Category: Insight

17 Apr 2018

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.6 billion and year to date flows stand at -$23.6 billion.  New issuance for the week was $3.7 billion and year to date HY is at $65.0 billion, which is -27% over the same period last year. 


(Bloomberg)  High Yield Market Highlights

  • Junk bond spreads tightened the most in nine weeks and CCC yields fell to a 5-week low as U.S. funds saw inflows and the year-to-date return turned positive.
  • Yields dropped across ratings in 6 of the last 9 sessions and have fallen for 4 consecutive sessions this week, amid strong technicals boosted by light supply, and WTI oil at a 40-month high
  • Spreads have narrowed in seven of last nine sessions
  • Year-to-date returns for junk bonds turned positive for the first time since early February, with a gain of 0.05% in the index, compared to a 2.38% loss in IG
  • Resilient junk bonds brought investors home after more than 10 weeks of no material inflow
  • Rebounding equities, steadily declining volatility — with the VIX hovering near and below 20 for last two weeks — boosted junk bonds
  • Supply is expected to be light as the earnings season was in progress
  • New issue pricing reinforced the strength of high yield as Drax Finco and J.B. Poindexter priced at the tight end of talk, with orders more than 3x the offer
  • Earlier this week, TopBuild advanced its pricing schedule, increased the size of the offer, priced at the middle of talk, suggesting junk investors were not avoiding risk
  • CCCs continued to outperform BBs and single Bs, with positive YTD returns of 1.25%, BBs were the worst with negative YTD returns of 0.92%, single-Bs turned positive with 0.54%


(Reuters)  Icahn to sell Federal-Mogul to Tenneco for $5.4 billion 

  • Activist investor Carl Icahn said on Tuesday he was selling auto parts maker Federal-Mogul to Tenneco Inc in a $5.4 billion deal, unloading an investment he has held for nearly two decades and picking up a new stake in Tenneco.
  • Tenneco plans to separate into two independent, publicly traded companies – one focusing on powertrain products and the other on auto parts such as suspensions and axle dampers – after the deal closes.
  • The new bulked up powertrain technology company will likely benefit from the fact that internal combustion engine parts and tailpipe exhaust scrubbing technology will be needed by automakers for a long time to come, before they can be replaced by newer technologies such as fully electric cars.
  • The aftermarket parts company would provide a potentially steady cash flow.
  • “Going to market with well-recognized brands, more product categories, greater coverage and expanded distribution capabilities is a strong formula for capturing growth, particularly in China,” Tenneco Executive Chairman Gregg Sherrill said.


(Forbes)  Why T-Mobile And Sprint Are Rekindling Their Merger Talks

  • Sprint and T-Mobile appear to be back at the negotiating table, marking the third time that the two companies are exploring a potential combination. While a potential merger is likely a net positive for both companies and the broader U.S. wireless industry, it remains unclear as to how much has changed since the two companies called off their last round of merger talks in 2017.
  • The biggest reason the two carriers are looking to restart talks is likely to avoid the duplication of future capital expenditures, as the wireless industry transitions from 4G technology to next-generation 5G technology. Sprint has a deep portfolio of 2.5 GHz spectrum holdings that could be used for 5G deployment, allowing the combined company to avoid some outlays that they may otherwise have to undertake individually. Moreover, wireless is a very high fixed cost business, on account of sizable network operation and maintenance costs as well as sales and marketing expenses. The present value of synergies stemming from a deal could stand at upwards of $20 billion.Additionally, the carriers may also have better pricing power in a saturating wireless market if a deal goes through.
  • The last round of talks fell through in late 2017, as the two companies were unable to agree on who would have control over the combined entity, and it’s not clear how much has changed since last year. T-Mobile’s majority owner Deutsche Telekom (which owns a ~63% stake) apparently views its ability to consolidate T-Mobile’s earnings with its financials as key, given that the U.S. carrier is one of its most valuable assets. This means that the company could be willing to put in more money to increase its effective stake in the joint entity and retain control. While Sprint is likely to have less bargaining leverage in a potential deal, considering its comparatively challenging financial position, with over $30 billion in long-term debt, its parent Softbank may still want to keep control of the joint entity. Softbank has been doubling down on the Internet of Things space, and it’s likely that it views Sprint as a crucial part of this plan, given its nationwide wireless network in the U.S.


(Wall Street Journal)  Wynn Resorts in Early Talks to Sell Boston-Area Casino Project to MGM

  • Wynn Resorts has been in talks to sell its partially built Boston-area casino project to rival MGM Resorts International, MGM according to people familiar with the matter, as Massachusetts regulators continue their investigation into the company’s handling of sexual-misconduct allegations against founder Steve Wynn.
  • The talks, which are over the Wynn Boston Harbor property and no other parts of the company’s gambling empire, are at an early stage and may not result in a deal, the people said.
  • Regulatory issues surrounding any potential deal would be complex, since Massachusetts forbids companies from operating more than one casino in the state, and MGM is planning to open one in Springfield soon, they added.
  • Wynn Resorts estimates the Massachusetts project, scheduled to open next year, will cost a total of $2.5 billion to build, making it one of the largest U.S. casino projects ever undertaken outside Las Vegas.
09 Apr 2018

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 -$24.2 billion.  New issuance for the week was $1.8 billion and year to date HY is at $60.0 billion, which is -28% over the same period last year. 


(Bloomberg)  High Yield Market Highlights

  • Junk bond yields continued to head south as they dropped to a two-month low at close, with the biggest decline in more than seven weeks. Yields fell across ratings for three consecutive sessions.
  • Spreads also tightened across ratings and saw the largest move in more than seven weeks as stocks continued to climb; the VIX dropped to a two-week low
  • Strength and resilience of the market was also reflected in the pricing of two drive-by offerings amid 11 weeks of outflows from retail funds
  • Two drive-by bond offerings were from the energy sector – Resolute Energy and Targa Resources; Targa Resources had orders of more than $3b and priced in the middle of talk
  • Primary market priced four deals for $1.8b, which suggested junk bond investors were not heading to the exit
  • While yields dropped and spreads tightened, junk investors have turned increasingly cautious and selective in credit-picking, a mood reflected in the pricing of American Greetings Corp yesterday
  • AM was the second deal this week after McDermott International to price at a deep discount and offer double-digit yields
  • CCCs continued to beat BBs and single-Bs with positive YTD returns of 0.55%
  • CCCs still beat stocks and investment-grade bonds, with IG’s YTD returns negative 2.68%
  • BBs were the worst with negative YTD returns of 1.41%, followed by single-Bs negative 0.24%
  • The default rate should move lower in 2018 amid a growing economy and improving credit conditions in the commodity sector, Moody’s John Puchalla wrote in note


