Month: July 2018

27 Jul 2018

CAM Investment Grade Weekly Insights

CAM Investment Grade Weekly

Corporate spreads rallied this week and the corporate index is 6 basis points tighter on the week as we go to print on Friday morning. The tone of the market remains firm this morning.

According to Wells Fargo, IG fund flows for the week of July 19-July 25 were +$1.2 billion. IG flows are now +$77.248 billion YTD.

Per Bloomberg, $9.20 billion of new issuance printed during the week with no deals pending on Friday morning. This was lighter than consensus estimates, which had called for issuance of around $20bln.  Earnings blackout most likely played a role in abated issuance.  Bloomberg’s tally of YTD total issuance stands at $691.984bn.

Treasury rates opened higher on Monday but then remained unchanged throughout the week. All told, we are 6bps higher today on 10yrs relative to last Friday’s close.

(WSJ) Prolonged Slump in Bond Liquidity Rattles Markets

  • Many bonds around the globe are becoming harder to trade, prompting some investors to shift to other markets and raising concerns about a broad decline in liquidity.
  • The median gap between the price at which traders offer to buy and sell, a proxy for the ability to move in and out of markets quickly, has widened this year across European corporate debt and emerging-market government and corporate bonds, according to data from trading platform MarketAxess. Trading in some derivatives has picked up as traders pull back from bond markets they view as increasingly unruly and expensive.



  • In May, Italian two-year government-bond yields notched their biggest one-day jump since at least 1989. The surge was triggered by Italian politics, but a lack of liquidity appeared to amplify the moves as the gap between the price at which traders were willing to buy and where they were willing to sell surged to above half a percentage point, according to Thomson Reuters data.
  • Alberto Gallo, who runs more than $1 billion in Algebris Investments’ Macro Credit strategy, said it took “around 10 times longer” to unwind a bet on Italian bonds than normal and that it was hard to get bids or offers on trades of more than $10 million in size.
  • Liquidity “was bad and it’s remained relatively bad” since May, he said.
  • Meanwhile, parts of global bond markets have always had patches of illiquid trading, particularly during bouts of financial-market turbulence.
  • But investors say that it is getting worse even in these areas, particularly in emerging markets.
  • For dollar-denominated government debt in emerging Europe, the Middle East and Africa, the median bid-ask spread has risen roughly 75% this year to around 22 cents, according to MarketAxess.
  • The much larger presence of triple-B-rated debt in the market—the lowest-rated securities still considered investment grade—means that liquidity may be lower than it currently appears given investors may shun riskier securities during times of market stress, according to Gerard Fitzpatrick, Russell Investments’ EMEA chief investment officer.
  • “We’ve done some scenario testing there and we think it’s a concern,” Mr. Fitzpatrick said.
27 Jul 2018

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were flat and year to date flows stand at -$35.1 billion.  New issuance for the week was $1.4 billion and year to date HY is at $112.7 billion, which is -24% over the same period last year. 


(Bloomberg)  High Yield Market Highlights

  • Issuance-starved junk bond investors made a beeline to Party City, the lone new issue yesterday, as the market headed for its slowest month for sales since January 2016. Yields fell to a five-week low across ratings, shrugging off fund outflows.
  • Party City got orders of about $1.6b for a $500m offering and priced at the tight end of talk
  • YTD supply is $112.7, lowest since 2009, down 24% year-on-year
  • CCCs yields dropped to six-month low yesterday
  • CCCs continued to beat other fixed-income assets, with a year-to-date return of 4.5%, the highest so far this year
  • IG bonds are down 2.75% YTD
  • High- yield backdrop is benign, including steady economic growth, healthy corporate earnings, low default rate


(Globe Newswire)  CoreCivic Enters Into New Agreement With Federal Government to Utilize the La Palma Correctional Center

  • CoreCivic announced that the Federal Government has entered into a new agreement to utilize CoreCivic’s 3,060-bed La Palma Correctional Center in Eloy, Arizona.  More specifically, the city of Eloy has agreed to modify an existing Intergovernmental Agreement with Immigration and Customs Enforcement (ICE) to add the La Palma facility as a place of performance, while also permitting the U.S. Marshals Service (USMS) to utilize capacity at the facility at any time in the future.  ICE currently expects to house up to 1,000 adult detainees at the La Palma facility under the new agreement and may house additional populations at the facility, subject to availability.  No family units or unaccompanied minors will be placed in the facility.
  • The La Palma Correctional Center currently houses approximately 2,500 inmates from the state of California.  The State has begun to withdraw its population at the facility and announced plans earlier this year to ultimately discontinue utilization by January 2019.  Capacity at the facility will be made available to the Federal Government under the new agreement as additional State inmate populations exit the facility.  Under the terms of our agreement, the federal and state populations will not mix while both government entities utilize the facility.
  • The new contract commences on July 24, 2018, and has an indefinite term, subject to termination by either party with 90 days’ written notice.  Updated full year 2018 financial guidance reflecting the impact of this new agreement will be provided with the issuance of the Company’s second quarter 2018 financial results on Wednesday, August 8, 2018.


(CNBC)  Hospital operator HCA lifts full-year forecast as admissions rise

  • S. hospital operator HCA Healthcare reported a 24.8 percent rise in quarterly profit and boosted its full-year earnings forecast on higher patient admissions
  • The upbeat results, coming from the largest U.S. for-profit hospital operator, allayed concerns that patients were delaying non-emergency surgeries due to worries about soaring out-of-pocket medical costs.
  • Net income attributable to HCA rose to $820 million in the second quarter ended June 30, from $657 million a year earlier.
  • Revenue rose to $11.53 billion from $10.73 billion a year ago, while revenue per equivalent admission rose 2.1 percent.
  • Same-facility equivalent admissions, which include patients who stay in the hospital overnight and those who are treated on an outpatient basis, rose 2.8 percent.


