Author: Rich Balestra - Portfolio Manager

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $1.5 billion and year to date flows stand at -$39.3 billion.  New issuance for the week was $0.9 billion and year to date HY is at $159.9 billion, which is -32% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• S. junk bond spreads narrowed as fund flows turned positive, despite oil’s fall below $60 as it entered a bear market.
• ETF inflows did accelerate
• WTI fell for a 10th consecutive session, the longest losing streak on record
• Bloomberg Barclays high yield energy index returns were up a tad and almost flat at close yesterday with YTD returns at 1.256% vs 1.252% on Tuesday suggesting high yield energy bonds barely budged
• Energy yields were little changed at 7.58% at close yesterday even as oil dropped by 1.6%
• S. high yield continued to outperform other fixed income assets with YTD return at 1.61%
• CCCs were still the best performers YTD beating IG, BB and single-B with returns at 3.56%
• Investment grade is down 3.58% YTD
• There appears to be no immediate catalyst to derail junk bonds, with supply at a 10-year low and oil losing its grip
• Low and declining corporate default rate, steady economy and improved quality of the junk bond universe boosts sentiment
• Number of companies rated B3 with negative outlook dropped to the lowest since 2014
• YTD high yield supply was the lowest since 2009

(KTLA)  Prop 8: California Voters Reject Measure That Would’ve Capped Dialysis Clinics’ Profits

• California voters on Tuesday rejected a ballot measure that would have capped dialysis clinics’ profits in an effort to improve patient care.
• Proposition 8 would have limited profits for dialysis clinics that provide vital treatment for people whose kidneys don’t work properly.
• The measure was the most expensive initiative on the 2018 ballot in California, generating more than $130 million in campaign contributions. A health care workers union, Service Employees International Union-United Healthcare Workers West, funded the $18 million supporting campaign. Dialysis companies contributed more than $111 million to kill the initiative.
• The union argued Proposition 8 would stop the dialysis companies from cutting corners to make money and force them to invest more of their revenue into patient care. Supporters say the profit-hungry companies don’t adequately clean clinics and overwork staff.
• Dialysis providers say the measure was actually a tactic to pressure the dialysis companies to let workers unionize and would have forced clinics to close. They say most California clinics provide high quality care.

(Reuters)  Dish beats profit estimates, expects more subscriber losses

• Dish Network Corp beat Wall Street estimates for quarterly profit on Wednesday, as the U.S. satellite TV provider benefited from lower programming costs due to a blackout of Univision channels.
• Dish shed a net 367,000 satellite subscribers during the third quarter, much higher than a consensus estimate of 232,000 net customer losses, according to research firm FactSet.
• Dish, which has been stockpiling licenses for wireless spectrum, or airwaves that carry data, said it was on track to build an Internet of Things wireless network, and it is placing antennas on towers this year.
• The company’s streaming video service Sling TV added just 26,000 subscribers during the quarter, below analyst expectations of 71,000 additions, according to FactSet.

(Sun Sentinel)  Prison operator Geo increased revenue, profits in third quarter

• Prison and detention center operator The Geo Group saw its third-quarter profits increase to $39.3 million, or 33 cents a share, compared with $38.5 million, or 31 cents a share, in the year-ago quarter, according to earnings released Wednesday.
• Revenue at the Boca Raton-based company increased 3 percent in the quarter to $583.53 million, up from $566.76 million in the third quarter of 2017, Geo said.
• Chairman and CEO George Zoley said he remains optimistic about demand for the company’s services and its outlook for “growth opportunities.”

