Trade concerns continued to weigh on debt and equity markets throughout the week. Spreads on the Bloomberg Barclays Corporate Index are 7 wider on the week as we go to print on Monday. A deluge of corporate bond supply in the primary market has certainly helped to push spreads wider. On Monday, Bayer printed a $15bln deal to fund its acquisition of Monsanto. At the time, this was the second largest deal of the year, after the jumbo $40bln deal that CVS brought to market in early March. Walmart would soon take the mantle of the second largest deal from Bayer as the retailer brought a $16bn deal on Wednesday to fund its acquisition of Indian-based ecommerce retailer Flipkart.
According to Wells Fargo, IG fund flows for the week of June 14-June 20 were -$1.4 billion. Even with the reversal in flows, IG flows are still positive at +$68.107 billion YTD.
Jumbo M&A led to one of the busiest new issue calendars that we have seen thus far in 2018. Per Bloomberg, over $43 billion in new corporate debt priced through Thursday. This brings the YTD total to $636 billion.
(Bloomberg) Why Corporate Bond Liquidity Might Not Be as Bad as You Fear
Banks’ shrinking corporate-bond holdings are partly a statistical mirage, according to a consulting firm. Some money managers and analysts believe it may be time to stop worrying about it.
One measure of total dealer holdings of corporate bonds has dropped by around 90 percent since the crisis, a fact that has instilled fear in money managers for years. Dealers’ inventories of corporate bonds can be a shock absorber for the market: in times of trouble, banks can buy the securities from panicked sellers, hang onto them, and then offload them slowly, potentially preventing prices from plunging.
But the decline in inventories is less dramatic than it seems because of a quirk in the data, consulting firm Tabb Group wrote in a recent report. The Federal Reserve Bank of New York statistic in question, primary dealer positions in corporate securities, fell to around $23 billion as of June 6 from around $265 billion in 2007. Much of that decline stemmed from the New York Fed narrowing the way it defined corporate bonds in 2013, when it appeared to have removed mortgage-backed securities without government backing from the mix, according to Tabb. On an apples-to-apples basis, inventories declined more like 35 percent to 50 percent for banks between 2007 and 2014, the consulting firm estimated.
Inventories aren’t even the best measure to look at for assessing liquidity, Tabb Group said. What money managers care about is a bank’s capacity to buy securities, and the bigger a dealer’s inventory, the less ability it has to buy more. The average capacity at the six biggest U.S. banks for corporate bond underwriting fell just 16 percent between 2006 and 2017, according to Tabb, and most of the banks can take on even more risk if there’s a valid business reason to do so.
Looking at the top 20 dealers, the decline in banks’ capacity from the pre-crisis era is closer to around 35 percent, Tabb estimates. But it’s not fair to completely blame rulemakers for these declines. There are good business reasons for banks to be less willing to hold the debt because interest rates are broadly rising, said Timothy Doubek, senior portfolio manager at Columbia Threadneedle Investments, which manages about $172 billion of fixed income assets.
There are still reasons to be worried about how corporate bonds may perform in a downturn. The declines in inventories and capacity have come at a time when the amount of debt outstanding has surged: there were about $9 trillion of U.S. corporate bonds outstanding as of the end of March, according to the Securities Industry and Financial Markets Association, a trade group. That’s an increase of around 85 percent from the end of 2006.
There’s no single way to define liquidity and it can vanish during times of stress. One measure known as the “bid-ask spread,” which looks at differences between the prices at which dealers will buy and sell a security, tends to grow wider when liquidity is low, and shrink when it’s strong. That spread is about as tight as it’s ever been.
Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.5 billion and year to date flows stand at -$31.8 billion. New issuance for the week was $1.7 billion and year to date HY is at $96.5 billion, which is -28% over the same period last year.
(Bloomberg) High Yield Market Highlights
Junk bond yields are up slightly with equity weakness and rising VIX, while lack of supply is supportive.
Yield to worst on Bloomberg Barclays US Corporate High Yield Bond Index rose to 6.26%
VIX saw the biggest jump in more than three weeks, closed at a 3-week high
DJIA dropped in nine of the last 10 sessions, closed at a 3-week low amid continuing tensions over tariffs
New issuance has been quite sparse
Junk bond YTD returns are 0.69%, the best performing in U.S. fixed income
CCCs continue to top BB, single-Bs with YTD returns of 3.52%
CCCs also beat investment grade bonds, which are down 3.58%
(Moody’s) Moody’s Upgrades AES Corporation’s Corporate Family Rating to Ba1 from Ba2; Rating Outlook is Stable
(CAM notes) Moody’s upgrade was based on the business diversity, lowering of carbon risk exposure, and an improving credit profile.
(Bloomberg) Cheniere to Buy Unit for $30.93 a Share in Streamlining Move
Cheniere Energy Inc., the first U.S. company to export shale gas overseas, will buy the remaining stake in a holding company it already controls for $30.93 a share, moving to simplify amid a U.S. tax overhaul that’s pummeling natural gas partnerships.
Investors in Cheniere Energy Partners LP Holdings LLC will receive 0.475 of a share in Cheniere Energy Inc. for each share of the holding company, of which Cheniere already controls 91.9 percent. The deal values the acquired company at about $7.2 billion.
The pact comes as companies from Williams Cos. to Enbridge Inc. take steps to tighten their structures as changes in U.S. tax law upend the master limited partnerships often used to own pipelines. Units in MLPs plunged in March after regulators said they can no longer charge customers for taxes they don’t pay.
“This has been the plan all along,” for Cheniere, Pavel Molchanov, an analyst at Raymond James Financial Inc., said by phone “This is part and parcel of a broader theme across the MLP landscape: companies are cleaning up, simplifying their structures.”
The holding company has a stake in Cheniere Energy Partners LP — the business that owns and operates Sabine Pass, the terminal that was first to export U.S. shale gas overseas.
(Moody’s) Moody’s downgrades U.S. Concrete’s Corporate Family Rating to B2 from B1; outlook remains stable
(CAM Notes) Moody’s downgrade was based on leverage being elevated from the expected level. Moody’s does see value in the Company’s ability to generate free cash flow. Additionally, the private non-residential commercial segment of the construction market is favorable.
(CNBC) Conagra has approached Pinnacle Foods about a potential deal
Conagra Brands has approached Pinnacle Foods about a potential acquisition, sources familiar with the situation told CNBC on Thursday.
A pairing of Healthy Choice-owner Conagra and Bird’s Eye-owner Pinnacle would combine two companies with a large presence in frozen foods at a time when the category is seeing a resurgence. Food companies, including Conagra, have poured money into previously neglected brands to highlight their healthiness, affordability and ease of use.
