Category: Insight

CAM High Yield Market Note

5/3/2019

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $0.07 billion and year to date flows stand at $16.9 billion. New issuance for the week was $5.0 billion and year to date HY is at $77.9 billion, which is +1% over the same period last year.

(Bloomberg) High Yield Market Highlights

• U.S. junk bond returns turned negative across all ratings yesterday, with the index falling most since March 8 as stocks and oil prices fell. Equity futures rose this morning as bright spots appeared in corporate earnings ahead of jobs data.
• Yields jumped across the risk spectrum, marking the biggest increase in eight weeks as oil closed at a 4-week low
• Yields had been at 12-month lows
• Energy sector yields hit a 3-week high and returns were negative for 6 straight sessions, for the first time since mid-December
• Despite this, investors made a beeline to new bonds in the primary market
• U.S. high-yield funds reported a modest inflow this week ended
• Flows turned negative last week, for the first time time in seven weeks
• Junk bond returns dropped to 8.69% YTD, still the best since 2009 for the comparable period
• Energy returns dropped below 10% to close at 9.61% after six consecutive sessions of negative returns
• CCC were still on top of the pack, with 9.175%
• BBs stood at 8.75% and single-Bs at 8.378%
• Loans at 5.746% and IG at 5.367% 

• (Bloomberg) The Junkiest Corporate Bonds Divide Wall Street

• Bank of America sees a further “melt-up” in triple-C debt, while Citigroup urges caution.
• Triple-C debt has returned 9 percent this year, according to Bloomberg Barclays data, compared with a 2.8 percent gain for the aggregate bond index. At first glance, that seems pretty good. But the broad high-yield index, which includes less risky borrowers, is up almost the same amount, at 8.6 percent.
• Ordinarily, such a return on the broad index would equate to gains of close to 15 percent for triple-C debt, according to strategists at Citigroup Inc. “The inability of triple-C credits to materially outperform has puzzled many investors,” Michael Anderson and Philip Dobrinov wrote. This means one of two things: Either triple-C securities are cheap, or bond traders aren’t fully buying into the risk-on environment.
• Bank of America Corp in an April 26 report, strategists Oleg Melentyev and Eric Yu made a bold proclamation: “A further CCC melt-up still appears inevitable to us.”
• The two sides: Those who favor triple-C debt argue that there’s a bit more juice left to squeeze out of this high-yield rally, even if the rebound from last year looks extreme and unsustainable. The bearish strategists are cautious about wading into triple-C debt and break down which kinds of companies make up the index. According to Citigroup, about half is health-care, energy, retail and communications companies — precisely those that have too much leverage or face a much-changed business climate from even a few years ago.

(Company Filing) Western Digital Announces Financial Results for Third Quarter Fiscal Year 2019

• Western Digital Corp reported revenue of $3.7 billion for its third fiscal quarter ended March 29, 2019. The operating loss was $394 million with a net loss of $581 million. Excluding certain non-GAAP adjustments, the company achieved non-GAAP operating income of $186 million and non-GAAP net income of $49 million. Both the GAAP and non-GAAP results include lower of cost or market inventory charges of approximately $110 million in cost of revenue, primarily related to certain flash memory products that contain DRAM components.
• In the year-ago quarter, the company reported revenue of $5.0 billion, operating income of $914 million and net income of $61 million. Non-GAAP operating income in the year-ago quarter was $1.3 billion and non-GAAP net income was $1.1 billion.
• The company generated $204 million in cash from operations during the third fiscal quarter of 2019, ending with $3.8 billion of total cash, cash equivalents and available-for-sale securities. The company returned $146 million to shareholders through dividends. On February 14, 2019, the company declared a cash dividend of $0.50 per share of its common stock, which was paid to shareholders on April 15, 2019.
• “Market conditions have generally been consistent with our expectations, and while the business environment remains soft, there are initial indications of improving trends,” said Steve Milligan, chief executive officer, Western Digital. “Our expectation for the demand environment to further improve for both flash and hard drive products for the balance of calendar 2019 is largely unchanged. We are executing well on enhancing our product portfolio, driving technology advancements, rightsizing our factory production levels and lowering our cost and expense structure, all of which position us to emerge stronger as market conditions improve.”

