Author: Rich Balestra - Portfolio Manager

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.6 billion and year to date flows stand at -$34.3 billion.  New issuance for the week was $6.5 billion and year to date HY is at $121.0 billion, which is -24% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• The U.S. junk bond issuance onslaught continued yesterday, with five more deals for $4.6 billion priced and strong oversubscription. This week was, the second busiest year-to-date, and most active since March.
• Global risk appetite took a hit this morning on Turkey contagion worries
• Demand for high-yield bonds in the primary market was most evident in the pricing of BMC Software, a CCC- credit funding an LBO by KKR
• Orders exceeded $4.5b for the $1.475b issue which priced at 9.75%, the wide end of talk after tightening from initial whispers of 10%
• HCA Inc drove-by with a $2b 2-tranche offering on orders of about $7.5b, more than 3.5x the size of the offering; priced at tight end of talk
• Marriott Vacations had orders of ~$3.8b, 5x the size of the offering, priced through talk
• Earlier in the week, Springleaf Finance and Wellcare Health were oversubscribed multiple times
• Junk bond yields are under some pressure as new supply hit, oil dropped for the second straight session and stocks retreated amid continuing trade tensions with China
• CCCs stay on top as they beat BBs and single-Bs, with YTD return of 4.64%
• IG bonds are down 2.36% YTD
• Goldman expects big boost to junk bond issuance from a rebound in acquisition activity by high yield-rated buyers

(CAM Note)  Moody’s upgrades debt of Penske Automotive Group

• The Moody’s upgrade was based on Penske’s continually improving credit profile. Additionally, Moody’s appreciates the diversity of Penske which helps insulate the Company from headwinds.

(CAM Note)  S&P downgrades debt of AMC Entertainment

• The S&P downgrade was based on their assessment that discretionary cash flow could turn negative for 2018. Therefore, leverage is likely to remain elevated.  However, S&P did note that AMC has adequate sources of liquidity to fund operations.

(Los Angeles Times)  Tribune Media terminates sale to Sinclair Broadcast Group, seeks $1 billion in damages

• Sinclair Broadcast Group’s proposed $3.9-billion deal to acquire Tribune Media is dead.
• Tribune announced Thursday that it is terminating the merger agreement first announced in May 2017. The companies had the option to kill the sale if it had not closed by Aug. 8.
• Tribune also said it filed a breach-of-contract lawsuit against Sinclair in Delaware Chancery Court, alleging it failed to make its best effort at getting regulatory approval of the sale. Tribune is seeking $1 billion in damages.
• “In light of the FCC’s unanimous decision … our merger cannot be completed within an acceptable timeframe, if ever,” Tribune Media Chief Executive Peter Kern said in a statement. “This uncertainty and delay would be detrimental to our company and our shareholders. Accordingly, we have exercised our right to terminate the merger agreement, and, by way of our lawsuit, intend to hold Sinclair accountable.”
• The merger has been on hold since the Federal Communications Commission voted July 19 to have the proposal reviewed by an administrative court, a process that has a history of killing such deals.
• Sinclair’s plan to buy Tribune’s 42 TV had been expected to benefit from President Trump’s appointment of FCC Chairman Ajit Pai, who is considered a strong proponent of deregulation of the broadcast industry.
• But Pai raised concerns about how Sinclair planned to divest some Tribune stations in order to meet the national cap on TV-station ownership. Under Sinclair’s plan, Tribune stations in Chicago, Dallas and Houston would have been sold to entities that had business ties to Sinclair for prices under market value. Sinclair also would have retained control of the stations even after the divestiture.

(Bloomberg)  Private-Prison REITs Expand Empires Thanks to Tax Advantages

• A big part of the success stems from Trump’s plan to spend nearly $2.8 billion next year expanding immigrant detention capacity by 30 percent from 2017. More than 70 percent of undocumented immigrants were held in private prisons last year, according to nonprofit group In the Public Interest.
• Use of the tax code plays a role, too. CoreCivic and GEO, the biggest U.S. prison companies, are classified as real estate investment trusts. That means almost all their profits from property-related operations are tax free as long as they’re distributed to shareholders through dividends.
• The tax rules incentivize CoreCivic and GEO to build and lease detention facilities rather than only manage them. They’re doing just that.
• Boca Raton, Florida-based GEO owned or leased 102 prisons in the U.S. last year, up from 65 in 2013, when it became a REIT.
• CoreCivic, based in Nashville, Tennessee, reduced managed-only contracts to seven last year from 16 in 2013, the year it also became a REIT. Facilities it owns and manages or leases grew to 82 from 53.
• “For the past five years, we’ve been very thoughtful about rebidding on CoreCivic Safety’s managed-only contracts when they are up for expiration,” CoreCivic spokeswoman Amanda Gilchrist said in an email. “The margins in the managed-only business are very low, and we are dependent on the government partner to maintain the real estate asset, including maintaining all critical security and life safety systems.”
• Both companies also have business lines whose revenue is taxable.