(Business Wire)  Zayo Announces Plans to Separate into Two Public Companies

• Zayo Group Holdings, Inc. today announced it plans to separate into two publicly traded companies: one to focus on providing core communications infrastructure and another to leverage infrastructure to provide solutions for a broad set of enterprise customers.
• Zayo Infrastructure, “InfraCo,” will be a unique, fiber-focused infrastructure provider with deep, dense networks and broad geographic reach throughout North America and Western Europe.
• “EnterpriseCo” will have a strong product portfolio and customer base centered on higher bandwidth connectivity to enterprise locations, including to public cloud and SaaS providers, that will be sold both directly to enterprise customers and wholesale through a carrier focused channel.
• “Today’s announcement is the logical next step in the evolution of Zayo,” said Dan Caruso, chairman and CEO of Zayo. “While Zayo’s business today is organized as five autonomous segments, the complexities of these businesses have made it more difficult to achieve our growth objectives. By completely separating the infrastructure and enterprise businesses, we will enable more focused execution within each business, leading to enhanced growth and unlocking value.”
• “This transaction positions InfraCo as the largest pure-play fiber-focused communications infrastructure provider and creates an opportunity for EnterpriseCo to fully focus on our extensive enterprise customer base, solution set and business model while maintaining a strategic relationship with InfraCo,” said Caruso. “As we operate independent businesses today, we anticipate the transition to be fairly straightforward.”
• The transaction is expected to be consummated via a pro rata taxable spin of EnterpriseCo from Zayo. Zayo’s existing NOLs are expected to be available to reduce any cash taxes owed by Zayo in conjunction with the spin-off. This structure preserves the ability for InfraCo to convert to a real estate investment trust (REIT). Consummation of the spin is subject to regulatory and Board approval. Immediately following the separation transaction, which is expected to be completed in late 2019, Zayo shareholders will own shares of both companies.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.2 billion and year to date flows stand at -$40.9 billion.  New issuance for the week was $0.8 billion and year to date HY is at $158.9 billion, which is -31% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• S. junk bonds appeared to be on the mend after the October tumult, with yields declining and returns rebounding across ratings yesterday. High yield is the only positive returning global fixed income segment this year, up 1.01% at the close yesterday.
• Heightened volatility in October caused outflows from U.S. high- yield funds
• October saw fourth biggest outflow on record with $4.93b for week ended Oct. 10
• Investors pulled cash in three of the last five weeks in October
• Supply drought is a dominant theme, with issuance down more than 30% year-over-year
• Little issuance kicked off November after a slow October
• Junk bonds are supported by low default rates, strong technicals, lack of supply, and steady GDP growth

(Bloomberg)  Junk Bonds Spooked by Worst October Since 2008 as Yields Spike 

• October is typically a good month for high yield, but this October is on track for the biggest loss since December 2015 as equity volatility, earnings and trade worries weigh.
• S. high yield’s 1.81 percent drop so far this month is exceeded only by the 1.87 percent decline for global high yield, making it the second-worst performer of all the main bond market indexes. October has been positive for high-yield bonds in every year since 2008, when the market tumbled almost 16 percent in the month.
• The equity and oil slump, VIX jump and rising concerns about trade wars, Brexit and Italy all dented risk appetite in October.
• The average yield jumped to almost 7 percent — from about 5.5 percent at the start of this year — the highest since July 2016. CCC yields crossed the 10 percent mark for the first time since Jan. 2017. This makes it more costly for lower-quality companies to raise new funds and pay down debt.
• While junk bond yields rose and returns plummeted, there has been no panic selling. Some investors see this as a buying opportunity. Firm credit fundamentals, low default rates and a steady economy are critical factors favoring junk bonds.

(PR Newswire)  Olin Announces Third Quarter 2018 Earnings

• Third quarter 2018 reported net income was $195.1 million, which compares to third quarter 2017 net income of $52.7 million.  Third quarter 2018 adjusted EBITDA was $398.3 million.  Third quarter 2017 adjusted EBITDA was $265.5 million.  Sales in the third quarter 2018 were $1,872.4 millioncompared to $1,554.9 million in the third quarter 2017.
• John E. Fischer, Chairman, President and Chief Executive Officer, said, “During the third quarter, Olin achieved the highest adjusted EBITDA level since the acquisition of the DowDuPont Chlorine Products businesses.  Olin benefited from strong operating performances by both the Chlor Alkali Products and Vinyls and Epoxy businesses as well as improved chlorine, ethylene dichloride, and other chlorine-derivatives pricing.  We also made significant progress on our de-leveraging initiatives, repaying $170 millionduring the third quarter, thereby reducing debt by $250 million during the first nine months of 2018.
• We now believe full year 2018 adjusted EBITDA will be approximately $1.26 billionwith upside opportunities and downside risks of approximately 2%. This reflects higher than previously anticipated ethylene costs, resulting from increased ethane prices, of approximately $25 million, lower expected caustic soda pricing of approximately $45 million, and lower Winchester results due to decreased commercial ammunition demand of approximately $15 million. “
• Despite near-term declines in caustic soda prices, Olin continues to believe that the long-term supply and demand fundamentals for caustic soda remain positive.  Long-term caustic soda demand growth from alumina, pulp and paper and inorganic chemicals is forecast to exceed long-term chlorine growth from PVC, water treatment, urethanes and refrigerants.  The combination of steady global demand growth, chlor alkali capacity reductions in North America, Europeand China over the last two years, and minimal capacity additions support a favorable caustic soda outlook.  Olin expects continued improvement in caustic soda pricing during the next several years.

