Tag: weekly insight

  • Home
  • weekly insight
10 Nov 2017
IG News Items 11102017
Investment Grade Weekly, Weekly Insights CAM Bond Funds 0 comment

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, IG fund flows on the week were $3.598bln. This brings the YTD total to +$286.112bln in total inflows into the investment grade markets. According to Bloomberg, investment grade corporate issuance for the week was $47.265bln, and YTD total corporate bond issuance was $1.239t. Investment grade corporate bond issuance thus far in 2017 is down 1% y/y when compared to 2016.

(Bloomberg) Investment-Grade Borrowers Power Through Thick Market

  • High-grade issuers continue to shrug off broader market weakness and forge ahead with funding plans. More than 30 investment-grade issuers have tapped the USD market this week, powering through soft market conditions and high supply. 
    • Each session this week has kicked off with a multi-tranche corporate deal; Apple Inc. (AAPL) $7b 6-part Monday, Oracle Corp. (ORCL) $10b 5-part Tuesday and Johnson & Johnson (JNJ) $4.5b 5-part on Wednesday
    • Utilities are having an active week, which was forecast with the completion of this year’s EEI conference. 
    • Weekly volume is set to top $40b in total volume, a feat not accomplished since early September

(Bloomberg) CenturyLink Dividend Doubts Send Shares, Bonds Plummeting

  • CenturyLink Inc.’s shares and bonds plummeted after the telecommunications and Internet provider reduced its full-year forecast, boosting fears among investors that a dividend cut will follow.
  • The company said 2017 results would fall short of guidance it provided in February because of lower-than-expected revenue growth as more people gave up on landlines. The shares plunged to their lowest value in seven years and the bonds were the biggest decliners in high-yield debt.
  • Analysts peppered company officials with questions on an earnings conference call Wednesday night over the level of the dividend. They asked whether the current payout — 54 cents a quarter — can be maintained even as the company repays debt for its $34 billion acquisition of Level 3 Communications Inc. Regulators last month approved the deal, which CenturyLink hopes will stabilize its business among growing competition from cable companies.
  • “CenturyLink’s near-term liquidity is OK,” said Stephen Flynn, a Bloomberg Intelligence analyst. “That said, CenturyLink does have a very large debt load and debt obligations step up significantly starting in 2020.”
  • CenturyLink executives said on the conference call that they expect cost savings and accelerated growth from the Level 3 acquisition to support the current shareholder payout.
  • “We are confident we can continue to pay the dividend while investing in growth and in our network,” Chief Executive Officer Glen Post said on the call.

(Bloomberg) Ebitda Mocked in Sign of How Frothy Debt Markets Have Become

  • In an anything-goes world for debt, there’s a new definition for Ebitda: Eventually Busted, Interesting Theory, Deeply Aspirational.
  • That’s the tongue-in-cheek assessment of a Moody’s analyst who’s been tracking earnings projections used by companies lately when asking investors for loans. Ebitda really means earnings before interest, taxes, depreciation and amortization, but borrowers have been stretching the limits of what’s acceptable when they tweak their accounting to boost the figure.
  • The adjustments — known as “add-backs” in Wall Street lingo — make companies look more creditworthy by increasing revenue and earnings forecasts. They’re legitimate when companies use them to factor out foreseeable or one-time events that might unfairly reduce the number. But in this frothy market, the size and vagueness of some add-backs seen in offering documents are raising eyebrows:
    • Eating Recovery Center, which helps people with diet disorders, almost doubled Ebitda through add-backs for a debt sale last month to help finance CCMP Capital’s purchase of a controlling stake in the company. Almost half of the add-backs were calculated on the basis that the company will “capture the true earnings potential” of its expanded treatment centers.
    • When whitening-agent firm Kronos Worldwide Inc. asked lenders for 400 million euros last month ($470 million), its earnings formula allowed wiggle room for half a dozen specific future actions, such as mergers, “and any operational changes.” Kronos didn’t say what that means.
    • Avantor Inc.’s $7.5 billion financing, also last month, pitched an adjusted earnings figure amounting to a 91 percent hike. The industrial supplierclaimed allowances such as shares awarded to employees as compensation, and operational benefits from a merger.
    • GoDaddy Inc.’s offering back in February included 21 ways the web-hosting registration service could adjust Ebitda upward, including repeatable savings and synergies from anything it does, or expects to do, in “good faith” for a two-year period.
  • Derek Gluckman, senior covenant officer at Moody’s Investors Service who floated the cheeky definition for Ebitda, said frustrated investors have little choice but to buy because of the overheated market. “We are seeing the prolonged effects of the persistent supply-demand imbalance for loans, which favors the borrowers enormously,” Gluckman said.
  • Traditional add-backs let borrowers include future savings from cost-cutting or increases in revenue in their Ebitda. There’s nothing illegal or underhanded about the practice, and the offerings clearly lay out exceptions to potential creditors.
  • But in a market that’s already in danger of boiling over, aggressive attempts to make companies appear more creditworthy could be masking the true amount of leverage in the system — and the pain for investors if the loans go sour. On top of that, the Trump administration is seeking to dial backregulations aimed at curtailing leverage, and a move is afoot in Congress to review and perhaps kill the current guidance from government agencies.
  • Add-backs without caps or restrictions for synergies and cost savings spread to 44 percent of new loan deals in the third quarter, from 27.1 percent in the first, according to research firm Covenant Review. In 2017, and each of the two preceding years, 91 percent to 94 percent of North American bonds had at least one Ebitda add-back considered aggressive by Moody’s.
  • More aggressive add-backs are one part of a trend toward weakening protections. The quality of covenants, or protections afforded to lenders, in junk bonds is hovering above a record low, according to Moody’s. Leverage levels are also near historical highs at 5.3 times in September, S&P Global Ratings said this week.

 IG News Items 11102017

(Fierce Wireless) Sprint’s Claure: Tower companies ‘going to be very happy’ with our capex

  • The nation’s fourth-largest wireless network operator has lowered its capex guidance several times over the last two years, raising the eyebrows of analysts who have questioned its ability to keep pace with the network upgrades of its rivals. But Son said on Monday that SoftBank not only will increase its stake in Sprint from 83% to 85%, but it will also roughly triple Sprint’s capex to a range of $5 billion to $6 billion beginning in a few quarters.
  • Sprint has also been criticized for trying to cut costs by focusing on small cells to densify its network, minimizing its spending on traditional towers. But that strategy hasn’t always been as effective as the carrier hoped, and Claure said Sprint will make macrocells a higher priority as capex ramps up.
  • “The last year and a half, two years have been a great learning experience. We’ve tried to disrupt the way networks get built. We’ve been successful in certain areas and, to be fair, we haven’t been successful in others,” he conceded. “So we’re going to go toward a more traditional network build-out. Our friends at the tower companies I think are going to be very happy.”
  • Claure added that fewer than half of its towers currently access the carrier’s valuable 2.5 GHz spectrum. Sprint expects all its macrosites to support triband spectrum.
  • Sprint still faces a mountain of debt, of course: It’s $38 billion in debt, about half of which will come due over the next four years. But Claure said the carrier’s ongoing cost-cutting efforts continue to prove successful, and its innovative financial mechanisms such as its handset-leasing program and its ever-improving cash position will help finance the network investments.

