Month: July 2017

30 Jul 2017

Q2 2017 High Yield Commentary

The Bloomberg Barclays High Yield Index returned 2.17% during the second quarter of 2017 and 4.93% for the first half of the year, continuing, although at a slower pace, the robust 2016 performance (+17.13%) which was the best since the 2009 recovery performance of 58.21%. Unlike Q1 and all of 2016, the highest rated credit sector (BB rated) outperformed the weaker sectors (i.e., BB rated bonds outperformed B and CCC rated bonds). While the highest rated credits within the universe outperformed the lower quality credits, the entire market was characterized by continued spread tightening – the Index spread tightened from 383 to 364, or 21 basis points over Treasuries and BB rated credits tightened from 252 to 227 or 25 basis points over Treasuries. Spreads are now near their tightest in almost a decade, and while performance during Q2 was positive across all credit subsectors, it is important to note that during 2008 and 2015, the lowest rated credit subsector (CCC) 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 the CCC 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, Q2 witnessed positive performance by almost all Sectors, led by the Financial Institutions Sector, which was up 3.67%. That Sector accounts for over 9% 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. In fact, Energy posted negative returns of 1.16% for Q2 as oil traded below $50 in the area of $45 per barrel for most of the quarter.

Even as the FED has increased the Federal Funds Target Rate twice this year, yields on intermediate Treasuries have declined with the 10‐year Treasury at 2.31% at June 30, down from 2.39% at the beginning of the quarter and from 2.45% at the beginning of the year. Intermediate term yields more often reflect GDP and expectations for future economic growth rather than actions taken by the FOMC to adjust the Target Rate. The consensus view of most economists suggests a sluggish GDP in the 2% range with inflation expectations at or below 2%. It is easy to understand that the “search for yield” that we have witnessed for several years continues and that the high yield market is benefitting from that search. 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. During Q2, high yield issuance continued to be fairly robust at $76.7BB versus $98.7BB during Q1. Year to date issuance stood at $175.3BB. This pace could see us easily exceeding 2016’s total issuance of $286BB.

Discussed at length during the year by many high yield observers was the fact that, while spreads were tightening, the restrictive covenants contained in the indentures under which the bonds were being issued were becoming more and more “relaxed”. In other words, while investors were searching for yield, issuers were able to negotiate with investors to remove covenants that previously were provided as standard protection for the investor: namely leverage constraints, disposition of assets, etc. More and more, a professional manager is needed to select bonds of quality – bonds that compensate the investor for the risks he undertakes in a high yield portfolio.

Cincinnati Asset Management buys only B3/B‐ and higher rated securities, and, given that the CCC sector underperformed the Index as a whole, it is easily understood that our performance exceeded the Index for the 2nd Quarter (2.24% gross total return vs. 2.17%). During this period, we 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:

An additional observation: The Index yield for the High Yield Market is 5.62%. Default rates have been low since the Energy sector “crisis” of 2015/16; however, there will always be defaults in the high yield universe. Historically, those defaults have come principally from the CCC and lower subsectors. So pricing needs to reflect that eventuality. 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., implied premium to Treasury bonds) is of concern given that the “search for yield” may have resulted in an overvalued market. 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.

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.

30 Jul 2017

Q2 2017 Investment Grade Commentary

The second quarter of 2017 saw a continuation of the prevailing trend of tighter credit spreads across the US corporate bond market. This trend of tighter spreads, which has been unabated for nearly 16 months, has been a significant contributing factor to the overall positive performance of the Investment Grade corporate bond market during that time frame. Specifically, during the quarter the A Rated Corporate credit spread tightened from 0.97% to 0.88% (down 9bps), the BBB Rated Corporate credit spread tightened from 1.51% to 1.41% (down 10bps) and the Bloomberg Barclays US Investment Grade Corporate Index credit spread tightened from 1.18% to 1.09% (down 9bps)i. Along with this credit spread tightening the movement in Treasury yields were generally lower as the as the 10 Year Treasury yield began the quarter at 2.39% and ended it at 2.31% (down 8bps). This continuation of lower treasury yields and tighter credit spreads have seen the overall yields of corporate bonds end the first half of the year lower than where they started the year. While both US Treasuries and Investment Grade corporate bonds both ended the quarter with lower yields, thus both achieving positive performance, Investment Grade corporate bonds outperformed Treasuries due to the tightening of credit spreads and higher coupon income collected. The Bloomberg Barclays US Investment Grade Corporate Index returned +2.54% for the quarter, outperforming the Bloomberg Barclays US Treasury 5‐10 year index return of +1.24%ii. The CAM Investment Grade Corporate Bond composite provided a gross total return of +2.08% which slightly underperformed the Investment Grade index but outperformed the US Treasury index.

