Author: Josh Adams - Portfolio Manager

CAM Investment Grade Weekly
05/17/2019

The tone in the credit markets was mixed this week.  The market felt heavy on Tuesday amid trade ramifications but by the time Thursday rolled around the tone was quite strong.  All told it looks as though we will finish the week relatively unchanged as far the spread on the index is concerned.  There are more negative headlines regarding China trade as we go to print on Friday which is leading to weakness in equity markets while Treasury’s are gaining.  The 10yr is modestly lower on the week and remains below 2.4% on Friday morning.

Just under $30bln in new corporate debt was brought to the market this week.  Demand for new issuance has been solid and thus concessions were low, in the neighborhood of 3-5 basis points for most deals.  Year-to-date corporate supply is up to $468bln, which lags 2019 issuance to the tune of -6.3% according to data compiled by Bloomberg.

According to Wells Fargo, IG fund flows during the week of May 9-May 15 were +$4.2bln.  This brings YTD IG fund flows to +$114bln.  2019 flows to this juncture are up 4.43% relative to 2018.

(Bloomberg) Bond Traders Need to Up Their Game as AI Systems Get Smarter

• Money is pouring into artificial intelligence in bond markets, challenging bankers and investors to adapt their skills in everything from issuing to trading securities.
• Fintech startup Nivaura is investing in technology to automate debt sales. Dutch bank ING Groep NV is improving systems to help traders buy and sell bonds, while AllianceBernstein Holding LP advanced its virtual assistant to identify notes that people miss.
• After taking over stocks, computers are slowly overcoming resistance in one of the most technology-averse corners of financial markets. Bond traders are wary of a one-size-fits-all approach coming from equity markets, which are now largely automated. They say that human relationships are at the center of the market and clients want to talk through complex transactions.
• AI has proved particularly useful in replacing manual tasks such as inputting data and executing small, liquid trades in markets such as currencies. It’s only just beginning in areas like corporate bonds, that traders call “high touch” for the traditional level of human involvement.
• Still, proponents say tech is being used as a tool by people rather than a replacement for them and that it helps firms use human resources more efficiently.

 (Bloomberg) In a Tariff-Muddled World, U.S. Treasuries Send a Clear Message

• Investors are wrestling with mixed U.S. data, underwhelming global growth, and an escalating trade war. While other asset classes have telegraphed optimism, sovereign debt is signaling a degree of caution, if not abject fear, about what comes next.
• While U.S. stocks are barely down on the week through Thursday after collapsing on Monday, Treasury yields are decisively lower. Bund yields aresolidly sub-zero. Chinese sovereign debt is being heralded as a clear winner in the clash over cross-border commerce.
• Another note of caution for Treasury bulls betting on an extension of the rally: expectations that the Federal Reserve is poised to ease – and perhaps materially – by the end of 2020 has helped juice the rally in longer-term debt. But patience – the central bank’s mantra – is almost definitionally incompatible with a proactively accommodative posture.
• Even Minneapolis Fed President Neel Kashkari – arguably the most dovish member of the FOMC – does not think a so-called “insurance” rate cut is appropriate. A more hawkish member – Kansas City chief Esther George – thinks a rate reduction could fuel financial excesses.
• If the market switched to betting the Fed will stay on hold this year, and if 10-year yields moved in lock-step with fed funds futures, then 10-year Treasuries would be north of 2.60% and trading closer to the 2019 highs than the trough.