(Modern Healthcare)  HCA posts strong revenue, earnings in Q3 

• The Nashville, Tenn.-based company’s revenue jumped 7.1% to $11.5 billion during the third quarter of 2018, which ended Sept. 30, compared with $10.7 billion during the same period in 2017. Net income attributable to HCA grew 78% year over year to $759 million, from $426 million during the same period in 2017.
• HCA’s earnings before interest, taxes, depreciation and amortization totaled about $2 billion during the quarter, compared to $1.8 billion during the same period in 2017.
• The company’s same-facility admissions grew 3.1% during the third quarter of 2018 year over year, while same-facility emergency room visits declined 0.4% during that time. Same-facility inpatient surgeries increased 1.6% year over year, and same-facility outpatient surgeries increased 4.2% during that period.
• HCA’s Chief Operating Officer Sam Hazen said on the earnings call that the third quarter of 2018 marked 18 consecutive quarters in which HCA has grown its same-facility admissions. He also noted that 12 of the company’s 14 divisions saw growth in both admissions and adjusted admissions.
• Considering macro trends in HCA’s markets, the company’s growth plan, market-share gains and its experienced management team, Hazen said he expects the earnings growth rate in 2019 to be within the range of the company’s 2018 guidance for its full-year EBITDA growth rate of roughly 7%.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$2.1 billion and year to date flows stand at -$39.6 billion.  New issuance for the week was $5.0 billion and year to date HY is at $158.1 billion, which is -30% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• Junk bond returns took a beating yesterday, with CCCs losing most and yields rising across ratings amid fund outflows, equity volatility and disappointing earnings. This morning’s drop in U.S. equity futures keeps the pressure on.
• Junk bond spreads widened and yields rose across the risk spectrum as equities dropped more than 4% mid week and the VIX jumped 27%
• Stocks recovered a bit, while VIX remains above 20
• October saw the fourth biggest outflow on record and MTD outflow was $5.4b
• While high yield investors turned cautious, lack of supply is supportive
• This was the slowest October since 2015 with $8.4 billion MTD of issuance
• YTD volume at $158b was the lowest since 2009

(Reuters)  Leverage rising on US buyout loans after regulation relaxed

• Leverage ratios on private equity-backed deals are rising again as banks compete more aggressively for lucrative private equity loans after regulators relaxed leveraged lending guidelines earlier this year.
• The guidelines were put in place in 2013 to limit systemic risk and prevent a re-run of the financial crisis, but were relaxed in February
• In the first nine months of 2018, the guidelines’ original limit of 6.0 times leverage was exceeded by a record 73.1% of private equity buyout loans, up from 64.2% in 2017. This exceeds the previous peak of the market in 2007 immediately before the financial crisis, when 61.5% of deals were levered at that level, according to LPC data.
• “The shackles have been taken off,” a banker said.
• Strong investor demand for floating rate leveraged loans is exceeding a limited supply of deals as cash continues to pour into the asset class in a rising interest rate environment. Toppy equity markets mean that private equity firms are paying high enterprise valuations, which is producing more highly leveraged loans as banks compete for mandates.
• The most aggressive highly leveraged deals are also setting new records with 41.4% of sponsored deals carrying leverage of more than 7.0 times. This eclipses the market’s previous high in 2007, when 38.5% of deals reached that level.
• When the guidelines came into effect in 2013, deals with debt-to-Ebitda leverage ratios of more than 6.0 times received unwelcome extra scrutiny from regulators including the Office of the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corp.
• Regulated banks were instructed to make sure that all the company’s secured debt, or half of total debt, could be paid down within five to seven years and explain any exceptions on ‘criticized’ deals.
• This immediately handed a competitive advantage to institutions not subject to the guidelines, which were able to lead more highly leveraged loans than regulated banks.
• That edge disappeared in September, when the Fed and the OCC said the guidelines are not technically rules, following February’s comments by Comptroller of the Currency Joseph Otting that banks could underwrite outside the guidelines as long as they did so prudently and had capital to support it.

