Category: Insight

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.0 billion and year to date flows stand at -$17.0 billion.  New issuance for the week was $11.4 billion and year to date HY is at $267 billion, which is up 26% over the same period last year. 

(Bloomberg)  High Yield Corporates Stalled as Monthly Returns Again Flat

• High yield corporate bonds, much like their high grade counterparts, continue to move sideways in 4Q to a U.S. Congress undertaking tax reform for stimulus clues. Communications sector spreads moved wider for the year, while miners and other basic industries remain the best performers for 2017.
• High yield corporates continue to lack direction with the Bloomberg Barclays U.S. High Yield Index total returns almost flat for November and 4Q, much like the investment grade counterpart. Corporate bond gains stalled as interest rates rose under the Federal Reserve’s less accommodative bias, while credit spreads near their tightest in three years exhausted momentum to narrow further, awaiting cues from a Congress debating tax reform.
• High yield gained a solid 7.2% year-to-date in line with the five year average. CCC rated debt has led gains, with 10% in total returns as stronger commodity prices and refinancing-friendly interest rates have benefited distressed issuers.
• Corporate junk spreads retraced early November trends to end just 6 bps wider for the month as gauged by the Bloomberg Barclays U.S. High Yield index OAS to Treasuries. Communications, the most indebted sector at 20% of the index struggled again, averaging spreads that were 41 bps wider for the month. It’s now the only sector trading at wider spreads than at the start of 2017. At the other end, metals and mining issuers led basic industries sector spreads to 150 bps tighter for the year on rising commodity prices.
• Bonds of Frontier Communications, among the largest issuers in the sector, averaged almost 8% total return losses in November as the company continues to struggle with high debt loads following the acquisition of Verizon assets early last year. Frontier returns have fallen 13% year-to-date.

(Wall Street Journal)  Cineworld to Buy Regal in $3.6 Billion Movie Theater Deal

• British movie theater operator Cineworld Group PLC has agreed to buy American counterpart Regal Entertainment Group for $3.6 billion, creating the world’s second-largest cinema operator.
• Cineworld said the deal would give it a meaningful footprint in the U.S.—the biggest box office market—and create a company with more than 9,000 screens.
• It added that the combined group’s scale will help it mitigate any volatility in particular markets and match the global nature of rivals, including industry leader AMC Entertainment Holdings Inc.

(Business Wire)  DAVITA SELLS DAVITA MEDICAL GROUP TO OPTUM FOR ABOUT $4.9B CASH 

• Optum, a leading health services company, and DaVita Medical Group, one of the nation’s leading independent medical groups and a subsidiary of DaVita Inc. are combining. The agreement, entered into on December 5, 2017, calls for Optum to acquire DaVita Medical Group for approximately $4.9 billion in cash. The transaction is expected to close in 2018 and is subject to regulatory approval and other customary closing conditions.
• DaVita Medical Group will join with Optum’s physician-led primary, specialty, in-home, urgent- and surgery-care delivery services business. The combination will improve care quality, cost and patient satisfaction through integrated ambulatory care delivery systems enabled by information technology and supportive clinical services. Optum’s data, analytics, technologies and clinical expertise will help DaVita Medical Group physicians deliver even higher quality care more effectively to the patients they serve. With medical groups in California, Colorado, Florida, Nevada, New Mexico and Washington, DaVita Medical Group will expand the market reach of Optum’s strategic care delivery portfolio, including Surgical Care Affiliates, MedExpress and HouseCalls. Patients will further benefit from the sharing of best practices across both organizations.
• “I am so proud of the DaVita Medical Group accomplishments, including our excellent clinical outcomes as reflected in our star ratings performance, our strong emphasis on growing physician leaders, our teammate engagement and advancing the care model,” said Kent Thiry, chairman and CEO of DaVita Inc.
• “Combining DaVita Medical Group and Optum advances our shared goal of supporting physicians in delivering exceptional patient care in innovative and efficient ways while working with more than 300 health care payers across Optum in ways that better meet the needs of their members,” said Larry C. Renfro, CEO of Optum.