(Business Wire) The GEO Group Reports First Quarter 2019 Results

• GEO reported first quarter 2019 net income attributable to GEO of $40.7 million compared to $35.0 million for the first quarter 2018. GEO reported total revenues for the first quarter 2019 of $610.7 million up from $564.9 million for the first quarter 2018. First quarter 2019 results reflect a $1.5 million loss on real estate assets. Excluding this loss, GEO reported first quarter 2019 Adjusted Net Income of $42.2 million.
• GEO reported first quarter 2019 Normalized Funds From Operations (“Normalized FFO”) of $60.3 million compared to $52.6 million in the first quarter 2018. GEO reported first quarter 2019 Adjusted Funds From Operations (“AFFO”) of $80.3 million, compared to $69.8 million in the first quarter 2018.
• George C. Zoley, Chairman and Chief Executive Officer of GEO, said, “We are pleased with our strong quarterly financial and operational performance, as well as, our improved outlook for the balance of the year. We have taken important steps to reactivate our idle capacity, and we are proud of the continued success of our GEO Continuum of Care enhanced rehabilitation and post-release programs. We remain focused on effectively allocating capital to enhance long-term value for our shareholders, and we believe we will continue to have access to cost-effective capital to support the growth and expansion of our high-quality services.”    

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.7 billion and year to date flows stand at $16.9 billion.  New issuance for the week was $1.2 billion and year to date HY is at $72.2 billion, which is -2% over the same period last year.

(Bloomberg)  High Yield Market Highlights

• Gains in U.S. junk bonds have started to sputter, with the Bloomberg Barclays high-yield index poised for its weakest two-week stretch since the start of March. The oil rally, a big driver in recent days, lost its momentum and cautious investors pulled cash out of high-yield funds.
• The reported an outflow was the first in seven weeks
• Returns turned slightly negative on Thursday with the exception of CCCs, which have gained each day this week
• Returns in the energy sector also turned negative, and could be poised for the same on Friday as WTI prices were down this morning by the most since March 1
• While there was caution, investors made a beeline to new issues
• The market remains ripe for borrowers. While investors withdrew cash from funds this week, retail funds have seen net inflows of ~$17 billion YTD amid a supply shortage
• The month is on track to be the slowest April since 2017
• Junk bond YTD returns dropped to 8.62%, still the best since 2009
• CCC returns rose to 9.016%, the best asset class in fixed income
• BBs stood at 8.28% and single-Bs at 8.64%
• Energy returns dropped to 10.29% while ex-energy rose at 8.53%
• Loans lagged junk bonds with 5.53% YTD

(PR Newswire)  Steel Dynamics Reports First Quarter 2019 Results 

• Steel Dynamics, Inc. announced first quarter 2019 financial results.  The company reported first quarter 2019 net sales of $2.8 billionand net income of $204 million.
• Comparatively, prior year first quarter net income was $228 million, with net sales of $2.6 billion.  Sequential fourth quarter 2018 net income was $270 million, which included additional company-wide performance-based compensation and lower earnings associated with planned maintenance outages at the company’s liquid pig iron production facility and its two flat roll steel mills.  Excluding these items, the company’s fourth quarter adjusted net income was $302 million.
• “The team delivered a strong first quarter performance in a somewhat challenging flat roll steel pricing environment,” said Mark D. Millett, President and Chief Executive Officer.  “A downward trend in flat roll steel prices began in the second half of 2018, and continued through mid-first quarter 2019, reaching an inflection point in February 2019.  The teams were able to increase shipments and offset some of the margin compression, resulting in first quarter 2019 consolidated operating income of $292 millionand adjusted EBITDA of $382 million.  The continued stabilization and improvement in flat roll steel prices are having a positive impact, resulting in increased flat roll order activity and solid order backlogs.  We are seeing continued strength in the automotive, energy and industrial sectors, and as evidenced by strong steel fabrication backlogs, strength in non-residential construction.”
• The company generated cash flow from operations of $182 millionduring the first quarter 2019 and maintained liquidity of $2.2 billion at March 31, 2019.  On March 1, 2019, the company used available cash of $93 million to fund the purchase of a 75 percent controlling interest of United Steel Supply, a leading distributor of painted Galvalume® flat roll steel used for roofing and siding applications.
• As evidence of the confidence in the company’s sustainable long-term cash flow generation capability, the board of directors approved a 28 percent increase in the company’s first quarter 2019 cash dividend, reflecting the strength of the company’s capital foundation and liquidity profile.  The company also repurchased $84 millionof its common stock during the first quarter of 2019.

