -2.08%, and the CAM Composite returned -3.39%. The S&P 500 stock index return was -4.39% (including dividends reinvested) for 2018. The 10 year US Treasury rate (“10 year”) spent most of quarter going lower. It finished at 2.69% which was down 0.37% from the end of the third quarter. While generally range bound between 2.80% and 3.10% for the majority of the year, the 10 year popped both the top and bottom of the range during the fourth quarter as volatility made a comeback. During the quarter, the Index option adjusted spread (“OAS”) widened a massive 210 basis points moving from 316 basis points to 526 basis points. For context, the Index hasn’t posted an OAS north of 500 basis points in over two years. During the fourth quarter, every quality grouping of the High Yield Market participated in the spread widening as BB rated securities widened 148 basis points, B rated securities widened 219 basis points, and CCC rated securities widened 405 basis points.

The Utilities, Banks, and REIT sectors were the best performers during the quarter, posting returns of -1.39%, -2.10%, and -2.57%, respectively. On the other hand, Energy, Finance, and Basic Industry were the worst performing sectors, posting returns of -10.04%, -5.45%, and -5.13%, respectively. At the industry level, airlines, office reits, and supermarkets all posted the best returns. The airline industry (-0.23%) posted the highest return. The lowest performing industries during the quarter were e&p, refiners, and oil field services. The oil field services industry (-16.12%) posted the lowest return.

During the fourth quarter, the high yield primary market posted only $16.9 billion in issuance. Issuance within Energy was the strongest with just over 20% of the total during the quarter. The 2018 fourth quarter level of issuance was significantly less than the $86.2 billion posted during the fourth quarter of 2017. While the 2017 issuance of $330.1 billion was the strongest year of issuance since 2014, the low issuance for 2018 was less than 40% of the 2017 total.

The Federal Reserve held two meetings during Q4 2018. The Federal Funds Target Rate was raised at the December 19th meeting. Reviewing the dot plot from Bloomberg that shows the implied future target rate, the Fed is expected to increase two more times in 2019. This is down from the three additional raises projected at the end of last quarter. However, based off certain market trading levels, traders are actually projecting a Fed cut as early as 2020. i While the Fed continued raising rates, the market has begun contemplating slowing growth and certain parts of the yield curve have started to invert. Since inversion, more research has been published on the meaning an implication. Importantly, the much watched 2year/10year has yet to invert and at quarter end maintained a spread of 19 basis points. Additionally, some market participants are not as concerned that the yield curve inverts, but they are focused on the magnitude of inversion. There has been work done suggesting that the central bank is compressing the 10 year by around 65 basis points.ii While the Target Rate increases tend to have a more immediate impact on the short end of the yield curve, yields on intermediate Treasuries decreased 38 basis points over the quarter, as the 10-year Treasury yield was at 3.06% on September 30th, and 2.68% at the end of the quarter. The 5-year Treasury decreased 44 basis points over the quarter, moving from 2.95% on September 30th, to 2.51% 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 moving steadily higher during 2018 from 1.8% to 2.4% and has settled at 2.2% as of the December 12th report. The revised third quarter GDP print was 3.4% (QoQ annualized rate). The consensus view of most economists suggests a GDP for 2019 around 2.6% with inflation expectations around 2.2%.

The midterm elections came and went during the quarter. Much as the market expected, Congress is now divided with the Republican Party maintaining control of the Senate and the Democratic Party controlling the House of Representatives. The oil market maintained a persistent downtrend throughout the quarter on a combination of supply concerns and declining economic growth outlooks. It was a brutal three months as WTI moved from $75 per barrel to $45 per barrel. Another theme during the quarter was the ongoing trade and tariff negotiation between the United States and China. Currently, the two countries are in talks to try and reach an agreement by March 1st. At which time, a trade truce expires and tariffs on $200 billion of Chinese goods will hike to 25%. The resolution of this trade war will undoubtedly be a major focus in 2019 as the implications are vast. As of this writing, Apple has announced a revenue guidance cut from $91 billion to $84 billion citing among other things a slowdown in China.