(Bloomberg) Walmart Rallies on Plan to Pass on Cost of Tariffs to Consumers

• Comparable sales for Walmart stores in the U.S. climbed 3.4% in the first quarter, its best for the period in nine years. Sales of groceries — Walmart’s biggest business — fueled the increase, and a later-than-usual U.S. flu season boosted health and wellness products. The shares rose as much as 4.1% Thursday in New York, the biggest intraday gain in almost three months.
• Walmart’s response to potential higher levies will likely set the tone for other discount retailers, and its decisions on whether to pass along or absorb the additional costs will have ripple effects on American consumers. In its favor, Walmart’s clout with suppliers gives it more room to maneuver, and much of its food comes from U.S. sources, easing the impact.
• “We will do everything we can to keep prices low, but increased tariffs lead to increased prices,” Chief Financial Officer Brett Biggs said in a Thursday morning interview. “It’s very item- and category-specific. There are some places where as we get tariffs, we will take prices up.” Finding alternative manufacturers “is one of a number of actions that our merchants are considering.”
• Walmart’s response to potential higher levies will likely set the tone for other discount retailers, and its decisions on whether to pass along or absorb the additional costs will have ripple effects on American consumers. In its favor, Walmart’s clout with suppliers gives it more room to maneuver, and much of its food comes from U.S. sources, easing the impact.
• “We will do everything we can to keep prices low, but increased tariffs lead to increased prices,” Chief Financial Officer Brett Biggs said in a Thursday morning interview. “It’s very item- and category-specific. There are some places where as we get tariffs, we will take prices up.” Finding alternative manufacturers “is one of a number of actions that our merchants are considering.”

CAM Investment Grade Weekly
05/10/2019

Amid a deluge of new issue supply and a weaker macroeconomic backdrop, we can finally say that the investment grade credit markets experienced a week of notable spread widening.  The spread on the corporate index closed Thursday at 116, 4 basis points wider on the week and 7 basis points off the lows from mid-April.  China trade headlines have dominated the tape this week which has led to volatility in the equity markets that has subsequently spilled over into the credit markets.  The impact to corporate credit has been relatively muted thus far but we would welcome short term bouts of volatility in our market as that has the potential to allow us to be more opportunistic in our purchases for the portfolios we manage.

$45.65bln of new corporate debt was issued this week led by Bristol-Myers and IBM.  On Tuesday, BMY printed $19bln in new bonds which at the time was the largest deal of 2019 and the 10^th largest of all time.  BMY was bested by IBM a mere 24 hours later as Big Blue printed $20bln in new debt to fund its purchase of Red Hat, tied for the 7^th largest bond deal of all time.  It is worth noting that, although CAM is a regular participant in the new issue market, we did not see value in either of these deals so we remained on the sidelines awaiting better opportunities.  $51.9bln of new corporate debt has been priced in the month of May and the year-to-date tally of new issuance is up to $439bln according to data compiled by Bloomberg.

According to Wells Fargo, IG fund flows during the week of May 2-May 8 were +$3.3bln.  This brings YTD IG fund flows to +$103.614bln.  2019 flows to this juncture are up 4% relative to 2018.

Bloomberg) IBM Sells $20 Billion of Bonds as Market Defies Trade Drag

• International Business Machines Corp. sold $20 billion of bonds, propelling the corporate-debt market to its busiest week in at least eight months despite turbulence across asset classes worldwide.
• The senior unsecured bonds will help fund the computer-services giant’s acquisition of Red Hat Inc. The longest portion of the offering, a 30-year security, will yield 1.45 percentage points more than Treasuries, after initial talk of around 1.55 percentage points, according to a person with knowledge of the matter, who asked not to be identified as the details are private.
• The order book for IBM’s eight-part bond sale was just shy of $40 billion, suggesting some investor indigestion following Tuesday’s offering from Bristol-Myers Squibb Co. The drugmaker managed to sell $19 billion of bonds, one of the biggest sales of the year.
• The U.S. investment-grade corporate bond market reached record highs on Tuesday, shrugging off the trade war fears that have weighed on stocks and oilthis week. High-grade issuance this week could top $40 billion, the most since September, according to data compiled by Bloomberg. High-yield issuers are also taking advantage of the frenzy — they collectively had their busiest day in three months.
• More big bond offerings are coming. T-Mobile US Inc. and Fidelity National Information Services Inc. are expected to issue debt in the coming weeks to fund their respective acquisitions.
• Companies are tapping the bond market to finance acquisitions after having shied away from that kind of issuance for much of the year. Just over $60 billion of investment-grade corporate debt was sold for that purpose in the first four months of the year, including about $2 billion in April, according to data compiled by Bloomberg. That’s out of $445.4 billion of total issuance over that period. Companies instead focused on selling bonds to refinance maturing securities and fund capital expenditure, among other corporate uses.
• Bond-sale volume linked to acquisitions is increasing now in part because borrowing has grown even cheaper: the average high-grade company bond yielded 3.6% on Tuesday, according to Bloomberg Barclays index data, close to its lowest level since early 2018. The debt has gained 5.9% this year.