(Investor’s Business Daily)  New-Home Sales Surge To 16-Month High

• New home sales unexpectedly rose 4.5% in March to a 692,000 annual rate, the best since November 2017, the Commerce Department reported Tuesday. Home sales have picked up in recent months as the Fed suspended rate hikes and mortgage rates fell, hitting a one-year low last month. That’s given new life to homebuilder stocks. Pulte Group (PHM) reported better-than-expected first-quarter earnings early Tuesday.
• Earlier on Tuesday, Pulte Group reported flat first-quarter EPS of 59 cents a share, 12 cents ahead of estimates. Revenue rose 1.4% to $2.0 billion. Still, new orders were valued at $2.7 billion, down from $2.9 billion a year ago.
• Pulte CEO Ryan Marshall said, “Helped by the recent decline in mortgage rates, homebuyers have been steadily returning to the market after a period of slowing demand that began in the second half of 2018.”
• Lower rates should allow housing to help cushion the landing for an economy that has slowed somewhat as tax-cut stimulus fades. Still, most economists expect the pace of improvement to be modest.

(Bloomberg)  High Yield Market Highlights

• S. junk bond returns turned negative yesterday across ratings for the first time in almost four weeks. Yields were off their near 12-month low as equities faltered and oil lost momentum.
• Issuers were undeterred, selling 5 deals for $2.6b, the busiest day in more than 4 weeks, with triple Cs accounting for almost 70% of the volume
• Junk bond returns remain best since 2009, with 8.47% year- to-date
• Retail funds estimate inflow of $926m at Tuesday’s close, JPMorgan wrote, citing Lipper
• Funds have reported inflows for the last five consecutive weeks
• 1Q saw an inflow of $13b, most since 3Q12’s $13.8b
• Energy returns stood at 9.93% YTD
• Ex-energy dropped to 8.2% after losing 0.06%
• Single-Bs and CCC returns were at 8.55% and 8.59% YTD, respectively
• BBs were at 8.2%
• Loans lagged bonds at 5.265%
• Steady growth, low default rate, and strong technicals provide friendly turf for junk bonds
• Moody’s global high-yield default rate dropped to 1.9% for the 12-month period ended March 2019, lowest since October 2011
• S. high-yield default rate is expected to close 2019 at 2.2%

(PR Newswire)  U.S. Concrete Names Ronnie Pruitt President and COO

• S. Concrete, Inc., a leading supplier of ready-mixed concrete and aggregates in active construction markets across the country, announced today that Chief Operating Officer (“COO”), Ronnie Pruitt, 48, has been named President and COO, effective April 15, 2019. Mr. Pruitt will continue to report to Chairman and CEO, William J. Sandbrook, and in this expanded role will take over many corporate functions that support the Company’s operational business units.
• Pruitt, who has been with U.S. Concrete since 2015, has over 25 years of industry experience.  Prior to joining U.S. Concrete, Mr. Pruitt served as Vice President of Martin Marietta Materials, Inc., and as Vice President of Cement Production and Vice President of Sales and Marketing of Texas Industries, Inc.
• “Ronnie has been instrumental in the strategic growth of our Company including very successfully integrating Polaris Materials, a major aggregates acquisition. His leadership and record of success with our ready-mixed concrete and aggregates operations has earned him this expanded role,” said U.S. Concrete Chairman and CEO William J. Sandbrook. “Ronnie is a champion for the health and safety of our employees, is dedicated to our environmental and sustainability initiatives and is laser focused on creating enhanced shareholder value through operational excellence. I am proud of Ronnie’s success and look forward to his enhanced contributions in his expanded role.”

