Year: 2018

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.8 billion and year to date flows stand at -$55.3 billion.  New issuance for the week was zero and year to date HY is at $162.5 billion, which is -41% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• Continued weakness in oil and stock markets will keep pressure on high yield bonds
• Index yield rose to 7.92%, highest since April 12, 2016
• Average yield on BB rated bond rose to 6.24%, highest since February 2016
• Trading volume was slightly above average for the time of year
• S. corporate high-yield funds posted a fifth consecutive week of outflows
• Junk index return was -1.28% on Thursday, the fifth straight decline
• High yield has lost 2.21% so far this month and is down 2.16% YTD
• No new high-yield bond issues priced MTD
• December could be first month in 10 years with no bond sales
• Key drivers of U.S. junk bonds — low default rate, steady GDP growth, corporate cash flow, earnings — holding firm

(Bloomberg)  Community Health, Tenet Notes Slip on Judge’s Obamacare Ruling

• Tenet Healthcare Corp. and Community Health Systems Inc. were among the biggest decliners in the high-yield market as hospitals sink after a federal judge in Texas ruled that Obamacare is unconstitutional.
• Tenet’s 7% senior unsecured 2025 bonds slid 2.25 cents on the dollar to 94, while its 8.125% bonds due 2022 dropped 2.125 cents to 100.75, according to Trace
• Community’s 6.25% notes due 2023 fell 1.25 cents to 92
• The judge’s ruling brings the constitutionality question around the ACA back into the political arena which creates another “known-unknown” for healthcare investors, “especially though involved in rural hospitals operators and Medicaid managed care companies,” Mike Holland of Bloomberg Intelligence said in an interview
• “The uncertainty around how and when this plays out will weigh on asset prices until the divided Congress comes up with a fix,” Holland said

(Bloomberg)  Charter Settles N.Y. Internet Suit for Record $174 Million

• Charter Communications Inc. agreed to pay $174.2 million to settle consumer fraud claims by the state of New York, which accused the cable provider of ripping off customers with promises of faster internet speeds than the company knew it could possibly deliver.
• The accord is believed to be the largest-ever payout to consumers by an internet service provider in U.S. history, New York Attorney General Barbara Underwood said in a statement Tuesday. The state claimed subscribers to the company’s premium plan received internet speeds as much as 70 percent slower than guaranteed in advertisements by Time Warner Cable, which Charter acquired in 2016 and renamed Spectrum.
• The settlement marks another black eye for an industry that has long been ranked poorly by consumers for its lackluster customer service.
• The pact includes $62.5 million in direct refunds to 700,000 consumers and provides about 2.2 million subscribers with more than $100 million in premium channels and streaming services, according to the attorney general’s statement. Charter also agreed to implement business reforms as part of the settlement, which will set the stage for similar marketing and business changes across the broadband industry, the attorney general’s office said.

(New York Times)  Sprint, T-Mobile Deal Gets Green Light From U.S. Regulators

• A federal government committee and other top regulators in the United States have approved the proposed merger between T-Mobile and Sprint, paving the way for a union between the country’s third- and fourth-largest wireless operators.
• The Committee on Foreign Investment in the United States — a body that reviews foreign investments in the United States for national security threats — the Department of Justice, the Department of Homeland Security, and the Department of Defense all agreed to the $26.5 billion deal, T-Mobile said in a statement.
• Some investors, consumer advocates and government officials opposed the merger, claiming that the new telecommunications giant would limit customer choices and result in high prices for consumers.
• Proponents of the deal said it would make the combined company, with about 100 million customers, a competitor that would be able to go toe-to-toe with AT&T and Verizon in the battle to dominate the next frontiers of wireless technology in the United States. John Legere, T-Mobile’s chief executive, has argued that he would “lower prices to attract new customers.”
• The combination would still need to secure approval from the Federal Communications Commission, which has scrutinized a possible T-Mobile-Sprint merger before. In 2014, regulators at the F.C.C. rejected a proposed merger, concluding that effectively reducing the American wireless market to three major carriers from four would not be good for consumers.
• The deal remains subject to other regulatory approvals as well. If the two companies receive those approvals, the deal is expected to close during the first half of 2019, according to T-Mobile.