(Business Wire)  Wireless Carrier Selects Zayo for Significant National Expansion

  • A major wireless carrier has selected Zayo for fiber-to-the-tower (FTT) to new macro towers in 30 markets across 21 states. The deal is an expansion of an agreement announced in September 2016. Inclusive of both contracts, Zayo will connect thousands of macro towers for the customer. The contract is Zayo’s largest mobile infrastructure contract to date.
  • The solution includes deployment of dark fiber infrastructure, in some cases replacing legacy Ethernet. The new infrastructure will support the carrier’s strategy of improving coverage and capacity across its network to accommodate increasing traffic and to prepare for 5G. The deployment will leverage Zayo’s existing fiber network and includes construction of hundreds of route miles of fiber.
  • “This undertaking is the result of a trusted relationship with the customer,” said Dan Caruso, chairman and CEO of Zayo. “As they continue to densify to meet the growing demand for bandwidth, dark fiber provides the optimal long-term solution.”
  • This agreement pertains to macro towers. Under other contracts, Zayo is deploying small cell infrastructure for this customer. In many cases, these are full turnkey implementations, including RF design, site acquisition, permitting and installation of equipment.


(Bloomberg)  AMC Cinemas Tiptoes Into Saudi Arabia as Theater Ban Lifted

  • AMC Entertainment, controlled by China’s Dalian Wanda, was granted the first cinema license in Saudi Arabia and plans to open 100 theaters with the country’s Public Investment Fund.
  • AMC, the world’s largest exhibitor, and the Development & Investment Entertainment Co., a subsidiary of Saudi Arabia’s PIF, plan to open as many as 40 cinemas within five years and 60 more by 2030, according to a statement Wednesday from the Leawood, Kansas-based company.
  • There are no commercial theaters in Saudi Arabia and plans to open them present challenges for the conservative kingdom, such as whether men and women can sit together and what types of movies will play. The partners are aiming for “50 percent market share of the Saudi Arabian movie theater industry,” the parties said. The first AMC in Saudi Arabia will open in the capital Riyadh on April 18.
  • The announcement coincides with the U.S. visit by Crown Prince Mohammed bin Salman, who is looking to burnish his image as the leader of a more open Saudi economy.


(Modern Healthcare)  Dialysis industry on alert as Calif. union pushes for reimbursement cap

  • A California fight between dialysis clinics and a major hospital workers’ union has healthcare industry investors and stakeholders jittery as the union gets ready to push a ballot initiative to cap private insurance reimbursements for dialysis.
  • The Service Employees International Union–United Healthcare Workers West, one of the country’s largest hospital workers’ unions, has gathered more than 600,000 voter signatures for a statewide ballot measure to cut off dialysis clinics’ commercial insurance reimbursement at 115% of care costs, which would slash their current rates.
  • The union claims the proposal would pressure clinics to improve care for dialysis patients by reinvesting extra revenue into staffing and other efforts to raise standards in order to bump up the cost of care.
  • But critics of the initiative say the measure could spur reverberating losses for corporate dialysis giants, hospitals and even state and federal coffers.
  • Most of dialysis market in California belongs to Colorado-based DaVita Healthcare Partners and the German company Fresenius Medical Care, who have about 70% of the state market share. The 30% remaining market share belongs to independent or not-for-profit clinics. California has just under 600 dialysis clinics.
  • California has an extra high rate of growth in dialysis patients — about 5% every year — and there are already more than 68,000 dialysis patients in the state.
  • But SEIU members say dialysis clinic regulations are far too lax, and facilities have been plagued by issues like rat and cockroach infestations or staffing shortages that leave technicians with only minutes to clean up stations before another patient receives treatment.
  • “With regards to staffing it’s a free-for-all,” said union member and longtime dialysis technician Emanuel Gonzales, who is helping to lead the union campaign and has worked in several dialysis centers across San Bernardino County and the Inland Empire in California. “They pretty much operate anyway they like. If something happens, they could blame workers.”
09 Apr 2018

Q1 2018 Investment Grade Commentary

The first quarter of 2018 saw credit spread volatility for the first time since early 2016. The Bloomberg Barclays US Investment Grade Corporate Bond Index started the year at a spread of 93 basis points over treasuries and narrowed to 85 on February 2nd which was the tightest level since 2007. From mid‐February onward, spreads finished the quarter wider, increasing to a spread of 109 basis points over treasuries. Recall that, if Treasury rates are held constant, tighter spreads mean bonds have increased in value while wider spreads mean those valuations have decreased. Treasury rates also impacted the performance of corporate bonds in the quarter. The 10yr Treasury started the year at 2.41% and closed as high as 2.95% on February 21st, before it finished the quarter at 2.74%. The combination of credit spreads that were 16 basis points wider and a 33 basis point increase in the 10yr Treasury was too great of a headwind for corporate credit during the quarter, and as a result the Bloomberg Barclays IG Corporate Index posted a negative return of ‐2.32%. This compares to CAM’s gross total return of ‐ 2.50%. By design, relative to the index, CAM is overweight higher quality credit (A‐rated) and underweight lower quality credit (BBB‐rated). Even though the index posted negative returns for the first quarter of 2018, the lower quality portions of the index outperformed the higher quality portions, a trend that has persisted since 2017.

As we have stated in previous commentaries, we expect that, over the longer term, this trend will reverse, and those investors who have favored higher quality and avoided the temptation of “reaching for yield” will be rewarded with outperformance over a longer time horizon.

Generally speaking, the economy has been stable and the backdrop for corporate credit has not deteriorated, yet this was the worst first quarter for corporate credit since 1996, when returns for the index started the year at ‐ 2.58%. So why then did corporate credit perform poorly during the first quarter? First, credit spreads experienced 16 basis points of spread widening, which has a negative impact on performance. Spreads generally go wider because investors are demanding more compensation for credit risk. As you can see from the above chart, a 16 basis point change in spreads is not that significant compared to the ranges that we have seen throughout the last 4 full years. What can impact credit as much or more than spreads is the overall level of interest rates. A 33 basis point move higher in the 10yr Treasury during the quarter, and a 35 basis point move higher in the 5yr Treasury are significant moves given the overall low level of interest rates. A concept called duration comes into play when

discussing these rate moves. The duration of The Investment Grade Corporate Bond Index at the end of March was 7.56. What this means is that, all else being equal, a 100 basis point increase in interest rates would yield a 7.56% drop in the value of a bond portfolio. So, a 50 basis point increase, all else being equal, would yield a 3.78% drop in the value of a bond portfolio. Conversely, a decrease in Treasury rates would increase the value of your bond portfolio. Now, rarely in the real world, do all other things remain equal, but the power of duration was the main driver of poor returns for corporate bonds during the quarter.

