Author: Josh Adams - Portfolio Manager

CAM Investment Grade Weekly
11/02/2018

It was another week of volatility in risk assets, but the tone improved throughout, and was cemented by an above-consensus monthly employment report on Friday morning. Credit spreads are at 3-month wides as the Bloomberg Barclays Corporate Index sits at an OAS of 119. As we go to print, positive economic data has sent the 10yr Treasury to its highest level of the week, at 3.17%.

According to Wells Fargo, IG fund flows during the week of October 25-October 31 were a mere $192 million. Per Wells data, this extended MTD outflows to -$7.4bln and marks the first monthly outflow for IG credit funds since January of 2016. Even still, IG fund flows remain firmly positive YTD at +$96.150bln, with short duration funds garnering the lion share of those flows.

According to Bloomberg, new corporate issuance on the week was $17.55bln. YTD corporate issuance has been $989.109bln.

(Bloomberg) General Electric Cut by Moody’s on Weakness in Power Unit

• General Electric’s long-term and senior unsecured rating was cut to Baa1 from A2 by Moody’s as the rating agency cites “the adverse impact on GE’s cash flows from the deteriorating performance of the Power business.”
  • Impact from power business will be considerable and could last some time
  • Weaker than expected performance of power business also due to co.’s “misjudgment of financial prospects and operational missteps”
  • Outlook stable predicated on Moody’s view that co. will be able to contend with the challenges posed by its power business

(Bloomberg) California Utilities to Reach 50% Renewable Power Target in 2020

• Three large utilities in California are ahead of schedule to hit their targets under a law requiring them to source 33 percent of their electricity from renewables by 2020, according to a California Public Utilities Commission report.
  • All three investor-owned utilities beat the state-mandated target of 27 percent for 2017
    • PG&E: 33%
    • Edison: 32%
    • Sempra: 44%
  • Renewable power contract prices, which peaked at more than $160/MWh in 2007, fell in 2017 to an average of $47/MWh, the report found
• NOTE: Utilities are required by California law to derive 60 percent of their electricity from renewable sources by 2030

(Bloomberg) Exxon, Chevron Surprise Wall Street as Permian Boosts Results

• Exxon Mobil Corp. and Chevron Corp. delivered their strongest third-quarter results in four years, capping a week in which Big Oil enjoyed profits not seen since the days of $100 crude.
• Exxon shares climbed as the American supermajor appeared to emerge from years of production setbacks after failed bets on Russia and Canada that undercut its previously gold-plated reputation among investors. Chevron’s stock also pushed higher.
• Exxon’s oil and natural gas output surpassed expectations for the first time in 10 quarters, rebounding from a decade-low reached in the second quarter. Earnings climbed 57 percent. At rival Chevron, record production combined with higher crude prices to double profit to $4 billion. Both companies cited growth in the Permian Basin of West Texas and New Mexico as key.

CAM Investment Grade Weekly
10/26/2018

Amid the backdrop of a volatile equity market, corporate credit spreads are meaningfully wider on the week as we go to print, with credit spreads at least 5 wider across the board. On Friday afternoon, the 10yr Treasury stood at 3.08%, which is 11 basis points lower on the week.

According to Wells Fargo, IG fund flows during the week of October 18-October 24 were -$1.6bln. Per Wells data, this was the fourth consecutive weekly outflow for a cumulative total of -$7.2bln over that time period.  IG fund flows are now +$96.342 billion YTD.

According to Bloomberg, new corporate issuance on the week was less than $6bln. This was an underwhelming issuance figure relative to market expectations of $15-20bln, with the weak tone of the market keeping issuers at bay.  Issuance for the month of October stands at $75bln while YTD issuance is $971.559bln.

(Bloomberg) AB InBev Cuts Payout in Half as Rising Rates Squeeze Debtors

• Anheuser-Busch InBev NV, the world’s largest brewer, cut its dividend in half as it seeks to pay down its $109 billion debt mountain, much of it taken on to acquire rival SABMiller Plc in 2016.
• The Budweiser maker justified its move by pointing to the plunge in emerging-market currencies, which is crimping its cash flow. Third-quarter profit missed analysts’ expectations and sales growth slowed to the weakest pace in more than a year. The stock plunged as much as 9.2 percent amid a global selloff.
• The most generous dividend-payer in the food-and-beverage industry is pulling back to protect itself as the U.S. Federal Reserve increases borrowing costs. The move comes as a number of payments are increasingly in doubt, including that of General Electric Co. Consumer-goods makers with the highest dividend yields include Kraft Heinz Co. and General Mills Inc. Such debt-laden companies are struggling to reduce leverage amid competition from small upstarts.
• AB InBev said the new dividend policy will make it easier to reach its goal of reaching a debt level that’s equivalent to two times earnings before interest, taxes, depreciation and amortization. The brewer may be trying to strengthen its finances in case acquisition opportunities arrive, wrote Nico von Stackelberg, an analyst at Liberum.
• “ABI needs a strong balance sheet to have the debt market’s confidence to do big deals,” he wrote, saying it could allow the brewer to bid for assets from the Castel family if they come on the market. Bordeaux-based Castel Group owns beer assets in addition to businesses in wine and soft drinks.
• The Budweiser maker will use the entire $4 billion it saves to pay down debt, Chief Financial Officer Felipe Dutra told journalists on a call. AB InBev has $1.5 billion of borrowings maturing this year, $3 billion next year and $6 billion in 2020, he said.