Being a more conservative asset manager, Cincinnati Asset Management remains significantly underweight CCC and lower rated securities. For the fourth quarter, the focus on higher quality credits did finally bear fruit. As noted above, our High Yield Composite gross total return outperformed the return of the Index by 1.12%. Our underweights in the banking sector and gaming industry were a drag on our performance. Additionally, our credit selections with the other industrial and automotive industries hurt performance. However, our overweight in the consumer non-cyclical sector and underweight in energy were bright spots. Additionally, our credit selections within utilities and healthcare were a benefit to performance.

The Bloomberg Barclays US Corporate High Yield Index ended the fourth quarter with a yield of 7.95%. This yield is an average that is barbelled by the CCC rated cohort yielding 12.55% and a BB rated slice yielding 6.24%. While the yield of 7.95% is up 1.71% from the 6.24% of last quarter, seeing near an 8% yield hasn’t happened in well over two years. Equity volatility, as measured by the Chicago Board Options Exchange Volatility Index (“VIX”), came out of its shell during the fourth quarter. The VIX ended the third quarter around 12 however; the level elevated in October and November before the big spike above 35 in the second half of December. High Yield default volume stayed low during the fourth quarter with only seven issuers defaulting. The twelve month default rate was 1.08% when iHeart Communications is excluded from the total and remains well below the historical average. iii Additionally, fundamentals of high yield companies continue to be generally solid. From a technical perspective, supply remains very low and could possibly provide some support as investors begin bargain hunting after the higher move in yields. As can be seen in the correlation triangle, high yield also has a diversification benefit relative to equities and investment grade credit. Due to the historically below average default rates, the higher yields available, 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.

Over the near term, we plan to remain rather selective. As the riskiest end of the High Yield market showed cracks in the quarter, our clients began to accrue the benefit of our positioning in the higher quality segments of the market. However, one quarter does not make a credit cycle, and we believe that it is over a complete cycle where our clients will gain the most benefit. 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 December 19, 2018: “Prospect of Fed Cut in 2020 Firms”

ii Bloomberg December 19, 2018: “For Some, Curve Inversion Isn’t If or When, But How Deep”

iii JP Morgan January 2, 2019: “Default Monitor”

25 Jan 2019
High Yield Weekly, Insight Rich Balestra - Portfolio Manager 0 comment

CAM HIGH YIELD WEEKLY INSIGHTS

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.3 billion and year to date flows stand at $3.2 billion.  New issuance for the week was $7.8 billion and year to date HY is at $9.6 billion, which is -45% over the same period last year.

(Bloomberg)  High Yield Market Highlights

  • The U.S. junk bond issuance spigot continued to flow, with two more drive-by deals for $2 billion taking the week’s volume to $7.8 billion, the most since early August.
  • Junk bonds shrugged off wobbling equities, outflows from retail funds and new supply as spreads and yields were little changed
  • Issuance dominated by drive-by offerings, uncharacteristic of the junk bond market, and opportunistic financing, suggesting investor confidence
  • Continuing uncertainty over the U.S.-China trade talks, prolonged government shutdown and concerns over slowing global growth weigh on junk bonds
  • Returns negative across ratings for the third straight session and first time since December
  • CCCs reported biggest loss, of 0.15%
  • CCCs remain best performing asset, with YTD return of 4.59%
  • Bloomberg Barclays high yield index loss was 0.05%
  • Junk bond return of 3.59% YTD beats IG return of 1.38%
  • High yield beats leveraged loans, which have returned 2.51% YTD

(Financial Times)  How Apollo’s buyout of Arconic fell apart over pensions

  • The $15bn buyout of Arconic by Apollo Global Management fell apart due to a last-minute dispute over hundreds of millions of dollars needed to cover pension obligations owed to the US manufacturer’s retirees, according to people involved in the transaction.
  • The unravelling of what would have been one of the largest leveraged buyouts since the financial crisis had little to do with the potential liabilities related to Arconic’s flammable cladding panels linked to the deadly Grenfell Tower fire in the UK — as many industry observers had speculated.
  • Instead, the sticking point involved issues investors and analysts had paid little attention to: underfunded pensions, as well as a disagreement over the company’s dividend policy in the period between an announcement of a buyout and its completion.
  • The decision by Arconic’s board to walk away from the deal at the last minute — up until midday on Monday, the company had agreed in principle to sell itself to Apollo and activist hedge fund Elliott Management — stunned investors.