At Cincinnati Asset Management, our view on interest rates is that of an agnostic. We consistently position the portfolio in intermediate maturities that are 5 to 10yrs from maturity. Over the medium and longer term time horizons we have observed that this is the ideal place from the standpoint of maximizing the steepness of both the yield curve and the corporate credit curve. A key point to note regarding duration is that it decreases over time. With each passing day, a bond gets closer to its final maturity date, and the bond valuation gets closer to its par value as it approaches maturity – after all, a bond is a contractual agreement where the company that issued the bond has agreed to make a series of semiannual coupon payments to the holder over a specified period of time and it has also agreed to return the par value of the bond at maturity. The 9yr bond that was purchased in your account yesterday will be an 8.5 year bond in 6 months. Someday, it will be a 5yr bond, at which point it likely makes sense to extend from 5yrs back to somewhere in the 7‐10yr portion of the curve, depending on what offers the most attractive valuation at that point in time. We at CAM are extremely confident that we cannot predict where rates will go next. We only know that they will go higher, lower or stay the same. Now, to be sure, we will always select the shortest maturity in that 5‐10yr range that maximizes valuation along the Treasury curve. We have been finding quite a bit of value in 8‐9 year bonds so far in 2018 whereas there are other points in time where 10yr or 7yr bonds make more sense. Where we add the most value for our clients is in the assessment and ongoing monitoring of credit risk. Rates are going to do what they are going to do, but the credit risk associated with individual companies can be studied, researched and managed. When you invest your money with CAM, you are not buying an unmanaged, passive index. Our goal is to populate each client portfolio with the bonds of individual companies that offer the most compelling risk reward at that particular point in time.

As we turn to the second quarter we are seeing what we believe are reasonably compelling valuations in corporate credit. Higher underlying Treasury rates coincident with somewhat wider spreads have served to create some attractive entry points into defensive credits. Some of these same defensive credits were trading at unattractive valuations just a few short months ago when spreads were tighter and rates were lower. We are also finding value in the financial sector, as those valuations are compelling relative to the industrial sector and the economy is set up well for banks and non‐bank financials to report healthy earnings growth which in turn leads to stable and/or improving balance sheets for financial companies. New issue supply in the market is down 11.3% from 2017i but new issue concessions have risen to an average of 11.5bps which is the highest level in over 2 yearsii. A “new issue concession” is the compensation provided to a buyer of a newly issued corporate bond. For example, if a company has a 10yr bond outstanding with a yield of 4%, and it wants to issue a new 10yr bond to finance a plant expansion, then it will have to provide a concession to investors in the form of extra compensation to incentivize investors to purchase the new bond in the primary market instead of the existing bond in the secondary market. If we take the average concession of 11.5bps then the new bond would have a coupon of 4.115% which would make it attractive relative to the existing bond with a coupon of just 4%. Our access to the institutional primary market is one of the ways which we provide value to our client accounts. During the 1st quarter of 2018, about 25% of our purchase volume was new issuance. This is despite the fact that we did not find a single attractive new issue to purchase during the entire month of March. In other words, we remain even more selective than usual when it comes to primary market opportunities, but we believe we will have plenty of chances in the coming months if concessions remain attractive. Ideally, we would like to make 30‐35% of our purchases at attractive levels in the primary market.

A recurring theme for us in our commentaries is the proliferation of lower rated (BBB) credit in the investment grade universe in recent years, as BBB rated debt has increased from 33% to 50% of the index in the past decade. We are pleased to see that this topic is garnering some coverage in the mainstream financial press as the WSJ recently pointed out some of the risks associated with this phenomenon and there are two salient points from a recent article that we believe should give investors pause:

  •   The growth of BBB rated debt to $2.5 trillion from $1.3 trillion 5 years ago, and
  •   The yield premium on BBB debt relative to treasuries which stood at 1.34% at the end of March 2018 down from over 2.75% at the beginning of 2016iii.

    At CAM we target a weighting of less than 30% for our allocation to the riskier portion of the investment grade universe, which is BBB rated credit. Our concern with the growth in this lower rated portion of the market is the question of what could happen when the current credit cycle runs its course. If we were to experience a shock to the credit markets or a recession, then there is a portion of the corporate bond universe that is rated low‐single‐A that would be at risk of falling to BBB, further increasing the weighting of the risker portion of the market. More than that, there is a risk that many companies, who are rated low‐BBB, or barely investment grade, would be in danger of falling to high yield. The risk profile of a credit that is investment grade versus high yield can be dramatically different over a longer time horizon. According to Moody’s Investors Service annual default study, the 10yr cumulative default rate for Baa rated credit is just under 4% but that cumulative default rate jumps to north of 16% for credits rated Ba (high yield). This is the type of default risk that our investors are simply not bargaining for when they choose to invest in a high quality investment grade rated portfolio that targets an average credit quality of A3/A‐. These are the type of risks that we attempt to mitigate through our bottom up research process and our focus on the higher quality segment of the investment grade credit market.

    In closing, we thank you for your business and your continued confidence in managing your portfolios.

    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 Barclays, April 2nd 2018 “Investment Grade New Issue Supply Analysis”
    ii Credit Suisse, April 2nd 2018 “CS Credit Strategy Daily Comment”
    iii The Wall Street Journal, April 1st 2018 “The Danger Lurking in a Safe Corner of the Bond Market”

09 Apr 2018

Q1 2018 High Yield Commentary

During the first quarter of 2018, the High Yield Market gave back a modest amount of the gains seen in 2016 & 2017. The first quarter return of the Bloomberg Barclays US Corporate High Yield Index (“Index”) return was ‐0.86%. While the total return was negative, the return still bested most of the other asset classes within fixed income.i As seen last year, once again the lowest quality portion of high yield, CCC rated securities, outperformed their higher quality counterparts. As we have stated many times previously, it is important to note that during 2008 and 2015, CCC rated securities recorded negative returns of 49.53% and 12.11%, respectively. We highlight these returns to point out that with outsized positive returns come outsized possible losses, and the volatility of the CCC rated cohort may not be appropriate for many clients’ risk profile and tolerance levels. During the quarter, the Index option adjusted spread widened 11 basis points moving from 343 basis points to 354 basis points. While the Index spread did break the multi‐year low of 323 basis points set in 2014 by reaching 311 basis points in late January, it is still a ways off from the 233 basis points reached in 2007. Every quality grouping of the High Yield Market participated in the spread widening as BB rated securities widened 26 basis points, B rated securities widened 21 basis points, and CCC rated securities widened 28 basis points.