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

  • Teva Pharmaceutical Industries Ltd. Chief Executive OfficerKare 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.
  • Kare Schultz
  • The company will have to either sell assets or find external sources of financing to meet its obligations, Fitch said. Sales of Teva’s biggest drug, Copaxone, are under siege after a cheaper copycat version of the multiple sclerosis medicine entered the U.S. market last month. Schultz, who took the helm at the start of this month, has pledged to increase profits and cash flow.
  • While Teva has enough free cash flow and proceeds from asset sales to pay down short-term debt, tackling longer-term leverage could be much more difficult. With the stock down 70 percent this year, issuing straight equity is an increasingly less attractive financing option. That may leave hybrid securities like mandatory convertibles the best source of new capital, Levenson said.
  • Fitch downgraded the company’s debt rating to BB from BBB-. Standard & Poor’s and Moody’s Investors Service have both assigned it the lowest investment-grade rating, and all three have warned another downgrade is possible.
    • Teva Bonds Already Trading at High-Yield Levels
      • Teva’s most liquid 10-year equivalent bonds are the Baa3/BBB- rated 3.15% unsecured notes due in October 2026, which have fallen 10 points from recent highs to the mid-80s, implying a yield of 5.2%, +290 bps. Using Bloomberg Barclays HY Index, BB bond spreads are less than 10 bps wide of 10-year lows of +192 bps on Oct. 24 and single B spreads of about +330 bps. Teva 2.2% unsecured notes due July 2021 are trading at a spread of +250 bps. In yield terms, Teva 2.2% unsecured notes due July 2021 are approaching 4.5%. (11/08/17)

(Bloomberg) Fixed 5G was tested by the cable industry, and it came up a bit short

  • One of the hottest topics in the wireless industry right now is whether fixed 5G will be able to replace wired connections like DSL, DOCSIS or fiber. The motivation behind this question is obvious: 5G operators might be able to beam high-speed wireless services into wired rivals’ homes (literally going over the top) to steal broadband internet customers away from providers like Charter and Comcast.
  • A wide range of tests and reports by wireless carriers and vendors have found plenty to get excited about in 5G—there’s lots of slideware featuring blazing fast speeds and limitless potential. But a new report from two leading players in the cable industry offers a decidedly more pragmatic picture of the fixed 5G space.
  • Although the millimeter wave spectrum bands (generally those above 28 GHz) were initially targeted for 5G deployments, T-Mobile, Sprint and others are now pushing to deploy 5G in bands 6 GHz and below. Indeed, T-Mobile has said its 5G deployment, kicking off in 2019, will go all the way down to 600 MHz.
  • However, lower spectrum bands generally transmit less data across farther geographic distances, while higher spectrum bands transmit more data across shorter geographic distances.
  • For cable players specifically, the 3.5 GHz CBRS band has generated a significant amount of attention, with Charter detailing its wide range of fixed wireless tests in the band. In their report, Arris and CableLabs noted that the 3.5 GHz band can provide “100s of Mbps of broadband capability” in NLOS conditions at distances up to 800 meters—and those speeds could be raised to up to 10 Gbps through channel aggregation of the full 70 MHz available in a licensed scenario.
  • Despite the burgeoning possibilities in the 3.5 GHz band, the report concludes that lower spectrum bands like 3.5 GHz simply won’t be able to keep pace with consumers’ growing demands for data, and will likely be used for backup connections. “For Fixed Wireless Access to be able to compete with Wired Solution, it has to be able to provide Gbps peak rates on both the Downlink and the Uplink. To achieve these peak data rates in a Wireless Access network the only wireless bandwidth available with sufficient contiguous spectrum to meet 3+ Gbps SG [service group] downstream service—if the spectral efficiencies remain under 10 bps/Hz—lies well into LOS-delivered (and near millimeter wave) frequencies (28 GHz, 37 GHz, 39 GHz, 60 GHz and 64-71 GHz). These frequencies offer huge amounts of bandwidth (the unlicensed bands alone in the 60 GHz range can deliver 128 Gbps),” the report states.
  • “But these frequencies present some clear technical, operational, and aesthetic challenges,” the authors add.
  • Although they have been long neglected, millimeter-wave bands have gained substantial notoriety in recent years. Indeed, Verizon and AT&T have spent several billion dollars this year acquiring millimeter-wave spectrum licenses.
  • And for good reason: As the report points out, speeds in millimeter wave transmissions can seem almost magical. “Link capacities of approximately 750 Mbps were achievable in LOS conditions, which were degraded to just under 490 Mbps in adverse weather conditions,” the report states, citing CableLabs tests of transmissions in the 37 GHz band. “Also of particular interest was the maximum link length that can be achieved to deliver service where a LOS link extending approximately 2600 feet while delivering nearly 190 Mbps was demonstrated.”
  • However, the report outlines the significant challenges players face in deploying millimeter-wave systems. In its 37 GHz tests, CableLabs found that speeds decreased to around 200 Mbps at 150 feet if signals have to travel through foliage – and those figures slow to below 100 Mbps at 150 feet in dense foliage.
  • Rain, snow, wind, window tinting, moving vans and other commonplace objects can all conspire to dramatically reduce the effectiveness of millimeter wave transmissions. “The impact of deciduous and conifer trees (under gusty wind conditions) suggest that the leaf density from the conifer more frequently produces heavy link losses and these, more so at higher carrier frequencies,” the report thoughtfully notes.
  • Thus, as is explained in the report, it’s still early days in 5G. Fixed applications in millimeter wave bands are some of the first applications of the technology, but that’s certainly not the only application. And advances in MIMO, beamforming, edge computing and other, related technologies may well push 5G calculations into more appealing territory.
  • Nonetheless, it’s definitely worth looking at 5G with a clear pair of eyes.
10 Nov 2017
High Yield Weekly, Weekly Insights Kathryn Bailey 0 comment

CAM High Yield Weekly Insights

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.”
03 Nov 2017
Investment Grade Weekly, Weekly Insights Kathryn Bailey 0 comment

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, IG fund flows on the week were $5.362bln. This brings the YTD total to +$282.514bln in total inflows into the investment grade markets. According to Bloomberg, investment grade corporate issuance for the week was $24.35bln, and YTD total corporate bond issuance was $1.19t. Investment grade corporate bond issuance thus far in 2017 is down 3% y/y when compared to 2016.

(WSJ) Mr. Ordinary: Who Is Jerome Powell, Trump’s Federal Reserve Pick?