New issuance in the quarter was a robust $344 billion in new Investment Grade corporate bonds, yet slowing down from the record pace in the first quarter, bringing the YTD total to $760 billion iii. We are well on our way to the sixth straight year of over $1 trillion in new issuance, which speaks to the persistent, global demand from investors searching for yield and income for their portfolios. This demand is partially driven by the fact there still exists $6.5 trillion of negative yielding securities in the Bloomberg Barclays Global benchmark index, a sum that has shrunk from a peak of $12 trillion in June 2016 (see chart)iv. With low‐to‐negative yields in global fixed income securities, the US Investment Grade corporate bond market still provides a good alternative for global investors.

The Federal Open Market Committee (FOMC) acted again during the quarter by boosting the target range for the Federal Funds rate by another 25bps at their June 14th meeting v. At the time of the FOMC action the 10yr US Treasury yield was 2.17% and the move up in short term rates influenced by the policy move has flattened the yield curve even further, something we discussed extensively in our Q1 2017 commentary. (A copy of that and all of our previous commentaries can be found on our website at Central Banks around the world have been hinting at ending their ultra‐ loose monetary policy and begin to wind down their active quantitative easing (QE) programs vi. While the FOMC has not been actively adding to its balance sheet via QE, it has been maintaining it around $4.5 trillion by reinvesting proceeds from maturing bonds in its portfolio. Members of the Federal Reserve board, including Janet Yellen, have openly discussed starting to unwind its $4.5 trillion balance sheet sometime this fall by letting some of its maturing securities run off and not be reinvested. However, as of yet, no set timetable has been established vii. As with most FOMC policy shifts, investors are best served to watch what the FOMC does and not what they say as they make these changes. The unwinding of trillions of dollars of securities will be difficult to execute, and will be closely watched by investors around the world. While the FOMC is looking to reduce the size of its balance sheet, the European Central Bank and Bank of Japan have been significantly adding to theirs over the past several years with both recently surpassing the size of the balance sheet of the Federal Reserve (see graph)viii. While neither of the two have definitive plans to end QE it would seem that halting open market purchases would be the first step in the direction of policy normalization.

With potentially significant central bank policy shifts on the horizon US Investment Grade corporate bond markets have exhibited a strange sense of calm in the first half of 2017. This could be attributable to the lack of volatility exhibited across nearly all asset classes along with the prevailing market perception that nearly any disruption in credit markets would be met with a large dose of liquidity from the Federal Reserve. While the Fed is close to meeting its unemployment mandate, it is failing to meet its desired inflation mandate. This is giving the market the sense that the Fed will feel that it has the flexibility to deliver more liquidity into the market if deemed necessary. With the persistent tightening of credit spreads and decline in overall interest rates, performance has been stable, consistent and fairly robust. With yields and credit spreads below their long term averages investors should not grow too complacent to think these trends will continue in perpetuity. A change in QE policy by global central banks or deterioration in credit conditions due to the onset of recession may alter the path of both interest rates and credit spreads rather quickly. While we are not predicting the imminent commencement of either of these events, investors should be prepared for potential volatility in corporate bonds that a reversion to the long term mean in rates and credit spreads would bring about. This volatility may not come for some time, but it is something to consider when thinking about expectations for the asset class. While this may, or may not, occur during the timeframe of anyone’s investment horizon, when it does, it will be imperative to understand the impact higher yields will have on the corporate bond market especially as it relates to a corporation’s balance sheet, cash flows and credit quality. Corporate bond investors are compensated for two risks; interest rate risk and credit risk. In our experience, investors spend a large portion of their time focusing on the risk they can’t control ‐ interest rate risk, and very little time on the risk that can be controlled – credit risk. We as a manager believe that we can provide the most value in terms of assessing credit risk. In our view, the key to earning a positive return over the long‐term is not dependent on the path of interest rates but a function of: (1) time (a horizon of at least 5 years), (2) an upward sloping yield curve (not only the treasury curve but also the credit curve) ‐ to roll down the yield curve, and (3) avoiding credit events that result in permanent impairment of capital. Understanding and assessing credit risk is at the core of what Cincinnati Asset Management has provided their clients for nearly 28 years.