(CNET)  T-Mobile’s John Legere denies Justice Department pushback on Sprint merger

• The Justice Department’s antitrust division is determining whether a combination of the US’ third- and fourth-largest wireless service providers would pose a threat to competition, according to a Tuesday report by The Wall Street Journal. Earlier this month, staffers reportedly shared concerns about the deal and the carriers’ arguments that merging would lead to key efficiencies for the company.
• Legere tweeted that the premise of the Journal’s story “is simply untrue,” adding the company has no further comment.
• Last year, the two carriers announced their $26 billion deal to merge. It may still take several weeks for a final decision to be made, as several state attorneys general are reviewing the deal and the Federal Communications Commission is seeking more data from the companies about the proposed merger, according to the Journal.

(Company Filing)  Western Digital Appoints Robert Eulau As Chief Financial Officer

• Western Digital Corp. announced the appointment of Robert Eulau to lead the company’s finance organization as executive vice president and chief financial officer (CFO), reporting to Steve Milligan, Western Digital’s chief executive officer (CEO). Eulau will join Western Digital on April 22, 2019 to begin his transition into the new role and will formally take over the CFO role from Mark Long on May 9, 2019. Eulau, who joins Western Digital with more than 30 years’ experience in financial and operational leadership roles in the technology industry, succeeds Long, who, as previously announced, will be leaving the company in June 2019.
• “Western Digital occupies an increasingly strategic position in today’s data-driven world. Bob Eulau’s background in optimizing financial and operational performance, paired with his strong leadership skills, will help position us to make the most of exciting short- and long-term growth opportunities,” said Milligan. “I’m thrilled to be adding an executive of Bob’s caliber to our leadership team and I look forward to working with him.”
• “I’m honored to join Western Digital at such an important time in the company’s history,” said Eulau. “The team has built a strong platform for growth and value creation, and I look forward to helping maximize the many opportunities ahead for the company.”
• Eulau was most recently CEO at Sanmina Corporation where he previously served for eight years as CFO. Previously, Eulau held chief financial officer positions at Alien Technology Corporation and Rambus Incorporated, and held a number of financial leadership roles at Hewlett-Packard Company. Eulau earned a Master’s in Business Administration (Finance/Accounting) from The University of Chicago and a Bachelor’s in Mathematics from Pomona College. He will be based at the company’s San Jose, CA headquarters location.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $1.9 billion and year to date flows stand at $15.2 billion.  New issuance for the week was $3.8 billion and year to date HY is at $61.8 billion, which is 4% over the same period last year.

(Bloomberg)  High Yield Market Highlights

• S. junk bonds saw the biggest fund inflow in 10 weeks as the rally extended with yields dropping across the risk spectrum.
• Junk bonds have seen cash inflows for four consecutive weeks and in 10 of the last 12 weeks
• Retail funds have reported net inflows of ~$15b YTD vs the $19b outflows for the same period in 2018
• Yields were near 6-month lows and spreads held firm near the October levels as oil was above $60 and equities rebounded
• On Staples’ aggressive $2.125b 2-part offering to fund a dividend distribution to equity sponsors, a secured tranche had orders of more than $2.5b, while the unsecured tranche was about deal size
• Staples is out with initial price talk of 10% area for a $1.375b 8-year unsecured tranche and about 7.5% on a $750m 7- year secured bond
• Junk bond returns rose to 7.64% YTD making it still the best since 2003
• CCCs slid to 7.54% YTD after posting negative returns yesterday
• Single-Bs beat CCCs with 7.65%
• BBs return is 7.5%
• IG returns are 4.78%
• Loans have gained 4.54%
• The energy sector posted the best 1Q return since 2009 with 8.3% and it continued to be the best performing sector YTD, with 9.32%
• Low default, steady oil, a dovish Fed, strong technicals — reflected in net inflows and slow issuance — boost risk assets