(Bloomberg)  NeoTract Welcomes UK Government Announcement to Remove Barriers to Adoption of the UroLift® System

• A new Government scheme announced today selects the UroLift^®System as one of seven innovations across all specialisms that are the most transformative for NHS patients
• The UroLift System will now benefit from support from the Accelerated Access Collaborative to rapidly increase its uptake in the NHS. This enables transformative products to reach patients as quickly as possible through streamlined regulatory and market access decisions.
• Neil Barber, Consultant Urologist, Frimley Health NHS Foundation Trust, was the first surgeon to routinely offer the UroLift System on the NHS. Mr. Barber said, “I am very pleased by this news. Having been involved in the initial European randomized clinical trial, the potential benefits of the UroLift System to both patients and the NHS quickly became very clear.

(Bloomberg)  At Sell-Off’s Core Is an Earnings Season That’s Consoling No One

• A quarter of the way through earnings season and 10 months into what is sure to be the biggest year for profit growth this decade, the numbers are strong. The market doesn’t care.
• It sounds astonishing: at a time when S&P 500 operating income is surging more than twice the historical average, stocks have gone nowhere, with both the Dow Jones Industrial Average and S&P 500 erasing their annual gain on Wednesday.
• Confidence in the present is quickly becoming panic about the future, as signs of a tottering real estate market, concern about China’s fragile economy and budding indications of inflation blot out optimism that had lifted the S&P 500 almost 10 percent through September. The VIX is at its highest since February.
• Aspects of the carnage are different from past corrections. The S&P 500 has declined in 19 of 24 days since peaking in September, with bad days landing at almost twice the frequency of the last three corrections. Unlike earlier selloffs, bulls are fighting the Fed. The central bank has lifted rates eight times since 2015 and given no indication it will let up.
• To the extent earnings matter anymore, it’s not this year’s but next year’s, where forecasts for an 11 percent gain are coming under the strictest of scrutiny. Partly it’s the “peak earnings” argument that says the deceleration to roughly half this year’s rate will leave investors with no reason to buy. But it’s also concern that the estimates themselves won’t hold up.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.5 billion and year to date flows stand at -$37.5 billion.  New issuance for the week was zero and year to date HY is at $153.0 billion, which is -32% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• Junk bonds yields rose back towards the recent three-month high amid continuing equity volatility and soft oil prices, despite positive fund flow data.
• Yesterday, Junk bonds fell 0.23%, the most for a day in more than a week
• They were the no new issues for the week
• Month-to-date volume is $5.775b, slowest October since 2015
• High yield was still the best performer in fixed income with a YTD gain of 1.65%
• CCCs beat IG, BBs and single-Bs with 5.16% YTD return, though CCCs also saw the biggest one-day decline in more than a week
• IG returns were negative 3.30% YTD

(CNBC)  Sears files for bankruptcy, and Eddie Lampert steps down as CEO

• Sears Holdings filed for bankruptcy protection early Monday after years of staying afloat through financial maneuvering and relying on billions of CEO Eddie Lampert’s own money. Lampert, who has served as CEO for the past five years, will step down from that post, effective immediately, but remain chairman.
• As part of the bankruptcy, Sears will shutter 142 stores toward the end of the year. It expects to begin liquidation sales shortly.
• Over the years, Lampert shed Sears assets and spun out real estate to pay down the debt. The company still has roughly 700 stores, which have at times been barren, unstocked by vendors who have lost their trust. Many of the stores have never been visited by younger generations of shoppers.
• Lampert, who has a controlling ownership stake in Sears, personally holds some 31 percent of its shares outstanding, according to FactSet. His hedge fund ESL Investments owns about 19 percent.
• But even with the bankruptcy filing, Lampert continues to invest in Sears. The retailer said Monday morning ESL is negotiating a $300 million debtor-in-possession loan to support it through its bankruptcy. That loan comes on top of an additional $300 million it has secured from investment banks.
• Lampert also expressed regret he couldn’t get the necessary parties to agree to his last efforts to stave off bankruptcy.
• The board was in a perilous position. Its special committee had been tasked with approving Lampert’s latest plan, a bid to buy his storied Kenmore appliance business and other brands.
• Approving Lampert’s offer would have helped Sears make its payment. But that would also thrust the board into the spotlight, potentially opening them to the threat of litigation from shareholders who might allege Lampert has stripped the business bare.