(CAM Note)  Both GEO and CoreCivic reported 2nd quarter results that exceeded analysts’ estimates and raised guidance for the year.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.2 billion and year to date flows stand at -$34.9 billion.  New issuance for the week was $1.7 billion and year to date HY is at $114.5 billion, which is -25% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• Issuance-starved investors scrambled for Intelsat, the first Ca-rated sale of 2018, placing more than $4 billion in orders for what started as a $1 billion deal.
• Offering upsized to $1.25b highlighting demand for credit rated lower than triple-C as investors move deeper down the risk spectrum for yield
• FS Energy and PGT Innovations also oversubscribed by 3x-4x, priced at tight end of talk, as investors made a beeline to rare new issues after a long drought
• Yesterday was the busiest issuance session in more than three weeks
• S. corporate high-yield funds returned to inflow
• CCCs continued to beat other fixed income assets with 4.53% YTD returns
• Investment-grade bonds down 2.62% YTD
• Strong technicals, steady economic growth, healthy corporate earnings and low default rate is backdrop for high yield
• Default rate projected to decline to 1.5% by April 2019 from current 3.7%, according to Moody’s

(Company Release)  Seagate Technology Announces CFO Resignation

• David H. Morton, Jr., executive vice president and chief financial officer at Seagate, will leave the company for a senior finance executive role at another company. Morton has agreed to assist in the orderly transition of his CFO responsibilities and will leave the company on August 3, 2018. His departure is not based on any disagreement with the company’s accounting principles, practices or financial statement disclosures.
• Dave Mosley, president and chief executive officer said, “On behalf of the board of directors and executive team at Seagate, I would like to thank Dave for his contributions over his 20+ year tenure at the company. As chief financial officer, Dave championed company-wide efforts to create shareholder value through optimizing our financial model, strengthening the company’s balance sheet and driving strategic investments. We wish Dave the best in his future endeavors.”
• Dave Morton said, “It has been a tremendous career experience working at Seagate and I am proud of the successful transitions we have accomplished in the business over the last few years. Seagate is well positioned with a strong operational and financial foundation to continue to achieve its strategic goals and create shareholder value.”
• Seagate will be initiating a search for a successor CFO and has named Kathryn R. Scolnick interim CFO. Kathryn has been a senior finance executive at Seagate for six years leading the company’s investor relations and treasury operations.

(CAM Note)  Morton will fill the Chief Accounting Officer role at Tesla

(Bloomberg)  NY Regulator Rescinds Charter Merger Approval 

• The New York State Public Service Commission revoked its approval of the 2016 merger between Charter Communications and Time Warner Cable because Charter did not provide the public benefits promised on which the approval was conditioned
• Commission directed its counsel to bring enforcement action against the company
• Commission directed Charter to pay $1 million to New York Treasury for missing the June milestone for expanding its service network, bringing the total amount of payments to $3 million
• Charter is also ordered to file a plan with the Commission within 60 days to ensure an orderly transition to a successor provider, or providers
• The Commission says the company repeatedly failed to meet deadlines and attempted to “skirt obligations to serve rural communities”
• Charter says in a statement that Spectrum has extended the reach of broadband network to more than 86,000 New York homes and businesses since merger
• Charter Communications has a “very strong legal case” in New York State and will litigate if needed against New York regulators, according to comments by management on its 2Q earnings call.

(Business Wire)  Arconic Reports Second Quarter 2018 Results

• Arconic Inc. reported second quarter 2018 results, for which the Company reported revenues of $3.6 billion, up 10% year over year. Organic revenue was up 5% year over year, driven by higher volumes in the commercial transportation, automotive, aerospace engines, defense, and building and construction markets. This was partially offset by unfavorable aerospace wide-body production mix, and the negative impact of $38 million related to the settlements of certain customer claims.
• Second quarter 2018 operating income was $324 million, up 1% year over year. Operating income excluding special items was $381 million, down 2% year over year, reflecting the impact of a $23 million charge related to a physical inventory adjustment in one facility, unfavorable aerospace wide-body production mix, and continued challenges in the Rings and Disks operations, mostly offset by higher volumes and net cost savings.
• Arconic Chief Executive Officer Chip Blankenship said, “In the second quarter, Arconic delivered strong organic revenue growth and doubled adjusted free cash flow. We announced contract awards at the Farnborough International Airshow, providing groundwork for exciting growth with valued customers. We have initiated the sale process of our Building and Construction Systems business as the first outcome of our ongoing strategy review. Our team is delivering operational improvements where we need it the most. While there is plenty of work yet to be done, we are driving progress and generating positive momentum.”
• Arconic ended the second quarter 2018 with cash on hand of $1.5 billion. Cash provided from operations was $176 million; cash used for financing activities totaled $35 million; and cash provided from investing activities was $117 million. Adjusted Free Cash Flow for the quarter was $289 million.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were flat and year to date flows stand at -$35.1 billion.  New issuance for the week was $1.4 billion and year to date HY is at $112.7 billion, which is -24% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• Issuance-starved junk bond investors made a beeline to Party City, the lone new issue yesterday, as the market headed for its slowest month for sales since January 2016. Yields fell to a five-week low across ratings, shrugging off fund outflows.
• Party City got orders of about $1.6b for a $500m offering and priced at the tight end of talk
• YTD supply is $112.7, lowest since 2009, down 24% year-on-year
• CCCs yields dropped to six-month low yesterday
• CCCs continued to beat other fixed-income assets, with a year-to-date return of 4.5%, the highest so far this year
• IG bonds are down 2.75% YTD
• High- yield backdrop is benign, including steady economic growth, healthy corporate earnings, low default rate