(Natural Gas Intelligence)  Cheniere’s Sabine Pass LNG Train 6 Near FID as Petronas Contracts for 20-Year Supply

• Cheniere Energy Partners LP on Tuesday said it has secured another liquefied natural gas (LNG) supply contract that may help to advance building the sixth train at the Sabine Pass export facility in Cameron Parish, LA.
• Petronas LNG Ltd., a subsidiary of Malaysia’s state-owned Petroliam Nasional Berhad, aka Petronas, made the sale and purchase agreement (SPA) with Cheniere’s Sabine Pass Liquefaction LLC for 1.1 million metric ton/year over 20 years on a free-on-board basis.
• The SPA is subject to a final investment decision (FID) by Cheniere to build Train 6 at the facility, which has been exporting gas overseas since 2016.
• “Petronas is one of the largest and most experienced participants in the global LNG market, and we are pleased to have it as our newest foundation customer at Sabine Pass, supporting Train 6,” Cheniere Partners CEO Jack Fusco said.
• “This 20-year agreement with Sabine Pass Liquefaction continues our momentum on Train 6, where early engineering, procurement, and site preparation activities have recently commenced ahead of a final investment decision.”

CAM High Yield Market Note

12/14/2018

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$1.4 billion and year to date flows stand at -$51.5 billion. New issuance for the week was zero and year to date HY is at $162.5 billion, which is -40% over the same period last year.

(Bloomberg) High Yield Market Highlights

• U.S. junk bond yields and spreads were flat to little changed across the risk spectrum, even as investors pulled more cash from funds.
• Reported outflows again this week, the fourth consecutive week of outflows
• This was the 7th outflow of over a billion dollars in the past 10 weeks
• Junk bond returns stayed positive, while CCCs turned negative yesterday
• Single-Bs were outperforming S&P 500, BBs and CCCs with 1.04% YTD return
• Record withdrawals from retail funds are offset by supply shortage, as YTD volume is lowest since 2009
• New issue market remained quiet and is expected to shut down by the end of next week ahead of the holidays
• This would be the first month of no issuance since November 2008
• Key drivers of U.S. junk bonds — default rate, GDP, corporate cash flow, earnings — are intact

(Washington Post) Investigation of generic ‘cartel’ expands to 300 drugs

• Executives at more than a dozen generic-drug companies had a form of shorthand to describe how they conducted business, insider lingo worked out over steak dinners, cocktail receptions and rounds of golf.
• The terminology reflected more than just the clubbiness of a powerful industry, according to authorities and several lawsuits. Officials from multiple states say these practices were central to illegal price-fixing schemes of massive proportion.
• The lawsuit and related cases picked up steam last month when a federal judge ruled that more than 1 million emails, cellphone texts and other documents cited as evidence could be shared among all plaintiffs.
• What started as an antitrust lawsuit brought by states over just two drugs in 2016 has exploded into an investigation of alleged price-fixing involving at least 16 companies and 300 drugs, Joseph Nielsen, an assistant attorney general and antitrust investigator in Connecticut who has been a leading force in the probe, said in an interview.
• While precise estimates of alleged overcharges have not been released, generic-industry sales were about $104 billion in 2017. Excessive billings of even a small fraction of annual sales over several years would equal billions of dollars in added costs to consumers, according to investigators.
• Generic manufacturers reject the accusations. They contend officials lack evidence of a conspiracy and have failed to prove anti-competitive behavior.
• Among the 16 companies accused are some of the biggest names in generic manufacturing: Mylan, Teva and Dr. Reddy’s.
• Investigators say voluminous documentation they have collected, much of it under seal and not available to the public, shows the industry to be riddled with price-fixing schemes. The plaintiffs now include 47 states. The investigators expect to unveil new details and add more defendants in coming months, which will put more pressure on executives to consider settlements.