Pinnacle has a market capitalization of $7.9 billion, while Conagra’s is $15.1 billion. A combination of Conagra and Pinnacle would create the second-largest U.S. frozen food company, analysts at RBC Capital Markets recently wrote. The other major players include Kraft Heinz and Nestle, the latter of which is the largest in the U.S., according to RBC.
The deal talks come after activist hedge fund Jana Partners recently disclosed a roughly 9 percent stake in Pinnacle and said it planned to talk with the company on a range of subjects, including a possible sale.
(Street Insider) Frontier Communications CFO R. Perley McBride Resigns
Frontier Communications announced that R. Perley McBride, its Executive Vice President and Chief Financial Officer, will be resigning from the company for personal reasons, and to return to Atlanta where his family resides. Mr. McBride will remain in his position until August 31, 2018 to help transition responsibilities. A search for his successor is being conducted.
Frontier’s President and Chief Executive Officer Daniel J. McCarthy stated, “We announce Perley’s resignation with regret. Perley has done a tremendous job managing our balance sheet. He has negotiated improvements in the terms of our credit agreements, raised $1.6 billion of new second lien debt, and retired approximately $1.7 billion of unsecured notes. These steps, together with the stabilization in our business as reflected in our most recent quarterly results, have placed Frontier on a positive path forward. On behalf of everyone at Frontier, I wish Perley and his family the best in the future.”
Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $0.5 billion and year to date flows stand at -$28.1 billion. New issuance for the week was $2.0 billion and year to date HY is at $94.7 billion, which is -29% over the same period last year.
(Bloomberg) High Yield Market Highlights
Junk bond spreads have dropped to an 8-week low — just 18bps from the tightest in 10 years — as investors seem to shrug off geopolitical tensions, fears of trade war and rates volatility. Supply is tight and fund inflows have resumed.
High yield index spread closed at +329
CCC spreads have dropped 53bps YTD to close at 5-month low of +562
For returns, CCCs continued to top BBs and single-Bs
High yield supply thin, retail funds seeing cash inflows
Summer is likely to see issuance picking up as acquisitions and buyouts gain some momentum
Moody’s survey of non-financial companies finds that 65% of them were better off with the 2017 tax cut and they expect to use additional cash to repay debt, and to a lesser extent, repurchase stocks
(Fierce Wireless) Sprint slashes data prices with $15 unlimited plan for those willing to switch
Sprint has unveiled one of the most aggressive wireless promotions yet, offering unlimited data, talk, and text for just $15 per line per month. The offer is for people who are switching to Sprint from another carrier. It can only be activated online, and does not require a contract.
By undercutting its competitors on price, Sprint is making several points. First, the carrier appears confident that its network can handle a lot more traffic and perform as well as those of its competitors. Second, despite a major investment in new Sprint retail stores across the country, Sprint would rather sign up its new customers online than in person. Third, Sprint is not content to languish in fourth place in the U.S. market while it waits to see if U.S. regulators will approve its merger with T-Mobile next year.
And finally, Sprint is underlining the point that a wireless market with four operators invites aggressive price promotion. Washington wants to see a competitive wireless market, but it doesn’t necessarily want to see carriers cutting prices to a point that threatens their ability to invest in next-generation networks.
The promotion also underscores the cutthroat nature of a four-carrier wireless market. Some analysts say a three-carrier market is likely to result in fewer discounts for customers. This is a negative for consumers in the short term, but could be positive in the longer term, according to some analysts.
Analyst Joe Madden of Mobile Experts has pointed out that in countries with just three carriers, higher margins create the financial opportunity for carriers to invest in new technologies, which ultimately lead to more value for consumers. Consumers may not see rock-bottom data prices, but they are able to get a lot more data for each dollar they spend. This is the type of argument that will almost certainly be made in Washington as the Justice Department and the FCC consider the proposed merger of Sprint and T-Mobile.
(Bloomberg) OPEC Highlights Demand Uncertainty Before Crucial Meeting
OPEC emphasized the deep uncertainty over the strength of demand for its oil just a week before contentious talks on whether to raise production.
There’s a “wide forecast range” for how much crude the Organization of Petroleum Exporting Countries needs to pump in the second half of the year, its research department said in a monthly report. With a range of uncertainty of 1.7 million barrels a day, demand could either be significantly higher, or slightly lower, than OPEC’s current output.
“Looking at various sources, considerable uncertainty as to world oil demand and non-OPEC supply prevails,” said the report, published by OPEC’s secretariat in Vienna. “This outlook for the second half of 2018 warrants close monitoring.”
OPEC and its allies will debate whether to revive halted output when they gather in Vienna next week. Saudi Arabia and Russia have said they want to raise supplies to prevent high prices hurting economic growth, but opposition among other producers is growing.
The rating actions incorporate Tenneco’s proposed capital structure related to financing its planned acquisition of Federal-Mogul LLC (Federal-Mogul), a leading global supplier to automotive original equipment manufacturers and the aftermarket. On a pro forma basis for 2017, the transaction will increase Tenneco’s leverage to over 4x inclusive of estimated synergies, from 2.4x. This is transformational for Tenneco, both the acquisition of Federal Mogul as well as the plan to separate into two separate businesses with one focused on Aftermarket & Ride Performance and the other on Powertrain Technology.
Tenneco is expected to acquire Federal-Mogul from affiliates of Icahn Enterprises L.P. for $5.4 billion. This is about a 7.2x multiple of Tenneco’s calculation of Federal-Mogul’s 2017 adjusted EBITDA (pre synergies). The acquisition is expected to close in the second half of 2018, subject to regulatory and shareholder approvals and other customary closing conditions.
The ratings reflect the significant increase in leverage, with the expectation that improvement is unlikely over the near term, as approximately 75% of the synergies will not be realized until late 2019. Pro Forma debt/EBITDA is estimated at 4.8x, and about 4.2x adjusting for Tenneco’s projected synergies. The ratings also reflect a number of near-term execution risks including: operating the ongoing businesses while both integrating certain operations related to the planned separation; and implementing programs to achieve the planned synergies and working capital improvements.
(CAM Note) S&P and Fitch have also downgraded the debt of Tenneco
(CNN) Fed raises interest rates and signals faster hikes on the way
The Federal Reserve on Wednesday lifted its benchmark rate by a quarter of a percentage point, the second hike this year.
And a majority of policy makers said they now expect a total of four interest rate increases this year. Fed officials had been split about whether to raise rates three times this year or four.
The decision reflected an economy that’s getting even stronger. Unemployment is 3.8%, the lowest since 2000, and inflation is creeping higher. The Fed is raising rates gradually to keep the economy from overheating.
“The main takeaway is that the economy is doing very well,” Fed Chairman Jerome Powell said at a news conference. “Most people who want to find jobs are finding them, and unemployment and inflation are low.”
