Category: Investment Grade Weekly

Fund Flows & Issuance: According to Lipper, for the week ended August 2, investment grade funds posted a net inflow of $1.485m. This marks 33 straight weeks of inflows and inflows in 69 of the last 74 weeks. Per Lipper data, the year-to-date net inflow into investment grade funds was $79.026bn. According to Bloomberg, investment grade corporate issuance for the week was $25.49bn. Through the week, YTD total corporate bond issuance was $855.925bn. Investment grade issuance thus far in 2017 is nearly identical to the total seen through this period in 2016.

(Bloomberg) Teva 10Y, 30Y Bond Spreads Again Get Crushed

• Teva Pharmaceutical bonds are seeing high volume for the second day amid reports that bond covenants may be breached. Its 3.15 percent coupon bond due 2026 tops the most active list, according to Trace data.
• Client and affiliate flows account for 85 percent of the volume. Client buying is near 2.3 times selling. Its spread has widened to +190 area compared with +170 around close of business Thursday and +140 area last Friday. The wider spreads may have enticed clients to be better buyers than sellers today.
• Teva was cut to BBB- by Fitch, outlook negative, this morning. Yesterday Moody’s cut Teva to Baa3 from Baa2 while S&P said its ratings on the company are not affected by the report of lower-than-expected second-quarter results and reduced 2017 guidance.
• The dramatic repricing has brought the investment-grade name closer to junk comparables.

(Bloomberg) SoftBank Default Risks Jump as Son Mulls Charter Takeover

• The possibility that SoftBank Group Corp. will pile on even more debt if founder Masayoshi Son goes ahead with a bid for Charter Communications Inc. is starting to spook the bond market.
• The cost to insure SoftBank’s debt against nonpayment has jumped 17.2 basis points this week to 156.7 basis points on Wednesday, the highest level since Jan. 9, after people familiar with the matter said the company has as much as $65 billion in financing lined up as Son weighs whether to make an offer. Theyield premium on the firm’s 6 percent dollar perpetual bonds has surged 31 basis points in the period, Bloomberg-compiled prices show.
• Going through with an acquisition of Charter would cause SoftBank’s already bloated debt burden to balloon even further. The ratio of debt to earnings before interest, taxes, depreciation and amortization at billionaire Son’s company is about 5.67, more than double the median of its telecom peers, according to data compiled by Bloomberg. Charter on Sunday rebuffed Son’s initial proposal to combine the company with Sprint Corp., which SoftBank controls.

(Bloomberg) IG NEW ISSUE SECONDARY: TMT Issues Trading Wider Despite NICs

• This week’s Technology Media and Telecommunications bonds were among the new issues that widened the most in secondary trading, according to Trace.
• Comcast Corp’s bonds last traded 7-8bps, Verizon Communications’ new 16y is off 2bps and last week’s AT&T jumbo $22.5b transaction is also trading 5-11bps back of issue levels.
• Comcast & AT&T’s bonds are trading wider despite many of their tranches pricing with double-digit new issue concessions. These issuers have a plethora of debt outstanding suggesting healthy new issue concessions would be required to sell the bonds. Concessions, however, are beginning to creep back into the market across sectors as Kinder Morgan (20bps), Capital One NA (10bps) paid up to price their deals. We have been in a low yield, tight credit spread environment for an extended period and these recent prints could be signaling a degree of investor pushback.

Fund Flows & Issuance: According to Lipper, for the week ended July 26, investment grade funds posted a net inflow of $2.319m. This marks 32 straight weeks of inflows and inflows in 68 of the last 73 weeks. Per Lipper data, the year-to-date net inflow into investment grade funds was $77.541bn. According to Bloomberg, investment grade corporate issuance for the week was $36.35bn. Through the week, YTD total corporate bond issuance was $830.435bn, which is down 1% when compared to 2016.

(Moody’s) Moody’s upgrades PG&E Corporation and Pacific Gas & Electric; outlook revised to stable

• Moody’s Investors Service, (“Moody’s”) today upgraded PG&E Corporation’s (PCG) senior unsecured rating to A3 from Baa1.The senior unsecured rating at Pacific Gas & Electric Company (PG&E), PCG’s principal utility operating subsidiary, was upgraded to A2 from A3. PG&E’s commercial paper rating was also upgraded to Prime-1 (P-1) from Prime-2 (P-2). The outlook on both companies was revised to stable from positive.

(Bloomberg) AT&T Sells Year’s Biggest Bond Deal and Market Wanted Even More

• AT&T Inc. sold $22.5 billion of bonds in a multi-part offering on Thursday, drawing almost three times as many orders as there were securities for sale, according to a person with knowledge of the matter. It’s not only the largest investment-grade deal of the year, but the third-biggest in history behind offerings from Verizon Communications Inc. and Anheuser-Busch InBev SA. The sale is likely the last funding AT&T needs for its $85.4 billion takeover of Time Warner Inc.
• The longest portion of the sale, which came in seven parts, is a 41-year bond that yields about 2.4 percentage points above Treasuries, down from initial talk of 2.55 percentage points, another person said. With the U.S. offering higher yields than Europe and Japan, it has become a destination for foreign investors to park their money, a trend that AT&T benefited from.

(FBN) Illinois Tool Works Sees Margin Expansion and Earnings Growth

• Multi-industrial company Illinois Tool Works (NYSE: ITW) delivered another good quarter of earnings and raised full-year guidance across the board. It was a positive quarter for the company, driven by its automotive segment and recovery in some of its more cyclical segments (specifically welding, test and measurement, and electronics). That said, management served notice of a relative slowdown in the third quarter.

(Bloomberg) Caterpillar Outlook Bright as Sales, Margins Rebound

• A global recovery in Caterpillar’s key markets is picking up steam — earlier than expected — after four years of plummeting sales as global growth accelerates. Aftermarket demand is leading the charge, yet construction equipment is strong and 2Q mining orders doubled. Almost $2 billion in cost cuts, with more to come, is generating much higher-than-historical operating leverage as volume rises. Market-share gains achieved in the downturn are another potential driver as mining and construction markets rebound.
• As the leader in construction and mining machinery, Caterpillar is a major beneficiary of a global recovery. The company may face a one-time charge of $2 billion related to alleged tax violations at a Swiss-based subsidiary and a higher tax rate.

