Month: May 2018

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.3 billion and year to date flows stand at -$26.2 billion.  New issuance for the week was $4.2 billion and year to date HY is at $89.1 billion, which is -23% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• Supply-starved U.S. junk bond investors feasted on CCC and PIK deals yesterday, despite choppy stocks and softening oil prices. Four new deals for $1.4b priced, led by CCC and PIK credits, and funds saw a modest inflow.
• Junk bond spreads, yields were little changed
• Triple-C credits traded above issue price reflecting the risk-on mood, even as oil prices dropped for a third straight session
• Atotech, a CCC PIK, priced within talk and traded at 99.625, above issue price
• TMXFIN, also CCC, priced at wide end of talk, traded at 101.375 yesterday afternoon, well above issue price
• CCCs beat BBs and single-Bs with YTD return of 2%
• High yield operating in an overall friendly environment with light supply, low defaults, steady domestic growth

(Bloomberg)  Goldman Says Riskiest Junk Bonds Are Most `Mispriced’ Since 2007

• The C-C-Craze for some of the riskiest corporate credits has gone too far, according to Goldman Sachs Group Inc.
• While U.S. investment-grade bonds that are most sensitive to moves in borrowing costs have been hit hard this year, investors continue to pile into debt sold by some of the weakest junk-rated companies. Bonds in the CCC category — just two notches above default — have returned a whopping 330 basis points in total this year, according to Bloomberg index data.
• That outperformance has helped push spreads on the Bank of America Merrill Lynch gauge of CCC rated debt to below 700 basis points earlier this week — the smallest premium since July 2014.
• Meanwhile, Goldman’s preferred valuation measure of corporate credit, which subtracts their projected expected-loss rates from current spreads, shows U.S. high-yield obligations are now mispriced for even the most benign scenarios.
• “In a nutshell, the CRP is the expected excess return on a buy-and-hold strategy of diversified credit portfolios over a five-year period,” write Goldman analysts led by Chief Credit Strategist Lotif Karoui in a note. “Put differently, the CRP is the extra premium earned by investors as compensation for future default losses.”
• Goldman estimates the credit-risk premium for CCC obligations has sunk to a negative 53 basis points, “even under a fairly optimistic assumption of no recession for the next five years.”
• That’s the lowest level since before the financial crisis, when the CRP touched negative 420 basis points in June 2007, at the height of the froth in the global debt market. It suggests investors are likely accepting credit risk without adequate compensation.

(CNBC)  HCA and KKR team up for Envision bid

• S. hospital operator HCA Healthcare and private-equity firm KKR have joined forces to make an offer for U.S. physician services provider Envision Healthcare
• The move is aimed at giving HCA and KKR an edge over buyout firms that are also pursuing Envision, which has a market capitalization of $5.1 billion and long-term debt of $4.6 billion, the sources said.
• HCA, which has a market capitalization of $36 billion and long-term debt of $31.6 billion, wants to acquire Envision’s AmSurg ambulatory surgery business, with KKR taking the over the remainder, according to the sources.
• Nashville-based Envision has asked potential acquirers to submit final offers later this month, sources said. Other private-equity firms competing for Envision include a consortium of Carlyle Group and TPG Global, sources added.
• Envision announced last year it was reviewing a range of strategic alternatives after reporting disappointing third-quarter earnings, which it attributed partly to the effects of hurricanes Harvey and Irma as well as a slowdown in the growth of patient demand.
• Last year, Envision agreed to sell its ambulance unit, AMR, to Air Medical, a medical helicopter business owned by KKR, for $2.4 billion.
• The year prior, it merged with AmSurg in an all-stock deal that valued the combined companies at the time at around $10 billion. HCA’s and KKR’s bid would reverse that combination.