There was no shortage of news in the market this week with political, economic and monetary policy events. To top it off, on Friday morning we learned that the U.S. and China are now officially in the early innings of a potential trade war, which has pushed the debt and equity markets firmly into risk-off mode as we head to press.
According to Wells Fargo, IG fund flows for the week of June 7-May 13 were +$2.3 billion. IG flows are now +$68.573 billion YTD. Short and intermediate duration funds continue to garner assets while long duration funds have been shrinking this year.
Per Bloomberg, 23.37 billion in new corporate debt priced through Thursday. This brings the YTD total to ~$592bn, which is down 8% year over year.
Treasury curves continue to flatten and are now the flattest they have been since 2007.
(CNET) Net neutrality is really, officially dead. Now what?
The Obama-era net neutrality rules, passed in 2015, are defunct. This time it’s for real.
Though some minor elements of the proposal by the Republican-led FCC to roll back those net neutrality rules went into effect last month, most aspects still required approval from the Office of Management and Budget. That’s now been taken care of, with the Federal Communications Commission declaring June 11 as the date the proposal takes effect.
While many people agree with the basic principles of net neutrality, the specific rules enforcing the idea has been a lightning rod for controversy. That’s because to get the rules to hold up in court, an earlier, Democrat-led FCC had reclassified broadband networks so that they fell under the same strict regulations that govern telephone networks.
FCC Chairman Ajit Pai has called the Obama-era rules “heavy-handed” and “a mistake,” and he’s argued that they deterred innovation and depressed investment in building and expanding broadband networks. To set things right, he says, he’s taking the FCC back to a “light touch” approach to regulation, a move that Republicans and internet service providers have applauded.
What’s net neutrality again?
Net neutrality is the principle that all traffic on the internet should be treated equally, regardless of whether you’re checking Facebook, posting pictures to Instagram or streaming movies from Netflix or Amazon. It also means companies like AT&T, which is trying to buy Time Warner, or Comcast, which owns NBC Universal, can’t favor their own content over a competitor’s.
So what’s happening?
The FCC, led by Ajit Pai, voted on Dec. 14 to repeal the 2015 net neutrality regulations, which prohibited broadband providers from blocking or slowing down traffic and banned them from offering so-called fast lanes to companies willing to pay extra to reach consumers more quickly than competitors.
Does this mean no one will be policing the internet?
The FTC will be the new cop on the beat. It can take action against companies that violate contracts with consumers or that participate in anticompetitive and fraudulent activity.
So what’s the big deal? Is the FTC equipped to make sure broadband companies don’t harm consumers?
The FTC already oversees consumer protection and competition for the whole economy. But this also means the agency is swamped. And because the FTC isn’t focused exclusively on the telecommunications sector, it’s unlikely the agency can deliver the same kind of scrutiny the FCC would.
What about internet fast lanes? Will broadband providers be able to prioritize traffic?
The repeal of FCC net neutrality regulations removes the ban that keeps a service provider from charging an internet service, like Netflix or YouTube, a fee for delivering its service faster to customers than competitors can. Net neutrality supporters argue that this especially hurts startups, which can’t afford such fees.
(Bloomberg) AT&T Closes Time Warner Deal After U.S. Declines to Seek Stay
AT&T Inc. closed its $85 billion takeover of Time Warner Inc., the culmination of a 20-month battle for the right to enter the media business by acquiring the owner of HBO and Warner Bros.
The completion of the deal came just hours after AT&T made a filing in federal court in Washington disclosing that it had reached an agreement with the Justice Department that waived a waiting period for closing.
The agreement doesn’t prevent the department’s antitrust division from appealing the decision issued Tuesday by a federal judge rejecting the U.S. antitrust lawsuit against the deal. The government is still weighing whether to appeal the ruling, a Justice Department official said.
AT&T’s completion of the takeover caps a nearly two-year effort to acquire Time Warner, the owner of CNN, HBO and Warner Brothers studio. The Justice Department sued in November to stop the merger, claiming the combination would raise prices for pay-TV subscribers across the country. After a six-week trial, U.S. District Judge Richard Leon ruled against the government’s case.
(Bloomberg) Powell Lauds Economy as Fed Nudges Up Interest-Rate Hike Path
Federal Reserve officials raised interest rates for the second time this year and upgraded their forecast to four total increases in 2018, as unemployment falls and inflation overshoots their target faster than previously projected.
The so-called “dot plot” released Wednesday showed eight Fed policy makers expected four or more quarter-point rate increases for the full year, compared with seven officials during the previous forecast round in March. The number viewing three or fewer hikes as appropriate fell to seven from eight. The median estimate implied three increases in 2019 to put the rate above the level where officials see policy neither stimulating nor restraining the economy.
Chairman Jerome Powell told reporters following the decision — which lifted the Fed’s benchmark rate by a quarter percentage point to a range of 1.75 percent to 2 percent — that the main takeaway was that “the economy is doing very well.” Powell also announced he plans to start holding a press conference after every meeting in January, cautioning that “having twice as many press conference does not signal anything.” The Fed chief currently speaks to reporters after every other meeting of policy makers.
(Bloomberg) Concho Resources Rides IG Upgrade Bump Again
Exploration & production company Concho Resources was among Thursday’s top performers, pricing $1.6 billion across 2 tranches to help fund the RSP Permian acquisition. The issuer rode the momentum of its Moody’s ratings hike from HY to IG Monday pricing flat to its outstanding credit curve.
CXO last accessed the debt capital markets in September pricing a whopping 25bps inside its curve after amassing more than $11 billion in orders. That deal came on the heels of an S&P upgrade to investment grade from HY.
(WSJ) Disney, Comcast Bids for Fox Assets Could Face Regulatory Sticking Point: Sports
Comcast Corp. CMCSA and Walt Disney Co. DIS -0.54% are fighting to win over 21st Century Fox Inc. FOX shareholders and acquire major assets of Rupert Murdoch’s media empire. After the boardroom fight comes the next battle: winning over Washington.
Both bids are expected to get a close look from antitrust regulators at the Justice Department, which earlier this week suffered a bruising loss when a judge approved AT&T Inc.’s acquisition of Time Warner Inc. with no conditions.
The Justice Department’s antitrust chief said Wednesday he wouldn’t let the outcome deter him from challenging other deals. “I don’t think our case or evidence or theories were flawed,” Makan Delrahim said, adding that “a different judge could have ruled completely differently.”
Comcast executives have begun reaching out to Fox and Comcast shareholders to make their case for the merger, people familiar with the matter say.
Because Disney and Comcast, like Fox, produce television shows and movies, either deal would represent a horizontal merger, in which direct rivals combine, further limiting the number of competitors in the industry.