(Reuters)  Toshiba, Western Digital aiming to settle chip dispute next week

• Toshiba Corp and Western Digital Corp have agreed in principle to settle a dispute over the Japanese firm’s plans to sell its $18 billion chip unit and aim to have a final agreement in place next week, sources familiar with the matter said.
• The board of the embattled Japanese conglomerate approved a framework for a settlement on Wednesday, one of the sources said.
• The potential for Western Digital – Toshiba’s partner in its main semiconductor plant and jilted suitor in the auction – to block a deal has been seen as the main obstacle to the planned sale of the unit to a Bain Capital-led consortium.
• The settlement under discussion calls for Western Digital to drop arbitration claims seeking to stop the sale in exchange for Toshiba allowing it to invest in a new production line for advanced flash memory chips that is slated to start next year, two sources said.

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.3 billion and year to date flows stand at -$15.9 billion. New issuance for the week was $6.3 billion and year to date HY is at $255 billion, which is up 22% over the same period last year.

(Bloomberg) Junk Investors Welcomed Debut Offerings as Yields Held Steady

• Junk bond issuers kicked off the week on a busy note, adding $2.5b to the pipeline; Starwood Property drove by and priced $500m at the tight end of talk.
• Two of the four issuers, MATW and MPVDCN, were tapping the debt markets for the first time, suggesting investors were willing to consider unknown credits
• Junk yields were steady as oil prices held firm and were off a tad from the 29-mo. high on Friday; stocks were near new highs
• GNC Holdings dropped its $500m 5NC3 notes offering and boosted its loan as bond investors strongly resisted adding on a retail name to their portfolios indicating investors were cautious in assessing risk
• The supportive environment for high yield continued amid steady stocks, strong oil and light supply
• Other factors that backed high yield remained strong: the Moody’s Liquidity Stress Indicator was at a new record low of 2.6% as of mid-November, suggesting strong corporate liquidity and issuers having ready access to capital markets
• Corporate default rates declined and the covenant stress index slipped to 2.3% in Oct., suggesting low risk of issuers violating financial maintenance covenants
• Steady economy, declining default rates, low volatility, rising oil prices and steady stocks augur well for high yield  

(Bloomberg) Rare Expansion for Corporate Junk on Busy Issuance, Downgrade

• The U.S. corporate high yield market has expanded in November, only the fourth monthly size gain in the past year as gauged by the Bloomberg Barclays U.S. Corporate High Yield Bond Index. Active primary, as well as a number of downgrades, will increase the net roster along with the index capitalization in the Dec. 1 rebalancing.
• Membership in the Bloomberg Barclays U.S. Corporate High Yield Bond Index is due to expand by a net 14 securities in the Dec. 1 rebalancing, only the fourth instance of roster growth in the past 12 rebalancing cycles. The primary market heated up in November on rising oil prices and credit spreads near the tightest levels in three years. The median net membership change over the past 12 rebalancings remains at negative 11 bonds.
• The Bloomberg Barclays U.S. Corporate High Yield Bond Index capitalization will add an estimated $4 billion in the Dec. 1 rebalancing, with $24 billion in bonds joining vs. $20 billion exiting. New issues account for $19 billion, with energy companies particularly active in the primary market as crude oil rose above $55 a barrel. 

(Deal Reporter) Regal, Cineworld Said to Reach Agreement on $23/Share

• Cineworld and Regal reached an agreement in principle on RGC takeout price of $23/share
• Talks are still ongoing and not the final agreement yet, though deal expected in next few days
• Offer price not likely to be further improved, seen as firm
• Funding for Cineworld’s bid for Regal Entertainment looks “stretched,” citing a top Cineworld holder, who said there’s a question of how much leverage the combined company can handle.
• RGC/Cineworld implied post-deal net debt to Ebitda, prior to any equity raise, likely >7x vs AMC’s 5.6x
• Cineworld in process of meeting with large holders this week, holders that will have input on the company’s likely equity offering  

