Category: Insight

05 May 2017
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CAM High Yield Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, flows week to date were -$0.3 billion and year to date flows stand at -$0.8 billion. New issuance for the week was $3.9 billion and year to date HY is at $101 billion.

(New York Post) Almost 500K drop pay TV in Q1

  • Almost half a million subscribers stopped paying for cable, satellite and other pay TV formats in the first quarter
  • Charter Communications, which is integrating Time Warner Cable and Bright House Networks, lost 100,000 TV subscribers in the first quarter, on top of 105,000 in the prior quarter.
  • Charter, backed by John Malone’s Liberty Broadband, has said new pricing has led to customer departures, though it added 428,000 broadband subscribers.
  • The picture at Charlie Ergen’s satellite service Dish is even bleaker. The satellite provider lost 143,000 TV subscribers versus Street estimates for a loss of 72,000.
  • AT&T, which operates DirecTV and U-Verse, said its satellite TV service DirecTV was flat, while its U-Verse service lost 233,000.
  • Only Comcast managed to eke out subscriber growth, adding 32,000 TV accounts.

(Business Wire) Frontier Communications Reports 2017 First Quarter Results

  • Frontier Communications Corporation reported its first quarter 2017 results, and announced that the Board of Directors has revised the Company’s capital allocation strategy, which includes a reduction in the quarterly dividend to $0.04 per share, to enhance financial flexibility and achieve a targeted leverage ratio of 3.5x by year-end 2021, down from the current ratio of 4.39x.
  • Dan McCarthy, President and CEO, stated, “During the quarter, we continued to realize our targeted efficiencies and synergies, and I am also pleased to have achieved our third consecutive quarter of improved FiOS gross additions in the California, Texas and Florida (CTF) markets. We are executing on a number of initiatives with the goal of enhancing customer experience, reducing churn, stabilizing revenues and generating cash flow.
  • “Our Board regularly reviews the Company’s long-term capital allocation strategy, and it has determined to reduce the dividend at this time to provide additional financial flexibility, while still returning a meaningful cash dividend to shareholders. As we continue to execute on our strategy to deliver on the full potential of our strong assets and generate additional cash flow, we will optimize our capital allocation to ensure we strike a balance between investing in the business, paying down debt and returning capital to shareholders,” said McCarthy.

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

  • Net operating revenues for the three months ended March 31, 2017, totaled $4.486 billion, a 10.3 percent decrease, compared with $4.999 billion for the same period in 2016.
  • During the three months ended March 31, 2017, the Company recorded a non-cash expense totaling $250 million related to impairment charges to reduce the value of long-lived assets, primarily allocated goodwill, at hospitals that the Company has identified for sale. The impairment charges do not have an impact on the calculation of the Company’s financial covenants under the Company’s Credit Facility.
  • Commenting on the results, Wayne T. Smith, chairman and chief executive officer of Community Health Systems, Inc., said, “We continue to make good progress on our strategic and operational initiatives, and we are pleased to see these efforts reflected in our first quarter results. We are focused on performance improvements that we believe will yield additional efficiencies as we move through 2017. At the same time, we are making progress with our portfolio rationalization strategy as we work to create a stronger, more sustainable company for the future and further reduce our debt.”

(Globe Newswire) Avis Budget Group Reports First Quarter 2017 Results

  • For the quarter, the Company reported revenue of $1.8 billion and a net loss of $107 million, or $1.25 per share. The Company reported an Adjusted EBITDA loss of $27 million and an adjusted net loss of $81 million, or $0.94 per diluted share, in the quarter.
  • “Our first quarter results reflect higher-than-expected fleet costs, continued pricing pressures and a shift of Easter traffic to the second quarter,” said Larry De Shon, Avis Budget Group Chief Executive Officer. “We have taken meaningful actions to reduce costs by more than $50 million to mitigate the effects of weak vehicle residual values. We are optimistic that our results will be stronger over the balance of the year as used-car values began to improve near the end of the quarter and our strategic initiatives continue to gain momentum.”
  • Revenue declined 2% in first quarter 2017 primarily due to a 5% decline in pricing partially offset by a 3% increase in rental days. Our first quarter net loss was $107 million, and our Adjusted EBITDA loss was $27 million. Results were impacted by lower pricing and higher per-unit fleet costs in the Americas, and by the shift in Easter from March last year to April this year.

(Business Wire) The GEO Group Reports First Quarter 2017 Results

  • GEO reported first quarter 2017 Normalized Funds From Operations of $58.1 million compared to $48.7 million for the first quarter 2016. GEO reported first quarter 2017 Net Operating Income of $142.4 million compared to $136.3 million for the first quarter 2016.
  • George C. Zoley, Chairman and Chief Executive Officer of GEO, said, “We are pleased with our strong first quarter results, which were driven by robust financial and operational performance across our diversified platform of real estate, management and programmatic services. Our diversified platform has allowed us to provide cost-effective, high quality services for our government partners while delivering industry-leading, evidence-based rehabilitation programs to the men and women who have been entrusted to our care. We’re also pleased to have been able to confirm our split-adjusted Normalized FFO and AFFO guidance for the full-year despite our recent equity offering of 10.4 million split-adjusted shares in March of this year. We remain focused on expanding the delivery of our services and programs and on the effective allocation of capital to continue to enhance value for our shareholders.”
  • GEO reported total revenues for the first quarter 2017 of $550.6 million up from $510.2 million for the first quarter 2016. First quarter 2017 revenues reflect $57.2 million in construction revenues associated with the development of the 1,300-bed Ravenhall Facility in Australia compared to $40.8 million in construction revenues for the first quarter 2016.
28 Apr 2017
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CAM High Yield Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, flows week to date were $0.8 billion and year to date flows stand at -$0.5 billion. New issuance for the week was $4.2 billion and year to date HY is at $97 billion.

(Modern Healthcare) Some hospitals want to end mandatory bundled pay programs

  • Several hospitals have called on the CMS to turn bundled-payment initiatives for cardiac and orthopedic care into voluntary programs, as they don’t have the financial resources to invest in the changes.
  • The bundled-payment initiatives pose a serious hardship for safety net hospitals that rely mostly on the Medicare, Medicaid and disproportionate-share hospital payments, according to the Greater New York Hospital Association.
  • “Medicare and Medicaid rates no longer cover an adequate level of operating and capital costs, and the resulting lack of margins for safety net hospitals does not allow for capital investment,” the trade group said in an April 19 comment letter.
  • Pennsylvania-based Geisinger Health System said it is against making the models voluntary, as some hospitals may game the system by selectively referring or transferring complex patients to providers not participating in the model.
  • The American Hospital Association said it supported the models’ overall goal to make providers more accountable for coordinating patients’ care. However, it has voiced concerns in the past over the CMS’ pace of rolling out the models. The AHA supports an implementation delay through Jan. 1, 2018. However, the agency should not delay the models beyond that, the group said.