The sports assets that would be combined in either a Disney-Fox or Comcast-Fox deal will get heavy scrutiny. Fox is selling nearly two-dozen regional sports networks including in New York, Los Angeles and Detroit. Its marquee property is the YES Network, the television home of the New York Yankees. Fox’s regional sports networks have been valued at $23 billion by industry analysts.
Comcast’s nine regional sports networks carry local teams in major markets such as Philadelphia and Chicago. Its SNY, the home of the New York Mets, competes for advertisers with Fox’s YES. The addition of Fox’s channels would make Comcast the home for local sports in just about every major television market. That could potentially give it leverage in negotiations with other distributors for the rights to carry those channels. However, the channels for the most part don’t compete against one another.
Disney doesn’t operate any local sports channels, but it owns ESPN, which has several national channels and rights to just about every major sport. The addition of Fox’s 22 regional channels could give it tremendous clout both locally and nationally with pay-TV distributors, sports leagues and advertisers.
Neither proposed deal includes the Fox Broadcasting network, its local TV stations, the Fox News and Fox Business channels or the national sports channel Fox Sports 1. The broadcast businesses in particular would have likely made either deal virtually impossible to get past regulators because Disney owns ABC and Comcast owns NBC.
(WSJ) PG&E Cut To BBB By S&P; Still May Be Cut Further
S&P said the cut reflects the incremental weakening of the business and financial risk profile after CAL FIRE’s determination that PG&E’s equipment was involved with 16 of the Northern California wildfires in late 2017.
S&P said it could resolve the negative CreditWatch in the near term when CAL FIRE determines the cause of the Tubbs fire, or if there is a legislative solution to inverse condemnation that materializes in the legislative session ending August 2018
Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $0.3 billion and year to date flows stand at -$26.2 billion. New issuance for the week was $4.2 billion and year to date HY is at $89.1 billion, which is -23% over the same period last year.
(Bloomberg) High Yield Market Highlights
Supply-starved U.S. junk bond investors feasted on CCC and PIK deals yesterday, despite choppy stocks and softening oil prices. Four new deals for $1.4b priced, led by CCC and PIK credits, and funds saw a modest inflow.
Junk bond spreads, yields were little changed
Triple-C credits traded above issue price reflecting the risk-on mood, even as oil prices dropped for a third straight session
Atotech, a CCC PIK, priced within talk and traded at 99.625, above issue price
TMXFIN, also CCC, priced at wide end of talk, traded at 101.375 yesterday afternoon, well above issue price
CCCs beat BBs and single-Bs with YTD return of 2%
High yield operating in an overall friendly environment with light supply, low defaults, steady domestic growth
(Bloomberg) Goldman Says Riskiest Junk Bonds Are Most `Mispriced’ Since 2007
The C-C-Craze for some of the riskiest corporate credits has gone too far, according to Goldman Sachs Group Inc.
While U.S. investment-grade bonds that are most sensitive to moves in borrowing costs have been hit hard this year, investors continue to pile into debt sold by some of the weakest junk-rated companies. Bonds in the CCC category — just two notches above default — have returned a whopping 330 basis points in total this year, according to Bloomberg index data.
That outperformance has helped push spreads on the Bank of America Merrill Lynch gauge of CCC rated debt to below 700 basis points earlier this week — the smallest premium since July 2014.
Meanwhile, Goldman’s preferred valuation measure of corporate credit, which subtracts their projected expected-loss rates from current spreads, shows U.S. high-yield obligations are now mispriced for even the most benign scenarios.
“In a nutshell, the CRP is the expected excess return on a buy-and-hold strategy of diversified credit portfolios over a five-year period,” write Goldman analysts led by Chief Credit Strategist Lotif Karoui in a note. “Put differently, the CRP is the extra premium earned by investors as compensation for future default losses.”
Goldman estimates the credit-risk premium for CCC obligations has sunk to a negative 53 basis points, “even under a fairly optimistic assumption of no recession for the next five years.”
That’s the lowest level since before the financial crisis, when the CRP touched negative 420 basis points in June 2007, at the height of the froth in the global debt market. It suggests investors are likely accepting credit risk without adequate compensation.
(CNBC) HCA and KKR team up for Envision bid
S. hospital operator HCA Healthcare and private-equity firm KKR have joined forces to make an offer for U.S. physician services provider Envision Healthcare
The move is aimed at giving HCA and KKR an edge over buyout firms that are also pursuing Envision, which has a market capitalization of $5.1 billion and long-term debt of $4.6 billion, the sources said.
HCA, which has a market capitalization of $36 billion and long-term debt of $31.6 billion, wants to acquire Envision’s AmSurg ambulatory surgery business, with KKR taking the over the remainder, according to the sources.
Nashville-based Envision has asked potential acquirers to submit final offers later this month, sources said. Other private-equity firms competing for Envision include a consortium of Carlyle Group and TPG Global, sources added.
Envision announced last year it was reviewing a range of strategic alternatives after reporting disappointing third-quarter earnings, which it attributed partly to the effects of hurricanes Harvey and Irma as well as a slowdown in the growth of patient demand.
Last year, Envision agreed to sell its ambulance unit, AMR, to Air Medical, a medical helicopter business owned by KKR, for $2.4 billion.
The year prior, it merged with AmSurg in an all-stock deal that valued the combined companies at the time at around $10 billion. HCA’s and KKR’s bid would reverse that combination.
(Reuters) Cheniere moves ahead with Corpus Christi LNG expansion
Cheniere Energy Inc said on Tuesday it had approved the construction of a third liquefaction unit, known as a train, at its Corpus Christi export terminal in Texas, the first new liquefied natural gas project to go ahead in the United States since 2015.
The positive investment decision on the 4.5 million-tonne per annum (Mtpa) LNG train comes as Washington and Beijing have stepped back from the brink of a trade war and agreed to hold further talks to boost U.S. exports to China.
China, which is turning to natural gas to reduce its dependency on coal for power, overtook South Korea last year to become the world’s No. 2 LNG buyer. Companies with U.S. projects say China could use LNG imports to reduce a trade surplus with the United States.
For its part, Cheniere signed long-term deals with China National Petroleum Corp (CNPC) in February, earmarking 1.2 Mtpa of the output from Corpus Christi Train 3 for the state-owned oil and gas firm.
The first two trains at Corpus Christi are expected to enter service next year. There is no timeline for the third train, though the builds generally take about four years each.
Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week of May 10-May 16 accelerated from prior weeks, with a positive inflow of $3.5 billion. Short duration funds have registered 80% of all inflows over the past four weeks, according to Wells. IG funds have garnered $65.764 billion in net inflows YTD.
Per Bloomberg, over $30bn in new corporate debt priced for the second straight week. This brings the YTD total to $509bn. The pace of new issuance is off 2% relative to this point in 2017.
