Year: 2017

20 Jan 2017
Investment Grade Weekly, Weekly Insights CAM 0 comment

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Lipper, for the week ended January 18th, investment grade funds posted a net inflow of $1.893bn. The total year-to-date net inflow into investment grade funds ended the week at $8.108bn. Per Bloomberg, investment grade corporate issuance through Thursday was ~$29bn. Thus far, $121.8bn of investment grade corporate bonds have been issued in January, besting consensus estimates of $112bn.

(Press Release) IBM Reports 2016 Fourth-Quarter and Full-Year Results

  • Highlights
    • Diluted EPS from continuing operations: GAAP of $4.73; Operating (non-GAAP) of $5.01
    • Revenue from continuing operations of $21.8 billion
    • Strategic imperatives revenue for full-year 2016 of $32.8 billion up 13 percent (up 14 percent adjusting for currency) represents 41 percent of IBM revenue
    • Cloud revenue of $13.7 billion for full-year 2016, up 35 percent
      • Cloud as-a-service annual exit run rate of $8.6 billion at year end, up 61 percent year to year (up 63 percent adjusting for currency)
    • 2017 EPS Expectations: GAAP of at least $11.95; Operating (non-GAAP) of at least $13.80
  • “In 2016, our strategic imperatives grew to represent more than 40 percent of our total revenue and we have established ourselves as the industry’s leading cognitive solutions and cloud platform company,” said Ginni Rometty, IBM chairman, president and chief executive officer. “IBM Watson is the world’s leading AI platform for business, and emerging solutions such as IBM Blockchain are enabling new levels of trust in transactions of every kind. More and more clients are choosing the IBM Cloud because of its differentiated capabilities, which are helping to transform industries, such as financial services, airlines and retail.”

(NYT) Morgan Stanley Nearly Doubled Profit From Year Earlier Fourth Quarter

  • Morgan Stanley roared in the fourth quarter, but it also exposed the limits of animal spirits. The bank led by James Gorman almost doubled its profit in the period from a year earlier to $1.7 billion. As at rivals, though, return on equity remains subpar.
  • Some banking businesses do not fare well when too much hangs in the balance, as occurred with an OPEC meeting, an Italian constitutional referendum and the American election late last year. Fees from new stock sales, for example, fell 5 percent from the third quarter at Morgan Stanley, 19 percent at JPMorgan Chase and 34 percent at Bank of America.
  • Trading desks ought to have been reaping the benefit from market mood swings. They certainly performed better in last year’s final quarter than during the same span in 2015. Morgan Stanley’s fixed-income, currency and commodities dealers raked in, at $1.5 billion, nearly three times as much revenue.
  • Profitability also remains subdued. With annualized return on equity of 8.7 percent in the fourth quarter, Mr. Gorman is inching toward his 2017 goal of 9 percent to 11 percent. For now, Morgan Stanley keeps failing to cover its cost of capital, generally assumed to be 10 percent for large banks.
  • Business may pick up in time, but that story has been told for years. What could power earnings is largely beyond Wall Street’s control: more and faster interest-rate increases from the Federal Reserve and financial rule changes from Washington.
  • Morgan Stanley is well placed to benefit from both. It is growing its lending business and its mostly domestic wealth-management unit accounts for an increasing share of the company’s profit. With a capital ratio of 16.8 percent, the bank holds more excess than rivals and thus has plenty to return to shareholders if regulators allow.

(Bloomberg) Key Republicans at Tom Price Hearing Still Wary on Health Law Repeal

  • A hearing on President-elect Donald Trump’s choice for health secretary became an arena Wednesday for key Republicans to stress their opposition to overturning the current health law without a clear replacement.
  • The panel was considering the selection of Rep. Tom Price (R., Ga.), but much of the session focused on GOP plans for undoing the health law. Sens. Lamar Alexander (R., Tenn.) and Susan Collins (R., Me.) pointedly told Mr. Price their concerns about an initial Republican strategy of repealing the law without an agreed alternative in hand.
  • Mr. Alexander, who chairs the Senate Health, Education, Labor and Pensions Committee, warned that the fragile insurance market in his state means he cannot support anything that would trigger further disruption. He finished on a similar note, telling Mr. Price he was confident he had secured his agreement.
  • “What I heard from you, I believe I’m correct about this, is that while we intend to repair the damage of Obamacare and that will eventually mean repealing parts of it—major parts of it—that won’t become effective until there are practical, concrete alternatives in place to give Americans access to health care,” he said.
  • The GOP-controlled Senate and House have taken their first procedural steps toward repealing the ACA, passing a budget that directs lawmakers to start drafting legislation to dismantle much of the law. But Republicans’ 52-48 Senate majority offers little room for defections as they move ahead.