(Reuters)  UGI to buy rest of AmeriGas Partners in $2.44 billion deal

• Energy distributor UGI Corp said on Tuesday it would buy the remaining nearly 75 percent it does not own in retail propane marketer AmeriGas Partners LP in a cash-and-stock deal valued at $2.44 billion.
• Pennsylvania-based UGI also cut its fiscal 2019 profit forecast because of a warmer-than-normal winter in Europe
• In the AmeriGas deal, shareholders will receive 0.50 shares of UGI in addition to $7.63 in cash for each share owned, the companies said in a statement.
• The offer represents a premium of 13.5 percent to AmeriGas’s Monday closing price. The company’s shares were up 13 percent in morning trade on Tuesday.
• “This transaction significantly enhances UGI’s free cash flow, one of the key elements of our long-term success,” UGI Chief Executive Officer John L. Walsh said on a conference call with analysts.
• “It will allow us to increase our dividend by a cumulative 25 percent,” he added.

(Business Wire)  U.S. Department of Energy extends AECOM-led joint venture contract at the Savannah River Site for an additional 18 months

• AECOM, a premier, fully integrated global infrastructure firm, announced today that the U.S. Department of Energy’s (DOE’s) Savannah River Operations Office in Aiken, South Carolina, extended the current liquid waste management contract with AECOM-led Savannah River Remediation LLC. The approximate US$750 million extension will run from April 1, 2019, to September 30, 2020. The value of the contract extension was included in AECOM’s backlog in the second quarter of fiscal 2019.
• “We are pleased that the DOE has decided to extend Savannah River Remediation’s contract,” said John Vollmer, president of AECOM’s Management Services group. “AECOM has a long history of supporting the DOE at the Savannah River Site and extensive experience in liquid waste disposition. We are committed to safely managing the radioactive waste system at the site while reducing the state of South Carolina’s critical environmental risk.”
• During the contract extension period, services that the AECOM-led joint venture will perform are operating the Defense Waste Processing Facility and Saltstone Production Facility, and continuing progress on the Tank Closure Cesium Removal demonstration and construction project and the construction of Saltstone Disposal Unit 7.

(Wall Street Journal)  T-Mobile Spells Out CFO Exit Plan

• T-Mobile US filed an amended employment agreement for its finance chief that spells out a plan for him to leave the company as it awaits regulatory review of a proposed merger with rival Sprint Corp.
• CFO Braxton Carter has been a key figure in the mobile carrier’s pending deal to buy Sprint. A spokeswoman for T-Mobile declined to comment on whether a successor had been chosen.
• Carter’s last day at T-Mobile will be decided by the status of the merger, the company said in a regulatory filing with the Securities and Exchange Commission. Mr. Carter is scheduled to leave at one of three fixed dates, depending which arrives first: the end of 2019; 20 days after the first quarterly filing of the merged company; or 20 days after an announcement the deal is off.
• Analysts speculated about the departure of Mr. Carter in September, when T-Mobile said Sunit Patel would join the company to lead its expected integration with Sprint. Mr. Patel had been chief financial officer at CenturyLink Inc.

(Bloomberg)  High Yield Market Highlights

• March has priced $19.4b so far, the slowest third month since 2009
• Average March issuance has been $31b in last five years
• This will be the slowest 1Q since 2016, which was hit by WTI dropping to a more than 13-year low
• Inflows slowed a bit this week as markets stalled
• Net inflows total ~$11b YTD vs outflows of ~$18b in the same period last year
• S. high yield returns of 6.99% YTD is best since 2003
• BBs beat single Bs and CCCs with a YTD return of 6.99%
• Single-Bs beat CCCs, with YTD return of 6.949%
• CCCs YTD was 6.76%, the lowest in the high yield space
• CCCs are having best 1Q since 2012
• Leveraged loans, higher in the capital structure, have YTD returns of 3.85%
• S. junk bonds operate against backdrop of strong technicals as reflected in net inflows into retail funds and light supply, low default rate, steady corporate earnings, Fed accommodation
• Markets imply more than a 55% probability of the Fed cutting rates as early as September and 62% in October