  • When a business-school student sought out Jerome Powell several years ago for career advice, Mr. Powell, President Donald Trump’s pick to become the 16th chairman of the Federal Reserve, offered his philosophy on getting ahead.
  • His advice: Keep your head down and work hard, according to the student, Sean Gillispie, today a software product director in the Washington area. Mr. Powell told him he would be surprised “how many otherwise competent people self-sabotage with poor behavior,” Mr. Gillispie recalls.
  • In recent years, there have been two kinds of Fed chairmen: commanding personalities such as Paul Volcker and Alan Greenspan, whose views on inflation and interest rates dominated central banking from the 1980s through the mid-2000s; and the consensus-driven leaders, Ben Bernanke and Janet Yellen, who guided the central bank toward more open decision-making and de-emphasized the power of the chairman.
  • Mr. Powell, judging by his nearly 40-year career in government, law and banking, is likely to be in the latter group. That means a Powell Fed might look a lot like it has since Mr. Greenspan retired in 2006.
  • Such continuity would be welcome in the markets, which don’t like uncertainty, and at the Fed, one of the world’s most powerful economic policy-making bodies. It also could please Mr. Trump, who has spoken approvingly of record stock prices and declining unemployment.
  • “I would be surprised if [Mr. Powell] walked away at the end of his term with a huge stamp of reshaping the Fed,” says Charles Plosser, who as president of the Federal Reserve Bank of Philadelphia until 2015 worked closely with Mr. Powell. “He’s not likely to lead Federal Reserve reform and innovation on monetary policy, but that does not mean he won’t be a good chair.”
  • Unlike Ms. Yellen and Mr. Bernanke, Mr. Powell doesn’t hold a degree in economics—which would make him the first chairman since the late 1970s without such a credential. Although he has worked as an investor, lawyer and bank regulator, he has no experience leading a large organization.
  • The Fed is no simple bureaucracy. It has a seven-member board, 12 regional banks, a secretive decision-making process and 2,700 employees involved in interest-rate decisions, bank regulation and managing the nation’s currency circulation. It also serves as the Treasury’s fiscal agent in managing the nation’s debt.
  • It is in the process of raising short-term interest rates from near-zero levels and of gradually winding down a $4.2 trillion portfolio of mortgage and Treasury securities built up during and after the financial crisis. Mr. Powell was part of a group in 2013 that pressed Mr. Bernanke to wind down the bond-purchase programs, although he has never dissented in 44 meetings on the Fed board.
  • Mr. Powell’s most notable mark on monetary policy at the Fed was his involvement in bond-buying phase out. Worried that investors believed the programs would continue indefinitely, he joined with two other Fed governors, Betsy Duke and Jeremy Stein, to persuade Mr. Bernanke to scale the program back. The effort was typical of Mr. Powell’s style—conducted almost entirely behind the scenes and with little fanfare.
  • One person who has worked with several Fed officials in recent years says he often heard about petty personal rivalries or feuds between board members, but these people never had a bad word for Mr. Powell.
  • “He is remarkably undogmatic,” says Jeremy Stein, a Harvard University economics professor, Democrat and former Fed governor whose office was adjacent to Mr. Powell’s. “He listens more than he talks.”
  • Mr. Powell has held several different roles on a board that has been plagued with vacancies in several years. He earned respect from colleagues for tackling unheralded operational tasks and technical issues, including managing payment-processing systems. He also boosted morale this summer when he oversaw the implementation of a relaxed summer dress code.

(Moody’s) Moody’s downgrades CenturyLink to Ba3; outlook negative

  • Moody’s Investors Service, (Moody’s) has downgraded CenturyLink, Inc.’s (CenturyLink) corporate family rating (CFR) to Ba3 from Ba2, downgraded its senior unsecured rating to B2 from Ba3, and confirmed its senior secured rating at Ba3. The downgrade reflects CenturyLink’s higher leverage related to its imminent acquisition of Level 3 Communications, Inc. (Level 3).
  • The senior unsecured ratings of Qwest Corporation and Embarq Corporation were downgraded to Ba2 from Ba1.

(Fitch) Fitch Downgrades CenturyLink’s Ratings to ‘BB’ / Affirms Level 3

  • Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDRs) assigned to CenturyLink, Inc. (CenturyLink) and its subsidiaries to ‘BB’ from ‘BB+’ and removed the ratings from Negative Watch. In addition, Fitch has affirmed the IDRs for Level 3 Communications, Inc. (LVLT) and its subsidiary, Level 3 Financing, Inc. The Outlook is Stable for all ratings. The rating action is due to CenturyLink’s completion of the acquisition of LVLT, which closed on Nov. 1, 2017 following approval by the Federal Communications Commission.
  • The $9.9 billion in secured financing is guaranteed by certain existing CenturyLink subsidiaries (including Embarq Corp.), except for Qwest Corporation (QC), and by a new holding company, Level 3 Parent, LLC, which is now LVLT’s parent. The stock of both LVLT and QC has been pledged as collateral for the facilities. LVLT and its subsidiaries will not provide guarantees to HoldCo or the acquisition debt, and its existing debt will remain outstanding.
  • Based on the one-notch downgrade of CenturyLink’s IDR to ‘BB’, Fitch has taken the following rating actions:
    • –A one-notch downgrade of CenturyLink’s and Qwest Capital Funding’s senior unsecured debt to ‘BB’/’RR4’. The one-notch downgrade is consistent with Fitch’s notching treatment of issue ratings with ‘RR4’ recoveries, reflecting a rating at the same level as the IDR.

(Bloomberg) Teva Lowers Debt Repayment Forecast to $3.5B: McClellan

  • Teva has no current plan to raise new equity; will consider raising equity with new management, Interim CFO Michael McClellan says on conference call with analysts.
    • Credit rating downgrade would raise rates on Teva term loans: CFO
    • Teva’s $6b term loans would face 25 basis point rise
    • Asset sales to generate $2.3b in net proceeds, majority to be collected this year: outgoing interim CEO Peterburg
    • CEO Schultz plans to focus on key generic launches, scale of operations, strengthening operations, stabilizing operating profit and cash flow
    • Teva will do “whatever is needed to improve performance:” Chairman Barer

(Bloomberg) Hurricane Rebound Comes Up Short in Payrolls

  • The October jobs report was well above trend, as a rebound from hurricane interruptions lifted hiring, albeit by not as much as the consensus of economists anticipated. However, significant upward revisions to August and September mean the net hiring gain was considerably stronger than the October headline would otherwise suggest.
  • The important takeaway from this report is that there has been little interruption of the underlying hiring trend due to recent hurricanes. In fact, the categories most impacted by storms — such as leisure and hospitality — posted complete recoveries. The underlying hiring pace of job creation (roughly 160k) exceeds the natural growth rate of the labor force, whereby the unemployment rate continues to grind lower. This is a critical development for policy makers, because unemployment is now running well below their estimate of the neutral level. As a result, Fed officials will be less concerned about the backsliding of inflation, which continues to perplex forecasters.
  • Tighter labor conditions will ultimately drive wages and consumer inflation higher. While the level of unemployment at which this occurs may be lower than policy makers currently estimate, it will almost certainly occur if unemployment descends into 3% territory; this appears likely over the next few quarters.
  • It is difficult to discern if wage pressures are flaring up in the latest jobs report, as average hourly earnings recoiled from a hurricane-driven surge in September. Nonetheless, other metrics of labor cost pressures, such as the employment cost index reported earlier this week, are reapproaching post-recession highs — thereby signaling that labor inflation is indeed mounting, albeit gradually.
  • Unfortunately, the hurricane distortions evident in both the September and October jobs reports leave policy makers with just one clean labor assessment ahead of their Dec. 13 rate decision. However, the latest GDP results, swift post-storm recovery in an array of data and solid employment gains all give the green light to policy makers to continue normalizing interest rates, particularly given that financial conditions continue to ease.
03 Nov 2017
High Yield Weekly, Weekly Insights Kathryn Bailey 0 comment