(Modern Healthcare) Healthcare industry braces for multiple hits from Senate tax bill

• The sprawling tax cut legislation speeding through Congress is likely to result in major changes in healthcare, including significant insurance coverage losses, higher premiums, tighter access to capital, and greater margin pressure.
• Experts caution that the legislation will have big downstream effects on funding for Medicare, Medicaid, Affordable Care Act subsidies and other federal and state healthcare programs. That’s because the projected $1.5 trillion increase in the federal budget deficit resulting from the tax cuts would put pressure on Congress to slash healthcare spending.
• Indeed, Sen. Marco Rubio (R-Fla.) said Wednesday that cutting taxes must be followed by restructuring and shrinking spending on entitlement programs, including reducing benefits and raising the eligibility age for Medicare and Social Security.
• Insurers and providers strongly oppose the Senate tax bill’s provision, likely to be adopted by the House, that would immediately repeal the Affordable Care Act’s tax penalty on people who don’t obtain health insurance. They warn that would hurt market stability by leading healthier people to drop coverage, thus driving up premiums and pushing insurers to exit the exchange market. 
• Healthcare industry analysts also are worried about the Senate bill’s repeal of the federal deduction for state and local taxes paid by individuals. That likely would create pressure in states with relatively high state and local taxes, like California and New York, to reduce taxes, leading to less revenue for funding Medicaid and other healthcare programs.
• And that could hurt providers and insurers. “We already are in a world where operating margins are being pressured and are generally declining,” said Martin Arrick, managing director of S&P Global Ratings’ not-for-profit group. “This will be one more event that puts additional pressure on provider margins.” 

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$5.0 billion and year to date flows stand at -$15.3 billion. New issuance for the week was $6.2 billion and year to date HY is at $243 billion, which is up 20% over the same period last year.

 (Bloomberg) Lows Are in for High Yield Spreads as Cycle Moves in Double Time

•  High yield’s 326-bp option-adjusted spread (OAS) of Oct. 24 may mark the lows of this cycle amid muted fundamental gains and low absolute yields. That spread compares with the 323-bp nadir of the last tightening cycle that ended in 2014. The current tightening cycle has been almost twice as rapid as the last.
• A nascent correction in high yield, which saw OAS widen 53 bps from multiyear lows in late October, may have room to run. The progression of the rally from early 2016 wides to today’s levels echoes the prior 2011-14 cycle, albeit at twice the pace. The first leg of the correction from the June 2014 lows pushed spreads back above 400 bps and reached 552 bps within six months, mostly mirroring the early stages of the oil-price unwind. Catalysts for a continued selloff are less explicit this go-round.
• Spread-widening from the Oct. 24 tights has been paced by weakness in communications and non-cyclicals, while energy has led after trailing for much of 2017. Bonds from Frontier and CenturyLink in wirelines, and those of Community Health in healthcare, have shown some of the steepest losses. The two sectors represent about 33% of the overall high yield index.
• Leverage has shown modest improvement vs. year-ago levels, lower by about a quarter turn, though it remains high in historic terms. That contrasts with the spread move from early 2016 that dropped OAS to prior-cycle lows. Further, the pace of improvement in fundamentals — from leverage to interest coverage — has flattened as oil prices have normalized, with leverage across most sectors actually near flat to higher over the last year. 