(thestreet.com) Aramark Tumbles as Forecast Disappoints

• Shares of Aramark Corp. tumbled 12% Tuesday after the food, facilities management, and uniform services company provided an earnings forecast that disappointed Wall Street.
• For fiscal years 2019-2021, the company, which held an investor day on Tuesday, forecast 2% to 4% organic growth and double-digit adjusted earnings per share growth.
• On average over the last three years, Aramark has grown earnings per share by 31% each year. It achieved revenue growth of 8.1% over the last year.
• The company operates in three segments: U.S. food and support services, international food and support services, and uniform and career apparel. In January, Aramark announced that it had completed the acquisition of AmeriPride Services Inc. for about $1 billion  

• (streetinsider.com) United Rentals FY19 Revenue Guidance Tops Views, Resumes Share Repurchase Program 

• United Rentals, the world’s largest equipment rental company, held its biennial Investor Day in New York City on December 11, 2018, to provide an in-depth look at a range of key initiatives. The event, hosted by senior leadership for members of the investment community, focused on the company’s strategic vision, sustainable competitive advantages and emphasis on long-term value maximization.
• The company reaffirmed its 2018 financial guidance and announced full year financial guidance for 2019.
• Michael Kneeland, chief executive officer of United Rentals, said, “Our 2019 guidance reflects the healthy momentum we see going into year-end and our confidence that positive conditions will prevail in the coming year. Our five 2018 acquisitions have been successfully integrated, increasing the tailwinds in our gen-rent and specialty segments. We look forward to reporting our fourth quarter results on January 23.”
• Additionally, the company announced that it will resume its $1.25 billion share repurchase program this month. The program was initiated in July 2018, with approximately $210 million of shares purchased through September
• Additionally, the company announced that it will resume its $1.25 billion share repurchase program this month. The program was initiated in July 2018, with approximately $210 million of shares purchased through September 30, 2018. The Company subsequently paused the program on November 1, 2018 to focus on the integration of the BlueLine acquisition. The company intends to complete the program by the end of 2019.

(Bloomberg) T-Mobile-Sprint M&A On Track at FCC Despite Strong Dish Dissent

• T-Mobile’s Sprint M&A is on track at the FCC, even though latest filing by Dish boosts its already strong case against the deal. While the combination’s level of concentration raises serious red flags and makes approval a very close call, we’re skeptical that Dish can sway a Republican-led FCC focused on 5G.

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.9 billion and year to date flows stand at -$50.1 billion. New issuance for the week was $0.3 billion and year to date HY is at $162.5 billion, which is -37% over the same period last year.

(Bloomberg) High Yield Market Highlights

• U.S. junk bonds had the worst day since February 9, with a loss 0.6 percent yesterday. CCCs led the downward spiral, with the biggest drop since February 2016.
• CCCs return was -0.958%
• YTD return turned negative for first time since early February
• Yields hit a fresh 30-mo. high after biggest rise in eight months
• CCC yields at 2 year high of 11.34% after biggest increase in two months
• Single-B yields spiked to a 30-month high, steepest jump in eight months
• Volatile stocks, falling Treasury yields, declining oil, rising VIX weigh on junk bonds
• S&P 500 lost 3% in intra-day trading before rebounding to close little changed
• VIX jumped 25% in early trading before stabilizing to close up 2.2%
• Oil also volatile, sliding 5% intra-day amid uncertainty over OPEC’s decision on cutting supply, before recovering to close down 2.7%
• Issuance drought continued in high yield with no issues added to calendar
• November priced just $5.13b, slowest 11th month since 2008, least for a month since Dec. 2015
• YTD supply is $163b, lowest since 2009

(Reuters) U.S., China agree on trade war ceasefire after Trump, Xi summit 

• China and the United States agreed to a ceasefire in their bitter trade war on Saturday after high-stakes talks in Argentina between U.S. President Donald Trump and Chinese President Xi Jinping, including no escalated tariffs on Jan. 1.
• Trump will leave tariffs on $200 billion worth of Chinese imports at 10 percent at the beginning of the new year, agreeing to not raise them to 25 percent “at this time”, the White House said in a statement.
• “China will agree to purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States to reduce the trade imbalance between our two countries,” it said.
• “China has agreed to start purchasing agricultural product from our farmers immediately.”
• The two leaders also agreed to immediately start talks on structural changes with respect to forced technology transfers, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture, the White House said.

