Category: Insight

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $2.0 billion.  New issuance for the week was $8.1 billion and year to date HY is at $14.2 billion.

(Bloomberg)  High Yield Market Highlights

• Triple C-rated debt is leading the rally in high-yield as returns for the year jump to 1.23% and yields on the lowest tier of junk fall below 10% for the first time in seven months.
• Triple C spreads tightened 10bps to 823bps over Treasuries, according to Bloomberg Barclays index data. That’s a more than five-month low and extends a recovery from over 1,000 bps in November
• Energy is powering CCC. The energy index yield fell to 7.99%, a new six-month low
• Junk-bond yields dropped to 5.01%, just 5bps off the 5.5-year low of 4.96%. They may fall further as stock futures rise amid easing trade tensions and a solid start to the earnings season. Oil is also up this morning to almost $59 a barrel

(Bloomberg)  Encompass Health Boosts Fiscal Year Operating Revenue View

• Encompass Health boosted its operating revenue forecast for the full year; the guidance midpoint met the average analyst estimate.
• Encompass sees FY operating revenue $4.59 billion to $4.61 billion, saw $4.5 billion to $4.6 billion, estimate $4.59 billion (range $4.57 billion to $4.61 billion)
• Encompass sees FY adjusted EPS from continuing operations $3.90 to $3.94, saw $3.71 to $3.85
• Encompass sees FY adjusted Ebitda $962 million to $967 million, saw $940.0 million to $960.0 million, estimate $952.2 million (range $942.0 million to $957.0 million)
• Encompass sees 2020 Adjusted EPS Continuing Operations $3.50 to $3.72, Est. $3.68

(Bloomberg)  WSP Is Said to Approach Engineering Firm Aecom About Deal

• Canada’s WSP Global Inc. has approached rival engineering services firm Aecom about a possible deal, according to people familiar with the matter. There’s no guarantee that the overture will lead to a transaction, said the people, who asked to not be identified
  because the matter isn’t public.
• Aecom, which had been targeted by activist investor Starboard Value last year, agreed in October to sell its management services division to a group of private equity firms
  for $2.4 billion.
• The potential acquisition would give WSP more exposure to the U.S. and could lead to cost savings of about $200 million, Deutsche Bank analyst Chad Dillard wrote in a note to clients Tuesday.
• Aecom’s services include consulting, planning, architecture, engineering and construction management, according to its website. While it has a growing backlog thanks to a steady stream of government and infrastructure contracts, profits have stagnated in recent years due to inefficiencies and construction contract
  losses, according to a Bloomberg Intelligence report in December.

(Wall Street Journal)  MGM, Blackstone Strike Casino Deal

• MGM Resorts International said a joint venture that includes Blackstone Group Inc. would buy the real estate of the MGM Grand and Mandalay Bay resorts and casinos on the Las Vegas Strip, in a deal valuing the properties at $4.6 billion.
• The deal values MGM Grand’s real-estate assets at about $2.5 billion and Mandalay Bay’s at just over $2 billion.
• Blackstone will own slightly less than half of the properties through the private-equity and real-estate giant’s nonlisted real-estate investment trust, while MGM Growth Properties LLC, a publicly traded REIT, will own the remainder.
• MGM Resorts spun off MGM Growth Properties in 2016 and still controls the REIT, which owns some MGM real estate including Mandalay Bay’s.
• MGM Resorts expects to receive cash proceeds of about $2.4 billion from the deal, as well as $85 million in MGM Growth partnership units.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.9 billion and new issuance for the week $6.1 billion.

(Bloomberg)  High Yield Market Highlights

• S. high-yield bonds are set for the longest streak of weekly gains since the first half of 2019 as the global hunt for yield continues to bolster the market.
• The Bloomberg Barclays U.S. high-yield index has posted gains each day this week as yields held steady at 5.11% through Thursday, one basis point lower on the week.
• The high-yield energy index weighed on performance as oil prices lost steam earlier in the week. The securities posted losses for the second consecutive day on Thursday, losing 0.13%; yields on energy bonds ended at 8.12%.
• Even while oil prices dropped back to levels before the Mideast tensions began, issuance activity was driven by energy borrowers.

