Category: Investment Grade Weekly

Fund Flows & Issuance: According to Lipper, for the week ended February 1st, investment grade funds posted a net inflow of $2.657bn. The total year-to-date net inflow into investment grade funds ended the week at $12.355bn. Per Bloomberg, investment grade corporate issuance through Thursday was $45.8bn. For the month of January, new issuance came in at $178.45bn, one of the largest months on record.

(Conference Call, CAM Notes) Simon Property Group Reports Full Year 2016 Earnings

• Conference Call Highlights:
  
  • SPG currently has 434 department store spaces in their portfolio
    
    • 1 current vacancy
  • Also of the recently announced department store closures, 1 was in their portfolio
  • SPG says they saw more stores closings in 2015 than 2016 (non-department)
  • On Traffic:
    
    • Gift cards sales were up 14% which, SPG believes, is a good indicator of traffic
    • Premium Outlet traffic (counted by cars entering parking lot) was up 1.5% YoY
  • David Simon stated on the call that they believe retailers are spending a lot of capital on internet sales, “and between that and the promotions required to get them to buy online between the cost of shipping and the returns, it’s not a great model for them.”
  • Mall & Premium outlets catering to foreign buyers were negatively affected by the strong dollar during the quarter (same as last)
  • Retail centers outside of tourist oriented malls were stable during the quarter
  • As far as development pipeline:
    
    • Redevelopment expansion projects are happening at 29 properties for approximately $1.1bn (their share)
    • Five outlets are currently under construction (all open in 2017):
    • Domestic: Norfolk, VA
    • The Clarksville Premium Outlet (D.C.) opened in late October and, “had the strongest open of any premium outlet in a long time.”
    • Internationally: France, South Korea, Malaysia and Canada.
    • One new mall is currently under construction: The Shops of Clearfork (Fort Worth) which is anchored by Niemen is to open in the fall of 2017
    • Brickell City Centre (Miami) opened in the 4th quarter

(Bloomberg) Apple, Microsoft Borrow Now Instead of Waiting for Tax Reform

• This year, tax reform could give U.S. companies access to hundreds of billions of dollars they have stashed overseas. Many corporations can’t wait that long.
• Apple Inc. and Microsoft Corp. combined sold $27 billion of debt this week to fund their daily operations, repay maturing debt, and buy back shares. Those bond sales might be unnecessary if new tax laws come this year, because under President Donald Trump’s proposed plan, companies could pay a one-time 10 percent levy to bring back money held overseas, less than a third of the current rate.
• Whenever companies can bring back cash, corporate bond issuance will likely drop, by as much as $150 billion a year, Bank of America Corp. estimated in November. That’s equal to more than 10 percent of the U.S. investment-grade debt issued last year, according to data compiled by Bloomberg. The companies with the most overseas cash tend to be in the technology and pharmaceutical industries.
• The U.S. last saw a tax holiday under a 2004 law. As part of that legislation, companies were allowed to bring back foreign earnings for one tax year at essentially a rate of 5.25 percent if they reinvested the funds in programs like worker hiring or capital investments. Although that holiday had a time frame of a single tax year, a program like the House Republicans’ could be implemented almost immediately, and last at least 10 years, Mills said.
• For now, companies don’t mind heading back to the debt markets, considering the low yields and minimal volatility, said Dave Novosel, a bond analyst at research firm Gimme Credit.
• “Markets are still pretty good. Why not take advantage of it?,” Novosel said. “A month from now, or two months from now, things might not be as good depending on what happens with Trump and Congress.”

Fund Flows & Issuance: According to Lipper, for the week ended January 25th, investment grade funds posted a net inflow of $1.589bn. The total year-to-date net inflow into investment grade funds ended the week at $9.697bn. Per Bloomberg, investment grade corporate issuance through Thursday was ~$25bn. Thus far, $146.8bn of investment grade corporate bonds have been issued in January.