CAM High Yield Weekly Insights

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.
27 Oct 2017
Investment Grade Weekly, Weekly Insights Kathryn Bailey 0 comment

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, IG fund flows on the week were $3.2bln. This brings the YTD total to +$277.152bln in total inflows into the investment grade markets. According to Bloomberg, investment grade corporate issuance for the week was $33.71bln, and YTD total corporate bond issuance was $1.163t. Investment grade corporate bond issuance thus far in 2017 is down 3% y/y when compared to 2016.

(Nikkei Asian Review) Abe’s coalition retains two-thirds majority in Japan election

  • Japanese Prime Minister Shinzo Abe’s ruling coalition held on to a two-thirds majority of the seats in Japan’s lower house after Sunday’s general election, putting the prime minister in a position to move toward revising the country’s pacifist constitution.
  • Abe’s Liberal Democratic Party and coalition partner Komeito easily saw off a challenge from a divided opposition, gaining 313 seats of the contested 465 seats.
  • Abe’s victory gives the prime minister a fresh mandate to pursue his cherished goal of reforming Japan’s postwar constitution and to continue his economic-stimulus measures. If he wins a fresh three-year term as LDP leader at a party congress next year, he could govern until 2021, making him Japan’s longest serving prime minister since World War II.
  • Following the coalition’s victory, Abenomics will get a new start. In the coming months, the prime minister will prepare a 2 trillion yen policy package that is to include making education free.

(TheStreet) Charter and Comcast Shares Get Punished for Cord Cutting

  • Over-the-top video services such as Netflix and Amazon Prime are eating away at pay-TV’s customer base, but Comcast says cord-cutting isn’t the end of the world.
  • Comcast badly wants to hold onto its video subscribers, although Chairman and CEO Brian Roberts told investors during a Thursday morning investor call that the cable operator has been preparing for the world of cord cutting.
  • “We anticipated this shift,” Roberts said. Comcast invested in its Emmy-winning X1 entertainment operating system that allows users to watch Netflix or Alphabet’s (GOOGL – Get Report) YouTube via its platform, developed a remote control that recognizes voice commands and launched the Xfinity streaming app, among other initiatives that enhance its video service.
  • When customers cut the cord to Comcast’s pay-tv offering, Roberts and other executives suggested, they don’t kill the cable operator’s model.
  • “Broadband connectivity, both residential and business — that’s now a $20 billion-year business,” Roberts said.
  • “That is a big portion of our company. That’s growing at double-digit revenue growth, and it is very accretive to our margin.” Over the next five years, he added, broadband usage will only increase with the growth of the Internet of things, smart home applications, virtual reality, 4K video, smart electrical grids and other applications.
  • Cord cutting actually improves some of Comcast’s metrics, cable unit CEO David Watson told investors.
  • While Comcast still wants customers to buy a package of video, mobile phone service, home security and other services, as the company has said that the bundle of services reduces customer defections. Or course, the package also boosts revenues. At the same time, though, Comcast actually has higher profit margins if consumers cut out other services. “The economics are very encouraging if they do select broadband only,” Watson said, noting not only the higher profit margins but also the lower cost to deliver just broadband.

(TheStreet) Coca-Cola Proves It’s Not Irrelevant

  • Coca-Cola Co. reported better-than-feared third-quarter earnings on Wednesday, Oct. 25, as the beverage company continues to reinvent itself for more health-focused consumers.
  • While Coca-Cola continues to “drive relevance” in its core brands like Coke, CEO James Quincey told analysts on the conference call that expanding its portfolio of smaller brands is crucial to the company’s success.
  • “The consumer landscape is changing,” he said. “We see an increasing number of smaller, faster competitors” catering to consumers seeking more variety. “In order to thrive in this kind of environment, we need to be more entrepreneurial and agile.” The Topo Chico acquisition is one such effort at “growing our portfolio multiple ways.”
  • Topo Chico, part of Coca-Cola’s venturing and emerging brands unit, will follow the same playbook Coca-Cola used after acquiring Honest Tea, maintaining the brand’s entrepreneurial spirit while rapidly expanding its reach.
  • “Growing premium beverage such as adult craft beverages,” like mixers, is another priority, Quincey added. Coca-Cola introduced a premium mixer brand, Royal Bliss, in Spain, and also relaunched Schweppes mixers in the U.K.
  • Strong North American performance came after Coca-Cola’s biggest competitor, PepsiCo Inc. , reported weak results in the region. Quincey downplayed the comparison, saying that in the highly competitive North American market, “it’s not just one large competitor we face-there are lots of competitors, large, medium, and small.”

(Bloomberg) Lear Full Year Sales Forecast Beats Highest Estimate

  • Lear forecast sales for the full year; the guidance beat the highest analyst estimate.
    • Sees FY sales $20.4 billion, estimate $20.06 billion (range $19.61 billion to $20.33 billion) (Bloomberg data)
    • 3Q net sales $4.98 billion, estimate $4.84 billion (range $4.65 billion to $4.95 billion) (BD)
    • 3Q adjusted EPS $3.96, estimate $3.74 (range $3.42 to $3.97) (BD)
    • Boosts Yr Views for Sales, Earnings, and Free Cash Flow
  • Lear’s credit profile may continue to be among the strongest of the auto suppliers covered by BI Credit in 2017. Downturn analysis shows the company’s profile weakening, but remaining well within raters’ targets and its maximum leverage covenant. Maintenance of current credit metrics may be sufficient for further upgrades of Lear’s bonds, based on rating providers’ comments. The company’s bonds trade wider than Delphi and BorgWarner, despite having outperformed them over the past year. (Bloomberg Intelligence – 09/25/17)

(Bloomberg) U.S. Notches Solid 3% Economic Growth, Despite Hurricanes

  • The U.S. economy grew robustly in the third quarter despite two hurricanes, propelled by steady spending from American businesses and households.
  • Gross domestic product, the broadest measure of goods and services made in the U.S., expanded at a 3% annual rate in July through September, the Commerce Department said Friday. Economists surveyed by The Wall Street Journal had projected a 2.7% gain.
  • Output expanded at 3.1% rate in the second quarter. This marks the economy’s best six-month stretch since mid-2014.
  • The third quarter’s strong growth is particularly impressive because two hurricanes—Harvey and Irma—temporarily shut down major population centers in Texas and Florida in August and September. The Commerce Department said in its report Friday that the storms likely suppressed business activity such as oil and gas extraction in Texas and agriculture production in Florida. But the agency added, “it is not possible to estimate the overall impact of Hurricanes Harvey and Irma on 2017 third-quarter GDP.”
27 Oct 2017
High Yield Weekly, Weekly Insights Kathryn Bailey 0 comment

CAM High Yield Weekly Insights

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.1 billion and year to date flows stand at -$7.3 billion. New issuance for the week was $4.3 billion and year to date HY is at $229 billion, which is up 22% over the same period last year.