(Bloomberg) Boeing Sends 737 Max to Brand Rehab to Avoid Fate of Ford Pinto

• Boeing Co.’s 737 Max is about to join the list of brands trying to come back from ignominy.
• Analysts are digging into decades-old safety scares for clues to the future of the jetliner — and Boeing’s finances. There’s the Chevrolet Corvair rollovers that launched Ralph Nader as a consumer advocate in the 1960s, gas-tank explosions that sank Ford Motor Co.’s Pinto in the 1970s, and the Tylenol poisonings of 1982 that spurred tamper-proof packaging.
• But there’s little precedent for the tangle of safety, regulatory and financial issues buffeting a workhorse jet that’s vital to sustaining the surge in global air travel. After two crashes of the aircraft model in five months and a grounding that’s nearing the two-month mark, some nervous passengers are vowing to avoid the Max. Boeing has added to the mess by not fully explaining the apparent flaws in the best-selling jet in company history.
• Longtime Boeing watcher Nick Cunningham said he’s starting to wonder if “this has become too serious and too protracted for the Max to escape unscathed.” The accidents in Indonesia and Ethiopia killed 346 people. Nader’s own grand niece was among the victims.
• The longer the crisis drags on, the greater the risk that the cumulative effect “will have acted to permanently lock it into people’s memories,” said Cunningham, founding partner at Agency Partners.
• Boeing is finalizing an update to software linked to both crashes, which it will submit to the Federal Aviation Administration in a crucial step toward getting the plane back in the air. A May 23 summit of global regulators “may lay out a path towards certifying fixes and removing the grounding,” Morgan Stanley analyst Rajeev Lalwani said in a note Thursday.
• Rebuilding consumer confidence is an urgent priority, as the Chicago-based company works with airlines to prepare resuming flights of the 737 model over the next few months. Boeing must also win over pilots, flight attendants and fractious regulators.

(Bloomberg) Chevron’s Mr. Discipline Sizes Up Costs as Anadarko Bid Ends

• Chevron Corp. Chief Executive Officer Mike Wirth’s decision to abandon his $33 billion offer for Anadarko Petroleum Corp. bolsters his reputation as one of the oil industry’s consummate financial disciplinarians.
• Anadarko was looking for Chevron to beat or at least match Occidental Petroleum Corp.’s $38 billion proposal, people familiar with the matter said Wednesday. But Wirth, whose deputies already had held integration meetings with counterparts at Anadarko, declined to escalate the bidding war and bowed out on Thursday.
• “Make no mistake about it, we had the financial capacity to easily outbid Occidental,” Wirth said in an interview. “But an increased offer would have eroded value to our shareholders and would have diminished returns on our capital. We’re serious about being disciplined.”
• The decision to cede Anadarko to a rival one-fifth of its size would have been unthinkable even five years ago, in the heady days of $100 a barrel oil when the world’s largest energy companies were focused on growth at almost any cost. But the crude price collapse, ascendance of of shale and a recognition that big deals often destroy shareholder value has changed Big Oil’s mindset.

CAM Investment Grade Weekly
04/26/2019

The investment grade credit market traded sideways this week as the OAS on the corporate index looks to finish relatively unchanged.  Spreads continue to remain near their tightest levels of 2019 which has been the case since mid-April.  It was a busy week for earnings and it was feast or famine for some large-cap firms.  Companies like Microsoft and Amazon produced some exceptional results while on the other hand Intel and 3M had lackluster earnings prints.  On the Treasury front, rates are lower by 3-5 basis points across the curve on the back of an economic release that showed inflation measures are slowing.

It was an extremely quiet week for corporate issuance as companies brought just $5.65bln of new corporate bonds.  Earnings blackout periods will likely continue to have an impact on issuance for the next several weeks.  $50.8bln of new corporate debt has been priced in the month of April and the year-to-date tally of new issuance is up to $371bln according to data compiled by Bloomberg.