(CNBC)  Talk of a US recession in 2020 is a little premature 

• Several analysts have come out of the woodwork in the last few weeks predicting not just a U.S. growth slowdown, but the start of a recession in 2020.
• Is the fiscally turbocharged U.S. growth about to come to an end? The economy is growing at a robust pace of around 3 percent for 2018 and is set to grow at 2.5 percent in 2019 (according to IMF’s latest world economic outlook): a moderation due to waning fiscal impulse and trade wars. But when does a late cycle economy transition into an economy that’s verging on a recession?
• While inflation has been rising, wage growth of sub-3 percent is still far from pre-great financial crisis levels north of 4 percent. In a note published last week, Goldman Sachs Chief U.S. Economist Jan Hatzius remarked that despite the unemployment rate standing the lowest level in 48 years (at 3.7 percent), core personal consumption expenditure (PCE) inflation — the metric the Federal Reserve looks at — has remained steady at around 2 percent.
• Rising wages would typically be associated with a squeeze in corporate profits. Perkins calculates that rising wages have been matched by productivity so there hasn’t been a corporate squeeze yet. In fact profit share, as a percentage of gross domestic product, is about 10 percent higher than it was 20 years ago, according to Perkins. Top-line earnings are still growing.
• That leaves us with asset valuations. Aggregate global debt continues to climb, U.S. asset prices are about 50 percent higher in aggregate than five years ago. And the market is certainly starting to get a little jittery if last week is anything to go by.
• Crucially however, the economy and companies’ revenues are still growing. The labor market is not showing signs of overheating. Therefore, the recession call might be premature.

(MarketWatch)  Fresenius Medical Care cuts view as income falls

• Fresenius Medical Care cut its targets for 2018, as it reported an 8% fall in third-quarter net income.
• According to preliminary figures released late Tuesday, net income at the German company fell 8% and sales decreased 6%.
• On the back of the results, Fresenius Medical Care cut its target for net income growth in 2018 to between 11% to 12%, from a previously guided range of between 13% to 15%. It also now expects revenue growth at between 2% to 3%, down from a previous target of between 5% to 7%.
• Fresenius said its third-quarter results were affected by weaker-than-expected volumes at its Dialysis Services business and contributions to campaigns in the U.S. opposing state ballot initiatives.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $2.3 billion and year to date flows stand at -$34.0 billion.  New issuance for the week was $4.7 billion and year to date HY is at $151.7 billion, which is -27% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• The lowest-rated junk bonds came under pressure, with CCC-rated debt yields hitting a six-month high, as global bond markets sold off. The spread on the Bloomberg Barclays High Yield Index meanwhile hit a fresh 11-year low.
• Triple-C yield jumped to almost 9.3% after the biggest rise in more than seven years
• Treasury moves and drifting stocks pressured junk bonds across ratings, rate-sensitive BBs and single-Bs were hit hardest
• Stocks lost steam amid concerns that Fed hikes, coupled with WTI at a new multi-year high, may cause economic slowdown
• Lack of supply continued, with just Covanta Holding pricing a $400m 8NC3 offering at the tight end of talk after receiving orders of more than $1b
• Junk bond spreads dropped to new lows as the 5Y and 10Y Treasury yields hit a fresh multi-year high yesterday

(Digitimes)  HDD demand for enterprise data centers remains robust, says WD executive

• HDD demand for enterprise data centers continues to be strong, according to Christopher Bergey, executive VP at Western Digital (WD).
• In the enterprise data center segment, HDD demand has as high as 40% annual growth, Bergey said. There is still a gap between SSD and HDD prices, though the industry’s transition to 3D NAND manufacturing has been dragging down SSD prices, Bergey indicated.
• Traditional hard drive storage is well suited for handling massive big data analytics to support machine learning, while solid state storage provides fast read and write speeds to allow fast and efficient decision making, Bergey said.
• Bergey continued that it is difficult to assume SSDs will completely replace HDDs given that the latter has its lower cost per unit storage. While SSDs are set to become a broadly use storage technology, the market for HDDs will become more condensed, Bergey suggested.
• WD is also a SSD provider. Sales of both the company’s SSD and HDD lines continue their growth momentum, Bergey said.