(Bloomberg) US Issuers to Look to European High-Yield Bond Market in 2018

  • Banks are anticipating more U.S. companies to tap the European market in a bid to diversify funding and capitalize on the region’s low interest rates in light of ongoing U.S. rate hikes.
  • “U.S.-based issuers with a desire for euro- or sterling-denominated debt liabilities are increasingly interested in issuing directly in euros or sterling given the relatively low interest rate and tight spread environment that continues to prevail in Europe,” said Mathias Blumschein, co-head of high-yield debt capital markets at ING Groep NV. The economics of issuing in dollars and swapping back into euros have become less attractive, he said.
  • Bond sales from Diversey Inc, Aramark and Netflix Inc have helped take year-to-date European issuance of high-yield bonds by U.S. firms to a record 11.0 billion euros-equivalent, according to data compiled by Bloomberg. This has already eclipsed the previous highest full-year total of 9.7 billion euros-equivalent in 2016, the data show.

(Pittsburgh Post-Gazette) Arconic Reports Earnings and Announces CEO

  • Arconic shares tumbled 10 percent Monday after the company reported a third-quarter earnings miss, raised its full-year sales estimate and named a veteran General Electric executive CEO.
  • The aluminum and titanium parts maker said third-quarter profit fell 28 percent to $119 million, or 22 cents per share, vs. earnings of $166 million, or 33 cents per share, in the year ago quarter. Sales totaled $3.24 billion, up 3 percent from year-ago levels.
  • Arconic said Charles “Chip” Blankenship, 51, will take over as CEO, effective Jan. 15. Mr. Blankenship formerly led GE’s commercial engine operations and was the president and CEO of its appliance business before the unit was sold to Haier Co. last year. He will also become a member of Arconic’s board.
  • Arconic said it now expects to report sales of $12.6 billion to $12.8 billion for the year, up from its previous forecast of $12.3 billion to $12.7 billion. The company affirmed its full-year guidance that adjusted earnings will be $1.15 to $1.20 per share.
  • Arconic was formed in November when Alcoa broke into two companies. The mining, refining and smelting businesses maintained the Alcoa name while the businesses that make aluminum and titanium parts for the aerospace, automotive and other industries became Arconic.

(PR Newswire) International Paper and Graphic Packaging Create Leading Consumer Packaging Platform

  • International Paper has signed a definitive agreement to contribute its North America Consumer Packaging business to Graphic Packaging in a transaction valued at $1.8 billion. IP plans to use $660 million in cash proceeds from a loan being assumed by Graphic Packaging to pay down existing debt. IP will also receive a 20.5% ownership interest valued at $1.14 billion in a subsidiary of Graphic Packaging that will hold the assets for the combined business. The transaction is expected to close in early 2018, subject to the receipt of regulatory approval and certain other closing conditions.
  • “After evaluating a range of strategic options, we believe this transaction represents excellent value for IP’s shareholders,” said International Paper Chairman and CEO Mark Sutton. “Investing in Graphic Packaging gives IP the opportunity to benefit from a much stronger value-creation consumer packaging platform, while allowing us to remain focused on growing value in our core businesses. Our North America Consumer Packaging business has a talented team, very good assets and great customers, and I am confident of the results the combined business will achieve.”
  • International Paper’s North America Consumer Packaging business is a leading producer and converter of solid bleached board used in a variety of fiber-based foodservice products such as hot and cold cups, cartons, paper plates, food containers and liquid packaging. The transaction includes 3,900 Coated Paperboard and Foodservice employees located at 10 locations in the United States and United Kingdom.

(Tech Crunch) Netflix is raising $1.6B in debt as its content costs balloon

  • Netflix raised a very large lump of debt for the typical laundry list of uses though, the timing comes as its content costs may hit as much as $8 billion next year.
  • The announcement comes off a strong earnings report last week, where Netflix once again beat expectations for its subscriber growth. The company also said it expects to spend between $7 billion and $8 billion on original content in 2018, up from around $6 billion on original content this year. To be sure, original content — and racking up those Emmy awards — is critical to Netflix’s future as it looks to convert those high-quality shows into new subscribers.
  • Original content is also going to be increasingly critical as it grows internationally, where it’s acquiring the majority of its new subscribers. Netflix said it would raise its prices earlier this year, and that may temper some expectations for domestic growth. The company’s future may rest on making sure that original content is strong, and also expanding into internationally-oriented original content like its original show 3%. (That show is quite good, by the way, and does a good job of demonstrating that internationally-focused content could perform well domestically as well.)
20 Oct 2017
High Yield Weekly, Weekly Insights Kathryn Bailey 0 comment

CAM High Yield Weekly Insights

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.4 billion and year to date flows stand at -$7.2 billion. New issuance for the week was $2.2 billion and year to date HY is at $224 billion, which is up 21% over the same period last year.

(Bloomberg) Refinancings Boost Corporate High Yield Primary Markets

  • Corporate high yield debt issuers have been active this month as credit spreads touched three-year lows. Most of the deals are refinancing-related, with the energy sector particularly active on firming oil prices.
  • Primary markets for U.S. corporate junk bonds have been remarkably active in October, totaling $16 billion through Oct. 15, and will likely surpass the month’s $18 billion historical median volume. Deals linked to refinancings account for about 80% of issuance, a large portion considering just half the total debt tracked by the Bloomberg Barclays U.S. Corporate High Yield Bond Index is refi-related. The index option-adjusted spread to Treasuries touched 341 bps in October, the tightest level in three years.
  • Issuers in the energy sector lead October sales of new dollar corporate junk bonds, accounting for over a third of the $16 billion sold vs. a 14% share of the total debt outstanding in the Bloomberg Barclays U.S. Corporate High Yield Bond Index. Most were refinancing deals as companies took advantage of oil prices firming above $50 a barrel and demand for high yield debt to extend maturities and strengthen balance sheets.

(PR Newswire) DaVita Provides Additional Information Regarding Patients Receiving Charitable Premium Assistance

  • DaVita believes that charitable premium assistance will continue to be available to dialysis patients.
  • In the unlikely scenario that charitable assistance were no longer available to any of its patients, DaVita estimates that the total negative impact to its annual operating income – after related cost offsets – would be in the range of $100 million to $250 million.
  • DaVita believes that elimination of charitable assistance entirely is unlikely due to the tremendous negative impact on tens of thousands of patients and the fact that it has been part of a stable dialysis ecosystem for decades. In addition, DaVita believes that the fact that most commercial patients would likely retain commercial coverage even without charitable assistance reduces not only the downside to its operating income but also the likelihood of such a scenario materializing in the first place.