(Globe Newswire) PULTEGROUP, INC. REPORTS FIRST QUARTER 2017 RESULTS

  • “Reflecting our increased business investment over the past few years and the ongoing execution of our Value Creation strategy, PulteGroup delivered another quarter of significant operating and financial gains that drove a 17% increase in earnings to $0.28 per share,” said Ryan Marshall, President and CEO of PulteGroup. “Consistent with our focus on delivering superior returns over the housing cycle, we continue to realize strong operating margins, improve our asset efficiency and return excess funds to our shareholders.”
  • “Buyer interest during the spring selling season of 2017 has been high and points to the ongoing strength in recovery for the housing industry,” added Marshall. “Strong buyer demand continues to be supported by an improving economy and resulting employment and wage gains, high consumer confidence, a low inventory of new and existing homes, and the powerful demographic forces of Millennials and Baby Boomers. Given the strength of our land pipeline and our disciplined investment practices, PulteGroup is well positioned to grow its market presence and improve its financial performance within this operating environment.”
  • Home sale revenues for the first quarter totaled $1.6 billion, an increase of 14% over the prior year. Higher revenues for the quarter were driven by a 7% increase in closings to 4,225 homes, in combination with a 6% increase in average selling price to $375,000.
  • PulteGroup’s backlog at quarter end totaled 9,323 homes valued at $3.8 billion, compared with prior year backlog of 8,755 homes valued at $3.4 billion. The average sales price in backlog of $408,000 is up 6% over the prior year and reflects the ongoing shift in both the mix of homes sold toward more move-up product and toward higher prices within the buyer category.

(Reuters) Trump’s plan to slash business taxes seen as ‘guidepost’

  • President Donald Trump unveiled a one-page plan proposing deep U.S. tax cuts, many for businesses, that would make the federal deficit balloon if enacted, drawing a cautious welcome from fiscal conservatives and financial markets.
  • Trump’s package fell far short of the kind of comprehensive tax reform that both parties in Washington have sought for years
  • Investors, who had been awaiting tax-plan details for months, largely shrugged off the news, with many saying it was still short on specifics and faced a long road to enactment.
  • House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell and the top Republicans on the congressional tax-writing committees welcomed the Trump proposals, while leaving space for details to change as legislation evolves.
  • “The principles outlined by the Trump administration today will serve as critical guideposts” as Congress and the administration work on tax changes, they said in a statement.

(PR Newswire) Graphic Packaging Holding Company Reports First Quarter 2017 Results

  • Graphic Packaging reported Net Income for first quarter 2017 of $37.0 million. This compares to first quarter 2016 Net Income of $57.5 million.
  • “Our first quarter Adjusted EBITDA was lower as expected at $161 million compared to $193 million in the prior year period. Net sales were up 2.7%, reflecting recent acquisitions and stable core volumes, consistent with the trends we experienced in 2016. Operating efficiencies improved during the quarter and we successfully upgraded two headboxes on the number six paper machine at our West Monroe, Louisiana mill” said President and CEO Michael Doss. “The quarter was negatively impacted by accelerating commodity input costs, primarily recycled fiber, and the planned downtime costs associated with the upgrade of the two headboxes.”
  • “We are executing price increases to offset the unprecedented recycled fiber input cost inflation we are experiencing and expect margins to improve from our pricing actions during the second half of 2017, and in 2018. Our focus on meeting cash flow commitments, growing cash flow, and returning more of it to stockholders over time has not changed.”
28 Apr 2017
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CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Lipper, for the week ended April 26, investment grade funds posted a net inflow of $4.699bn. Per Lipper data, the year-to-date net inflow into investment grade funds was $48.036bn. Per Bloomberg, investment grade corporate issuance for the week was $22.4bn, while volume for the month of April was $78.45bn. IG corporate bond issuance started the year at a robust pace but that has now somewhat abated, still, issuance is slightly outpacing last year and is up 1% year over year.

(Bloomberg, Conference Call) Masco Corporation Reports First Quarter 2017 Results

  • Masco Corporation (NYSE: MAS), one of the world’s leading manufacturers of branded home improvement and building products, reported strong net sales and operating profit growth in the first quarter of 2017.
  • “Our strong operating performance continued in the first quarter of 2017 as our leading brands coupled with our innovative products and programs drove demand with consumers and pros alike, resulting in profitable growth across our portfolio,” said Masco President and CEO, Keith Allman.
  • Conference Call Highlights:
    • Masco has no exposure to Canadian lumber tariffs
    • The company is seeing some cost inflation; however, it takes two quarters to flow through the financial statements
    • The company is seeing strong demand in their Repair & Remodeling products across all product lines and price points. R&R accounts for 83% of total sales (unchanged)
    • Masco is still focusing on bolt-on strategies in either their plumbing or decorative architecture segments, which has been unchanged over the past several quarters
      • The company looked at the paint assets divested from the Valspar/Sherwin-Williams transaction, but they weren’t a good strategic fit
    • Masco returned $124mm to its shareholders through dividends and share repurchases for the quarter

(Bloomberg) Comcast Leaps to a Record as ‘Get Out’ Helps Film Unit Shine

  • Comcast Corp.’s foray into Hollywood is paying off, with box-office hits “Get Out” and “Fifty Shades Darker” boosting first-quarter profits and sending shares to a record.
  • The shares rose as much 3.9 percent to $40.29 in New York Thursday, the highest price since at least 1983.
  • The results offer the latest proof of Comcast’s ascent to the heights of the American entertainment industry, a trajectory that seemed unlikely when the Philadelphia-based company bought NBCUniversal in 2011. Comcast is showing it can compete head-on with Walt Disney Co. for TV audiences, moviegoers and theme-park tourists.
  • Comcast executives attributed the turnaround largely to the company’s new video platform, called X1, which makes it easier to search for shows and movies, as well as YouTube and Netflix, from their cable set-top box. X1 is in about half of Comcast homes.
  • At the same time, the company is continuing to add residential high-speed internet subscribers. Comcast signed up 397,000 new broadband customers in the quarter, shy of the average prediction of 400,000 from three analysts. It signed up 403,000 broadband subscribers in the same quarter a year ago.

 
(Bloomberg) Microsoft Momentum Slows on Weaker Sales of Surface Tablets

  • Satya Nadella’s plan to reshape Microsoft Corp. as a cloud-computing company hit a snag in the third quarter, when lackluster sales of Surface tablets and weaker demand for corporate services kept revenue growth in check.
  • Adjusted sales in the period that ended in March rose to $23.56 billion, falling slightly short of analysts’ average estimate. The miss was enough to give investors pause — the software maker’s shares slipped 1.9 percent following the report, after rising to an all-time high at Thursday’s close in New York.
  • Even as some non-cloud businesses underperformed, the company posted another quarter of brisk demand for internet-based versions of Office software and its Azure service for running and storing customers’ data and applications. Azure sales rose 93 percent, while commercial Office 365 — cloud-based versions of Word, Excel and other productivity software — increased 45 percent. Microsoft spent last year pouring billions into data centers to run these services and is now signing up customers to fill them. Meanwhile, the personal-computer market, a drag on Microsoft results for the past several years, has begun to stabilize.

