Category: Investment Grade Weekly

CAM Investment Grade Weekly
03/15/2019

The investment grade credit markets look to finish the week marginally tighter.  After opening the week at 123, the OAS on the corporate index closed on Thursday at 121, near the YTD low of 120.  The 10yr Treasury is 4 basis points lower on the week as we go to print and it is 15 basis points lower than where it closed on the first trading day of March.

It was yet another solid week of issuance as IG firms issued just over $25bln in new corporate debt during the week.  New issue concessions remain razor thin and in some cases turned negative as investors “pay up” for the liquidity that it is afforded by the availability of new debt.  At the midpoint of the month, $64bln in new debt has been issued which brings the YTD tally to $268.498bln according to data compiled by Bloomberg.

According to Wells Fargo, IG fund flows during the week of March 7-March 13 were +$4.9 billion. This brings YTD IG fund flows to +$49.968bln.  2019 flows to this juncture are up 1.39% relative to 2018.

(WSJ) $10 Billion Corporate Debt Sale Highlights Credit Market’s Recovery

• The world’s largest maker of automotive batteries is set to sell more than $10 billion worth of speculative-grade debt Friday to fund its purchase by an investor-group led by Brookfield Business Partners LP, underscoring the recent resurgence in demand for low-rated bonds and loans.
• Power Solutions, the automotive-battery business currently owned by Johnson Controls International, is poised to sell roughly $3.7 billion worth of secured and unsecured bonds, denominated in both dollars and euros, along with around $6.5 billion in loans, also split between euro and U.S. dollar tranches.
• The long-anticipated sale is on track to be relatively easy for a large group of underwriting banks, as investors have eagerly embraced what many see as a stable business that is able to shoulder the large amount of debt being placed on it.
• The expected completion of the Power Solutions deal is a testament to the improved tone in high-yield debt markets, several investors said. Though fears of an economic slowdown led to a sharp decline in bond and loan sales in the final months of 2018, issuance picked up in the middle of January and has been fairly steady since then.
• Through Wednesday, businesses had sold a total of $106.9 billion of speculative-grade bonds and loans this year, according to LCD, a unit of S&P Global Market Intelligence. That is down from $162 billion in the same period last year.
• Some investors cautioned that the likely success of the Power Solutions deal doesn’t necessarily mean other businesses will find it as easy to sell such a large amount of debt in the current market. Even using conservative assumptions, analysts expect the company should be able to generate ample free cash flow in the coming years. Its secured bonds and loans, in particular, appealed to investors who have been eager to buy debt at the higher end of the speculative-grade ratings scale.
• Not everything about the deal pleased investors. Prospective buyers were able to make some changes to the package of investor protections, known as covenants, an unusual outcome for such an in-demand deal. Yet the result, some said, still gives the company’s owners plenty of room to pay themselves dividends and remove collateral from the business, in keeping with the long-term trend toward weaker covenants.

(Bloomberg) U.S. Junk Bonds May Be Signaling That It’s Time to Be Cautious

• There are early signs that it’s time to be cautious now in U.S. junk bonds.
• Investors seem reluctant to buy the weakest high-yield corporate securities, a potential signal of trouble ahead, according to Citigroup Inc. strategists. Ratings firms are downgrading speculative-grade companies at the fastest rate relative to upgrades since the start of 2016, according to data compiled by Bloomberg. And to sell their bonds, a handful of issuers including Scientific Games International Inc. have had to pay higher yields this month than dealers had expected.
• For now, many investors are shrugging off those concerns. Junk bonds have reached record highs this year and are the best performing U.S. fixed-income sector, gaining more than 6.4 percent through Wednesday. A Bank of America Corp. survey of U.S. credit-fund managers found the lowest level of alarm about high-yield and investment-grade corporate bonds since 2014.
• A handful of companies including Arrow Bidco LLC and Community Health Systems Inc. are feeling the impact of those concerns. The borrowers had to pay more than dealers expected to entice investors to buy bonds in recent weeks.
• There are other reasons for investors to be cautious now. Economists surveyed by Bloomberg expect growth to slow in the U.S. over the next three years. U.S. corporate earnings growth could come under pressure as tax benefits subside, which should reset junk bond prices and generate “meaningful” negative excess returns in the coming weeks and months, Bank of America said. Corporate bankruptcy filings in the U.S. have jumped, according to a Bloomberg index.
• Warning signs aren’t limited to the U.S. The European Central Bank has slashed its economic expansion forecasts for the region, China has lowered its goal for economic growth, and an increasing number of corporate borrowers there are struggling to repay debt obligations.
• There are still positives for corporate-debt investors. More companies have been getting upgraded to investment grade than getting cut to junk, a trend that’s expected to continue this year, according to Barclays Plc strategists led by Bradley Rogoff. The highest ratings tier now makes up almost 46 percent of the overall junk market, near an all-time high. The size of the junk bond market has been shrinking for more than a year, in part because companies have borrowed more in the loan market, making the securities scarcer. And default rates remain low, although they are rising.