(CNBC) Netflix adds 5.3 million subscribers during third quarter, beating analysts’ estimates

  • Netflix continues to grow, adding 5.3 million net subscribers this past quarter. And it’s willing to spend the money to continue that trajectory, with a new content budget of between $7 billion to $8 billion for next year. The figure is up from the $7 billion figure chief operating officer Ted Sarandos previously said to Variety.
  • “While we have multi-year deals in place preventing any sudden reduction in content licensing, the long-term trends are clear,” the company said in a letter to shareholders. “Our future largely lies in exclusive original content that drives both excitement around Netflix and enormous viewing satisfaction for our global membership and its wide variety of tastes.”
  • Netflix latest earnings report beat analysts’ estimates, mostly on the back of its high number of subscription additions. Revenue: $2.98 billion vs. $2.97 billion expected Thomson Reuters consensus estimate
  • The company now has about 109.3 million subscribers globally. Netflix said it added 850,000 subscribers in the U.S., ahead of the 810,000 Street Account estimate for the quarter. It boomed internationally, signing up 4.45 million subscribers versus the 3.69 million Street Account estimate. The subscription additions were up 49 percent year over year.

(Business Wire) HCA Previews 2017 Third Quarter Results

  • HCA anticipates revenues for the third quarter of 2017 to approximate $10.696 billion compared to $10.270 billion in the third quarter of 2016. Adjusted EBITDA for the third quarter of 2017 is expected to approximate $1.776 billion compared to $1.957 billion in the previous year’s third quarter.
  • During the third quarter of 2017, the Company incurred additional expenses and experienced losses of revenues estimated at approximately $140 million associated with hurricanes Harvey and Irma’s impact on our Corpus Christi, Houston, Florida, Georgia and South Carolina facilities. This amount is prior to any insurance recoveries which the Company may receive.
  • Also, results for the third quarter of 2017 include a negative impact to operating results related to the Texas Medicaid Waiver program of approximately $50 million. This reflects final settlement amounts related to the program year ended September 30, 2017.
  • Same facility admissions for the third quarter of 2017 increased 0.6 percent, while same facility equivalent admissions increased 0.3 percent, when compared to the third quarter of 2016. Same facility emergency room visits for the third quarter of 2017 increased 0.3 percent from the prior year’s third quarter. The Company estimates that hurricanes had unfavorable impacts of 30 basis points on same facility admissions growth, 80 basis points on same facility equivalent admissions growth and 30 basis points on same facility emergency visits growth during the third quarter.
  • HCA anticipates reporting its complete financial and operating results for the third quarter of 2017 on, or about, October 31, 2017.
13 Oct 2017
High Yield Weekly, Weekly Insights Kathryn Bailey 0 comment

CAM High Yield Weekly Insights

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $0.5 billion and year to date flows stand at -$5.9 billion. New issuance for the week was $7.3 billion and year to date HY is at $222 billion, which is up 20% over the same period last year.

(Bloomberg) OPEC Says ‘Extraordinary’ Steps Needed for Stable Market in 2018

  • Oil producers are succeeding in re-balancing an oversupplied market, though they may need to take further steps to sustain the recovery into 2018, OPEC Secretary-General Mohammad Barkindo said.
  • Saudi Arabia and Russia are currently leading consultations between the Organization of Petroleum Exporting Countries and other major suppliers about the future of their agreement to cut oil output, Barkindo said Sunday in New Delhi. The pact expires in March, and oil producers are debating whether to extend it later into the year.
  • “There is a growing consensus that, number one, the re-balancing process is underway,” he said after meeting with Indian Oil Minister Dharmendra Pradhan. “Number two, to sustain this into next year, some extraordinary measures may have to be taken in order to restore this stability on a sustainable basis going forward.”
  • Barkindo didn’t elaborate on what those additional measures could be and if they would include the main proposal currently on the table — an extension of the existing cuts by up to nine months — or something else. Venezuela has suggested making deeper cuts, but that’s considered unlikely given the political challenges of getting all members to agree unanimously.

(Phone Arena) Sprint and T-Mobile expected to announce merger details this month

  • Rumors about the Sprint/T-Mobile merger continue to make headlines, but that won’t go for too long now. Apparently, the carriers are currently ironing out the final details of the deal, so we could have an official announcement laying them out sometime this month.
  • The companies have reached the point where they need to decide on the exchange ratio that will determine Sprint’s valuation, one of the last steps before the merger could be officially announced.
  • Sprint and T-Mobile continue to discuss non-cash items, such as the location of the HQ that will shelter the leadership of the new entity resulting from the merger.
  • People with knowledge of the matter claim that a traditional breakup free will most certainly not be included in the final agreement as to avoid the risk of US regulators rejecting the merger, much like the merger deal between Comcast and Time Warner Cable Inc.
  • Last but not least, both carriers want to go ahead with the merger as quickly as possible and finalize a deal agreement that can be released at the same time with the quarterly earnings, which is meant to help them avoid confusion over the status of the deal.

(Bloomberg) Callability and Duration Characteristics of HY Market

  • Over $500 billion of high yield bonds trade above their next call prices, reflecting the market’s extended rally. Communications and consumer staples debt leads subindexes with about $197 billion of the total, including debt from Altice, Charter and T-Mobile US. Health-care names, including Valeant and HCA, are among the non-cyclicals with the highest amount of debt trading above call.
  • The current environment, with modified duration to maturity at almost 120% of effective duration, historically portends a high probability for negative price returns in subsequent months. Partly that’s because the relationship is largely driven by changes in effective duration and, in turn, the negative convexity characteristics of the high yield market, given widespread use of call features. Periods of negative total returns are rarer given the impact of overall carry.
  • In negatively convex environments, the relationship between prices and yields changes: bonds become less sensitive to further spread or rate compression, but more sensitive to extension risk should the market-required yield widen substantially.
  • Almost 60% of the bonds in the Bloomberg Barclays U.S. Corporate High Yield total return index with a duration of less than three years may be sensitive to potential extension risk should spreads widen significantly. On a yield-to-worst basis, these are bonds where the embedded call feature has resulted in the effective duration being at least one year less than the modified duration to maturity. In dollar terms, this is a little over $300 billion, more than half of which has an effective duration below one.

(Bloomberg) Trump Cuts Off Health-Insurer Subsidy, Threatening Obamacare Chaos

  • President Donald Trump’s administration took its most drastic step yet to roll back the Affordable Care Act, cutting off a subsidy to insurers hours after issuing an executive order designed to draw people away from the health law’s markets.
  • Late Thursday, the administration said it would immediately stop paying what are known as cost-sharing reduction subsidies. The payments — which are the subject of a legal dispute — go to health insurers in the Affordable Care Act to help lower-income people with co-pays and other cost sharing. Without them, insurers have said they’ll dramatically raise premiums or pull out of the law’s state-based markets.
  • The White House said the Department of Justice and the Department of Health and Human Services concluded that there is no appropriation for cost-sharing reduction payments to insurance companies under Obamacare.
  • The payments will stop immediately, with no transition period, Acting HHS Secretary Eric Hargan and Centers for Medicare and Medicaid Services Administrator Seema Verma said in a statement. The next payments were due next week.
06 Oct 2017
High Yield Weekly, Weekly Insights CAM 0 comment

CAM High Yield Weekly Insights

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $1.1 billion and year to date flows stand at -$6.5 billion. New issuance for the week was $9.9 billion and year to date HY is at $215 billion, which is up 18% over the same period last year.

