Month: June 2018

Corporate spreads moved modestly wider during the week as BBB credit continues to underperform A-rated credit.

According to Wells Fargo, IG fund flows for the week of June 21-June 27 were +$1.3 billion.  IG flows are now +$69.387 billion YTD.

Per Bloomberg, it was the slowest week for the new issue calendar thus far in 2018, with only $2.4 billion in new corporate debt priced through Thursday.  This brings the YTD total to ~$595bn.

Treasury rates did not change materially this week and curves remain flat.

(Bloomberg) Fed Test Slaps Wall Street Titans, Unleashes Record Payout

• Tougher Federal Reserve stress tests forced some of Wall Street’s top banks to rein in ambitious plans for pumping out cash to shareholders. But even those diminished returns spell a record payout to investors.
• As the central bank’s annual stress tests ended Thursday, the nation’s four largest lenders — JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. — said they will distribute more than $110 billion through dividends and stock buybacks, sending their stocks higher. Even shares of Goldman Sachs Group Inc. and Morgan Stanley — which the Fed blocked from boosting total payouts — climbed in early trading Friday.
• The Fed’s decisions in the test provided some relief for investors after arecord 13 straight days of declines in the S&P 500 Financials Index. In the hours after clearing the test, more than 20 firms described how they’ll reward their owners over the coming four quarters. Wells Fargo plans to boost payouts more than 70 percent to about $33 billion, while JPMorgan signaled a 16 percent increase to $32 billion.
• The Fed also delivered some bad news. The regulator said it rejected initial proposals from six firms — JPMorgan, Goldman, Morgan Stanley, American Express Co., M&T Bank Corp. and KeyCorp — to make even higher payouts, forcing them to temper their requests. Never have so many firms taken that so-called mulligan to finish the exam.
• The Fed also failed a U.S. subsidiary of Deutsche Bank AG, citing “widespread and critical deficiencies” in its planning. The widely anticipated rejection limits the unit’s ability to send capital home to Germany and comes as senior executives try to bolster investor confidence. The Frankfurt-based firm said it’s working with regulators and making progress.

 (Bloomberg) Charter Pays Double-Digit Concession                     

• Domestic telecom company Charter Communications was the lone issuer to navigate what’s become a treacherous investment-grade primary market.
  • Compressing spreads 15bps, CHTR paid 10bps in new issue concession to print $1.5 billion split between 5.5-year fixed- and floating-rate notes when taking into account both their outstanding 22s and 25s.
  • New issue fatigue continues to grip the market as investors digest more than $31 billion in jumbo acquisition-related financing from Bayer and Walmart alone. After considering persistent headline risk from global trade tensions, sensitivities around Italy and an upcoming holiday-shortened week, activity is likely to remain muted until the week beginning July 9.
  • With just $2.4 billion pricing, we are on pace for the lightest volume week of the year. Prior to this, the last week of May held that distinction with $4.75 billion of sales.
  • It was surprising that a split-rated, high-beta telecommunications company elected to move forward today given the recent uneven broader market backdrop and weaker credit landscape.
  • Execution can best be described as mixed this week, highlighted by triple-B captive finance issuer Penske Truck Leasing’s 5-year deal stalling Tuesday, launching at initial price thoughts while the borrower was forced to pay elevated concessions.
  • As we saw over the last two active sessions, today’s final orderbook was less than 2 times covered.

(Bloomberg) In GE Overhaul, Once-Mighty Finance Arm Goes Out With a Whimper

• General Electric Co.’s finance business was once considered “too big to fail’’ by the U.S. government. These days, John Flannery is trying to make it too small to notice.
• The chief executive officer is selling the bulk of what’s left of GE Capital as part of an effort to remake the parent company into a less volatile — and much smaller — maker of aerospace and power equipment.
• When he’s done, the lending side, which GE has been downsizing since the financial crisis, will consist of a world-class aircraft leasing unit and not much else. It wasn’t that long ago that it offered everything from credit cards and commercial real estate loans to freight-train financing and pet insurance.
• Flannery’s plan, which also calls for spinning off the health-care division and backing out of the oil and gas market, would effectively complete the slow-motion breakup of a banking business that predecessors Jack Welchand Jeffrey Immelt had built into a Wall Street titan.
• Flannery, who spent decades in finance roles at GE, acknowledged the diminishing role of lending at the company but wouldn’t call it the end of GE Capital. After all, there’s still one big business left.
• GE Capital Aviation Services, better known as Gecas, is one of the world’s top plane lessors, with a fleet of almost 2,000 aircraft. The business generated $283 million in profit in the first quarter, while GE Capital overall lost $1.8 billion.
• Flannery has no plans to sell Gecas, which he argues is complementary to GE’s jet-engine manufacturing operations. Still, he said there’s a lot of external interest, giving GE “optionality” down the road. As he put it, potential acquirers “call us constantly.”