(WSJ) Apple Sues Qualcomm Over Licensing Practices

• The suit, filed Friday in federal district court in the Southern District of California, claims that Qualcomm leveraged its monopoly position as a manufacturer of baseband chips, a critical component used in cellphones, to seek “onerous, unreasonable and costly” terms for patents, and that Qualcomm blocked Apple’s ability to choose another supplier for chipsets.
• The complaint seeks $1 billion in rebate payments that Apple says Qualcomm has withheld as retribution for Apple’s participation in an investigation by South Korea’s antitrust regulator.
• Apple said in a statement that it sued Qualcomm “after years of disagreement over what constitutes a fair and reasonable royalty.”

(Bloomberg) Ford Seen as ‘Canary’ With Record Leases Spurring Used Glut

• A glut of used vehicles has started to depress prices. That trend will intensify as Americans will return 3.36 million leased cars and trucks this year, another jump after a 33 percent surge in 2016, according to J.D. Power. The fallout has already begun, with Ford Motor Co. shaving $300 million from its financial-services arm’s profit forecast for this year.
• “Ford is the canary in the coal mine,” said Maryann Keller, a former Wall Street analyst who’s now an auto industry consultant in Stamford, Connecticut.
• This drag may be hitting the rest of the industry, too. A National Automobile Dealers Association index of used-vehicle prices declined each of the last six months of last year. When auto lenders lease out vehicles, they charge the customer a monthly payment and make an assumption of the car or truck’s value when it will be returned for resale. If vehicles are depreciating more than expected, losses can pile up.
• “We haven’t seen anything that suggests that what’s happening to our portfolio is different from what’s happening across the industry,” Bob Shanks, Ford’s chief financial officer, told analysts in November.
• Another way automakers could cope is by expanding their offerings of certified pre-owned vehicles — used cars with extended warranties — to try to bolster prices.
• The question for auto companies is whether pulling those levers will offset any losses from overlooking the true cost of using hefty incentives and discounted leases to boost new-vehicle sales.

(Bloomberg) Dow Sees DuPont Merger Closing in 1H, CEO Says on Conf. Call

• Dow Chemical says DuPont merger could be a “2Q close”; confident that company can solve EU antitrust concerns, CEO Andrew Liveris said during conf. call.
• Says other jurisdictions will “fall in line” after EU
• Sees Trump using executive orders to lift regulatory burdens
• Sees DOW benefiting from infrastructure plan, Keystone Pipeline decision
• DOW is a big U.S. exporter, so Trump border tax “big positive”
• Sees Trump lifting regulatory burdens in 30-60 days
• Sees new plant delays maintaining ethylene operating rates

Fund Flows & Issuance: According to Lipper, for the week ended January 18th, investment grade funds posted a net inflow of $1.893bn. The total year-to-date net inflow into investment grade funds ended the week at $8.108bn. Per Bloomberg, investment grade corporate issuance through Thursday was ~$29bn. Thus far, $121.8bn of investment grade corporate bonds have been issued in January, besting consensus estimates of $112bn.

(Press Release) IBM Reports 2016 Fourth-Quarter and Full-Year Results

• Highlights
  • Diluted EPS from continuing operations: GAAP of $4.73; Operating (non-GAAP) of $5.01
  • Revenue from continuing operations of $21.8 billion
  • Strategic imperatives revenue for full-year 2016 of $32.8 billion up 13 percent (up 14 percent adjusting for currency) represents 41 percent of IBM revenue
  • Cloud revenue of $13.7 billion for full-year 2016, up 35 percent
    
    • Cloud as-a-service annual exit run rate of $8.6 billion at year end, up 61 percent year to year (up 63 percent adjusting for currency)
  • 2017 EPS Expectations: GAAP of at least $11.95; Operating (non-GAAP) of at least $13.80
• “In 2016, our strategic imperatives grew to represent more than 40 percent of our total revenue and we have established ourselves as the industry’s leading cognitive solutions and cloud platform company,” said Ginni Rometty, IBM chairman, president and chief executive officer. “IBM Watson is the world’s leading AI platform for business, and emerging solutions such as IBM Blockchain are enabling new levels of trust in transactions of every kind. More and more clients are choosing the IBM Cloud because of its differentiated capabilities, which are helping to transform industries, such as financial services, airlines and retail.”