(WSJ) The Era of Low Mortgage Rates Is Over
Mortgage rates this week jumped to their highest level since 2011, signaling a shift from a period of ultracheap loans to a higher-rate environment that could slow home price appreciation and squeeze first-time buyers.
The average rate for a 30-year fixed-rate mortgage rose to 4.61% this week from 4.55% last week, according to data released Thursday by mortgage-finance giant Freddie Mac.
The concern among economists is that higher rates will prompt homeowners to keep their low-rate mortgages rather than trade up for better properties. As rates approach 5%, the risk of the phenomenon known as rate lock grows, economists said.
A one percentage point increase in rates can lead to a reduction in home sales of 7% to 8%, according to Lawrence Yun, chief economist at the National Association of Realtors. The recent increases in home prices and mortgage rates could especially hurt first-time and moderate-income borrowers, economists said.
The Mortgage Bankers Association expects refinancings to decline 26% this year, after plunging 40% last year.
(WSJ) What Do Tesla, Apple and SoftBank Have in Common? They’re All Hot for Lithium
Tesla Inc. and a large Chinese firm each struck deals with lithium producers, the latest sign that big users are rushing to secure supplies of the material used in electric-car and cellphone batteries.
Both lithium and cobalt, which is also used in these batteries, face potential shortages in the years ahead as electric-vehicle use increases.
That concern is driving a number of companies like technology firms and car makers reliant on lithium and cobalt to strike deals now, even if it means joining with suppliers that haven’t started producing yet.
In addition to the sector’s dominant players such as Glencore PLC and Albemarle Corp. , analysts estimate there are more than 100 smaller lithium miners and about 25 cobalt firms. Many are publicly traded in Canada and Australia, and some have already clinched deals with big users. “It just looks like we’re on the precipice of this wave,” said Chris Berry, founder of House Mountain Partners LLC, a New York-based adviser to battery-metals companies and investors. “You’re going to need a lot of investment in a hurry to meet demand.”
But the rush to lock in deals could turn out to be a speculative bust. Prices of lithium and cobalt more than doubled from 2016 through last year, but the rally has cooled off recently amid worries about oversupply. Some investors also think manufacturers will replace pricey materials like lithium and cobalt using different types of batteries with a higher concentration of cheaper metals such as nickel.
Analysts expect demand for the materials used to power electric vehicles and smartphones to more than double by 2025, pushing transportation and technology companies into exploring unconventional deals to meet that pressing need.
Many lithium and cobalt mines are located in regions that have historically been unstable: Congo in the case of cobalt, and South America for lithium, adding to worries about a supply shortage.
(Bloomberg) U.S. Retail Sales Gain Points to Healthier Second Quarter
S. retail sales rose in broad fashion last month as bigger after-tax paychecks helped compensate for rising fuel costs, signaling consumer demand was off to a firm start this quarter.
The value of sales increased 0.3 percent in April, matching the median forecast, after a 0.8 percent advance in the prior month that was stronger than initially reported, Commerce Department figures showed Tuesday.
So-called retail-control group sales, which are used to calculate gross domestic product and exclude food services, auto dealers, building materials stores and gasoline stations, improved 0.4 percent after an upwardly revised 0.5 percent gain.
The results add to the expectation that consumer spending, the biggest part of the economy, will rebound from its first-quarter weak patch. A strong job market and higher take-home pay in wake of tax reductions are buoying Americans’ wherewithal to spend and cushioning the squeeze from costlier fuel that leaves people with less money to buy other goods and services.
Nine of 13 major retail categories showed advances in April, led by the biggest jump in sales at apparel stores since March of last year. Increased receipts were also evident at furniture merchants, building-materials outlets, Internet retailers and department stores.
While consumer spending has remained solid in this expansion, business investment has also been posting strong growth in recent quarters. Tax cuts that President Donald Trump signed into law at the end of 2017 were seen as providing a further jolt to consumption and capital spending that would spur growth toward the president’s 3 percent goal.
Economists including those at Bank of America Corp. and JPMorgan Chase & Co. have noted the recent runup in gasoline prices, and said persistently higher fuel costs this year would risk eroding a sizeable portion of the tax benefits.
Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.8 billion and year to date flows stand at -$26.5 billion. New issuance for the week was $1.6 billion and year to date HY is at $84.8 billion, which is -23% over the same period last year.
(Bloomberg) High Yield Market Highlights
Despite all the hullabaloo about rising rates, U.S. high yield investors bought three CCC-rated deals in the primary, led by Valeant.
Valeant dropped a senior secured tranche, increased size of a term loan
Bond priced at tight end of talk, received orders of more than $5.5b
SRS Distribution and Hearthside funded aggressive buyouts by private equity
Both made material covenant changes to strengthen investor protection
Investors ignored outflows from retail funds
CCCs beat BBs and single-Bs with a return of 2.03% YTD
IG’s YTD return is negative 4.15%
Lack of supply, combined with low default rate and decent corporate earnings, boosts risk-on sentiment for junk bonds
High yield is expected to be tested in the second half of the year by supply from Blackstone funding the buyout of financial and risk businesses from Thomson Reuters, Carlyle Group funding for acquisition of specialty chemicals business from AkzoNobel
(Multichannel News) Charter’s Enterprise Unit Earmarks $1B-Plus for Fiber Plan
Spectrum Enterprise, a unit of Charter Communications focuses on the large business services segment, said it will invest more than $1 billion in 2018 to increase the density of its national fiber network.
Charter said this will be the second straight year in which the company has invested in excess of $1 billion exclusively in Spectrum Enterprise, which will be looking to expand on a network of nearly 200,000 fiber-lit buildings.
Spectrum Enterprise will absorb the bulk of the upfront costs of fiber construction for most new enterprise clients in its footprint for solutions such as Fiber Internet Access, Ethernet and voice trunks.
The investment will also come to add fiber density as wired networks become a significant backhaul channel for a coming wave of 5G-based services and other bandwidth-intensive offerings.
“As fiber connectivity has become fundamental to economic growth, we are focused on making our fiber infrastructure more accessible to clients, and reshaping their experience to align with the evolving realities of today’s modern enterprise,” Phil Meeks, EVP and president of Spectrum Enterprise, said in a statement. “Advanced video and virtual reality solutions, cloud, IoT and the future of 5G all depend on a reliable and highly-dense fiber network. Our commitment is to ensure that our clients have the most robust fiber network and solutions to grow today and take advantage of future technologies that have immense demands on bandwidth.”