The Other Financial, Transportation, and Other Industrial Sectors were the best performers during the quarter posting returns of 1.03%, .06%, and .00%, respectively. On the other hand, Banking, Consumer Cyclical, and REITs were the worst performers posting returns of ‐2.49%, ‐1.15%, and ‐1.13%, respectively. At the industry level, tobacco, wirelines, retailers, and healthcare all posted strong returns. The tobacco industry (1.92%) posted the highest return. However, restaurants, wireless, supermarkets, and food & beverage had a rough go of it during the quarter. The restaurant industry (‐2.75%) posted the lowest return.

During the first quarter, the high yield primary market posted $72.7 billion in issuance. Importantly, almost three‐quarters of the issuance was used for refinancing activity. That was the highest level of refinancing since 2009. Issuance within Energy comprised just over a quarter of the total issuance. The 2018 first quarter level of issuance was relative to the $98.7 billion posted during the first quarter of 2017. The full year issuance for 2017 was $328.1 billion, making 2017 the strongest year of issuance since the $355.7 posted in 2014.

The Federal Reserve increased the Federal Funds Target Rate three times during 2017. In the first quarter of 2018, Chairman Jerome Powell took over for outgoing Chair Janet Yellen. So far, the Fed has increased the Target Rate just once in 2018 at the March meeting. While the outlook is for three increases this year, Chair Powell plans to “strike a balance between the risk of an overheating economy and the need to keep growth on track.”ii Naturally, the Fed is quite data dependent and the outlook can change as 2018 progresses. While the Target Rate increases tend to have a more immediate impact on the short end of the yield curve, yields on intermediate Treasuries increased 33 basis points over the quarter, as the 10‐year Treasury yield was at 2.74% at March 31st, from 2.41% at the beginning of the quarter. The 5‐year Treasury increased 34 basis points over the quarter, moving to 2.56% at March 31st, from 2.21% at the start of the year. 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. It was the cropping up of inflation concern that was the main driver of the intermediate term yield increase.iii The revised fourth quarter GDP print was 2.9%, and the consensus view of most economists suggests a GDP for 2018 in the upper 2% range with inflation expectations at or above 2%.

Digging into the monthly details a bit should be beneficial in understanding the dynamics of the quarter. January and February were almost entirely about higher rates and inflation fears, with spreads hitting tights at the end of January and then correcting quite a bit in early February. Mid to late February saw spreads begin to come back down to help offset the continued increase of higher Treasury rates. The return of higher spreads in March was more about tempered growth enthusiasm as retail sales growth continued to be sluggish, January durable goods were weak, Atlanta FED’s GDPNow forecasts continued to slide lower, and fears that global trade wars would slow growth further. Interestingly, the 10 year Treasury yield peaked on February 21st versus the 5 year Treasury peaking a month later on March 20th. That flattening is telling as growth expectations came down while the Fed continues a less accommodative posture. According to Wells Fargo, global quantitative easing has been reduced by 50% from the fourth quarter of 2017 to the first quarter of 2018. Lower rated CCC credits underperformed in March after the outperformance displayed in January and February. As the second quarter gets under way, Treasuries are down from the highs, high yield spreads are off the lows, and higher quality credit seems compelling as lower rated credit has finally started to underperform.

The chart to the left is sourced from Bloomberg and is the Chicago Board Options Exchange Volatility Index (“VIX”). The VIX is a market estimate of future volatility in the S&P 500 equity index. It is quite clear that the market has entered a period of higher volatility. In fact, the equity market through the first quarter of 2018 is already much more volatile than all of 2017 as measured by the number of positive and negative 1% days.iv In addition to the volatility witnessed throughout the markets during the first quarter, there have been a few transitions in high profile government posts as well. Jerome Powell began a four‐year term as Chair of the Federal Reserve following the end of Janet Yellen’s single term in that role; economist Larry Kudlow succeeded to director of the National Economic Council after Gary Cohn’s resignation; and Mike Pompeo and John Bolten were nominated as Secretary of State and National Security Adviser, respectively, after Rex Tillerson and HR McMaster were dismissed from the roles.

See Accompanying Endnotes

The Administration has taken action to impose tariffs on steel and aluminum. These actions were taken after a US Department of Commerce report on section 232 of the Trade Expansion Act suggested that the tariffs were justified. Several countries are currently exempt from the tariffs, including Canada and Mexico, likely because of the ongoing NAFTA negotiations. However, there seems to be a fair amount of flexibility going forward to manage the duties as the Administration sees fit. China is taking exception to the tariffs and has responded by imposing their own tariffs on 128 different products.v While 128 products is a seemingly high number, it only amounts to about $3 billion which is just a fraction of total trade between the US and China. This appears to be a negotiation tactic and clearly a developing story over the balance of 2018.

Being a more conservative asset manager, Cincinnati Asset Management remains significantly underweight CCC and lower rated securities. For the first quarter, that focus on higher quality credits was a detriment as our High Yield Composite gross total return underperformed the return of the Bloomberg Barclays US Corporate High Yield Index (‐1.83% versus ‐0.86%). The higher quality credits that were a focus tended to react more negatively to the interest rate increases. This was an additional consequence also contributing to the underperformance. Our credit selections in the food & beverage and home construction industries were an additional drag on our performance. However, our credit selections in the cable & satellite and leisure industries were a bright spot in the midst of the negative first quarter return.

The Bloomberg Barclays US Corporate High Yield Index ended the first quarter with a yield of 6.19%. This yield is an average that is barbelled by the CCC rated cohort yielding 9.24% and a BB rated slice yielding 5.09%. The Index yield has become more and more attractive since the third quarter of 2017. While the volatility discussed earlier does lend itself to spread widening and higher yields, there are still positives in the environment to keep in mind. First, the current administration is viewed as pro‐business and the tax reform bill that was passed should provide benefits throughout 2018. Additionally, High Yield has displayed a fundamental backdrop that is stable to The default volume did tick up during the first quarter, and the twelve month default rate is currently 2.36%.vii However, the current default rate is still significantly below the historical average. Also, a total of twelve issuers defaulted in the first quarter. Three of those issuers accounted for 74% of the default total. iHeart Communications was the largest to default accounting for 55% of the total. Separate from the uptick in the default ratio, the volume of distressed bonds did tick down in March. That was only the seventh downtick within the past two years. Finally, from a technical perspective, the high yield market generates close to $80 billion in coupon income every year. That is a nice supporting demand factor when facing a more volatile market environment. Due to the historically below average default rates and the higher income available in the High Yield market, it is still an area of select opportunity relative to other fixed income products.

