What a difference a few days makes. The investment grade credit market, like equities, went out with a whimper last week. On Monday, with the stimulus package in limbo, a deluge of supply pushed spreads out to their widest levels of the year, and the Bloomberg Barclays Corporate Index closed at 373. The next few days saw a much improved tone, and even in the face of a historically large primary calendar, spreads ratcheted in 71 basis points to close Thursday at 302. To put this 71 basis point move into context, it was larger than the yearly range of the corporate index for each of the preceding three years, and it took only three days; truly a stunning reversal. Even with the improved tone, through Thursday, the index was down -5.96% year-to-date while the S&P 500 was down -18.21%.
The primary market continues to bustle with activity and through Thursday it easily smashed the record for its busiest week in history. $98.9 billion had priced through Thursday eclipsing the previous weekly record of $74.8 billion, according to data compiled by Bloomberg. There are several deals in the market as we go to print on Friday morning which will push the final weekly total north of $100 billion. The bulk of the issuance this week was from highly rated issuers with “A” credit ratings but we started to see some BAA-rated issuers get into the mix as the week wore on. There is one lower quality BAA issuer in the market on Friday morning which is really the first of its kind in recent weeks so we will get an idea about how the market feels about lending to more challenged credit stories.
Investment grade credit was hit with major outflows for the fourth consecutive week. Flows for the week of March 19-25 were -$43.3bln according to data compiled by Wells Fargo. The four week total was nearly -$100bln. Year-to-date flows are now negative to the tune of -$28bln. We would like to think that with an improved tone that many of the panic sellers and leveraged fast money has exited a space that is more suited for strategic permanent capital. Improving flows can only help to further strengthen the tone in the credit markets.
This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The index is unmanaged and does not take into account fees, expenses, and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.
We hope this commentary finds you all safe and healthy. We wish we would be able to provide you more frequent commentary however things have been changing so rapidly that any update we could provide would have been deemed irrelevant by the time the ink dried on the page. We will seek to provide you with commentary weekly or as is relevant.
The investment grade credit market has just capped off one of the most volatile two week periods in the history of its existence. The impact of a global pandemic as well as the Saudi-Russia oil standoff has weighed heavily on risk assets of all stripes, and although high quality investment grade typically behaves as a safe haven, even it has not been able to escape the grasp of panicked sellers. Through the week ended March 20, the YTD gross total return on the Bloomberg Barclays US Corporate Index was -10.58%. For context, the S&P 500 was down -28.33% over the same time period. CAM does not provide intra-monthly performance for our portfolios but we are generally more conservatively positioned relative to the corporate index. Recall that CAM has a significant structural underweight on BAA-rated credit by capping our exposure at 30% while the index has a BAA concentration of nearly 50%. CAM also targets a minimum rating of A3 for its portfolio. In a risk off panic, such as the one we have experienced as of late, it is BAA-rated debt that typically underperforms relative to A-rated debt and that has been consistent with what the market has experienced so far in 2020. Year-to-date, A-rated credit has outperformed BAA-rated credit as spreads on the A-rated portion of the index have widened 270 basis points while BAA-rated credit has underperformed to the tune of 46 basis points, having widened 316 basis points thus far in 2020. The AAA/AA portion of the corporate index has held up even better, having outperformed the BAA-rated portion of the index by 126 basis points year to date on a spread basis. To be sure, a pandemic driven global recession is not bullish for investment grade credit, however, it is important to remember that we are talking about high quality investment grade rated companies. This portion of a portfolio is designed to be the ballast that, over time, will reduce volatility and correlations with other asset classes in the context of a well-diversified portfolio. A recession is not good for any asset class and there will be some investment grade companies that are more affected than others. By and large the majority of these companies will see themselves through to the other side and the vast majority of companies will continue to pay interest and debts owed to bondholders. It is also important to remember that, in the framework of a capital structure, bondholders are ahead of equity holders as it is the bondholders that have first claim on the assets of a company. We are already seeing numerous companies change their behavior by suspending share buybacks and cutting dividends in order to protect their balance sheets so that they can continue to make good on their financial obligations that are not negotiable – payments to bondholders.