(CNBC)  DaVita shares rise after California bill capping dialysis payments is vetoed

• Shares of dialysis clinic operator DaVita rose more than 3 percent on Monday after California’s governor vetoed a bill that would have cut into its sales.
• The bill, which was vetoed by Gov. Jerry Brown on Sunday, would have limited reimbursements for financial assistance to dialysis patients. That assistance is used by companies to maximize their reimbursements and can drive up premium costs.
• CEO Javier Rodriguez said in a statement the bill “would have harmed thousands of dialysis patients in California by allowing health plans to discriminate against low-income dialysis patients who rely on charitable assistance to pay their insurance premiums.” He also noted the company was “deeply relieved” the bill was vetoed.
• Though this is seemingly a win for DaVita, one of the largest kidney care provider in the U.S., but it all depends on what happens next month. California voters will have a chance to vote on a ballot that would limit how much revenue dialysis providers can earn from commercially insured individuals.

(Bloomberg)  Sky High Valuations in CCC Bonds

• Although the riskiest U.S. corporate bonds have been a great bet this year, some money managers think high valuations mean it’s finally time to sell.
• Company bonds that are the most likely to default, rated in the CCC tier, have gained more than 6% this year including interest, while the rest of the junk-bond universe is up just 2.2%. But Bank of America analysts recently warned that the riskiest junk bonds seem to be losing momentum, and investors should consider switching into safer securities.
• Bank of America strategists led by Oleg Melentyev advised investors last week to trim their exposure to CCC debt, saying that most of the bonds’ gains relative to higher-rated speculative-grade debt occurred in the first half of the year. The current extra return investors are getting to hold the notes isn’t “the right level of compensation for the amount of credit risk investors are taking,” they wrote.

(Bloomberg)  Teleflex Buys Essential Medical; Terms Not Disclosed 

• Teleflex says it acquired privately-held Essential Medical Inc., developer of the “Manta” device.
• Company sees deal modestly adding to constant currency revenue growth and gross margins over multi-year period after the anticipated FDA premarket approval of the Manta device in 2019
• Device “specifically designed for closure of large bore arteriotomies following procedures utilizing devices or sheaths ranging in size from 10F to 18F (with maximum outer diameters up to 25F)”

(Business Wire)  Arconic Announces Sale of Its Texarkana, Texas, Rolling Mill

• Arconic announced today that it has reached an agreement to sell its Texarkana, Texas rolling mill to Ta Chen International, Inc., a U.S. subsidiary of aluminum and stainless steel distributor Ta Chen Stainless Pipe Co., Ltd. Under the terms of the transaction, Arconic will sell Texarkana for approximately $300 million in cash, plus additional contingent consideration of up to $50 million. The transaction is expected to close in the fourth quarter of 2018, subject to receipt of certain regulatory approvals and other customary closing conditions. The Company expects to record a gain on the sale.

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$1.3 billion and year to date flows stand at -$36.4 billion. New issuance for the week was $4.0 billion and year to date HY is at $146.6 billion, which is -27% over the same period last year. 

(Bloomberg) High Yield Market Highlights

• Junk bonds are leading the fixed income pack with a near 2.5 percent return at the end of third quarter, shrugging off fund outflows as issuance remains sparse.
• U.S. corporate high-yield funds saw a $1.3b outflow for the week ended September 26, biggest outflow in more than 10 weeks
• CCCs are the best performing asset in fixed income with YTD return of 5.88%
• Investors appeared wary of aggressive LBO funding after Refinitiv and AkzoNobel, as Envision Healthcare’s $1.625b senior notes offering to fund its buyout by KKR was met with resistance to loose covenants, forcing a cut in the size of the offering by $400m and moving funds to term loan
• Besides issuer-friendly covenants, Envision was weighed down by stalled negotiations with UnitedHealthcare as it threatened to drop the firm from its network
• YTD supply of $147b is the slowest since 2009

(Company Release) CenturyLink Chief Financial Officer Sunit Patel to depart company

• CenturyLink announced that Executive Vice President and Chief Financial Officer Sunit Patel has resigned from CenturyLink after accepting an executive leadership role at another company. Patel’s resignation is effective Sept. 28. CenturyLink will initiate a search process for his replacement that will include both internal and external candidates.
• Neel Dev, CenturyLink’s group vice president of finance, has been named interim CFO effective upon Patel’s departure. Dev served as the integration planning lead for Level 3 in the recent CenturyLink acquisition and currently has responsibility for business unit finance support, supply chain and procurement, capital governance management, budgeting and financial performance analysis and management. He has been part of Patel’s leadership team for 14 years and has more than 20 years of experience in the telecommunications industry, in both financial and operational roles.
• “Sunit has made significant contributions to CenturyLink and Level 3 as CFO, and he has been a valuable partner to both companies and to me,” said Jeff Storey, president and chief executive officer of CenturyLink. “Additionally, Sunit did a great job in building bench strength and an excellent leadership team across the finance organization. As Sunit focused on our external stakeholders, Neel has been our de facto operational CFO and part of my management team for the past ten years. I am highly confident he will continue our drumbeat of financial discipline across CenturyLink with a focus on synergy attainment, operating efficiency and profitable growth.”  