(Business Wire)  Spectrum Brands Holdings Reports Financial Results

  • Effective July 13, 2018, the HRG merger was completed resulting in the merger of Spectrum Brands and its former majority shareholder HRG Group, Inc. As a result of the legal form of the merger, HRG Group, Inc. has emerged as the surviving legal entity and renamed as Spectrum Brands Holdings, Inc., with a combined shareholder group of the two former entities, and will continue to operate as a global consumer products company similar to the legacy Spectrum Brands company.
  • Net sales of $945.5 million in the third quarter of fiscal 2018 increased 9.6 percent compared to $862.9 million last year. Excluding the impact of $4.9 million of favorable foreign exchange and acquisition sales of $14.5 million, organic net sales increased 7.3 percent versus the prior year.
  • Adjusted EBITDA of $206.4 million in the third quarter of fiscal 2018 increased 3.6 percent compared to $199.3 million in fiscal 2017.
  • “I am pleased to report to you today that the turnaround of our HHI and GAC business units is well under way,” said David Maura, Chairman and CEO of Spectrum Brands Holdings. “While we have much more progress to make and will be investing in further efficiency measures over the next 12 months, I am thrilled that the leadership changes we have made and the focus on restoring the ownership accountability culture of our Company are already reading through to positive financial results. To execute 14.7 percent sales growth in our HHI division and a 12.5 percent top-line growth in our GAC division is gratifying, and a testament to what is possible with new leadership, new culture and an intense passion to win from our employee partners in these divisions.
  • “As we are regaining operating momentum, we are on track to deliver the improved performance we promised in the second half of this fiscal year,” Maura said. “As such, we reiterate our fiscal 2018 adjusted EBITDA guidance for continuing operations of $600-$617 million and total company adjusted free cash flow of $485-$505 million.”
24 Jul 2018

Q2 2018 Investment Grade Commentary

The second quarter of 2018 brought wider spreads and higher rates, which weighed on the performance of investment grade corporate credit.  The Bloomberg Barclays US Corporate Index opened the quarter at a spread of 109 basis points over Treasuries and it finished the quarter at a spread of 123.  Like spreads, Treasury rates were also higher on the quarter, as the 10yr Treasury rose as high as 3.11% on May 17th, before it finished the quarter at 2.86%, which was 0.12% higher than where it opened the quarter.  Wider (higher) credit spreads and higher rates both have a negative impact on bond prices, which sometimes cannot fully be offset by the coupon income that is earned from a diversified corporate bond portfolio.   The US Corporate Index posted a total return on the quarter of -0.98%.  This compares to CAM’s gross return during the second quarter of -0.45%.  Looking at YTD numbers, the corporate index posted a total return of -3.27% through the first 6 months of the year while CAM’s gross return was -2.94%.  CAM outperformed the index during the quarter due in part to the fact that CAM’s portfolio is always positioned in intermediate maturities that generally range from 5 to 10 years.  Treasury rates have moved higher thus far in 2018, and the index has a longer duration than CAM’s portfolio, so interest rates are more of a headwind for the corporate index relative to the intermediate positioning of CAM’s portfolio.  Additionally, CAM has benefitted from the higher credit quality of its portfolio relative to the Corporate Index.  CAM targets a weighting of 30% for its allocation to BBB-rated corporate credit, which is the riskier portion of the investment grade universe, while the index has a weighting of nearly 50% in BBB-rated credit.

Credit spreads finished the quarter near the widest levels of the year.  The tightest level for spreads in 2018 was on Friday, February 2nd.  Since that time, there has been significant dispersion in the performance of lower rated credit versus higher rated credit.  From February 2nd until the end of the quarter on June 29th, the Corporate Bond Index was 38 basis points wider.  During this same time period, single-A rated credit outperformed the index as a whole, as this higher quality portion of the index was 33 basis points wider while the BBB-rated portion of the index was a significant underperformer as it widened by 46 basis points.  In other words, since the market low on February 2nd, A-rated credit spreads have outperformed BBB-rated credit spreads by 13 basis points.  It is too early to tell if this quality performance dispersion is the making of a trend, but we at CAM are comfortable with our significant underweight to the riskier BBB-rated portion of the index, as we are not seeing enough value in riskier credit currently and believe that the balance between risk and reward is better served by staying overweight higher quality A-rated credit.  

The Federal Reserve raised the Fed Funds Target Rate at its June meeting.  This marks the 7th increase in the target since the current tightening cycle began in December of 2015.  Our clients often ask us what we are doing in response to the Fed’s tightening cycle, which may call for an additional 1-2 rate hikes this year and as many as 3 in 2019.  Our response is that we will continue to position the portfolio in intermediate maturities that range from 5-10 years until maturity.  Generally speaking, we will allow bonds to roll down the curve until somewhere around the 5-year mark at which time it is often beneficial to sell that 5-year maturity and redeploy the proceeds into a more attractive opportunity that matures in 7-10 years.  This cycle tends to repeat itself time and time again.  We believe that the intermediate portion of the yield curve is the spot where investors are most appropriately compensated for credit risk and interest rate risk.  An investor can earn a higher yield by investing in bonds that mature in 20 or 30 years but the extra compensation afforded for credit risk beyond 10 years is generally benign and an investor would also be taking on much more interest rate risk beyond 10 years.  Rather than trying to “guess” the next move in interest rates, we position the portfolio in a predictable maturity band and focus our efforts on analyzing the prospects of individual companies that populate our portfolio.  