As far as our portfolio positioning is concerned, we are not infallible and we have some credits that have been impacted by the economic consequences of the pandemic. We are closely monitoring these situations as we always do. We are fortunate in that we have zero exposure to gaming, lodging, leisure or restaurants, as these have been particularly hard hit by the pandemic. We have some exposure to the energy sector but we are materially underweight relative to the corporate index. We have some exposure to airlines but no exposure to unsecured bonds – our only exposure to airlines is through bonds that are secured by the aircraft themselves. Our high quality bias and our bottom up research process leaves us feeling positive about the positioning of our portfolio relative to the index and we are constantly monitoring the portfolio for opportunities to better position, which for us usually means to more conservatively position.
Market Recap
Remarkably, the investment grade primary market remains alive and well as the week of March 16-20 ended up as the third busiest of all time with 23 borrowers bringing over $62bln in new debt. This flurry of issuance was important for the psyche of the market in our view as it once again proved that the investment grade market is never closed to high quality issuers. This was true during the depths of the financial crisis and it is true now. So why, may you ask, would issuers choose to print deals amid such volatility? First, it is really just the prudent thing to do if a company has access – faced with an uncertain near term economic outlook; it makes sense to bolster the balance sheet. Second, due to the drop in Treasuries, debt remains cheap. Take Coca-Cola for example, which was able to issue 10yr debt with a coupon of 3.45% on Friday. That is a very reasonable interest rate when viewed through a historical context. It is also reasonable compensation for investors who are faced with declining yields throughout the world.
Flows have not been the friend for credit investors with long time horizons these past two weeks and the flows themselves have been an even bigger driver of performance than the pandemic in our view. Outflows from IG credit for the week of March 12-18 were an eye-watering -42.7bln according to data compiled by Wells Fargo. This represents the largest outflow on record and is nearly 5x larger than the previous record for a weekly outflow. Investment grade credit is liquid, especially compared to the majority of other fixed income products, such as municipals, but it is not liquid enough to withstand an outflow of this magnitude without serious dislocation, and that is exactly what occurred over the past week. Liquidity for investment grade was easily as bad as it has been since the financial crisis and quite possibly worse based on the opinion of our team at CAM. To be clear, yes the pandemic will weigh on credit metrics for many IG companies, but the underperformance of the IG market over the past week was much more about flows than concerns about creditworthiness. This was panic selling plain and simple. If the market gets to a point where flows are positive or even neutral then the path of least resistance is tighter spreads. The dislocation has created opportunity for committed investment grade buyers especially at the front end of the curve as you can now purchase the 5-6-7 year bonds of some issuers at yields that are greater than their bonds that mature at 10yrs and beyond.
The Federal Reserve continues to act aggressively and decisively as it announced support for numerous market segments on Monday morning. Of particular interest to us is that the Fed will now be buying investment grade rated corporate bonds. The Fed will operate a Primary Market Corporate Credit Facility and a Secondary Market Corporate Support Facility. Through the Primary Facility the Fed will purchase IG rated corporate bonds with maturities of 4 years or less. Through the Secondary Facility, the Fed will purchase IG rated corporate bonds maturing in 5 years or less and it will also be providing liquidity for fixed income ETFs which should go a long way to correcting some of the price discovery problems we saw in the IG market last week. This package by the Fed had the immediate effect of driving IG credit spreads significantly tighter, but more importantly than that it gave the market some much needed confidence. The next step to instilling some semblance of calm into the capital markets would be the passage of a substantial relief package by the Senate. They failed to come to an agreement Sunday evening and for the second time Monday afternoon but we are hopeful that they will come to terms by the end of this week.
As we continue to navigate these turbulent times we wish the best for the health of you and your families. Thank you for your continued interest.
This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The index is unmanaged and does not take into account fees, expenses, and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.
Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$5.3 billion and year to date flows stand at -$22.9 billion. New issuance for the week was zero and year to date issuance is at $71.5 billion.
(Bloomberg) High Yield Market Highlights
U.S. junk bonds may pare losses Friday with stock futures higher and oil extending a recovery. But the asset class has lost the most in any month so far since 2008, and investors pulled billions of dollars of cash from funds.
Yet the junk-bond index has posted losses for 11 straight sessions, with 2.63% on Thursday alone. The asset class has lost 17.6% year-to-date and 16.46% in March, the biggest monthly loss since 2008
High-yield spreads widened 72bps Thursday to 976bps. Single-B spreads widened 78bps to 990bps. That’s very close to the 1,000bps that’s typically considered distressed
In less than two weeks, the amount of distressed debt in the U.S. has doubled to a half-trillion dollars as the collapse of oil prices and the fallout from the coronavirus shutters entire industries.