(Bloomberg Intelligence) Dakota Access Still Has Path to Completion Despite Corps’ Review

  • The Dakota Access Pipeline project may be delayed by a new Army Corps environmental review, but that isn’t likely to stop the project from being completed.
  • The pipeline lost a court bid to block the Army Corps from preparing an environmental impact statement on the lake crossing, opening up the project to a period of public comment and review ending Feb. 20.
  • While publication of the EIS notice somewhat hems in the incoming Trump administration, the new president’s appointees may still withdraw it or reverse course.
  • In the interim, the federal district court in Washington could also agree with Dakota Access that the easement was actually granted in July, negating the EIS process completely.
  • If the EIS process is allowed to go to completion, that process may last as long as six months.
13 Jan 2017
High Yield Weekly CAM 0 comment

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 $1.1 billion. New issuance for the week was $1.2 billion and year to date HY is at $1.4 billion.

(Business Wire) Williams and Williams Partners Announce Financial Repositioning for Long-Term, Sustainable Growth

  • Williams and Williams Partners L.P. announced an agreement to permanently waive payment obligations under the incentive distribution rights held by Williams and convert Williams’ economic general partner interest into a non-economic interest for 289 million newly issued Williams Partners common units
  • The estimated transaction value is approximately $11.4 billion. Following the IDR Waiver, Williams will hold approximately 660 million Williams Partners common units, representing approximately 72% of the common units outstanding
  • Williams also announced that it expects to purchase newly issued common units of Williams Partners at a price of $36.08586 per unit. Williams expects to fund the unit purchase with equity. With respect to units issued to Williams in the private placement, Williams Partners will not be required to pay distributions for the quarter ended December 31, 2016 and the prorated portion of the first quarter of 2017 up to closing of the private placement
  • As a result of the measures announced today, Williams expects that Williams Partners will not be required to access the public equity markets for the next several years. In addition, the Transactions result in debt reduction at Williams Partners and a meaningful increase in its cash coverage ratio to approximately 1.2x in 2017 and maintenance of strong coverage in excess of 1.1x thereafter
  • Strengthening Williams Partners’ coverage and credit profile through the Transactions will benefit stakeholders in Williams Partners, including Williams. In addition, maintaining Williams Partners as a strong, separate entity provides on-going strategic and financial flexibility to Williams, enabling it to capitalize on future opportunities to grow both organically and inorganically

(Business Wire) Parsley Energy Buys Permian Properties for $607 Million

  • Parsley Energy Inc. is buying oil and gas properties in America’s hottest shale play for $607 million as it seeks to boost production by almost 60 percent this year
  • The acquisition comprises 23,000 net acres of land adjacent to the company’s existing operations in the Midland and Southern Delaware portions of the Permian Basin
  • The Permian shale formation straddling West Texas and New Mexico has been a hot spot for deals and the center of a revival in U.S. oil drilling as producers have managed to make a profit in the region even during the worst price crash in a generation

Sabine Pass Liquefaction was recently upgraded to BBB- by Fitch. This makes the Sabine bonds rated investment grade by two of the three major rating agencies.

(Bloomberg) Valeant Sells $2.1 Billion in Assets to Ease Debt Burden

  • Valeant Pharmaceuticals agreed to sell about $2.1 billion in assets in two deals, an important first step in the struggling drugmaker’s endeavor to get cash and begin easing its debt burden
  • L’Oreal SA, the Paris-based cosmetic giant, will pay Valeant $1.3 billion for three skin-care brands. Valeant will also sell its Dendreon Pharmaceuticals unit to closely held Chinese conglomerate Sanpower Group Co. for about $820 million. Valeant’s shares and bonds jumped after the news
  • The agreements mark Valeant’s biggest divestitures in almost three years, and a start to its efforts to pay down about $30 billion in debt. It’s a significant break for Chief Executive Officer Joe Papa, who took over in May to help turn around a company that had been embroiled in scandals about high prices and accounting that led to legal and regulatory investigations
  • Proceeds from both sales will be used to permanently repay term-loan debt under Valeant’s senior credit facility, according to the company. The Sanpower transaction is expected to close in the first half of this year, while the sale to L’Oreal should close in the first quarter

(Bloomberg) Sprint Debt Upgraded by Moody’s on Better Performance, Liquidity

  • “Despite the heavy promotional activity, profitability has remained stable due to Sprint’s cost-reduction initiatives,” Moody’s said, adding that annual savings could top $2 billion. The more solid footing “has reduced Sprint’s refinance risk and its dependence upon the often-volatile high-yield bond market,” Moody’s said. Sprint also benefits from implicit support of its parent, SoftBank Group Corp., the report said.
  • Sprint has struggled to improve its finances under Chief Executive OfficerMarcelo Claure. The unprofitable carrier, based in Overland Park, Kansas, has had to borrow money using assets including airwave licenses as collateral to help finance the business. Through promotions such as half-off pricing, it has curbed subscriber defections and turned in its first annual increase in seven years.