Much has been written and reported in the financial press with regard to the flattening of the yield curve.  The Fed Funds Target Rate has a significant impact on Treasury rates in the 2-5 year range whereas the 7-10 year band of Treasury rates is more dependent on GDP and inflation expectations.  The first target rate hike of the current cycle occurred in December of 2015.  Since that time and until the end of the second quarter of 2018, the 2-year Treasury has moved 150 basis points higher and the 5-year has gone 100 basis points higher while the 10-year moved just 60 basis points higher.  At the end of the second quarter, the 5/10 Treasury curve was 13 basis points, meaning the 10-year Treasury yield was only 13 basis points higher than the 5-year Treasury yield.  The 10/30 Treasury curve was just as flat, at 13 basis points.  Think of it this way, if you were to invest in a 30-year Treasury instead of a 10-year Treasury, you would only be earning 0.13% more; this hardly seems like very good compensation for a Treasury investor taking on an additional 20 years of maturity.  We at CAM are corporate bond investors so it is important to note that, although corporate bonds trade at a spread over Treasuries, the corporate bonds themselves also have credit curves.  Corporate bond curves tend to behave more rationally than Treasury curves and investors are typically more fairly compensated for taking on additional years of maturity.  Corporate bond curves are organic in nature and ever changing.  Higher quality A-rated corporate credits tend to have flatter curves whereas BBB-rated credits will have steeper curves.  In the below example, you can see that the investor who extends in Apple or Ford credit receives 40 and 56 basis points of compensation respectively, while the Treasury investor receives only 11 basis points of compensation.

As we turn to the second half the year, we at CAM remain as cautious as ever.  The U.S. economic expansion has entered its 10th year, but we must remember that this is a global economy[1].  While the global economy seems relatively good, growth has been low, and it would not take much to create a recessionary environment where risk assets could fare poorly.  There are a number of risks that could impair global growth, most especially a trade conflict that has the potential to erupt into a global trade war.  We continue to be selective in our investments, focusing on higher quality credits with sustainable competitive advantages that will allow them to thrive in a variety of economic environments.  We are also favoring companies with management teams that have shown financial discipline during a prolonged low interest rate environment, as many management teams have been tempted by low borrowing costs and have piled debt on their balance sheets that could force them to refinance in an environment where borrowing costs are higher.  In short, we will continue to add value for our clients by focusing on credit work and populating the portfolio with our best ideas within the realm of corporate credit.

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.

[1] The Wall Street Journal, July 2nd 2018 “Real Time Economics: The U.S. Economic Expansion Enters Its 10th Year… How Much Longer Does It Have?”

24 Jul 2018

Q2 2018 High Yield Commentary

In the second quarter of 2018, the Bloomberg Barclays US Corporate High Yield Index (“Index”) return was 1.03%.  For the year, the Index return was 0.16%.  While Treasury rates have generally increased throughout 2018, High Yield is one of the best performing asset classes within fixed income.  As seen last year and also during Q1, the lowest quality portion of high yield, CCC rated securities, outperformed its higher quality counterparts.  As we have stated many times previously, it is important to note that during 2008 and 2015, CCC rated securities recorded negative returns of 44.35% 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 rated cohort may not be appropriate for many clients’ risk profile and tolerance levels.  During the quarter, the Index option adjusted spread widened 9 basis points moving from 354 basis points to 363 basis points.  As a reminder, the Index spread broke the multi-year low of 323 basis points set in 2014 by reaching 311 basis points in late January.  The longer term low of 233 basis points was reached in 2007.  Mid April 2018 had a low spread of 314 basis points essentially retesting the 311 spread of late January.  Every quality grouping of the High Yield Market except CCC rated securities participated in the spread widening as BB rated securities widened 16 basis points, B rated securities widened 9 basis points, and CCC rated securities tightened 45 basis points.

The Energy, Communications, and Electric Utilities sectors were the best performers during the quarter, posting returns of 2.52%, 1.93%, and 1.47%, respectively.  On the other hand, Banking, Consumer Cyclical, and Capital Goods were the worst performing sectors, posting returns of -1.58%, -0.23%, and -0.16%, respectively.  At the industry level, supermarkets, pharma, oil field services, and independent energy all posted strong returns.  The supermarket industry (5.48%) posted the highest return.  However, automotive, tobacco, lodging, and building materials had a rough go of it during the quarter.  The automotive industry (-3.00%) posted the lowest return.

During the second quarter, the high yield primary market posted $52.8 billion in issuance.  Issuance within Financials and Energy was quite strong during the quarter.  The 2018 second quarter level of issuance was significantly less than the $75.6 billion posted during the second quarter of 2017.  Year to date 2018 issuance has continued at a much slower pace than the strong issuance seen in 2017.  The full year issuance for 2017 was $330.1 billion, making 2017 the strongest year of issuance since 2014.  

The Federal Reserve held two meetings during Q2 2018.  The Federal Funds Target Rate was raised at the June 13th meeting.  Reviewing the dot plot that shows the implied future target rate, the Fed is expected to increase two more times in 2018 and three more times in 2019.  However, the Fed will be quite data dependent and likely show flexibility since Chair Powell plans to “strike a balance between the risk of an overheating economy and the need to keep growth on track.”[1]  While the Target Rate increases tend to have a more immediate impact on the short end of the yield curve, yields on intermediate Treasuries increased 12 basis points over the quarter, as the 10-year Treasury yield was at 2.74% on March 31st, and 2.86% at the end of the quarter.  The 5-year Treasury increased 18 basis points over the quarter, moving from 2.56% on March 31st, to 2.74% at the end of the quarter.  Intermediate term yields more often reflect GDP and expectations for future economic growth and inflation rather than actions taken by the FOMC to adjust the Target Rate.  Inflation as measured by core CPI has been moving steadily higher during 2018 from 1.8% to 2.2% as of the June 12th report.  The revised first quarter GDP print was 2.0%, and the consensus view of most economists suggests a GDP for 2018 in the upper 2% range with inflation expectations at or above 2%.  The chart on the left from Bloomberg shows the yield compression of the 2 year US Treasury versus the 10 year US Treasury over the past year.

While the Fed continues a less accommodative posture, other Central Banks aren’t necessarily following suit.  The Bank of Japan is still buying an annualized JPY45 trillion of Japanese Government Bonds (“JGB’s”) and targeting a JGB yield of 0%.[2]  The Bank of England is maintaining bond purchases and keeping rates at 0.5%.[3]  Additionally, the European Central Bank has plans to keep rates where they are for at least another year as Mario Draghi recently commented “at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with the current expectations of a sustained adjustment path.”[4]  This backdrop has no doubt been a factor in the US Dollar appreciation during the second quarter of 2018.  As can be seen in the charts below from Barclays, growth is increasingly driven by the US and policy is becoming more divergent.