(Bloomberg) Japan’s Insurers Aren’t Hedging Their Foreign Bonds Anymore: RBC

• Japanese life insurers are holding more unhedged foreign bonds and their hedge ratios are falling, according to RBC Chief Currency Strategist Adam Cole, supporting his bearish view on the yen.
  • Notable participants are Nippon Life, Meiji Yasuda and Mitsui, Cole wrote in note; main exception is Kampo
  • The trend was “instrumental in turning us bearish” on the yen and is only becoming “more entrenched”
  • Life insurers will ramp up purchases of unhedged bonds when the yen is strong
  • RBC sees long-term USD/JPY target of 125; pair traded at ~111.95 as of 9:50am ET
  • The desire to cut hedges on existing foreign bonds holding is probably why dips in USD/JPY have been shallow lately, even in severe risk-offs

CAM Investment Grade Weekly
09/28/2018

Corporate credit spreads are largely unchanged on the week. As expected, the Fed increased the Federal Funds Target Rate by 25 basis points on Thursday to an upper bound of 2.25%.  This was the third rate hike of 2018 and the 8^th increase in the current tightening cycle which began in December of 2015.  Notably, the 10yr Treasury has trended modestly lower on the back of the Fed announcement –it was as high as 3.07% at noon on Thursday but today it is at 3.04% as we go to print.

According to Wells Fargo, IG fund flows decelerated once again during the week of September 20-September 26 and were +$779 million during the week. IG fund flows are now +$97.141 billion YTD.

According to Bloomberg, issuance on the week is going to come in at $12.7bln, as there is a small deal pending this Friday morning. This brings the September new issuance tally to $122.9bln and the YTD tally to over $895bn. September has now passed January as the month with the most issuance so far in 2018.

(Bloomberg) Why Comcast Is Paying Dearly for Britain’s Sky

• Pay-TV subscriptions are still growing in Europe, and Comcast’s $39 billion purchase of Sky Plc gives it global reach.
• The Sky deal would propel Comcast’s debt to at least $100 billion, placing the company among a small group that have borrowed that much, including AT&T Inc., which in June closed on its $85 billion purchase of Time Warner Inc. The debt could go even higher now that Fox on Sept. 26 said it will sell Comcast its 39 percent stake in Sky, worth more than $15 billion—a decision that required approval from Walt Disney Co., which is buying most of Fox.
• Comcast executives say they’re confident they can generate enough cash flow to pay down their debt over time. For now, the company’s credit ratings are unchanged, though an S&P Global Ratings analyst has given it a negative outlook. But the success of the deal depends on continued strength at its U.S. business and the combined TV giants fending off the global rise of streaming rivals Netflix Inc. and Amazon.com Inc.
• Sky is essentially Comcast’s European twin, with about 23 million customers, mostly in the U.K. and Ireland. With Sky, the U.S. company would almost double its customer base. Like Comcast and its X1, Sky sells a box called Sky Q, which has a slick interface that makes it easier to find what to watch—and provides a rich source of data on customer viewing habits. Unlike Comcast, Sky is still gaining video customers.
• The two companies could benefit from being under the same roof. For instance, Comcast and Sky could have their studios team up to create more original TV shows for Sky’s online service. That could provide a bulwark against the rise of Netflix, Amazon, and Home Box Office Inc., which are spending billions of dollars in a global race for online TV customers, especially in Europe. Perhaps most important, as more Americans drop their cable-TV subscriptions, Sky offers Comcast a foothold on a continent where cord-cutting hasn’t taken off yet.

(Bloomberg) Abbott Laboratories EU3.42b Debt Offering in 3 Parts

• Use Of Proceeds: To repay all or portions of Abbott’s outstanding 2.00% notes due 2020, 4.125% notes due 2020, 3.25% notes due 2023, 3.4% notes due 2023, and 3.75% notes due 2026, and for fees, expenses, and other costs associated therewith
• CAM Comment: According to BVAL the OAS on ABT 3.75% 2026 has tightened 25bps in the month of September 2018

(Bloomberg) All four of the Vogtle 3 & 4 co-owners vote to move forward with construction of nuclear expansion project

• All four of the Vogtle 3 & 4 project co-owners (Georgia Power, Oglethorpe Power, MEAG Power and Dalton Utilities) have voted to continue construction of the two new nuclear units near Waynesboro, Ga.
• The new units are the first to be built in the United States in more than 30 years and the only new nuclear units currently under construction in America. Expected on-line in November 2021 (Unit 3) and November 2022 (Unit 4), the new units are expected to generate enough emission-free electricity to power approximately 500,000 homes and businesses.