Fund Flows & Issuance: According to Lipper, for the week ended July 19, investment grade funds posted a net inflow of $3.817m down from $2.299bn the prior week. This marks 31 straight weeks of inflows and inflows in 67 of the last 72 weeks. Per Lipper data, the year-to-date net inflow into investment grade funds was $75.222bn. According to Bloomberg, investment grade corporate issuance for the week was $47.7bn. Through the week, YTD total corporate bond issuance was $794.085bn, which is down 3% when compared to 2016.

(Bloomberg) Abbott Boosts Full Year Forecast as Deals Fall Into Place

• The company raised its full-year guidance after showing strength in its pain control and diabetes businesses. Abbott closed its $29 billion deal for St. Jude Medical in January, doubling the size of its medical technology division and expanding beyond devices used to clear clogged heart arteries. Its diagnostics business, about to swell with the addition of Alere Inc. after a protracted battle, is showing strength as well.
• The legacy St. Jude business grew at about a 4 percent pace in the quarter, after breaking even for the past four years, Abbott Chief Executive Officer Miles White said during a conference call with analysts. That trend should continue or accelerate, he said, as the company continues to roll out new products like an MRI-safe defibrillator, helping it regain sales lost to rivals that already offer the technology.
• “Our forecast, or deal model, was built on the expectation of sequential improvement in their sales going forward,” he said. “We are seeing that.”
• The smaller operations secured by the St. Jude deal are posting the greatest gains. Demand for devices to control pain propelled growth of 49 percent, while sales of tools that deal with the heart’s electrical pathways rose 10 percent. The company’s focus on diabetes, with Bigfoot Biomedical picking Abbott’s Freestyle Libre for its artificial pancreas, yielded 21 percent growth.
• The outsized performances are easing the pain caused by slowing markets in the company’s former key industries, like heart stents, which was down 6 percent, and devices like pacemakers and defibrillators, which fell 9.2 percent.
• Abbott raised its full-year guidance range to $2.43 to $2.53 per share, excluding some items. That’s up from a previous forecast of $2.40 to $2.50 per share.

(WSJ) Lessons From Microsoft’s Success in the Cloud

• Microsoft Corp.’s success in the cloud is driving the growth of the overall business. That’s because it is the business. Cloud isn’t a satellite orbiting around the data-center sun. The numbers speak for themselves. As the Journal’s Jay Greene reports, Microsoft’s “Intelligent Cloud segment, which includes Azure, rose 11% to $7.4 billion. In the Productivity and Business Processes segment, which includes the Office franchise, revenue climbed 21% to $8.4 billion.”
• Microsoft doesn’t disclose revenue figures Azure and Office 365, but it said revenue from these businesses rose 97% and 43% respectively, surprising CFO Amy Hood. “Azure was the primary source of our outperformance in the quarter,” she said in an interview. “It’s higher than I was expecting.”\
• Microsoft has gained traction in the cloud, one might argue, because it has accepted the idea that it isn’t the only platform that customers use. CIOs employ other clouds and they still have plenty of use for the data center. Microsoft has crafted a hybrid approach around those customer intentions. More recently, it has looked to build data and intelligence into its cloud infrastructure, platforms and applications. As the Journal notes, “Microsoft is working to connect its business products to LinkedIn, giving sales representatives using its Dynamics software, for example, tools to easily mine the professional social network to prospect for leads.” As this process continues, expect the cloud to fade into the background, much as the electric grid has faded into the background. In a few years, we won’t think about cloud computing any more than we think about “electrical toasters.” The cloud will be an invisible and ubiquitous dimension of most elements of business.

(Bloomberg) Scripps Talks Said to Be Advanced, Deal Soon as This Month

• Negotiations to acquire media company Scripps Networks Interactive Inc. are advanced and a deal could be announced as soon as this month, people familiar with the matter said.
• Both Discovery Communications Inc. and Viacom Inc. are vying to buy Scripps, and are likely to fund the deal with a mixture of cash and shares, the people said, asking not to be identified as the details aren’t public. No final decisions have been made and talks may still fall apart, they said.
• Shares in Scripps rose as much as 4.1 percent in New York to a high of $80.02. They had already climbed about 14 percent this week on news of the possible combinations, giving the Knoxville, Texas-based company a market valuation of about $10 billion. Viacom was up less than 1 percent to $36.31 at 2:40 p.m., while Discovery fell less than 1 percent to $26.98. Representatives for Discovery, Viacom and Scripps declined to comment.
• Buying Scripps could help the larger media companies cut costs, gain negotiating leverage with distributors and expand internationally as their U.S. TV businesses faces new pressures. Network owners are grappling with a decline in subscriptions for cable and satellite services as they lose viewers to online video services and social networks.

(Bloomberg) BNY Mellon Ups Revenue View, Shows 2Q Momentum: Earnings Outlook

• Post-2Q Earnings Outlook: BNY Mellon showed a further acceleration in revenue in 2Q, with trends in fee income and managed assets boding well for 2H.
• Fee growth of 4% for investment services and 6% in investment management marks another rise after 1Q’s pickup, while both assets under custody and management hit record levels.
• The updated 2017 view includes spread income growth at the high-end of its prior 4-6% range and a cost rise of about 1%, with a caveat that this would be “challenging.”

Fund Flows & Issuance: According to Lipper, for the week ended June 28, investment grade funds posted a net inflow of $2.299m down from $2.535bn the prior week. Per Lipper data, the year-to-date net inflow into investment grade funds was $71.045bn. According to Bloomberg, investment grade corporate issuance for the week was $26.49bn. Through the week, YTD total corporate bond issuance was $746.385bn, which is down 5.5% when compared to 2016.

(WSJ) Visa Takes War on Cash to Restaurants

• Visa Inc. has a new offer for small merchants: take thousands of dollars from the card giant to upgrade their payment technology. In return, the businesses must stop accepting cash.
• The company unveiled the initiative on Wednesday as part of a broader effort to steer Americans away from using old-fashioned paper money. Visa says it is planning to give $10,000 apiece to up to 50 restaurants and food vendors to pay for their technology and marketing costs, as long as the businesses pledge to start what Visa executive Jack Forestell calls a “journey to cashless.”
• Consumers at those stores would be able to pay for goods or services only with debit or credit cards or with their cellphones. In exchange, Visa is offering to pay for upgrades to merchants’ technology at the checkout line so that they can accept contactless payments, such as Apple Pay . The $10,000 incentive can also help cover some of the merchants’ marketing expenses.
• Visa has long considered cash one of its biggest competitors and has been taking steps to chip away at it. Getting rid of cash is a priority for Visa Chief Executive Al Kelly, who took over late last year, especially as cash and check transactions continue to grow globally.
• “We’re focused on putting cash out of business,” Mr. Kelly said at Visa’s investor day last month, adding that converting check and cash to digital and electronic payments is the company’s “number-one growth lever.”
• Still, cash remains a formidable competitor. Check and cash transactions totaled $17 trillion world-wide in 2016, up about 2% from a year prior, according to Visa.
• Cards have made a dent in cash in the U.S., but cash remains the most widely used payment form among Americans, accounting for 32% of all consumer transactions in 2015, compared with 27% for debit cards and 21% for credit cards, according to a November report by the Federal Reserve Bank of San Francisco.