Investors had high expectations for the G7 Summit in Quebec in early June due to the United States’ positioning on global trade.  However, the Summit left much to be desired.  President Trump decided to leave early and withdraw support from the joint statement.  Canada, France, and Germany all spoke out against the US President following the meeting.  IMF’s Christine Lagarde noted that there is a risk to global growth with the escalating threats of a trade war.[5]  So while US growth has been improving, trade is a risk that needs to be monitored as the US continues to push for a shake up of the global status quo.

Being a more conservative asset manager, Cincinnati Asset Management remains significantly underweight CCC and lower rated securities.  For the second quarter, the focus on higher quality credits was again a detriment as our High Yield Composite gross total return underperformed the return of the Bloomberg Barclays US Corporate High Yield Index (-0.20% versus 1.03%).  The higher quality credits that were a focus tended to react more negatively to the interest rate movements.  Our credit selections in the capital goods, communications, and healthcare were an additional drag on our performance.  However, our credit selections in the food & beverage and metals & mining industries were a bright spot.  Additionally, our underweight in the energy sector hurt performance.  Our credit selection within the midstream subsector was a benefit to performance. 

The Bloomberg Barclays US Corporate High Yield Index ended the second quarter with a yield of 6.49%.  This yield is an average that is barbelled by the CCC rated cohort yielding 8.84% and a BB rated slice yielding 5.40%.  The Index yield has become more and more attractive since the third quarter of 2017.  Equity volatility, as measured by the Chicago Board Options Exchange Volatility Index, has trended down from the first quarter of this year but is still elevated relative to 2017.   High Yield default volume was very low during the second quarter, and the twelve month default rate decreased to 1.98%.[6]   The current default rate remains significantly below the historical average.  Fundamentals of high yield companies continue to be generally solid.  Moody’s recently published results of a survey they conducted on the effects of the Tax Cut and Jobs Act.  The results showed that across the credit spectrum, the majority of companies expect to be better off and have improved cash flow.  Finally, from a technical perspective, while flows have continued to be negative in High Yield, demand (coupon + flows) is outstripping supply (issuance + redemptions).  This positive backdrop is likely to provide support for the market especially as sizeable coupon payment demand begins to kick in towards the end of the year.  Due to the historically below average default rates and the higher income available in the High Yield market, it is still an area of select opportunity relative to other fixed income products.  

Over the near term, we plan to remain rather selective.  When the riskiest end of the High Yield market begins to break down, our clients should realize the benefit of our positioning in the higher quality segments of the market.  The market needs to be carefully monitored to evaluate that the given compensation for the perceived level of risk remains appropriate on a security by security basis.  It is important to focus on credit research and buy bonds of corporations that can withstand economic headwinds and also enjoy improved credit metrics in a stable to improving economy.  As always, we will continue our search for value and adjust positions as we uncover compelling situations.

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.

See Accompanying Endnotes

[1] Reuters February 27, 2018:  “First Congressional Testimony by Fed Chair Powell”

[2] Proshare/Fitch Ratings June 27, 2018:  “Bank of Japan Asset Purchases Continue to Slow Sharply”

[3] Bank of England June 21, 2018:  “Monetary Policy Summary”

[4] MarketWatch June 14, 2018:  “5 Key Takeaways from the ECB”

[5] Bloomberg June 11, 2018:  “Lagarde Says Clouds Over Global Economy Are Darker by the Day”

[6] JP Morgan July 2, 2018:  “Default Monitor”

20 Jul 2018

CAM High Yield Weekly Insights

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.6 billion and year to date flows stand at -$35.1 billion. New issuance for the week was $2.7 billion and year to date HY is at $111.3 billion, which is -24% over the same period last year. 

(Bloomberg) High Yield Market Highlights

  • Supply eludes the U.S. high-yield bond market, which is on track for the slowest July for new issuance since 2008. Two deals are expected to price today, and no new issues were added to the calendar.
  • July has traditionally been a light month for junk bond sales, with an average supply of $15.5b the last five years
  • Year-to-date supply is lowest since 2009
  • Supply is down 24% year-over- year
  • Junk bonds spread and yields were resilient yesterday amid faltering stocks and rising VIX
  • High yield spreads and yields were little changed
  • CCCs are at a 5-month low yield
  • High yield has been operating in a friendly environment backed by the supply shortage, steady economic growth with no imminent threat of recession, healthy corporate earnings, low default rate

(The Economist) Netflix suffers a big wobble

  • Even the most celebrated firms have their hiccups. On July 16th Netflix, an online-streaming giant, presented disappointing news to investors: it had added just 5.2m new subscribers in the second quarter of 2018, well below its projected number of 6.2m. Shares plunged by 14%.
  • This most recent bout of volatility may say more about the firm’s soothsaying abilities than the strength of its underlying business. Although Netflix’s subscriber growth fell short of its own projections, it was still in line with that of past quarters. In percentage terms, Netflix registered a bigger miss against projected subscriber growth in the second quarter of 2016, when its shares fell by 13%.
  • When asked this week to explain the forecasting error, Netflix’s chief executive, Reed Hastings, responded that the company never worked out what happened in 2016 either, “other than that there is some lumpiness in the business”. It is possible that subscriber growth fell short of expectations because none of the shows Netflix released last quarter captivated audiences in the way that past hits such as “House of Cards” have. Data from Metacritic, a review-aggregator, show its users gave Netflix shows released in the past quarter an average score of just 6.4 out of 10, well below the online streamer’s historical average of 7.2.  