(Bloomberg) AerCap takes Delivery of its First Boeing 737 MAX

• AerCap Holdings N.V. has today announced that it has taken delivery of its first 737 MAX 8. The aircraft will be leased to China Southern Airlines, the first of 5 aircraft to go on lease to the airline from AerCap’s 737 MAX order book with Boeing.
• AerCap has a total of 104 Boeing 737 MAX aircraft owned and on order, delivering through 2022.

(Bloomberg) Bill Ford Sees No Crisis While Fitch Warns of Challenging Times

• Ford Motor Co. has work to do to reverse its declining fortunes but isn’t a company in crisis, Executive Chairman Bill Ford said Thursday, while the Fitch Ratings service warned of challenging times ahead for the automaker.
• “I don’t think it’s even close to a crisis — we’re making good profitability,” Ford told reporters at a centennial celebration of the company’s Rouge manufacturing complex near its headquarters in Dearborn, Michigan. “Do we still have work to do? Yes, we do. But we are investing heavily in the product. We’re investing heavily in the future. And there’s nothing that we want to do that we can’t do.”
• Fitch Ratings today warned of risks Ford faces in its $11 billion restructuring, which the automaker said could take five years. Moody’s Investor Service lowered Ford’s credit rating last month to one notch above junk on concerns about executing that overhaul.
• “The company has entered a challenging period, despite a strong liquidity position,” Stephen Brown, Fitch senior director, wrote in a note on Ford. “With the recent cost pressures, there is less headroom in the ratings, which heightens the potential for a negative rating action if it appears the transformation program is not meeting expected milestones.”

CAM Investment Grade Weekly
09/21/2018

Corporate credit spreads are generically 3 bps tighter on the week and the 10-yr Treasury is 8 bps higher than last weeks close. At 3.08%, the 10-yr is close to retesting year-to-date highs of 3.11%.

According to Wells Fargo, IG fund flows decelerated during the week of September 13-September 19 and were +$1.0 billion. IG fund flows are now +$96.361 billion YTD.

According to Bloomberg, issuance on the week topped $29bln which brings the September new issuance tally to $110.2bln and the YTD tally to $883.134bn.

(WSJ) Comcast, Fox to Settle $35 Billion Takeover Battle for Sky in Weekend Auction

• Comcast Corp. and 21st Century Fox Inc. will settle their takeover battle for Sky PLC in a weekend auction run by British regulators, setting up a dramatic climax to a 21-month sale process that has pitted some of the world’s biggest media giants against each other.
• The U.K. Takeover Panel, which polices deal making in the country, laid out Thursday rules for the auction. It is a process the regulator hasn’t run many times previously—and never before with such a large company as the prize. London-listed Sky has a market value of some $35 billion.
• Auctions of big, publicly traded companies are extremely rare elsewhere, too. In 1988, private-equity giant KKR & Co. won a tumultuous auction for tobacco and food giant RJR Nabisco. It beat out a group led by the company’s management in a $25 billion deal, ending a takeover battle immortalized in the book and film “Barbarians at the Gate.”
• The Sky auction pits Rupert Murdoch’s 21st Century Fox, which already owns 39% of Sky, against Comcast. Walt Disney Co. has separately agreed to buy a big chunk of Fox, including its Sky stake, for $71 billion.
• That puts Disney Chief Executive Bob Iger and Mr. Murdoch on the same team, bidding against Comcast CEO Brian Roberts. Because Fox already owns a big stake in Sky, the Disney-Fox team has an interest in driving up the bidding, even if it doesn’t ultimately win. That would make the stake more valuable should it decide to sell it to Comcast.
• Mr. Murdoch has long sought to consolidate his holding in London-based Sky. Disney and Comcast see Sky as a way to expand internationally. The broadcaster also sells wireless, TV and internet services throughout Europe, and it is a media company that produces its own news, entertainment and sports programming.
• The auction will run through the day Saturday, and consist of a maximum three rounds of bidding. The winner will be announced shortly after the auction ends Saturday evening. If there is a third and final round, it will be conducted with sealed bids—secret, final offers made to the regulator.
• Fox first offered in December 2016 to buy the rest of Sky it didn’t already own for £10.75 ($14.22) a share. After Fox’s merger proposal hit regulatory and political delays, Comcast made a surprise offer last February, for £12.50 a share.
• Comcast made the most recent offer in July, for £14.75 ($19.49) a share, valuing Sky at $34 billion. That is above Fox’s current bid, also made in July, of £14 a share.

(Bloomberg) Sempra Energy to Sell U.S. Solar Assets to Consolidated Edison

• Sempra Energy today announced that it has entered into an agreement to sell its U.S. non-utility operating solar assets, solar and battery storage development projects and one wind facility to Consolidated Edison, Inc. for $1.54 billion in cash, subject to adjustments for working capital and pre-closing cash contributions.
• “This sale represents an important step forward in the portfolio-optimization plan we announced in June to support market growth opportunities,” said Joseph A. Householder, president and chief operating officer of Sempra Energy. “We plan to work closely with Consolidated Edison to ensure a smooth transition.”