Over the near term, we plan to stay rather selective. The selectiveness should serve our clients well as we navigate the higher volatility environment. Further, if the High Yield market begins to break down, our clients should accrue the benefit of our positioning in the higher quality segments of the market. 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 Credit Sights April 1, 2018: “US Monday Meeting Notes”
ii Reuters February 27, 2018: “First Congressional Testimony by Fed Chair Powell”
iii USA Today February 12, 2018: “U.S. Treasury yields rise to a new 4‐year high as inflation concerns drag on” iv Marketwatch March 28, 2018: “The Dow and S&P 500 have already doubled the number of 1% moves seen in all of 2017”
v CNN April 2, 2018: “China hits the United States with tariffs on $3 billion of exports”
vi Bloomberg March 20, 2018: “Historical Fundamentals – High Yield Corporates”
vii JP Morgan April 2, 2018: “Default Monitor”

27 Mar 2018

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week of March 15-March 21 were a positive $167 million, though flows have slowed now for four consecutive weeks. The data analyzed by wells shows that longer duration funds are gathering flows at the expense of shorter duration funds.  This is in contrast to Lipper data, where IG saw a solid inflow of $3.5bn versus the 4-wk Lipper average of +$1.6bn.  HY outflows continue, with Lipper reporting an outflow of $1.17bn taking YTD outflows to nearly $18bn for the HY asset class.

The IG new issue calendar saw $26.875bn price on the week, as Anheuser-Busch InBev led the way with a $10bn print across six tranches. Corporate issuance is down 18% y/y but there are several large M&A related deals waiting in the wings that could narrow this gap substantially in the coming weeks.  It is also likely that the market tone and renewed volatility in stocks and rates are keeping some issuers on the sidelines for the time being.

The Bloomberg Barclays US IG Corporate Bond Index opened on Friday with an OAS of 109, which is widest level yet seen in 2018.


(WSJ) ‘Rolldown’ Shows Why the Bond Market Is an Unfriendly Place to Hide

  • For bond investors, a concept called “rolldown” is like a virtuous form of financial gravity, a force that generates returns without doing much work. A flattening yield curve, however, is threatening the physics that investors rely upon.
  • The signals sent by the Federal Reserve Wednesday suggests the yield curve could flatten further: Its rate increases will raise short-dated yields, but there is still skepticism that rates in the long term will be materially higher.
  • When the yield curve is steep, investors benefit from the yield on a long-term bond “rolling down” the curve. As a 10-year bond over time becomes a nine-year bond, all else being equal, its yield falls and its price rises, producing a gain above the initial yield when the bond is purchased. That offers protection for bond investors in a rising-rate environment, notes TwentyFour Asset Management.
  • The U.S. yield curve still slopes upwards, with 10-year Treasurys yielding 0.57 percentage point more than two-year securities. But the further out you go, the flatter the curve gets. There is now only a 0.07 percentage-point gap between seven- and 10-year Treasury yields, a gap that has more than halved from a year ago. The potential for rolldown gains is small.
  • A similar phenomenon is showing up in U.S. corporate bond markets too, with the gap between short- and long-maturity bonds shrinking in both yield and spread terms. A number of forces are potentially at play here, as with the rise in Libor rates.
  • Higher U.S. Treasury bill issuance is competing for investors’ cash. And the pool of funding for short-dated debt may also have shrunk due to corporate cash repatriation, Citigroup suggests: if dollars can be repatriated and spent, they don’t need to be tied up in bond investments.
  • By contrast, steeper curves in eurozone government and corporate bond markets may make them attractive to investors. The European Central Bank’s negative-rate policy, which it is in no rush to change, is acting as an anchor for yields, reassuring bond investors. Coupled with the cost for foreign investors to hedge dollar-denominated bonds, U.S. bonds lose out despite their higher yields. All of that may lead to tighter U.S. financial conditions.

(Bloomberg) Bayer Hopes to Close $66 Billion Deal With Monsanto in 2Q18


  • Bayer continues to await antitrust clearance from the U.S. Department of Justice to close its proposed $66 billion purchase of Monsanto after having obtained all other necessary approvals. A DOJ decision is likely in 2Q. While Bayer agreed to sell or license about $7 billion worth of assets to BASF to ease antitrust concerns, additional measures may be needed for approval. Though this is more likely than not to be secured, if antitrust issues prevent it, Bayer will owe Monsanto a $2 billion fee.
  • Bayer also has ongoing patent suits against generic-drug makers with respect to Xarelto (with J&J), Beyaz/Safyral, Betaferon/Betaseron, Damoctocog alfa pegol, Finacea, Nexavar and Staxyn. It’s involved in product liability litigation with respect to Yasmin, Mirenac and Xarelto. Other legal issues include environmental and tax matters. 

(Bloomberg) PG&E Has a Plan to Prevent More Deadly Wildfires


  • Five months after wildfires ripped through Northern California’s wine country, PG&E Corp. has developed a plan to lower the risk of another outbreak.
  • PG&E will establish new guidelines for proactively turning off power lines in areas where there’s extreme fire risk — a practice that regulators had asked about after last year’s events. The company will also keep trees and limbs farther away from power lines to meet new standards and expand its practice of disabling some equipment during fire season, according to an emailed statement Thursday.
  • The announcement comes as state investigators probe whether PG&E power lines played a role in causing fires in Napa and Sonoma counties that destroyed thousands of structures and killed at least 40 people. The San Francisco-based company has lost more than a third of its market value amid investor concern that its equipment may have sparked the deadly blazes. No cause has been determined.
27 Mar 2018

CAM High Yield Weekly Insights

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$1.0 billion and year to date flows stand at -$22.7 billion. New issuance for the week was $3.3 billion and year to date HY is at $53.1 billion, which is -27% over the same period last year. 


(Bloomberg) High Yield Market Highlights


  • Junk bonds have been impervious to tumbling stocks and rising VIX amid threats of potential trade war, as the new issue market priced Cequel Communications, a CCC-credit, in a drive-by offering yesterday.
  • Yields were resilient as they rose by just 0.6% across ratings, while stocks plunged more than 2.5%, the biggest drop in six weeks; VIX rose more than 30%, also the biggest jump in six weeks
  • Investors, though cautious, also seem to shrug off another outflow from retail funds
  • There was no evidence of any panic selloff as yields were on a holding pattern and investors on watch mode
  • Oil was still near a 6-week high and has been rising in 6 of the last 10 sessions
  • BofAML strategist Oleg Melentyev wrote in note earlier in the week that technicals are still constructive, and pressure would build up to put cash to work amid light supply; April would see coupon generation of about $7.4b in cash
  • CCC credits continued to outperform BBs and single-Bs with positive YTD returns of 0.47%, as additional evidence of the strength of junk bond market
  • BBs were the worst, with negative YTD returns of 1.55%, followed by single-Bs negative 0.36%
  • Junk bond market was now stronger qualitatively, with issuers rated B3 and lower declining in numbers; Moody’s notes that issuers rated B3 and lower dropped to 13%, below the long-term average of 15% for the 6th straight month  