(The New York Times) As Momentum for Sinclair Deal Stalls, Tribune Considers Options

  • The Sinclair Broadcast Group’s plan to create a broadcasting behemoth that it hoped would rival Rupert Murdoch’s Fox News appears to be coming to an end.
  • Already the largest local television operator in the nation, Sinclair agreed last year to buy the rival TV group Tribune Media for $3.5 billion. The deal would have given the combined company control of broadcasters reaching seven in 10 households across the country, including in New York, Chicago and Los Angeles.
  • But in light of the Federal Communications Commission’s draft order this week questioning whether Sinclair was sufficiently transparent in how it represented the deal to regulators and whether a merger would be in the public interest, Tribune said in a statement Thursday that it was “evaluating its implications and assessing all of our options.”
  • The merger agreement allows either side to walk away from the deal if it does not close by Aug. 8. Sinclair declined to comment.
  • This week has brought a stunning shift in momentum for a deal that once seemed almost assured of being completed, thanks in no small part to policy changes proposed or enacted by the F.C.C. and advocated by Sinclair. The commission had also eased a cap on how many stations a broadcaster can own and relaxed a restriction on advertising revenue and other resources shared by television stations.
  • But on Monday, the agency’s chairman, Ajit Pai — who is the subject of an investigation by the office of the F.C.C.’s inspector general regarding his new policies — said he had “serious concerns” about the Sinclair-Tribune merger. Mr. Pai asked the agency’s four commissioners to hand off its review of the merger to an administrative law judge to determine the legality of Sinclair’s proposal.

(Aluminium Insider) Arconic Lands Long-Term Aluminium Sheet Supply Contract With Boeing

  • Value-added aluminium firm Arconic announced Monday a new, long-term contract with The Boeing Company to supply the aerospace firm with aluminium sheet and plate for the entirety of its offerings from Boeing Commercial Airplanes.
  • This latest contract is the biggest to date, and it builds upon a deal signed by Arconic’s predecessor-in-interest with Boeing four years ago. Arconic and its predecessors have a longstanding relationship to provide wing skins for the entirety of Boeing’s metallic-structured airplanes, and this week’s agreement adds structural plate to the slate, which is used on a wide swath of Boeing’s offerings, including the 787 and 777X.
  • Arconic plans to use materials produced by its Very Thick Plate Stretcher (VTPS), which is a program that began last year and is capable of stretching thicker aluminium plate than any competing process. Additionally, Arconic will begin offering aluminium plate treated by its new horizontal heat-treat furnace, which it expects to begin qualifications next year.
  • Per Arconic, the principal challenge faced by composite wing makers is maintaining structural strength as wing surfaces increase. Arconic says its processes have allowed aircraft manufacturers like Boeing to address this problem, which has, in turn, led to a significant uptick in demand for its composite aluminium sheet solutions.

(The Wall Street Journal) Arconic Draws Interest From Buyout Firms 

  • Aerospace-parts maker Arconic Inc. ARNC -2.59% is the subject of takeover interest from private-equity firms, according to people familiar with the matter.
  • The company has received expressions of interest from buyout firms including Apollo Global Management APO -1.93% LLC, the people said.
  • A takeover of Arconic would be a relatively big deal, especially for private equity. The New York company, which was known as Alcoabefore the aluminum maker broke itself up, currently has a market value of $8.3 billion, so with a typical premium it could go for north of $10 billion in a sale. Arconic also has $6.4 billion in debt.
  • No deal is imminent, and there is no guarantee there will be one.

(CAM Note) HCA debt was upgraded one notch by S&P

  • The upgrade reflects the company’s credit profile, cash flow growth, and free cash flow generation.

(CAM Note) Ingles debt was upgraded one notch by Moody’s

  • The upgrade reflects the company’s real estate base, stable gross margins, and same store sales numbers in the context of a competitive food retail landscape.
20 Jul 2018

CAM Investment Grade Weekly Insights

Corporate spreads are modestly tighter on the week.

According to Wells Fargo, IG fund flows for the week of July 12-July 18 were +$2.5 billion. IG flows are now +$76.072 billion YTD.

Per Bloomberg, $31.380 billion of new issuance priced through Friday morning. Banks led the way this week, as they issued $20bln+ in new supply coincident with earnings releases.  Bloomberg’s tally of YTD total issuance stands at $682.784bn.

Treasury rates did not change materially this week while curves have added a touch of steepness off the lows.

(Bloomberg) Here’s Exactly What PG&E Wants California to Do About Fires

  • Virtually everyone who’s been following the multibillion-dollar problem that California’s power companies are facing in the wake of last year’s devastating wildfire season knows that the biggest among them — PG&E Corp. — is lobbying the state hard to change its wildfire policies.
  • And California lawmakers seem receptive: Governor Jerry Brown formed a committee this month to consider changes to regulations that hold utilities liable for the costs of wildfires that their equipment ignite — even if they weren’t negligent. In a telephone interview Thursday, PG&E’s senior vice president of strategy and policy, Steve Malnight, laid out exactly what the company’s lobbying Sacramento for. Here’s the utility’s wish list:
    • A change in the way the state applies its so-called inverse condemnation law — the one that holds utilities strictly liable for fire damages regardless of negligence. PG&E thinks it should take into account whether a company acted in a “reasonable way.” Malnight said that’s how local flood control districts are treated today when the state considers flood damage liabilities. “We think that’s a fair standard,” he said.
    • A bill that would allow PG&E to issue bonds backed by customer bills that would help pay for costs tied to the deadly Wine Country wildfires last year. (California investigators have already determined that PG&E’s equipment caused several of the blazes.) The legislation wouldn’t shield the utility from costs associated with potential negligence, Malnight said. He estimated that a bond issuance would save PG&E’s customers about a third of the costs of covering damages compared with traditional financing means, such as issuing equity.
    • More “comprehensive solutions” to preventing future wildfires. Malnight said the company supports state regulations that go beyond liability rules and speak to the resiliency of infrastructure. He said the committee that Brown formed has already called for the need for broader solutions including forest management.
  • Malnight said PG&E has been building a “broad-based” coalition of investor-owned and publicly owned utilities and labor unions to push for reforms.