(Globe Newswire)  CoreCivic Enters Into New Agreement With Federal Government to Utilize the La Palma Correctional Center

• CoreCivic announced that the Federal Government has entered into a new agreement to utilize CoreCivic’s 3,060-bed La Palma Correctional Center in Eloy, Arizona.  More specifically, the city of Eloy has agreed to modify an existing Intergovernmental Agreement with Immigration and Customs Enforcement (ICE) to add the La Palma facility as a place of performance, while also permitting the U.S. Marshals Service (USMS) to utilize capacity at the facility at any time in the future.  ICE currently expects to house up to 1,000 adult detainees at the La Palma facility under the new agreement and may house additional populations at the facility, subject to availability.  No family units or unaccompanied minors will be placed in the facility.
• The La Palma Correctional Center currently houses approximately 2,500 inmates from the state of California.  The State has begun to withdraw its population at the facility and announced plans earlier this year to ultimately discontinue utilization by January 2019.  Capacity at the facility will be made available to the Federal Government under the new agreement as additional State inmate populations exit the facility.  Under the terms of our agreement, the federal and state populations will not mix while both government entities utilize the facility.
• The new contract commences on July 24, 2018, and has an indefinite term, subject to termination by either party with 90 days’ written notice.  Updated full year 2018 financial guidance reflecting the impact of this new agreement will be provided with the issuance of the Company’s second quarter 2018 financial results on Wednesday, August 8, 2018.

(CNBC)  Hospital operator HCA lifts full-year forecast as admissions rise

• S. hospital operator HCA Healthcare reported a 24.8 percent rise in quarterly profit and boosted its full-year earnings forecast on higher patient admissions
• The upbeat results, coming from the largest U.S. for-profit hospital operator, allayed concerns that patients were delaying non-emergency surgeries due to worries about soaring out-of-pocket medical costs.
• Net income attributable to HCA rose to $820 million in the second quarter ended June 30, from $657 million a year earlier.
• Revenue rose to $11.53 billion from $10.73 billion a year ago, while revenue per equivalent admission rose 2.1 percent.
• Same-facility equivalent admissions, which include patients who stay in the hospital overnight and those who are treated on an outpatient basis, rose 2.8 percent.

(Business Wire)  Spectrum Brands Holdings Reports Financial Results

• Effective July 13, 2018, the HRG merger was completed resulting in the merger of Spectrum Brands and its former majority shareholder HRG Group, Inc. As a result of the legal form of the merger, HRG Group, Inc. has emerged as the surviving legal entity and renamed as Spectrum Brands Holdings, Inc., with a combined shareholder group of the two former entities, and will continue to operate as a global consumer products company similar to the legacy Spectrum Brands company.
• Net sales of $945.5 million in the third quarter of fiscal 2018 increased 9.6 percent compared to $862.9 million last year. Excluding the impact of $4.9 million of favorable foreign exchange and acquisition sales of $14.5 million, organic net sales increased 7.3 percent versus the prior year.
• Adjusted EBITDA of $206.4 million in the third quarter of fiscal 2018 increased 3.6 percent compared to $199.3 million in fiscal 2017.
• “I am pleased to report to you today that the turnaround of our HHI and GAC business units is well under way,” said David Maura, Chairman and CEO of Spectrum Brands Holdings. “While we have much more progress to make and will be investing in further efficiency measures over the next 12 months, I am thrilled that the leadership changes we have made and the focus on restoring the ownership accountability culture of our Company are already reading through to positive financial results. To execute 14.7 percent sales growth in our HHI division and a 12.5 percent top-line growth in our GAC division is gratifying, and a testament to what is possible with new leadership, new culture and an intense passion to win from our employee partners in these divisions.
• “As we are regaining operating momentum, we are on track to deliver the improved performance we promised in the second half of this fiscal year,” Maura said. “As such, we reiterate our fiscal 2018 adjusted EBITDA guidance for continuing operations of $600-$617 million and total company adjusted free cash flow of $485-$505 million.”

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.6 billion and year to date flows stand at -$35.1 billion. New issuance for the week was $2.7 billion and year to date HY is at $111.3 billion, which is -24% over the same period last year. 