Trade concerns continued to weigh on debt and equity markets throughout the week. Spreads on the Bloomberg Barclays Corporate Index are 7 wider on the week as we go to print on Monday.  A deluge of corporate bond supply in the primary market has certainly helped to push spreads wider.  On Monday, Bayer printed a $15bln deal to fund its acquisition of Monsanto.  At the time, this was the second largest deal of the year, after the jumbo $40bln deal that CVS brought to market in early March.  Walmart would soon take the mantle of the second largest deal from Bayer as the retailer brought a $16bn deal on Wednesday to fund its acquisition of Indian-based ecommerce retailer Flipkart.

According to Wells Fargo, IG fund flows for the week of June 14-June 20 were -$1.4 billion. Even with the reversal in flows, IG flows are still positive at +$68.107 billion YTD.

Jumbo M&A led to one of the busiest new issue calendars that we have seen thus far in 2018. Per Bloomberg, over $43 billion in new corporate debt priced through Thursday.  This brings the YTD total to $636 billion.

(Bloomberg) Why Corporate Bond Liquidity Might Not Be as Bad as You Fear

• Banks’ shrinking corporate-bond holdings are partly a statistical mirage, according to a consulting firm. Some money managers and analysts believe it may be time to stop worrying about it.
• One measure of total dealer holdings of corporate bonds has dropped by around 90 percent since the crisis, a fact that has instilled fear in money managers for years. Dealers’ inventories of corporate bonds can be a shock absorber for the market: in times of trouble, banks can buy the securities from panicked sellers, hang onto them, and then offload them slowly, potentially preventing prices from plunging.
• But the decline in inventories is less dramatic than it seems because of a quirk in the data, consulting firm Tabb Group wrote in a recent report. The Federal Reserve Bank of New York statistic in question, primary dealer positions in corporate securities, fell to around $23 billion as of June 6 from around $265 billion in 2007. Much of that decline stemmed from the New York Fed narrowing the way it defined corporate bonds in 2013, when it appeared to have removed mortgage-backed securities without government backing from the mix, according to Tabb. On an apples-to-apples basis, inventories declined more like 35 percent to 50 percent for banks between 2007 and 2014, the consulting firm estimated.
• Inventories aren’t even the best measure to look at for assessing liquidity, Tabb Group said. What money managers care about is a bank’s capacity to buy securities, and the bigger a dealer’s inventory, the less ability it has to buy more. The average capacity at the six biggest U.S. banks for corporate bond underwriting fell just 16 percent between 2006 and 2017, according to Tabb, and most of the banks can take on even more risk if there’s a valid business reason to do so.
• Looking at the top 20 dealers, the decline in banks’ capacity from the pre-crisis era is closer to around 35 percent, Tabb estimates. But it’s not fair to completely blame rulemakers for these declines. There are good business reasons for banks to be less willing to hold the debt because interest rates are broadly rising, said Timothy Doubek, senior portfolio manager at Columbia Threadneedle Investments, which manages about $172 billion of fixed income assets.
• There are still reasons to be worried about how corporate bonds may perform in a downturn. The declines in inventories and capacity have come at a time when the amount of debt outstanding has surged: there were about $9 trillion of U.S. corporate bonds outstanding as of the end of March, according to the Securities Industry and Financial Markets Association, a trade group. That’s an increase of around 85 percent from the end of 2006.
• There’s no single way to define liquidity and it can vanish during times of stress. One measure known as the “bid-ask spread,” which looks at differences between the prices at which dealers will buy and sell a security, tends to grow wider when liquidity is low, and shrink when it’s strong. That spread is about as tight as it’s ever been.