  • (CNBC) Fed hikes rates and raises GDP forecast again 
  • Interest rates are going up again, thanks to a well-telegraphed Federal Reserve move Wednesday.
  • Central bankers, led by Jerome Powell in his first meeting as chairman, approved the widely expected quarter-point hike that puts the new benchmark funds rate at a target of 1.5 percent to 1.75 percent. It was the sixth rate hike since the policymaking Federal Open Market Committee began raising rates off near-zero in December 2015.
  • Along with the increase came another upgrade in the Fed’s economic forecast, and a hint that the path of rate hikes could be more aggressive. The market currently expects three hikes for 2018, and that remained the baseline forecast, but at least one more increase was added in the following two years.
  • “The economic outlook has strengthened in recent months,” the committee said in its post-meeting statement, a sentence that had not been in previous releases. The language came even though the committee said earlier in the statement that “economic activity has been rising at a moderate rate,” a seeming downgrade from January’s characterization of a “solid” rate.
  • Fed officials raised their forecast for 2018 GDP growth from 2.5 percent in December to 2.7 percent, and increased the 2019 expectation from 2.1 percent to 2.4 percent.
  • However, growth is likely to cool after, with the 2020 forecast holding at 2 percent and the longer-run measure still at 1.8 percent.
  • Inflation expectations, on which the market has been laser-focused lately, changed little. The 2018 forecast remains just 1.9 percent for both core and headline inflation — core excludes food and energy prices. For 2019, the forecast for core personal consumption expenditures edged higher to 2.1 percent from 2 percent, while headline remained at 2 percent. The committee nudged the 2020 level up from 2 percent to 2.1 percent for both core and headline.
  • The benign inflation expectations are particularly remarkable considering that Fed officials now see unemployment running even lower than before. Currently at 4.1 percent, officials now see the rate for 2018 at 3.8 percent, down from the 3.9 percent December forecast, and 2019 falling all the way to 3.6 percent from the original 3.9 percent outlook. The 2020 forecast also fell, from 4 percent to 3.6 percent.
  • The so-called dot plot, which indicates individual members’ rate expectations, took a hawkish tilt. While a three-hike policy remains the baseline for 2018, the committee pushed 2019 from 2½ to three increases and 2020 from 1½ to two. The funds rate for 2020 is now expected to be 3.4 percent from the initial 3.1 percent, though the longer-run forecast rose just a bit, from 2.8 percent to 2.9 percent.  


  • (Bloomberg) As Commodities Roar, Africa Wants Bigger Slice of Mining Pie
  • The collapse in commodities through 2015 hobbled some of Africa’s biggest resource economies, stunting growth and leaving budgets short. Since then a recovery in prices has sent the continent’s biggest miners soaring, boosted profits and rewarded shareholders with bumper payouts. But a lack of returns to governments is drawing a backlash from Mali in the Sahara to Tanzania on the Indian Ocean.
  • Zambia is the latest flash point. Africa’s second-biggest copper producer slapped a $7.9 billion tax assessment on First Quantum Minerals Ltd. and said it’s planning an audit of other miners in the country. Companies operating in Zambia include units of Glencore Plc and Vedanta Resources Plc.
  • Next door in the Democratic Republic of Congo, Glencore, the world’s biggest commodity trader, is dealing with a dispute over a new mining code that dramatically boosts taxes, while major gold producer Mali has reportedly saidit might follow Congo’s example. Tanzania has all but crippled its biggest gold miner Acacia Mining Plc, a unit of Barrick Gold Corp., with export bans and a whopping $190 billion tax bill.  
16 Mar 2018

High Yield Weekly 03/16/2018

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.2 billion and year to date flows stand at -$17.4 billion. New issuance for the week was $8.9 billion and year to date HY is at $49.2 billion, which is -25% over the same period last year.


(Bloomberg) High Yield Market Highlights

  • Junk bonds showed some signs of exhaustion as yields rose for several consecutive sessions, with CCC yields rising to a 12-mo. high; as stocks tumbled and the VIX rose for three consecutive sessions. CCC yields have been rising steadily in 7 of last 10 sessions.
  • Junk investors, though weary and wary, embraced CCC credits and made a beeline for them in the primary market, with two deals for ~$1b pricing
  • NVA Holdings, CCC credit, got orders more than 3x the size of the offering and priced through talk, suggesting risk appetite was robust
  • Guitar Center, CCC-rated and a distressed issuer, was welcomed by investors and priced at the middle of talk
  • CCCs still beat BBs and single-Bs with positive YTD returns of about 0.8%, showing investor appetite for risk was still alive
  • BBs continued to be the worst performer with negative YTD returns of about 1.3%
  • Junk bond market was also stronger qualitatively, with issuers rated B3 and lower declining in numbers; Moody’s notes that issuers rated B3 and lower dropped to 13%, below the long-term average of 15% for the 6th straight month


(International Financing Review) Sprint launches near US$4bn spectrum bond

  • Telecom carrier Sprint raised almost US$4bn from a financing backed by its spectrum, a deal some analysts say will further boost its liquidity and help better prepare for a potentially tough year ahead.
  • The deal launched roughly in line with price talk
  • “Spectrum is its most viable assets, and that’s why it is borrowing against it,” an investor said.
  • The cost of financing for Sprint, rated junk itself, was also cheaper than available in the high-yield market. Sprint’s US$1.5bn junk bond sale last month – the company’s first in three years – came with yields of 7.625% for eight-year debt.
  • “We are encouraged by Sprint’s efforts to diversify its financing sources and use its under-utilized spectrum to secure more attractive pricing,” CreditSights analysts said.
  • They predict a bumpy year ahead for the company, earning that Sprint could burn through cash as it ramps up network capex and focuses on moving customers to leasing plans. That comes as the company faces some significant debt maturities.
  • The analysts note the company has amended its outstanding spectrum-backed note indenture to allow for the issuance of spectrum-backed notes in excess of the US$7bn that will be reached after its latest ABS.
  • “We would not be surprised to see the carrier explore new secured financing alternatives to bolster its cash position,” said CreditSights.


(Fierce Cable) Is SoftBank back on the Charter hunt? Reportedly buys 5% of cable operator’s stock

  • Japan’s SoftBank has laid the groundwork for a $100 billion takeover of Charter Communications by its U.S. mobile operator Sprint Communications, the London Times reported over the weekend.
  • The Times said that led by billionaire Masayoshi Son, SoftBank has quietly purchased 5% of Charter stock in recent weeks.
  • Neither Charter nor Sprint has commented on this report.
  • Last summer, Charter rebuffed a SoftBank merger offer of $540 a share at a time when the cable operator’s stock was trading in the low $400 range. Liberty Media kingpin John Malone, Charter’s biggest shareholder, was reported to be in favor of the deal. Also enthusiastic was the Newhouse family, who became influential Charter shareholders when the cable company bought Bright House Networks.
  • Charter’s management team, led by Chairman and CEO Tom Rutledge, has been resistant of a takeover, while still keen on actualizing the value of fully digested integrations of 2016 acquisitions Bright House and Time Warner Cable.


