Category: High Yield Weekly

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

(Bloomberg)  High Yield Market Highlights

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

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

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

(The Street)  Steel Dynamics had Revenue Miss Estimates

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

(Business Wire)  United Rentals Announces Fourth Quarter Results

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

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

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

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

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

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

(Bloomberg)  High Yield Market Highlights

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

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

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

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

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

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

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

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

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

CAM High Yield Market Note

12/14/2018

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

(Bloomberg) High Yield Market Highlights

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

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

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

(thestreet.com) Aramark Tumbles as Forecast Disappoints

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

• (streetinsider.com) United Rentals FY19 Revenue Guidance Tops Views, Resumes Share Repurchase Program 

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

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

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

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.9 billion and year to date flows stand at -$50.1 billion. New issuance for the week was $0.3 billion and year to date HY is at $162.5 billion, which is -37% over the same period last year.

(Bloomberg) High Yield Market Highlights

• U.S. junk bonds had the worst day since February 9, with a loss 0.6 percent yesterday. CCCs led the downward spiral, with the biggest drop since February 2016.
• CCCs return was -0.958%
• YTD return turned negative for first time since early February
• Yields hit a fresh 30-mo. high after biggest rise in eight months
• CCC yields at 2 year high of 11.34% after biggest increase in two months
• Single-B yields spiked to a 30-month high, steepest jump in eight months
• Volatile stocks, falling Treasury yields, declining oil, rising VIX weigh on junk bonds
• S&P 500 lost 3% in intra-day trading before rebounding to close little changed
• VIX jumped 25% in early trading before stabilizing to close up 2.2%
• Oil also volatile, sliding 5% intra-day amid uncertainty over OPEC’s decision on cutting supply, before recovering to close down 2.7%
• Issuance drought continued in high yield with no issues added to calendar
• November priced just $5.13b, slowest 11th month since 2008, least for a month since Dec. 2015
• YTD supply is $163b, lowest since 2009

(Reuters) U.S., China agree on trade war ceasefire after Trump, Xi summit 

• China and the United States agreed to a ceasefire in their bitter trade war on Saturday after high-stakes talks in Argentina between U.S. President Donald Trump and Chinese President Xi Jinping, including no escalated tariffs on Jan. 1.
• Trump will leave tariffs on $200 billion worth of Chinese imports at 10 percent at the beginning of the new year, agreeing to not raise them to 25 percent “at this time”, the White House said in a statement.
• “China will agree to purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States to reduce the trade imbalance between our two countries,” it said.
• “China has agreed to start purchasing agricultural product from our farmers immediately.”
• The two leaders also agreed to immediately start talks on structural changes with respect to forced technology transfers, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture, the White House said.

(Bloomberg) Qatar to Leave OPEC as Politics Finally Rupture Oil Cartel

• Qatar said it will leave OPEC next month, a rare example of the toxic politics of the Middle East rupturing a group that had held together for decades through war and sanctions.
• Qatar, a member since 1961, is leaving to focus on its liquefied natural gas production, Energy Minister Saad Sherida Al-Kaabi told a news conference in Doha on Monday. He didn’t mention the political backdrop to the decision: dire relations with Saudi Arabia, which has led a blockade against his country since 2017; and a rhetorical onslaught from U.S. President Donald Trump against the cartel.
• Qatar is OPEC’s 11th-biggest oil producer, accounting for less than 2 percent of total output, so its departure may not have a significant impact on discussions this week to cut production in conjunction with allies including Russia. Yet it sets a troubling precedent for a group that prides itself on putting shared economic interests above external politics — even extreme events like the Iran-Iraq war in the 1980s or Saddam Hussein’s 1991 invasion of Kuwait.

(Business Wire) The GEO Group Signs Contract Extension for the Continued Management of the Junee Correctional Centre in Australia

• The GEO Group, Inc. announced that its subsidiary, The GEO Group Australia Pty Ltd has signed a five-year contract extension with the State of New South Wales, Corrective Services for the continued management and expansion of the Junee Correctional Centre.
• GEO Australia has managed the 790-bed Centre for over 25 years since its opening in 1993. The Centre is currently undergoing a 489-bed expansion project which will bring its total capacity to 1,279 beds during 2019. The five-year agreement will be effective from April 1, 2019 through March 31, 2024, with annual revenues of approximately $51 million.
• George C. Zoley, Chairman of the Board and Chief Executive Officer of GEO, said: “We appreciate the trust placed in our company by the State of New South Wales, which is a reflection of our long-standing partnership with the Corrective Services at the Junee Correctional Centre. We are looking forward to working with the Department of Justice to further strengthen our 25-year partnership.”

(CAM Note) Moody’s upgrades the debt of Diamondback Energy

• The unsecured debt was upgraded one notch and the outlook is stable.
• Moody’s completed a rating review that was started nearly six months ago after Diamondback announced an acquisition for Energen Corp.
• Moody’s noted a larger Diamondback that is financially stronger and has greater capital and operational flexibility as reasons for the debt upgrade.