(Bloomberg) Microsoft Floats to Record Highs as Wall Street Cheers the Cloud        

  • Microsoft Corp.’s foray into cloud technologies is paying off after revenue for the fiscal fourth quarter bested the highest of analysts’ estimates.
  • Thanks to the growing adoption of Microsoft’s cloud offering, Wall Street is rewarding the Redmond, Washington-based software provider with buy reiterations and price target increases. Goldman Sachs, while boosting its price target to $125 from $114, said the company’s bring-your-own-licence program is “starting to bear fruit.”
  • Chief Executive Officer Satya Nadella has been overseeing steady growth in the company’s Azure and Office 365 cloud businesses. Surveys of customer chief information officers by both Morgan Stanley and Sanford C. Bernstein published in the past month show an increase in companies signing up for or planning to use Microsoft’s cloud products. Revenue from cloud-computing platform Azure rose 89 percent in the quarter, while sales of web-based Office 365 software to businesses climbed 38 percent. Microsoft also saw a bump from relative improvements in the corporate personal-computer market, which has been stagnant for years.

(Bloomberg) Comcast Drops Out of Bidding War for Fox to Focus on Sky

  • Comcast Corp. will no longer seek to compete with Walt Disney Co.’s for a swath of 21st Century Fox Inc.’s entertainment assets, choosing to focus instead on winning control of the British pay-TV service Sky Plc.
  • Following a bidding war with Disney, Comcast concluded that the price for the Fox assets was too high, according to a person familiar with the matter who asked not to be identified because the decision process was private. Another hurdle was the regulatory requirement to divest Fox’s regional sports networks as part of any deal, the person said.
  • Disney can now go ahead with its offer of $71.3 billion for Fox’s properties, which include a 39 percent stake in Sky. Comcast has offered about $34 billion for the U.K. pay-TV provider, including Fox’s stake, though it’s unclear if Disney will be willing to part with it.
    • Comcast bondholders may be relieved if the company abandons its debt-fueled pursuit of Fox’s entertainment assets and limits its M&A activities to the Sky deal. If Comcast were to successfully acquire both Fox and Sky, its debt load would likely increase to the $170 billion range, net leverage would rise to the mid-4x area and its ratings could fall two notches to mid-triple B. In anticipation of such a scenario, Comcast and Fox bonds have been among the worst performers within the communications sector so far this year. Conversely, their bond spreads could narrow if Comcast retains its A3/A- ratings and Fox bonds are assumed by Disney.
16 Jul 2018

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $1.2 billion and year to date flows stand at -$33.0 billion.  New issuance for the week was $1.8 billion and year to date HY is at $108.5 billion, which is -25% over the same period last year. 


(Bloomberg)  High Yield Market Highlights

  • The spread on the riskiest end of the junk bond market plunged to a four-year low as yields fell across the board and investors allocated fresh funds to high yield.
  • Spreads tightened in four of the last five sessions across ratings
  • Triple-C spread tightened most, closing at a 4-year low of +556
  • Junk yields dropped to a 2-week trough, with CCC yields closing at a 3-week low as the S&P 500 closed at a 5-month high and the VIX dropped in four of the last five sessions to hit a 3-week low
  • Investors ignored the hype and hoopla surrounding the trade conflict as high yield retail funds reported cash inflows
  • Lipper reported an inflow of $1.8b for week ended July 11, the biggest inflow since April
  • YTD supply is down 25%
  • CCCs beat BBs and single-Bs with YTD returns of 3.65%
  • CCCs outperformed investment-grade bonds, which are down 2.56% YTD


(MarketWatch)  U.S. oil sees steepest one-day percentage decline in more than a year

  • Oil futures finished sharply lower Wednesday, with the U.S. benchmark registering its sharpest daily slump in about 13 months as fears of flagging demand and renewed production from Libya overshadowed a report showing the biggest weekly drop in domestic crude supplies in nearly two years.
  • August West Texas Intermediate crude the U.S. benchmark, fell 5%, to $70.38 a barrel on the New York Mercantile Exchange—its lowest finish since June 25. The drop marked the worst percentage decline for a most-active contract since June 7 of 2017 and the steepest fall on a dollar basis since Sept. 1 of 2015, according to WSJ Market Data Group.
  • “Market players are taking profits after reports of the return of Libyan crude oil,” possible waivers for U.S. sanctions on Iranian oil and renewed trade war fears, said Phil Flynn, senior market analyst at Price Futures Group.
  • There is also speculation that U.S. President Donald Trump “will hammer Russia on raising oil production” in an effort to push prices lower, and that has “traders running for cover,” he said.
  • The losses come even as the Energy Information Administration reported Wednesday that domestic crude supplies plunged by 12.6 million barrels for the week ended July 6.
  • “The biggest draw since September 2016 should be a wake up call for the U.S.,” said Flynn. “We are in a tightening supply situation that is not going to get better soon.” The EIA reported a climb in crude supplies last week, but that followed three-consecutive weeks of hefty declines.
  • Meanwhile, Libya’s state-run National Oil Corp. lifted force majeure on eastern oil ports on Wednesday after the ports were handed back from an armed faction, paving the way for a resumption of full production.
  • “Resumption of exports from Libya trumps one week of bullish EIA data,” said James Williams, energy economist at WTRG Economics. “That reduces fear of shortages with so little spare production capacity worldwide.”


(Bloomberg)  Dish Network Gets Distress Signals From FCC

  • Hurry up is the message the Federal Communications Commission had for Dish Network Corp. in a July 9 letter asking for more detail about how Dish plans to use the $40 billion of spectrum it acquired in recent years to build a wireless network. Dish faces an accelerated March 2020 deadline to use-or-lose some of the spectrum after missing previous cutoff dates.
  • Chairman Charlie Ergen has invested heavily in wireless spectrum as he pivots the company he co-founded away from its declining satellite TV business. He’s funneling cash from the old business to fund the new one, and bondholders are worried they’ll be left behind.
  • The agency said it’s following up on recent meetings between Ergen and FCC Chairman Ajit V. Pai with more more than a dozen questions about Dish’s plans to build out “spectrum that is apparently lying fallow.” Bond and stock holders might want the answers, too: The queries include the timing of critical milestones, the service Dish intends to provide and what industry standard technology might be used. Officials at Dish didn’t immediately respond to a request for comment.