(PR Newswire) Huntsman Acquires Demilec, a Leading North American Spray Polyurethane Foam Insulation Manufacturer

  • Demilec has annual revenues of approximately $170 million and two manufacturing facilities located in Arlington, Texas and Boisbriand, Quebec where they produce a full suite of MDI based SPF formulations which they market directly to applicators as well as through distributors. Demilec specializes in both closed cell and open cell formulations, with a focus on products with renewable and recyclable content that are eco-friendly, bio-preferred and reduce energy consumption through highly efficient insulation properties.
  • Under terms of the agreement, Huntsman will pay $350 million in an all-cash transaction, funded from available liquidity. Based upon full year 2018 EBITDA estimates, this represents a purchase price multiple of approximately 11.5x or 7.5x, pro forma for synergies. The transaction is expected to close by the end of second quarter 2018.
  • Peter Huntsman, Chairman, President and CEO commented: “This bolt-on acquisition is a great fit to our core strategy to move downstream. The integration of Demilec into our Polyurethanes business offers significant synergies and delivers substantially higher and very stable margins by pulling through large amounts of upstream polymeric MDI into specialized spray foam systems. This integrated business will have greater than 25% EBITDA margins and double digit growth.”
09 Mar 2018

High Yield Weekly 03/09/2018

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$1.8 billion and year to date flows stand at -$17.1 billion. New issuance for the week was $4.9 billion and year to date HY is at $40.2 billion, which is -23% over the same period last year.


(Bloomberg) High Yield Market Highlights

  • Junk bonds, though cautious overall, ignored stumbling stocks as issuance continued its steady pace, with Teva Pharmaceuticals pricing through price talk and increasing the size of the offering.
  • Junk bonds were impervious to wide-spread fears of a possible trade-war as investors saw that as just noise, and that has now become evident in the introduction of new exemptions from the proposed tariff
  • High yield investors shrug off any talk of rise in rates as the 10 year yield has stayed flat or range bound in the last four weeks
  • While junk bond yields dropped a tad in sympathy with steadily declining oil prices, there was no material collapse of the market, as was evident in the new issue market, which added a CCC-rated FTR to the calendar after pricing TEVA
  • CCCs continued to outperform BBs and single-Bs with YTD positive returns of about 0.8%
  • Goldman Sachs, however, cautioned against CCCs and recommended BBs


(Bloomberg) Sinclair Making Progress Toward FCC Nod on Tribune

  • Sinclair’s latest FCC filing shows progress on looming issues in the review of its Tribune acquisition. FCC approval is likely in 2Q, after the Justice Department finishes its work. The FCC will now take public comment on Sinclair’s divestiture plan. Sinclair’s bigger risk likely comes after the deal closes, from litigation over the FCC’s UHF discount.
  • Sinclair’s March 7 update to the FCC indicates that the company is making progress on work needed to get approval of its Tribune M&A. The company now says it seeks to use a recently relaxed FCC rule to own top-four rated stations in only two markets; it abandoned its request for the Harrisburg, Pennsylvania, market. To satisfy a national cap, Sinclair will divest stations in Chicago, New York, and San Diego. The fact that Sinclair will still provide service to some of those stations isn’t likely to dissuade FCC Republicans from backing the deal.
  • The FCC’s review of the Sinclair-Tribune deal will likely stretch into 2Q, after Sinclair on March 7 amended its application to address divestitures. The FCC will now probably set a brief period to take public comments on the issue. It will then likely take weeks to reach a decision. Sinclair said it plans to sell stations in nine markets where it would otherwise have two top-four stations. It also said it would like to retain two top-four stations in two markets. Justice Department approval will likely come first.


(Bloomberg) Community Health’s Loan Is Said to Fall After Rating Downgrade

  • Community Health’s outstanding $1.9b term loan H dropped to almost a point, after Moody’s downgraded the hospital operator to Caa1 from B3, according to people familiar with matter.
  • The Company’s outstanding $1.037b term loan G also fell about a point
  • The ratings cut “is driven by material erosion in financial performance over the last six months and a lower earnings and cash flow outlook for 2018″: Moody’s
  • Moody’s now expects adjusted debt/EBITDA to remain above 7.5x over the next 12-18 months
  • First Lien secured ratings also downgraded to B2 from Ba3


(Business Wire) Frontier Communications Announces $1.6 Billion Second Lien Secured Notes Offering

  • Frontier intends to use the proceeds from the offering to finance the cash consideration payable in connection with its previously announced offers to purchase for cash certain of its senior notes maturing in 2020, 2021, 2022 and 2023 and to pay related fees and expenses.


(CAM Note) Moody’s downgraded Frontier Communications debt one notch to Caa1

09 Mar 2018

Investment Grade Weekly 03/09/2018

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week of March 1-March 7 were a positive $577 million.  This is in contrast to Lipper data, where IG saw its second outflow YTD with an exodus of $740 million from IG funds.  HY outflows continue, and now there have been 8 consecutive weeks of HY outflows for Lipper reporters.  Over $16.6 billion has exited HY over that time period, the largest high-yield outflow streak on record.

The IG new issue calendar saw the most active week of the year, with much of the activity driven by CVS’s $40 billion issuance across 9 tranches.  The $40bn deal was the third largest corporate bond deal on record behind Anheuser-Busch InBev’s 2016 $46bn deal and Verizon’s 2013 $49bn deal.  Appetite was robust for the CVS issuance due to attractive concessions and plenty of portfolio capacity for the issuer –the bonds are currently 10-20 basis points tighter across the curve from where the deal priced.  The strong payroll data has brought a couple of IG issuers into the market as we go to print on Friday morning.  All-in total corporate issuance should end the week at nearly $50bln.  Corporate issuance is down 12% y/y but there are several large M&A related deals waiting in the wings that could narrow this gap substantially in the coming weeks.

The Bloomberg Barclays US IG Corporate Bond Index opened on Friday with an OAS of 100 on par with its YTD wide of 100.  The YTD tight on the index in 2018 was 85, the tightest level since 2007, when spreads bottomed at 82.  The all-time tight was 54 in March of 1997 and the all-time wide was 555 in December 2008.  2017 wide/tight was 122/93.