(Reuters)  Fed focuses on repo market exit strategy after avoiding year-end crunch 

• Wall Street’s worst fears of a year-end funding squeeze never materialized thanks in large part to the quarter-trillion dollars the Federal Reserve stuffed into the market to ensure nothing became gummed up.
• The question now, though, is what it will take for the U.S. central bank to withdraw from its daily liquidity operations in the $2.2 trillion market for repurchase agreements, or repos – after it became a dominant player in a short three months.
• “The repo operations are a band-aid, but the wound isn’t healed fully,” said Gennadiy Goldberg, an interest rate strategist at TD Securities.
• The New York Fed began injecting billions of dollars of liquidity into the repo market in mid-September, when a confluence of events sent the cost of overnight loans as high as 10%, more than four times the Fed’s rate at the time. A month later, the Fed moved to expand its balance sheet – and boost the level of reserves – by snapping up $60 billion a month in U.S. Treasury bills.
• The Fed will continue pumping tens of billions a day into the repo market through at least the end of January. Its ability to exit from the repo market after that time will depend on how long it takes the central bank to make the balance sheet large enough so there are adequate reserves in the banking system – and the repo operations are no longer needed.
• “It seems implausible to me that the Fed will be able to stop their repo operations by the end of January,” said Mark Cabana, head of U.S. rates strategy at Bank of America Merrill Lynch.

(Company Report)  Tenneco Inc. plans to streamline its leadership structure

• The Company announced that Brian Kesseler, Tenneco’s Co-Chief Executive Officer and a member of the Board of Directors, will assume the newly consolidated role of Chief Executive Officer of Tenneco. Kesseler will oversee the operations of the New Tenneco business, in addition to continuing to oversee the DRiV business. Roger Wood will no longer serve as Tenneco’s Co-Chief Executive Officer and is stepping down as a Director of the Company, effective immediately.
• Jason Hollar will continue to serve as Executive Vice President and Chief Financial Officer of Tenneco overseeing the financial organizations of both DRiV and New Tenneco.
• “On behalf of the Board of Directors, I would like to thank Roger for his dedication to Tenneco during a critical time for our company,” said Gregg M. Sherrill, Chairman of the Tenneco Board. “We appreciate his service and contributions in leading the New Tenneco business as we began the integration of the Federal-Mogul acquisition. As we pursue the separation of our businesses, the Board determined that consolidating our leadership structure now will help improve Tenneco’s operational efficiency and achieve our near-term financial performance objectives. We wish Roger the very best in his future endeavors.”
• During 2020, Tenneco will be focused on the execution of its accelerated performance improvement plan to facilitate the expected separation of the businesses.
• As previously discussed in the Company’s third quarter release on October 31, 2019, current end-market conditions are affecting the Company’s ability to complete a separation in the mid-year 2020 time range. The Company expects that these trends will continue throughout this year. The Company is ready to separate the businesses as soon as favorable conditions are present.

CAM High Yield Market Note

11/29/2019

This is an abbreviated Note due to the Thanksgiving holiday. Happy Thanksgiving!

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $0.2 billion and year to date flows stand at $23.5 billion. New issuance for the week was $12.8 billion and year to date HY is at $251.1 billion, which is +55% over the same period last year.

(Bloomberg) Single and Double B Junk Bond Returns Hit 2019 Peak Amid Rally

• Junk bond returns are creeping back to record highs after three consecutive days of gains.
• Junk bond year-to-date returns rose to 11.928%, inching closer to the highs of just over 12% reached earlier this month. Index yields were unchanged, closing at a two-week low of 5.64%
• BB returns hit a year-to-date peak of 13.944%, while single B returns set a new high at 12.553%
• CCCs are also catching a bid, boosted by a lift in energy bonds, after posting gains for three straight sessions to take year-to-date returns to 4.101%. That comes less than a week after CCC spreads jumped above 1,000bps over U.S. Treasuries for the first time in more than three years 

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $1.6 billion and year to date flows stand at $24.4 billion.  New issuance for the week was $3.8 billion and year to date HY is at $219.3 billion, which is +37% over the same period last year.

(Bloomberg)  High Yield Market Highlights 

• S. junk bonds rebounded as equities rallied to a record high and the 10Y UST yield jumped. The debt may open on a softer note as stock futures declined and oil prices dropped amid uncertainty over supply cuts.
• The debt’s returns turned positive on Thursday after a two-day losing streak as equities climbed to a new high. Year-to-date returns were 12.01%, just 9bps off the 2019 peak
• Gains were across ratings, with single-Bs posting the most at 0.1% and YTD at 12.39%
• Junk bond yields were little changed. Single-Bs dropped 6bps to close at 5.68% and BBs closed at 3.88%, down 2bps
• Spreads held firm across ratings moving in tandem with UST yields
• There was lull in the primary market with just two drive-by deals for $1.1b pricing yesterday
• Yesterday’s deals took the November volume to $4.98b
• As investors turned cautious of weaker credits, Wesco’s $2.18b bond offering faced some resistance and its pricing was delayed

(Reuters)  U.S. may not need to impose auto tariffs this month 

• The United States may not need to impose tariffs on imported vehicles later this month after holding “good conversations” with automakers in the European Union, Japan and Korea, U.S. Commerce Secretary Wilbur Ross said in an interview published on Sunday.
• The United States must decide by Nov. 14 whether to impose threatened U.S. national security tariffs of as much as 25% on vehicles and parts. The tariffs have already been delayed once by six months, and trade experts say that could happen again.
• “We have had very good conversations with our European friends, with our Japanese friends, with our Korean friends, and those are the major auto producing sectors,” Ross said.
• “Our hope is that the negotiations we have been having with individual companies about their capital investment plans will bear enough fruit that it may not be necessary to put the 232 (tariffs) fully into effect, may not even be necessary to put it partly in effect,” he added.