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.

i Barclay’s Credit Research: Daily Credit Call
ii Bloomberg Barclay’s Indices: Global Family of Indices June 2017
iii CreditSights: US IG Credit Monitor Q2 2017
iv Bloomberg Markets July 11, 2017: “Pool of Negative‐Yield Debt Shrinks Rapidly as Bond Market Turns” v FOMC statement dated 6/14/2017
vi Bloomberg Markets June 28, 2017: “Central Bankers Tell the World Borrowing Costs Are Going Up”
vii Janet Yellen semiannual Humphrey‐Hawkins testimony to US House Financial Services committee 7/12/2017
viii Yardeni Research, Inc. 7/7/2017: “Global Economic Briefing: Central Bank Balance Sheets”

28 Jul 2017

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 -$6.0 billion. New issuance for the week was $2.0 billion and year to date HY is at $151 billion.

(Bloomberg) Lean Inventory Fueling Home-Price Gains in 20 U.S. Cities

  • Steady price gains in 20 U.S. cities in May indicate that a tight supply of properties paired with increased demand is boosting home values, according to figures from S&P CoreLogic Case-Shiller on Tuesday.
  • A shortage of listings is still behind the rapid appreciation of home prices, particularly in high-demand areas such as Portland, Oregon, and Seattle, where values have surpassed pre-recession peaks. Housing demand is supported by a solid labor market, steadily rising wages and low mortgage rates. While lofty asking prices are making it difficult for some Americans to become homeowners for the first time, they’re encouraging owners of more expensive properties to put their houses up for sale, as trade-up demand remains solid.
  • “Home prices continue to climb and outpace both inflation and wages,” David Blitzer, chairman of the S&P index committee, said in a statement. “The small supply of homes for sale, at only about four months’ worth, is one cause of rising prices. New home construction, higher than during the recession but still low, is another factor in rising prices.”

(Reuters) Saudi vows to cap crude exports next month

  • Saudi Energy Minister Khalid al-Falih said his country would limit crude oil exports at 6.6 million barrels per day in August, almost 1 million bpd below levels a year ago.
  • Russian Energy Minister Alexander Novak also told reporters that an additional 200,000 bpd could be removed from the market if compliance with a global deal to cut output was 100 percent.
  • The Saudi and Russian energy ministers were in St. Petersburg for a gathering of the Organization of the Petroleum Exporting Countries and other producers. Ministers discussed their previous agreement to cut production 1.8 million bpd from January 2017 through March 2018.
  • Falih said OPEC and non-OPEC partners were committed to cut output longer if necessary but would demand that non-compliant nations stick to the agreement.
  • OPEC members Nigeria and Libya have been exempt from the output cuts, and market watchers remain concerned that production from the two countries is offsetting the impact of the global reduction.
  • In the United States, rig counts were up to 764 in the latest week, from 371 rigs a year ago.
  • The executive chairman of energy services company Halliburton said he expected a U.S. rig count above 1,000 by year end, but that about 800 to 900 rigs was more sustainable in the medium term.

(MarketWatch) HCA’s weak quarter speaks to a long-term trend: People are going to the doctor less

  • Hospital operator HCA Healthcare Inc. reported a dismal quarter early Tuesday, complete with profit and revenue misses and a cut to its earnings-per-share outlook for the year.
  • Hospital operators haven’t been having a particularly good time in recent months, especially given congressional Republicans’ effort to repeal the Affordable Care Act. The ACA, also called Obamacare, greatly benefited hospitals because more people became insured, especially through the law’s Medicaid expansion.
  • But there’s another possible reason at play, too: fewer people going to the doctor, said Veda Partners analysts Spencer Perlman and Sumesh Sood.
  • Health plans increasingly shift more costs to consumers through such things as high deductibles and cost-sharing, which has in turn changed how patients behave, they said.
  • HCA earnings show that “we remain in a much lower healthcare utilization environment post-2008 and this is the new normal,” they said.
  • Perlman and Sood also pointed to data published by the Healthcare Cost and Utilization Project in June, which “clearly indicates a continued decline in inpatient stays, surgical volumes and deteriorating payer mix.”

S&P awards Regal Entertainment unsecured debt an upgrade to B+

  • Regal unsecured debt was upgraded one notch to B+ on the expectation of continued investment in the theater network and stable leverage over the next 12-18 months

(Fierce Cable) Charter’s 90K lost video subscribers in Q2 far better than forecasts