(Bloomberg) High Yield Market Highlights

• Supply eludes the U.S. high-yield bond market, which is on track for the slowest July for new issuance since 2008. Two deals are expected to price today, and no new issues were added to the calendar.
• July has traditionally been a light month for junk bond sales, with an average supply of $15.5b the last five years
• Year-to-date supply is lowest since 2009
• Supply is down 24% year-over- year
• Junk bonds spread and yields were resilient yesterday amid faltering stocks and rising VIX
• High yield spreads and yields were little changed
• CCCs are at a 5-month low yield
• High yield has been operating in a friendly environment backed by the supply shortage, steady economic growth with no imminent threat of recession, healthy corporate earnings, low default rate

(The Economist) Netflix suffers a big wobble

• Even the most celebrated firms have their hiccups. On July 16th Netflix, an online-streaming giant, presented disappointing news to investors: it had added just 5.2m new subscribers in the second quarter of 2018, well below its projected number of 6.2m. Shares plunged by 14%.
• This most recent bout of volatility may say more about the firm’s soothsaying abilities than the strength of its underlying business. Although Netflix’s subscriber growth fell short of its own projections, it was still in line with that of past quarters. In percentage terms, Netflix registered a bigger miss against projected subscriber growth in the second quarter of 2016, when its shares fell by 13%.
• When asked this week to explain the forecasting error, Netflix’s chief executive, Reed Hastings, responded that the company never worked out what happened in 2016 either, “other than that there is some lumpiness in the business”. It is possible that subscriber growth fell short of expectations because none of the shows Netflix released last quarter captivated audiences in the way that past hits such as “House of Cards” have. Data from Metacritic, a review-aggregator, show its users gave Netflix shows released in the past quarter an average score of just 6.4 out of 10, well below the online streamer’s historical average of 7.2.  

(The New York Times) As Momentum for Sinclair Deal Stalls, Tribune Considers Options

• The Sinclair Broadcast Group’s plan to create a broadcasting behemoth that it hoped would rival Rupert Murdoch’s Fox News appears to be coming to an end.
• Already the largest local television operator in the nation, Sinclair agreed last year to buy the rival TV group Tribune Media for $3.5 billion. The deal would have given the combined company control of broadcasters reaching seven in 10 households across the country, including in New York, Chicago and Los Angeles.
• But in light of the Federal Communications Commission’s draft order this week questioning whether Sinclair was sufficiently transparent in how it represented the deal to regulators and whether a merger would be in the public interest, Tribune said in a statement Thursday that it was “evaluating its implications and assessing all of our options.”
• The merger agreement allows either side to walk away from the deal if it does not close by Aug. 8. Sinclair declined to comment.
• This week has brought a stunning shift in momentum for a deal that once seemed almost assured of being completed, thanks in no small part to policy changes proposed or enacted by the F.C.C. and advocated by Sinclair. The commission had also eased a cap on how many stations a broadcaster can own and relaxed a restriction on advertising revenue and other resources shared by television stations.
• But on Monday, the agency’s chairman, Ajit Pai — who is the subject of an investigation by the office of the F.C.C.’s inspector general regarding his new policies — said he had “serious concerns” about the Sinclair-Tribune merger. Mr. Pai asked the agency’s four commissioners to hand off its review of the merger to an administrative law judge to determine the legality of Sinclair’s proposal.

(Aluminium Insider) Arconic Lands Long-Term Aluminium Sheet Supply Contract With Boeing

• Value-added aluminium firm Arconic announced Monday a new, long-term contract with The Boeing Company to supply the aerospace firm with aluminium sheet and plate for the entirety of its offerings from Boeing Commercial Airplanes.
• This latest contract is the biggest to date, and it builds upon a deal signed by Arconic’s predecessor-in-interest with Boeing four years ago. Arconic and its predecessors have a longstanding relationship to provide wing skins for the entirety of Boeing’s metallic-structured airplanes, and this week’s agreement adds structural plate to the slate, which is used on a wide swath of Boeing’s offerings, including the 787 and 777X.
• Arconic plans to use materials produced by its Very Thick Plate Stretcher (VTPS), which is a program that began last year and is capable of stretching thicker aluminium plate than any competing process. Additionally, Arconic will begin offering aluminium plate treated by its new horizontal heat-treat furnace, which it expects to begin qualifications next year.
• Per Arconic, the principal challenge faced by composite wing makers is maintaining structural strength as wing surfaces increase. Arconic says its processes have allowed aircraft manufacturers like Boeing to address this problem, which has, in turn, led to a significant uptick in demand for its composite aluminium sheet solutions.

(The Wall Street Journal) Arconic Draws Interest From Buyout Firms 

• Aerospace-parts maker Arconic Inc. ARNC -2.59% is the subject of takeover interest from private-equity firms, according to people familiar with the matter.
• The company has received expressions of interest from buyout firms including Apollo Global Management APO -1.93% LLC, the people said.
• A takeover of Arconic would be a relatively big deal, especially for private equity. The New York company, which was known as Alcoabefore the aluminum maker broke itself up, currently has a market value of $8.3 billion, so with a typical premium it could go for north of $10 billion in a sale. Arconic also has $6.4 billion in debt.
• No deal is imminent, and there is no guarantee there will be one.