(Bloomberg) Fitch Upgrades Merck’s Rating to ‘A+’; Outlook Stable

• Fitch Ratings-Chicago-20 September 2018: Fitch Ratings has upgraded Merck & Co., Inc.’s (Merck) Long-Term Issuer Default Rating (IDR) to ‘A+’ from ‘A’. The Rating Outlook is Stable. The ratings apply to roughly $23.5 billion of debt outstanding at Jun. 30, 2018. A complete list of Fitch’s rating actions follow at the end of this press release.
• KEY RATING DRIVERS
  • Leverage Consistent with ‘A+’ Rating: Merck has reduced its leverage (total debt/EBITDA) since year-end 2015 through a combination of EBITDA growth and debt reduction. Merck’s leverage was 1.4x at June 30, 2018, compared to 1.8 at Dec. 31, 2015. The company reduced debt by roughly $2.9 billion and increased EBITDA by approximately $2.1 billion during the same period. Improving operations, particularly with the performance of Keytruda (cancer), has helped drive EBITDA growth.
  • New Products/ Growth Opportunities: Products approved during the last three years should help to drive intermediate- to long-term, top-line growth for Merck. In addition, Keytruda (cancer) continues to expand, supported by an ongoing stream of clinical data. However, it will continue to face competition from Bristol-Myers and Pfizer/Bayer, which have similar-acting drugs. Merck is also evaluating Keytruda’s safety and efficacy in other cancers and in combination with other cancer therapies. Recent approvals to treat diabetes, cancer and infectious diseases should help to augment long-term growth and diversify sources of revenue.
• • Expanding Late-Stage Pipeline: Fitch expects Merck to continue to build its late-stage pipeline with new therapies to treat cancers, infectious diseases and cardiovascular disorders. While the majority of these projects are internally developed, Merck also partners with innovator firms to take advantage of technological advancements that were discovered externally. Given the breadth and pace of new drug discovery and development, Fitch believes that it is advantageous for firms to look externally as well as internally to optimally build their pipelines.
  • Patent Exposure Manageable: Merck is facing generic and biosimilar competition to Zetia, Vytorin and Remicade. However, Fitch views the risk as manageable with roughly 9% of firm sales at risk. Remicade, which accounts for about 2.1% of total firm sales, is a biologic that will likely continue to experience less rapid sales losses to biosimilar competition, compared to traditional small-molecule pharmaceuticals when a generic enters the market. Interestingly, Merck recently launched its own biosimilar version of Remicade in the U.S. Vytorin and Zetia are small molecules and account for roughly 5.2% of total revenues. Sales erosion for these two drugs has been rapid.
  • Solid Free Cash Flow Expected: Fitch forecasts that Merck will generate $4.0 billion – $4.2 billion in free cash flow (FCF) during 2018. Gradually increasing margins driven by an improving sales mix and decent cost control should augment moderate near-term, top-line growth. Fitch expects FCF to incrementally increase during the multi-year forecast period due to moderately improving margins and stronger top-line growth
  • Targeted Acquisition Likely: Fitch looks for Merck to pursue mainly targeted acquisitions in the intermediate term. The company has improved its operational and financial prospects through successfully gaining regulatory approvals on late-stage pipeline projects and has continued to back fill its pipeline with new and advancing projects. An improved growth and profitability profile decreases the need for the company to execute large strategic business combinations in order to fill pipeline gaps or offset sales losses from patent expiries.
  • Payers Increasingly Demanding Value: While drug pricing is always near the top of contentious issues in healthcare, it has become increasingly so during the past three years. Some of the scrutiny has been self-inflicted by a few firms pursuing significant price increases on long-established drugs. Other concerns surround the high price points of recently approved innovative drugs. Regardless, pharmaceutical manufacturers will increasingly need to demonstrate the value of their therapies to payers, patients and providers with strong clinical outcomes driven by increased safety and efficacy. This dynamic will place further pressure on the research and development efforts of innovative biopharmaceutical firms.

(Bloomberg) Lilly’s Elanco Rises After $1.5 Billion Animal-Health IPO 

• Pricing the deal higher than expected is a good sign in what will be a test of investor appetite for large, standalone animal-health businesses. The first one to be taken public by a pharmaceutical giant has rewarded investors with a tripling in stock price. Elanco faces the challenge of showing that it can follow suit five years after rival Pfizer Inc. listed its animal-health business, Zoetis Inc.
• LLY expects to completely sell down its stake in Elanco in 2019 (CAM Comment)