(Reuters)  Cheniere moves ahead with Corpus Christi LNG expansion 

• Cheniere Energy Inc said on Tuesday it had approved the construction of a third liquefaction unit, known as a train, at its Corpus Christi export terminal in Texas, the first new liquefied natural gas project to go ahead in the United States since 2015.
• The positive investment decision on the 4.5 million-tonne per annum (Mtpa) LNG train comes as Washington and Beijing have stepped back from the brink of a trade war and agreed to hold further talks to boost U.S. exports to China.
• China, which is turning to natural gas to reduce its dependency on coal for power, overtook South Korea last year to become the world’s No. 2 LNG buyer. Companies with U.S. projects say China could use LNG imports to reduce a trade surplus with the United States.
• For its part, Cheniere signed long-term deals with China National Petroleum Corp (CNPC) in February, earmarking 1.2 Mtpa of the output from Corpus Christi Train 3 for the state-owned oil and gas firm.
• The first two trains at Corpus Christi are expected to enter service next year. There is no timeline for the third train, though the builds generally take about four years each.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.8 billion and year to date flows stand at -$26.5 billion.  New issuance for the week was $1.6 billion and year to date HY is at $84.8 billion, which is -23% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• Despite all the hullabaloo about rising rates, U.S. high yield investors bought three CCC-rated deals in the primary, led by Valeant.
• Valeant dropped a senior secured tranche, increased size of a term loan
• Bond priced at tight end of talk, received orders of more than $5.5b
• SRS Distribution and Hearthside funded aggressive buyouts by private equity
• Investors showed restraint, demanding appropriate risk premia
• Both deals priced at wide end of talk
• Both made material covenant changes to strengthen investor protection
• Investors ignored outflows from retail funds
• CCCs beat BBs and single-Bs with a return of 2.03% YTD
• IG’s YTD return is negative 4.15%
• Lack of supply, combined with low default rate and decent corporate earnings, boosts risk-on sentiment for junk bonds
• High yield is expected to be tested in the second half of the year by supply from Blackstone funding the buyout of financial and risk businesses from Thomson Reuters, Carlyle Group funding for acquisition of specialty chemicals business from AkzoNobel

(Multichannel News)  Charter’s Enterprise Unit Earmarks $1B-Plus for Fiber Plan

• Spectrum Enterprise, a unit of Charter Communications focuses on the large business services segment, said it will invest more than $1 billion in 2018 to increase the density of its national fiber network.
• Charter said this will be the second straight year in which the company has invested in excess of $1 billion exclusively in Spectrum Enterprise, which will be looking to expand on a network of nearly 200,000 fiber-lit buildings.
• Spectrum Enterprise will absorb the bulk of the upfront costs of fiber construction for most new enterprise clients in its footprint for solutions such as Fiber Internet Access, Ethernet and voice trunks.
• The investment will also come to add fiber density as wired networks become a significant backhaul channel for a coming wave of 5G-based services and other bandwidth-intensive offerings.
• “As fiber connectivity has become fundamental to economic growth, we are focused on making our fiber infrastructure more accessible to clients, and reshaping their experience to align with the evolving realities of today’s modern enterprise,” Phil Meeks, EVP and president of Spectrum Enterprise, said in a statement. “Advanced video and virtual reality solutions, cloud, IoT and the future of 5G all depend on a reliable and highly-dense fiber network. Our commitment is to ensure that our clients have the most robust fiber network and solutions to grow today and take advantage of future technologies that have immense demands on bandwidth.”

(PR Newswire)  Steel Dynamics to Acquire CSN Heartland Flat Roll Operations

• Steel Dynamics, Inc. announced that it has entered into a definitive agreement to acquire Heartland from CSN Steel, S.L.U., a wholly-owned subsidiary of Companhia Siderurgica Nacional.  Located in Terre Haute, Indiana, Heartland produces various types of higher-margin, flat roll steel by further processing hot roll coils into pickle and oil, cold roll, and galvanized products.  Steel Dynamics has agreed to purchase Heartland for $400 millionin cash inclusive of $60 million of normalized working capital, subject to customary transaction purchase price adjustments.  Steel Dynamics believes the purchase price approximates current replacement value.  The transaction is expected to be accretive to near-term earnings and cash flow per share.  The acquisition will expand Steel Dynamics’ annual flat roll steel shipping capacity to 8.4 million tons and total shipping capability to 12.4 million tons.  The additional exposure to lighter-gauge and greater width flat roll steel offerings will broaden the Company’s value-added product portfolio, enhancing Steel Dynamics position as a leading North American steel producer.
• “The acquisition of Heartland represents a step in the continuation of our growth strategy,” said Mark D. Millett, Chief Executive Officer. “It levers our core strengths, and at the same time fulfills our initiatives to further increase value-added product and market diversification.  We look forward to welcoming the Heartland employees and customers into the Steel Dynamics family, and working with them to drive future growth and success.
• “We have positioned our capital structure and organizational framework for growth,” continued Millett, “and we believe this acquisition will result in numerous future earnings benefits both to Heartland’s current operations and to our Midwest flat roll operations.  In combination with our current operations, Heartland brings a tremendous amount of operating flexibility and optionality.  As a part of our broader business platform, Heartland is expected to provide numerous synergies with our existing operations, and we look forward to levering these opportunities in the future.”