(PR Newswire) Suburban Propane Announces Financial Results

• Adjusted EBITDA increased $20.0 million, or 9.0%, to $243.0 million in fiscal 2017 from $223.0 million in the prior year. Net income for fiscal 2017 was $38.0 million, compared to $14.4 million in fiscal 2016. Revenues for fiscal 2017 of $1,187.9 million increased $141.8 million, or 13.6%, compared to the prior year, primarily due to higher retail selling prices associated with higher wholesale costs, combined with higher volumes sold. Retail propane gallons sold in fiscal 2017 increased 6.0 million gallons, or 1.4%, to 420.8 million gallons.
• In announcing these results, President and Chief Executive Officer Michael A. Stivala said, “Fiscal 2017 presented another challenging operating environment as a result of the impact on customer demand arising from the unprecedented, second consecutive record warm winter heating season, as well as the devastating effects of the two Category 4 hurricanes.  Through it all, the resiliency of our people, and our preparedness coming into the year, contributed to a meaningful improvement in our operating performance; including a 9% increase in Adjusted EBITDA compared to the prior year.”
• Concluding his remarks, Mr. Stivala said, “As we enter fiscal 2018, one of our goals will be to focus on restoring our balance sheet strength to best position the business for long-term profitable growth.  With the previously announced reduction in our annualized distribution rate, we have reduced our annual cash requirements to a level that provides added downside protection in the event of a sustained period of warm weather and, with an improvement in weather, should provide enhanced flexibility to reduce debt and make investments in line with our strategic initiatives.  We have adapted our business model to the recent warm weather trends, as evidenced by the improvement in earnings for fiscal 2017 and, as we enter a new heating season, our people are prepared to continue providing the highest level of service quality and total value to our customers in each market we serve.”  

(Financial Times) Altice to pull back on acquisitions and focus on cutting debt 

• Altice has promised to get its debt under control after ruling out more blockbuster takeovers and expensive content rights after an alarming collapse in its share price over the past two weeks.
• Dennis Okhuijsen, chief financial officer, told investors at the Morgan Stanley Technology, Media & Telecom Conference that the telecom company would now focus its efforts on deleveraging the business. “We are very focused on no M&A and to go back to the basics,” he said. “We take deleveraging very seriously,” he added, raising the prospect of non-core asset sales, including its mobile masts.   Mr. Okhuijsen also ruled out spending more money on content.
• Altice shares have fallen sharply since it issued a poorly received trading statement two weeks ago. Michel Combes, chief executive, resigned last week as part of a management shake-up that saw founder Patrick Drahi take the reins of the company.
• The collapse in the shares has called its aggressive acquisition strategy into question only months after it was linked with a $185bn bid for US cable company Charter Communications.

(Environment Analyst) Construction boom fuels AECOM 

• AECOM has reported a year of revenue growth, record orders and free cash flow in its latest financial results. However, the strong performance of its construction services offset a decline in design and consulting.
• AECOM’s full year revenue of $18.2bn for the twelve months ending 30 September 2017 was 4.6% up on the prior year, boosted by a particularly strong fourth quarter which saw revenue up 12% year-on-year to $4.9bn. Organic growth of 3% for the twelve month period was boosted by a further $270m contribution from acquisitions.
• Net income jumped 158% to $421m. As a result the firm was able to reduce its debt by 9.9%. Although still a substantial figure at $3.1bn, AECOM’s debt has now fallen by $1.4bn since the closing of the URS acquisition in Q4 2014.    

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$1.1 billion and year to date flows stand at -$9.1 billion. New issuance for the week was $5.1 billion and year to date HY is at $237 billion, which is up 18% over the same period last year.

 (Bloomberg) Junk Bonds on Wait and Watch Mode

•  Junk bonds slowed down a bit amid lack of clarity on the new tax initiatives, together with concerns about rate risk and the future of the monetary policy as William Dudley, the president of NY Fed, announced his retirement.
• The Federal Reserve will miss three of its governors next year, leading to new faces on the committee
• While junk bonds have lost some spring in their step, there has been no material change yet to the supportive backdrop as oil prices saw the biggest jump in more than 3 months and closed at a new 28-mo. High
• The unveiling of the new tax policy by the House rattled highly leveraged companies, as the new proposal considered a cap on interest deductibility
• Clearly, investors are still backing risk as Windstream increased its bond offering and priced at the tight end of talk even as the issuer was dealing with threats of litigation amid an overall struggling communications industry

(Bloomberg) Teva’s Schultz Faces Dwindling Choices as Rating Cut to Junk

• Teva Pharmaceutical Industries Ltd. Chief Executive Officer Kare Schultz is finding himself in the hot seat in his first week on the job with rapidly shrinking options to halt the slide in the Israeli company’s securities after its debt was cut to junk overnight.
• Fitch Ratings cited the “significant operational stress” that the world’s biggest maker of copycat drugs faces at a time when it needs to pay down debt, and pared its rating by two levels to non-investment grade late on Monday. Teva’s debt obligations are almost three times its market value following an ill-timed $40 billion acquisition last year of Allergan Plc’s generics business.
• “We find it troubling that management, which presumably met with Fitch before the downgrade, was not able to convince the rating agency that it would take more dramatic deleveraging actions in order to preserve investment grade ratings,” Carol Levenson, an analyst at bond research firm Gimme Credit, said in a report.