(The Street)  Steel Dynamics had Revenue Miss Estimates

  • Fort Wayne, Ind.-based steel company Steel Dynamics Inc. reported earnings that were ahead of Wall Street expectations but fourth-quarter revenue that fell just short.
  • The company reported net income of $1.31 per share, topping analysts’ expectations of $1.25. Revenue for the period came in at $2.9 billion, short of analysts’ predictions of $2.92 billion for the period.
  • “The performance of the entire Steel Dynamics team was exceptional this year. We performed at the top of our industry, both operationally and financially,” said Mark D. Millett, president and chief executive officer. “In 2018, the domestic steel industry benefited from a steady improvement in underlying steel consumption, based on strength from the automotive, construction and energy sectors.”
  • The Company’s press release noted two significant planned maintenance outages during the fourth quarter.

(Business Wire)  United Rentals Announces Fourth Quarter Results

  • Rental revenue increased 8.5% year-over-year, reflecting growth of 4.3% in the volume of equipment on rent and a 2.4% increase in rental rates.
  • time utilization decreased 60 basis points year-over-year to 69.0%
  • Total gross margin of 43.3% increased 30 basis points year-over-year, while SG&A expense as a percentage of revenue declined 20 basis points to 13.1%. The company’s pre-tax margin increased 90 basis points to 18.4%.
  • Michael Kneeland, chief executive officer of United Rentals, said, “We delivered strong fourth quarter results, including broad volume growth and rental rate improvement, in a year that leveraged our numerous competitive advantages. Our integration of major acquisitions expanded our service offering, and we gained traction from investments in fleet and technology.
  • Kneeland continued, “Our momentum in the quarter gave us a strong start to 2019, when we expect to once again outpace the industry. By reaffirming our guidance, we’re underscoring our confidence in the cycle and our differentiation in the marketplace. Customer feedback, as well as key internal and external indicators, continues to point to healthy end-market activity. We remain focused on balancing growth, margins, returns and free cash flow to maximize shareholder value.”

(Bloomberg)  MGM Committee to Evaluate Real Estate After Activist Push

  • MGM Resorts International said it would evaluate options for its real estate portfolio, forming a board committee to consider how to extract more value from the properties.
  • The committee will be composed of three independent directors with real estate and financial markets experience
  • Caesars last year spun off its real-estate holdings into Vici Properties Inc., and the real estate investment trust controlled by MGM Resorts, MGM Growth Properties LLC, tried to combine with Vici but failed.
  • MGM created MGM Growth Properties, known as MGP, for some of its assets in 2016 under pressure from activists. CEO Jim Murren has said he’ll continue to sell casinos to MGM Growth Properties and reduce the company’s ownership stake in the REIT.

(Bloomberg)  PG&E Excitement Cools as Wall Street Sticks to Bankruptcy View

  • PG&E Corp.’s 75 percent surge late Thursday after being cleared of responsibility for the deadly 2017 Tubbs fire may be short-lived as Wall Street continues to weigh the prospects of a bankruptcy filing.
  • Shares are down about 12 percent in pre-market trading. Susquehanna now sees PCG’s total liability from the 2017 and 2018 fires combined to be $7 billion-$11 billion from earlier estimate of $10 billion-$14 billion.
18 Jan 2019
High Yield Weekly, Insight Rich Balestra - Portfolio Manager 0 comment

CAM HIGH YIELD WEEKLY INSIGHTS

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $2.5 billion and year to date flows stand at $3.5 billion.  New issuance for the week was $1.8 billion and year to date HY is at $1.8 billion, which is -81% over the same period last year.