(PR Newswire) Steel Dynamics to Acquire CSN Heartland Flat Roll Operations
Steel Dynamics, Inc. announced that it has entered into a definitive agreement to acquire Heartland from CSN Steel, S.L.U., a wholly-owned subsidiary of Companhia Siderurgica Nacional. Located in Terre Haute, Indiana, Heartland produces various types of higher-margin, flat roll steel by further processing hot roll coils into pickle and oil, cold roll, and galvanized products. Steel Dynamics has agreed to purchase Heartland for $400 millionin cash inclusive of $60 million of normalized working capital, subject to customary transaction purchase price adjustments. Steel Dynamics believes the purchase price approximates current replacement value. The transaction is expected to be accretive to near-term earnings and cash flow per share. The acquisition will expand Steel Dynamics’ annual flat roll steel shipping capacity to 8.4 million tons and total shipping capability to 12.4 million tons. The additional exposure to lighter-gauge and greater width flat roll steel offerings will broaden the Company’s value-added product portfolio, enhancing Steel Dynamics position as a leading North American steel producer.
“The acquisition of Heartland represents a step in the continuation of our growth strategy,” said Mark D. Millett, Chief Executive Officer. “It levers our core strengths, and at the same time fulfills our initiatives to further increase value-added product and market diversification. We look forward to welcoming the Heartland employees and customers into the Steel Dynamics family, and working with them to drive future growth and success.
“We have positioned our capital structure and organizational framework for growth,” continued Millett, “and we believe this acquisition will result in numerous future earnings benefits both to Heartland’s current operations and to our Midwest flat roll operations. In combination with our current operations, Heartland brings a tremendous amount of operating flexibility and optionality. As a part of our broader business platform, Heartland is expected to provide numerous synergies with our existing operations, and we look forward to levering these opportunities in the future.”
(Bloomberg) Teva Rises After Berkshire Hathaway Boosts Stake in Drugmaker
Teva Pharmaceutical shares rose after Warren Buffett’s Berkshire Hathaway Inc. more than doubled its stake in the struggling Israeli drugmaker, a vote of confidence in Chief Executive Officer Kare Schultz’s turnaround effort.
Berkshire Hathaway owns 40.5 million American depositary receipts in Teva, Buffett’s company said in a regulatory filing Tuesday. The Omaha, Nebraska-based company made its initial investment in Teva last year.
Saddled with debt, Teva has been cutting its workforce and closing factories to cut costs. The company this month raised its 2018 profit forecast as Schultz’s belt-tightening program begins to take hold. Teva has been hurt by falling margins on knockoff drugs and rapidly declining sales for its best-selling product, the multiple sclerosis drug Copaxone.
Buffett, 87, has handed some of his stock-picking duties to Todd Combs and Ted Weschler, who together oversee about $25 billion. Berkshire hired Combs in late 2010 and Weschler about a year later. Buffett said in February that the Teva investment was made by one of his deputy stock pickers and he didn’t know the reasoning behind the decision.
(CNBC) Williams to buy rest of Williams Partners in $10.5 billion deal
Pipeline operator The Williams Cos. said on Thursday it would buy the remaining 26 percent stake that it does not already own in its master limited partnership, William Partners, for $10.5 billion. Williams would give 1.494 of its shares for each share of Williams Partners, with the offer representing a premium of 6.4 percent based on Wednesday’s closing price.
The company said the deal will immediately add to cash available to dividends extending the period for which the company is not expected to be cash taxpayer through 2024.
The deal simplifies Williams’ corporate structure, streamlines governance and maintains investment-grade credit ratings, the company said.
(CAM Note) Moody’s and Fitch has moved the debt of Williams Companies to under review for upgrade on the news.
Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week of May 3-May 9 were positive, with an inflow of $912 million. According to data analyzed by Wells Fargo, IG funds have garnered $60.031 billion in net inflows YTD.
According to Bloomberg, $44.039bn in new corporate debt priced during the week. This brings the YTD total to $478.934bn. Per Bloomberg, this has been the highest weekly volume total since the week ended March 9, which included the $40 billion 9-part CVS deal to fund the Aetna transaction.
(Bloomberg) U.S. Yield Curve Flattest Since August 2007 as Long Bonds Soar
The Treasury yield curve from 5 to 30 years flattened Thursday to the lowest level since August 2007, as a combination of weaker-than-expected U.S. inflation and solid demand for a record bond auction bolstered investor confidence in owning long-dated securities.
The spread narrowed by more than 4 basis points, the most since February, dropping through a previous intraday low from April to 27.7 basis points. The gap between 2- and 10-year Treasuries also shrank in a bull flattening move.
Investors and Federal Reserve officials alike have been on guard for the curve flattening toward inversion, which has historically preceded recessions. Yet bond traders are still pricing in more than two additional quarter-point rate hikes by year-end, betting policy makers will stick to their tightening path.
(WSJ) Cord-Cutting Pain Spreads to High-Yield Bond Market
The consumer stampede to streaming media from traditional broadcasters is claiming an unexpected victim: high-yield bond investors.
Telecommunications, cable and satellite companies have borrowed hundreds of billions of dollars in junk debt to build networks that would allow them to dominate their markets for decades to come.
The proliferation of internet-based providers is upending that expectation, forcing investors to question the safety of bonds they bought from companies such as satellite broadcaster Dish Network, cable giant Charter Communications, and landline telecommunications company Frontier Communications.
Defaults are low right now in telecommunications and media bonds, and some companies that offer broadband and wireless access actually benefit from the move toward streaming media.
(Bloomberg) U.S. Economic Growth Can Withstand the Threat From Rising Prices
Want ads for truck drivers to haul crude oil in Texas are touting salaries as high as $150,000 a year. Some nurses are getting $25,000 signing bonuses. The U.S. unemployment rate just fell to 3.9 percent, one tick away from its lowest since the 1960s. And on May 8 the Bureau of Labor Statistics reported there are 6.5 million unfilled jobs in the U.S., the most on record. Some employers say they’re feeling the squeeze. “Rising labor costs remain the primary contributing factor to our margin erosion,” Chatham Lodging Trust, a company in West Palm Beach, Fla., that owns more than 130 hotels either by itself or in joint ventures, said on May 1.
Is the U.S. economy overheating? Yes and no. There are plenty of inflationary bottlenecks, and not only in the labor market. Backlogs of orders are the highest since 2004, according to the Institute for Supply Management. Transportation costs have jumped in part because of driver shortages. Strong U.S. oil and gas production has helped push up the prices of essential inputs such as steel pipe and specialty sands used in fracking.
On the other hand, the bottlenecks aren’t yet causing high inflation across the economy, which would require the Federal Reserve to speed up its interest rate hikes. The U.S. central bank passed up the opportunity to raise the federal funds rate at its May 1-2 meeting while noting that the rate of inflation has “moved close” to the bank’s 2 percent target. “In my judgment, the Fed is ready to accelerate [rate hikes] if they need to, but they’re not getting ahead, which I think is appropriate,” says Josh Wright, chief economist at ICIMS Inc., which makes software to find and hire talent.