  (Business Wire) B&G Foods to Appoint Bruce C. Wacha as Chief Financial Officer

• B&G Foods, Inc. announced today that it will appoint Executive Vice President of Corporate Strategy and Business Development, Bruce C. Wacha, to Executive Vice President of Finance and Chief Financial Officer, effective November 27, 2017. As Chief Financial Officer, Mr. Wacha will oversee the Company’s finance organization and be responsible for all financial and accounting matters. He will also continue to oversee the Company’s corporate strategy and business development, including mergers & acquisitions, capital markets transactions and investor relations. He will continue to serve on the Company’s executive management team, reporting to President and Chief Executive Officer, Robert C. Cantwell.
• “Since joining our executive team in August, Bruce has demonstrated excellent leadership skills, financial expertise and an excellent work ethic,” stated Mr. Cantwell. “I’m delighted to announce Bruce’s appointment to CFO. Bruce is an experienced and talented executive and after working with Bruce the past few months I am confident that he is the right person to lead our finance organization and help us achieve our growth objectives.”
• Mr. Wacha joined B&G Foods from Amira Nature Foods, where he spent three years as that company’s chief financial officer and executive director of the board of directors. Prior to joining Amira Nature Foods, Mr. Wacha spent more than 15 years in the financial services industry at Deutsche Bank Securities, Merrill Lynch and Prudential Securities, where he advised corporate clients across the food, beverage and consumer products landscape. Mr. Wacha earned a bachelor of arts and a master of business administration from Columbia University’s Columbia College and Columbia Business School.

(Moody’s) B&G Foods Unsecured Debt Rating Raised One Notch to B2

(Variety) Theater Chain AMC Entertainment Slides to $42.7 Million Loss, Blames Box Office

• Citing lousy box office performance, AMC Entertainment Holdings has reported a third-quarter loss of $42.7 million, compared with earnings of $30.4 million for the 2016 quarter.
• “We have been predicting weakness in the third quarter industry box office, due to the quantity and subject matter of the films that were scheduled to be released,” said Adam Aron, president and CEO. “Not surprisingly, our foreshadow was accurate.”
• The third quarter was one of the roughest in recent years for the domestic box office with Sony’s “The Dark Tower” and STXfilms’ “Valerian and the City of a Thousand Planets” falling short of expectations. August box office was the lowest in a decade.
• “In our view, the weakness of the summer box office is not indicative of a long-term trend, especially immediately after two and a half years of record box office performance and just before what we expect will be strong and robust consumer demand through year end,” he said. “We are similarly confident and excited about the film slate that is coming in 2018 and again in 2019. Accordingly, we remain optimistic about the viability and strength of the movie theatre industry generally, and of AMC specifically.”

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.6 billion and year to date flows stand at -$8.0 billion. New issuance for the week was $2.7 billion and year to date HY is at $231 billion, which is up 19% over the same period last year.