(Company Release) CyrusOne Inc. Prices Public Offering of Common Stock

• CyrusOne announced that it has priced a public offering of 8,000,000 shares of its common stock, of which 5,500,000 shares were offered directly by CyrusOne, and 2,500,000 shares were offered, at the request of CyrusOne, by the Forward Purchaser, at a price to the public of $62.00 per share. CyrusOne granted the underwriters an option to purchase up to 1,200,000 additional shares of its common stock in connection with the offering.
• In connection with the offering of CyrusOne’s common stock, CyrusOne entered into a forward sale agreement with Morgan Stanley (who is referred to in such capacity as the “Forward Purchaser”), with respect to 2,500,000 shares of CyrusOne’s common stock covered by the offering.
• Pursuant to the terms of the forward sale agreement, and subject to CyrusOne’s right to elect cash or net share settlement under the forward sale agreement, CyrusOne intends to issue and sell, upon physical settlement of such forward sale agreement, 2,500,000 shares of its common stock to the Forward Purchaser in exchange for cash proceeds per share equal to the applicable forward sale price, which will initially be the public offering price, less underwriting discounts and commissions, and will be subject to certain adjustments as provided in the forward sale agreement. CyrusOne expects to physically settle the forward sale agreement in full and receive proceeds by September 15, 2019.
• The Operating Partnership intends to use such proceeds to repay borrowings under the senior unsecured revolving credit facility, fund growth capital expenditures related to recently signed leases and for general corporate purposes, which may include funding future acquisitions, investments or capital expenditures.

(CAM Note) On the back of the stock issuance, S&P upgraded the debt of CyrusOne by one notch. The debt is now investment grade at S&P.

(CNBC) Health Management Associates to pay $260 million to settle criminal charges for allegedly defrauding Medicare, Medicaid

• Health Management Associates has agreed to pay more than $260 million to settle fraud charges that included paying kickbacks to physicians and ripping off federal health programs, the Justice Department said.
• HMA, which was acquired by the for-profit hospital Community Health Systems in 2014, paid physicians in exchange for patient referrals and submitted inflated claims for emergency department fees to federal health insurance programs, prosecutors said.
• The agreement announced Tuesday also resolves several outstanding civil claims against the hospital operator, the DOJ said. An HMA subsidiary that operated under the name Carlisle Regional Medical Center additionally agreed to plead guilty to one count of conspiracy to commit health-care fraud.
• “HMA pressured emergency room physicians, including through threats of termination, to increase the number of inpatient admissions from emergency departments — even when those admissions were medically unnecessary,” Assistant Attorney General Brian Benczkowski said in a statement. “Hospital operators that improperly influence a physician’s medical decision-making in pursuit of profits do so at their own peril.”

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $0.3 billion and year to date flows stand at -$35.0 billion. New issuance for the week was $6.4 billion and year to date HY is at $142.6 billion, which is -26% over the same period last year. 

 (Bloomberg) High Yield Market Highlights

• Supply shortage is the continuing theme for U.S. junk bonds, aggravated by more cash flowing into dedicated funds.
• AkzoNobel priced at the tight end of price talk yesterday as investors shrugged off aggressive issuer-friendly covenants
• Orders exceeded $2.5b for the $600m offering
• Covenants allow flexibility to convert asset sale proceeds into restricted payments; permit dividend distribution to sponsor without deleveraging
• Oversubscription on new issues have become common as investors scramble for yield
• This week, orders for Refinitiv’s $2.8b USD tranche exceeded $10b
• Diamondback Energy’s drive-by offering got orders above $2b for a $500m offering, which was increased to $750m
• IGT and Clearway Energy had 3x-4x the size of the offering and priced at tight end of talk
• YTD supply is $142b, down 26% from same time last year, lowest since 2009
• Junk bond spreads, yields little changed across ratings
• CCCs beat BBs and single-Bs and remained the best performing asset, with YTD returns of 5.59%, a new YTD high
• IG down 2.62% YTD
• High yield supported by low default rate, strong corporate earnings, steady U.S. growth
• Moody’s expects default rate to fall to 2.6% by year-end and 2.2% in August 2019