(Bloomberg)  High Yield Market Highlights

  • Buyers jumped on rare new U.S. junk-bond issues, driving significant oversubscription as funds saw their biggest net inflow since December 2016.
  • Issuance-starved investors made a beeline to HCA’s drive-by offering yesterday
  • The $1.5b deal saw orders of more than $5b, was upsized from $1b
  • Deal priced at lower end of talk
  • Junk bond yields fell to new 2-mo. low, spreads tightened across risk spectrum
  • Junk bonds top investment grade and loans, with YTD returns of 3.52% vs 0.499% and 2.467% for IG and loans, respectively
  • CCCs are best-performing in fixed income, with gain of 4.66% YTD
  • There appeared to be no immediate catalyst to derail junk bonds, with the economy on a steady path, no signs of an imminent recession, rate hikes on hold in the short term
  • Several forecasters have raised their return projections for 2019
  • Risk- aversion could take hold and bonds could plunge should U.S.- China trade tensions escalate

(Bloomberg)  High-Yield Bond Sales Freeze Is Thawed by Red-Hot Energy Sector

  • Finally the junk bond new issue market has reopened, following the biggest secondary price rally in a decade. The energy sector is leading the way, just as it’s done in the secondary.
  • Targa Resources is the first company to sell U.S. junk bonds in six weeks. The midstream energy services provider’s sold $750 million in bonds due 2027.
  • The deal is rated Ba3/BB and may be used to buy back existing debt, so it’s far from the riskiest type of sale for this market. But it should open the door for more issuers, particularly given the secondary market rally and strong reception being seen for investment-grade bonds.
  • Some issuers may be waiting for even better pricing, especially if they want to refinance. But according to UBS, which cites S&P, there’s $8.5 billion of new issues in the junk
    bond pipeline.

(Reuters)  CEO exits as PG&E faces fire liabilities, bankruptcy preparations

  • Chief Executive Geisha Williams stepped down as pressure from potentially crushing liabilities linked to catastrophic wildfires have pushed the California utility owner to the financial brink and prompted it to make bankruptcy preparations.
  • Williams, who took the helm of the provider of electricity and natural gas to millions of customers in March 2017, will be replaced by General Counsel John Simon on an interim basis, the company said. She also resigned from the boards of both PG&E and its utility subsidiary, Pacific Gas and Electric Co.
  • “While we are making progress as a company in safety and other areas, the Board recognizes the tremendous challenges PG&E continues to face. We believe John is the right interim leader for the company,” PG&E Chairman Richard Kelly said in a statement. “Our search is focused on extensive operational and safety expertise, and the board is committed to further change at PG&E.”
  • The company faces widespread litigation, government investigations and liabilities that could potentially reach $30 billion, according to analyst estimates.
  • The management shake-up comes as PG&E is in discussions with banks for a multibillion-dollar bankruptcy financing package to aid operations during bankruptcy proceedings.

(Bloomberg)  Junk Bond Forecasts Are Quickly Going From Good to Great

  • Junk bonds limped into 2019 nursing wounds from a December rout that was the worst month for the market since 2011. After a robust rally to start the year, strategists are significantly upgrading their annual forecasts.
  • Most bullish on the asset class is Wells Fargo, which boosted its high-yield total return forecast to 9.9 percent, from a 6-7 percent call made last year. An attractive starting yield, fundamental backdrop and slight uptick in issuance are all positive drivers, the bank said in a Jan. 4 report.
  • Barclays beefed up its high-yield bond total return call to 6.5-7.5 percent from a 3.5-4.5 percent projection made at the end of November. This compares to a 2.1 percent loss in 2018, the worst for the sector since 2015.
  • JPMorgan raised its U.S. high-yield bond return forecast to 8 percent, from 3.3 percent at the end of November. It cited a meager chance of a recession, low rates and attractive valuations as reasons to buy.
  • Even Morgan Stanley — historically one of the most bearish credit prognosticators — expects a better year for junk. In a Jan. 11 report, it lifted its high-yield total return forecast for 2019 to 4.5 percent from 0.5 percent.