(WSJ) Southern’s Georgia Power Objects to Westinghouse Bankruptcy Loan

  • Georgia Power Co. has taken issue with Westinghouse Electric Co.’s proposed $800 million bankruptcy loan, saying the financing could threaten the construction of the first new nuclear reactors to be built in the U.S. in decades.
  • Westinghouse filed for chapter 11 bankruptcy at the end of March and wants to borrow money to keep its other businesses healthy, while it contends with the fallout of nuclear construction projects that are years behind schedule and billions of dollars over budget.
  • With a Friday deadline looming for Georgia Power to decide whether to continue construction at the Vogtle Electric Generating Plant, it and other plant owners are protesting Westinghouse’s efforts to pledge intellectual property as collateral for the loan deal.
  • If Westinghouse’s bankruptcy loan goes through as planned, the company’s lenders would be in position to “foreclose on the intellectual property, which could seriously disrupt or even potentially halt construction,” lawyers for Georgia Power, the largest subsidiary of Southern Co., warned in a court filing.
  • Based on Westinghouse’s AP1000 nuclear power plant design, the new Vogtle reactors are the first of what is supposed to be a new generation of commercial nuclear plants to be built in the U.S.
  • U.S. Commerce Secretary Wilbur Ross told The Wall Street Journal this week that the fate of Westinghouse’s nuclear business is a matter of national security. Asked if he would consider using public funds to assist Westinghouse, Mr. Ross said he believed the company’s bankruptcy funding was “adequate” for the immediate future. Any change to the financing, however, could change that assessment.

 
(FBN) Crown Castle International Corp. Makes a Big Bet on Small Cells

  • Crown Castle exceeded the high end of management’s guidance ranges on many metrics, including revenue and AFFO profits.
    • Site rental revenue showed 4% organic year-over-year growth, with the remaining increases coming from new site acquisitions.
    • Small-cell revenue jumped 41% higher and now accounts for 15% of Crown Castle’s total sales. That’s up from 11% in the year-ago quarter.
    • Crown Castle is emphasizing its small-cell operations in a big way, backed by large capital investments. Sixty-one percent of this quarter’s discretionary capital expenses, or $151 million, were funneled into construction and infrastructure improvements in the small-cell segment. That’s up from 43% or $79 million in the first quarter of 2016.
    • Crown Castle is planning to double its network of small-cell stations over the next 28 to 24 months. The network model of small wireless stations supported by direct fiber-optic backbone connections promises to match the traditional cell tower market in terms of long-term revenue footprint.

(WSJ) Coke to Cut 20% of Corporate Workers as It Battles Soda Slump

  • Coca-Cola Co. executives said Tuesday they plan to eliminate roughly 20% of corporate staff, as the beverage giant battles a slump in soda sales and expands a long-running cost-cutting program.
  • James Quincey, a company veteran who will take over as chief executive from Muhtar Kent next week, said the Atlanta-based company will cut 1,200 jobs to run a “more focused, lean corporate center.”
  • Coke’s beverage volumes were flat in the first quarter globally, dragged down by the macroeconomic conditions in some Latin American markets and the shift of the Easter holiday into the second quarter. Soda volumes world-wide fell 1%.
  • Mr. Kent said the company remains on track to meet its revenue and profit targets for the year.
  • The beverage giant has been aiming to cut sugar from its products and diversify beyond soda as more countries consider special taxes on high-calorie drinks to combat rising obesity and diabetes, and as consumers switch to healthier beverages.
  • On Tuesday, Mr. Quincey said the company is adjusting its growth model to meet people’s changing tastes and preferences.

(Bloomberg) Spirits Maker Castle Said to Eye Sale Amid Takeover Interest

  • Castle Brands Inc., a producer of whiskey, vodka and other spirits, is exploring a sale and may draw interest from potential buyers including Corona-maker Constellation Brands Inc. and Sazerac Co., according to people familiar with the matter.
  • The New York-based company is working with advisers at Perella Weinberg Partners on a potential sale, the people said, asking not to be identified as the information is private. Castle Brands may also attract bigger rivals, such as Diageo Plc, the world’s largest distiller, and Pernod Ricard SA, the people said. Heaven Hill Distilleries Inc. may also consider a bid, the people said. Castle Brands had a market value of about $260 million at the close of trading on Tuesday.
  • Sales of distilled spirits in the U.S. may outperform the 3.7 percent annual growth rate they’ve maintained since 2007 on the back of reduced regulatory restrictions on product availability under the Donald Trump administration and new emphasis on luxury and super-premium products, according to a report from Bloomberg Intelligence.

(Bloomberg) Entergy Sees ‘Strong’ Power Demand by Refiners in Rest of 2017

  • Entergy CFO Drew Marsh cites wider crack spreads and end to turnarounds for forecast, commenting on 1Q earnings call.
    • Says “premature” to lower 2017 forecast after 1Q EPS miss; adds no change to spending plan if federal taxes cut
    • CEO Leo Denault says co. may propose smaller peaker, renewables in New Orleans
    • Seeking to lower CO2 emissions regardless of President Trump’s executive order
    • Co. says all steps on track for Indian point closing; litigation ended
21 Apr 2017
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CAM High Yield Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, flows week to date were -$21 million and year to date flows stand at -$1.3 billion. New issuance for the week was $1.4 billion and year to date HY is at $93 billion.

(Company Release) GEO Group Awarded Contract

  • GEO Group has been awarded a contract by U.S. Immigration and Customs Enforcement (“ICE”) for the development and operation of a new $110 million, company-owned 1,000-bed Detention Facility to be located in Conroe, Texas
  • GEO expects to design, finance, build, and operate the company-owned Facility under a ten-year contract with ICE, inclusive of renewal option periods. The 1,000-bed Facility is scheduled for completion in the fourth quarter of 2018 and is expected to generate approximately $44 million in annualized revenues and returns on investment consistent with GEO’s company-owned facilities.
  • “We are very appreciative of the continued confidence placed in our company by U.S. Immigration and Customs Enforcement,” said George C. Zoley, GEO’s Chairman and Chief Executive Officer.