(Bloomberg)  Teva Rises After Berkshire Hathaway Boosts Stake in Drugmaker

• Teva Pharmaceutical shares rose after Warren Buffett’s Berkshire Hathaway Inc. more than doubled its stake in the struggling Israeli drugmaker, a vote of confidence in Chief Executive Officer Kare Schultz’s turnaround effort.
• Berkshire Hathaway owns 40.5 million American depositary receipts in Teva, Buffett’s company said in a regulatory filing Tuesday. The Omaha, Nebraska-based company made its initial investment in Teva last year.
• Saddled with debt, Teva has been cutting its workforce and closing factories to cut costs. The company this month raised its 2018 profit forecast as Schultz’s belt-tightening program begins to take hold. Teva has been hurt by falling margins on knockoff drugs and rapidly declining sales for its best-selling product, the multiple sclerosis drug Copaxone.
• Buffett, 87, has handed some of his stock-picking duties to Todd Combs and Ted Weschler, who together oversee about $25 billion. Berkshire hired Combs in late 2010 and Weschler about a year later. Buffett said in February that the Teva investment was made by one of his deputy stock pickers and he didn’t know the reasoning behind the decision.

(CNBC)  Williams to buy rest of Williams Partners in $10.5 billion deal

• Pipeline operator The Williams Cos. said on Thursday it would buy the remaining 26 percent stake that it does not already own in its master limited partnership, William Partners, for $10.5 billion. Williams would give 1.494 of its shares for each share of Williams Partners, with the offer representing a premium of 6.4 percent based on Wednesday’s closing price.
• The company said the deal will immediately add to cash available to dividends extending the period for which the company is not expected to be cash taxpayer through 2024.
• The deal simplifies Williams’ corporate structure, streamlines governance and maintains investment-grade credit ratings, the company said.
• (CAM Note) Moody’s and Fitch has moved the debt of Williams Companies to under review for upgrade on the news.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.1 billion and year to date flows stand at -$25.6 billion.  New issuance for the week was $4.7 billion and year to date HY is at $83.2 billion, which is -20% over the same period last year.   

(Bloomberg)  High Yield Market Highlights 

• CCC yields saw the biggest drop since October 2017 as U.S. high yield firmed with rising oil and growing appetite for risk assets.
• High yield spread fell to 336bps from 343bps at the start of the week
• Investors, starved of supply, shrugged off outflows from retail funds
• Most of the Primary issuance was the $3.2b issued on Wednesday
• High-yield is best performing asset class in fixed income, led by CCCs
• CCCs beats BBs, single-Bs, with positive YTD return of 1.90%
• IG bonds have lost 3.46% this year
• CCC spread also tightened most in 6 months yesterday
• Moody’s said the U.S. speculative-grade default rate was projected to decline to 1.5% by April 2019

(Bloomberg)  Arconic Cuts Outlook on Higher Aluminum Costs

• Arconic Inc. sold off after the company slashed its forecast because of rising aluminum prices and business inefficiencies.
• Adjusted profit will be 18 percent less than the previous estimate, the New York-based metals maker said in a statement. That trailed the lowest estimate of analysts surveyed by Bloomberg.
• “It is clear that we have areas in need of operational improvement,” Chief Executive Officer Chip Blankenship, who took the reins in January, said in the statement. “We are updating our full year 2018 guidance due to rising aluminum prices and my deeper understanding of our operations.”
• The comments reflect Blankenship’s challenge as he looks to revitalize Arconic after a bitter battle with Elliott Management Corp. last year. He has already pledged to review Arconic’s strategy and portfolio while moving the headquarters to a lower-cost location. More recently, growing tensions over aluminum and steel tariffs, as well as U.S. sanctions on Russian aluminum giant United Co. Rusal, have roiled metals producers and their customers.