(SEC Filing 8k) Abbot Deleveraging

• Abbott Ireland Financing DAC, a wholly-owned subsidiary of Abbott Laboratories (“Abbott”), intends to offer senior unsecured notes in an offering exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), subject to market and other conditions. Abbott will fully and irrevocably guarantee the notes on a senior unsecured basis. Abbott intends to use the net proceeds from the offering of the notes to refinance all or portions of Abbott’s outstanding 2.00% Notes due 2020, 4.125% Notes due 2020, 3.25% Notes due 2023, 3.4% Notes due 2023, and 3.75% Notes due 2026, and for fees, expenses, and other costs associated therewith.
• Abbott’s forthcoming EUR issuance is expected Monday and proceeds will be used to reduce USD debt. We expect this to be a leverage neutral transaction, but would not be surprised to see ABT reduce more USD debt than the proceeds (CAM Comment)
• On the last earnings call (7/18/18), CEO Miles White commented “And you say at some point, well, how far would you take debt down? How far would you pay down debt? What are you going to do when you hit the point where you think that that’s enough? And I’m going to give a couple of answers to that. A lot of people seem to get comfortable somewhere between $15 billion and $20 billion. I remember with $15 billion worth of debt is still a hell of a lot of debt.” and further emphasized, “So I think our platter right now says we can afford to just be opportunistic. I don’t have big M&A on the radar screen or big transactions on the radar screen I’d say from a capital or cash allocation standpoint. I’m going to keep paying down debt, because I think that’s a prudent path for now.” (CAM comment)
• ABT had just over $20bn of debt after repaying just over $7bn in the first six months of this year as of the end of last quarter ended June 30, 2018. (CAM Comment)

CAM Investment Grade Weekly
09/14/2018

The corporate credit market has had a positive tone this week and the majority of individual credits are at least 3-4 basis points tighter since the week began, while some higher beta credits are close to 10 basis points tighter. Ten year Treasuries are higher on the week and flirting with 3% as we go to print on Friday morning.

According to Wells Fargo, IG fund flows strengthened during the week of September 6-September 12 were +$2.7 billion. Short duration funds continue to garner the lion share of assets.  IG fund flows are now +$95.882 billion YTD.

Issuance on the week topped $27bln which brings the September new issuance tally to $81bln and the YTD tally to $853.934bn (source: Bloomberg).

(WSJ) 5G Needs a Lot More Cell Towers. Some Residents Aren’t Happy.

• Residents of Denver’s Riviera apartments were surprised earlier this year when a roughly 30-foot-tall green pole appeared a few feet in front of their building entrance. The pole, installed by Verizon Communications Inc. and laden with cellular antennas, was designed to improve cellphone service in the area, but the residents complained about the placement.
• Months later, it was gone. But that was just a small taste of what’s to come across the country: Millions of Americans will soon encounter similar poles or notice antennas sprouting on existing structures, like utility poles, street lamps and traffic lights, all over their neighborhoods. All four national cellphone companies are pushing to build out their networks with a profusion of small, local cells to keep their data-hungry customers satisfied and lay the groundwork for fifth-generation, or 5G, service.
• Those plans face pushback in many places, and not just from residents. Officials in some cities say they don’t have enough staff to process applications for dozens or even hundreds of new installations. In some smaller towns, officials say they lack the expertise to review the new technology, though they’re working fast to get up to speed.
• More than 100,000 small cells are already wired up across the U.S., according to industry research firm S&P Global . Cellphone companies plan to boost their capacity with several hundred thousand more cells to improve existing service and prepare for 5G service, which they see as a potential competitor for cable and fiber optics, among other things.
• Some of the local resistance is rooted in how small cells work. Companies can usually find space on private property for large cell towers with a range of several miles. Small cells reach only a few hundred feet, so carriers need many more sites, usually on public land, for the system to work.
• Cellphone companies don’t have much choice if they want to keep up with their customers’ appetite for data, says Jonathan Adelstein, chief executive of the Wireless Infrastructure Association, whose members include wireless carriers. “People wonder why they might be having a dropped call or slow video,” Mr. Adelstein says. “Then they have a vocal minority that are ruining it for everybody” by opposing the expansion of cellular networks.

(Bloomberg Intelligence) Despite Florence, Progressive’s 2H Looks Solid: Earnings Outlook

• • Progressive is on track to post robust EPS growth in 3Q after delivering strong results in both July and August. While September’s catastrophe costs could rise from a year ago due to Hurricane Florence and any other events before quarter-end, this would likely be substantially offset by the more than $200 million drop in the company’s August catastrophe losses vs. August 2017. Progressive has just 1% share of homeowners business in the Carolinas, which should help ease the impact from Florence.

• Progressive’s results continued to benefit from expanding underlying underwriting margins in August, coming in at 9.7% vs. 8.8% a year earlier. Year-to-date, this metric is up 160 bps to 11.8%. Written-premium growth remained robust at 17%, down modestly vs. July’s 21%, but up vs. 16% in August 2017.