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

• GEO reported third quarter 2019 net income attributable to GEO of $45.9 million, compared to $39.3 million, for the third quarter 2018. GEO reported total revenues for the third quarter 2019 of $631.6 million up from $583.5 million for the third quarter 2018.
• GEO reported third quarter 2019 Normalized Funds From Operations (“Normalized FFO”) of $70.3 million, compared to $62.9 million, for the third quarter 2018. GEO reported third quarter 2019 Adjusted Funds From Operations (“AFFO”) of $85.6 million, compared to $77.9 million, for the third quarter 2018.
• George C. Zoley, Chairman and Chief Executive Officer of GEO, said, “We are pleased with our strong quarterly financial performance, which reflect strong fundamentals and growing earnings. During the quarter, we reactivated 4,600 previously idle beds, which are expected to drive future cash flow growth. We are proud to have published our first-ever Human Rights and ESG report in September, highlighting our long-standing commitment to respecting the human rights of all those in our care, as well as, the continued success of our GEO Continuum of Care enhanced rehabilitation and post-release programs. We believe that our current dividend payment is supported by stable and predictable cash flows, and we expect to continue to apply our growing excess cash flow towards paying down debt.”
• During the third quarter 2019, GEO repurchased approximately $34 million of senior unsecured notes due 2022. GEO also closed on a $44 million, 15-year real estate loan bearing interest at 4.22 percent annually. At the end of the third quarter, GEO had approximately $395 million in available borrowing capacity under its $900 million revolving credit facility, which matures in May 2024.

(Business Wire)  Arconic Reports Third Quarter 2019 Results

• The Company continues to target the completion of the separation in the second quarter 2020. We expect the Form 10 filing to be available in the fourth quarter 2019. The Engineered Products and Forgings businesses (engine products, fastening systems, engineered structures and forged wheels) will remain in the existing company (Remain Co.), which will be renamed Howmet Aerospace Inc. at separation. The Global Rolled Products businesses (global rolled products, aluminum extrusions and building and construction systems) will comprise Spin Co. and will be named Arconic Corporation at separation.
• Arconic Inc. reported third quarter 2019 results, for which the Company reported revenues of $3.6 billion, up 1% year over year. Organic revenue was up 6% year over year on strong volumes across all key markets and favorable pricing in the Engineered Products and Forgings segment, and volume growth in packaging, industrial, and aerospace markets as well as favorable pricing in the Global Rolled Products segment.
• Third quarter 2019 operating income was $326 million, versus operating income of $345 million in the third quarter 2018. Operating income excluding special items was $475 million, up 36% year over year, as favorable product pricing, higher volume, favorable aluminum prices, and net cost reductions more than offset operational challenges in the aluminum extrusions business and unfavorable product mix.
• Arconic Chairman and Chief Executive Officer John Plant said, “In the third quarter 2019, the Arconic team delivered improved quarterly revenue, adjusted operating income, adjusted operating income margin, adjusted free cash flow and adjusted earnings per share on a year-over-year basis. Arconic’s third quarter 2019 return on net assets improved by 550 basis points year over year. We expect this positive year-over-year trend to continue in the fourth quarter. Based on our performance through the first nine months of 2019 and our outlook for the remainder of 2019, we are increasing our full-year adjusted earnings per share guidance for the third time in 2019.”
• Arconic ended the third quarter 2019 with cash on hand of $1.3 billion. Cash provided from operations was $52 million; cash used for financing activities totaled $202 million, reflecting the impact of the accelerated share repurchase program of $200 million; and cash provided from investing activities was $117 million. Adjusted Free Cash Flow for the quarter was $154 million.

CAM High Yield Market Note

11/1/2019

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $1.1 billion and year to date flows stand at $22.9 billion. New issuance for the week was $5.9 billion and year to date HY is at $215.4 billion, which is +36% over the same period last year.