CAM Investment Grade Weekly
03/01/2019

The investment grade credit markets are barreling toward year-to-date tights as the week comes to a close.  The OAS on the corporate index closed at 121 at the end of February, which marks a new low for spreads in 2019.  Risk assets continue to perform well even as Treasuries have inched higher.  The 10yr Treasury is 9 basis points higher as we go to print and sits just a few basis points lower than the 2019 high water mark.

In what seems to be a recurring them, it was yet another solid week of issuance as companies raised nearly $25bln in new debt during the last week of the month.  Concessions on new issuance remain thin as most order books are well oversubscribed to the tune of 3-5x deal sizes.  $98.21bln of new corporate debt was priced during the month of February, bringing the YTD total to $202.573bln.

According to Wells Fargo, IG fund flows during the week of February 21-February 27 were +$5.6 billion. This brings YTD IG fund flows to +$35.345bln.  Flows at this point in the year are modestly outpacing 2018 numbers.

CAM Investment Grade Weekly
02/22/2019

The investment grade credit markets look to end the week on a positive tone, but spreads are largely unchanged for the third consecutive week.  The OAS on the index closed at 125 on February 4^th and has traded within just a 2 basis point range since then and most of that time was spent within a 1 basis point range.  The OAS on the index was 125 at the market close on February 21^st and we remain wrapped around that number as we go to print this morning.

It was another solid week of issuance as companies raised over $25bln in new debt during the holiday shortened week.  Investor demand for new deals remains very strong and concessions on new debt have continued to grind lower.  As far as basis points go, mid-single digit new issue concessions are the name of the game in the current environment.  Over $73bln in new bonds has come to market in February and the YTD total is now $178bln.

According to Wells Fargo, IG fund flows during the week of February 14-February 20 were +$1.6 billion. This is a more modest pace of flows compared to prior weeks and it brings YTD IG fund flows to +$30bln.  Flows at this point in the year are modestly outpacing 2018 numbers by the tune of 2%.

A Blurb about BBB’s – CAM is significantly structurally underweight and quite cautious when it comes to BBB credit.  However, we can pick and choose the credits that we would like to own so we are not nearly as worried as some market commentators and those in the financial press seem to be with regard to the growth of the BBB portion of the index.  Here are a few interesting recent developments that show that not all the growth in BBB credit should be viewed as negative and that there are some very large BBB-rated issuers who may become A-rated in the near term.

• HCA 1^st lien debt was upgraded to investment grade by Moody’s in January. HCA was previously the single largest issuer in the high yield index.  As a result of receiving its second BBB-rating, $13.2bln of HCA debt moved from junk to investment grade with low-BBB ratings.
• Also in January, payment processor Fiserv, Inc. announced that it would be acquiring First Data. Junk rated First Data is one of the 50 largest issuers in the high yield index.  The deal is structured in a manner so that Fiserv will retain its mid-BBB investment grade ratings.  Fiserv plans to re-finance $5.31bln of junk rated debt – and the new debt will be BBB rated.  The NewCo will have more BBB debt, but it is largely the result of refinancing junk rated debt while creating a larger company with more scale, better growth prospects and greater free cash flow generation.
• On February 21^st, Verizon held an investor day. Verizon has been actively paying down debt in recent quarters and its CFO highlighted this when talking about its capital allocation plans.

  “Our long-term leverage target is to have net unsecured debt to adjusted EBITDA between 1.75 and 2.0….This metric improved by 0.3 times last year to 2.1. …. And we believe this target is consistent with a low-single-A credit profile.”

Verizon already has an A- rating at Fitch and it is high-BBB at both Moody’s and S&P so it needs only one of them to upgrade it to single-A before it is “officially” an A-rated credit.  An upgrade is a distinct possibility if the company remains on a deleveraging path.  Verizon is the second largest BBB-rated bond issuer in the corporate index and an upgrade would result in over $73bln of index eligible debt leaving the BBB-rated portion of the index and entering the A-rated portion.

Bottom line, headlines about BBB-rated credit are just that –to get the real story one must dig into the details.