(Fierce Telecom)  Frontier launches new cloud-based UCaaS offering for businesses

  • Frontier Communications is now offering its customers a cloud-based unified communications-as-a-service to help them migrate their voice services to the cloud.
  • Frontier’s AnyWare UCaaS allows small- to medium-sized business and enterprise customers to lease phones and equipment without having to worry about stranding investments in outdated gear.
  • The scalable and customizable platform can be adapted for each company’s specific needs. Customers are able to save money by putting former hardware functions into the cloud while also reducing the cost of investing in and maintaining on-premise PBX systems.
  • The UCaaS business has been booming of late. In the most recent fourth quarter, more than 300,000 subscriber seats were added to the global installed base, which is now growing by 29% per year, according to Synergy Research. Mitel and RingCentral were the top-two UCaaS companies in Synergy Research’s fourth quarter report. Combined, the two companies accounted for more than half of all the growth in the fourth quarter.
  • Other UCaaS competitors in Frontier’s footprint include Charter Spectrum, Comcast and 8×8.
16 Jul 2018

CAM Investment Grade Weekly Insights

Corporate spreads have moved tighter throughout the week.  Generically, most credits are 2-4 basis points tighter on the week while the corporate index is 3 basis points tighter week over week as of Friday morning.

According to Wells Fargo, IG fund flows for the week of July 5-June 11 were +$3.4 billion.  IG flows are now +$71.912 billion YTD.

Per Bloomberg, $11.4 billion of new issuance priced through Friday morning.  A slow week of issuance is unsurprising given that earnings season has begun, which precludes issuance due to blackout periods.  Bloomberg’s tally of YTD total issuance stands at $651.404bn.

Treasury rates did not change materially this week and curves remain near their flattest levels of the year.


(Bloomberg) AT&T Appeal Seen as High-Stakes Shot at Redemption for Enforcers

  • The Trump administration’s renewed battle against AT&T Inc.’s Time Warner Inc. deal signals that it still sees a path to undoing the blockbuster merger — even after a stinging rebuke of its case last month.
  • Rather than walk away, the Justice Department’s antitrust division took a big gamble Thursday, with a one-sentence notice of appeal filed in federal court in Washington. In doing so, it risks a second defeat that could lead to binding precedent that makes future merger challenges harder.
  • But the move offers a tempting shot at redemption after a humiliating loss handed down by U.S. District Judge Richard Leon. The case will be heard by the U.S. Court of Appeals for the District of Columbia Circuit, where President Donald Trump’s recent Supreme Court nominee Brett Kavanaugh sits.
  • “Their assessment of the strategic risks may be bad, may be unduly risky — a lot of people said that about this case in the first place,” said Chris Sagers, an antitrust law professor at Cleveland State University. “So far that has all proven true and maybe it will prove true that appealing this decision was also unwise.”
  • In last month’s 172-page opinion, Leon ripped apart the government’s case that the $85 billion deal would give AT&T the power to hike prices. The Justice Department argued that the telecom giant would charge its cable-TV competitors more money for Time Warner shows, bringing higher bills to consumers across the country.
  • To some observers, the judge’s decision smacked at times of anti-government bias — particularly when Leon admonished Justice Department lawyers not to bother seeking a temporary order halting the merger from proceeding. Obtaining a stay, which the government had a right to seek, “would undermine the faith in our system of justice,” Leon wrote.
  • “The judge’s ruling showed an extreme favoritism for AT&T’s arguments and appeared to substantially discount everything the government presented,” said Gene Kimmelman, the head of Public Knowledge, a Washington-based public policy group that opposed the merger. “I’m not surprised the government views it as a totally incorrect ruling.”
  • AT&T closed the Time Warner transaction on June 14, two days after Leon’s ruling. The Justice Department had agreed not to seek an emergency court order preventing the deal from closing after AT&T promised to operate Time Warner’s Turner Broadcasting as a separate business unit until 2019. That would make it easier for AT&T to sell Turner if the government ultimately prevails.


 (Bloomberg) NAFTA Repeal Would Be ‘Disaster’ for U.S.: Union Pacific CEO         

  • Repealing the North American Free Trade Agreement would be a “disaster” for the U.S. economy, says Union Pacific CEO Lance Fritz.
    • Growing list of tariffs from President Trump’s trade policies threatens “to undo progress” made in economy in recent years, Fritz says at the National Press Club in Washington
    • Administration should address China’s impact and modernize NAFTA, but other trade proposals “look as if they’ll do more harm than good”: Fritz
    • To change China’s behavior, “we need to work with our allies, not start trade wars,” he says
      • “The best thing we can do for American workers is to create new jobs, and the best way to create new jobs is trade”
    • Uncertainty over trade is discouraging capital expenditure, he says
      • It costs $3m to build a mile of railroad track; costs $3.25m with steel tariffs, he says


(Bloomberg) U.K. Takeover Panel Sets Sky Floor Price in Disney-Comcast Fight

  • The body that oversees U.K. takeovers raised the minimum price that Walt Disney Co. must pay for British pay-TV company Sky Plc as Disney battles Comcast Corp. for control of Rupert Murdoch’s media empire.
  • Disney would have to bid for all of Sky at 14 pounds ($18.37) a share if it manages to acquire the entertainment assets of Murdoch’s 21st Century Fox Inc. before a bidding war for Sky between Fox and Comcast concludes, the Takeover Panel said in a statement.
  • The panel’s decision is unlikely to affect the outcome of the contest as the floor price is in line with Fox’s current bid for Sky and below the 14.75 pounds a share offer from Comcast.
  • Disney and Comcast are vying for Fox assets including a 39 percent stake in Sky. The Takeover Panel can uphold the interests of other Sky shareholders by forcing Disney and Comcast to buy them out at a minimum price. That price is calculated by examining the bids for the Fox assets and ascribing an implied valuation to the Sky stake. The Panel’s so-called chain principle mandates a full takeover bid for a company if a buyer acquires more than 30 percent of its shares, even if those shares are acquired as part of a larger deal.
  • The panel had previously ruled, following Disney’s initial $52.4 billion bid for Fox, that a Disney offer for Sky would be required at 10.75 pounds a share. Disney has since increased its offer for the Fox bundle by 35 percent.
  • Sky is seeking to review the latest ruling, the panel said in the statement, without giving details of Sky’s concerns. “Each of Disney and Fox is considering its position,” it added.
06 Jul 2018