(Bloomberg) JPMorgan Predicts the Next Financial Crisis Will Strike in 2020

• A decade after the collapse of Lehman Brothers sparked a plunge in markets and a raft of emergency measures, strategists at the bank have created a model aimed at gauging the timing and severity of the next financial crisis. And they reckon investors should pencil it in for 2020.
• The good news is, the next one will probably generate a somewhat less painful hit than past episodes, according to their analysis. The bad news? Diminished financial market liquidity since the 2008 implosion is a “wildcard” that’s tough to game out.
• The JPMorgan model calculates outcomes based on the length of the economic expansion, the potential duration of the next recession, the degree of leverage, asset-price valuations and the level of deregulation and financial innovation before the crisis. Assuming an average-length recession, the model came up with the following peak-to-trough performance estimates for different asset classes in the next crisis, according to the note.
  • A U.S. stock slide of about 20 percent.
  • A jump in U.S. corporate-bond yield premiums of about 1.15 percentage points.
  • A 35 percent tumble in energy prices and 29 percent slump in base metals.
  • A 2.79 percentage point widening in spreads on emerging-nation government debt.
  • A 48 percent slide in emerging-market stocks, and a 14.4 percent drop in emerging currencies.

CAM Investment Grade Weekly
09/07/2018

There was plenty of activity in the credit markets this week as the primary market was active right out of the gate on Monday. Contagion fears related to emerging markets weighed on spreads mid-week, particularly high beta, but by the time Friday afternoon rolled around, the spreads of most individual credits were unchanged to modestly tighter.

According to Wells Fargo, IG fund flows for the week of August 30-September 5 were +$1.7 billion. IG flows are now +$93.164 billion YTD.

This was the busiest week of 2018 for investment grade issuance as over $53bln in new bonds were brought to market. Bloomberg’s tally of YTD total issuance stands at more than $826bln.

(Bloomberg) Verizon’s Internet Head Is in Talks to Leave, Dow Jones Reports

• Tim Armstrong, the head of Verizon Communications Inc.’s media and advertising unit, is in discussions to depart as soon as next month, Dow Jones reported, citing unidentified people familiar with the matter.
  • Key Takeaways
    • • Armstrong joined in 2015 when Verizon bought AOL and helped steer the acquisition of Yahoo two years later. His departure would be a setback to Verizon’s efforts to build a digital advertising giant.
      • There were recent discussions about spinning off Oath, but Verizon decided against it, Dow Jones reported.

  • Verizon new CEO Hans Vestberg, who took over last month and previously ran Ericsson, is seen as having more of a focus on network technology than on media.

(Bloomberg) U.S. Two-Year Yield Rises to Decade High After Jobs Data: Chart

The yield on two-year Treasuries rose as much as 6 basis points Friday to 2.69 percent, the highest level since July 2008, after the U.S. jobs report for August showed an unexpected uptick in average hourly earnings growth. The better-than-anticipated data are helping to cement expectations for a Federal Reserve rate hike this month, while the odds of an additional increase by year end have also received a boost.

(Bloomberg) Cigna Sells $20 Billion in This Year’s Second-Biggest Bond Sale

• Cigna Corp. sold $20 billion of bonds to fund its takeover of Express Scripts Holding Co., making for the U.S. corporate-bond market’s second-biggest of the year.
• The health insurer issued senior unsecured bonds in 10 parts, according to a person with knowledge of the matter. The longest portion of the offering, a $3 billion security maturing in 2048, yields 1.87 percentage points above Treasuries, after initially discussing around 2.05 percentage points, said the person, who asked not to be identified because talks with potential investors are private.
• The sale is leading what’s been a busy start to September, with some strategists already raising their monthly issuance estimates. Investors, anticipating that a bulging pipeline of M&A deals would bring a wave of debt sales after the summer lull, have been selling debt the past few weeks to make room for new securities, said Travis King, head of investment-grade credit at Voya Investment Management in Atlanta.
• “It’s the kind of deal where everyone is going to feel that they need to own this,” King said before the deal priced. “It’s one of those classic mega deals that gets everyone’s attention.”
• The expected boost in new-issue supply helped boost the amount of yield investors demand to hold corporates instead of government debt, Bloomberg Barclays index data show. Investment-grade bond spreads over Treasuries have widened by 6 basis points since the end of July to 115 basis points.

CAM Investment Grade Weekly
08/31/2018

As summer winds down, it was another quiet week in the credit markets, and spreads are set to finish the week a touch wider on global trade concerns.

According to Wells Fargo, IG fund flows for the week of August 23-August 29 were +$965 million. IG flows are now +$91.421 billion YTD.

Per Bloomberg, there was just $2.5 billion of new issuance printed during the week. Bloomberg’s tally of YTD total issuance stands north of $774bn.