(CAM Note)  MOODY’S UPGRADES HCA INC.’S SR SECURED DEBT TO Baa3

  • HCA’s senior secured debt is now rated investment grade at two of the three rating agencies

(Wall Street Journal)  Apollo Nears Deal to Buy Arconic for More Than $10 Billion

  • Private-equity firm Apollo Global Management is nearing a deal to buy Arconic Inc. for more than $10 billion, ending months of negotiation over what would be one of the largest leveraged buyouts in recent years.
  • The Wall Street Journal first reported in July that Apollo and others were interested in an acquisition of Arconic, an aerospace-parts maker that was Alcoa before the aluminum company was split up in 2016.
  • As usual in complicated merger talks, the timing could slip and a deal isn’t guaranteed. Should one be completed, it would end a months long sales process for Arconic. Apollo, before emerging as the front-runner, competed in an auction with other buyout firms including a team of Blackstone Group LP and Carlyle Group LP.
  • In addition to providing relief to its shareholders, a deal for Arconic, to be funded with a huge helping of high-yield debt, would be another sign of a thaw in the credit markets. Just a few weeks ago, it looked like turmoil in global markets might threaten Apollo’s bid, but a recovery in recent days has aided the deal’s prospects.
11 Jan 2019
High Yield Weekly, Insight Rich Balestra - Portfolio Manager 0 comment

CAM HIGH YIELD WEEKLY INSIGHTS

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $2.0 billion and year to date flows stand at $1.0 billion.  New issuance for the week was zero, and high yield has not seen a new issue in over 5 weeks now. 

(Bloomberg)  High Yield Market Highlights

  • U.S. junk bonds traded slightly higher yesterday, adding to recent strong gains as investors piled back into the asset class and issuance restarted. The index is up 3.06 percent this year, the best return in fixed income.
  • U.S. corporate high-yield funds swung back to inflows
  • Junk bond index yield dropped to 7.23%, lowest since Dec. 4
  • Index return was 0.04% yesterday, extending rising streak to 10 days
  • Energy sector and triple C debt outperformed
  • CCC yield dropped to 11.38% vs. 12.77% on Dec. 26
  • This was the tenth day of decline, marking the longest falling streak since December 2016, Bloomberg data show
  • CCCs YTD return is 4.38%
  • High- yield U.S. bonds are unlikely to move much higher, following the best start to a year since 2009, UBS strategists said in a note

(Reuters)  PG&E falls further after S&P cuts credit rating to junk

  • PG&E Corp’s shares fell 14 percent on Tuesday, after S&P Global stripped the California power company of its investment-grade credit rating in the face of massive claims stemming from deadly wildfires.
  • S&P cut the rating on PG&E and its Pacific Power & Gas Co unit on Monday to “B” from “BBB-,” the lowest tier of so-called investment-grade ratings, citing political and regulatory pressure and uncertainty over its potential liabilities.
  • The utility, whose roughly $18 billion in bonds fell on Monday due to bankruptcy fears, has come under severe pressure since a fatal Camp fire in November compounded its woes. It currently faces billions of dollars in liabilities related to wildfires in 2017 and 2018.
  • S&P Global said it could further cut the company’s rating over the next few months if explicit steps are not taken by authorities to improve the regulatory situation, signaling that the agency may be losing faith that lawmakers could rescue PG&E.

(Fierce Wireless)  T-Mobile/Sprint merger review suspended

  • The federal government funding lapse has claimed another victim, at least temporarily. The FCC has paused its review of the $26 billion proposed merger between T-Mobile and Sprint for the second time in four months.
  • The 180-day review period for mergers and other transactions that require FCC approval, otherwise known as a shot clock, was suspended earlier this week (PDF) when the agency shut down most operations due to the ongoing impasse over federal government funding. The partial government shutdown has effectively put the timeline for a final decision on hold until Congress and the president come to an agreement on a federal government spending bill.