(Company Report) United Rentals Completes Acquisition of Neff Corporation

  • United Rentals, Inc. announced that it has completed its previously announced acquisition of Neff Corporation for a total purchase price of approximately $1.3 billion. The purchase was funded primarily through newly issued unsecured debt.
  • The acquisition will augment the company’s earthmoving capabilities and efficiencies of scale in key market areas, particularly fast-growing southern geographies, and is expected to lead to attractive revenue synergies through the cross-selling of United Rentals’ broader fleet, including its specialty offerings. The assets acquired with Neff include approximately $867 million of fleet based on original equipment cost, and 69 branch facilities serving end markets in the infrastructure, non-residential, energy, municipal and residential construction sectors.
  • Michael Kneeland, president and chief executive officer of United Rentals, said, “We’re excited to complete the Neff combination and begin leveraging the many areas where we’re stronger together. Today we welcome approximately 1,200 new colleagues who share our focus on safety and customer service.”
  • The company plans to update its 2017 financial outlook to reflect the combined operations when it releases financial results for the third quarter.

(Company Reports) US Concrete makes several acquisitions

  • U.S. Concrete has acquired the assets of two independently owned and operated ready-mixed concrete operations, Harbor Ready-Mix and A-1 Materials. The acquisitions include two ready-mixed concrete batch plants and 23 mixer trucks. The acquisitions also include the assets of L.C. Frey Co., Inc., a landscape materials business related to A-1’s operations.
  • Both ready-mixed concrete operations serve the commercial and residential sectors in the Peninsula and South Bay areas of San Francisco. These favorably located plants give U.S. Concrete increased capacity to serve an expanded customer base in the Northern California market.
  • U.S. Concrete also acquired the assets of Action Supply Co, which supplies the Philadelphia metropolitan market with high-quality, high-strength ready-mixed concrete to commercial and infrastructure construction projects. Action’s proximity to U.S. Concrete’s aggregates production facility, Corbett Aggregates Companies, LLC, offers immediate synergies from the vertical integration of fine aggregates.
  • For 58 years, Action has been known for its service and innovation in the delivery of concrete. Action is Pennsylvania Department of Transportation approved and has the capabilities to meet stringent specifications. Action’s well-known projects in Philadelphia include Lincoln Financial Field, Citizens Bank Park, FMC Tower and the South Street Bridge replacement.
  • Finally, U.S. Concrete has entered into an arrangement agreement with Polaris Materials, pursuant to which U.S. Concrete will acquire all the issued and outstanding common shares of Polaris for C$3.40 per share in cash by way of a statutory plan of arrangement. The price per share implies an aggregate fully diluted equity value for Polaris of approximately C$309 million.
  • “We believe that Polaris is an ideal strategic fit and enables a replication in California of our vertically integrated business model that we successfully operate in New York” said U.S. Concrete’s President, CEO and Vice Chairman William J. Sandbrook. “The acquisition of Polaris will provide U.S. Concrete with long-term, high quality aggregate reserves and is expected to deliver meaningful synergies and strengthen the Company’s strategic position in the highly attractive, aggregate supply-constrained Californian markets. Following completion of the acquisition, U.S. Concrete expects to have the capability to self-supply a large majority of its market leading ready-mixed concrete operations’ aggregate requirements in Northern California and to drive increased production volumes at Polaris’ Orca Quarry.”

(Reuters) Seagate to give $1.25 bln of $18 bln deal to buy Toshiba chip unit

  • Seagate Technology said it would contribute up to $1.25 billion towards the purchase of Toshiba Corp’s chip unit by a consortium led by Bain Capital LP.
  • Toshiba said it had signed an $18 billion deal to sell the unit to the group, overcoming a key – albeit not its last – hurdle as it scrambles for funds to stave off a potential delisting.
  • Seagate also said it expects to enter into a long-term supply agreement with the unit, Toshiba Memory Corp.
  • Besides Seagate, Bain’s consortium includes Apple Inc , South Korean chipmaker SK Hynix, Dell Inc and Kingston Technology.

(Barrons) CenturyLink-Level 3 Gains DOJ Approval

  • The merger of Level 3 Communications and CenturyLink cleared a key hurdle Monday afternoon when the U.S. Department of Justice gave its approval for the deal, subject to some conditions.
  • For the deal to close, it still needs court approval of some provisions and it remains subject to approval from the Federal Communications Commission and the California Public Utilities Commission.
  • The muted response of the stocks may reflect that investors had already priced in that the deal would close.
06 Oct 2017
Investment Grade Weekly, Weekly Insights CAM 0 comment

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, IG fund flows on the week were the 4th largest inflow on record, at $6.3bln. This brings the YTD total to +$248.232bln in total inflows into the investment grade markets. According to Bloomberg, investment grade corporate issuance for the week was $16.15bln, and YTD total corporate bond issuance was $1.077t. Investment grade corporate bond issuance thus far in 2017 is down 5% y/y when compared to 2016. October issuance is off to a slow start, relative to what we have seen through much of 2017, but this can be attributed to earnings blackout as well as the timing of the release of employment data.

(Bloomberg) Disney-Altice Deal Shows Operators Will Still Pay for Sports

  • Walt Disney Co. and cable provider Altice USA Inc. reached a preliminary programming agreement that will enable 2.4 million New York-area pay-TV subscribers to continue to get ABC, ESPN and the Disney Channel.
  • The two sides “have extended the deadline accordingly to try and finalize the terms,” according to a joint email on Sunday. No details were included in the statement. The preliminary terms were struck at the last minute, as Disney was about to cut off broadcasting to Altice subscribers Sunday night.
  • Disney won price increases for its major channels, though not as much as the Burbank, California-based entertainment giant originally asked, according to two people familiar with the terms who asked not to be named because the discussions are private. Altice also agreed to pick up two collegiate sports networks, the people said.
  • The agreement, if finalized, shows that pay-TV operators are still willing to pay for pricey sports channels even in an age of video streaming and declining viewership. The talks were seen as a litmus test of the business model that’s fueled Disney’s profit for years: charging ever-higher fees for ESPN even though many consumers don’t watch sports, and using the network’s popularity to force pay-TV providers to carry other programming.