(CAM Note) HCA debt was upgraded one notch by S&P

• The upgrade reflects the company’s credit profile, cash flow growth, and free cash flow generation.

(CAM Note) Ingles debt was upgraded one notch by Moody’s

• The upgrade reflects the company’s real estate base, stable gross margins, and same store sales numbers in the context of a competitive food retail landscape.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $1.2 billion and year to date flows stand at -$33.0 billion.  New issuance for the week was $1.8 billion and year to date HY is at $108.5 billion, which is -25% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• The spread on the riskiest end of the junk bond market plunged to a four-year low as yields fell across the board and investors allocated fresh funds to high yield.
• Spreads tightened in four of the last five sessions across ratings
• Triple-C spread tightened most, closing at a 4-year low of +556
• Junk yields dropped to a 2-week trough, with CCC yields closing at a 3-week low as the S&P 500 closed at a 5-month high and the VIX dropped in four of the last five sessions to hit a 3-week low
• Investors ignored the hype and hoopla surrounding the trade conflict as high yield retail funds reported cash inflows
• Lipper reported an inflow of $1.8b for week ended July 11, the biggest inflow since April
• YTD supply is down 25%
• CCCs beat BBs and single-Bs with YTD returns of 3.65%
• CCCs outperformed investment-grade bonds, which are down 2.56% YTD

(MarketWatch)  U.S. oil sees steepest one-day percentage decline in more than a year

• Oil futures finished sharply lower Wednesday, with the U.S. benchmark registering its sharpest daily slump in about 13 months as fears of flagging demand and renewed production from Libya overshadowed a report showing the biggest weekly drop in domestic crude supplies in nearly two years.
• August West Texas Intermediate crude the U.S. benchmark, fell 5%, to $70.38 a barrel on the New York Mercantile Exchange—its lowest finish since June 25. The drop marked the worst percentage decline for a most-active contract since June 7 of 2017 and the steepest fall on a dollar basis since Sept. 1 of 2015, according to WSJ Market Data Group.
• “Market players are taking profits after reports of the return of Libyan crude oil,” possible waivers for U.S. sanctions on Iranian oil and renewed trade war fears, said Phil Flynn, senior market analyst at Price Futures Group.
• There is also speculation that U.S. President Donald Trump “will hammer Russia on raising oil production” in an effort to push prices lower, and that has “traders running for cover,” he said.
• The losses come even as the Energy Information Administration reported Wednesday that domestic crude supplies plunged by 12.6 million barrels for the week ended July 6.
• “The biggest draw since September 2016 should be a wake up call for the U.S.,” said Flynn. “We are in a tightening supply situation that is not going to get better soon.” The EIA reported a climb in crude supplies last week, but that followed three-consecutive weeks of hefty declines.
• Meanwhile, Libya’s state-run National Oil Corp. lifted force majeure on eastern oil ports on Wednesday after the ports were handed back from an armed faction, paving the way for a resumption of full production.
• “Resumption of exports from Libya trumps one week of bullish EIA data,” said James Williams, energy economist at WTRG Economics. “That reduces fear of shortages with so little spare production capacity worldwide.”

(Bloomberg)  Dish Network Gets Distress Signals From FCC

• Hurry up is the message the Federal Communications Commission had for Dish Network Corp. in a July 9 letter asking for more detail about how Dish plans to use the $40 billion of spectrum it acquired in recent years to build a wireless network. Dish faces an accelerated March 2020 deadline to use-or-lose some of the spectrum after missing previous cutoff dates.
• Chairman Charlie Ergen has invested heavily in wireless spectrum as he pivots the company he co-founded away from its declining satellite TV business. He’s funneling cash from the old business to fund the new one, and bondholders are worried they’ll be left behind.
• The agency said it’s following up on recent meetings between Ergen and FCC Chairman Ajit V. Pai with more more than a dozen questions about Dish’s plans to build out “spectrum that is apparently lying fallow.” Bond and stock holders might want the answers, too: The queries include the timing of critical milestones, the service Dish intends to provide and what industry standard technology might be used. Officials at Dish didn’t immediately respond to a request for comment.

(Fierce Telecom)  Frontier launches new cloud-based UCaaS offering for businesses

• Frontier Communications is now offering its customers a cloud-based unified communications-as-a-service to help them migrate their voice services to the cloud.
• Frontier’s AnyWare UCaaS allows small- to medium-sized business and enterprise customers to lease phones and equipment without having to worry about stranding investments in outdated gear.
• The scalable and customizable platform can be adapted for each company’s specific needs. Customers are able to save money by putting former hardware functions into the cloud while also reducing the cost of investing in and maintaining on-premise PBX systems.
• The UCaaS business has been booming of late. In the most recent fourth quarter, more than 300,000 subscriber seats were added to the global installed base, which is now growing by 29% per year, according to Synergy Research. Mitel and RingCentral were the top-two UCaaS companies in Synergy Research’s fourth quarter report. Combined, the two companies accounted for more than half of all the growth in the fourth quarter.
• Other UCaaS competitors in Frontier’s footprint include Charter Spectrum, Comcast and 8×8.