Junk-bond yields jumped 63bps to close at 10.75%, the highest since September 2009
Energy-bond yields surged to a new 20-year high of 23.69%, with the index losing more than 37% this month
High-yield bonds with more than $1.37b outstanding are trading above upcoming call prices, making it attractive for issuers to redeem the securities in the next three months. But that’s down 70% from the prior week, and the primary market hasn’t seen a deal price since March 4
Banks that agreed to help private equity firms and highly leveraged companies fund recent acquisitions may have to come up with billions of dollars of their own cash
to finance the deals if the market for risky debt remains shut.
Underwriters across Wall Street have committed to providing more than $30 billion to junk-rated companies by mid-year, according to data compiled by Bloomberg and people with knowledge of the matter who asked not to be identified because not authorized to speak publicly.
But with the markets for leveraged loans and high-yield bonds virtually shut since the Covid-19 pandemic triggered fears of a global recession, the banks now face the prospect that they might not be able to offload the risk before the takeovers are scheduled to close.
The exposure is a small fraction of the commitments they held heading into the 2008 financial crisis. Still, it could force banks to take losses or tie up capital for months just as
dozens of companies are drawing credit lines or seeking fresh financing to cope with the coronavirus fallout.
The deals run the gamut of sectors and geographies, ranging from an $11 billion financing for the leveraged buyout of ThyssenKrupp’s elevator unit in Europe to a $500 million debt deal for Culligan’s acquisition of water-filtration company AquaVenture.
Representatives for lead arrangers including Morgan Stanley, JPMorgan Chase & Co., Deutsche Bank AG, Bank of America Corp., Citigroup Inc. and Barclays Plc declined to comment.
For the vast majority of deals, the acquisitions themselves are not in doubt. If the banks are unable to syndicate the loans to institutional investors before closing, they are typically required to come up with the cash, and may try to offload the debt at a later date.
It was a difficult week for the Corporate Bond market as fear and uncertainty related to COVID-19, a precipitous drop in oil, and an inter-meeting rate cut by the U.S. Federal Reserve drove Treasuries lower and spreads wider.
When we look at the Investment Grade market the option adjusted spread on the Bloomberg Barclays US Corporate Index was 122 at month-end February 2020, while on Friday, March 13, 2020 it closed at 216. This was one of the quickest and most volatile spread moves in the history of the investment grade credit market.
(Source: Bloomberg)
There was a corresponding move lower in Treasuries across the board – this helped to mitigate some, but not all, of the impact of widening spreads.
(Source: Bloomberg)
To provide some context on the performance of the investment grade credit market, through the end of the day on Friday March 13, the Bloomberg Barclays US Corporate Index posted a YTD gross total return of -1.88%. Comparatively, the S&P 500 YTD gross total return was -15.73% (Source: Bloomberg). While we are not happy to see negative returns in the corporate bond market, the asset class has performed as expected during a period of extreme volatility, and it has held up materially better than equities and other risk assets.
CAM does not provide intra-monthly performance figures, however as of March 13, 2020 we note that CAM’s portfolio has the following defensive characteristics relative to the Index. CAM is significantly underweight in BBB rated corporate credit relative to the Index. CAM caps its exposure to BBB-rated credit at 30% while the Corporate Index’s exposure was 49.14% as of March 13. Interestingly, the BBB concentration of the Index is down slightly YTD but that is merely because some large issuers, like Kraft-Heinz, were downgraded from BBB to junk status – an example of the type of investment CAM seeks to avoid through its bottom up research process. The second and third major factors that will impact CAM’s performance relative to the Index relate to individual credit selection and avoidance of certain industries which have been particularly hard hit by COVID-19, such as Leisure. To be sure, we have individual credits within our portfolio that have been affected by both COVID-19 and the decline in the oil market and we are constantly monitoring and evaluating those situations through active management of the portfolio.
It was also an exceptionally difficult week for the High Yield market with a one-two punch of fear and uncertainty related to COVID-19 as well as a complete flush of the oil market due to the lack of an OPEC agreement. The option adjusted spread on the Bloomberg Barclays US Corporate High Yield Index spiked above 700 for the first time since the commodity fueled rout of 2016. The Index YTD gross total return was -8.84% through the end of Friday March 13 (Source: Bloomberg).