(Moody’s) HCA’s Increased ABL Reduces Likelihood of Upgrade of Senior Secured Notes

• HCA Inc. (subsidiary of HCA Healthcare, Inc.) recently amended and extended its asset-based revolving credit facility (ABL). The facility was upsized to $3.75 bilion from $3.25 billion and the expiration date was extended to June 2022. In addition, HCA amended and extended its $2 billion revolving credit facility. The expiration date of the revolving credit facility was extended to 2022 from 2019. There are no changes to any ratings including the Ba2 Corporate Family Rating, the Baa2 rating on the ABL, the Ba1 on the senior secured debt and the B1 on the unsecured notes. The rating outlook is positive.
• Absent any further changes to the capital structure, there is reduced likelihood that the senior secured debt (including notes and credit facilities) would be upgraded to investment grade if Moody’s upgrades HCA’s CFR to Ba1. This is due to changes in the HCA’s capital structure and attributes of Moody’s Loss Given Default Methodology.

(Bloomberg) Implications of Tax Policy Changes on IG Industrials

• Potential changes in tax laws could have credit implications for high grade industrials. The 28 high grade industrials tracked at BI have accumulated $55 billion of cash, largely in non-U.S. subsidiaries, mainly to avoid current repatriation laws. Cash-to-revenue averaged as low as 8% for the peers as recently as 2008, but topped 28% at year-end. That suggests about $27 billion could be repatriated, possibly earmarked for share repurchases and dividends, akin to 2004’s tax holiday.
• Honeywell, Illinois Tool Works, Cummins and Rockwell Automation are among the group outliers, with above-average ratios, suggesting they may have more opportunity to bring cash home.

(WSJ) Corporate Bond Markets Asleep at the Wheel

• There’s a fine line in financial markets between resilience and complacency. Corporate bonds are sitting right on it.
• Global government bonds have been shaken as central banks, most notably the European Central Bank, have signaled that the clock is ticking on ultra-loose monetary policy. Ten-year German bond yields have risen about 0.3 percentage point from their late-June lows, pushing up U.S. Treasury yields too.
• Yet corporate bonds haven’t even blinked. Indeed, the yield spread on European and U.S. investment-grade bonds versus underlying government debt has actually compressed since the turmoil started, Bank of America Merrill Lynch indexes show. Yields have risen, just not by as much as on government bonds. At 0.99 percentage point in Europe and 1.12 points in the U.S., investment-grade spreads are close to their tightest level since the global financial crisis.
• And credit conditions may be shifting. Activist investors are making waves in Europe: perhaps the best example is Dan Loeb at hedge fund Third Point targeting consumer giant Nestlé , pitting shareholder interests against those of bondholders. The company promised to double its leverage ratio to fund stock buybacks, yet spreads on its bonds barely reacted. Better earnings prospects should support corporate bonds; but the real benefit will accrue to shareholders, not bondholders. Spreads do offer some protection against falling bond prices, but little against a deterioration in credit quality.
• Corporate bonds have benefited greatly from central-bank support and benign credit conditions. Shifting tides mean relying on those factors persisting looks risky.

Fund Flows & Issuance: According to Lipper, for the week ended June 28, investment grade funds posted a net inflow of $724.337m down from $1.55bn the prior week. Per Lipper data, the year-to-date net inflow into investment grade funds was $66.571bn. According to Bloomberg, investment grade corporate issuance for the week remained muted, weighing in at $14.8bn. Through the week, YTD total corporate bond issuance was $714.145bn. Per Bloomberg data, U.S. investment grade credit spreads are at the tightest level since 2014:

• Bloomberg Barclays US IG Corporate Bond Index OAS at 109, a new tight YTD and the tightest level since Sept. 2014, vs 110
  
  • 2017 wide/tight: 122/109
  • 2016 wide/tight: 215 (a new wide since Jan. 2012)/122
  • 2015 wide/tight: 171/122
  • 2014 wide/tight: 137/97
  • All time wide/tight back to 1989: 555 (Dec. 2008)/54 (March 1997)

(Bloomberg) Martin Marietta Will Buy Bluegrass Materials for $1.625b in Cash

• Martin Marietta sees deal closing in 4Q, is expected to add to EPS and cash flow in first full year.
  • MLM sees annual run-rate cost savings of ~$15m.
  • Bluegrass Materials is largest closely held, pure-play aggregates company in U.S.; MLM says Bluegrass has leading positions in some of nation’s highest growth markets.
  • Bluegrass CEO says co. “ran a thorough, competitive process.”

(Bloomberg) Bayer Seeks EU Blessing for $66 Billion Monsanto Takeover

• Bayer AG asked the European Union to approve its $66 billion combination with Monsanto Co., the last of a trio of mega-deals reshaping the global agrochemicals industry.
• The German chemical giant’s filing kickstarts an initial review with an Aug. 7 deadline. Bayer said it’s still seeking to close the deal “before the end of 2017,” a sign that it’s hoping to sidestep a lengthy second phase probe that could add a further four months to the process.
• Bayer has already filed for approval in the U.S. and the Justice Department could require additional asset sales to resolve competition concerns. BASF SE and Syngenta are among companies that have submitted preliminary bids for assets that Bayer plans to sell in order to get regulatory approval for its takeover, according to people familiar with the matter.
• Agricultural businesses have been dogged by falling crop prices globally. Falling crop prices and a quest for greater efficiency triggered a cascade of deals in the industry.