(Bloomberg) ‘Disastrous’ Kraft Heinz Quarter Foments Street Doubt on M&A

• CAM NOTE: This is yet another example of a highly levered BBB-rated company impairing shareholders in order to pay down debt. It is our view that equity holders are the ones most at risk when it comes to BBB-rated credit, as bond holders have priority in the capital structure waterfall.  CAM has no exposure to Kraft Heinz.
• Kraft Heinz Co.’s “disastrous” earnings announcement prompted analysts to question the packaged-food giant’s growth prospects and its capacity to move ahead with plans for a significant acquisition.
• The shares plummeted as much as 28 percent to $34.70. Kraft’s plunge erased about $16 billion in market value. For perspective, that’s more than the entire value of packaged-food peers JM Smucker Co. or Campbell Soup Co.
• Analysts at Goldman Sachs, Barclays, JPMorgan, Stifel, Piper Jaffray, Barclays and UBS cut their ratings on the stock following what Stifel described as a “barrage of bad news:” Quarterly profit missed estimates, the outlook for 2019 was disappointing, and Kraft Heinz cut its dividend, lowered profit-margin expectations and took a $15.4 billion writedown on key brands.
• “The dividend cut and the margin rebase reflect serious balance sheet concerns,” Robert Moskow, an analyst at Credit Suisse AG, wrote in a note detailing his decision to slash his price target to a street-low of $33 from $42. The update “also pokes an enormous hole in management’s contention that it can execute a meaningful acquisition any time soon.”

CAM Investment Grade Weekly
02/15/2019

Investment grade spreads tightened modestly throughout the first half of the week before a deluge of new issue supply led the market to take a breather on Thursday.  While the tone is positive on Friday morning, the corporate index looks like it will finished the week relatively close to unchanged.

The real story this week was the aforementioned new issue supply.  Over $38bln of new debt priced in just three trading days, through Wednesday while no deals priced on Thursday or Friday.  Altria led the way this week as it priced $11.5bln on Tuesday and then AT&T came with $5bln on Wednesday.  3M Co, Goldman Sachs, Boeing and Tyson Foods were among the other companies that printed multi-billion dollar deals during the week.

According to Wells Fargo, IG fund flows during the week of February 7-February 13 were +$2.9 billion. This brings YTD fund flows to +$13.312bln.

As far as new supply is concerned, monthly volume projections for February are still calling for ~$90bln of issuance during the month.  As we roll past the mid-month mark, we have seen just over $48bln in new supply.

CAM Investment Grade Weekly
02/08/2019

It was a mixed week for Investment Grade Credit. The spread on the Corporate Index marched tighter on Monday and Tuesday before closing wider on both Wednesday and Thursday. The wider close on Wednesday snapped a remarkable streak of 22 straight trading days where the index closed tighter than the prior day. Still, even with two days of slightly wider spreads, the index remains one basis point tighter than where it opened the week and investor sentiment in the corporate credit space remains strong.

The market tone to start the day on Friday is, like the two prior days, somewhat softer. All told, we view this as healthy after the unabated “student body left” tightening that we experienced for 3+ weeks. Ebbs and flows in the market tend to create opportunities for patient investors with longer time horizons.

According to Wells Fargo, IG fund flows during the week of January 31-February 6 were +$5.9 billion. This was the largest inflow since October 2017 according to the data that is tracked by Wells Fargo, bringing YTD fund flows to +$10.759bln.

Issuance slowed this week compared to last, as $10.350bln in new corporate bonds were priced, bringing the year-to-date total to $114.713bln. Monthly volume projections for February are calling for ~$90bln of issuance during the month, according to data compiled by Bloomberg. New issue concessions continue to hover in the low single digits as investor demand for new issues remains robust.

(Bloomberg) Greed Is Back as Debt Markets Face an $8.6 Trillion Hangover

• Prayers for a sudden return to dovish monetary policies have been answered, and now investors are living with the aftermath: a world awash with $8.6 trillion in negative-yielding debt.
• That’s one reason money managers are wading once more into the fringes of fixed-income markets across the globe.
• Consider the action over the past week: Serial defaulter Ecuador managed to sell $1 billion in new bonds even as the government is in talks for International Monetary Fund financing. Crisis-prone Greece received blockbuster orders for its 2.5 billion-euro ($2.9 billion) sale. And the decidedly frontier republic of Uzbekistan, encouraged by risk-on markets, is meeting investors for a debut international offering.
• No wonder the world’s largest funds are betting the explosive rally in developing-economy debt still has legs.
• Meanwhile, U.S. high-yield is in the throes of a rebound, as traders bet easier monetary policy will prolong the business cycle. Lower-rated borrowers are in vogue after the asset class posted the biggest monthly gain in seven years.