(Bloomberg) High Yield Market Highlights

• U.S. junk bonds are set to rebound from a three-day decline to open higher this morning as stock futures advance on the heels of better-than-expected manufacturing data from China and as oil prices rise after a four-day losing streak.
• Junk bonds fell for the third straight session and reported a loss of 0.15%, the longest losing streak in almost five weeks. Spreads are 38bps wider in the past four days at 392bps over U.S. Treasuries
• CCCs posted a loss of 0.29%, the most across high yield yesterday, taking year-to-date returns down to 5.38%. CCC yields surged to a nine-month high of 11.25% and spreads widened the most in 10 months to 969bps
• Investors, though cautious, continued to allocate cash to high-yield for the week
• Supply has ground to a halt with no new deals announced or priced in the past two days but there are some in the pipeline that could emerge soon.  

• (Bloomberg) Extended Junk Rally Squeezes Spread Between BBB and BB to Record 

• The difference between BBB and BB U.S. corporate bond spreads collapsed further as investors continued chasing yield in the highest-rated junk bonds

• • The differential between the best high yield and worst investment grade hit a fresh post-credit crisis low amid continued inflows to bond funds and negative yielding debt
    overseas
  • The compression is making it so investors may have to start reaching even further down the ratings spectrum to find value
  • The differential between BBB and BB was 49 basis points Monday morning, a new record

   

(Business Wire)  Western Digital Announces CEO Succession Plan

• Western Digital Corp. announced that Steve Milligan, chief executive officer and a member of the Western Digital Board of Directors (“the Board”) since January 2013, has informed the Board that he intends to retire as the Company’s CEO. Milligan will continue to serve as CEO until the Board has identified and appointed a successor, and then will remain with the Company in an advisory role until September 2020 to ensure a smooth transition. He will also remain a director on the Company’s Board for a transition period after his successor is appointed.
• The Board has initiated a search to identify Western Digital’s next CEO, and has engaged Heidrick & Struggles, a leading executive search firm, to assist in the process. In order to facilitate a comprehensive process, the Board will evaluate both internal and external candidates.
• “The Board and management team are committed to ensuring a smooth transition, and we are grateful that we’ll continue to benefit from Steve’s experience and perspective throughout this process,” said Matthew Massengill, chairman of the Board. “As the Board conducts its search for Steve’s successor, we are focused on identifying a strong leader with a proven track record of operating successfully at scale while defining and executing a growth strategy driven by innovation, operational excellence, and world-class talent development.”

(PR Newswire)  Tenneco Reports Third Quarter 2019 Results

• Tenneco Inc. reported third quarter 2019 revenue of $4.3 billion, versus $2.4 billiona year ago, including $1.8 billion from acquisitions.  On a constant currency pro forma basis, total revenue increased 3% versus last year, while light vehicle industry production declined 3% in the quarter.
• Third quarter EBIT was $148 millionincluding the acquired Federal-Mogul business, versus $112 million last year.  EBIT as a percent of revenue was 3.4% versus 4.7% last year.   Cash generated from operations was $164 million.
• Light vehicle production in the fourth quarter is expected to be lower year-over-year by 6%, and the commercial truck market is showing signs of softening in the quarter. In this environment, Tenneco expects fourth quarter revenue in the range of $3.95 billionto $4.05 billion.  Further, the company expects its fourth quarter adjusted EBITDA to be in the range of $295 million to $315 million, including year-over-year margin improvement of approximately 50 basis points in the DRiV division. The company expects the GM labor stoppage to have a negative impact on EBITDA of approximately $35 million.
• The company has made significant progress on the administrative separation of the two business divisions into two independent companies
• Tenneco remains committed to the separation of the businesses and continues to execute its plan for the spin off. Additionally, the company is evaluating multiple strategic options to deleverage and facilitate the separation.  Certain of these options could help mitigate the impact of challenging market conditions, which, if current trends were to continue, would likely affect the company’s ability to complete a separation in the mid-year 2020 time range.

Reuters)  U.S. Fed cuts interest rates, signals it is on hold

• The Federal Reserve on Wednesday cut interest rates for the third time this year to help sustain U.S. growth despite a slowdown in other parts of the world, but signaled there would be no further reductions unless the economy takes a turn for the worse.
• “We believe that monetary policy is in a good place,” Fed Chair Jerome Powell said in a news conference after the U.S. central bank announced its decision to cut its key overnight lending rate by a quarter of a percentage point to a target range of between 1.50% and 1.75%.
• “We took this step to help keep the economy strong in the face of global developments and to provide some insurance against ongoing risks,” he said. “We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook.”
• In his news conference, Powell ticked off an extensive list of reasons why he feels the economy is doing well, and likely to continue to do so under the current stance of monetary policy – from robust consumer spending, strengthening home sales, and asset prices he considered healthy but not to a level of excess.
• The outlook for the U.S. economy continues to be for “moderate” growth, a strong labor market and inflation rising back to the Fed’s 2% annual goal, he said, and only “a material reassessment” of that outlook could drive the central bank to cut rates further from here.