Category: Insight

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Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.6 billion and year to date flows stand at -$23.6 billion.  New issuance for the week was $3.7 billion and year to date HY is at $65.0 billion, which is -27% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• Junk bond spreads tightened the most in nine weeks and CCC yields fell to a 5-week low as U.S. funds saw inflows and the year-to-date return turned positive.
• Yields dropped across ratings in 6 of the last 9 sessions and have fallen for 4 consecutive sessions this week, amid strong technicals boosted by light supply, and WTI oil at a 40-month high
• Spreads have narrowed in seven of last nine sessions
• Year-to-date returns for junk bonds turned positive for the first time since early February, with a gain of 0.05% in the index, compared to a 2.38% loss in IG
• Resilient junk bonds brought investors home after more than 10 weeks of no material inflow
• Rebounding equities, steadily declining volatility — with the VIX hovering near and below 20 for last two weeks — boosted junk bonds
• Supply is expected to be light as the earnings season was in progress
• New issue pricing reinforced the strength of high yield as Drax Finco and J.B. Poindexter priced at the tight end of talk, with orders more than 3x the offer
• Earlier this week, TopBuild advanced its pricing schedule, increased the size of the offer, priced at the middle of talk, suggesting junk investors were not avoiding risk
• CCCs continued to outperform BBs and single Bs, with positive YTD returns of 1.25%, BBs were the worst with negative YTD returns of 0.92%, single-Bs turned positive with 0.54%

(Reuters)  Icahn to sell Federal-Mogul to Tenneco for $5.4 billion 

• Activist investor Carl Icahn said on Tuesday he was selling auto parts maker Federal-Mogul to Tenneco Inc in a $5.4 billion deal, unloading an investment he has held for nearly two decades and picking up a new stake in Tenneco.
• Tenneco plans to separate into two independent, publicly traded companies – one focusing on powertrain products and the other on auto parts such as suspensions and axle dampers – after the deal closes.
• The new bulked up powertrain technology company will likely benefit from the fact that internal combustion engine parts and tailpipe exhaust scrubbing technology will be needed by automakers for a long time to come, before they can be replaced by newer technologies such as fully electric cars.
• The aftermarket parts company would provide a potentially steady cash flow.
• “Going to market with well-recognized brands, more product categories, greater coverage and expanded distribution capabilities is a strong formula for capturing growth, particularly in China,” Tenneco Executive Chairman Gregg Sherrill said.

(Forbes)  Why T-Mobile And Sprint Are Rekindling Their Merger Talks

• Sprint and T-Mobile appear to be back at the negotiating table, marking the third time that the two companies are exploring a potential combination. While a potential merger is likely a net positive for both companies and the broader U.S. wireless industry, it remains unclear as to how much has changed since the two companies called off their last round of merger talks in 2017.
• The biggest reason the two carriers are looking to restart talks is likely to avoid the duplication of future capital expenditures, as the wireless industry transitions from 4G technology to next-generation 5G technology. Sprint has a deep portfolio of 2.5 GHz spectrum holdings that could be used for 5G deployment, allowing the combined company to avoid some outlays that they may otherwise have to undertake individually. Moreover, wireless is a very high fixed cost business, on account of sizable network operation and maintenance costs as well as sales and marketing expenses. The present value of synergies stemming from a deal could stand at upwards of $20 billion.Additionally, the carriers may also have better pricing power in a saturating wireless market if a deal goes through.
• The last round of talks fell through in late 2017, as the two companies were unable to agree on who would have control over the combined entity, and it’s not clear how much has changed since last year. T-Mobile’s majority owner Deutsche Telekom (which owns a ~63% stake) apparently views its ability to consolidate T-Mobile’s earnings with its financials as key, given that the U.S. carrier is one of its most valuable assets. This means that the company could be willing to put in more money to increase its effective stake in the joint entity and retain control. While Sprint is likely to have less bargaining leverage in a potential deal, considering its comparatively challenging financial position, with over $30 billion in long-term debt, its parent Softbank may still want to keep control of the joint entity. Softbank has been doubling down on the Internet of Things space, and it’s likely that it views Sprint as a crucial part of this plan, given its nationwide wireless network in the U.S.

(Wall Street Journal)  Wynn Resorts in Early Talks to Sell Boston-Area Casino Project to MGM