(Forbes) Oracle’s Q4 Cloudburst: Why Larry Ellison’s All-In Cloud Strategy Is Paying Off

• After a few years of lofty talk but lackluster performance, Oracle’s blowout Q4 results prove beyond a doubt that Larry Ellison’s 10-year-old decision to rewrite all of Oracle’s IP for the cloud is giving the company a unique competitive advantage in being fully vested across all three layers of the cloud: SaaS, PaaS and IaaS.
• Ellison, who in recent quarters has called out Workday as Oracle’s primary SaaS competitor, did not mention Workday in his prepared remarks but focused instead on how Oracle is now ahead of Salesforce.com on the cloud metric of Annual Recurring Revenue, or ARR. “Last fiscal year we sold more than $2 billion in cloud annually recurring revenue. This is the second year in a row that we sold more cloud ARR than salesforce.com,” Ellison said. “We are now well on our way to passing them and becoming number one in the enterprise SaaS market.”
• Ellison based that prediction on the breadth of Oracle’s suite of SaaS applications versus those offered by Salesforce, noting that Oracle offers cloud apps for financials, procurement, supply chain, manufacturing, human resources, payroll, marketing, sales and service, whereas “Salesforce in contrast only competes in three of these nine market areas.”
• With regard to IaaS market leader Amazon, Ellison didn’t speak specifically about the IaaS layer, but positioned Oracle’s combination of world leadership in databases (PaaS) with its next-gen technology for IaaS as the way Oracle will cut into the huge lead AWS currently enjoys. “During this new fiscal year, we expect both our PaaS and IaaS businesses to accelerate into hyper-growth, the same kind of growth we are seeing with SaaS. As our customers begin to migrate their millions of Oracle databases to Generation 2 of the Oracle Public Cloud…we expect that our Oracle PaaS and IaaS businesses will grow so fast that they will be even bigger than our SaaS business.”
• Ellison’s linkage of Oracle’s emerging IaaS business with its PaaS business is significant because, as he says in the comment above, Oracle is the world’s leading database vendor by a wide margin—so if Oracle can pull lots of those on-premise customers into the Oracle Cloud and away from the aggressive marketing of Amazon and Microsoft, that would be a huge win.

(Bloomberg) Pfizer’s Glasdegib Gets FDA Orphan Status in Leukemia

• FDA designated Pfizer’s drug as orphan treatment for acute myeloid leukemia.
  
  • FDA awarded designation to the treatment, which has generic name glasdegib, on June 28.
  • Orphan drugs are entitled to 7 years market exclusivity if approved by FDA for rare disease.

Fund Flows & Issuance: According to Lipper, for the week ended June 21, investment grade funds posted a net inflow of $1.55bn down from $2.603bn the prior week. Per Lipper data, the year-to-date net inflow into investment grade funds was $65.843bn. Per Bloomberg, investment grade corporate issuance for the week was $19.675bn, which was underwhelming relative to consensus. Through the week, YTD total corporate bond issuance was $700.045bn, which trails 2016 by 3%. Barring a Friday turnaround, WTI crude oil is headed for its fifth consecutive weekly drop, and while IG remains just off YTD tights, weakening oil prices are likely weighing on primary issuance.

(Bloomberg) Celanese, Blackstone to Form Venture for Cigarette Filter Fiber

• Celanese Corp. and Blackstone Group agreed to form a joint venture to create a global supplier of acetate tow, a derivative of wood pulp used in making cigarette filters and other products.
• The business will combine Celanese’s Cellulose Derivatives and Blackstone’s Rhodia Acetow units, the companies said Sunday in a joint statement. Celanese will own 70 percent of the venture and Blackstone the remaining 30 percent, and the as-yet-unnamed venture will distribute $1.6 billion to Celanese when it closes.
• A tasteless, odorless form of cellulose, acetate tow is also used to make products such as marker tips, air fresheners and perfume dispensers. The new entity is expected to have 2017 pro forma revenue of about $1.3 billion with about 2,400 employees and will benefit from synergies in supply procurement, innovation, energy, equipment and other services, according to the statement.
• “The combination of these tow assets will enhance our ability to serve customers more efficiently and reliably from a global production footprint while also creating growth opportunities for employees,” said Mark Rohr, chief executive officer of Celanese.
• Celanese will name three members of the new company’s five-member board. Blackstone will pick the other two.

(BNA) Linde and Praxair Prepared for Long Haul in Antitrust Fight

• Linde AG and Praxair Inc. are girding for a long antitrust fight across multiple countries for their proposed merger of equals, and have given themselves a generous two years to close the deal.
• The two companies announced their proposed merger on June 1. The combined entity, with a current value in excess of $70 billion, would become the biggest player in a concentrated industrial gases market worldwide. It would outrank current market leader Air Liquide SA, which combined with Airgas Inc. in 2016 for $13 billion. The remaining players in the market have less than half the market position of either large firm, according to Bloomberg Intelligence.
• By setting a closing deadline far in the future, Linde and Praxair have avoided having their contract expire before their deal clears regulatory hurdles. But they face other risks, including changes in the market and extra costs to sealing the deal, Jones Day partner Chip MacDonald told Bloomberg BNA.
• MacDonald, who handles bank and broker dealer mergers with a complex regulatory overlay, said he doesn’t see parties setting longer deadlines in his own practice. A one-year expiration keeps everybody focused on closing the deal, including regulators, he noted.
• Most notable examples include scuttled mega-mergers between Staples Inc. and Office Depot Inc., Sysco Corp. and US Foods Holding Corp., and Electrolux AB and General Electric Co.
• U.S. regulators examined those mergers based on a narrow slice of “national accounts” served by limited big players. When regulators draw the market on that basis, it is the scale and scope of the operation that matters, not operational overlap that can be cured by divesting a few facilities or product lines.
• “The gas industry’s growth is defined by new projects at customers’ sites,” said Bloomberg Intelligence senior analyst Jason Miner in an analysis. “It’s this pipeline of potential on-site sales, rather than overlaps in installed footprints, that would likely drive regulatory concerns in a Praxair-Linde combination.”

(Bloomberg, Reuters) AT&T Awaiting Justice Department Details for Time Warner Deal

• AT&T senior executive VP Bob Quinn said the company is still unsure what final conditions may be needed as part of the approval process.
• The Justice Department is continuing its review of the $85.4 billion acquisition of Time Warner Inc. by telecom company AT&T , with AT&T still awaiting details about any final requirements to get the deal done, Reuters reports.
• Speaking with C-SPAN this week AT&T senior executive VP for external and legislative affairs Bob Quinn said the company is still unsure what final conditions may be needed as part of the approval process.
• “That conversation is just beginning really. We’ve gotten through the point where we’re produced all the data and answered all the questions and I think that process will kick off this summer,” Quinn said, according to Reuters.