(Reuters)  Leverage levels peaking again on US mega buyouts 

• Leverage levels on US private equity buyouts are returning to record levels and private equity firms’ equity checks are shrinking as banks underwrite more aggressive loans, safe in the knowledge that they will not be penalized by regulators.
• Average leverage levels of 6.8 times in 2019 so far are rebounding towards a recent record of 6.97 times in the third quarter of 2018, before year-end volatility cooled the market and the number fell to 6.09 times, according to LPC data.
• As leverage and the amount of debt that sponsors are piling on businesses is rising, the amount of equity they are contributing is falling. Equity checks of 35.7% in the first quarter of 2019 so far are lower than 38.7% in 2018 and 43.3% in 2017, the data shows.
• Huge highly leveraged buyout loans are contributing to the spike, including US$3.2bn of loans for travel commerce platform Travelport and a US$6.4bn dual-currency loan for Power Solutions, which backs the buyout of Johnson Controls’ battery unit.
• Current leverage ratios are the highest debt-to-Ebitda levels seen since the second quarter of 2007, before the financial crisis, when leverage also averaged 6.8 times. This is due to regulators giving more freedom to arranging banks and investors’ hunt for higher yield, market participants said.
• US regulators implemented Leveraged Lending Guidance (LLG) in 2013 to limit systemic risk. This imposed extra scrutiny on loans with leverage greater than 6 times and also required all secured debt or half of total debt to be able to be paid down within five to seven years.
• LLG was relaxed last year when government agencies said that it was guidance and not a rule, which is encouraging banks to arrange more highly leveraged deals without fear of regulatory penalties. It is also producing riskier deals and more aggressive market conditions.

(CNBC)  Bond market says not only is a recession coming, but the Fed will cut interest rates to stop it 

• Fed funds futures were pointing to a quarter point in easing, as traders said scary signals continued to emanate from the bond market
• There was an inversion in the yield curve, meaning very short rates rose above longer 10-year note rates, a fairly reliable recession signal
• Traders say the bond market may be overreacting, while stocks seem to be ignoring the recession warnings and fears the Fed will have to jump in with one or more rate cuts to stop the economy from rolling over
• One strategist commented that he believes some of the moves in the market Monday were more about technical signals and short squeezes than real fear about recession. The Fed changed the tone in markets significantly when it was even more dovish than expected and cut its rate forecast to just one for this year from two.

(Bloomberg)  Here’s Why U.S. Bond Yields Plunged So Much Over the Past Week

• The Federal Reserve’s surprise policy shift last week shook markets, but, even still, the intensity of the ensuing drop in U.S. bond yields has puzzled many observers. A massive wave of hedging in the swaps market helps explain the scale of the eye-catching move.
• Treasuries rallied after the Fed signaled it was done raising interest rates for the moment, driving yields on 10-year notes down to levels last seen in 2017. That forced two sets of
  traders — those who had bought mortgage bonds and those who had bet markets would remain calm — to turn to derivatives markets to tweak their portfolios or stanch their losses. They snapped up positions in interest-rate swaps, pushing Treasury yields down even more.
• What’s the evidence? While yields on 10-year Treasuries declined to as low as 2.35 percent, the rate on similar maturity swaps dropped to as little as 2.30 percent, according to data compiled by Bloomberg. The 10-year swap spread, as the gap between the two is known, had shown the swap rate at a premium for nearly all of the past year until last week. But that has now flipped to a discount and the gap has gone to a level unseen since 2017, indicating a flurry of activity in the derivatives market.
• The Treasuries rally and resulting volatility surge quickly burned those who had sold options, pressuring them to hedge in the swaps market by receiving fixed rates. That’s tantamount to going long Treasuries and is a profitable trade if yields keep falling. The intensity of that trading — along with the actions of mortgage investors — accelerated the drop in Treasury yields.