• Wynn Resorts has been in talks to sell its partially built Boston-area casino project to rival MGM Resorts International, MGM according to people familiar with the matter, as Massachusetts regulators continue their investigation into the company’s handling of sexual-misconduct allegations against founder Steve Wynn.
• The talks, which are over the Wynn Boston Harbor property and no other parts of the company’s gambling empire, are at an early stage and may not result in a deal, the people said.
• Regulatory issues surrounding any potential deal would be complex, since Massachusetts forbids companies from operating more than one casino in the state, and MGM is planning to open one in Springfield soon, they added.
• Wynn Resorts estimates the Massachusetts project, scheduled to open next year, will cost a total of $2.5 billion to build, making it one of the largest U.S. casino projects ever undertaken outside Las Vegas.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.2 billion and year to date flows stand at -$24.2 billion.  New issuance for the week was $1.8 billion and year to date HY is at $60.0 billion, which is -28% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• Junk bond yields continued to head south as they dropped to a two-month low at close, with the biggest decline in more than seven weeks. Yields fell across ratings for three consecutive sessions.
• Spreads also tightened across ratings and saw the largest move in more than seven weeks as stocks continued to climb; the VIX dropped to a two-week low
• Strength and resilience of the market was also reflected in the pricing of two drive-by offerings amid 11 weeks of outflows from retail funds
• Two drive-by bond offerings were from the energy sector – Resolute Energy and Targa Resources; Targa Resources had orders of more than $3b and priced in the middle of talk
• Primary market priced four deals for $1.8b, which suggested junk bond investors were not heading to the exit
• While yields dropped and spreads tightened, junk investors have turned increasingly cautious and selective in credit-picking, a mood reflected in the pricing of American Greetings Corp yesterday
• AM was the second deal this week after McDermott International to price at a deep discount and offer double-digit yields
• CCCs continued to beat BBs and single-Bs with positive YTD returns of 0.55%
• CCCs still beat stocks and investment-grade bonds, with IG’s YTD returns negative 2.68%
• BBs were the worst with negative YTD returns of 1.41%, followed by single-Bs negative 0.24%
• The default rate should move lower in 2018 amid a growing economy and improving credit conditions in the commodity sector, Moody’s John Puchalla wrote in note

(Business Wire)  Wireless Carrier Selects Zayo for Significant National Expansion

• A major wireless carrier has selected Zayo for fiber-to-the-tower (FTT) to new macro towers in 30 markets across 21 states. The deal is an expansion of an agreement announced in September 2016. Inclusive of both contracts, Zayo will connect thousands of macro towers for the customer. The contract is Zayo’s largest mobile infrastructure contract to date.
• The solution includes deployment of dark fiber infrastructure, in some cases replacing legacy Ethernet. The new infrastructure will support the carrier’s strategy of improving coverage and capacity across its network to accommodate increasing traffic and to prepare for 5G. The deployment will leverage Zayo’s existing fiber network and includes construction of hundreds of route miles of fiber.
• “This undertaking is the result of a trusted relationship with the customer,” said Dan Caruso, chairman and CEO of Zayo. “As they continue to densify to meet the growing demand for bandwidth, dark fiber provides the optimal long-term solution.”
• This agreement pertains to macro towers. Under other contracts, Zayo is deploying small cell infrastructure for this customer. In many cases, these are full turnkey implementations, including RF design, site acquisition, permitting and installation of equipment.

(Bloomberg)  AMC Cinemas Tiptoes Into Saudi Arabia as Theater Ban Lifted

• AMC Entertainment, controlled by China’s Dalian Wanda, was granted the first cinema license in Saudi Arabia and plans to open 100 theaters with the country’s Public Investment Fund.
• AMC, the world’s largest exhibitor, and the Development & Investment Entertainment Co., a subsidiary of Saudi Arabia’s PIF, plan to open as many as 40 cinemas within five years and 60 more by 2030, according to a statement Wednesday from the Leawood, Kansas-based company.
• There are no commercial theaters in Saudi Arabia and plans to open them present challenges for the conservative kingdom, such as whether men and women can sit together and what types of movies will play. The partners are aiming for “50 percent market share of the Saudi Arabian movie theater industry,” the parties said. The first AMC in Saudi Arabia will open in the capital Riyadh on April 18.
• The announcement coincides with the U.S. visit by Crown Prince Mohammed bin Salman, who is looking to burnish his image as the leader of a more open Saudi economy.

(Modern Healthcare)  Dialysis industry on alert as Calif. union pushes for reimbursement cap

• A California fight between dialysis clinics and a major hospital workers’ union has healthcare industry investors and stakeholders jittery as the union gets ready to push a ballot initiative to cap private insurance reimbursements for dialysis.
• The Service Employees International Union–United Healthcare Workers West, one of the country’s largest hospital workers’ unions, has gathered more than 600,000 voter signatures for a statewide ballot measure to cut off dialysis clinics’ commercial insurance reimbursement at 115% of care costs, which would slash their current rates.
• The union claims the proposal would pressure clinics to improve care for dialysis patients by reinvesting extra revenue into staffing and other efforts to raise standards in order to bump up the cost of care.
• But critics of the initiative say the measure could spur reverberating losses for corporate dialysis giants, hospitals and even state and federal coffers.
• Most of dialysis market in California belongs to Colorado-based DaVita Healthcare Partners and the German company Fresenius Medical Care, who have about 70% of the state market share. The 30% remaining market share belongs to independent or not-for-profit clinics. California has just under 600 dialysis clinics.
• California has an extra high rate of growth in dialysis patients — about 5% every year — and there are already more than 68,000 dialysis patients in the state.
• But SEIU members say dialysis clinic regulations are far too lax, and facilities have been plagued by issues like rat and cockroach infestations or staffing shortages that leave technicians with only minutes to clean up stations before another patient receives treatment.
• “With regards to staffing it’s a free-for-all,” said union member and longtime dialysis technician Emanuel Gonzales, who is helping to lead the union campaign and has worked in several dialysis centers across San Bernardino County and the Inland Empire in California. “They pretty much operate anyway they like. If something happens, they could blame workers.”