(Bloomberg) Qatar to Leave OPEC as Politics Finally Rupture Oil Cartel

• Qatar said it will leave OPEC next month, a rare example of the toxic politics of the Middle East rupturing a group that had held together for decades through war and sanctions.
• Qatar, a member since 1961, is leaving to focus on its liquefied natural gas production, Energy Minister Saad Sherida Al-Kaabi told a news conference in Doha on Monday. He didn’t mention the political backdrop to the decision: dire relations with Saudi Arabia, which has led a blockade against his country since 2017; and a rhetorical onslaught from U.S. President Donald Trump against the cartel.
• Qatar is OPEC’s 11th-biggest oil producer, accounting for less than 2 percent of total output, so its departure may not have a significant impact on discussions this week to cut production in conjunction with allies including Russia. Yet it sets a troubling precedent for a group that prides itself on putting shared economic interests above external politics — even extreme events like the Iran-Iraq war in the 1980s or Saddam Hussein’s 1991 invasion of Kuwait.

(Business Wire) The GEO Group Signs Contract Extension for the Continued Management of the Junee Correctional Centre in Australia

• The GEO Group, Inc. announced that its subsidiary, The GEO Group Australia Pty Ltd has signed a five-year contract extension with the State of New South Wales, Corrective Services for the continued management and expansion of the Junee Correctional Centre.
• GEO Australia has managed the 790-bed Centre for over 25 years since its opening in 1993. The Centre is currently undergoing a 489-bed expansion project which will bring its total capacity to 1,279 beds during 2019. The five-year agreement will be effective from April 1, 2019 through March 31, 2024, with annual revenues of approximately $51 million.
• George C. Zoley, Chairman of the Board and Chief Executive Officer of GEO, said: “We appreciate the trust placed in our company by the State of New South Wales, which is a reflection of our long-standing partnership with the Corrective Services at the Junee Correctional Centre. We are looking forward to working with the Department of Justice to further strengthen our 25-year partnership.”

(CAM Note) Moody’s upgrades the debt of Diamondback Energy

• The unsecured debt was upgraded one notch and the outlook is stable.
• Moody’s completed a rating review that was started nearly six months ago after Diamondback announced an acquisition for Energen Corp.
• Moody’s noted a larger Diamondback that is financially stronger and has greater capital and operational flexibility as reasons for the debt upgrade.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.9 billion and year to date flows stand at -$47.4 billion.  New issuance for the week was zero and year to date HY is at $162.2 billion, which is -35% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• S. junk bonds gained for the second straight session across the risk spectrum for first time in about two weeks, shrugging off outflows from retail funds. Yields dropped and spreads tightened and the energy index gained for a second consecutive session.
• Investors also seemed to ignore steadily declining oil prices, with oil briefly dropping below $50 in intra-day trading recently
• Energy was the worst performing sector this month as oil continued to drag and flirt with $50
• Outflows were negative for the week, and this was the 6th time when outflows exceeded $1b in the past 10 weeks
• Single-Bs replaced CCCs as best-performing asset YTD, with 0.86% returns vs 0.49% for CCCs
• Bloomberg Barclays high-yield index YTD return was at 0.03%
• November new issue was a mere $5b, lowest monthly volume since December 2015, slowest 11th month since at least 2006
• Supply shortage expected to continue into 2019 with UBS forecasting 15%-20% drop in issuance
• JPMorgan expects high yield supply flat in 2019 at about $200b
• Morgan Stanley expects supply to stay around $183b
• GS forecasts $150b in issuance next year