According to Wells Fargo, IG fund flows during the week of April 18-April 24 were +$6.7bln, which was the second largest weekly inflow thus far in 2019. This brings YTD IG fund flows to +$97.6bln.  2019 flows to this juncture are up 3.8% relative to 2018.

(Bloomberg) A 48-Hour Reporting Delay Could Be Coming for Corporate Debt

• The Financial Industry Regulatory Authority will likely test the market impact of delaying the disclosure of large corporate bond trades after some of the biggest investors argued that such a move would improve liquidity.
• Finra last week proposed running a pilot program that would give traders 48 hours before having to reveal their so-called block trades to other investors. The effort would allow the industry-funded brokerage regulator, which is overseen by the U.S. Securities and Exchange Commission, to evaluate how delayed transparency might affect corporate bond trading.
• Current rules require that block trades be reported within 15 minutes. Brokers and investment firms such as BlackRock Inc. and Pacific Investment Management Co. have long said that such rapid disclosure can make it harder for a dealer to offload securities it’s bought, because market participants know exactly what was bought and at what price.
• The idea for the pilot was suggested by a group of industry executives that advises the SEC. The Securities Industry and Financial Markets Association, Wall Street’s biggest trade group, has expressed support for the proposed test as did JPMorgan Chase & Co. and Eaton Vance, according to Finra. At the same time, the regulator said that two market makers for exchange-traded funds have expressed concern that the changes would reduce price transparency.

(Bloomberg) Wall Street Said to Accelerate Shake-Up in Market for New Bonds

• Wall Street is moving closer to modernizing the clubby $2 trillion market for new corporate bond issues while seeking to retain control of a lucrative business that’s being eyed by the tech sector.
• A group of banks led by Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co., has set up a company and appointed a chief executive officer to develop an electronic system for investors to request allocations of new debt, according to people familiar with the matter.
• Other banking heavyweights including Barclays Plc, BNP Paribas SA, Deutsche Bank AG, Goldman Sachs Group Inc. and Wells Fargo & Co. have also joined the founders in backing the platform that was originally conceived more than a year ago, the people said, asking not to be identified because it isn’t public.
• Bloomberg talked to 10 people familiar with the initiative. While many of its details are yet to be finalized, Bloomberg reported a year ago the banks plan to focus initially on U.S. investment-grade bonds.
• The new system, dubbed Project Mars, aims to modernize the process of buying new corporate bonds, streamlining communication in a market that still relies on phone calls, instant messaging and emails to handle billions of dollars in orders from investors.
• Investors have pushed banks for years to streamline the market and make it more transparent amid mounting frustration at current practice where they often over-order to secure a quota of bonds that’s close to what they want. Bond allocation has become a high-stakes game, as demonstrated by Saudi Aramco’s recent $12 billion deal which saw investors place orders for more than $100 billion.

(Bloomberg) Ford Shares Surge After Q1 Earnings Beat as U.S. Sales Offset Global Weakness

• Ford Motor Co. shares were traded sharply higher Friday after the carmarker posted stronger-than-expected first quarter earnings thanks to a surge in U.S. demand for its iconic pick-up trucks that offset weakening international demand.
• Ford said earnings for the three months ending in March rose nearly 52% from the same period last year to a forecast-beating 44 cents a share even as total revenues edged 3.9% lower to $40.34 billion as key markets in China continue to weaken.
• S. sales, however, held steady at $25.4 billion. with healthy demand for trucks and SUVs in the company’s home market providing $2.2 billion of its overall $2.4 billion in operating earnings for the quarter.

(Bloomberg) U.S. Growth of 3.2% Tops Forecasts on Trade, Inventory Boost

• S. economic growth accelerated by more than expected in the first quarter on a big boost from inventories and trade that offset slowdowns in consumer and business spending, bolstering hopes that growth is stabilizing after its recent soft patch.
• Gross domestic product expanded at a 3.2 percent annualized rate in the January-March period, according to Commerce Department data Friday that topped all forecasts in a Bloomberg survey calling for 2.3 percent growth. That followed a 2.2 percent advance in the prior three months.
• But underlying demand was weaker than the headline number indicated. Consumer spending, the biggest part of the economy, rose a slightly-above-forecast 1.2 percent, while business investment cooled. A Federal Reserve-preferred inflation measure, the personal consumption expenditures price index excluding food and energy, slowed to 1.3 percent, well below policy makers’ 2 percent objective.