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.9 billion and year to date flows stand at -$34.4 billion. New issuance for the week was $5.8 billion and year to date HY is at $106.7 billion, which is -27% over the same period last year. 

(Bloomberg) High Yield Market Highlights

• Junk bond yields were flat and spreads little changed in a quiet market after the Independence Day holiday. Issuance is expected to resume next week.
• July has traditionally been a light month for HY bond sales with an average volume of $15.5b the last five years
• Last July issuance was under $11b and it was $8b in 2015
• Investors pulled cash from retail funds last week, wary of continuing trade tensions
• While some signs of caution emerged, high yield continued to operate in a benign environment of low default rates, a steady economy and strong oil prices
• Default rate projected to decline to 1.5% by April 2019 according to Moody’s
• CCCs continued to outperform BBs and single-Bs, with YTD returns of 3.08%
• CCCs also beat investment-grade bonds, which are down 2.95% YTD 

• (Industrial Distribution) United Rentals To Acquire BakerCorp For $715M

• United Rentals and BakerCorp International Holdings announced Monday they have entered into a definitive agreement under which United Rentals will acquire BakerCorp for approximately $715 million in cash. The boards of directors of United Rentals and BakerCorp have unanimously approved the agreement. The transaction is expected to close in the third quarter of 2018.
• BakerCorp is a  multinational provider of tank, pump, filtration and trench shoring rental solutions for a broad range of industrial and construction applications. The company has approximately 950 employees serving more than 4,800 customers in North America and Europe. BakerCorp’s operations are primarily concentrated in the United States and Canada, where it has 46 locations, with another 11 locations in France, Germany, the UK and the Netherlands. For the trailing 12 months ended May 31, 2018, BakerCorp generated $79 million of adjusted EBITDA at a 26.9 percent margin on $295 million of total revenue.
• “We’re very pleased to announce an agreement to acquire BakerCorp, an expert in fluid solutions and a highly regarded, customer-focused operation,” said Michael Kneeland, CEO of United Rentals. “We’re gaining a terrific team that shares our strong commitment to safety and customer service, and operations that complement our North American pump and trench offerings. This transaction will also be our company’s first experience in Europe, where BakerCorp has established an attractive, fast-growing business with significant future opportunity. We set a high bar across strategic, financial and cultural metrics when evaluating any acquisition. BakerCorp met every test, with the additional advantage of being primed to benefit from our systems and technology. We expect the combination to augment our revenue, earnings and EBITDA in 2018, while propelling the growth of one of our most promising specialty segments.”
• Also, United Rentals announced that William Plummer will retire as executive vice president and chief financial officer on Oct. 12. Plummer is the company’s longest-serving CFO, having joined United Rentals in 2008. He will remain with United Rentals until January 31, 2019, in an advisory capacity.
• The United Rentals board of directors has appointed Jessica Graziano as chief financial officer, effective Oct. 12. Graziano joined United Rentals in December 2014 as controller and principal accounting officer and was promoted to her current role in March 2017. In this role, she works closely with the senior leadership team and oversees the company’s accounting, financial planning and analysis and insurance departments. Graziano has more than two decades of financial management experience, previously serving as senior vice president, principal financial officer, chief accounting officer and corporate controller for Revlon Inc. Earlier, she held senior financial positions with UST Inc. (now Altria Group), Sturm, Ruger & Company Inc. and KPMG LLP.

• (Seeking Alpha) Crude Oil Makes Another New High This Week

• Crude oil continues to be the strongest commodity out there these days. As precious metals recently fell to their lowest level of the year, copper fell below a critical support level, grains are feeling the pain of tariffs, and many other raw material prices are under pressure, crude oil keeps on grinding higher. After the correction that took the price to a low of $63.59 per barrel on the NYMEX active month futures contract early in the week of June 18, the path of least resistance for the energy commodity has been higher.
• On Tuesday, July 3, the price of nearby August NYMEX crude oil futures rose to a higher high at $75.27 per barrel. Meanwhile, the Brent active month September futures contract has not been able to make it back above $80 per barrel since reaching a high of $80.50 on May 22. On that day, NYMEX WTI crude oil only traded to a high of $72.90 per barrel, so then Brent premium since the end of May has declined which is likely the result of OPEC’s increase in output at the June 22 biannual meeting. Despite the production increase by the world’s oil cartel at the end of June, the U.S. President continues to push the OPEC’s leading producer to pump up the volume, even more, these days.
• Before, during, and after the OPEC meeting on June 22, U.S. President Donald Trump continued to push for higher production from the cartel.
• In the aftermath of the OPEC meeting, President Trump has repeatedly called for more oil from the cartel. Russia and Saudi Arabia favored a production increase at the June meeting of oil ministers. However, Iran stood against any increase and the Trump administration warned other nations around the world from buying Iranian crude in coming months. The politics surrounding crude oil production in the Middle East is a complicated political puzzle these days. Despite continued requests and even threats about protection in the region, President Trump’s requests for more production have done little to stop the ascent of the price of the energy commodity which remains not far below its most recent high, and around $10 above the lows seen on June 18 before the OPEC meeting.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.5 billion and year to date flows stand at -$33.4 billion.  New issuance for the week was $4.2 billion and year to date HY is at $100.8 billion, which is -27% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• The yield on the Bloomberg Barclays US Corporate High Yield Bond Index jumped to the highest since December 2016 as issuance surged and funds saw outflows.
• Yesterday was busiest day for issuance this year, marking the busiest week of supply since early March
• Stars Group, a CCC-credit, got orders over $2b, priced at tight end of talk, increased size of the offering, cut size of TLB
• Nationstar, a low single-B credit, priced in middle of talk on orders of more than $3b
• AmWINS, also single-B, priced at tight end of talk
• June on track to be slowest sixth month since 2013
• 2018 issuance expected to be lower than last year’s $275b
• BB and single-B yields jumped to 20-month high after rising most in more than 2 months