(Bloomberg)  Steel Dynamics Plans to Spend $1.8 Billion to Expand Output 

• Steel Dynamics Inc., the U.S. producer of the metal that has seen record cash flow, plans to spend as much as $1.8 billion to build a new facility that will have the capacity to produce advanced high-strength steel products.
• The electric-arc-furnace flat roll steel mill will have an annual output capacity of about 3 million tons, the Fort Wayne-based company said in a statement Monday. Construction is expected to begin in 2020 and the facility will start operating in the second half of 2021, it said. The investment is designed “to cost effectively serve not only the southern United States, but also the underserved Mexican flat roll steel market,” the company said.
• The steelmaker announced the investment that it said will generate 600 “well-paying” positions on the same day General Motors Co. said it could shutter four factories in the U.S. by the end of 2019. In October, Steel Dynamics reported record quarterly cash flow from operations on strong domestic demand for the metal.

(Business Wire)  Western Digital Announces CFO Transition Plan

• Western Digital Corp. today announced that Mark Long, chief financial officer, chief strategy officer and president, Western Digital Capital, has decided he will step down from his current role to pursue opportunities as a private equity investor. Western Digital has begun a comprehensive search for a successor. To ensure a smooth leadership transition, Long will remain an active member of the company’s leadership team through June 1, 2019. Long will remain chief financial officer until his departure or until a permanent successor is appointed.
• Long has served as Western Digital’s chief financial officer since 2016. Prior to that, he served as the company’s executive vice president and chief strategy officer since February 2013. Additionally, Long has served as president, Western Digital Capital, a strategic investment fund targeting innovative companies within the data infrastructure and broader technology industry aligned to Western Digital’s strategic plan, since February 2013.
• “On behalf of the Western Digital Board of Directors and leadership team, I want to thank Mark for his valued partnership and tremendous contributions to the company over the years,” said Steve Milligan, Western Digital chief executive officer. “Mark has been instrumental in developing and overseeing the company’s growth strategy, including our successful acquisitions and integrations of Hitachi Global Storage Technologies and SanDisk. He helped create the foundation for Western Digital’s leadership in today’s data-driven world, and we are now well positioned to capitalize on the long-term opportunities associated with rapid growth in the volume and value of data. We wish Mark the best in his future endeavors and look forward to discussing the company’s long-term vision and strategy on Dec. 4, 2018, at our 2018 Investor Day.”

(Modern Healthcare)  Most skilled-nursing facilities penalized by CMS for readmission rates

• The vast majority of skilled nursing facilities will receive a penalty on their Medicare payments for fiscal 2019 for poor 30-day readmission rates back to hospitals, according to new CMS
• Of the 14,959 skilled nursing facilities subject to the CMS’ Skilled Nursing Facility Value-based Purchasing Program, 73% received a penalty while 27% got a bonus. The data also show that the SNFs on average got worse at managing readmissions the longer they were in the program.
• The penalties, which went into effect for the first time on Oct. 1, were mandated by the Protecting Access to Medicare Act of 2014 in an effort to transition SNFs from fee-for-service to value-based payment. Under the program, SNFs can see up to a 1.6% bonus in their Medicare Part A payments or up to a 2% cut.
• The CMS has been providing SNFs quarterly confidential feedback reports since October 2016 regarding how they are doing on the readmission measure, but fiscal year 2019 was the first time the CMS penalized providers on performance.

(Bloomberg)  Leveraged Loans Hit Rough Patch

• The U.S. leveraged loan market is showing a few cracks. A $6.5 billion loan that helped finance the leveraged buyout of a Thomson Reuters unit is quoted at around 97.25 cents on the dollar, after being sold for just shy of 100 cents. The $5.05 billion of loans for KKR’s buyout of Envision Healthcare now quoted at 96.125 cents on the dollar, around two months after being issued at 99.75 cents.
• These debts have weakened with the broader loan market, which on average is priced at its lowest level since 2016. And there are other signs of cooling in loans too: the percentage of new deals that had to increase pricing spiked earlier this month to the highest of the year, according to data compiled by Bloomberg. Loan offerings are getting pulled at the fastest rate since July. And U.S. leveraged-loan funds are seeing some of their biggest outflows in nearly three years.