(NYT) Morgan Stanley Nearly Doubled Profit From Year Earlier Fourth Quarter

• Morgan Stanley roared in the fourth quarter, but it also exposed the limits of animal spirits. The bank led by James Gorman almost doubled its profit in the period from a year earlier to $1.7 billion. As at rivals, though, return on equity remains subpar.
• Some banking businesses do not fare well when too much hangs in the balance, as occurred with an OPEC meeting, an Italian constitutional referendum and the American election late last year. Fees from new stock sales, for example, fell 5 percent from the third quarter at Morgan Stanley, 19 percent at JPMorgan Chase and 34 percent at Bank of America.
• Trading desks ought to have been reaping the benefit from market mood swings. They certainly performed better in last year’s final quarter than during the same span in 2015. Morgan Stanley’s fixed-income, currency and commodities dealers raked in, at $1.5 billion, nearly three times as much revenue.
• Profitability also remains subdued. With annualized return on equity of 8.7 percent in the fourth quarter, Mr. Gorman is inching toward his 2017 goal of 9 percent to 11 percent. For now, Morgan Stanley keeps failing to cover its cost of capital, generally assumed to be 10 percent for large banks.
• Business may pick up in time, but that story has been told for years. What could power earnings is largely beyond Wall Street’s control: more and faster interest-rate increases from the Federal Reserve and financial rule changes from Washington.
• Morgan Stanley is well placed to benefit from both. It is growing its lending business and its mostly domestic wealth-management unit accounts for an increasing share of the company’s profit. With a capital ratio of 16.8 percent, the bank holds more excess than rivals and thus has plenty to return to shareholders if regulators allow.

(Bloomberg) Key Republicans at Tom Price Hearing Still Wary on Health Law Repeal

• A hearing on President-elect Donald Trump’s choice for health secretary became an arena Wednesday for key Republicans to stress their opposition to overturning the current health law without a clear replacement.
• The panel was considering the selection of Rep. Tom Price (R., Ga.), but much of the session focused on GOP plans for undoing the health law. Sens. Lamar Alexander (R., Tenn.) and Susan Collins (R., Me.) pointedly told Mr. Price their concerns about an initial Republican strategy of repealing the law without an agreed alternative in hand.
• Mr. Alexander, who chairs the Senate Health, Education, Labor and Pensions Committee, warned that the fragile insurance market in his state means he cannot support anything that would trigger further disruption. He finished on a similar note, telling Mr. Price he was confident he had secured his agreement.
• “What I heard from you, I believe I’m correct about this, is that while we intend to repair the damage of Obamacare and that will eventually mean repealing parts of it—major parts of it—that won’t become effective until there are practical, concrete alternatives in place to give Americans access to health care,” he said.
• The GOP-controlled Senate and House have taken their first procedural steps toward repealing the ACA, passing a budget that directs lawmakers to start drafting legislation to dismantle much of the law. But Republicans’ 52-48 Senate majority offers little room for defections as they move ahead.

(Bloomberg Intelligence) Dakota Access Still Has Path to Completion Despite Corps’ Review

• The Dakota Access Pipeline project may be delayed by a new Army Corps environmental review, but that isn’t likely to stop the project from being completed.
• The pipeline lost a court bid to block the Army Corps from preparing an environmental impact statement on the lake crossing, opening up the project to a period of public comment and review ending Feb. 20.
• While publication of the EIS notice somewhat hems in the incoming Trump administration, the new president’s appointees may still withdraw it or reverse course.
• In the interim, the federal district court in Washington could also agree with Dakota Access that the easement was actually granted in July, negating the EIS process completely.
• If the EIS process is allowed to go to completion, that process may last as long as six months.