There was no shortage of news in the market this week with political, economic and monetary policy events.  To top it off, on Friday morning we learned that the U.S. and China are now officially in the early innings of a potential trade war, which has pushed the debt and equity markets firmly into risk-off mode as we head to press.

According to Wells Fargo, IG fund flows for the week of June 7-May 13 were +$2.3 billion.  IG flows are now +$68.573 billion YTD.  Short and intermediate duration funds continue to garner assets while long duration funds have been shrinking this year.

Per Bloomberg, 23.37 billion in new corporate debt priced through Thursday.  This brings the YTD total to ~$592bn, which is down 8% year over year.

Treasury curves continue to flatten and are now the flattest they have been since 2007.

(CNET) Net neutrality is really, officially dead. Now what?

• The Obama-era net neutrality rules, passed in 2015, are defunct. This time it’s for real.
• Though some minor elements of the proposal by the Republican-led FCC to roll back those net neutrality rules went into effect last month, most aspects still required approval from the Office of Management and Budget. That’s now been taken care of, with the Federal Communications Commission declaring June 11 as the date the proposal takes effect.
• While many people agree with the basic principles of net neutrality, the specific rules enforcing the idea has been a lightning rod for controversy. That’s because to get the rules to hold up in court, an earlier, Democrat-led FCC had reclassified broadband networks so that they fell under the same strict regulations that govern telephone networks.
• FCC Chairman Ajit Pai has called the Obama-era rules “heavy-handed” and “a mistake,” and he’s argued that they deterred innovation and depressed investment in building and expanding broadband networks. To set things right, he says, he’s taking the FCC back to a “light touch” approach to regulation, a move that Republicans and internet service providers have applauded.
  • What’s net neutrality again?
    • Net neutrality is the principle that all traffic on the internet should be treated equally, regardless of whether you’re checking Facebook, posting pictures to Instagram or streaming movies from Netflix or Amazon. It also means companies like AT&T, which is trying to buy Time Warner, or Comcast, which owns NBC Universal, can’t favor their own content over a competitor’s.
  • So what’s happening?
    • The FCC, led by Ajit Pai, voted on Dec. 14 to repeal the 2015 net neutrality regulations, which prohibited broadband providers from blocking or slowing down traffic and banned them from offering so-called fast lanes to companies willing to pay extra to reach consumers more quickly than competitors.
  • Does this mean no one will be policing the internet?
    • The FTC will be the new cop on the beat. It can take action against companies that violate contracts with consumers or that participate in anticompetitive and fraudulent activity.
  • So what’s the big deal? Is the FTC equipped to make sure broadband companies don’t harm consumers?
    • The FTC already oversees consumer protection and competition for the whole economy. But this also means the agency is swamped. And because the FTC isn’t focused exclusively on the telecommunications sector, it’s unlikely the agency can deliver the same kind of scrutiny the FCC would.
  • What about internet fast lanes? Will broadband providers be able to prioritize traffic?
    • The repeal of FCC net neutrality regulations removes the ban that keeps a service provider from charging an internet service, like Netflix or YouTube, a fee for delivering its service faster to customers than competitors can. Net neutrality supporters argue that this especially hurts startups, which can’t afford such fees.

(Bloomberg) AT&T Closes Time Warner Deal After U.S. Declines to Seek Stay

• AT&T Inc. closed its $85 billion takeover of Time Warner Inc., the culmination of a 20-month battle for the right to enter the media business by acquiring the owner of HBO and Warner Bros.
• The completion of the deal came just hours after AT&T made a filing in federal court in Washington disclosing that it had reached an agreement with the Justice Department that waived a waiting period for closing.
• The agreement doesn’t prevent the department’s antitrust division from appealing the decision issued Tuesday by a federal judge rejecting the U.S. antitrust lawsuit against the deal. The government is still weighing whether to appeal the ruling, a Justice Department official said.
• AT&T’s completion of the takeover caps a nearly two-year effort to acquire Time Warner, the owner of CNN, HBO and Warner Brothers studio. The Justice Department sued in November to stop the merger, claiming the combination would raise prices for pay-TV subscribers across the country. After a six-week trial, U.S. District Judge Richard Leon ruled against the government’s case.