(Bloomberg) Supply Dearth Elevates Junk Bonds to Top Fixed Income Performer

• Buy U.S. junk bonds — they’re not selling enough of them.
• Investors who followed that logic this year are enjoying the best returns anywhere in fixed-income, as high-yield issuance runs much slower than in 2017.
• September, traditionally a busy month for supply, has been the slowest since 2011
• Volume is down after years of refinancing and a lack of LBO activity
• Some financing is being done in the loan market instead of bonds
• The shortage has pushed investors to reach for yield and give less regard to risk

(Reuters) Cheniere signs 15-year LNG deal with oil trading giant Vitol

• U.S.-based Cheniere Energy Inc said that it has signed a 15-year agreement to supply liquefied natural gas (LNG) to the world’s largest oil trader Vitol Group that has been steadily ramping up its presence in that market.
• The move by Vitol is part of a long-term objective shared by many major commodity traders to increase their traded gas volumes as emerging markets seek cleaner fuels for power generation.
• China in particular has soaked up what many analysts expected to be a significant LNG glut this year as it replaces some of its coal furnaces with gas-fuelled ones.
• Part of the drive for traders is that the LNG market is becoming increasingly liquid with more spot deals, presenting arbitrage opportunities and supply imbalances that traders thrive off.
• Cheniere said it will sell 700,000 tonnes of LNG per year to Vitol, starting in 2018 with a purchase price pegged to the Henry Hub monthly average, plus a fee.

(Health Imaging) TriMedx to buy Aramark healthcare division, including imaging tech services, for $300M

• TriMedx announced plans to buy the healthcare technologies division of Aramark Corporation for $300 million. The two companies have signed a definitive agreement and expect the transaction to be completed by the end of the year.
• Aramark’s Healthcare Technologies business, which it acquired in 2001, maintains and services imaging equipment and provides management programs for clinical equipment. TriMedx specializes in clinical asset management and clinical engineering services.
• “We are excited to bring our technology and service model to a greater number of healthcare providers, delivering a comprehensive and differentiated clinical asset management program in an ever-changing environment,” said Henry Hummel, CEO of TriMedx, in a company statement. “We look forward to Aramark HCT’s talented associates joining the TRIMEDX team to support our strategic operating model focused on partnering with healthcare providers to drive measurable and persistent value.”
• Aramark executives announced plans to use the proceeds of the sale to pay down debt and buy back $50 million in shares.
• “Today’s action is another demonstration of the clear and focused strategy we are following that has substantially elevated our operating performance and is driving Aramark’s success,” said Eric J. Foss, chairman, president and CEO, in a prepared statement. “The divestiture of our Healthcare Technologies business will further focus our portfolio around our core food, facilities and uniforms businesses. I want to thank and congratulate our HCT team members for their contributions to Aramark and wish them continued success.”

(Business Wire) AMC Entertainment Closes on $600 Million Strategic Investment from Silver Lake 

• AMC issues $600 million Senior Unsecured Convertible Notes due 2024 to Silver Lake bearing interest at 2.95% and convertible into AMC Class A common stock at $20.50 per share, before giving effect to the special dividend noted below; with ongoing cash interest expense of the Notes to be more than offset by the cash dividend savings no longer being paid on the AMC shares repurchased from Wanda.
• On September 28, 2018, AMC will pay a special dividend of $1.55 per share to all AMC Class A and Class B common shareholders of record as of September 25, 2018. The special dividend will not be paid to Wanda on the shares repurchased by AMC.
• Silver Lake, a private equity firm with over $40 billion of invested or committed capital, and a global leader in technology investing, receives one seat on the AMC Board and a two-year right of first refusal on certain future transfers of AMC shares by Wanda.
• With support from Silver Lake in identifying candidates, AMC will add a new independent Director to its Board who will have significant technology experience and knowledge.
• Wanda and Silver Lake are both wholly committed to continuing AMC’s current growth strategies under the leadership of AMC CEO and President Adam Aron and AMC’s senior management team.