CAM High Yield Weekly Insights

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.9 billion and year to date flows stand at -$34.4 billion. New issuance for the week was $5.8 billion and year to date HY is at $106.7 billion, which is -27% over the same period last year. 


(Bloomberg) High Yield Market Highlights


  • Junk bond yields were flat and spreads little changed in a quiet market after the Independence Day holiday. Issuance is expected to resume next week.
  • July has traditionally been a light month for HY bond sales with an average volume of $15.5b the last five years
  • Last July issuance was under $11b and it was $8b in 2015
  • Investors pulled cash from retail funds last week, wary of continuing trade tensions
  • While some signs of caution emerged, high yield continued to operate in a benign environment of low default rates, a steady economy and strong oil prices
  • Default rate projected to decline to 1.5% by April 2019 according to Moody’s
  • CCCs continued to outperform BBs and single-Bs, with YTD returns of 3.08%
  • CCCs also beat investment-grade bonds, which are down 2.95% YTD 


  • (Industrial Distribution) United Rentals To Acquire BakerCorp For $715M


  • United Rentals and BakerCorp International Holdings announced Monday they have entered into a definitive agreement under which United Rentals will acquire BakerCorp for approximately $715 million in cash. The boards of directors of United Rentals and BakerCorp have unanimously approved the agreement. The transaction is expected to close in the third quarter of 2018.
  • BakerCorp is a  multinational provider of tank, pump, filtration and trench shoring rental solutions for a broad range of industrial and construction applications. The company has approximately 950 employees serving more than 4,800 customers in North America and Europe. BakerCorp’s operations are primarily concentrated in the United States and Canada, where it has 46 locations, with another 11 locations in France, Germany, the UK and the Netherlands. For the trailing 12 months ended May 31, 2018, BakerCorp generated $79 million of adjusted EBITDA at a 26.9 percent margin on $295 million of total revenue.
  • “We’re very pleased to announce an agreement to acquire BakerCorp, an expert in fluid solutions and a highly regarded, customer-focused operation,” said Michael Kneeland, CEO of United Rentals. “We’re gaining a terrific team that shares our strong commitment to safety and customer service, and operations that complement our North American pump and trench offerings. This transaction will also be our company’s first experience in Europe, where BakerCorp has established an attractive, fast-growing business with significant future opportunity. We set a high bar across strategic, financial and cultural metrics when evaluating any acquisition. BakerCorp met every test, with the additional advantage of being primed to benefit from our systems and technology. We expect the combination to augment our revenue, earnings and EBITDA in 2018, while propelling the growth of one of our most promising specialty segments.”
  • Also, United Rentals announced that William Plummer will retire as executive vice president and chief financial officer on Oct. 12. Plummer is the company’s longest-serving CFO, having joined United Rentals in 2008. He will remain with United Rentals until January 31, 2019, in an advisory capacity.
  • The United Rentals board of directors has appointed Jessica Graziano as chief financial officer, effective Oct. 12. Graziano joined United Rentals in December 2014 as controller and principal accounting officer and was promoted to her current role in March 2017. In this role, she works closely with the senior leadership team and oversees the company’s accounting, financial planning and analysis and insurance departments. Graziano has more than two decades of financial management experience, previously serving as senior vice president, principal financial officer, chief accounting officer and corporate controller for Revlon Inc. Earlier, she held senior financial positions with UST Inc. (now Altria Group), Sturm, Ruger & Company Inc. and KPMG LLP.


  • (Seeking Alpha) Crude Oil Makes Another New High This Week
  • Crude oil continues to be the strongest commodity out there these days. As precious metals recently fell to their lowest level of the year, copper fell below a critical support level, grains are feeling the pain of tariffs, and many other raw material prices are under pressure, crude oil keeps on grinding higher. After the correction that took the price to a low of $63.59 per barrel on the NYMEX active month futures contract early in the week of June 18, the path of least resistance for the energy commodity has been higher.
  • On Tuesday, July 3, the price of nearby August NYMEX crude oil futures rose to a higher high at $75.27 per barrel. Meanwhile, the Brent active month September futures contract has not been able to make it back above $80 per barrel since reaching a high of $80.50 on May 22. On that day, NYMEX WTI crude oil only traded to a high of $72.90 per barrel, so then Brent premium since the end of May has declined which is likely the result of OPEC’s increase in output at the June 22 biannual meeting. Despite the production increase by the world’s oil cartel at the end of June, the U.S. President continues to push the OPEC’s leading producer to pump up the volume, even more, these days.
  • Before, during, and after the OPEC meeting on June 22, U.S. President Donald Trump continued to push for higher production from the cartel.
  • In the aftermath of the OPEC meeting, President Trump has repeatedly called for more oil from the cartel. Russia and Saudi Arabia favored a production increase at the June meeting of oil ministers. However, Iran stood against any increase and the Trump administration warned other nations around the world from buying Iranian crude in coming months. The politics surrounding crude oil production in the Middle East is a complicated political puzzle these days. Despite continued requests and even threats about protection in the region, President Trump’s requests for more production have done little to stop the ascent of the price of the energy commodity which remains not far below its most recent high, and around $10 above the lows seen on June 18 before the OPEC meeting.