(Bloomberg) Occidental’s $38 Billion Anadarko Offer Starts Permian Fight

• After being rebuffed several times, Occidental Petroleum Corp. on Wednesday made public a $38 billion offer to buy Anadarko Petroleum Corp., seeking to break up a proposed takeover by Chevron Corp. The $76 per share cash-and-stock bid for The Woodlands, Texas-based oil and natural gas producer is 20 percent more than Chevron’s $33 billion April 12 agreement.
• For Occidental, which has a market value of about $46 billion, the acquisition would be its largest ever and the biggest purchase of an oil producer anywhere in at least four years. It would pull together two second-tier oil and natural gas producers, as opposed to Chevron’s bid to create another “ultramajor” to rival Exxon Mobil Corp. It would require Anadarko to pay a $1 billion breakup fee to Chevron.
• In an email, Chevron spokesman Kent Robertson said the company was “confident the transaction agreed to by Chevron and Anadarko will be completed.”
• A tie-up would help Occidental maintain its leading position in the Permian Basin of West Texas and New Mexico, where it currently faces being overtaken by Chevron, which has ambitious growth plans for the region. The Permian is the world’s fast-growing oil major patch and has helped to turn the U.S. into a net exporter, also making it a bigger producer than Saudi Arabia.
• Chief Executive Officer Vicki Hollub said in a Bloomberg Television interview that the offer is the same it made to Anadarko in January 2018. The company has also made three bids since late March, she said Wednesday in a letter to Anadarko’s board of directors. Occidental said it has completed its due diligence on the deal and has financing lined up with Bank of America Merrill Lynch and Citigroup Inc.

CAM Investment Grade Weekly
04/12/2019

The investment grade credit market continues to benefit from the euphoria of risk-on sentiment that is flooding the capital markets.  The OAS on the index closed Thursday at its tightest level of the year.  Segmenting the index out by quality, both the A-rated portion of the index and the BBB-rated portion are now trading at year-to-date tights.  The market also feels quite strong as we go to print on Friday morning and it looks likely that the corporate bond index will close the week even tighter still.  On the Treasury front, rates are higher across the curve, with the 5yr Treasury up 6 basis points over the past week and the 10yr Treasury up 5 basis points.

Corporate issuance was somewhat muted as borrowers brought just $10.15bln of new debt during the week.  Corporate issuance is likely to remain light in the weeks to come as many companies are now in earnings blackout periods.  The big story of the week on the new-issuance front was non-corporate borrower Saudi Arabian Oil Co, which priced $12bln of new debt across 5 tranches.  The Saudi bonds were soaked up by yield chasers across the globe on no other analysis other than it was “cheap for the rating.”  According to Bloomberg, the order book for the new issue was allegedly in excess of $100bln which is quite strong relative to the $12bln size of the deal. However, all 5 tranches of debt immediately traded wider on the break and all remain wider on the bid side as we go to print.  The 10yr tranche in particular is sucking wind, and is currently bid at +120 in the street versus its new issue pricing level of +105.  This leads us to believe that demand for this deal may have been overstated, possibly by an order of magnitude.  $26.2bln of new corporate debt has been priced in the month of April and the year-to-date tally of new issuance is up to $346bln according to data compiled by Bloomberg.

According to Wells Fargo, IG fund flows during the week of April 4-April 10 were +$8.7bln. This brings YTD IG fund flows to +$81bln.  2019 flows to this juncture are up 2.6% relative to 2018.

CAM Investment Grade Weekly
03/22/2019

The investment grade credit markets closed at YTD tights on Thursday evening, riding a wave of strong sentiment from a surprisingly dovish Fed statement on Wednesday.  The story changed on Friday, however, with a decidedly softer tone fueled by concerns about the lack of growth globally.  Credit is mixed as we go to print on Friday with major stock indices firmly in the red on the day.  The 10yr Treasury will finish the week almost 10 basis points lower than where it started, which will likely mark a YTD low for the benchmark rate.  After peaking at 3.24% in November of 2018, the 10yr has now completely retraced its steps to 2.43%, which is almost exactly where it opened in 2018.  The extreme volatility that we have seen in rates over the past six months offers us a reminder of just how difficult it can be to accurately predict interest rate moves and this unpredictability is the reason that we at CAM focus on credit risk and the intermediate portion of the yield curve as opposed to trying to predict where rates will go next by making duration bets.