(New York Times) Senate Takes Major Step Toward Repealing Health Care Law

  • In a 51 to 48 vote, the Senate took their first major step toward repealing the Affordable Care Act, approving a budget blueprint that would allow the health care law to be gutted without the threat of a filibuster.
13 Jan 2017
Investment Grade Weekly CAM 0 comment

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Lipper, for the week ended January 11th, investment grade funds posted a net inflow of $4.029bn. The total year-to-date net inflow into investment grade funds ended the week at $6.215bn. Per Bloomberg, investment grade corporate issuance through Thursday was $38.8bn. Thus far, $92.8bn of investment grade corporate bonds have been issued in January, while consensus estimates call for $112bn for the full first month of the year.

(Bloomberg) Teflon Chemical Cases Face Uncertain Fate If Dow, DuPont Merge

  • Uncertainty cloaks DuPont Co.’s liability for 3,500 toxic tort lawsuits over a Teflon-related chemical as the company proceeds toward a merger with Dow Chemical Co.
  • PFOA has been found in drinking water in West Virginia and Ohio, near the Parkersburg plant. In the first three of those 3,500-plus cases, DuPont lost to residents of that area who claimed DuPont’s PFOA was responsible for their cancer.
  • DuPont’s spinoff, Chemours Co., will defend the PFOA cases although DuPont has been the named defendant.
  • Tom Claps, litigation analyst at Susquehanna Financial Group LLLP, said his company estimates DuPont will be liable for about $550 million for settlement of the current 3,500-plus PFOA cases. Chemours is required to reimburse DuPont for that amount, as the companies agreed in 2015.
  • “However, DuPont must write the initial PFOA checks to plaintiffs in these cases, and will then go after Chemours for reimbursement,” Claps said.
  • According to the Environmental Protection Agency, PFOA was found in blood serum in 99 percent of the U.S. general population between 1999 and 2012, but that percentage has been decreasing as domestic companies phase out production of the chemical.
  • The agency issued a health advisory in 2016 limiting PFOA exposure to 0.07 parts per billion after studies in test animals showed the chemical has adverse health effects, including cancers and impacts on development and the immune system.

(Moody’s, CAM notes) Constellation Brands Raised to Investment Grade by Moody’s

  • The rating upgrade reflects Constellation’s strong brand portfolio and favorable category trends, and its commitment to manage its net debt/EBITDA leverage to around 3.5x compared to a historical targeted range of 3x to 4x.
  • Moody’s expects that Constellation will maintain strong liquidity, characterized by over $1.4 billion in annual operating cash flow and $1.15 billion in revolving credit facilities with substantial borrowing availability.
  • With this Moody’s upgrade, Constellation is now rated investment grade by all three rating agencies.

(Bloomberg) ‘End of Covenants’ Sparks Revolt Over Erosion of Bond Safeguards

  • The first time Adam Cohen’s Covenant Review sounded the alarm in October about a new passage creeping into bond offerings, it described the junk-rated deal from Rackspace Hosting Inc. as “outrageous” and “unprecedented.” Investors bought it anyway.
  • To Cohen, it seemed no one was paying attention to the fine print. So he blasted out a report titled “The End of Covenants,” ultimately fingering 18 deals with the disputed passage.
  • “I had to do something dire,” said Cohen, founder and chief executive officer of his New York-based firm. “By sending out something with the ridiculous title of ‘The End of Covenants,’ people figured out, ‘Wait, something’s going on here.’”
  • Bonds typically come with a lengthy array of standard covenants that protect bondholders by requiring company managers to maintain certain financial ratios, limit asset sales and meet certain deadlines. If they don’t, it can be deemed a voluntary default that entitles bondholders to penalty payments. The “no premium on default” passage casts doubt on those payments, according to Cohen’s firm.
  • Such language may be less jarring to junk-bond owners, who accept more risk and allow corporate managers more leeway in return for higher yields. Mainstream investors weren’t so forgiving.
  • Chatter about the covenants spread through buy-side e-mail chains and chatrooms Monday and Tuesday, with some investors urging others to contact banks to oppose the language.
  • The firestorm that erupted by the middle of this week pushed issuers including Marsh & McLennan, GM and Broadcom Ltd. to drop the idea. The report had struck a nerve with buyers of high-grade bonds, who already have fewer protections and aren’t eager to go down the path that led to five years of eroding protection for junk-bond covenants, as tracked by Moody’s Investors Service.
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