(Bloomberg) Historical Fundamentals: High Yield Corporates

• 3Q is poised to deliver a sixth-straight quarter of Ebitda margin expansion across the high yield index, though such gains have resulted in only a marginal improvement in leverage trends. Double Bs have seen more fundamental improvement vs. single B, while commodity sectors have been notable outperformers. Almost half the Russell 1000 has reported 3Q results to date.
• Double B total debt-to-Ebitda is modestly lower vs. year-ago levels, though remains almost half a turn above the 10-year average. Basic industries, consumer cyclicals and transportation have leverage below the long-term average, while other sectors are higher, notably energy and technology. The BB technology sector has become a more frequent issuer over the last decade amid mergers such as Dell-EMC and increased leverage at more cyclical memory suppliers such as Western Digital and Micron.
• Ebitda margin has increased almost 200 bps vs. year-ago levels, given 3Q quarter-to-date earnings reports, paced by gains in the energy sector, where margins have expanded to 21.5% from 4.2% for 3Q16. Only consumer staples have seen margins decline over the period, though leverage for the sector is also lower on both a gross and net basis. Free cash flow trends across single B corporates are relatively unchanged on the year, though up from the flat-to-negative levels of 2013-15.

(The Verge) T-Mobile makes Sprint new offer in hopes of saving merger

• T-Mobile and Sprint aren’t calling it quits on their potential merger yet despite recent disagreements over which side would have control over the combined company. The Wall Street Journal reports that T-Mobile US has restarted talks by presenting Sprint with a revised offer, and it’s still possible that a deal could be struck “within weeks.” T-Mobile CEO John Legere and Sprint CEO Marcelo Claure spoke on Wednesday, with Legere making it clear that T-Mobile doesn’t want the deal to collapse.
• Earlier this week, SoftBank chairman Masayoshi Son reportedly wanted to walk away from negotiations after his shareholders expressed concern about handing over control of Sprint if the merger were successful. Deutsche Telekom would presumably hold a majority stake in a combined T-Mobile/Sprint, but SoftBank has reportedly been exploring ways to guarantee itself a powerful say in the company’s direction.

(Business Wire) Community Health Systems, Inc. Announces Third Quarter 2017 Results

• Net operating revenues for the three months ended September 30, 2017, totaled $3.666 billion, a 16.3 percent decrease, compared with $4.380 billion for the same period in 2016. Adjusted EBITDA for the three months ended September 30, 2017, was $331 million compared with $465 million for the same period in 2016, representing a 28.8 percent decrease.
• The consolidated operating results for the three months ended September 30, 2017, reflect a 14.8 percent decrease in total admissions, and a 15.5 percent decrease in total adjusted admissions, compared with the same period in 2016. On a same-store basis, both admissions and adjusted admissions decreased 2.3 percent during the three months ended September 30, 2017, compared with the same period in 2016. On a same-store basis, net operating revenues decreased 1.5 percent during the three months ended September 30, 2017, compared with the same period in 2016.
• Commenting on the results, Wayne T. Smith, chairman and chief executive officer of Community Health Systems, Inc., said, “Numerous factors affected our operating and financial results in the third quarter, including lower volumes, divestiture activity and extreme weather events. Hurricanes Harvey and Irma directly impacted operations at a significant number of our hospitals, forcing evacuations at some facilities and requiring others to take extraordinary measures to remain operational during these storms.”
• Smith added, “Looking forward, we remain focused on strategic initiatives that we believe will yield positive results in the future. We’ve made substantial progress in our portfolio rationalization initiative with 30 hospital divestitures now complete. Our goal is to emerge from this process with a sustainable group of hospitals that are positioned for long-term success and growth.”

(Bloomberg) Frontier Faces Tough Road With Declines, Dividend Cut

• While subscriber trends are improving in acquired Verizon markets, Frontier Communications still faces steep revenue declines. Management will need to continue delivering on initiatives to bolster gross subscriber additions and reduce churn. In legacy markets, this may not happen until 2018. Even after customer trends improve, stabilizing revenue will remain a challenge, given the company’s large exposure to declining legacy services. Cost synergies from the acquisition should help stabilize its Ebitda margin.
• The company cut its common dividend by 62% in May to help pay down debt amid declines in profit and free cash flow. Near term, this saves cash to use toward improving leverage. Yet the same risks remain long term, and Frontier will have to stabilize revenue and profit.
• Customer revenue in acquired markets declined 14.2% in 3Q, after falling 17% in 2Q, highlighting the long path to stabilization. This compares with a 8.1% drop in legacy market revenue.