(Fierce Cable) Sinclair, 120 Sports launching new linear sports network

  • Sinclair Broadcast Group, Silver Chalice and 120 Sports are launching a new multiplatform sports network with linear broadcast and digital offerings.
  • The companies will merge 120 Sports’ live studio operations, Silver Chalice’s Campus Insiders’ live collegiate games and Sinclair’s American Sports Network’s (ASN) distribution and live collegiate games. The companies intend to use the professional and collegiate rights from 120 Sports and Silver Chalice to increase access to post-game highlights, news, original long-form programming and full game archives provided by various partners.
  • “With this incomparable set of strategic partners, we are evolving ASN into a vastly improved network with access to exclusive content and a combined linear and premium OTT offering that is the model for the future of television,” said Chris Ripley, president and CEO of Sinclair, in a statement.
  • “Our recent focus has been on expanding our business with new digital multicast networks that leverage our broadcast spectrum and household reach,” said Ripley in a statement. “Much of the multicast market today focuses on classic TV and movie content, with little aimed at audiences for whom fresh and relevant pop culture content is important. With the launch of TBD, we aim to pair the very best premium digital-first content with the unmatched branding power of traditional television.”

(Business Wire) HCA Previews 2017 First Quarter Results

  • HCA anticipates revenues for the first quarter of 2017 to approximate $10.623 billion compared to $10.260 billion in the first quarter of 2016. Net income attributable to HCA Holdings, Inc. for the first quarter is expected to approximate $659 million, or $1.74 per diluted share, compared to $694 million, or $1.69 per diluted share, in the first quarter of 2016. Adjusted EBITDA for the first quarter of 2017 is expected to approximate $2.005 billion compared to $2.003 billion in the previous year’s first quarter.
  • Same facility admissions for the first quarter of 2017 increased 1.2 percent, while same facility equivalent admissions increased 1.6 percent when compared to the first quarter of 2016. Same facility emergency room visits for the first quarter of 2017 increased 1.1 percent from the prior year’s first quarter.
  • Results for the first quarter of 2017 were affected by changes in payer mix and the loss of one day when compared to the first quarter of 2016. Same facility Medicare admissions comprised 48.1 percent of the first quarter 2017 admissions, compared to 47.0 percent in the prior year’s first quarter. In the first quarter of 2017, same facility managed care/health exchange admissions comprised 27.4 percent of admissions, compared to 28.6 percent in the prior year’s first quarter.
  • Same facility revenue per equivalent admission is expected to increase approximately 1.7 percent in the first quarter of 2017 compared to the prior year’s first quarter.

(CNBC) US housing starts total 1.215M in March vs. 1.25M starts expected

  • U.S. homebuilding fell in March as the construction of single-family homes in the Midwest recorded its biggest decline in three years, likely reflecting bad weather.
  • Housing starts declined 6.8 percent to a seasonally adjusted annual rate of 1.22 million units, the Commerce Department said on Tuesday. February’s starts were revised up to a 1.30 million-unit pace from the previously reported 1.29 million-rate.
  • Economists polled by Reuters had forecast groundbreaking activity falling to a 1.25 million-unit pace last month. Homebuilding was up 9.2 percent compared to March 2016.
  • Construction in February was boosted by unseasonably warm temperatures. But temperatures dropped in March and a storm lashed the Northeast and Midwest regions, which could have accounted for the drop last month in homebuilding.
  • Single-family homebuilding, which accounts for the largest share of the residential housing market, fell 6.2 percent to a 821,000 unit-pace last month. Single-family starts in the Midwest declined 35 percent, the largest drop since January 2014, to their lowest level since August 2015.
  • Pointing to underlying strength in the housing market, building permits increased 3.6 percent, driven by a 13.8 percent surge in the multi-family segment.
  • A tightening labor market, which is generating steady wage growth is underpinning the housing market. The sector, however, remains constrained by a dearth of properties available for sale.
14 Apr 2017
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CAM High Yield Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, flows week to date were -$0.5 billion and year to date flows stand at -$0.6 billion. New issuance for the week was $5.0 billion and year to date HY is at $91.6 billion.

(Company Report) Frontier Communications Expands Broadband in Wisconsin

  • Frontier Communications announced that it has made enhanced broadband service available to an additional 8,100 households in Wisconsin. Frontier is leveraging the FCC’s Connect America Fund (CAF) program to bring broadband to approximately 5,000 households in CAF-eligible census blocks while expanding its overall service and reach to approximately 3,100 more households throughout Wisconsin.
  • “Through ongoing network investments, Frontier is providing broadband and faster speeds to residents,” John Van Ooyen, Frontier Director of Operations said. “We have been aggressively deploying and upgrading our broadband service and look forward to serving more residents.”
  • The deployments are made possible through a combination of Frontier’s capital investment and the CAF. The FCC established the CAF in 2011 to facilitate broadband deployment to the millions of Americans living in rural areas without access to broadband infrastructure. As of 2016, Frontier began receiving approximately $30 million a year from the CAF to expand and upgrade the company’s network to 77,000 locations in Wisconsin by the end of 2020.

(Fierce Cable) Charter sued for selling personal customer data without consent

  • According to the St. Louis Record, which obtained a copy of the Eastern District of Missouri court complaint filed on April 4, subscriber “A. Michael” said that between 2011 and 2013, Charter sold information such as names and addresses to unknown companies without customer consent.
  • The plaintiffs are alleging that Charter violated Missouri’s Merchandising Practices Act. Michael claims he was not provided with a copy of Charter’s privacy policy, which is required under that law. The complaint also said Charter failed to obtain written consent to sell the information or provide an opt-out provision.
  • Just as Comcast, AT&T and Verizon stated in similar messaging, Charter said the recent overturning by the Republican-led Congress of Obama-era FCC rules regulating ISP privacy does not change its position.
  • “Protecting the privacy of our consumers is one of our most important responsibilities as a broadband provider,” Charter said. “Recent activity by Congress does not change, or weaken, Charter’s commitment to the protection of our customers’ online privacy, or our rigorous privacy practices and policies. To be clear it also does not change the way in which Charter collects, uses or shares customer information.”

(New York Times) Trump Administration to Pay Health Subsidies Disputed by House

  • The Trump administration says it is willing to continue paying subsidies to health insurance companies under the Affordable Care Act even though House Republicans say the payments are illegal because Congress never authorized them.
  • The statement sends a small but potentially significant signal to insurers, encouraging them to stay in the market.
  • The Affordable Care Act requires insurers to reduce deductibles and other out-of-pocket costs for certain low-income consumers. The “cost-sharing” subsidies, which total $7 billion a year, compensate insurers for these discounts.
  • House Republicans sued the Obama administration, saying that the spending — in the absence of an appropriations law — was unconstitutional. A Federal District Court judge agreed and ordered a halt to the payments, but suspended her order to allow the government to appeal.
  • The Trump administration has not clearly indicated its position on the appeal. Asked to clarify, the Department of Health and Human Services sent a written statement on Monday: “The precedent is that while the lawsuit is being litigated, the cost-sharing subsidies will be funded. It would be fair for you to report that there has been no policy change in the current administration.”