  • Charter Communications delivered far better pay-TV customer metrics in the second quarter than predicted by investment analysts, with the No. 2 U.S. cable company dropping only 90,000 customers in the three-month period that is typically the weakest for pay-TV operators.
  • Video subscriber losses at legacy Charter (down 10,000 vs. -7,000 in the second quarter of 2016) and Bright House Networks (down only 12,000 vs. -72,000 in Q2 2016) were offset by 68,000 lost former Time Warner Cable customers during the period.
  • Most of the decline came from the loss of “limited basic relationships” at TWC, Charter CFO Christopher Winfrey told investment analysts.
  • Revenue grew 3.9% to $10.4 billion on a pro forma basis, while second quarter EBITDA was up 8.6% to $3.8 billion.
  • “Results were a nice surprise, with EBITDA ahead of estimates and subscriber trends well ahead,” said New Street Research analyst Jonathan Chaplin. “Video losses in the TWC markets were half what we and consensus expected. This bears out management’s comment that they had turned the corner on TWC integration and churn. This quarter should have been the low-water mark, and the results were good.”
28 Jul 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Lipper, for the week ended July 26, investment grade funds posted a net inflow of $2.319m. This marks 32 straight weeks of inflows and inflows in 68 of the last 73 weeks. Per Lipper data, the year-to-date net inflow into investment grade funds was $77.541bn. According to Bloomberg, investment grade corporate issuance for the week was $36.35bn. Through the week, YTD total corporate bond issuance was $830.435bn, which is down 1% when compared to 2016.

(Moody’s) Moody’s upgrades PG&E Corporation and Pacific Gas & Electric; outlook revised to stable

  • Moody’s Investors Service, (“Moody’s”) today upgraded PG&E Corporation’s (PCG) senior unsecured rating to A3 from Baa1.The senior unsecured rating at Pacific Gas & Electric Company (PG&E), PCG’s principal utility operating subsidiary, was upgraded to A2 from A3. PG&E’s commercial paper rating was also upgraded to Prime-1 (P-1) from Prime-2 (P-2). The outlook on both companies was revised to stable from positive.

(Bloomberg) AT&T Sells Year’s Biggest Bond Deal and Market Wanted Even More

  • AT&T Inc. sold $22.5 billion of bonds in a multi-part offering on Thursday, drawing almost three times as many orders as there were securities for sale, according to a person with knowledge of the matter. It’s not only the largest investment-grade deal of the year, but the third-biggest in history behind offerings from Verizon Communications Inc. and Anheuser-Busch InBev SA. The sale is likely the last funding AT&T needs for its $85.4 billion takeover of Time Warner Inc.
  • The longest portion of the sale, which came in seven parts, is a 41-year bond that yields about 2.4 percentage points above Treasuries, down from initial talk of 2.55 percentage points, another person said. With the U.S. offering higher yields than Europe and Japan, it has become a destination for foreign investors to park their money, a trend that AT&T benefited from.

(FBN) Illinois Tool Works Sees Margin Expansion and Earnings Growth

  • Multi-industrial company Illinois Tool Works (NYSE: ITW) delivered another good quarter of earnings and raised full-year guidance across the board. It was a positive quarter for the company, driven by its automotive segment and recovery in some of its more cyclical segments (specifically welding, test and measurement, and electronics). That said, management served notice of a relative slowdown in the third quarter.

(Bloomberg) Caterpillar Outlook Bright as Sales, Margins Rebound

  • A global recovery in Caterpillar’s key markets is picking up steam — earlier than expected — after four years of plummeting sales as global growth accelerates. Aftermarket demand is leading the charge, yet construction equipment is strong and 2Q mining orders doubled. Almost $2 billion in cost cuts, with more to come, is generating much higher-than-historical operating leverage as volume rises. Market-share gains achieved in the downturn are another potential driver as mining and construction markets rebound.
  • As the leader in construction and mining machinery, Caterpillar is a major beneficiary of a global recovery. The company may face a one-time charge of $2 billion related to alleged tax violations at a Swiss-based subsidiary and a higher tax rate.
21 Jul 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Lipper, for the week ended July 19, investment grade funds posted a net inflow of $3.817m down from $2.299bn the prior week. This marks 31 straight weeks of inflows and inflows in 67 of the last 72 weeks. Per Lipper data, the year-to-date net inflow into investment grade funds was $75.222bn. According to Bloomberg, investment grade corporate issuance for the week was $47.7bn. Through the week, YTD total corporate bond issuance was $794.085bn, which is down 3% when compared to 2016.