(Bloomberg)  Community Health Continues Debt Revamp With $1 Billion of Senior Notes

• Community Health Systems Inc. is raising $1.027 billion by selling new senior notes to pay down more than$1 billion in term loans.
• The new first lien debt due in 2024 would be used to pay off Community’s Term Loan G, according to a statement. The sale would put off a near-term maturity and give the hospital operator a respite from refinancing for more than two years, at an incremental cost of $50 million in interest, Mike Holland, a Bloomberg Intelligence analyst, said in an interview.
• The offering follows Community’s debt exchange of unsecured notes for secured bonds with longer maturities. The Franklin, Tennessee-based company is unwinding a debt-fueled acquisition binge and cutting costs as it confronts tepid admissions, low margins and the industry’s high expenses. Community sold 30 hospitals last year, and it’s trying to strengthen results at the hospitals it’s keeping by focusing on more profitable treatments and getting out of low-margin treatments.
• Moody’s Investors Service rated the new first lien notes at B3, six steps below investment grade, on the expectation that Community will continue to operate with “very high financial leverage” of over eight times. The ratings firm expects negative free cash flow over the next 12 to 18 months as a result of high interest costs and “significant capital requirements” of the business.

(Moody’s)  Moody’s upgrades Diamondback Energy’s debt by one notch, positive outlook

(CAM Notes)  The Moody’s upgrade was based on the expected production and reserve growth over the next year and a half.  Additionally, Moody’s likes the generated top-tier margins of Diamondback.

(PR Newswire)  Steel Dynamics Announces Columbus Flat Roll Division’s New Galvanizing Line Expansion

• Steel Dynamics announced plans to expand its offering of value-added flat roll steel products through the addition of a new galvanizing line in Columbus, Mississippi.  The company plans to invest approximately $140 millionand create 45 new jobs, adding a third galvanizing line at its Columbus Flat Roll Division.  After the planned completion of this new facility, the company will have nine value-added galvanizing lines located throughout the eastern half of the United States, with a total annual coating capacity of approximately 3.8 million tons.  Upon the closing of the recently announced planned Heartland acquisition, the company will have ten flat roll steel galvanizing lines with approximately 4.2 million tons of coating capacity, solidifying Steel Dynamics as the largest provider of non-automotive galvanized flat roll steel in the United States.
• “This investment is another step of further diversification into higher-margin products for our Columbus Flat Roll Division,” said Mark D. Millett, President and Chief Executive Officer.  “In recent years, Columbushas transformed its product offerings through the addition of painting and Galvalume® coating capability, as well as through the introduction of more complex grades of flat roll steel, some of which serve the automotive sector.  These value-added improvements have reduced the amount of volume available to our existing galvanized customer base.  The addition of a third galvanizing facility will allow Columbus to serve these existing customers, as well as new customers in the region, and will also further reduce its exposure to the more cyclical hot roll market.”
• Construction is planned to take place during the next 24 months, with operations expected to begin mid-year 2020.
• Additionally, Steel Dynamics was recognized as the “2018 Steel Producer of the Year” on Tuesday, June 26, 2018, during the AMM Awards for Steel Excellence ceremony.
• Finalists were selected by senior American Metal Market editors, and those entries were scored by steel industry veterans who serve as judges to select the winners.