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$1.0 billion and year to date flows stand at -$22.7 billion. New issuance for the week was $3.3 billion and year to date HY is at $53.1 billion, which is -27% over the same period last year. 

(Bloomberg) High Yield Market Highlights

• Junk bonds have been impervious to tumbling stocks and rising VIX amid threats of potential trade war, as the new issue market priced Cequel Communications, a CCC-credit, in a drive-by offering yesterday.
• Yields were resilient as they rose by just 0.6% across ratings, while stocks plunged more than 2.5%, the biggest drop in six weeks; VIX rose more than 30%, also the biggest jump in six weeks
• Investors, though cautious, also seem to shrug off another outflow from retail funds
• There was no evidence of any panic selloff as yields were on a holding pattern and investors on watch mode
• Oil was still near a 6-week high and has been rising in 6 of the last 10 sessions
• BofAML strategist Oleg Melentyev wrote in note earlier in the week that technicals are still constructive, and pressure would build up to put cash to work amid light supply; April would see coupon generation of about $7.4b in cash
• CCC credits continued to outperform BBs and single-Bs with positive YTD returns of 0.47%, as additional evidence of the strength of junk bond market
• BBs were the worst, with negative YTD returns of 1.55%, followed by single-Bs negative 0.36%
• Junk bond market was now stronger qualitatively, with issuers rated B3 and lower declining in numbers; Moody’s notes that issuers rated B3 and lower dropped to 13%, below the long-term average of 15% for the 6th straight month  

• (CNBC) Fed hikes rates and raises GDP forecast again 

• Interest rates are going up again, thanks to a well-telegraphed Federal Reserve move Wednesday.
• Central bankers, led by Jerome Powell in his first meeting as chairman, approved the widely expected quarter-point hike that puts the new benchmark funds rate at a target of 1.5 percent to 1.75 percent. It was the sixth rate hike since the policymaking Federal Open Market Committee began raising rates off near-zero in December 2015.
• Along with the increase came another upgrade in the Fed’s economic forecast, and a hint that the path of rate hikes could be more aggressive. The market currently expects three hikes for 2018, and that remained the baseline forecast, but at least one more increase was added in the following two years.
• “The economic outlook has strengthened in recent months,” the committee said in its post-meeting statement, a sentence that had not been in previous releases. The language came even though the committee said earlier in the statement that “economic activity has been rising at a moderate rate,” a seeming downgrade from January’s characterization of a “solid” rate.
• Fed officials raised their forecast for 2018 GDP growth from 2.5 percent in December to 2.7 percent, and increased the 2019 expectation from 2.1 percent to 2.4 percent.
• However, growth is likely to cool after, with the 2020 forecast holding at 2 percent and the longer-run measure still at 1.8 percent.
• Inflation expectations, on which the market has been laser-focused lately, changed little. The 2018 forecast remains just 1.9 percent for both core and headline inflation — core excludes food and energy prices. For 2019, the forecast for core personal consumption expenditures edged higher to 2.1 percent from 2 percent, while headline remained at 2 percent. The committee nudged the 2020 level up from 2 percent to 2.1 percent for both core and headline.
• The benign inflation expectations are particularly remarkable considering that Fed officials now see unemployment running even lower than before. Currently at 4.1 percent, officials now see the rate for 2018 at 3.8 percent, down from the 3.9 percent December forecast, and 2019 falling all the way to 3.6 percent from the original 3.9 percent outlook. The 2020 forecast also fell, from 4 percent to 3.6 percent.
• The so-called dot plot, which indicates individual members’ rate expectations, took a hawkish tilt. While a three-hike policy remains the baseline for 2018, the committee pushed 2019 from 2½ to three increases and 2020 from 1½ to two. The funds rate for 2020 is now expected to be 3.4 percent from the initial 3.1 percent, though the longer-run forecast rose just a bit, from 2.8 percent to 2.9 percent.  

• (Bloomberg) As Commodities Roar, Africa Wants Bigger Slice of Mining Pie

• The collapse in commodities through 2015 hobbled some of Africa’s biggest resource economies, stunting growth and leaving budgets short. Since then a recovery in prices has sent the continent’s biggest miners soaring, boosted profits and rewarded shareholders with bumper payouts. But a lack of returns to governments is drawing a backlash from Mali in the Sahara to Tanzania on the Indian Ocean.
• Zambia is the latest flash point. Africa’s second-biggest copper producer slapped a $7.9 billion tax assessment on First Quantum Minerals Ltd. and said it’s planning an audit of other miners in the country. Companies operating in Zambia include units of Glencore Plc and Vedanta Resources Plc.
• Next door in the Democratic Republic of Congo, Glencore, the world’s biggest commodity trader, is dealing with a dispute over a new mining code that dramatically boosts taxes, while major gold producer Mali has reportedly saidit might follow Congo’s example. Tanzania has all but crippled its biggest gold miner Acacia Mining Plc, a unit of Barrick Gold Corp., with export bans and a whopping $190 billion tax bill.