(WSJ) The Bond and Stock Markets Need to Talk

• Investors buying bonds should start checking what their colleagues in the stock market are doing.
• Yields on 10-year U.S. government bonds hover below 2.7%. This is extremely low considering that sovereign debt tracks where the central bank is expected to set interest rates—which the Federal Reserve now pegs between 2.25% and 2.5%—plus a premium for locking up the money long term.
• The Treasury yield is even more strikingly at odds with the S&P 500, which has climbed back from its December lows during the fourth-quarter earnings season. The technology-heavy Nasdaq is even close to exiting its recent bear market.
• In the U.S., it is likely bond investors who have got too pessimistic: Derivatives markets price in a 98% chance that interest rates will be at their current level or lower in a year’s time, according to CME Group. Only three months ago, they predicted that the Fed would tighten policy at least twice this year.
• One possibility is that the legendary pessimism of fixed-income investors is correct and stocks are treading on perilous ground because the U.S. economy is in worse shape than it looks.
• Yet if January’s improvement in economic data is pointing in the right direction, writing off rate rises with such certainty is perilous. Fed chairman Jerome Powell’s transformation from hawk to dove in January is likely explained—at least in part—by the equity rout late in 2018. If stocks keep rallying, he may very well nudge rates up again at least once.
• European stock investors, by contrast, should heed the advice of the bond market: The region’s equities have slightly outperformed U.S. ones in recent months, glossing over Europe’s greater vulnerability to the Chinese slowdown. And with rates already at record lows, the European Central Bank has little ammunition left.
• Treasurys aren’t in for a dramatic selloff, because inflation is being kept in long-term check by weak labor bargaining power. However, investors’ confidence that the Fed will sit on its hands for a full year looks misplaced.

CAM Investment Grade Weekly
11/09/2018

Credit spreads look to finish the week tighter, as the Bloomberg Barclays Corporate Bond Index opened Friday at an OAS of 114 after starting the week at 117. As we go to print, the 10yr Treasury sits at 3.223%, which is 1 basis point higher relative to its close a week prior.

According to Wells Fargo, IG fund flows during the week of November 1-November 7 were +$2.7 billion with short duration funds posting a record +$3.6 billion inflow. Per Wells data, YTD fund flows are +$98.796bln.

According to Bloomberg, new corporate issuance on the week was $22bln. YTD corporate issuance has been $1.011 trillion.

(Bloomberg) Oil Teeters Near Record Losing Streak After Entering Bear Market

• Oil extended a run of declines after falling into a bear market, heading for its longest losing streak on record.
• Futures in New York fell for a 10th day, extending a dramatic plunge that’s dragged prices down more than 20 percent from a four-year high reached in early October. In London, Brent sank to a seven-month low below $70 a barrel. The drop comes days before the Organization of Petroleum Exporting Countries meets with partners in Abu Dhabi, having signaled it may cut output next year.
• Oil’s decline has been exacerbated by a U.S. decision to allow eight countries to continue importing from Iran, which it slapped with sanctions earlier this week. That decision, as well as pledges by Saudi Arabia and other producers to pump more and gains in American supply and stockpiles, have turned fears of a supply crunch into talk of an oversupply.

(Bloomberg) California Wildfire Quadruples in Size, and PG&E Falls

• A wildfire in Northern California’s Sierra Nevada foothills quadrupled in size late Thursday as winds threaten to make it spread faster. The state’s largest utility, PG&E Corp., fell 10 percent in early trading.
• The blaze near Chico has left more than 23,000 homes and businesses without power, according to PG&E’s website. Residents in several towns were evacuated. The National Weather Service warns flames will spread rapidly as high pressure across the region has parched the air and fueled gusts of up to 65 miles per hour.
• As of 8 p.m. Thursday, the foothills fire had grown to 20,000 acres up from 5,000 earlier in the day. Two fires have broken out in Ventura County, just north of Los Angeles, consuming about 12,000 acres, and causing residents there to flee the flames.
• PG&E is struggling to cope with losses from deadly fires last year that could cost the utility as much as $17.32 billion in liabilities, according to a JPMorgan Chase & Co. estimate. Investors are still waiting on the state’s investigation into the Tubbs fire, the deadliest of last year’s wine country fires.