(Moody’s) Moody’s upgrades DaVita to Ba2; outlook is stable

  • Moody’s Investors Service upgraded the ratings of DaVita, Inc. including the Corporate Family Rating to Ba2 from Ba3 and the Probability of Default Rating to Ba2-PD from Ba3-PD. Moody’s also upgraded DaVita’s senior secured credit facilities to Baa3 from Ba1 and its senior unsecured notes to Ba3 from B1. Lastly, Moody’s affirmed DaVita’s Speculative Grade Liquidity Rating of SGL-1. The outlook is stable.
  • The upgrade of DaVita’s Corporate Family Rating to Ba2 reflects Moody’s expectation that the company will benefit from US dialysis patient population growth of approximately 4% and stabilization of its integrated care business. Moody’s expects that DaVita will maintain adjusted debt to EBITDA in the mid-to-high 3 times range even in the face of several business uncertainties relating to biosimilars and the availability of charitable premium assistance.
13 Apr 2017
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CAM Investment Grade Weekly Insights

Fund Flows & Issuance: Per Bloomberg, investment grade corporate issuance for the holiday shortened week was $11bn. Investment grade corporate issuance so far for the month of April is $31.1bn.

(Forbes) Defying Critics, Apple Continues To Gain On PC Rivals

  • If you read enough tech news, you “know” that Apple is blowing it with the Mac. For months now, the headlines have been clear: “How Apple Alienated Mac Loyalists,” Bloomberg wrote back in December. And just yesterday on FORBES, Ewan Spence reported on a Laptop Mag report about Apple’s dwindling customer satisfaction ranking in “Apple Losing Out As Consumers Reject New MacBook Pro.” With this kind of drumbeat, it wouldn’t be surprising to learn Apple is indeed losing market share. Except that it isn’t. On the contrary, the two firms that track PC sales both agree Apple is gaining share in the PC market — as it has nearly every quarter for the past several years.
  • Here are the figures for Q1 of 2017: Gartner says Apple sales were up 4.5% over a year ago and market share rose from 6.3% to 6.8% worldwide. That puts Apple in Gartner’s top 5 ahead of flagging Acer. Apple’s total is just 7% behind fourth-place Asus in shipments, suggesting the Mac maker could leapfrog it as well soon. IDC has slightly different figures, with Apple’s Mac total rising 4.1% and share growing from 6.7% to 7.0%. In Gartner’s math, Apple is already fourth. Both agree Apple delivered a bit over 4.2 million computers, a figure which Apple always clarifies by offering a precise number with earnings. (Those are due in a few weeks.)
  • Notably, Gartner thinks the PC market contracted by 2.4% over 2016 while IDC sees it growing by a mild 0.6%. Part of that difference is methodology: Gartner doesn’t include Chromebooks in its numbers but does include 2-in-1s like the Surface (iPad Pros? nope). IDC includes Chromebooks, which it credited for at least part of the overall increase, but excludes all detachable tablets — so that means Surface and iPad Pro are out.
  • But no matter how you slice and dice the data, it’s good news for Apple, which saw 4%+ unit growth against a flat or shrinking PC landscape. While Apple remains a small slice of the market, it helps to have some perspective on how that slice has grown. Back in 2010, the PC market was a robust 351 million units for the year (per Gartner). Apple wasn’t in the top 5, but searching through its earnings reports yields a total of 14.4 million Macs that year. That was good for just over 4% of the PC market.

 
(Moody’s) Moody’s says AT&T’s $1.6 billion acquisition of Straight Path is positive

  • Moody’s Investors Service, (“Moody’s”) said AT&T Inc.’s (Baa1, review for downgrade) planned acquisition of Straight Path is positive. AT&T announced yesterday a definitive agreement to purchase Straight Path Communications for $1.25 billion in stock plus certain liabilities of Straight Path that values the transaction at approximately $1.6 billion. Straight Path is one of the largest holders of wireless spectrum licenses in the 28 GHz and 39 GHz bands, which AT&T intends to deploy in conjunction with its proposed 5G wireless architecture.
  • We view this transaction as a strategic positive as it gives AT&T access to key infrastructure elements to pursue its 5G wireless capabilities and keeps AT&T on pace with Verizon in this effort. The relatively small purchase price will result in a very large spectrum position for AT&T, at least on par with Verizon’s 5G holdings following its 2016 acquisition of XO Communications.
  • We believe that 5G wireless services are unlikely to reach scaled deployment for at least 3 years. Carriers have articulated plans to deploy 5G as a fixed wireless solution initially, with more advanced mobile applications to follow. We think the technology will be competitive with traditional broadband services, but we think the economics of a fixed 5G architecture may not be competitive with cable broadband’s embedded cost structure. Therefore, we think that wireless carriers must offer additional functionality with 5G to differentiate it from traditional broadband in order to drive the inevitably higher price points that will lead to a profitable business.
  • Despite its large pending acquisition of Time Warner, AT&T continues to assemble assets that support its core wireless business. In addition to the Straight Path transaction, AT&T announced in January that it will acquire FiberTower, a holder of 24 GHz and 39 GHz licenses for an undisclosed amount. We view these deals as strategic positives, but not material to the near term (0 to 3 years) financial performance. However, these small strategic asset purchases are essential to AT&T remaining competitive and perpetuating its market share.

(Bloomberg Gadfly) Walmart Fights Amazon With Cheap When People Want Easy

  • Wal-Mart Stores Inc. on Wednesday unveiled a new discount program to entice customers to pick up online orders from its stores. The idea is: If it’s cheaper for Walmart to get stuff to its 5,000 stores, rather than millions of individual households, than why not pass along part of that discount? It has the extra benefit of getting customers back into stores to buy more.
  • In an era where Amazon.com Inc. has trained shoppers to be so lazy that they can order cardboard boxes and packing tape an hour before they are ready to pack up their goods and move to another apartment, it’s unclear consumers are going to want to work that hard just to save Walmart, and themselves, a buck or two.
  • For many of Walmart’s low-income customers, every penny counts. But the retailer has said one reason it bought Jet.com last year was that Walmart’s online customers tended to be wealthier shoppers who would spend more for the higher-end brands Jet.com could offer.
  • It can’t hurt for Walmart to try the discount program out — testing and learning about what its customers want. But it will likely realize that instead of trying to figure out how to make things easier for Walmart, it should worry more about making things easier for people to shop with the retailer. If not, any advantage Walmart is building online will have a short shelf life.
07 Apr 2017
IG Note 20170407 Image
Investment Grade Weekly, Weekly Insights CAM Bond Funds 0 comment

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Lipper, for the week ended April 5th, investment grade funds posted a net inflow of $4.3bn. Per Lipper data, the year-to-date net inflow into investment grade funds was $43.39bn through April 5th. Per Bloomberg, investment grade corporate issuance through Thursday was $20.1bn with 19 issuers pricing 37 tranches on the week. Investment grade corporate issuance is slightly outpacing 2016 with 2017 corporate issuance up 3% year-to-date. Volume is expected to be lower next week with Easter/Passover holidays.