(Bloomberg) When Diversification Doesn’t Spread Your Risks

• If you want to diversify your risks, invest with a bunch of different managers, right?
• Well, not always. When investment managers create diversity within their funds, chances are they will look similar to other managers also aiming for diversity. And that means they could all succumb to the same ills. This is a widespread issue, but it is highly relevant right now in risky credit markets.
• A simple illustration is index-tracking equity funds. There is almost zero benefit to investing in several managers that all track the S&P 500: You are just buying the same stocks via different channels.
• A more complex example is how banking developed over the years before the 2008 crisis. Banks grew large and they diversified across borders and business lines, which was partly to avoid their past mistakes of taking too much risk in one place, such as Texan real estate. But big global banks ended up with many of the same exposures, and so all hit the same problems at the same time.
• This diversification philosophy also drove securitization, the business of turning a big book of mortgages, for example, into a set of investible bonds. But you know the story: Each deal was diversified and risks were spread around, but too many mortgages were too similar and everybody lost.
• This idea is alive and well in today’s market for risky leveraged loans, where securitization creates so-called collateralized loan obligations, which buy 60% of loans.
• Despite the recent boom in the issuance of both loans and CLOs, markets remain concentrated. So CLO portfolios are often similar and the biggest loans are very commonly held, according to data from Fitch Ratings. In the U.S., debt from computer maker Dell International is owned by 86% of CLOs, for example. On average, U.S. CLO managers have roughly one-third of all borrowers in common, while in Europe about half of borrowers are common.
• There is a simple lesson here for CLO investors: Never assume that investing with multiple managers diversifies your risk, as there is a fair chance you are buying many of the same underlying loans.
• But there is a potential pitfall here that everyone should note. Today’s loan market has a much greater concentration of deals with low ratings, single-B and below, which are more prone to downgrades and defaults. More low-quality loans everywhere likely means more widespread losses when a downturn comes—no matter what kind of diversification you think you have.

(Bloomberg) Moody’s upgrades Abbott Laboratories’ senior unsecured rating to Baa1, outlook remains positive          

• Moody’s Investors Service (“Moody’s”) today upgraded Abbott Laboratories’ (“Abbott”) senior unsecured rating to Baa1 from Baa2. The company’s commercial paper rating was affirmed at Prime-2. The rating outlook remains positive.
• “The upgrade reflects the company’s continued progress deleveraging since the 2017 acquisitions of St Jude Medical and Alere,” stated Scott Tuhy, a Senior Vice President at Moody’s. Moody’s expects that Abbott’s debt/EBITDA will approach 3 times by the end of 2018. Debt/EBITDA was approximately 3.4 times as of June 30, 2018. “The upgrade also reflects the progress the company has made integrating its acquisitions. In particular, Abbott’s Cardiovascular and Neuromodulation businesses — the significant majority of which is legacy St Jude operations — has shown accelerating revenue growth and expanding operating margins since the merger,” added Tuhy.
• The positive outlook reflects Moody’s expectations for further deleveraging into 2019 as the company reduces debt and improves earnings. Upward pressure is tempered by the company’s recent track record of increasing debt to fund acquisitions.

CAM Investment Grade Weekly
08/24/2018

Investment grade corporate spreads were essentially unchanged in what was a relatively quiet week for the credit markets.

According to Wells Fargo, IG fund flows for the week of August 16-August 22 were +$1.9 billion. IG flows are now +$90.456 billion YTD.

Per Bloomberg, $8.25 billion of new issuance printed during the week. This paltry figure for issuance was unsurprising, as the last two weeks of August are typical very quiet on the issuance front.  August as a whole, however, has been fairly active all things considered, with $75bln of issuance so far in the month.  Bloomberg’s tally of YTD total issuance stands at $771.934bn.

(Bloomberg) Utilities May Still Choose to Retire Coal, Not Upgrade Under EPA Plan

• Upgrade or retire. The choice for coal-fired plants under the Trump EPA’s new power sector proposal isn’t that different from what they faced under the Obama-era carbon controls the plan would replace.
• But even with the Environmental Protection Agency’s attempts this time around to pave the way for more coal plant upgrades, many state regulators and utilities still may look to invest more of their dollars in cleaner burning natural gas and renewable energy instead.
• That is because the reduced upgrade costs coal-fired plants might see due to a proposed change in EPA air pollution permitting requirements may not outweigh the low cost of natural gas.
• Still, even if just a relatively small number of older plants stay online as a result of the rule, the carbon dioxide and other pollution they put into the atmosphere would be damaging, critics of the plan say.
• “In some states there will be inertia to extend the life of enough coal plants that it’s worth worrying about if you remember that this is supposed to be a response to climate change,” Joseph Goffman, former senior counsel in the EPA’s air office during the Obama administration, told Bloomberg Environment.
• Low natural gas and falling renewable energy prices may pull utilities toward the direction of retiring aging coal. But a proposed change to the EPA’s new source review program, tucked in the broader Trump plans, could allow plants to add these technologies while bypassing new pollution control requirements.
• Under new source review, companies must install controls when they expand or add new facilities that significantly increase emissions of air pollutants such as nitrogen oxides, particulate matter, and sulfur dioxide. The EPA is proposing to assess any emissions increase, historically measured on an annual basis, by also using an hourly rate—a change that could mean power plants could run longer and therefore emit more pollution without triggering requirements to control their emissions.
• The change “has the potential to change the calculus for these coal plants close to retiring and on the fence,” Meredith Hankins, the Shapiro Fellow in Environmental Law and Policy at UCLA, told Bloomberg Environment. They’ve been “handed this opportunity to upgrade their equipment.”
• In many cases, making a plant more efficient and allowing it to run longer could help a company’s bottom line, though it would depend on each plant’s situation, Michael Goo, regulatory counsel for the Institute of Clean Air Companies, which represents makers of pollution-control equipment, told Bloomberg Environment at the Baltimore conference.