(Bloomberg) Medtronic Announces $5B Share Buyback; Boosts Qtr Dividend 7%

• Medtronic qtr cash dividend raised to 46c/shr from 43c vs. estimate 47c, the company said in a press release.
  
  • Dividend is payble on July 26 to holders of record at the close of business July 7
  • Buyback replaces previous 2015 repurchase authorization
  • NOTE: 15 buys, 12 holds, 0 sells before today; avg PT $92.35

(Bloomberg) Dow-DuPont Wins U.S. Antitrust Nod to Create Chemicals Giant
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(Bloomberg) Committee Approves Extension of Nuclear Production Tax Credit
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Fund Flows & Issuance: According to Lipper, for the week ended June 14, investment grade funds posted a net inflow of $2.603bn. Per Lipper data, the year-to-date net inflow into investment grade funds was $64.293bn. Per Bloomberg, investment grade corporate issuance for the week was $13.75bn. Through the week, YTD total corporate bond issuance was $680.37bn, which now trails 2016 by 5.5%. The FOMC meeting on Wednesday was a big factor in the lackluster primary calendar this week.

(CNBC) Eli Lilly CEO David Ricks weighs in on drug costs and health reform

• CEO David Ricks on Thursday zeroed in on drug costs and the need for faster regulatory approvals as the debate over health-care reform rages on.
• “We hope this is a moment where we can make improvements in the health care system for everyday Americans,” he told CNBC in an interview at the Heartland Summit in Minnesota.
• One issue being talked about, according to Ricks, is why individual payers in high-deductible plans are paying the list price for medications.
• “Because we’re providing deep rebates to payers in the system who enjoy those, but the small guy, the consumer on the street, doesn’t get that same benefit,” Ricks said.
• He also advocated for faster FDA approval on generic drugs and “innovative breakthroughs,” in areas such as Alzheimer’s and cancer treatment, to help increase competition in the pharmaceutical industry.
• Drug costs have become an increasingly visible issue following the controversial price hikes orchestrated by pharma bro Martin Shkreli and the uproar over Mylan’s skyrocketing EpiPen costs, among other developments.

(Bloomberg) Banks Leave Savers Waiting After Being Quick to Raise Loan Rates

• Federal Reserve officials raised the benchmark lending rate to a range of 1 percent to 1.25 percent on Wednesday; the central bank’s third such move in six months. In the hours since the decision was announced, U.S. banks including Citigroup Inc., U.S. Bancorp and SunTrust Banks Inc. announced that they’ll pass on the higher interest rates to borrowers, without disclosing plans to provide better rates for deposit customers.
• After years of stubbornly low interest rates, U.S. banks have been slow to increase offers for deposit accounts. They are seeking to benefit from a fatter margin between what they charge for loans and what they pay out to customers who provide the funds.
• “We do think that there’s going to be a little bit more pressure on the retail side after this rate hike, and then certainly into the future,” Terry Dolan, chief financial officer at U.S. Bancorp, the country’s largest regional bank, said at an investor conference on Tuesday. So far, he said, the bank has “seen really no change in deposit betas on the retail side.”
• At least one large U.S. bank has broken ranks. Goldman Sachs Group Inc. raised its deposit rate to 1.2 percent this month, among the highest rates offered by firms tracked on Bankrate.com, a website that monitors 4,800 financial institutions.

(Bloomberg) Dow-DuPont Wins U.S. Antitrust Nod to Create Chemicals Giant

• Dow Chemical Co. and DuPont Co. won U.S. antitrust approval for their $73 billion merger, overcoming one of the last remaining hurdles to a deal that would create a global chemicals giant.
• DuPont agreed to sell off some of its herbicide and insecticide products to resolve government concerns that the combination would harm competition and raise prices for customers, according to a settlement filed Thursday in federal court in Washington. Dow will sell a plastics packaging unit.
• The takeover is among a trio of mega-deals that would reshape the global agrochemicals industry if approved by regulators around the world. Bayer AG is seeking approval to buy Monsanto Co., while China National Chemical Corp.’s agreement to buy Syngenta AG is nearing completion. If cleared, the transactions together would consolidate the industry into four major players, including BASF SE.
• The deals have drawn complaints from farmers and environmental activists who say the the combined companies’ control of pesticide and seed markets might increase prices for farmers.
• The U.S. approval of the Dow-DuPont tie-up follows the European Union’sclearance of the deal in March, when DuPont agreed to divest part of its pesticide business, including research and development. The companies also won clearance from India and are awaiting approval from Canada.

(Bloomberg) Committee Approves Extension of Nuclear Production Tax Credit

• House Ways and Means votes to approve legislation sought by the nuclear industry power that would extend an unused tax credit for new nuclear reactors.
  
  • H.R. 1551 extends Nuclear Production Tax credit past current sunset date of 2021
  • Bill also tweaks legislation to allow nonprofit public power co-owners of plants and other partners to use the credit by allocating their pro-rated share of the credit to private partners
  • Legislation is seen as beneficial to Southern Co. and Scana Corp., which have reactors under construction that could qualify for the credit
  • NOTE: Under current law, 1.8-cents-per-kilowatt-hour credit is capped at 6,000 megawatts and only available to nuclear power plants placed in service before January 2021

Fund Flows & Issuance: According to Lipper, for the week ended June 7, investment grade funds posted a net inflow of $3.731bn. Per Lipper data, the year-to-date net inflow into investment grade funds was $61.689bn. Per Bloomberg, investment grade corporate issuance for the week topped $18bn. Through the week, YTD total corporate bond issuance was $665.12bn, which is up ~3% from 2016.