It was another solid week of issuance for corporate bowers, as companies brought $21.55bln in new corporate debt during the week.  $88.125bln of debt has been priced in the month of March and the year-to-date tally of new issuance is $292.298bln according to data compiled by Bloomberg.  The pace of 2019 IG issuance is trailing 2018 by 9%.

According to Wells Fargo, IG fund flows during the week of March 14-March 20 were +$4.5 billion. This brings YTD IG fund flows to +$62.222bln.  2019 flows to this juncture are up 2.43% relative to 2018.

CAM Investment Grade Weekly
03/15/2019

The investment grade credit markets look to finish the week marginally tighter.  After opening the week at 123, the OAS on the corporate index closed on Thursday at 121, near the YTD low of 120.  The 10yr Treasury is 4 basis points lower on the week as we go to print and it is 15 basis points lower than where it closed on the first trading day of March.

It was yet another solid week of issuance as IG firms issued just over $25bln in new corporate debt during the week.  New issue concessions remain razor thin and in some cases turned negative as investors “pay up” for the liquidity that it is afforded by the availability of new debt.  At the midpoint of the month, $64bln in new debt has been issued which brings the YTD tally to $268.498bln according to data compiled by Bloomberg.

According to Wells Fargo, IG fund flows during the week of March 7-March 13 were +$4.9 billion. This brings YTD IG fund flows to +$49.968bln.  2019 flows to this juncture are up 1.39% relative to 2018.

(WSJ) $10 Billion Corporate Debt Sale Highlights Credit Market’s Recovery

• The world’s largest maker of automotive batteries is set to sell more than $10 billion worth of speculative-grade debt Friday to fund its purchase by an investor-group led by Brookfield Business Partners LP, underscoring the recent resurgence in demand for low-rated bonds and loans.
• Power Solutions, the automotive-battery business currently owned by Johnson Controls International, is poised to sell roughly $3.7 billion worth of secured and unsecured bonds, denominated in both dollars and euros, along with around $6.5 billion in loans, also split between euro and U.S. dollar tranches.
• The long-anticipated sale is on track to be relatively easy for a large group of underwriting banks, as investors have eagerly embraced what many see as a stable business that is able to shoulder the large amount of debt being placed on it.
• The expected completion of the Power Solutions deal is a testament to the improved tone in high-yield debt markets, several investors said. Though fears of an economic slowdown led to a sharp decline in bond and loan sales in the final months of 2018, issuance picked up in the middle of January and has been fairly steady since then.
• Through Wednesday, businesses had sold a total of $106.9 billion of speculative-grade bonds and loans this year, according to LCD, a unit of S&P Global Market Intelligence. That is down from $162 billion in the same period last year.
• Some investors cautioned that the likely success of the Power Solutions deal doesn’t necessarily mean other businesses will find it as easy to sell such a large amount of debt in the current market. Even using conservative assumptions, analysts expect the company should be able to generate ample free cash flow in the coming years. Its secured bonds and loans, in particular, appealed to investors who have been eager to buy debt at the higher end of the speculative-grade ratings scale.
• Not everything about the deal pleased investors. Prospective buyers were able to make some changes to the package of investor protections, known as covenants, an unusual outcome for such an in-demand deal. Yet the result, some said, still gives the company’s owners plenty of room to pay themselves dividends and remove collateral from the business, in keeping with the long-term trend toward weaker covenants.