(Bloomberg) Comcast Jumps Into Wireless With $45 Service Undercutting Rivals

  • Comcast Corp. unveiled a wireless service that offers unlimited data on Verizon Communications Inc.’s network for less than nearly every other competitor and said the venture will be profitable once it reaches hundreds of thousands of subscribers.
  • While the pricing plans have some strings attached and are available only to Comcast’s internet and TV customers, the initial $45 unlimited offer is the lowest among the top U.S. wireless carriers and is likely to further escalate a price war that has ravaged the industry. Shares of the cable giant rose the most in more than two months.
  • “The more products you add, the lower the churn,” said Greg Butz, president of Comcast Mobile, using the industry term for monthly subscriber defections.
  • Comcast’s entry into wireless comes at a crucial moment for the cable giant. AT&T has moved aggressively onto its turf, offering low-cost TV packages that can be watched on-the-go and don’t count toward monthly data limits. And advances in wireless 5G technology could make surfing the web on phones as fast and reliable as high-speed internet connections at home — a service that has been a major growth area for Comcast.
  • Depending on its success in wireless, Comcast could get more ambitious and pursue an acquisition of a wireless carrier such as T-Mobile US Inc., according to some analysts. For now, Comcast says that selling wireless through Verizon’s network is the long-term strategy.
    • Unlimited Plans by Carrier (Source: Bloomberg)

IG Note 20170407 Image

(Bloomberg) Monsanto Gets Boost as Takeover by Bayer Looks More Likely

  • Monsanto Co., the world’s largest seed company, is getting a boost from increased optimism that Bayer’s $66 billion takeover of the company will go through, as similarly huge transactions between competitors inch toward the finish line.
  • Shares of St. Louis-based Monsanto climbed for a third straight day on Wednesday.
  • The Bayer-Monsanto combination has more than a 90 percent likelihood of completion, analysts at Citi Research said in a report Wednesday. That outlook comes after Dow Chemical Co.’s $77 billion bid to merge with DuPont Co. cleared antitrust hurdles in the European Union last week, and China National Chemical Corp. just received a green light on its $43 billion acquisition of Swiss pesticide maker Syngenta from the U.S. and the European Union.
  • Monsanto Chief Executive Officer Hugh Grant reiterated Wednesday in a call with analysts that a finished deal is expected by year-end. Bayer is planning to place regulatory filings with the European Commission this quarter, and there’s progress with a second round of inquiries with the U.S. Justice Department, he said. Those procedures signal that the deal is progressing, said William Selesky, an analyst at Argus Research Corp. in New York.
  • Monsanto’s shares are also up on speculation that the agricultural economy may be better than initially thought. The company on Wednesday reported record fiscal second-quarter earnings amid signs that U.S. farmers are preparing to sow record acreage with soybeans this year.

(Bloomberg) Mexican Beer Boom Sends Shares of Constellation Brands Soaring

  • The growing U.S. thirst for imported Mexican beer help send Constellation Brands Inc.’s stock on its biggest rally in three years, even as simmering border tensions threaten to undercut demand.
  • The company, which sells Corona, Modelo and other top Mexican brands,posted a 17 percent gain in beer sales last quarter. Constellation’s Ballast Point Brewing & Spirits, which it acquired for $1 billion in 2015, also helped boost revenue.
  • In the wake of the growth, Constellation delivered an annual forecast that beat analysts’ estimates. It also raised its quarterly dividend by about 30 percent. The bullish outlook helped allay concerns that the Trump administration will hurt Mexican importers by imposing a border tax or ripping up the North American Free Trade Agreement. Because of its heavy reliance on Mexican beer, Constellation has been seen as one of the most vulnerable companies to policy changes.
  • “Our beer business continues to be a powerhouse for growth,” Chief Executive Officer Rob Sands said in a statement. Constellation was the “No. 1 growth contributor to the U.S. beer industry for the year,” he said.
  • The company’s wine and spirit sales aren’t growing as quickly as beer. They climbed 6 percent last quarter, helped by the acquisition of the Meiomi and Prisoner brands.

(Bloomberg, Company Press Release) QVC Group to Become Asset-Backed Stock

  • Liberty Interactive Corporation (“Liberty Interactive”) (Nasdaq: QVCA, QVCB, LVNTA, LVNTB) and General Communication, Inc. (“GCI”) (Nasdaq: GNCMA) today announced that they have entered into a definitive agreement (the “Agreement”) whereby Liberty Interactive will acquire GCI through a reorganization in which certain Liberty Ventures Group (“Liberty Ventures”) assets and liabilities will be contributed to GCI in exchange for a controlling interest in GCI.
  • “We are pleased to announce this transaction with GCI,” said Greg Maffei, Liberty Interactive President and CEO. “GCI is the largest communications provider in Alaska, generates solid cash flow with upside potential and is a strong fit with the largest businesses in Liberty Ventures. This transaction will ultimately create a standalone Liberty Ventures, reducing the tracking stock discount and enabling an asset-backed QVC Group.”
  • Liberty Interactive believes an asset-backed QVC Group will provide the following benefits:
    • Establish leading pure play discovery based retail and eCommerce company
      • Liberty Interactive expected to be renamed QVC Group, Inc.
    • Make QVC Group eligible for possible inclusion in stock indices through elimination of tracking stock structure
    • Reduce the tracking stock discount
    • Increase near-term and annual liquidity through reattribution (discussed below) of approximately $329 million(1) of cash and approximately $130 million annual free cash flow from tax savings related to exchangeable bonds that will grow
      • Cash can be used for investments, stock repurchases and debt reduction
    • Establish a strong currency that will be a more effective tool for management compensation and retention and for potential future acquisitions
    • Maintain strong ability and liquidity to service all debt

(Bloomberg) Plenty of Beauty in U.S. Jobs Data Beneath Ugly Headline Number

  • For the March U.S. employment report, with its ugly headline payrolls number, it’s what’s inside that counts.
  • While the gain of 98,000 jobs in a survey of businesses and government agencies was the weakest since May and below all analysts’ forecasts, many accompanying details showed a solid labor market. The jobless rate, derived from a separate survey of households, fell to the lowest in almost a decade even as workforce participation was unchanged, while a measure of underemployment reached a fresh post-recession low, boding well for further wage increases.
  • The March data from the Labor Department on Friday also were challenged by weather anomalies — a storm in the Northeast during the survey week and more seasonable temperatures after two warmer months — that had economists bracing for at least some slowdown in payrolls from a strong start to the year. The reassuring figures elsewhere in the report keep the Federal Reserve on track to continue plans for two more interest-rate increases this year as the labor market continues to tighten.
  • The two-month revisions to payrolls subtracted 38,000 jobs, leaving the average so far in 2017 at 178,000. That’s in line with the 187,000 monthly average for all of last year.
  • Whether the tight job market triggers the long-awaited wage gains in this almost-eight-year-old economic expansion remains a puzzle. Average hourly earnings increased 2.7 percent in March from a year earlier, just a touch above the average since the start of 2016. That, more than weaker-than-expected employment, might merit more attention in the months ahead.