(Bloomberg) Abbott Boosts Full Year Forecast as Deals Fall Into Place

  • The company raised its full-year guidance after showing strength in its pain control and diabetes businesses. Abbott closed its $29 billion deal for St. Jude Medical in January, doubling the size of its medical technology division and expanding beyond devices used to clear clogged heart arteries. Its diagnostics business, about to swell with the addition of Alere Inc. after a protracted battle, is showing strength as well.
  • The legacy St. Jude business grew at about a 4 percent pace in the quarter, after breaking even for the past four years, Abbott Chief Executive Officer Miles White said during a conference call with analysts. That trend should continue or accelerate, he said, as the company continues to roll out new products like an MRI-safe defibrillator, helping it regain sales lost to rivals that already offer the technology.
  • “Our forecast, or deal model, was built on the expectation of sequential improvement in their sales going forward,” he said. “We are seeing that.”
  • The smaller operations secured by the St. Jude deal are posting the greatest gains. Demand for devices to control pain propelled growth of 49 percent, while sales of tools that deal with the heart’s electrical pathways rose 10 percent. The company’s focus on diabetes, with Bigfoot Biomedical picking Abbott’s Freestyle Libre for its artificial pancreas, yielded 21 percent growth.
  • The outsized performances are easing the pain caused by slowing markets in the company’s former key industries, like heart stents, which was down 6 percent, and devices like pacemakers and defibrillators, which fell 9.2 percent.
  • Abbott raised its full-year guidance range to $2.43 to $2.53 per share, excluding some items. That’s up from a previous forecast of $2.40 to $2.50 per share.

(WSJ) Lessons From Microsoft’s Success in the Cloud

  • Microsoft Corp.’s success in the cloud is driving the growth of the overall business. That’s because it is the business. Cloud isn’t a satellite orbiting around the data-center sun. The numbers speak for themselves. As the Journal’s Jay Greene reports, Microsoft’s “Intelligent Cloud segment, which includes Azure, rose 11% to $7.4 billion. In the Productivity and Business Processes segment, which includes the Office franchise, revenue climbed 21% to $8.4 billion.”
  • Microsoft doesn’t disclose revenue figures Azure and Office 365, but it said revenue from these businesses rose 97% and 43% respectively, surprising CFO Amy Hood. “Azure was the primary source of our outperformance in the quarter,” she said in an interview. “It’s higher than I was expecting.”\
  • Microsoft has gained traction in the cloud, one might argue, because it has accepted the idea that it isn’t the only platform that customers use. CIOs employ other clouds and they still have plenty of use for the data center. Microsoft has crafted a hybrid approach around those customer intentions. More recently, it has looked to build data and intelligence into its cloud infrastructure, platforms and applications. As the Journal notes, “Microsoft is working to connect its business products to LinkedIn, giving sales representatives using its Dynamics software, for example, tools to easily mine the professional social network to prospect for leads.” As this process continues, expect the cloud to fade into the background, much as the electric grid has faded into the background. In a few years, we won’t think about cloud computing any more than we think about “electrical toasters.” The cloud will be an invisible and ubiquitous dimension of most elements of business.

(Bloomberg) Scripps Talks Said to Be Advanced, Deal Soon as This Month

  • Negotiations to acquire media company Scripps Networks Interactive Inc. are advanced and a deal could be announced as soon as this month, people familiar with the matter said.
  • Both Discovery Communications Inc. and Viacom Inc. are vying to buy Scripps, and are likely to fund the deal with a mixture of cash and shares, the people said, asking not to be identified as the details aren’t public. No final decisions have been made and talks may still fall apart, they said.
  • Shares in Scripps rose as much as 4.1 percent in New York to a high of $80.02. They had already climbed about 14 percent this week on news of the possible combinations, giving the Knoxville, Texas-based company a market valuation of about $10 billion. Viacom was up less than 1 percent to $36.31 at 2:40 p.m., while Discovery fell less than 1 percent to $26.98. Representatives for Discovery, Viacom and Scripps declined to comment.
  • Buying Scripps could help the larger media companies cut costs, gain negotiating leverage with distributors and expand internationally as their U.S. TV businesses faces new pressures. Network owners are grappling with a decline in subscriptions for cable and satellite services as they lose viewers to online video services and social networks.

(Bloomberg) BNY Mellon Ups Revenue View, Shows 2Q Momentum: Earnings Outlook

  • Post-2Q Earnings Outlook: BNY Mellon showed a further acceleration in revenue in 2Q, with trends in fee income and managed assets boding well for 2H.
  • Fee growth of 4% for investment services and 6% in investment management marks another rise after 1Q’s pickup, while both assets under custody and management hit record levels.
  • The updated 2017 view includes spread income growth at the high-end of its prior 4-6% range and a cost rise of about 1%, with a caveat that this would be “challenging.”
21 Jul 2017

CAM High Yield Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, flows week to date were $1.9 billion and year to date flows stand at -$5.7 billion. New issuance for the week was $3.5 billion and year to date HY is at $149 billion.