Some of the factors driving up the U.S. inflation rate—in particular, the jump in crude oil prices to about $70 a barrel from less than $50 a year ago—have external causes and don’t reflect overheating in the domestic economy. Rising commodity prices caused in part by new steel tariffs cost General Motors Co.and Fiat Chrysler Automobiles NV at least $200 million each in the first quarter. Tariffs have also helped drive lumber prices to a record. Other external factors are the high price of imported alumina for aluminum smelters and the weather-related runup in prices of vanilla from Madagascar and cocoa from Ivory Coast and Ghana.
The U.S. economy performed below capacity for so long that it can be hard for managers to remember how to operate without lots of spare resources. Half of the surveyed members of the National Federation of Independent Business say there are “few or no” qualified workers for job openings. Yet on May 8 the NFIB reported that in April the net percentage of small-business owners who reported improved earnings trends was the highest in the survey’s history. “There is no question that small business is booming,” William Dunkelberg, NFIB’s chief economist, said in a statement. (Big companies are, too: First-quarter earnings for companies in the S&P 500 are expected to be 24 percent higher than a year earlier, Bloomberg calculated on May 9.)
Sectors with strong pay growth generally confront special circumstances. Those truck drivers being offered as much as $150,000? They’re being hired by oil producers in the Permian Basin who are desperate to get their crude to market. Hospitals, whose median expenditures for contract labor rose 19 percent in the past year, face their own special problems, according to John Morrow, a managing director of Franklin Trust Ratings who analyzes hospitals. People whose skills are in high demand and work under temporary contract rather than salary can take full advantage of shortages for their talents, according to Morrow. “This is a level of skill that requires advanced-level training that involves medicine, technology, and science, and all of those things are costly,” he says.
An important sign that rising costs remain manageable is that most companies haven’t passed them along to customers. Walmart Inc., the nation’s largest private employer, raised starting wages to $11 an hour in January and announced annual bonuses of as much as $1,000. But it’s cutting prices to remain competitive with Amazon.com Inc. and low-cost supermarket chains Aldi Inc. and Lidl US LLC. The same goes for packaged-goods companies. General Mills Inc. has acknowledged that attempts to hike prices for its Progresso soup and Yoplait yogurt ultimately hurt sales by driving shoppers to other brands. In freight transportation, BNSF Railway Co. has picked up market share from Union Pacific Corp. by underpricing it.
“We have to be a little bit cautious in inferring that wage growth is going to be a major constraint for business,” says Gregory Daco, head of U.S. macroeconomics for Oxford Economics Ltd. While some economists warn that rising inflation is a “late-cycle” phenomenon—i.e., a precursor of recession—“we don’t have clear evidence that we’re at the end rather than the middle of the cycle,” says Michael Englund, chief economist of Action Economics LLC in Boulder, Colo.
A key statistic to watch is unit labor costs, which are wages adjusted for productivity. They rose at an annual rate of 2.7 percent in the first quarter. But over the past year as a whole, the increase was only 1.1 percent. As long as companies’ unit labor costs don’t rise faster than the prices they charge, tight labor markets won’t be a problem.
The Fed’s preferred measure of inflation, the price index for personal consumption expenditures, is going to look high for a few months because a brief dip in prices for clothing, hotel rooms, airline fares, and other items has ended, says Ian Shepherdson, chief economist of Pantheon Macroeconomics. That might influence the Fed, he says. There’s a risk that Fed rate setters could react too quickly to signs of overheating. “As inflation climbs, so too will the risk of recession, because at some point policymakers will feel impelled to respond,” Ellen Zentner, chief U.S. economist of Morgan Stanley, wrote in a note to clients on May 2.
Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$1.1 billion and year to date flows stand at -$25.6 billion. New issuance for the week was $4.7 billion and year to date HY is at $83.2 billion, which is -20% over the same period last year.
(Bloomberg) High Yield Market Highlights
CCC yields saw the biggest drop since October 2017 as U.S. high yield firmed with rising oil and growing appetite for risk assets.
High yield spread fell to 336bps from 343bps at the start of the week
Investors, starved of supply, shrugged off outflows from retail funds
Most of the Primary issuance was the $3.2b issued on Wednesday
High-yield is best performing asset class in fixed income, led by CCCs
CCCs beats BBs, single-Bs, with positive YTD return of 1.90%
IG bonds have lost 3.46% this year
CCC spread also tightened most in 6 months yesterday
Moody’s said the U.S. speculative-grade default rate was projected to decline to 1.5% by April 2019
(Bloomberg) Arconic Cuts Outlook on Higher Aluminum Costs
Arconic Inc. sold off after the company slashed its forecast because of rising aluminum prices and business inefficiencies.
Adjusted profit will be 18 percent less than the previous estimate, the New York-based metals maker said in a statement. That trailed the lowest estimate of analysts surveyed by Bloomberg.
“It is clear that we have areas in need of operational improvement,” Chief Executive Officer Chip Blankenship, who took the reins in January, said in the statement. “We are updating our full year 2018 guidance due to rising aluminum prices and my deeper understanding of our operations.”
The comments reflect Blankenship’s challenge as he looks to revitalize Arconic after a bitter battle with Elliott Management Corp. last year. He has already pledged to review Arconic’s strategy and portfolio while moving the headquarters to a lower-cost location. More recently, growing tensions over aluminum and steel tariffs, as well as U.S. sanctions on Russian aluminum giant United Co. Rusal, have roiled metals producers and their customers.
(Hollywood Reporter) AMC Entertainment Posts Higher First-Quarter Earnings, Beats Estimates
Cinema giant AMC Entertainment posted higher first-quarter earnings and revenues on the strength of Black Panther and Jumanji‘s box-office returns and its Nordic Cinema Group Holding acquisition internationally.
Net earnings for the three months to March 31 climbed to $17.7 million against a year-earlier $8.4 million. Overall revenues rose 8 percent to $1.387 billion, exceeding a $1.35 billion analyst forecast.
“We are truly heartened by AMC’s start to 2018 and couldn’t be more excited about the prospects for the year after the record-breaking success of Avengers: Infinity Warearly in the second quarter,” AMC CEO Adam Aron said in a statement.
During an analyst call that followed the release of his latest results, the AMC boss took a bullish stance on his company’s prospects going forward, as Aron pointed to a bounce-back in early 2018 box office on the strength of Black Panther and Avengers ticket receipts after the “painful depths” of the summer 2017 multiplex business.
The exec argued market analysts who had questioned the prospects of movie theaters amid the rise of streaming content competition like Netflix and Amazon Prime had been proven wrong. “When Hollywood makes movies that people want to see, they flock to our theaters and they do so in huge numbers,” Aron added.