(Bloomberg) Oil Climbs After U.S. Strike Against Syria Roils Global Markets

  • Crude headed for its second weekly gain after briefly spiking in reaction to the first military strike undertaken by President Donald Trump’s administration.
  • Futures surged more than 2 percent to the highest in a month in early trading Friday after a U.S. cruise-missile strike against Syria. Gains eased after a weak jobs report fueled concern about the strength of the U.S. economy. Russia’sdeal with OPEC to cut crude supply hasn’t delivered as much as expected, according to Deputy Prime Minister Arkady Dvorkovich. OPEC ministers will gather in Vienna on May 25 to decide whether to extend the accord.
31 Mar 2017
Investment Grade Weekly, Weekly Insights CAM Bond Funds 0 comment

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Lipper, for the week ended March 29th, investment grade funds posted a net inflow of $3.966bn. Per Lipper data, the year-to-date net inflow into investment grade funds was $39.090bn through March 29th. Per Barclays, investment grade corporate issuance through Thursday was $21.25bn. For the month of March, $128.57bn in investment grade deals priced. This compares to $128.58bn in March of 2016. Q12017 was the largest IG corporate issuance quarter on record at $397bn. Dealers on the street are expecting issuance to abate somewhat in the April, which stands to reason given earnings blackout periods.

(Bloomberg) DuPont, FMC to Swap Crop Protection and Health & Nutrition Units

  • DuPont agrees divest its Crop Protection business, including certain R&D capabilities, and to buy FMC’s Health & Nutrition business.
    • Deal includes $1.6b to DD to reflect difference in value ($1.2b cash, $425m working capital)
    • Sale satisfies DD’s EC commitments regarding Dow merger
    • FMC buying DD’s Cereal Broadleaf Herbicides, Chewing Insecticides portfolios, including Rynaxypyr, Cyazypyr, Indoxacarb; assets being divested generated 2016 rev. ~$1.4b
    • DD buying FMC’s Health & Nutrition business, which generated 2016 rev. >$700m from 2 main segments: texturants as food ingredients, pharmaceutical excipients
    • FMC sees immediately accretive to adj. EPS on closing; will update outlook on earnings call scheduled for May 2
    • DD/FMC deal close due in 4Q, subject to DD/DOW merger, regulatory approvals
    • DOW/DD extend outside date of deal to Aug. 31; see deal closing between Aug. 1 and Sept. 1
    • Material Science Company now expected to be first spin-off
    • Evercore, Goldman advising DD
    • Dyal, Citi advising FMC; Citi provided financing advice, committed debt facilities

(Bloomberg) Union Pacific Rattles Its Cash Coffer With $1 Billion Debt Issue

  • Union Pacific’s $500 million debt offering of 10-year and $500 million of 30-year bonds has the use of proceeds earmarked for general corporate purposes, including refinancing maturities, working capital and buybacks. The rail operator has about $500 million of maturities in 2017. The incremental $500 million of debt may put adjusted debt-to-Ebitda at about 1.8x, assuming the company meets consensus 2017 Ebitda. This level of leverage is below its 2x target and in-line with single A rated peer Canadian National.

(Bloomberg) Oil Set for Biggest Weekly Gain in 2017 as OPEC Eyes Extension

  • Oil headed for its biggest weekly increase this year amid speculation OPEC will extend its deal to curb output and ease a global glut.
  • Futures are up 4.7 percent in New York this week, climbing back above $50 a barrel after Kuwait Oil Minister Issam Almarzooq reiterated support for prolonging a six-month deal to trim supply past June. Still, prices are down 6.5 percent this quarter, their biggest three-month loss since late 2015, as U.S. crude stockpiles continue to pile up.
  • The latest comments from Kuwait’s oil minister are bolstering confidence in OPEC’s commitment to drain swollen stockpiles ahead of the group’s next formal ministerial meeting on May 25 in Vienna. Five producers from the Organization of Petroleum Exporting Countries joined with non-member Oman on Sunday to voice support for an extension. Optimism over the cuts had wavered recently amid a surge in U.S. supply, with the nation boosting crude output last week to the highest in more than a year.
  • “OPEC is fully aware that running down the crude overhang will take more than six months, so a rollover of the deal is still the most likely outcome,” said Amrita Sen, chief oil analyst at Energy Aspects Ltd. “Overall balances are heading in the right direction, but only crude stock draws will help prices break out of the current range-bound trading.”
31 Mar 2017
High Yield Weekly, Weekly Insights CAM Bond Funds 0 comment

CAM High Yield Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, flows week to date were $0.5 billion and year to date flows stand at -$2.7 billion. New issuance for the week was $2.4 billion and year to date HY is at $77.8 billion.

(Bloomberg) Huntsman Eyes Merger After Spinoff of Titanium-Dioxide Unit

  • Huntsman Corp. is considering a major merger after the planned spinoff of its paint-pigments business, Chairman Jon Huntsman Sr. said.
  • “We are looking seriously at the possibility of doing a merger or doing something that would double or triple our revenues,” Huntsman, 79, said Tuesday after speaking at a breakfast during an AFPM chemical conference in San Antonio. The company wants to “expand our horizons” to increase shareholder value, he said.
  • Seven or eight specialty chemical companies would make suitable business partners with Huntsman, some of which have already been in contact about a potential merger, the chairman said without naming them. Huntsman’s annual revenue will drop to $4.5 billion to $5 billion and profit margins will be higher after the midyear spinoff of the titanium-dioxide unit, which will be named Venator, Huntsman said.

(Business Wire) B&G Foods Announces Public Offering of Senior Notes

  • B&G Foods intends to use the proceeds of the offering to repay all of the outstanding borrowings under B&G Foods’ revolving credit facility and all of the outstanding amounts due in respect of B&G Foods’ tranche A term loans, and to pay related fees and expenses. B&G Foods intends to use any remaining net proceeds for general corporate purposes, which could include, among other things, repayment of other long term debt or possible acquisitions.
  • The $500.0 million aggregate principal amount of senior notes due 2025 priced at $100 with a 5.25% coupon

(Reuters) Trump, conservatives try to put aside bitterness to cut tax deal

  • Raw feelings and mistrust could pose an obstacle to President Donald Trump and hard-line conservative lawmakers in his Republican Party as they seek to rebound from defeat on healthcare legislation by launching into an overhaul of the U.S. tax code.
  • Trump has accused the Freedom Caucus lawmakers of snatching a “defeat from the jaws of victory” with their rejection of the White House-backed healthcare bill to replace President Barack Obama’s 2010 healthcare reform bill.
  • In interviews with 10 of the roughly three dozen House Freedom Caucus members, the lawmakers said they were eager to put aside tensions over the healthcare debacle and seek common ground on tax reform.
  • But there is no consensus, even within the conservative faction, on details of a tax-reform bill, with some members open to discussing ideas such as the border tax plan supported by House leaders and others opposed to it.