(PR Newswire) Valeant Agrees To Sell Obagi Medical Products Business

  • Valeant Pharmaceuticals International, Inc. announced that certain affiliates of the Company have entered into an agreement to sell its Obagi Medical Products business for $190 million in cash to Haitong International Zhonghua Finance Acquisition Fund I, L.P. Limited partners of the Fund include industry veterans in other geographic markets, such as China Regenerative Medicine International Limited.
  • “The sale of Obagi marks additional progress in our efforts to streamline our operations and reduce debt,” Joseph C. Papa, chairman and CEO, Valeant. “As we continue to transform Valeant, we will remain focused on the core businesses that will drive high value for our shareholders.”
  • Obagi Medical Products is a global specialty pharmaceutical company founded by leading skin care experts in 1988. Obagi products are designed to help minimize the appearance of premature skin aging, skin damage, hyperpigmentation, acne and sun damage and are primarily available through dermatologists, plastic surgeons, medical spas and other skin care professionals.
  • Valeant will use proceeds from the sale to permanently repay term loan debt under its Senior Secured Credit Facility. The transaction is expected to close in the second half of 2017, subject to customary closing conditions, including receipt of applicable regulatory approvals.

(Reuters) Buffett, Malone explore investment in Sprint

  • Warren Buffett’s Berkshire Hathaway Inc and John Malone’s Liberty Media Corp are exploring an investment of between $10 billion and $20 billion in U.S. wireless carrier Sprint Corp, people familiar with the matter said.
  • Masayoshi Son, the chief executive of Japan’s SoftBank Group Corp, which controls Sprint, met Buffett and Malone separately this week at an annual gathering of business and media moguls in Sun Valley, Idaho, the sources said on Friday, confirming a report in The Wall Street Journal. Sprint CEO Marcelo Claure is also involved in the negotiations, the sources said.
  • Berkshire Hathaway is considering an investment of up to $20 billion in Sprint, while the amount that Liberty Media is looking to invest is not yet known, the sources said. Talks are in the early stages and could still fall apart, the people added.

(New York Times) Health Care Overhaul Collapses as Two Republican Senators Defect

  • Two more Republican senators declared on Monday night that they would oppose the bill to repeal the Affordable Care Act
  • The announcement by the senators, Mike Lee of Utah and Jerry Moran of Kansas, left their leaders at least two votes short of the number needed to begin debate on their bill to dismantle the health law. Two other Republican senators, Rand Paul of Kentucky and Susan Collins of Maine, had already said they would not support a procedural step to begin debate.
  • With four votes against the bill, Republican leaders now have two options.
  • They can try to rewrite it in a way that can secure 50 Republican votes, a seeming impossibility at this point, given the complaints by the defecting senators. Or they can work with Democrats on a narrower measure to fix the flaws in the Affordable Care Act that both parties acknowledge.
  • Senator Mitch McConnell, the Republican leader, conceded Monday night that the effort to repeal and immediately replace the Affordable Care Act will not be successful. He outlined plans to vote now on a measure to repeal the Affordable Care Act, with it taking effect later. That has almost no chance to pass, however, since it could leave millions without insurance and leave insurance markets in turmoil.

(CNET) T-Mobile shakes off rival unlimited plans as growth soars

  • The nation’s third-largest wireless carrier said it added 1.3 million net new customers in the second quarter, helped largely by the 786,000 new phone customers on a post-paid plan, or who pay at the end of the month.
  • The numbers underscore the fact that despite the rival carriers throwing themselves at you for your business, T-Mobile continues to win over new customers. The heightened pressure has resulted in more deals for consumers, including Sprint offering a year of service for free(excluding taxes and fees), and its prepaid arm Virgin Mobile going with an all-iPhone model with a rate of $1 for the first year of service. AT&T is throwing its DirecTV Now streaming service into its unlimited plan for $10 extra. Likewise, it was the first full quarter that Verizon offered its unlimited plan.
  • T-Mobile, conversely, has been relatively tame and quietly raised the price of its One Plus unlimited plan by $10, matching the price of Verizon’s $80 unlimited data plan.
  • Unlike in previous quarters, T-Mobile is the first of the big carriers to report results, so we won’t know for sure how well it fared relative to its competitors. The company has consistently outstripped its rivals in subscriber growth, leading the industry for 14 straight quarters.
14 Jul 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Lipper, for the week ended June 28, investment grade funds posted a net inflow of $2.299m down from $2.535bn the prior week. Per Lipper data, the year-to-date net inflow into investment grade funds was $71.045bn. According to Bloomberg, investment grade corporate issuance for the week was $26.49bn. Through the week, YTD total corporate bond issuance was $746.385bn, which is down 5.5% when compared to 2016.