(Source: Bloomberg)
Again, CAM does not provide intra-monthly performance figures, but our High Yield portfolio has the following defensive characteristics relative to the Index. CAM had over 10% of its portfolio in cash at the start of the current sell-off in February and CAM is underweight, or zero weight, some sectors of the market that were particularly hard hit by this sell off, such as Oil Field services. To be sure, our portfolio’s gross total return was negative as of February 29, 2020, and subsequent drawdown has been widespread. We have a number of credits that have experienced increased volatility and as always we are closely monitoring those situations as well as all the credits in our portfolio. Currently, we are comfortable with the individual credit metrics of our holdings and we believe the overall portfolio is well positioned should the economy enter a recessionary environment. Our cash balance also affords us the ability to be opportunistic on behalf of our clients as those situations arise.
The High Yield market can be extremely volatile in times of stress. It is not as deep or as liquid as the Investment Grade credit market and that is one of the reasons that spreads can gap wider so quickly. The growth of ETFs has exacerbated this problem as they are often forced to sell in the face of investor liquidations. We would caution that during times like these it can be difficult to achieve favorable pricing when looking to sell a high yield security; and depending on your risk tolerance it can often be a good opportunity to buy. We ask that our investors continue to trust that we will professionally manage your portfolios with a long-term objective and through the extent of the current downturn to the best of our ability.
We believe it is important in times like these to remind our investors of our investment philosophy and process at CAM. While volatile markets present challenges as well as opportunities, the way we manage money remains very consistent. We are conservative investors of domestic corporate bonds with a “bottom-up value” investment discipline, stressing first and foremost the preservation of capital, with an important secondary focus on total return. We seek to deliver these results by identifying quality businesses that we are comfortable owning in all markets.
We take the responsibility of managing your money very seriously and we will always do our best to perform that task to the highest standard of care. We sympathize with our clients in uncertain times such as these and we hope that you and your families stay safe and healthy.
This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. High Yield bonds present risks specific to below investment grade fixed income securities. Valuation may result in uncertainties and greater volatility, less liquidity, widening credit spreads, and a lack of price transparency. Investments in fixed income securities may be affected by changes in the creditworthiness of the issuer and are subject to nonpayment of principal and interest. The value of fixed income securities also may decline because of real or perceived concerns about the issuer’s ability to make principal and interest payments. Past performance is not a guarantee of future results. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The Index is unmanaged and does not take into account fees, expenses, and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.
The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable, or that the investment decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.
Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.1 billion and year to date flows stand at $2.0 billion. New issuance for the week was $3.1 billion and year to date issuance is at $63.7 billion.
(Bloomberg) High Yield Market Highlights
It’s looking like a risk-off day in the junk-bond market as stock futures fall amid renewed concerns about the spread of the coronavirus outside China.
CAA yields, meanwhile, have crossed the 10% mark for the first time in three weeks.
Issuers are likely to remain on the sidelines Friday and the calendar is light, though Bausch Health is expected to emerge with a $3.25b junk-bond that’s part of a broader $8b refinancing
Yields rose 4bps to 5.13%, the biggest jump in three weeks though the index posted a modest gain of 0.018%
BA yields rose 4ps to 3.64%, single-B yields rose to 5%
(Bloomberg) Macy’s, Renault Add to Fallen Angel Fear With Downgrades to Junk
The credit-rating downgrades of Macy’s Inc. and Renault SA to junk status are rekindling fears among investors of a potential uptick in so-called fallen angels after a run of relative tranquility in the U.S. corporate bond market.
The American retailer and French carmaker each lost an investment-grade rating Tuesday, affecting billions of dollars of debt. They follow Kraft Heinz Co., the iconic U.S. packaged-food company, which was downgraded to junk by two credit raters last Friday as its turnaround shows little signs of progress.
Even though Macy’s and Renault were downgraded for idiosyncratic reasons and will still trade in investment-grade indexes unless another credit-rating company follows suit, their cuts bring back to the fore what had been a central concern among investors less than two years ago: That a slowing global economy could hamper companies’ ability to service their obligations, especially those that had taken on significant debt loads to finance deals.
While many firms took actions to reduce debt levels in 2019, several are still proving to be susceptible to ratings risk. Kraft Heinz alone, with around $21 billion of debt leaving the Bloomberg Barclays investment-grade index at the end of this month, nearly eclipses last year’s fallen angel volume of just under $22 billion, according to Bank of America Corp. strategists. Macy’s has about $8 billion of total debt, while Renault’s roughly $66 billion is predominantly denominated in euros and yen, according to data compiled by Bloomberg.