(Bloomberg) Powell Lauds Economy as Fed Nudges Up Interest-Rate Hike Path

• Federal Reserve officials raised interest rates for the second time this year and upgraded their forecast to four total increases in 2018, as unemployment falls and inflation overshoots their target faster than previously projected.
• The so-called “dot plot” released Wednesday showed eight Fed policy makers expected four or more quarter-point rate increases for the full year, compared with seven officials during the previous forecast round in March. The number viewing three or fewer hikes as appropriate fell to seven from eight. The median estimate implied three increases in 2019 to put the rate above the level where officials see policy neither stimulating nor restraining the economy.
• Chairman Jerome Powell told reporters following the decision — which lifted the Fed’s benchmark rate by a quarter percentage point to a range of 1.75 percent to 2 percent — that the main takeaway was that “the economy is doing very well.” Powell also announced he plans to start holding a press conference after every meeting in January, cautioning that “having twice as many press conference does not signal anything.” The Fed chief currently speaks to reporters after every other meeting of policy makers.

(Bloomberg) Concho Resources Rides IG Upgrade Bump Again

• Exploration & production company Concho Resources was among Thursday’s top performers, pricing $1.6 billion across 2 tranches to help fund the RSP Permian acquisition. The issuer rode the momentum of its Moody’s ratings hike from HY to IG Monday pricing flat to its outstanding credit curve.
• CXO last accessed the debt capital markets in September pricing a whopping 25bps inside its curve after amassing more than $11 billion in orders. That deal came on the heels of an S&P upgrade to investment grade from HY.

(WSJ) Disney, Comcast Bids for Fox Assets Could Face Regulatory Sticking Point: Sports

• Comcast Corp. CMCSA and Walt Disney Co. DIS -0.54% are fighting to win over 21st Century Fox Inc. FOX shareholders and acquire major assets of Rupert Murdoch’s media empire. After the boardroom fight comes the next battle: winning over Washington.
• Both bids are expected to get a close look from antitrust regulators at the Justice Department, which earlier this week suffered a bruising loss when a judge approved AT&T Inc.’s acquisition of Time Warner Inc. with no conditions.
• The Justice Department’s antitrust chief said Wednesday he wouldn’t let the outcome deter him from challenging other deals. “I don’t think our case or evidence or theories were flawed,” Makan Delrahim said, adding that “a different judge could have ruled completely differently.”
• Comcast executives have begun reaching out to Fox and Comcast shareholders to make their case for the merger, people familiar with the matter say.
• Because Disney and Comcast, like Fox, produce television shows and movies, either deal would represent a horizontal merger, in which direct rivals combine, further limiting the number of competitors in the industry.
• The sports assets that would be combined in either a Disney-Fox or Comcast-Fox deal will get heavy scrutiny. Fox is selling nearly two-dozen regional sports networks including in New York, Los Angeles and Detroit. Its marquee property is the YES Network, the television home of the New York Yankees. Fox’s regional sports networks have been valued at $23 billion by industry analysts.
• Comcast’s nine regional sports networks carry local teams in major markets such as Philadelphia and Chicago. Its SNY, the home of the New York Mets, competes for advertisers with Fox’s YES. The addition of Fox’s channels would make Comcast the home for local sports in just about every major television market. That could potentially give it leverage in negotiations with other distributors for the rights to carry those channels. However, the channels for the most part don’t compete against one another.
• Disney doesn’t operate any local sports channels, but it owns ESPN, which has several national channels and rights to just about every major sport. The addition of Fox’s 22 regional channels could give it tremendous clout both locally and nationally with pay-TV distributors, sports leagues and advertisers.
• Neither proposed deal includes the Fox Broadcasting network, its local TV stations, the Fox News and Fox Business channels or the national sports channel Fox Sports 1. The broadcast businesses in particular would have likely made either deal virtually impossible to get past regulators because Disney owns ABC and Comcast owns NBC.

(WSJ) PG&E Cut To BBB By S&P; Still May Be Cut Further

• S&P said the cut reflects the incremental weakening of the business and financial risk profile after CAL FIRE’s determination that PG&E’s equipment was involved with 16 of the Northern California wildfires in late 2017.
• S&P said it could resolve the negative CreditWatch in the near term when CAL FIRE determines the cause of the Tubbs fire, or if there is a legislative solution to inverse condemnation that materializes in the legislative session ending August 2018