(CNBC)  Conagra Brands to acquire Pinnacle Foods for about $8.1 billion

• Conagra Brands on Wednesday announced plans to acquire Pinnacle Foods in a cash-and-stock deal valued at about $8.1 billion that furthers Conagra’s transformation under CEO Sean Connolly and its push into frozen foods.
• Including debt, the deal is valued at $10.9 billion.
• The pairing of Healthy Choice-owner Conagra and Bird’s Eye-owner Pinnacle would create the second-largest U.S. frozen food company behind Nestle, analysts at RBC Capital Markets have written. Conagra has poured money into its frozen business, with an eye toward repackaging and reformulating its products to cater to younger diners.
• Under the agreement, Pinnacle shareholders will receive $43.11 per share in cash and 0.6494 shares of Conagra’s common stock for each share of Pinnacle. Pinnacle shareholders are expected to own approximately 16 percent of the combined company.
• The deal is the culmination of on-again, off-again talks the two have had for years. It comes months after activist investor Jana Partners disclosed a roughly 9 percent stake in Pinnacle and said it planned to talk with the company about a possible sale.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.5 billion and year to date flows stand at -$31.8 billion.  New issuance for the week was $1.7 billion and year to date HY is at $96.5 billion, which is -28% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• Junk bond yields are up slightly with equity weakness and rising VIX, while lack of supply is supportive.
• Yield to worst on Bloomberg Barclays US Corporate High Yield Bond Index rose to 6.26%
• VIX saw the biggest jump in more than three weeks, closed at a 3-week high
• DJIA dropped in nine of the last 10 sessions, closed at a 3-week low amid continuing tensions over tariffs
• New issuance has been quite sparse
• Junk bond YTD returns are 0.69%, the best performing in U.S. fixed income
• CCCs continue to top BB, single-Bs with YTD returns of 3.52%
• CCCs also beat investment grade bonds, which are down 3.58%

(Moody’s)  Moody’s Upgrades AES Corporation’s Corporate Family Rating to Ba1 from Ba2; Rating Outlook is Stable

(CAM notes)  Moody’s upgrade was based on the business diversity, lowering of carbon risk exposure, and an improving credit profile.

(Bloomberg)  Cheniere to Buy Unit for $30.93 a Share in Streamlining Move

• Cheniere Energy Inc., the first U.S. company to export shale gas overseas, will buy the remaining stake in a holding company it already controls for $30.93 a share, moving to simplify amid a U.S. tax overhaul that’s pummeling natural gas partnerships.
• Investors in Cheniere Energy Partners LP Holdings LLC will receive 0.475 of a share in Cheniere Energy Inc. for each share of the holding company, of which Cheniere already controls 91.9 percent. The deal values the acquired company at about $7.2 billion.
• The pact comes as companies from Williams Cos. to Enbridge Inc. take steps to tighten their structures as changes in U.S. tax law upend the master limited partnerships often used to own pipelines. Units in MLPs plunged in March after regulators said they can no longer charge customers for taxes they don’t pay.
• “This has been the plan all along,” for Cheniere, Pavel Molchanov, an analyst at Raymond James Financial Inc., said by phone “This is part and parcel of a broader theme across the MLP landscape: companies are cleaning up, simplifying their structures.”
• The holding company has a stake in Cheniere Energy Partners LP — the business that owns and operates Sabine Pass, the terminal that was first to export U.S. shale gas overseas.

(Moody’s)  Moody’s downgrades U.S. Concrete’s Corporate Family Rating to B2 from B1; outlook remains stable

(CAM Notes)  Moody’s downgrade was based on leverage being elevated from the expected level.  Moody’s does see value in the Company’s ability to generate free cash flow.  Additionally, the private non-residential commercial segment of the construction market is favorable.

(CNBC)  Conagra has approached Pinnacle Foods about a potential deal 

• Conagra Brands has approached Pinnacle Foods about a potential acquisition, sources familiar with the situation told CNBC on Thursday.
• A pairing of Healthy Choice-owner Conagra and Bird’s Eye-owner Pinnacle would combine two companies with a large presence in frozen foods at a time when the category is seeing a resurgence. Food companies, including Conagra, have poured money into previously neglected brands to highlight their healthiness, affordability and ease of use.
• Pinnacle has a market capitalization of $7.9 billion, while Conagra’s is $15.1 billion. A combination of Conagra and Pinnacle would create the second-largest U.S. frozen food company, analysts at RBC Capital Markets recently wrote. The other major players include Kraft Heinz and Nestle, the latter of which is the largest in the U.S., according to RBC.
• The deal talks come after activist hedge fund Jana Partners recently disclosed a roughly 9 percent stake in Pinnacle and said it planned to talk with the company on a range of subjects, including a possible sale.

(Street Insider)  Frontier Communications CFO R. Perley McBride Resigns

• Frontier Communications announced that R. Perley McBride, its Executive Vice President and Chief Financial Officer, will be resigning from the company for personal reasons, and to return to Atlanta where his family resides. Mr. McBride will remain in his position until August 31, 2018 to help transition responsibilities. A search for his successor is being conducted.
• Frontier’s President and Chief Executive Officer Daniel J. McCarthy stated, “We announce Perley’s resignation with regret. Perley has done a tremendous job managing our balance sheet. He has negotiated improvements in the terms of our credit agreements, raised $1.6 billion of new second lien debt, and retired approximately $1.7 billion of unsecured notes. These steps, together with the stabilization in our business as reflected in our most recent quarterly results, have placed Frontier on a positive path forward. On behalf of everyone at Frontier, I wish Perley and his family the best in the future.”