By year-end, the volume of fallen angels is likely to dwarf that of 2019, according UBS Group AG strategists led by Matthew Mish. They predict there could be as much as $90 billion of investment-grade debt downgraded to high yield this year. Guggenheim Partners has said as much as 20% of BBBs in the U.S., or $660 billion, will get cut to junk in the next downgrade wave.
(Reuters) U.S. labor market remains strong; manufacturing likely stabilizing
The number of Americans filing for unemployment benefits rose modestly last week, suggesting sustained labor market strength that could help to support the economy amid risks from the coronavirus and weak business investment.
There was encouraging news on the struggling manufacturing sector, with other data on Thursday showing factory activity in the mid-Atlantic region accelerated to a three-year high in February, likely as tensions in the 19-month trade war between the United States and China diminished.
But the coronavirus, which has killed more than 2,000 people, mostly in China, and Boeing’s suspension last month of the production of its troubled 737 MAX jetliner, grounded in March 2019 after two fatal crashes, continue to loom over the manufacturing sector.
Minutes of the Federal Reserve’s Jan. 28-29 meeting published on Wednesday showed policymakers “expected economic growth to continue at a moderate pace,” but expressed concern about possible economic risks from the coronavirus, which has also infected thousands globally.
“Manufacturing growth may be past its trough,” said Oren Klachkin, lead U.S. economist at Oxford Economics in New York. “However, looking ahead we continue to believe that activity will advance at a lackluster pace as global growth and trade policy headwinds are unlikely to significantly relent and the negative impact of the coronavirus will be felt via global supply chains interlinkages.”
(Bloomberg) Aecom Conference Cancellation May Increase Deal Rumblings
Reports on Aecom not attending two industrial conferences this week are being “seen as a positive indication that the company might be in later-stage negotiations for a deal,” Baird analyst Andrew Wittmann wrote in a note.
Baird confirmed that Aecom canceled from a Citi conference, and is not in attendance at a Barclays conference
Wittmann noted previous reports that Aecom had been approached by WSP Global regarding a deal
Corporate credit spreads were wider across the board this week but lower Treasury rates were the bigger story and more than offset the move wider in spreads. After closing the week prior at a spread of 96, the Bloomberg Barclays Corporate Index closed Thursday evening at a spread of 97, but spreads are weak and drifting wider as we go to print on Friday morning. Global risk markets are skittish among renewed fears that coronavirus may not be adequately contained. Frankly, we are a bit mystified at how easily markets dismissed virus fears to this point. It is not so much the virus itself but the fact that the second largest economy in the world has been closed for business for the better part of a month. This has serious consequences for growth across the globe due to the interconnected nature of the global economy. Treasuries were volatile over the course of the past week. The 10yr closed at 1.58% last Friday and it is wrapped around 1.45% as we go to print, coincident with its lowest levels of 2019. Meanwhile, the 30yr Treasury fell as much as 7 basis points on Friday morning to an all-time low of 1.89%.
The primary market had a very solid week especially considering it was shortened by one day due to a market holiday on Monday. Weekly issuance topped $35bln pushing the month-to-date total north of $86bln. Year-to-date issuance is now closing in on $220bln which is ahead of 2019’s pace by more than +23% according to data compiled by Bloomberg. Issuance is off to a strong start in 2020 but we would expect this pace to slow in the second half of the year as the presidential election approaches.
According to Wells Fargo, IG fund flows during the week of February 13-19 were +$7.4bln. This marks one of the strongest starts to a year on record. Year-to-date IG fund flows have now eclipsed $71bln.
Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $2.4 billion and year to date flows stand at $3.7 billion. New issuance for the week was $12.4 billion and year to date issuance is at $60.6 billion.
(Bloomberg) High Yield Market Highlights
Zayo Group Holdings Inc. is readying more than $3 billion of junk bonds, one of the biggest buyout financings since 2018 that may test investor appetite for riskier debt in the CAA tier.
The new notes, along with a leveraged loan package totaling more than $5b, will finance Zayo’s buyout by private equity firms Digital Colony Partners and EQT Partners
The bond portion of the offering may include $1b of seven-year secured notes and $2.1b of unsecured eight-year bonds, and marketing begins next Tuesday
It’s hitting the market after two straight weeks of gains for junk- bonds, which looks set to continue on Friday as stock futures edge higher and oil climbs
Triple C rated bonds have lagged the broader high-yield market so far this year, returning 0.942% through Thursday while the larger junk universe rose 1.11%
Yet CAA index yields have still fallen to a nine-month low of 9.71% and posted positive returns for three consecutive sessions this week. Other issuers, including Hecla Mining, have also priced debt in this rating range
Investors have plenty of cash to put to work too after corporate high-yield funds reported inflows
BA and single-B yields have fallen to a three- week low of 3.59% and 5%, respectively
BAs have gained for ten straight sessions, taking year-to-date returns to 1.175%
(Bloomberg) Natural Gas Tumbles to 4-Year Low on ‘Epic’ U.S. Demand Loss
Natural gas futures sank to a four-year low as the latest U.S. forecasts all but eliminated bulls’ hopes for a late-winter cold push.