(Bloomberg) U.S. Added 313,000 Jobs in February; Wage Gains Cool to 2.6%

  • Payrolls rose 313,000 in February, compared with the 205,000 median estimate in a survey of economists, and the two prior months were revised higher by 54,000, Labor Department figures showed Friday. The jobless rate held at 4.1 percent, the fifth straight month at that level. Average hourly earningsincreased 2.6 percent from a year earlier following a downwardly revised 2.8 percent gain.
  • U.S. stock futures and bond yields rose, as the report signaled the labor market remains strong and will keep driving economic growth. The wage figures show a cooling from a pace that spurred financial turbulence last month on concern that the Federal Reserve could raise interest rates faster. While the unemployment rate remains well below Fed estimates of levels sustainable in the long run, the rise in participation suggests the presence of slack that would keep policy makers to a gradual pace of hikes.

(Bloomberg) CVS Builds $120b Book, Pays Palatable Concessions


  • CVS Health Corp. paid about 18 basis points on average to price the $40 billion bond leg of its proposed acquisition of Aetna Inc. in the third largest U.S. dollar corporate debt offering ever. The company is said to have built orders surpassing $120 billion, or 3 times covered, at the guidance phase.
    • New issue concessions ranged from 10-25bps, levels agreeable to the issuer given the size and scope of this deal. Concessions included 25bps on the $9b 10-year and 15bps on the $8b 30-year. Many were looking for this trade to strengthen a credit market that’s softened in recent weeks.
    • Relative valuation is challenging for a trade of this size, given the high visibility and larger credit spread widening.
  • Word that a deal was in the works started circulating around February 21 when the 10-year was trading around +120. Those bonds widened out to +135 by March 1, when the investor meetingswere disseminated to the market suggesting a deal was imminent.
  • So where is the “pure trade” before the transaction is priced into the market? Sticking to a method of using trades prior to announcement gives us T+132 on the 10-year, suggesting that the new issue concession on the 10-year was 25bp.(Bloomberg) Blackstone’s Goodman Says High Yield Faces Needed Disruption


  • “Rising rates is going to create volatility, particularly in the high-yield bond market,” Goodman, the co-head of Blackstone Group LP’s $132 billion GSO Capital Partners credit business, said in a Bloomberg Television interview in New York. “We need that dislocation — that disruption — to find new things to invest in.”
  • Goodman said he expects the average spread on high-yield bonds, currently about 340 basis points over rates on comparable Treasuries, to widen to widen to 700 basis points in the next two to three years. Spreads haven’t been that wide since oil prices reached a bottom in early 2016.
  • Distressed and mezzanine investors like GSO and rival Oaktree Capital Management have been patiently waiting for rates to rise, as a glut of yield-hungry investors have made slim pickings for credit firms. GSO has $25 billion of dry powder — money sitting on the sidelines, waiting for investment opportunities — while Oaktree has $20 billion, according to a recent filing.
  • “As spreads widen you’re going to find lots of investors coming back in to that market,” Goodman said.
02 Mar 2018

High Yield Weekly 03/02/2018

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.5 billion and year to date flows stand at -$15.3 billion.  New issuance for the week was $0.8 billion and year to date HY is at $35.0 billion, which is -12% over the same period last year. 


(Bloomberg)  High Yield Market Highlights

  • Junk bond investors continued to be wary amid tumbling stocks and rising volatility, with the VIX rising for three consecutive sessions and closing at a two-week high yesterday.
  • Stocks saw the biggest decline in three weeks and closed at a two-week low as markets could not get a break to consolidate after digesting the Fed chair Powell’s assessment of the economy, following the new tariff proposal of 25% and 10%, respectively, on aluminum and steel
  • Amid all the hullabaloo over a possible trade war, junk bond yields were resilient


(Modern Healthcare)  20 states sue federal government to abolish Obamacare

  • Twenty states sued the federal government on Monday to end the Affordable Care Act, claiming the repeal of the individual mandate’s tax penalty rendered the law unconstitutional.
  • The U.S. Supreme Court upheld the ACA in 2012, determining President Barack Obama’s healthcare reform law was a tax penalty. But the tax cuts signed by President Donald Trump in December zeroed out the penalty, and the rest of the ACA can’t stand as law without it, according to the states.
  • Health insurance is regulated by the states, but the ACA required states to create or adopt exchanges where individuals could purchase plans. The law also imposed certain requirements on plans, including covering pre-existing conditions.
  • Since Trump signed the tax cut law, some states have taken action to stabilize their individual markets. In January, Wisconsin’s Republican Governor Scott Walker urged the state legislature to pass a reinsurance program that would help minimize rate increases for residents. Idaho’s GOP Governor Butch Otter has issued an executive order that would allow insurers to sell plans that don’t comply with the ACA, as long as they also have compliant plans for sale in the state.


(Barron’s)  Frontier’s Disappearing Dividend Shouldn’t Have Surprised Anyone

  • Frontier Communicationsannounced it was suspending its dividend following its fourth-quarter earnings report.
  • Frontier said it lost $13.92 a share in the quarter, which included an impairment charge, on revenue that fell to $2.2 billion but beat forecasts for $2.1 billion. Ebitda came in at $919 million, ahead of the Street consensus for $911 million.


(Bloomberg)  AES issues new debt and tenders for existing notes

  • The AES Corporation issued $1.0 billion aggregate principal amount of senior notes. $500 million senior notes due 2021 priced at 4% while $500 million senior notes due 2023 priced at 4.5%. AES intends to use the net proceeds from the offering of the Notes to fund the concurrent tender offer announced to purchase AES’ outstanding 8.00% senior notes due 2020 and 7.375% senior notes due 2021 (together, the “Outstanding Notes”) and to pay certain related fees and expenses. AES intends to use any remaining net proceeds from this offering after completion of the tender offer to retire certain of its outstanding indebtedness. In conjunction with the tender offer, the Company is soliciting consents to the adoption of certain proposed amendments to the indenture governing the Outstanding Notes to alter the notice requirements for optional redemption with respect to each series of Outstanding Notes.


(Bloomberg)  Teva Selling $3.5 Billion of Junk Bonds to Refinance Debt

  • Teva Pharmaceutical Industries Ltd., in its first offering as a high-yield issuer, is selling $3.5 billion of bonds to refinance debt.
  • The drugmaker will have to bear higher interest costs to push out maturities as a massive debt load and weakening sales of a top product have cost it its investment-grade ratings. Teva is selling 1 billion euros ($1.22 billion) and $2.25 billion of debt, it said in a statement. The European offering will include maturities of four and seven years, according to people with knowledge of the matter.
  • In early discussions with investors, the six-year dollar notes have been marketed at a yield of around 6.5 percent, while the bonds due in 10 years are being offered at about 7.25 percent, said a person familiar with the deal, who asked not to be identified as the details are private. Teva’s outstanding 10-year notes due 2026 currently yield about 5.9 percent, according to Trace bond price data.
  • “That’s enough of a concession that people are going to look at it,” said John Yovanovic, a high-yield portfolio manager at PineBridge Investments LLC. “This is going to get a lot of attention.”