(Hollywood Reporter)  AMC Entertainment Posts Higher First-Quarter Earnings, Beats Estimates

• Cinema giant AMC Entertainment posted higher first-quarter earnings and revenues on the strength of Black Panther and Jumanji‘s box-office returns and its Nordic Cinema Group Holding acquisition internationally.
• Net earnings for the three months to March 31 climbed to $17.7 million against a year-earlier $8.4 million. Overall revenues rose 8 percent to $1.387 billion, exceeding a $1.35 billion analyst forecast.
• “We are truly heartened by AMC’s start to 2018 and couldn’t be more excited about the prospects for the year after the record-breaking success of Avengers: Infinity Warearly in the second quarter,” AMC CEO Adam Aron said in a statement.
• During an analyst call that followed the release of his latest results, the AMC boss took a bullish stance on his company’s prospects going forward, as Aron pointed to a bounce-back in early 2018 box office on the strength of Black Panther and Avengers ticket receipts after the “painful depths” of the summer 2017 multiplex business.
• The exec argued market analysts who had questioned the prospects of movie theaters amid the rise of streaming content competition like Netflix and Amazon Prime had been proven wrong. “When Hollywood makes movies that people want to see, they flock to our theaters and they do so in huge numbers,” Aron added.

(Business Wire)  B&G Foods Reports Financial Results for First Quarter 2018

• Base business net sales for the first quarter of 2018 increased $1.1 million, or 0.3%, to $411.1 million from $410.0 million for the first quarter of 2017. The $1.1 million increase was attributable to an increase in net pricing of $1.2 million, or 0.3%, partially offset by a decrease in unit volume of $0.1 million.
• For the first quarter of 2018, adjusted EBITDA, which excludes acquisition-related and non-recurring expenses and the non-cash accounting impact of the Company’s inventory reduction plan, was $89.4 million, a decrease of 2.9%, or $2.6 million, compared to $92.0 million for the first quarter of 2017. Adjusted EBITDA as a percentage of net sales was 20.7% for the first quarter of 2018.
• Robert C. Cantwell, President and Chief Executive Officer of B&G Foods stated, “When we laid out our vision for 2018 earlier this year, we expressed our belief that during 2018 we would return to modest growth, stable margins and strong free cash flow generation, benefiting in part from our inventory reduction plan, and we delivered on those expectations in the first quarter.”
• B&G Foods reaffirmed its guidance for full year 2018. Net sales are expected to be approximately $1.720 billion to $1.755 billion, adjusted EBITDA is expected to be approximately $347.5 million to $365.0 million and adjusted diluted earnings per share is expected to be approximately $2.05 to $2.25.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.7 billion and year to date flows stand at -$24.4 billion.  New issuance for the week was $3.2 billion and year to date HY is at $78.5 billion, which is -21% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• Junk bond issuance and inflows have resumed, with CCC-rated LBO supply highlighting the strength of risk appetite. Lipper reported an inflow for week ended May 2 after an outflow the prior week.
• Four deals for $1.34b priced yesterday, two of them CCC credits
• GFL Environmental, rated CCC, did a drive-by to fund an LBO by an investor consortium led by BC Partners
• Strong fundamentals and steady growth are boosting junk bonds
• Oil is hovering near a 3 year high amid reports that OPEC was likely to extend production cuts into 2019
• Consensus at Milken Institute conference this week was that the credit markets would have a few more years of a smooth run as global growth was steady and fundamentals were sound
• Credit cycle will extend, and there’s no fear of imminent recession
• CCCs continued to top BBs, B, stocks and IG, with YTD positive returns of 1.25%
• Stocks report negative returns YTD 1.06% and IG negative 3.38%
• Moody’s notes that the number of companies rated B3 or lower declined and was down 22% from a year ago and 35% from its peak in 2016
• “Decreasing number of lower-rated corporate issuers is a sign of declining or low default rate risk in the year ahead,” Moody’s analyst Julia Churson wrote
• Moody’s forecasts default rate to decline to 1.7% by March 2019, helped by rising corporate earnings, abetted by fiscal stimulus