(Bloomberg)  T-Mobile Outpaces Even Verizon’s Strong Growth in Customer Adds

  • T-Mobile US Inc.’s fourth-quarter wireless customer gains surpassed analyst estimates and topped strong growth at larger rival Verizon Communications Inc., continuing the company’s run as the fastest-growing U.S. mobile carrier.
  • The phone provider said it added 1.4 million regular monthly wireless customers, according to preliminary results. Analysts expected 985,000 new subscribers, according to data compiled by Bloomberg. The new additions included 1 million phone customers,
    more than the 650,000 Verizon added in the quarter.
  • T-Mobile’s outperformance of even Verizon’s surprisingly strong numbers is a signal that it’s continuing to take the most market share among U.S. carriers.
  • The results suggest it’ll be tough for AT&T Inc. and T-Mobile’s planned merger partner Sprint Corp. to hit their current estimates for subscriber growth, in a mature wireless
    market that has seen little new-customer growth overall.

(Bloomberg)  U.S. Says China Willing to Buy More American as Trade Talks End

  • The Trump administration wrapped up the latest round of trade talks in Beijing, noting a commitment by China to buy more U.S. agricultural goods, energy and manufactured items.
  • China and the U.S. concluded three days of talks on Wednesday with a cautious sense of optimism that the world’s two biggest economies might be able to reach a deal that ends their bruising trade war.
  • In a statement, the office of U.S. Trade Representative Robert Lighthizer said the two sides considered ways to “achieve fairness, reciprocity, and balance in trade relations.” Officials discussed the need for any deal to include “ongoing verification and effective enforcement,” USTR said. The U.S. will decide on the next steps after officials report back to Washington.
21 Dec 2018
High Yield Weekly, Insight Rich Balestra - Portfolio Manager 0 comment

CAM HIGH YIELD WEEKLY INSIGHTS

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.8 billion and year to date flows stand at -$55.3 billion.  New issuance for the week was zero and year to date HY is at $162.5 billion, which is -41% over the same period last year. 

 

(Bloomberg)  High Yield Market Highlights

  • Continued weakness in oil and stock markets will keep pressure on high yield bonds
  • Index yield rose to 7.92%, highest since April 12, 2016
  • Average yield on BB rated bond rose to 6.24%, highest since February 2016
  • Trading volume was slightly above average for the time of year
  • S. corporate high-yield funds posted a fifth consecutive week of outflows
  • Junk index return was -1.28% on Thursday, the fifth straight decline
  • High yield has lost 2.21% so far this month and is down 2.16% YTD
  • No new high-yield bond issues priced MTD
  • December could be first month in 10 years with no bond sales
  • Key drivers of U.S. junk bonds — low default rate, steady GDP growth, corporate cash flow, earnings — holding firm

 

(Bloomberg)  Community Health, Tenet Notes Slip on Judge’s Obamacare Ruling

  • Tenet Healthcare Corp. and Community Health Systems Inc. were among the biggest decliners in the high-yield market as hospitals sink after a federal judge in Texas ruled that Obamacare is unconstitutional.
  • Tenet’s 7% senior unsecured 2025 bonds slid 2.25 cents on the dollar to 94, while its 8.125% bonds due 2022 dropped 2.125 cents to 100.75, according to Trace
  • Community’s 6.25% notes due 2023 fell 1.25 cents to 92
  • The judge’s ruling brings the constitutionality question around the ACA back into the political arena which creates another “known-unknown” for healthcare investors, “especially though involved in rural hospitals operators and Medicaid managed care companies,” Mike Holland of Bloomberg Intelligence said in an interview
  • “The uncertainty around how and when this plays out will weigh on asset prices until the divided Congress comes up with a fix,” Holland said

 

(Bloomberg)  Charter Settles N.Y. Internet Suit for Record $174 Million

  • Charter Communications Inc. agreed to pay $174.2 million to settle consumer fraud claims by the state of New York, which accused the cable provider of ripping off customers with promises of faster internet speeds than the company knew it could possibly deliver.
  • The accord is believed to be the largest-ever payout to consumers by an internet service provider in U.S. history, New York Attorney General Barbara Underwood said in a statement Tuesday. The state claimed subscribers to the company’s premium plan received internet speeds as much as 70 percent slower than guaranteed in advertisements by Time Warner Cable, which Charter acquired in 2016 and renamed Spectrum.
  • The settlement marks another black eye for an industry that has long been ranked poorly by consumers for its lackluster customer service.
  • The pact includes $62.5 million in direct refunds to 700,000 consumers and provides about 2.2 million subscribers with more than $100 million in premium channels and streaming services, according to the attorney general’s statement. Charter also agreed to implement business reforms as part of the settlement, which will set the stage for similar marketing and business changes across the broadband industry, the attorney general’s office said.