(CNBC) Homebuilders struggle to fill jobs

  • Homes in Denver take about two months longer than normal to build, and, in some cases, contractors are doubling their wages just to keep workers from skipping to the next site.
  • “The labor shortage has basically grown and accelerated. It’s the top challenge in the building industry right now,” said Rob Dietz, chief economist with the National Association of Home Builders.
  • “Because the building industry is highly decentralized you do see poaching. There are situations where you can recruit a worker, and they can work for you for a quarter or two, and then they’re working for another subcontractor down the road,” Dietz said.
  • Wages in the residential building industry are growing at twice the rate of wages in the overall economy. Labor is the top concern among the nation’s builders, according to an NAHB survey, and worry over its cost and availability is growing.

(Multichannel News) Spectrum Auction Ends with a Total Take of $19.8B

  • “Today’s conclusion of the assignment phase formally brings all bidding activity in this multi-phase auction to a close,” said Gary Epstein, chair of the FCC’s Incentive Auction Task Force. “The incentive auction has required unprecedented commitment from bidders as well as Commission staff, who from the moment that broadcasters made their initial commitments to the final bids processed this afternoon have worked each day to assist bidders and ensure a fair and successful auction. We are excited to share the results of the reverse and forward auctions and extensive information about the post-auction transition in the next few weeks.”
  • That is when the FCC will announce which stations and forward auction bidders got what and start the clock on the 39-month repack of TV stations and turning over the licenses for the reclaimed broadcast spectrum—84 MHz minus 14 MHz for unlicensed wireless—to those forward auction bidders.
  • The day after the mid-April release of the Auction Closing and Channel Reassignment Public Notice, which will identify the winning TV station bidders, the FCC will release “complete forward auction round-by-round results, including bidder identities.”
30 Mar 2017
High Yield Quarterly, Market Commentary Rich Balestra - Portfolio Manager 0 comment

Q1 2017 High Yield Commentary

The High Yield Market returned 2.70% during the first quarter of 2017, continuing, although at a slower pace, the robust 2016 performance (+17.13%) which was the best since the 2009 recovery performance of 58.21% (Bloomberg Barclays Indices). As was the case for all of 2016, Q1 performance was characterized by outsized performance of the weakest credit sectors within the Index, i.e., the CCC and lower rated credits, which currently account for approximately 15% of the high yield universe. These lowest rated credits returned slightly less than 5% during Q1 (they returned over 30% during 2016). In fact, if we were to exclude the CCC rated credit sub‐sector, the Index would have posted a 1.44% return, lower than our gross return performance of 2.00%. It is important to note that during 2008 and 2015, that lowest rated credit subsector recorded negative returns of 49.53% and 12.11%, respectively. We highlight these returns to point out that with outsized positive returns come outsized possible losses, and the volatility of that credit subsector may not be appropriate for many clients’ risk profile and tolerance levels.

Unlike calendar 2016’s performance that was, in great measure, attributable to the robust recovery of the Energy Sector, Q1 witnessed positive performance by all Sectors, led by the Utility Sector, which was up 4.37%. That Sector accounts for less than 2.76% of the Index, so its performance had a positive impact on the Index performance, but clearly not the significant impact that Energy played during 2016 (The Energy Sector was up over 37% during 2016 and comprised approximately 15% of the Index at year end.) In fact, Energy’s 3.0% return approximated the overall Index as oil traded in a $50‐$55 range for most of the quarter, although it did drop to a low of $47.34 late in the quarter.

The performance of the least credit‐worthy within the high yield universe represented the continuing “search for yield” that we have witnessed for several years as interest rates on Treasury bonds, in general, fell to their lowest levels in a decade during July ‘16 and then increased to a level at year end (2.45%) that was only marginally higher than where it began the year. After the FOMC increased the Federal Funds Target Rate by 25bps in December, the 10‐year Treasury yield declined from 2.60% mid‐December ’16 to 2.39% at March 31. (This search for yield has also been observed in the investment grade universe where the lowest credit rated debt has outperformed the investment grade index as a whole.) The result of this “search” has been the tightening of spreads, i.e. the premium yield of bonds relative to the risk free Treasury rate. At year‐end 2015, the premium yield on BB, B, and CCC rated bonds was 417, 654, and 1,351 basis points, respectively. We ended 2016 with those premia at 270, 382, and 807, respectively; and by March 31, spreads had tightened even more – to 252, 375, and 692, respectively. So, while Treasury rates over the first 3 months of 2017 declined, the premium demanded by the investor for “risk compensation” continued to fall considerably. We make note of this only to inform the investor of the market dynamics surrounding both yield movement (up and down) and premia movement: both impact bond prices.

The demand for yield was met by $98.7BB in new issuance during Q1 2017; total 2016 issuance was $286BB. The Energy and Metal & Mining Sectors were the largest issuers, accounting for 13% and 10% of total volume, respectively. It is interesting to note that the several years prior to 2015, 17‐19% of new issuance came from the lowest rated credits, and that percentage declined dramatically during 2015‐2016, to just over 10% in 2016. However, Q1 2017 saw that percentage increase to almost 16%.

Given that Cincinnati Asset Management does not buy CCC rated securities, it is easily understood that our performance trailed that of the Index for 1st Quarter (2.00% gross total return vs. 2.70%). We have remained cautious in our investment strategy, maintaining higher than normal cash balances as we become more selective (higher credit quality) in our security purchases. Given the market performance, these cash balances served as a drag on our performance as well.

Further addressing the issue of performance by credit sub-sector, the following table highlights the impact of the performance of the several credit sub‐sectors in the high yield universe on the aggregate high yield performance:

With respect to 2017, we continue to be cautious. Many potentially positive factors could favorably impact corporations in the high yield space (changes in the tax code, relaxed and fewer regulations, etc.); however, the impact of changes in trade agreements and the health of the global economy need to be carefully monitored. Defaults, excluding Energy, have remained lower than the long‐term average default rate – a positive sign with respect to the current health of the asset category. On the other hand, the “shrinking” spreads (i.e., premium to Treasury bonds) is of concern given that the “search for yield” may have resulted in an overvalued market. While CCC spreads have tightened considerably, BB and B spreads remain modestly tighter on the year, although they had tightened considerably during 2016. The tightening of spreads implies the expectation of a robust recovery in corporate performance. In this uncertain environment, it is important to focus on credit research and to attempt to buy bonds of corporations that we believe can withstand economic headwinds and can enjoy improved credit metrics in a stable to improving economy.

Cincinnati Asset Management’s High Yield Strategy remains conservatively positioned. The construction of the portfolio is driven by our bottom‐up analysis and our restriction from CCC‐rated securities adds an additional level of conservatism.

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The index is unmanaged and does not take into account fees, expenses, and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.

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