Frigid weather in parts of the Midwest and West this week won’t stick around for long, according to Commodity Weather Group LLC. Mild temperatures are poised to blanket the eastern half of the country in late February, a shift from previous outlooks that showed a lingering chill.
Unusually warm winter weather has wreaked havoc on gas demand, allowing an onslaught of supply from shale basins to overwhelm the market. American liquefied natural gas cargoes, a key outlet for production, are at risk of being curtailed as the coronavirus outbreak in China curbs consumption in the world’s second-largest economy. The resulting collapse in global gas prices is squeezing profits for U.S. exporters.
“The lack of heating demand is epic. It’s a worst-case scenario,” John Kilduff, founding partner at hedge fund Again Capital LLC in New York, said by phone. “We continue to have a very weak demand environment that’s persisted all winter.”
The gas glut has been especially severe in the Permian Basin, where local prices for March delivery have dropped below zero. Output from the West Texas and New Mexico shale play, where gas is extracted as a byproduct of oil drilling, is increasing so fast there isn’t enough space on pipelines to take it away.
(Reuters) T-Mobile-Sprint merger wins approval from U.S. judge
T-Mobile edged closer to a takeover of Sprint Corp after a federal judge on Tuesday approved the deal, rejecting a claim by a group of states that said the proposed transaction would violate antitrust laws and raise prices.
During a two-week trial in December, T-Mobile and Sprint argued the merger will better equip the new company to compete with top players Verizon Communications Inc and AT&T Inc as the third-largest U.S. wireless carrier, creating a more efficient company with low prices and faster internet speeds.
Finalizing a deal will be a boon to Japan’s Softbank Group Corp, Sprint’s controlling shareholder, as the conglomerate offloads a troubled asset that has lost subscribers at a faster rate and as it seeks to secure funding for a second Vision Fund.
Sprint and T-Mobile said in a statement that they would move to finalize the merger, which is still subject to closing conditions and possible additional court proceedings.
A spokesman for the California Public Utilities Commission, the last regulatory body to decide on the merger, said its review of the deal is expected to conclude in July.
(Wall Street Journal) MGM Resorts Chief Set To Step Down
MGM Resorts International Chief Executive Jim Murren will leave the global casino operator after its board picks his successor, the company said.
Mr. Murren, who is also stepping down as chairman, has led the company since 2008. He is leaving before his contract expires at the end of 2021.
“When I thought through how I could best serve MGM going forward, I thought it was pretty clear that a leader should help lead a company into the next decade or two,” Mr. Murren said on a conference call with Wall Street analysts on Wednesday. “I wanted to make sure the board had the time, which it will use promptly, to do a robust search and find my successor.”
MGM Resorts, which has a market value of $17 billion, didn’t give a firm date for Mr. Murren’s departure. The board has formed a search committee to find a new CEO, the company said. Mr. Murren said he anticipates being on MGM Resorts’ next quarterly earnings call, in about three months.
The company has sold off much of its real estate, including deals with MGM Growth Properties, a real-estate investment trust MGM Resorts spun off in 2016, and other property deals. The company’s “asset-light” strategy is intended to pull cash out of the company’s valuable real estate, including prime locations on the Las Vegas Strip.
MGM Resorts’ remaining company-owned real estate includes MGM Springfield in Massachusetts, a 50% stake in CityCenter in Las Vegas and more than half of MGM Growth Properties.
Spreads for corporate credit were generally tighter on the week. After closing the week prior at a spread of 102, the Bloomberg Barclays Corporate Index closed Thursday evening at a spread of 96. The tone at mid-day Friday is mixed as risk markets continue to weigh the impact of coronavirus. Treasuries were volatile over the course of the past week. The 10yr closed at 1.51% last Friday which was its lowest level of the year. The benchmark rate then closed as high as 1.65% this Wednesday and is now fluttering around 1.58% on Friday afternoon.