 

(New York Times)  Sprint, T-Mobile Deal Gets Green Light From U.S. Regulators

  • A federal government committee and other top regulators in the United States have approved the proposed merger between T-Mobile and Sprint, paving the way for a union between the country’s third- and fourth-largest wireless operators.
  • The Committee on Foreign Investment in the United States — a body that reviews foreign investments in the United States for national security threats — the Department of Justice, the Department of Homeland Security, and the Department of Defense all agreed to the $26.5 billion deal, T-Mobile said in a statement.
  • Some investors, consumer advocates and government officials opposed the merger, claiming that the new telecommunications giant would limit customer choices and result in high prices for consumers.
  • Proponents of the deal said it would make the combined company, with about 100 million customers, a competitor that would be able to go toe-to-toe with AT&T and Verizon in the battle to dominate the next frontiers of wireless technology in the United States. John Legere, T-Mobile’s chief executive, has argued that he would “lower prices to attract new customers.”
  • The combination would still need to secure approval from the Federal Communications Commission, which has scrutinized a possible T-Mobile-Sprint merger before. In 2014, regulators at the F.C.C. rejected a proposed merger, concluding that effectively reducing the American wireless market to three major carriers from four would not be good for consumers.
  • The deal remains subject to other regulatory approvals as well. If the two companies receive those approvals, the deal is expected to close during the first half of 2019, according to T-Mobile.

 

(Natural Gas Intelligence)  Cheniere’s Sabine Pass LNG Train 6 Near FID as Petronas Contracts for 20-Year Supply

  • Cheniere Energy Partners LP on Tuesday said it has secured another liquefied natural gas (LNG) supply contract that may help to advance building the sixth train at the Sabine Pass export facility in Cameron Parish, LA.
  • Petronas LNG Ltd., a subsidiary of Malaysia’s state-owned Petroliam Nasional Berhad, aka Petronas, made the sale and purchase agreement (SPA) with Cheniere’s Sabine Pass Liquefaction LLC for 1.1 million metric ton/year over 20 years on a free-on-board basis.
  • The SPA is subject to a final investment decision (FID) by Cheniere to build Train 6 at the facility, which has been exporting gas overseas since 2016.
  • “Petronas is one of the largest and most experienced participants in the global LNG market, and we are pleased to have it as our newest foundation customer at Sabine Pass, supporting Train 6,” Cheniere Partners CEO Jack Fusco said.
  • “This 20-year agreement with Sabine Pass Liquefaction continues our momentum on Train 6, where early engineering, procurement, and site preparation activities have recently commenced ahead of a final investment decision.”
14 Dec 2018
High Yield Weekly, Insight Rich Balestra - Portfolio Manager 0 comment

CAM HIGH YIELD WEEKLY INSIGHTS

CAM High Yield Market Note

12/14/2018

 

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$1.4 billion and year to date flows stand at -$51.5 billion. New issuance for the week was zero and year to date HY is at $162.5 billion, which is -40% over the same period last year.

 

(Bloomberg) High Yield Market Highlights

 

  • U.S. junk bond yields and spreads were flat to little changed across the risk spectrum, even as investors pulled more cash from funds.
  • Reported outflows again this week, the fourth consecutive week of outflows
  • This was the 7th outflow of over a billion dollars in the past 10 weeks
  • Junk bond returns stayed positive, while CCCs turned negative yesterday
  • Single-Bs were outperforming S&P 500, BBs and CCCs with 1.04% YTD return
  • Record withdrawals from retail funds are offset by supply shortage, as YTD volume is lowest since 2009
  • New issue market remained quiet and is expected to shut down by the end of next week ahead of the holidays
  • This would be the first month of no issuance since November 2008
  • Key drivers of U.S. junk bonds — default rate, GDP, corporate cash flow, earnings — are intact