Bloomberg Barclays US IG Corporate Bond Index OAS started the day on Friday 113:

• 2017 wide/tight: 122/111
• 2016 wide/tight: 215 (a new wide since Jan. 2012)/122
• 2015 wide/tight: 171/122
• 2014 wide/tight: 137/97
• All time wide/tight back to 1989: 555 (Dec. 2008)/54 (March 1997)

(WSJ) Amazon Fights Wal-Mart for Low-Income Shoppers

• Amazon.com Inc. is dropping its membership price for low-income shoppers, going after a Wal-Mart Stores Inc. stronghold.
• The online retailer giant said Tuesday that it will offer a nearly 20% segment of the U.S. population—people who obtain government assistance with cards typically used for food stamps—a $5.99 monthly Prime membership, less than the $10.99 a month or $99 annual plan for other consumers.
• The new Prime offering takes direct aim at Wal-Mart, which counts on shoppers who receive government assistance for a large percentage of sales. Wal-Mart generated about $13 billion in sales last year from shoppers using the Supplemental Nutrition Assistance Program, or SNAP, accounting for around 18% of the money spent through the program nationwide.
• Those customers also spend additional income while in Wal-Mart stores.
• Amazon will require cards typically used for food stamps as an initial measure to determine participant eligibility, although they can’t yet be widely used for shopping online.

(Bloomberg) U.S. Natural Gas Heads for Weekly Gain on Hot Weather Outlook

• Natural gas for July delivery +1.8c to $3.046 at 9:23am (Friday) on Nymex, setting pace for first weekly gain in four weeks.
• Temperatures may above normal from West Coast to Great Lakes region June 19-23: the Weather Company
• “A little bit of hot weather seems to be providing some support,” says Gene McGillian, manager of market research at Tradition Energy
• The fact “that we’re basically getting ready to enter the prime months of summer cooling season might be putting some hesitation on the minds of the sellers”

(Bloomberg) From ‘King Arthur’ to ‘Mummy,’ Summer Is a Bummer in Hollywood

• Even “Wonder Woman” may not be able to save the summer for Hollywood.
• The acclaimed superhero movie is only the second big hit in an otherwise dismal season for the film industry, which typically counts on May to early September for about 40 percent of the year’s revenue. A rash of box-office disappointments, starting with “King Arthur: Legend of the Sword” and continuing through “Baywatch,” is likely to repeat this weekend, whenUniversal Pictures’ “The Mummy” lurches into theaters.
• Even if the rest of this season’s films perform in line with estimates, summer 2017 is likely to just edge out 2014 — the worst summer for blockbuster films since 1976, by some measures, according to Doug Creutz, a Cowen & Co.
• As some blockbuster films fall short, the market for smaller films is also getting squeezed, Creutz said. “Baywatch,” “Snatched” and “Diary of a Wimpy Kid: The Long Haul” underperformed his estimates by more than 50 percent. Concentration at the box office, with fewer movies sharing a majority of the spoils, has intensified.
• The best solution for the industry is probably just to make better movies, said Wunderlich’s Harrigan. “The movie business is not a zero-sum game,” Harrigan said. “If you get good movies the box office will improve.”

(Bloomberg Intelligence) Chubb’s 9x Fixed-Charge Coverage Is Above Allstate, Hartford

• Chubb and Travelers’ superior fixed-charge coverage, at over 9x, stems from their steady profitability and moderate leverage. Their coverage ratios are about two percentage points above Allstate and Hartford, which operate at a mid-7x level.
• Allstate’s leverage is higher, at 23%, and its results haven’t been as steady as Chubb’s. Hartford’s profitability has suffered from weak results in its personal auto line, which it’s revamping. AIG incurred a loss in 2016 as it boosted reserves repeatedly.
• Peer Comparison: Chubb’s leverage and fixed charge coverage ratios are in-line with Travelers and superior to the other three insurers’. Chubb is rated A3/A/A, similar to Travelers (A2/A/A+) and Allstate (A3/BBB+). AIG is rated Baa1/BBB+/BBB+ negative, and Hartford is rated Baa2/BBB+.

(Bloomberg BNA) Dow-DuPont Merger Inches Toward Finish Line With Australian OK

• DuPont Co. and the Dow Chemical Co. are one step closer to closing their $78.5 billion merger after Australia cleared the deal on June 8, but they still face three important hurdles.
• The deal is still being weighed by a few major merger review authorities — the U.S. Justice Department, India, and Canada. The tie-up is the first stage in a planned division of the combined Dow-DuPont business into three separate companies in agriculture, materials science, and specialty products.
• Under the companies’ agreement, the deadline to complete the merger is Aug. 31. Dow’s Director of Public Affairs, Rachelle Schikorra, confirmed to Bloomberg BNA that companies expect the merger is on track to close in August with the intended spin-offs completed 18 months thereafter.
• The deadline for public comment in India was April 10. Following public comment, the Competition Commission of India as a standard operating procedure asks for information from the parties and must generally reach a final determination 45 days after it receives the companies’ submissions.
• Because the process in the U.S. and Canada is confidential, information on where the companies stand in those merger reviews is unavailable. Canada’s antitrust agency publicly announces its merger decisions on a monthly basis only, but a spokeswoman confirmed that the bureau is still reviewing the merger.

Fund Flows & Issuance: Corporate bond issuance for the week topped $25bn, which is higher than most market participants had expected in a holiday-shortened week. Through the end of this week, YTD total corporate bond issuance was $646bn+ (Source: Bloomberg).

(NYP) Cable giant Charter snubbed a buyout bid from Verizon

• Verizon boss Lowell McAdam, his company facing slowing sales of mobile phones, made a proposal to acquire cable-TV giant Charter Communications in recent months, three sources told The Post.
• The offer — valued at between $350 and $400 a share, and well over $100 billion, according to two of the sources familiar with the move — was rejected by Liberty Media-controlled Charter because it was too low — and because Charter was not ready to sell.
• Verizon, whose archrival AT&T has moved to expand beyond the wireless world by buying DirecTV and Time Warner, also recently expressed interest in another Liberty Media property, Sirius XM Holdings, sources said.
• Verizon’s interest in SiriusXM didn’t get as far as a bid, the sources said.
• Also standing in the way of Liberty Media agreeing to a deal for any of its units is the tax implications, which would be unpalatable to its billionaire chairman John Malone, sources said.

(Business Wire) Chevron Highlights 2016 Performance and Future Plans at Annual Meeting of Stockholders

• Chevron Corporation (NYSE: CVX) today provided an overview of the company’s 2016 operational and social performance and future growth plans for the company at its 2017 Annual Meeting of Stockholders in Midland, Texas.
• “2016 was a transition year for Chevron and the industry,” said John Watson, chairman of the board and chief executive officer. “We took significant actions to reduce costs, limit cash consumption and protect the balance sheet. As oil prices improved, recovery in earnings was evident in the second half of the year. This progress has continued into 2017.”
• Watson reiterated that he is confident about the company’s future. “We are well positioned with a strong portfolio and the right business model, including a profitable downstream and chemical business and an upstream portfolio of shorter cycle opportunities, highlighted by our enviable position in the Permian Basin,” said Watson. “Our long-term strength is also underpinned by projects in Kazakhstan, Australia, the deepwater Gulf of Mexico, and attractive future options in West Africa, South America, Asia and North America.”