(Bloomberg) American, United Jump as Airline Investors Bet Worst Behind Them    

• American Airlines Group Inc. led a surge in U.S. airline stocks as investors bet that strong travel demand and lower fuel prices will help carriers extend a rebound following the industry’s first-half rout.
• Jet fuel prices have settled below $2.20 a gallon in recent weeks after climbing as high as $2.28 in May. Scheduled talks between China and the U.S. hold out the prospect of easing trade tensions and therefore a better outlook for business trips. And airlines have vowed to slow expansion plans in an effort to raise prices by paring growth in the seat supply.
• In an interview Monday, American’s president, Robert Isom, said the company is already seeing “great signs” of progress in its efforts to increase sales, cut costs and improve product offerings.
• “We know we can do better and we’re doing everything we can to accelerate the initiatives we have out there,” Isom said. “We are seeing great signs that they are taking root.”

Investment grade corporate spreads drifted wider mid-week before firming on Thursday and into Friday morning. As we go to print, spreads for the corporate index are now unchanged for the week.

According to Wells Fargo, IG fund flows for the week of August 9-August 15 were +$910 million. IG flows are now +$88.544 billion YTD.

Per Bloomberg, $29.950 billion of new issuance printed during the week. Relatively speaking, this was a robust week for issuance considering that it is mid-August, a time that is typically associated with lower levels of supply.  In fact, the consensus issuance figure for August was $60bln and that has already been surpassed with $66.2bln in new issuance month to date.  Bloomberg’s tally of YTD total issuance stands at $763.684bn.

Despite a relative deluge of supply, dealer inventories remain very low, near their lowest levels since 2013.

(PR Newswire) Aircastle Corporate and Senior Unsecured Credit Ratings Upgraded to Baa3 by Moody’s

• Company now one of only two industry players with investment grade ratings from the three major credit rating agencies
• Mike Inglese, Aircastle’s Chief Executive Officer, stated, “Aircastle is now part of a select group of global aircraft leasing companies with investment grade credit ratings from all three major rating agencies.  We are very pleased that Moody’s, S&P and Fitch recognize the strength of Aircastle’s business platform and our unique position in the industry.”  Mr. Inglese continued, “As the leading investor in the secondary aircraft market, Aircastle is positioned to continue to grow in a disciplined and profitable manner.  We believe that three investment grade credit ratings will substantially broaden Aircastle’s liquidity base and funding access, and should enable us to efficiently raise competitively priced capital in the global markets to further drive profitable growth.”

(Bloomberg) Bayer Vows Stronger Roundup Defense as It Absorbs Monsanto           

• The German drug and chemical giant said it will formally absorb the U.S. company after selling some crop-science businesses to competitor BASF SE to resolve regulatory concerns. Because U.S. authorities insisted that the businesses operate separately until that sale was complete, Bayer said it previously had been barred from steering Monsanto’s legal strategy.
• That will now change as the stakes mount in the U.S. battle over Roundup. Bayer is facing $289 million in damages after Monsanto lost the first court case stemming from claims that the weed killer causes cancer. Even if a judge overturns or reduces the award, the trial will probably be the first of many: More than 5,000 U.S. residents have joined similar suits.
• “Bayer did not have access to detailed internal information at Monsanto,” the Leverkusen, Germany-based company said in a statement. “Today, however, Bayer also gains the ability to become actively involved in defense efforts.”
• The move to integrate the companies came as Bayer shares continued their slide in the wake of the court ruling, falling as much as 6.6 percent on Thursday. The company has lost about 16 billion euros ($18 billion) in market value this week, since the jury’s award in the Roundup case.
• Bayer said on Thursday it’s considering its options for further legal action regarding the California listing, saying it “requires judicial intervention and correction.”
• Bayer is also facing lawsuits in the U.S. over dicamba, another herbicide in Monsanto’s portfolio. The German company said it will also take an active role in any claims for damages over dicamba.

(The Canadian Press) Constellation Brands spending $5 billion to boost stake in Canopy Growth

• Constellation Brands has signed a deal to invest $5 billion in Canopy Growth Corp. to increase its stake in the marijuana company to 38 per cent and make it its exclusive global cannabis partner.
• The owner of Corona beer described the deal as the biggest investment yet in the burgeoning marijuana industry.
• “Over the past year, we’ve come to better understand the cannabis market, the tremendous growth opportunity it presents, and Canopy’s market-leading capabilities in this space,” Constellation Brands chief executive Rob Sands said in a statement.
• “We look forward to supporting Canopy as they extend their recognized global leadership position in the medical and recreational cannabis space.”
• Makers of alcoholic beverages, searching for new sources of growth as their traditional business slows in many developed markets, are looking to cannabis as Canada and some U.S. states ease regulations. Molson Coors Brewing Co. has started a joint venture with Hydropothecary Corp. to develop non-alcoholic, cannabis-infused beverages for the Canadian market. Heineken NV’s Lagunitas craft-brewing label has launched a brand specializing in non-alcoholic drinks infused with THC, the active ingredient in marijuana.