(Washington Post) Investigation of generic ‘cartel’ expands to 300 drugs

  • Executives at more than a dozen generic-drug companies had a form of shorthand to describe how they conducted business, insider lingo worked out over steak dinners, cocktail receptions and rounds of golf.
  • The terminology reflected more than just the clubbiness of a powerful industry, according to authorities and several lawsuits. Officials from multiple states say these practices were central to illegal price-fixing schemes of massive proportion.
  • The lawsuit and related cases picked up steam last month when a federal judge ruled that more than 1 million emails, cellphone texts and other documents cited as evidence could be shared among all plaintiffs.
  • What started as an antitrust lawsuit brought by states over just two drugs in 2016 has exploded into an investigation of alleged price-fixing involving at least 16 companies and 300 drugs, Joseph Nielsen, an assistant attorney general and antitrust investigator in Connecticut who has been a leading force in the probe, said in an interview.
  • While precise estimates of alleged overcharges have not been released, generic-industry sales were about $104 billion in 2017. Excessive billings of even a small fraction of annual sales over several years would equal billions of dollars in added costs to consumers, according to investigators.
  • Generic manufacturers reject the accusations. They contend officials lack evidence of a conspiracy and have failed to prove anti-competitive behavior.
  • Among the 16 companies accused are some of the biggest names in generic manufacturing: Mylan, Teva and Dr. Reddy’s.
  • Investigators say voluminous documentation they have collected, much of it under seal and not available to the public, shows the industry to be riddled with price-fixing schemes. The plaintiffs now include 47 states. The investigators expect to unveil new details and add more defendants in coming months, which will put more pressure on executives to consider settlements.

(thestreet.com) Aramark Tumbles as Forecast Disappoints

  • Shares of Aramark Corp. tumbled 12% Tuesday after the food, facilities management, and uniform services company provided an earnings forecast that disappointed Wall Street.
  • For fiscal years 2019-2021, the company, which held an investor day on Tuesday, forecast 2% to 4% organic growth and double-digit adjusted earnings per share growth.
  • On average over the last three years, Aramark has grown earnings per share by 31% each year. It achieved revenue growth of 8.1% over the last year.
  • The company operates in three segments: U.S. food and support services, international food and support services, and uniform and career apparel. In January, Aramark announced that it had completed the acquisition of AmeriPride Services Inc. for about $1 billion  

 

  • (streetinsider.com) United Rentals FY19 Revenue Guidance Tops Views, Resumes Share Repurchase Program 
  • United Rentals, the world’s largest equipment rental company, held its biennial Investor Day in New York City on December 11, 2018, to provide an in-depth look at a range of key initiatives. The event, hosted by senior leadership for members of the investment community, focused on the company’s strategic vision, sustainable competitive advantages and emphasis on long-term value maximization.
  • The company reaffirmed its 2018 financial guidance and announced full year financial guidance for 2019.
  • Michael Kneeland, chief executive officer of United Rentals, said, “Our 2019 guidance reflects the healthy momentum we see going into year-end and our confidence that positive conditions will prevail in the coming year. Our five 2018 acquisitions have been successfully integrated, increasing the tailwinds in our gen-rent and specialty segments. We look forward to reporting our fourth quarter results on January 23.”
  • Additionally, the company announced that it will resume its $1.25 billion share repurchase program this month. The program was initiated in July 2018, with approximately $210 million of shares purchased through September
  • Additionally, the company announced that it will resume its $1.25 billion share repurchase program this month. The program was initiated in July 2018, with approximately $210 million of shares purchased through September 30, 2018. The Company subsequently paused the program on November 1, 2018 to focus on the integration of the BlueLine acquisition. The company intends to complete the program by the end of 2019.

(Bloomberg) T-Mobile-Sprint M&A On Track at FCC Despite Strong Dish Dissent

  • T-Mobile’s Sprint M&A is on track at the FCC, even though latest filing by Dish boosts its already strong case against the deal. While the combination’s level of concentration raises serious red flags and makes approval a very close call, we’re skeptical that Dish can sway a Republican-led FCC focused on 5G.
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