(Bloomberg) Lithium Giant Staying Nimble in Fickle Car-Battery Market

• The world’s largest lithium producer is planning to expand production in Australia, chasing the market for a form of the metal increasingly being used by the makers of electric car batteries.
• Albemarle Corp. will halt plans to expand its lithium carbonate production in Chile, the company said on Thursday. Instead, it will plow funding into a Western Australia project that produces lithium hydroxide, a rarer form of the metal that’s growing in use and currently sells for higher prices than the carbonate form.
• Lithium hydroxide works better with cathodes containing higher levels of nickel, helping cars go further on a single charge. Global demand for lithium overall is expected to almost triple by 2025, according to Bloomberg NEF, as carmakers such as Tesla Inc. look to boost sales of battered-powered vehicles.
• Lithium miners, meanwhile, have struggled to meet demand, and prices for the metal have tripled in just four years.
• “The challenge at this point in the cycle is that lithium companies must ramp their capital spending amidst a backdrop of some uncertainty around lithium pricing,” Chris Berry, a New York-based analyst and founder of research firm House Mountain Partners LLC, said by phone on Thursday. “For Albemarle to maintain its market share with such robust lithium demand growth, the company needs to execute their capacity expansion plans perfectly.”
• Albemarle is planning to boost its overall production of lithium across its operations in Chile, China and Australia to 225,000 tons per year in 2025 from 65,000 tons in 2017, the company said in its earnings report. In just four years, lithium has gone from being Albemarle’s least important product to representing 44.5 percent of the company’s revenue in 2017.
• On Thursday, the Charlotte, North Carolina-based company posted mixed third quarter results that sent shares down 2 percent at 4:15 p.m. to $105.57 in New York trading. Capital expenditures were up, reaching record levels, but Albemarle missed estimates for sales.

CAM Investment Grade Weekly
11/02/2018

It was another week of volatility in risk assets, but the tone improved throughout, and was cemented by an above-consensus monthly employment report on Friday morning. Credit spreads are at 3-month wides as the Bloomberg Barclays Corporate Index sits at an OAS of 119. As we go to print, positive economic data has sent the 10yr Treasury to its highest level of the week, at 3.17%.

According to Wells Fargo, IG fund flows during the week of October 25-October 31 were a mere $192 million. Per Wells data, this extended MTD outflows to -$7.4bln and marks the first monthly outflow for IG credit funds since January of 2016. Even still, IG fund flows remain firmly positive YTD at +$96.150bln, with short duration funds garnering the lion share of those flows.

According to Bloomberg, new corporate issuance on the week was $17.55bln. YTD corporate issuance has been $989.109bln.

(Bloomberg) General Electric Cut by Moody’s on Weakness in Power Unit

• General Electric’s long-term and senior unsecured rating was cut to Baa1 from A2 by Moody’s as the rating agency cites “the adverse impact on GE’s cash flows from the deteriorating performance of the Power business.”
  • Impact from power business will be considerable and could last some time
  • Weaker than expected performance of power business also due to co.’s “misjudgment of financial prospects and operational missteps”
  • Outlook stable predicated on Moody’s view that co. will be able to contend with the challenges posed by its power business

(Bloomberg) California Utilities to Reach 50% Renewable Power Target in 2020

• Three large utilities in California are ahead of schedule to hit their targets under a law requiring them to source 33 percent of their electricity from renewables by 2020, according to a California Public Utilities Commission report.
  • All three investor-owned utilities beat the state-mandated target of 27 percent for 2017
    • PG&E: 33%
    • Edison: 32%
    • Sempra: 44%
  • Renewable power contract prices, which peaked at more than $160/MWh in 2007, fell in 2017 to an average of $47/MWh, the report found
• NOTE: Utilities are required by California law to derive 60 percent of their electricity from renewable sources by 2030

(Bloomberg) Exxon, Chevron Surprise Wall Street as Permian Boosts Results

• Exxon Mobil Corp. and Chevron Corp. delivered their strongest third-quarter results in four years, capping a week in which Big Oil enjoyed profits not seen since the days of $100 crude.
• Exxon shares climbed as the American supermajor appeared to emerge from years of production setbacks after failed bets on Russia and Canada that undercut its previously gold-plated reputation among investors. Chevron’s stock also pushed higher.
• Exxon’s oil and natural gas output surpassed expectations for the first time in 10 quarters, rebounding from a decade-low reached in the second quarter. Earnings climbed 57 percent. At rival Chevron, record production combined with higher crude prices to double profit to $4 billion. Both companies cited growth in the Permian Basin of West Texas and New Mexico as key.