(Fortune) State Street Takes On Wall Street’s Gender Gap

• The financial services industry has long faced a pipeline problem in recruiting and promoting women—and its culture is one of the biggest obstacles. In the 1980s and ’90s, as asset management became a dominant branch of the economy, the sector earned a reputation as a particularly frat-house-like branch of the corporate boys’ club.
• State Street wasn’t immune to such behavior. Since the early 1990s, 30 gender discrimination complaints have been filed against the firm at the Massachusetts Commission Against Discrimination. Most have been dismissed or settled, but a few have attracted embarrassing publicity.
• Company veterans say such incidents were overblown in the press and involved just a few bad apples. Still, such history may be reflected in the fact that there are few women among State Street’s top leaders, most of whom began their careers at least 20 years ago. At the time, “the image of the industry was so tarnished,” notes Evelyn Murphy, former lieutenant governor of Massachusetts and founder of the WAGE Project, a campaign to end the gender pay gap. “For women who were graduating from business schools and colleges, [finance] was not an inviting place to go work.”
• Despite the reputational troubles, ­financial services companies have largely caught up with corporate America when it comes to women in management. The problem is that women stall at the vice presidential rank. Imagine State Street’s 35,000 employees as a pyramid. At the bottom, there are roughly 17,000 associates and fund accountants, of whom 53% are women. A couple of levels up are assistant vice presidents—middle managers, essentially—and again, there’s a relatively high share of women, at 42%. But the numbers keep declining as you climb. At the top of the pyramid—senior vice presidents and above—only 27% of the positions are filled by women.
• In 2012 the company announced its first explicit gender-parity goals. Aiming for fifty-fifty at the top right away seemed entirely unrealistic. Instead, State Street aimed for 27% women in senior management roles within three years, up from 24% at the time. They raised the target to 28% in 2015; they’re due to raise it again this year. The percentage of women at the SVP level and higher has steadily risen, and there are now three women on the firm’s 15-­person management committee, up from just one in 2010.
• Earlier this year, State Street promoted six people to the executive vice president ranks, of whom three were women—the first time in company history that women accounted for 50% of executive-level promotions. The milestone brought Hooley satisfaction. “It’s been eight frustrating years, but I think we’re finally starting to make some traction,” he says.

(Bloomberg) American Tower Said to Explore Purchase of Spain’s Cellnex

• American Tower Corp. is exploring a bid for Cellnex Telecom SAto expand in Europe as the Spanish tower operator’s main shareholder considers selling assets as part of a merger, according to people familiar with the matter. Cellnex surged in Madrid trading.
• Any offer from American Tower would hinge on the successful combination of the Spanish company’s largest shareholder, Abertis Infraestructuras SA, with Atlantia SpA, the people said, asking not to be identified as the information is private. Atlantia would determine whether to sell the Abertis assets once the deal is concluded, one of the people said. The Italian company has said it expects the deal to close in the fourth quarter.
• Cellnex shares rose 5.1 percent to $18.84 at 10:33 a.m. in Madrid on Wednesday after earlier gaining as much as 7.3 percent, the biggest intraday jump since 2015. The shares had risen about 31 percent this year through Tuesday, giving the company a market value of about 4.2 billion euros ($4.7 billion).
• American Tower, which has a market value of about $56 billion, has yet to make a formal offer for the Spanish firm, another person said. No final agreements have been reached with any of the parties, and the discussions may not result in a deal, the people said.

(Bloomberg) The Whistleblower Behind Caterpillar’s Massive Tax Headache Could Make $600 Million

• In the the spring of 2008, finance executives fromCaterpillar Inc. gathered for a few days of meetings in the Peoria Civic Center, a few blocks from company headquarters. Early in the proceedings, Eugene Fife, chairman of the audit committee, reminded the attendees that they cradled Caterpillar’s reputation in their hands.
• It would take just one or two wayward stewards to wreak havoc, Fife said, even at a company as mighty as Caterpillar, the world’s largest maker of bulldozers and other construction equipment. Anyone aware of financial malfeasance or trickery was obliged to report it immediately. Later, then-Chief Executive Officer Jim Owens pressed the point, saying he slept well because he couldn’t imagine Caterpillar experiencing the sorts of ethical lapses that had doomed Enron Corp. and other companies.
• Listening with dismay was Daniel Schlicksup, an accountant who’d been with Caterpillar for 16 years. He’d been telling his bosses that the company was engaged in an overseas tax arrangement that, by his reckoning, had helped it illegally avoid more than $1 billion in taxes. Now, as Owens spoke, Schlicksup concluded that no one had passed his warnings to the CEO. “I thought to myself, ‘Jim, it’s happening here,’  ” Schlicksup later said in sworn testimony. “ ‘You just don’t know it.’  ”
• His missives began a chain reaction that’s still in motion. The IRS, aided by documents Schlicksup provided, concluded in 2013 that Caterpillar had employed an “abusive” tax strategy; the agency later demanded $2 billion in back taxes and penalties. In early 2014 a U.S. Senate investigative committee, with input from Schlicksup, grilled executives and concluded the company had avoided taxes on more than $8 billion in revenue.
• Schlicksup, now 55, parted ways with Caterpillar five years ago. The company has portrayed him in court filings as a paranoid, self-righteous employee who buried his own future there. But if the IRS collects what it claims it is owed, Schlicksup might end up the best-paid whistleblower of all time, with a potential paycheck of $600 million, while Caterpillar, the 92-year-old pride of Peoria, will experience something unfamiliar: public humiliation.
• For all its complexity, the basics are easy enough to understand: Caterpillar essentially flipped the parts profit allocation so the new Swiss entity would be credited with 85 percent of the income on those sales. The company then paid taxes on those earnings at rates ranging from 4 percent to 6 percent, as negotiated with the Swiss tax authorities.
• Caterpillar wound up effectively keeping two sets of books. The public one attributed the bulk of parts profits to Geneva, with its puny tax rate. An internal ledger known as “accountable profits” tracked the operating income of the divisions and calculated employee bonuses accordingly, says a 2014 report on CSARL by the Senate Permanent Subcommittee on Investigations. Under former Senator Carl Levin, a Michigan Democrat, the subcommittee scrutinized tax avoidance strategies at Cat, Apple, HP, and Microsoft.
• In court filings, Caterpillar says it took Schlicksup seriously, but he was just wrong. “Caterpillar has investigated every one of Mr. Schlicksup’s complaints and has been satisfied with the investigative process and the conclusions drawn,” the company told OSHA. “Mr. Schlicksup, however, was, and continues to be, unwilling to accept that investigations are initiated, closed, and owned by Caterpillar and that he is not entitled to know the outcomes of investigations.”