(Bloomberg) U.S. Junk Bonds May Be Signaling That It’s Time to Be Cautious

• There are early signs that it’s time to be cautious now in U.S. junk bonds.
• Investors seem reluctant to buy the weakest high-yield corporate securities, a potential signal of trouble ahead, according to Citigroup Inc. strategists. Ratings firms are downgrading speculative-grade companies at the fastest rate relative to upgrades since the start of 2016, according to data compiled by Bloomberg. And to sell their bonds, a handful of issuers including Scientific Games International Inc. have had to pay higher yields this month than dealers had expected.
• For now, many investors are shrugging off those concerns. Junk bonds have reached record highs this year and are the best performing U.S. fixed-income sector, gaining more than 6.4 percent through Wednesday. A Bank of America Corp. survey of U.S. credit-fund managers found the lowest level of alarm about high-yield and investment-grade corporate bonds since 2014.
• A handful of companies including Arrow Bidco LLC and Community Health Systems Inc. are feeling the impact of those concerns. The borrowers had to pay more than dealers expected to entice investors to buy bonds in recent weeks.
• There are other reasons for investors to be cautious now. Economists surveyed by Bloomberg expect growth to slow in the U.S. over the next three years. U.S. corporate earnings growth could come under pressure as tax benefits subside, which should reset junk bond prices and generate “meaningful” negative excess returns in the coming weeks and months, Bank of America said. Corporate bankruptcy filings in the U.S. have jumped, according to a Bloomberg index.
• Warning signs aren’t limited to the U.S. The European Central Bank has slashed its economic expansion forecasts for the region, China has lowered its goal for economic growth, and an increasing number of corporate borrowers there are struggling to repay debt obligations.
• There are still positives for corporate-debt investors. More companies have been getting upgraded to investment grade than getting cut to junk, a trend that’s expected to continue this year, according to Barclays Plc strategists led by Bradley Rogoff. The highest ratings tier now makes up almost 46 percent of the overall junk market, near an all-time high. The size of the junk bond market has been shrinking for more than a year, in part because companies have borrowed more in the loan market, making the securities scarcer. And default rates remain low, although they are rising.

CAM Investment Grade Weekly
03/01/2019

The investment grade credit markets are barreling toward year-to-date tights as the week comes to a close.  The OAS on the corporate index closed at 121 at the end of February, which marks a new low for spreads in 2019.  Risk assets continue to perform well even as Treasuries have inched higher.  The 10yr Treasury is 9 basis points higher as we go to print and sits just a few basis points lower than the 2019 high water mark.

In what seems to be a recurring them, it was yet another solid week of issuance as companies raised nearly $25bln in new debt during the last week of the month.  Concessions on new issuance remain thin as most order books are well oversubscribed to the tune of 3-5x deal sizes.  $98.21bln of new corporate debt was priced during the month of February, bringing the YTD total to $202.573bln.

According to Wells Fargo, IG fund flows during the week of February 21-February 27 were +$5.6 billion. This brings YTD IG fund flows to +$35.345bln.  Flows at this point in the year are modestly outpacing 2018 numbers.

CAM Investment Grade Weekly
02/22/2019

The investment grade credit markets look to end the week on a positive tone, but spreads are largely unchanged for the third consecutive week.  The OAS on the index closed at 125 on February 4^th and has traded within just a 2 basis point range since then and most of that time was spent within a 1 basis point range.  The OAS on the index was 125 at the market close on February 21^st and we remain wrapped around that number as we go to print this morning.

It was another solid week of issuance as companies raised over $25bln in new debt during the holiday shortened week.  Investor demand for new deals remains very strong and concessions on new debt have continued to grind lower.  As far as basis points go, mid-single digit new issue concessions are the name of the game in the current environment.  Over $73bln in new bonds has come to market in February and the YTD total is now $178bln.

According to Wells Fargo, IG fund flows during the week of February 14-February 20 were +$1.6 billion. This is a more modest pace of flows compared to prior weeks and it brings YTD IG fund flows to +$30bln.  Flows at this point in the year are modestly outpacing 2018 numbers by the tune of 2%.

A Blurb about BBB’s – CAM is significantly structurally underweight and quite cautious when it comes to BBB credit.  However, we can pick and choose the credits that we would like to own so we are not nearly as worried as some market commentators and those in the financial press seem to be with regard to the growth of the BBB portion of the index.  Here are a few interesting recent developments that show that not all the growth in BBB credit should be viewed as negative and that there are some very large BBB-rated issuers who may become A-rated in the near term.