The primary market had a fair week as corporate borrowers issued over $21bln in new debt. 2020 issuance has eclipsed $154bln according to data compiled by Bloomberg.
According to Wells Fargo, IG fund flows during the week of January 30-February 5 were +$9.0bln making it the largest 5-week total for fund flows on record. This brings year-to-date IG fund flows to over $36bln. Both domestic and global investors continue to favor U.S. credit markets as one of the last bastions for reasonably safe yield.
Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $0.1 billion and year to date flows stand at $1.2 billion. New issuance for the week was $12.5 billion and year to date issuance is at $48.2 billion.
(Bloomberg) High Yield Market Highlights
New issues have been well-received
Yet it’s looking like a risk-off day as stock futures slide on renewed fears of the spread of the coronavirus
Junk- bond yields have fallen 24bps in the past week. At 5.28%, they’re just 30bps off the 5.5-year low hit on Jan. 21
Spreads have tightened 34bps over the same period to 356bps over Treasuries
Even riskier debt has rallied with yields on CAAs falling below 10% for the first time in two weeks to 9.95%
Junk- bond investors are pouring money back into exchange-traded funds again
HYG and JNK, the two biggest high-yield ETFs, reported a combined inflow of $325m yesterday after $630m the previous day
(New York Times) Some Takeaways From Trump’s State of the Union Address
President Trump framed his third year in office as an unmistakable success and his fourth as more of the same.
A partisan atmosphere loomed over the House floor from the very start of Mr. Trump’s speech, when Republican lawmakers chanted “four more years” after the president stepped up to the rostrum. The hostility carried through to the end, when House Speaker Nancy Pelosi ripped up a copy of the address after he finished delivering it.
He proclaimed that the economy was setting records, that American enemies were on the defense, and that the American spirit had been renewed.
“In just three short years, we have shattered the mentality of American decline and we have rejected the downsizing of America’s destiny,” he said. “We are moving forward at a pace that was unimaginable just a short time ago and we are never going back.”
Trump dived into the state of the economy at the top of the speech, making broad declarations about tax cuts, deregulation and the renegotiation of the North American Free Trade Agreement, the new version of which he signed into law last week.
Trump addressed two pieces of potential health care legislation that remain a top priority for both parties in the coming months: surprise billing and prescription drugs.
After signing an initial trade deal with China last month, Mr. Trump pointed on Tuesday to the tariffs he has imposed on the country in order to take on its “massive theft of America’s jobs.” He said that “our strategy has worked.”
Trump’s attention on foreign policy later swung to the Middle East, when he highlighted two people his administration killed in recent months: Abu Bakr al-Baghdadi, the leader of the Islamic State, and Maj. Gen. Qassim Suleimani, the powerful Iranian commander.
(Wall Street Journal) Ford’s Operating Income Plunges
Ford Motor Co. said fourth-quarter operating income sank by two-thirds, and it issued a lower-than-expected profit outlook for 2020, the latest signs of trouble for Chief Executive Jim Hackett’s turnaround plan.
Ford said operating income for the October-to-December period was $485 million, down from $1.5 billion a year earlier. Earnings per share adjusted for one-time items were 12 cents, well short of analysts’ estimate of 17 cents.
The company’s financial standing has continued to weaken under Mr. Hackett, who was brought in nearly three years ago to revive the auto maker’s profit growth and give it a stronger vision for the future.
Revenue for the full year dropped 3% to $155.9 billion.
“Financially, it wasn’t OK,” finance chief Tim Stone said of the 2019 results during a discussion with reporters at Ford’s headquarters. “Strategically. . .I think we made strong progress.”
Ford pinned the shortfall in part on lower production volumes in North America stemming from problems with launches of key models, including the redesigned Explorer and Escape sport-utility vehicles and its Super Duty pickup truck. It also cited higher warranty costs and a bonus payout to United Auto Workers that totaled about $600 million.
The auto maker forecast operating profit this year of $5.6 billion to $6.6 billion, compared with $6.38 billion last year. That equals an earnings-per-share range of 94 cents to $1.20, which is lower than the average analysts’ estimate of $1.30, according to S&P Global Market Intelligence.
Hackett’s strategy to revitalize Ford — which includes a multiyear, multibillion-dollar restructuring — hasn’t returned the company to earnings growth or restored profitability overseas, where Ford is closing plants and shedding thousands of workers to cut costs.
“Financially, the company’s 2019 performance was short of our original expectations, mostly because our operational execution — which we usually do very well — wasn’t nearly good enough,” Mr. Hackett said. “We recognize, take accountability for and have made changes because of this.”