(WSJ) Visa Takes War on Cash to Restaurants

  • Visa Inc. has a new offer for small merchants: take thousands of dollars from the card giant to upgrade their payment technology. In return, the businesses must stop accepting cash.
  • The company unveiled the initiative on Wednesday as part of a broader effort to steer Americans away from using old-fashioned paper money. Visa says it is planning to give $10,000 apiece to up to 50 restaurants and food vendors to pay for their technology and marketing costs, as long as the businesses pledge to start what Visa executive Jack Forestell calls a “journey to cashless.”
  • Consumers at those stores would be able to pay for goods or services only with debit or credit cards or with their cellphones. In exchange, Visa is offering to pay for upgrades to merchants’ technology at the checkout line so that they can accept contactless payments, such as Apple Pay . The $10,000 incentive can also help cover some of the merchants’ marketing expenses.
  • Visa has long considered cash one of its biggest competitors and has been taking steps to chip away at it. Getting rid of cash is a priority for Visa Chief Executive Al Kelly, who took over late last year, especially as cash and check transactions continue to grow globally.
  • “We’re focused on putting cash out of business,” Mr. Kelly said at Visa’s investor day last month, adding that converting check and cash to digital and electronic payments is the company’s “number-one growth lever.”
  • Still, cash remains a formidable competitor. Check and cash transactions totaled $17 trillion world-wide in 2016, up about 2% from a year prior, according to Visa.
  • Cards have made a dent in cash in the U.S., but cash remains the most widely used payment form among Americans, accounting for 32% of all consumer transactions in 2015, compared with 27% for debit cards and 21% for credit cards, according to a November report by the Federal Reserve Bank of San Francisco.

(Moody’s) HCA’s Increased ABL Reduces Likelihood of Upgrade of Senior Secured Notes

  • HCA Inc. (subsidiary of HCA Healthcare, Inc.) recently amended and extended its asset-based revolving credit facility (ABL). The facility was upsized to $3.75 bilion from $3.25 billion and the expiration date was extended to June 2022. In addition, HCA amended and extended its $2 billion revolving credit facility. The expiration date of the revolving credit facility was extended to 2022 from 2019. There are no changes to any ratings including the Ba2 Corporate Family Rating, the Baa2 rating on the ABL, the Ba1 on the senior secured debt and the B1 on the unsecured notes. The rating outlook is positive.
  • Absent any further changes to the capital structure, there is reduced likelihood that the senior secured debt (including notes and credit facilities) would be upgraded to investment grade if Moody’s upgrades HCA’s CFR to Ba1. This is due to changes in the HCA’s capital structure and attributes of Moody’s Loss Given Default Methodology.

(Bloomberg) Implications of Tax Policy Changes on IG Industrials

  • Potential changes in tax laws could have credit implications for high grade industrials. The 28 high grade industrials tracked at BI have accumulated $55 billion of cash, largely in non-U.S. subsidiaries, mainly to avoid current repatriation laws. Cash-to-revenue averaged as low as 8% for the peers as recently as 2008, but topped 28% at year-end. That suggests about $27 billion could be repatriated, possibly earmarked for share repurchases and dividends, akin to 2004’s tax holiday.
  • Honeywell, Illinois Tool Works, Cummins and Rockwell Automation are among the group outliers, with above-average ratios, suggesting they may have more opportunity to bring cash home.

(WSJ) Corporate Bond Markets Asleep at the Wheel

  • There’s a fine line in financial markets between resilience and complacency. Corporate bonds are sitting right on it.
  • Global government bonds have been shaken as central banks, most notably the European Central Bank, have signaled that the clock is ticking on ultra-loose monetary policy. Ten-year German bond yields have risen about 0.3 percentage point from their late-June lows, pushing up U.S. Treasury yields too.
  • Yet corporate bonds haven’t even blinked. Indeed, the yield spread on European and U.S. investment-grade bonds versus underlying government debt has actually compressed since the turmoil started, Bank of America Merrill Lynch indexes show. Yields have risen, just not by as much as on government bonds. At 0.99 percentage point in Europe and 1.12 points in the U.S., investment-grade spreads are close to their tightest level since the global financial crisis.
  • And credit conditions may be shifting. Activist investors are making waves in Europe: perhaps the best example is Dan Loeb at hedge fund Third Point targeting consumer giant Nestlé , pitting shareholder interests against those of bondholders. The company promised to double its leverage ratio to fund stock buybacks, yet spreads on its bonds barely reacted. Better earnings prospects should support corporate bonds; but the real benefit will accrue to shareholders, not bondholders. Spreads do offer some protection against falling bond prices, but little against a deterioration in credit quality.
  • Corporate bonds have benefited greatly from central-bank support and benign credit conditions. Shifting tides mean relying on those factors persisting looks risky.
14 Jul 2017

CAM High Yield Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, flows week to date were -$1.4 billion and year to date flows stand at -$6.1 billion. New issuance for the week was $0.4 billion and year to date HY is at $145 billion.