(WSJ) Monsanto Boosted by Continued Adoption of New Products

  • Monsanto has been introducing soybean varieties that are genetically engineered to resist a more powerful combination of herbicides. More than 20 million U.S. acres were sown with the new seeds, the company said Wednesday, and it expects to have the supply for 40 million acres across next year’s planting season.
  • For the quarter Monsanto reported income of $20 million, or 5 cents a share, up from a loss of $191 million, or 44 cents a share, a year ago. Revenue grew 4.8% to $2.69 billion. On an adjusted basis, earnings were 20 cents a share.
  • The positive adjusted profit was far higher than the loss of 41 cents that analysts had projected. Monsanto said the better-than-expected results were due to tax benefits and a pretax benefit of $200 million due to corn licenses in Brazil.

(Bloomberg) PepsiCo Makes E-Commerce Bet as Amazon Roils Food Industry

  • The food-and-beverage giant has created a 200-person business unit that’s tasked with spurring online growth in a fast-evolving grocery landscape. So far, it’s working. PepsiCo is on pace to hit $1 billion in annualized e-commerce sales this year, Chief Financial Officer Hugh Johnston said in an interview.
  • That’s about double the rate a year earlier, even if it remains a small piece of the pie. PepsiCo has total revenue of about $63 billion a year.
  • “That business is just really growing like crazy,” said Johnston, who also serves on Microsoft Corp.’s board. “We run it more like a tech company than we do a consumer-products company, and it’s a real star of the portfolio for us right now.”
  • To further set the online business apart, it’s located in midtown Manhattan — about an hour from the company’s suburban headquarters in Purchase, New York.
  • The group is focused on marketing and packaging PepsiCo’s products for online sellers, including Amazon.com Inc. and Boxed Wholesale, as well as traditional brick-and-mortar grocers that are trying to boost their digital footprint. The division was founded about two years ago, but PepsiCo has been quiet about it until now.
  • PepsiCo faces more pressure to go big in e-commerce because grocery sales of soft drinks have weakened, especially in North America. And the overall food industry is bracing for a wave of change. Grocery companies have been rocked this year by Amazon’s $13.7 billion purchase of Whole Foods Market, a deal that sent shares of traditional supermarkets tumbling.

(WSJ) Corona is the New King of Beers

  • U.S. beer sales are in a funk, but Americans are still clamoring for Mexican suds.
  • Constellation Brands Inc., STZ the U.S. distributor of Corona and Modelo, reported a 13% jump in beer sales in the summer months. The gains come as market leaders Budweiser and Bud Light are hemorrhaging volume and even craft beer—which until two years ago was growing in the double digits—is experiencing a shakeout.
  • “It’s a little bit of a misnomer to think that the growth in the beer category, to the extent that there is any, is coming from imports” from around the globe, said the company’s chief executive, Robert Sands, on a conference call Thursday to discuss the latest results. “It is not. It is coming from Constellation’s portfolio of Mexican beers.”
  • The company has expanded beyond its roots as a bulk wine distributor, adding well-known brands such as Robert Mondavi and spirits like Svedka vodka. It now gets two thirds of its revenue from the beer division, which also includes Ballast Point, a craft brewer it acquired for $1 billion in 2015. In the latest quarter, Constellation purchased the small Florida craft brewery Funky Buddha.
  • Constellation plans a national launch next year for a new version of Corona called Corona Premier, as well as a rollout of a product called Corona Familiar in major Hispanic markets—a key demographic for the brand.
  • Constellation attributed 60% of its growth to expanded distribution, and Mr. Sands said Thursday that he’s still unsatisfied on that front. “We don’t have the distribution that we ought to have as a company,” he said. “There’s a big growth runway ahead of us.”

(Bloomberg) Lilly Jumps to Two-Year High After Cancer Drug Patent Upheld

  • Eli Lilly’s patent for its lung cancer drug Alimta was upheld, the Patent Trial and Appeal Board said in an opinion. Shares rise as much as 2.5% to the highest since September 2015.
    • Patent expires in May 2022; Alimta is LLY’s third-biggest drug behind Humalog and Cialis, making up $532.9m or 9.1% of total pharma sales in 2Q: Bloomberg data
    • Teva, Apotex, Neptune Generics and others had filed the challenge; other companies later joined the petition
    • The PTAB decision can be appealed to the U.S. Court of Appeals for the Federal Circuit, which had already upheld the validity of the patent in January

(WSJ, Press Release) Teva Comments on Anticipated At-Risk U.S. Launch of Generic

  • Teva Pharmaceutical Industries Ltd. today commented that any launch by Mylan of a generic version of COPAXONE(R) 40mg/ml (glatiramer acetate) prior to final resolution of the pending patent appeals and other patent litigation should be considered an “at-risk” launch, which could subject Mylan to significant damages among other remedies. Additionally, Mylan also announced approval of a generic glatiramer acetate 20mg/mL.
  • “We have planned for the eventual introduction of a generic competitor to glatiramer acetate,” said Dr. Yitzhak Peterburg, Teva’s Interim President and CEO. “We remain confident in patient and physician loyalty to Teva’s COPAXONE(R) due to its recognized efficacy, safety and tolerability profile, and we will continue to promote and support the product. As we are closing the third quarter, it is too soon to officially comment on any change to our full year business outlook.”
  • Two appeals will be argued before a single panel of judges of the U.S. Court of Appeals for the Federal Circuit. In the first case, Teva is appealing the December 2016 inter partes review decisions of the Patent Trial Appeal Board that found all of the claims of three COPAXONE(R) patents to be unpatentable. In the second case, Teva is appealing the January 2017 decision of the U.S. District Court for the District of Delaware, which declared certain claims of four COPAXONE(R) patents invalid. The two appeals have been fully briefed and await the scheduling of oral arguments. In additional litigation, Teva brought suit against five Abbreviated New Drug Application (ANDA) filers, including Mylan, for infringement of a patent covering a manufacturing process for glatiramer acetate product.
  • Due to the anticipated launch of another generic 20mg glatiramer acetate product and the anticipated launch of a first generic 40mg glatiramer acetate product, Teva’s early assessment of the impact of these launches to its earnings for the fourth quarter ended December 31, 2017 is that it could be affected by at least $0.25 cents per share. These conditions are subject to change based on the discount; adoption rate; and other factors of the competitive products. Teva will provide additional details on its 3(rd) Quarter Earnings Conference Call on November 2, 2017.

(Bloomberg) Hurricanes Wash Out More Than Payrolls in September

  • U.S. payrolls fell 33k in September, considerably weaker than the consensus estimate, which called for an 80k increase. The month of August was revised to a rise of 169k (previously estimated to have been a 156k gain). The two-month payroll net revision was -38k. The 3Q average of 91k currently stands less than half the 2Q average of 187k, and weaker than the 12-month average of 148k.
  • The hurricanes had an outsized impact on employment. Absences from work due to bad weather (1474k) and weather-related curtailments of average weekly hours (2934k) significantly exceeded their respective historical averages (10-year averages stood at 44k and 236k, respectively, before the report). Average hourly earnings were also vulnerable to storm-distortion. Acute demand for utility workers resulted in a spike in average hourly earnings in the sector, large enough to influence the overall outcome. Average weekly hours for utility workers also jumped. The leisure and hospitality industry bore the brunt of the storms’ impact on employment.
©Cincinnati Asset Management. All Right Reserved 2023.