(Business Wire) B&G Foods Reports Financial Results for First Quarter 2018
Base business net sales for the first quarter of 2018 increased $1.1 million, or 0.3%, to $411.1 million from $410.0 million for the first quarter of 2017. The $1.1 million increase was attributable to an increase in net pricing of $1.2 million, or 0.3%, partially offset by a decrease in unit volume of $0.1 million.
For the first quarter of 2018, adjusted EBITDA, which excludes acquisition-related and non-recurring expenses and the non-cash accounting impact of the Company’s inventory reduction plan, was $89.4 million, a decrease of 2.9%, or $2.6 million, compared to $92.0 million for the first quarter of 2017. Adjusted EBITDA as a percentage of net sales was 20.7% for the first quarter of 2018.
Robert C. Cantwell, President and Chief Executive Officer of B&G Foods stated, “When we laid out our vision for 2018 earlier this year, we expressed our belief that during 2018 we would return to modest growth, stable margins and strong free cash flow generation, benefiting in part from our inventory reduction plan, and we delivered on those expectations in the first quarter.”
B&G Foods reaffirmed its guidance for full year 2018. Net sales are expected to be approximately $1.720 billion to $1.755 billion, adjusted EBITDA is expected to be approximately $347.5 million to $365.0 million and adjusted diluted earnings per share is expected to be approximately $2.05 to $2.25.
Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $0.7 billion and year to date flows stand at -$24.4 billion. New issuance for the week was $3.2 billion and year to date HY is at $78.5 billion, which is -21% over the same period last year.
(Bloomberg) High Yield Market Highlights
Junk bond issuance and inflows have resumed, with CCC-rated LBO supply highlighting the strength of risk appetite. Lipper reported an inflow for week ended May 2 after an outflow the prior week.
Four deals for $1.34b priced yesterday, two of them CCC credits
GFL Environmental, rated CCC, did a drive-by to fund an LBO by an investor consortium led by BC Partners
Strong fundamentals and steady growth are boosting junk bonds
Oil is hovering near a 3 year high amid reports that OPEC was likely to extend production cuts into 2019
Consensus at Milken Institute conference this week was that the credit markets would have a few more years of a smooth run as global growth was steady and fundamentals were sound
Credit cycle will extend, and there’s no fear of imminent recession
CCCs continued to top BBs, B, stocks and IG, with YTD positive returns of 1.25%
Stocks report negative returns YTD 1.06% and IG negative 3.38%
Moody’s notes that the number of companies rated B3 or lower declined and was down 22% from a year ago and 35% from its peak in 2016
“Decreasing number of lower-rated corporate issuers is a sign of declining or low default rate risk in the year ahead,” Moody’s analyst Julia Churson wrote
Moody’s forecasts default rate to decline to 1.7% by March 2019, helped by rising corporate earnings, abetted by fiscal stimulus
(Wall Street Journal) Watch Out: Junk Bonds Getting Junkier
One thing owners of junk bonds are usually sure of is that when the borrower defaults, they will get a veto on cash going to shareholders, to junior debtors or into new deals.
Not any more. Junk bonds financing private-equity firm KKR & Co.’s latest buyout subvert the usual order by allowing such payments to go ahead even after a formal default.
The $1.4 billion of bonds, to repay temporary borrowing for the buyout of Unilever PLC’s margarine business, mark a new low in the quality of covenants protecting lenders and are yet another sign of the wall of money chasing the higher yield on offer from junk bonds.
Several recent bonds have allowed what are known as restricted payments even when a company is in technical default — so that, for example, a planned takeover or joint venture wouldn’t be derailed.
Flora Food Group, Unilever’s business, appears to be the first explicitly to allow them after a formal “event of default,” which should put creditors at the front of the line.
This matters when it comes to assessing the risk of the market as a whole. Junk-bond enthusiasts tend to highlight the yield spread over Treasurys, which in the U.S. is much higher now than it was at the end of the last bull market in 2007 and about where it stood in 2014.
But the weakening of covenants means that losses are likely to be bigger if there is another wave of defaults, which ought to justify lower prices, and so higher spreads over Treasurys.
(New York Times) Sprint and T-Mobile C.E.O.s Are in Washington to Sell Their Merger
From the moment T-Mobile and Sprint announced their $26.5 billion merger on Sunday, the wireless carriers have positioned their proposed deal with an eye toward Washington. After all, regulators in the Obama administration blocked one of their previous efforts to combine.
This time around, the chief executives of the companies emphasized that merging would help them to:
Build a next-generation wireless network, one robust enough to keep up with China in a growing technological arms race; Create thousands of jobs, especially in rural areas; Keep prices low for consumers, especially as cable companies like Comcast try to enter the market.
The heads of both companies began a charm offensive in Washington on Tuesday
(Knowledge@Wharton) T-Mobile and Sprint: Will the Deal Go Through?
T-Mobile and Sprint, the nation’s third and fourth largest wireless telecom companies, have been trying to tie the knot for years. But concerns that regulators won’t approve a merger because it would reduce competition have kept them apart. Their antitrust concerns are not unfounded: In 2011, the U.S. Justice Department torpedoed AT&T’s planned $39 billion acquisition of T-Mobile. Three years later, Obama’s FCC chairman, Tom Wheeler, bluntly told Sprint he was skeptical such a deal would be approved.
That was then, this is now. Today’s FCC is more business friendly, chaired by Republican Ajit Pai and with a GOP majority among its commissioners.
But has the environment changed sufficiently that T-Mobile’s acquisition of Sprint will not be dead on arrival in Washington? “I’d be very surprised if Ajit went along with this,” said Gerald Faulhaber, Wharton professor emeritus of business economics and public policy and former FCC chief economist.
This is the third time that T-Mobile and Sprint reportedly talked about merging — and the same challenges remain. “I’d be surprised if the third time is a charm. Market shares are pretty high. Post-merger, you’d have three firms with more than 30% of the market each. Under the orthodox approach that the merger guidelines take, that would be a clearly challengeable merger,” said Herbert Hovenkamp, a Penn Integrates Knowledge professor at the University of Pennsylvania, with dual appointments at Wharton and Penn Law
Hovenkamp pointed to another hurdle: Unlike other wireless telecom mergers that need approval by both the FCC and Justice Department, this one also needs to be greenlit by The Committee on Foreign Investment in the United States (CFIUS). That’s because T-Mobile is owned by Germany’s Deutsche Telekom and Sprint is majority owned by SoftBank of Japan. “We’ve got three agencies this time that need to approve this merger,” he said.
Moreover, the committee, which falls under the U.S. Treasury, is subject to the presidential executive order, Hovenkamp said. In March, the Trump administration sank the acquisition of U.S. chipmaker Qualcomm by Broadcom, a U.S. chipmaker acquired by a Singaporean company that is now relocating back to America. Trump “could probably do that this time again,” he said. “There’s a whole lot of uncertainty facing this merger.”