In a bright spot for the year, Ford trimmed its losses in overseas markets. It halved its China loss, to $771 million from $1.55 billion, which it attributed to cost cutting. In Europe, the company had a $47 million loss for the year, down from a $398 million loss a year earlier.
Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$2.7 billion. New issuance for the week was $8.2 billion and year to date HY is at $35.7 billion.
(Bloomberg) High Yield Market Highlights
S. junk-bonds are heading for their second weekly loss amid fears about the spreading coronavirus from China. Investors pulled $2.7 billion from high-yield retail funds, the biggest cash withdrawal in almost six months, and exchange-traded funds are continuing to leak cash.
Junk-bond returns turned negative for the second time this week posting a loss of 0.16% Thursday. The CAA index posted losses of 0.17% and is also set for its second weekly declines
Those falls may extend Friday with stock futures lower. Oil prices are higher this morning, but fell to an almost six-month low on Thursday, weighing on the high-yield energy index
Junk bond yields rose 9 basis points to 5.49%, the biggest weekly jump since October, while spreads widened 11 basis points to 382 basis points over Treasuries
Single-B yields jumped 10 basis points to 5.46%, while CAA yields rose 9 basis points to 10.32%
The two biggest high-yield ETFs — HYG and JNK — saw a combined outflow of $547 million in the last session as outflows continue
(Business Wire) Arconic Reports Financial Results
Arconic Inc. reported fourth quarter 2019 and full year 2019 results. The Company reported fourth quarter revenues of $3.4 billion, down 2% year over year. Organic revenue was up 1% year over year on growth in the aerospace, packaging and industrial markets and favorable product pricing, largely offset by weakness in the automotive, commercial transportation, and building and construction markets.
Operating income excluding special items was $444 million, up 37% year over year, driven by net cost reductions, favorable product pricing, and favorable aluminum and raw material costs, partially offset by lower volumes in automotive and commercial transportation. Full year 2019 operating income was $1.0 billion versus $1.3 billion in the full year 2018. Operating income excluding special items for full year 2019 was $1.8 billion versus $1.4 billion in the full year 2018, driven by favorable product pricing; net cost reductions; volume growth in aerospace, packaging and commercial transportation markets; and favorable aluminum and raw material costs. These impacts were partially offset by unfavorable product mix.
Arconic Chairman and Chief Executive Officer John Plant said, “In 2019, the Arconic team delivered improved revenue, adjusted operating income, adjusted operating income margin, adjusted free cash flow and adjusted earnings per share. Arconic’s 2019 return on net assets improved by 450 basis points year over year to 13.7%.”
(Bloomberg) Fed Holds Main Rate as Powell Stresses Need to Hit 2% Inflation
The Federal Reserve kept its key interest rate unchanged and continued to signal policy would stay on hold for the time being, while stressing the importance of lifting inflation to officials’ target.
The central bank also made a technical adjustment to the rate it pays on reserve balances and said it would extend at least through April a program aimed at smoothing volatility in
money markets.
“We believe monetary policy is well positioned to serve the American people by supporting continued economic growth,” Chairman Jerome Powell told a press conference Wednesday in Washington.
Officials kept the target range of the benchmark federal funds rate at 1.5% to 1.75% and called that stance “appropriate to support sustained expansion of economic activity.”
S. stocks erased gains while yields on the 10-year Treasury note declined and the dollar fluctuated. Traders extended bets the Fed would cut rates toward the end of this year.
“The Fed has made it clear that the barriers to move in either direction are quite high,” said said Daniel Ahn, the chief U.S. economist at BNP Paribas. “But we believe the wall
for a cut is lower than the wall for a hike.” He detected a “dovish tilt” in Powell’s efforts to stress the Fed was uncomfortable with inflation running persistently too low.
Policy makers changed their statement to say that the current stance of monetary policy is appropriate to support “inflation returning to the committee’s symmetric 2% objective.” Previously they had said policy was supporting inflation “near” the goal.
Powell explained in his press conference that the change was made to send “a clearer signal” that the committee was not comfortable with inflation running persistently below target. “We wanted to underscore our commitment to 2% not being a ceiling,” he said.
Their preferred gauge of price pressures — the personal consumption expenditures price index — rose 1.5% for the 12 months ending in November. Powell said inflation was expected to move closer to 2% over the next few months thanks to so-called base effects, “as unusually low readings from early 2019 drop out of the calculation.”