Fund Flows & Issuance: Fund flows remain positive but final data for the week is not yet available as we go to print. Issuance was strong ahead of the holiday shortened week which saw $48.775bn in investment grade corporate primary issuance. Through the end of this week, YTD total corporate bond issuance was $621.145bn. As we near the close of the week, the BofAML US Corporate IG Index is at +118 vs +117, tying the tight YTD and the tightest level since Sept. 2014, was also seen May 15-16 (Source: Bloomberg).

(Bloomberg Intelligence, CAM notes from conference call) Broad-Based Demand Fuels Toll’s Volume Gains, Prices Slip on Mix

• Toll Brothers’ 2017 homebuilding revenue may top the midpoint of revenue guidance calling for an 11% gain. Closings are likely to skew toward the high end of the range, signaling growth of more than 20%, while average selling prices fall about 6% (driven solely by mix). Volume growth is being fueled by broad-based demand, particularly in California, where Toll will open 18 communities in 2017 as part of its 7% community count growth target. In addition, Toll’s lower-priced products should support faster turnover.
• Regions: Toll Brothers’ homebuilding operations are divided into five regions and City Living. As of fiscal 2016, California accounted for 28% of revenue, followed by the West (18%), Mid-Atlantic (17%), South (16%), North (16%) and City Living (5%).
  
  • 2017 Outlook per conference call & investor presentation:
    • 9500 – 7,450 home closings (Previously 6,700-7,500)
    • ASP of $775-825k (unchanged)
    • Revenue of $5.4-6.1bn (Previously $5.19-6.19bn)
    • Community count growth similar to 2016 (unchanged)
    • Gross margins of 24.8% – 25.3% (unchanged)
    • SG&A Margin of 10.6% of revenues (unchanged)
    • JV income between $160-200mm (unchanged)

(CNET) Sports-free digital TV for $10 a month? Viacom may be trying

• Hunting for a streaming TV option that doesn’t make you pay for ESPN? Viacom may be aiming to deliver.
• The TV company, which owns networks like Comedy Central, MTV and Nickelodeon, is talking with rival programmers AMC and Discovery about a possible digital-TV bundle that could cost as little as $10 a month, according to a report late Monday in the New York Post.
• Scripps, which operates channels like HGTV, is also a possible partner.
• It would add a fresh option in the ballooning marketplace for live, online TV options. In the past year, YouTube, Hulu and DirecTV have rolled out livestreaming television subscriptions that go up against traditional cable as well as existing digital competitors like Sling TV and PlayStation Vue.
• But Viacom’s potential bundle would be unique from all the rest in a major way: You wouldn’t be paying for the most expensive kind of TV out there, like sports on ESPN.

(PR Newswire) Vulcan Announces Agreement to Acquire Aggregates USA LLC

• Vulcan Materials Company (NYSE:VMC), the nation’s largest producer of construction aggregates, today announced that it has reached a definitive agreement with SPO Partners to acquire its aggregates business, Aggregates USA LLC for $900 million in cash. Aggregates USA LLC operates 31 facilities serving high growth markets in Georgia, Florida, Tennessee, South Carolina and Virginia.
• “We are pleased to have reached agreement with SPO Partners for these strategic assets, which enhance our ability to serve high growth markets throughout the southeastern U.S.,” said Vulcan’s Chairman and Chief Executive Officer Tom Hill. “With the addition of these quarries and related assets, Vulcan will be able to capitalize on continuing increases in state highway funding programs in Georgia, Florida, South Carolina, Tennessee, and Virginia, and on the continued private sector growth across the region. This transaction will provide Vulcan with long-term high quality reserves across the entire portfolio. Aggregates USA operates efficient, high productivity facilities run by strong teams, and we welcome them to our Company.”
• The acquisition complements and expands Vulcan’s service offerings in Georgia with three granite quarries – two of which have rail capabilities extending the Company’s reach into important markets – along with 16 rail distribution yards in Georgia, South Carolina and Florida. In addition, the acquisition includes 12 limestone quarries in eastern Tennessee and southwest Virginia. Vulcan may divest several quarries in Tennessee to a third party in order to expedite the regulatory approval process.

(FitchRatings) Fitch Affirms Albemarle Corp.’s IDR at ‘BBB-‘; Outlook Revised to Positive

• Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) of Albemarle Corp. (NYSE: ALB) at ‘BBB-‘. The Rating Outlook is revised to Positive from Stable. Albemarle’s ratings reflect its exposure to the growing lithium industry, the relative stability of its bromine and catalysts businesses, strong FCF generation and increased financial flexibility.
• Albemarle’s credit metrics have improved considerably since the Rockwood transaction was finalized in early 2015 due primarily to strong growth in the company’s lithium business and the repayment of greater than $2 billion of debt using proceeds from several divestitures including the sale of its Chemetall business in 2016. Fitch projects Albemarle’s FFO Adjust Leverage will stay within the 2.5x-3.0x range through 2019 and forecasts strong FCF generation that should average between $150 million to 200 million on a normalized basis. Albemarle plans to spend greater than $2 billion in CapEx through 2021 with the bulk of that spending used to increase capacity in its lithium business. While Fitch projects the company should be able to comfortably self-fund these expenditures, Albemarle has also stated its intent to utilize its strengthened balance sheet to pursue acquisitions in the lithium space and return cash to its shareholders in the form of growing dividends and/or share repurchases. However, Fitch believes the company will balance such priorities against its goal of maintaining a net leverage ratio in the 2.0-2.5x range.
• The Positive Outlook reflects Fitch’s view that Albemarle’s positive operating momentum and strengthened balance sheet paired with a demonstrated track record of adhering to a credit conscious capital allocation policy as the company pursues its strategic goals would likely lead to a positive rating action in the coming 12-18 months.