(Reuters) Fed’s Williams still sees rate hike, asset unwinding this year

  • A top U.S. central banker on Tuesday said he still expected one more rise in interest rates from the Federal Reserve this year and for it to start unwinding its massive balance sheet in the next few months.
  • Answering audience questions at an economics event in Sydney, San Francisco Federal Reserve Bank President John Williams said he believed a recent softening in U.S. inflation was transitory and that inflation would pick up to around 2 percent over the coming year.
  • Williams emphasized that if inflation did not accelerate as expected, that would argue for a much slower pace of rate rises than currently projected.
  • He also noted that raising rates and trimming the balance sheet were complimentary forms of tightening and his projections for policy took that into account.

(Wall Street Journal) Frontier’s Big Bets on Landlines Falter

  • The once small phone company amassed $17 billion in debt by scooping up networks across the country from Verizon Communications Inc. and AT&T Inc. It was a contrarian strategy that Frontier could generate steady revenue from residential internet and video services even as wireless use exploded.
  • Instead, Frontier has been losing customers and scrambling to cover looming debt payments.
  • Frontier’s troubles multiplied in spring 2016 after it closed a $10.5 billion deal for phone and internet lines from Verizon. The move nearly doubled Frontier’s revenue and gave it millions of new customers in California, Texas and Florida. They included 1.6 million subscribers on Fios, a fiber-optic service that appeared lucrative but hid some snags below the surface.
  • “This last acquisition was largely about acquiring fiber,” a strategy the company still supports, Frontier finance chief Perley McBride said. “It’s just integration that didn’t go well. When you double in size and you don’t do it well, it’s sort of up front and center.”
  • Mr. McBride said he doesn’t expect revenue growth anytime soon from the consumer markets acquired from Verizon last year. That is a reversal from the forecast of his predecessor, John Jureller, who in 2015 called the revenue trends “very positive.”
  • “Cable companies are beating the pants off Frontier,” said Jonathan Chaplin, an analyst for New Street Research, noting that companies like Charter Communications Inc. have invested more heavily in marketing, network equipment and customer service in the past three years.

(Reuters) U.S. mortgage activity posts biggest weekly drop since December

  • U.S. mortgage application activity recorded its steepest drop since December as interest rates on 30-year fixed-rate home loans climbed to their highest level in nearly two months, Mortgage Bankers Association data released on Wednesday showed.
  • The Washington-based group said its seasonally adjusted index for mortgage applications fell to 391.9 in the week ended July 7, down 7.4 percent from the prior week which marked its biggest decline since a 12.1 percent fall in the Dec. 23 week.

(Washington Post) Siemens and AES team up on industrial-size batteries

  • Transnational engineering giant Siemens is taking aggressive steps to expand into the ¬alternative energy market through a new partnership with AES, an Arlington-based power company that operates in 17 countries.
  • The two firms said in a Tuesday regulatory filing that they are forming a new D.C.-based joint venture called Fluence, which will sell industrial-scale batteries to large businesses.
  • Fluence will compete against established players such as Elon Musk’s Tesla, which has built out a line of business in industrial power storage alongside its electric cars.
  • “Our ultimate aim is to accelerate adoption of the electricity network of the future,” AES chief executive Andres Gluski said, “and we think energy storage will be a very big part of that.”
  • Gluski declined to say exactly how much the two companies are investing at the outset, but said the venture will be “fully funded for the next five years.”

(Business Wire) Dynegy Reaches Agreement to Sell Three Power Generating Assets

  • Dynegy Inc. has reached agreement to sell three of its generating plants for approximately $300 million. Combined with the previously announced LS Power transaction, a total of approximately $780 million in aggregate sales proceeds will be used primarily for debt reduction.
  • Dynegy reached an agreement to sell its Lee Energy Facility, a 625 MW (summer capacity rating) gas-fueled peaking asset in the PJM ComEd region to an affiliate of Rockland Capital.
  • Dynegy will receive $180 million in cash and avoid the incremental capital investment necessary to convert the plant to dual fuel status in order to meet PJM capacity performance obligations. The sale allows the Company to crystallize value in the ComEd region and generate additional cash proceeds for debt repayment.
  • Dynegy has also signed a purchase and sales agreement with Starwood Energy Group Global for two assets totaling $119 million. The combined 310 MW (summer rating) of assets to be sold include two intermediate gas-fueled plants located in Dighton and Milford, Massachusetts. The Company anticipates allocating the cash proceeds to debt reduction.