• HCA 1^st lien debt was upgraded to investment grade by Moody’s in January. HCA was previously the single largest issuer in the high yield index.  As a result of receiving its second BBB-rating, $13.2bln of HCA debt moved from junk to investment grade with low-BBB ratings.
• Also in January, payment processor Fiserv, Inc. announced that it would be acquiring First Data. Junk rated First Data is one of the 50 largest issuers in the high yield index.  The deal is structured in a manner so that Fiserv will retain its mid-BBB investment grade ratings.  Fiserv plans to re-finance $5.31bln of junk rated debt – and the new debt will be BBB rated.  The NewCo will have more BBB debt, but it is largely the result of refinancing junk rated debt while creating a larger company with more scale, better growth prospects and greater free cash flow generation.
• On February 21^st, Verizon held an investor day. Verizon has been actively paying down debt in recent quarters and its CFO highlighted this when talking about its capital allocation plans.

  “Our long-term leverage target is to have net unsecured debt to adjusted EBITDA between 1.75 and 2.0….This metric improved by 0.3 times last year to 2.1. …. And we believe this target is consistent with a low-single-A credit profile.”

Verizon already has an A- rating at Fitch and it is high-BBB at both Moody’s and S&P so it needs only one of them to upgrade it to single-A before it is “officially” an A-rated credit.  An upgrade is a distinct possibility if the company remains on a deleveraging path.  Verizon is the second largest BBB-rated bond issuer in the corporate index and an upgrade would result in over $73bln of index eligible debt leaving the BBB-rated portion of the index and entering the A-rated portion.

Bottom line, headlines about BBB-rated credit are just that –to get the real story one must dig into the details.

(Bloomberg) ‘Disastrous’ Kraft Heinz Quarter Foments Street Doubt on M&A

• CAM NOTE: This is yet another example of a highly levered BBB-rated company impairing shareholders in order to pay down debt. It is our view that equity holders are the ones most at risk when it comes to BBB-rated credit, as bond holders have priority in the capital structure waterfall.  CAM has no exposure to Kraft Heinz.
• Kraft Heinz Co.’s “disastrous” earnings announcement prompted analysts to question the packaged-food giant’s growth prospects and its capacity to move ahead with plans for a significant acquisition.
• The shares plummeted as much as 28 percent to $34.70. Kraft’s plunge erased about $16 billion in market value. For perspective, that’s more than the entire value of packaged-food peers JM Smucker Co. or Campbell Soup Co.
• Analysts at Goldman Sachs, Barclays, JPMorgan, Stifel, Piper Jaffray, Barclays and UBS cut their ratings on the stock following what Stifel described as a “barrage of bad news:” Quarterly profit missed estimates, the outlook for 2019 was disappointing, and Kraft Heinz cut its dividend, lowered profit-margin expectations and took a $15.4 billion writedown on key brands.
• “The dividend cut and the margin rebase reflect serious balance sheet concerns,” Robert Moskow, an analyst at Credit Suisse AG, wrote in a note detailing his decision to slash his price target to a street-low of $33 from $42. The update “also pokes an enormous hole in management’s contention that it can execute a meaningful acquisition any time soon.”

CAM Investment Grade Weekly
02/15/2019

Investment grade spreads tightened modestly throughout the first half of the week before a deluge of new issue supply led the market to take a breather on Thursday.  While the tone is positive on Friday morning, the corporate index looks like it will finished the week relatively close to unchanged.

The real story this week was the aforementioned new issue supply.  Over $38bln of new debt priced in just three trading days, through Wednesday while no deals priced on Thursday or Friday.  Altria led the way this week as it priced $11.5bln on Tuesday and then AT&T came with $5bln on Wednesday.  3M Co, Goldman Sachs, Boeing and Tyson Foods were among the other companies that printed multi-billion dollar deals during the week.

According to Wells Fargo, IG fund flows during the week of February 7-February 13 were +$2.9 billion. This brings YTD fund flows to +$13.312bln.

As far as new supply is concerned, monthly volume projections for February are still calling for ~$90bln of issuance during the month.  As we roll past the mid-month mark, we have seen just over $48bln in new supply.