(Wall Street Journal)  Watch Out: Junk Bonds Getting Junkier

• One thing owners of junk bonds are usually sure of is that when the borrower defaults, they will get a veto on cash going to shareholders, to junior debtors or into new deals.
• Not any more. Junk bonds financing private-equity firm KKR & Co.’s latest buyout subvert the usual order by allowing such payments to go ahead even after a formal default.
• The $1.4 billion of bonds, to repay temporary borrowing for the buyout of Unilever PLC’s margarine business, mark a new low in the quality of covenants protecting lenders and are yet another sign of the wall of money chasing the higher yield on offer from junk bonds.
• Several recent bonds have allowed what are known as restricted payments even when a company is in technical default — so that, for example, a planned takeover or joint venture wouldn’t be derailed.
• Flora Food Group, Unilever’s business, appears to be the first explicitly to allow them after a formal “event of default,” which should put creditors at the front of the line.
• This matters when it comes to assessing the risk of the market as a whole. Junk-bond enthusiasts tend to highlight the yield spread over Treasurys, which in the U.S. is much higher now than it was at the end of the last bull market in 2007 and about where it stood in 2014.
• But the weakening of covenants means that losses are likely to be bigger if there is another wave of defaults, which ought to justify lower prices, and so higher spreads over Treasurys.

(New York Times)  Sprint and T-Mobile C.E.O.s Are in Washington to Sell Their Merger

• From the moment T-Mobile and Sprint announced their $26.5 billion merger on Sunday, the wireless carriers have positioned their proposed deal with an eye toward Washington. After all, regulators in the Obama administration blocked one of their previous efforts to combine.
• This time around, the chief executives of the companies emphasized that merging would help them to:
• Build a next-generation wireless network, one robust enough to keep up with China in a growing technological arms race; Create thousands of jobs, especially in rural areas; Keep prices low for consumers, especially as cable companies like Comcast try to enter the market.
• The heads of both companies began a charm offensive in Washington on Tuesday

(Knowledge@Wharton)  T-Mobile and Sprint: Will the Deal Go Through?

• T-Mobile and Sprint, the nation’s third and fourth largest wireless telecom companies, have been trying to tie the knot for years. But concerns that regulators won’t approve a merger because it would reduce competition have kept them apart. Their antitrust concerns are not unfounded: In 2011, the U.S. Justice Department torpedoed AT&T’s planned $39 billion acquisition of T-Mobile. Three years later, Obama’s FCC chairman, Tom Wheeler, bluntly told Sprint he was skeptical such a deal would be approved.
• That was then, this is now. Today’s FCC is more business friendly, chaired by Republican Ajit Pai and with a GOP majority among its commissioners.
• But has the environment changed sufficiently that T-Mobile’s acquisition of Sprint will not be dead on arrival in Washington? “I’d be very surprised if Ajit went along with this,” said Gerald Faulhaber, Wharton professor emeritus of business economics and public policy and former FCC chief economist.
• This is the third time that T-Mobile and Sprint reportedly talked about merging — and the same challenges remain. “I’d be surprised if the third time is a charm. Market shares are pretty high. Post-merger, you’d have three firms with more than 30% of the market each. Under the orthodox approach that the merger guidelines take, that would be a clearly challengeable merger,” said Herbert Hovenkamp, a Penn Integrates Knowledge professor at the University of Pennsylvania, with dual appointments at Wharton and Penn Law
• Hovenkamp pointed to another hurdle: Unlike other wireless telecom mergers that need approval by both the FCC and Justice Department, this one also needs to be greenlit by The Committee on Foreign Investment in the United States (CFIUS). That’s because T-Mobile is owned by Germany’s Deutsche Telekom and Sprint is majority owned by SoftBank of Japan. “We’ve got three agencies this time that need to approve this merger,” he said.
• Moreover, the committee, which falls under the U.S. Treasury, is subject to the presidential executive order, Hovenkamp said. In March, the Trump administration sank the acquisition of U.S. chipmaker Qualcomm by Broadcom, a U.S. chipmaker acquired by a Singaporean company that is now relocating back to America. Trump “could probably do that this time again,” he said. “There’s a whole lot of uncertainty facing this merger.”