Author: Rich Balestra - Portfolio Manager

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $1.7 billion and year to date flows stand at $21.7 billion.  New issuance for the week was $5.6 billion and year to date HY is at $209.4 billion, which is +33% over the same period last year.

(Bloomberg)  High Yield Market Highlights

• S. junk bond returns hit a new peak of 11.853% this year, the highest since 2016, amid a hunt for yield by investors. Junk bonds have rallied for 11 straight days, the longest winning streak since April, according to Bloomberg Barclays index data.
• BB bond returns also rose to a high of 13.433%
• Junk bond yields also fell to 5.56%, approaching a 20-month low of 5.55% hit on Sept. 23
• BB yields are 3.85%, near the record low of 3.82% reached on Oct. 21
• Spreads were largely unchanged moving in tandem with 5Y UST
• Investors are pouring cash into the asset class.
• The rally may run out of steam Friday as oil prices are lower and stock futures mixed

(Bloomberg)  Cracks in Leveraged Credit Are Widening

• S. leveraged credit markets are coming under increasing pressure amid price swings, ratings downgrades and selling by CLOs, according to a report from Morgan Stanley.
• Strategists led by Srikanth Sankaran identified the increased frequency of big price moves in loans and bonds even outside stressed credits, amid a number of pockets of weakness
• In loans, about $48b of notional debt representing 4.2% of the leveraged loan index now trades below 80 cents, compared to $14b and 1.3% a year ago
• The sub-90 cash price bucket also increased to 9.8% from 3.2% in the same period, according to the report
• “Beneath the veneer of relative spread resilience and muted realized defaults, the weak links in the leveraged credit markets are coming under pressure,” the strategists wrote in the report
• Selling pressure from CLOs has exacerbated the loan price swings, and willingness to sell is particularly high in CCCs
• “CLO managers are net sellers of large price moves, especially in lower-rated names,” the strategists wrote

(Wall Street Journal)  Wave of Financial Stress Hits Low-Rated Companies

• An array of business challenges are hitting low-rated companies across the U.S. economy, driving selling in the bottom tier of the corporate-debt market that contrasts with gains in stocks and other riskier assets.
• In recent months, consumer demands for wireless phones and high-speed internet have helped push one landline telecom company, Windstream Holdings Inc., into bankruptcy protection and another, Frontier Communications Corp., into restructuring talks with its creditors.
• Meanwhile, competition from cheap natural gas and renewable-energy sources has caused at least seven coal producers to file for chapter 11 protection over the past year. Opioid lawsuits and the threat of legislation that would curb surprise medical bills have exposed vulnerabilities at some highly leveraged health-care companies. Retailers continue to be pressured by the shift to online shopping. And a wave of financial distress has again hit the oil patch due in part to persistently low commodity prices.
• Taken together, these developments have caused yields, which rise when bond prices fall, to climb for months on the lowest-rated group of corporate bonds. Unusually, that has happened even as yields have fallen on higher-rated junk bonds.
• Investors and analysts closely watch junk bonds because companies with subpar credit ratings tend to be affected by economic problems sooner than others. Right now, many remain confident that the problems befalling certain companies aren’t symptomatic of broader economic challenges. Still, others worry that cracks at the very bottom of the market shouldn’t be taken lightly and could ultimately spread to a larger group of assets.
• “There are specific names and specific subsectors where things are not working,” said Oleg Melentyev, a credit strategist at Bank of America Corp.
• Melentyev doesn’t think the problems facing the lowest-rated businesses will spill over into the broader market. Still, he said, it is difficult to know for sure because “you have too many yellow signs, warning signs, around.”

CAM High Yield Market Note

10/18/2019

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $1.9 billion and year to date flows stand at $20.0 billion. New issuance for the week was $4.1 billion and year to date HY is at $203.8 billion, which is +33% over the same period last year.

(Bloomberg) High Yield Market Highlights

• A six-day rally in U.S. junk bonds is poised to run out of steam as investors digest more corporate earnings and as stock futures drift on data showing slowing growth in China.
• Returns on BB junk bonds hit a new high of 13.189% as investors continue to scramble for higher-quality junk debt
• BBs are the second best performing asset class in fixed income after BBBs, which have returned 14.31%
• The overall junk bond index extended gains for the sixth straight session to 11.635%. The year-to- date high was 11.809% on September 23
• Issuance has slowed this week as the earnings season keeps companies in blackout
• Junk bond index yields rose 2bps to close at 5.67%, while spreads held steady at 380bps over U.S. Treasuries
• BB yields eased to 3.96% after reaching a six-year low
• CCC yields rose 4bps to 10.97%  

• (Bloomberg) Aecom Reaches $2.4 Billion Deal for Management Services Unit

• Aecom, targeted by activist investor Starboard Value, agreed to sell its management services division to a consortium of private equity firms including Lindsay Goldberg and American Securities for $2.4 billion.
• The Los Angeles-based firm, one of the world’s top engineering and design groups, plans to use the proceeds from the sale to reduce debt and to repurchase stock, it said in a statement Monday, confirming an earlier report in Bloomberg News. The transaction is expected to close in the first half of fiscal year 2020, it said.
• “We are extremely pleased with today’s transformative and value-enhancing announcement, which significantly accelerates our planned debt reduction and commitment to repurchase stock,” Michael Burke, AECOM’s chairman and chief executive officer, said in a statement.
• Aecom announced plans to spin off its management services unit in June. It argued at the time that the move would create a leading government services company for its clients, including the U.S. Departments of Defense and Energy, by leveraging its expertise in areas such as intelligence, cyber-security and information technology.

Business Wire) AMC Entertainment Selects Sean Goodman as Its New CFO

• AMC Entertainment announced the hiring of Sean Goodman, currently CFO of Fortune 500 company Asbury Automotive Group (NYSE: ABG), who will commence working with AMC as Executive Vice President – Finance on December 2, 2019. Current AMC CFO Craig Ramsey will retire on February 28, 2020, in a long-envisioned move.
• During the overlap, the two executives will work closely together, and Goodman will assume the Chief Financial Officer title upon Ramsey’s retirement. The Company expects an orderly, easy and seamless transition.
• After an extensive and comprehensive national search, AMC has tapped Goodman, 54, to be Ramsey’s successor. Goodman has more than 30 years of finance experience including leading Financial Planning and Analysis as well as Business Development at Home Depot in Atlanta, was an investment banker at Morgan Stanley in London and worked for Deloitte & Touche in South Africa and New York. He has U.S. public company CFO experience at Asbury Automotive Group. In addition to his almost 20 years working in the United States, Goodman has extensive international work experience in Europe, Asia and Africa.
• In early February, Craig Ramsey will achieve a milestone 25th anniversary in leadership roles at AMC, including having become its CFO in the year 2000. His eventual retirement has long been in the executive succession planning process for AMC.
• Adam Aron, AMC CEO and President said, “I cannot thank Craig Ramsey enough for his longstanding service to AMC, and the many vital contributions he has made as one of our most key executives. Our company has greatly benefited from his distinguished career, which has been marked by integrity, ability and common sense. At the same time, I am absolutely thrilled that we have been able to attract to AMC Sean Goodman who surely will help us to propel AMC forward in the years ahead. As we recruited him to join AMC, the sharpness of his mind, his strategic clarity, his extensive international experience and authentic leadership style were all quite evident. It is a terrific outcome that we have added such a superb top tier talent to AMC’s executive team.”

(Business Wire) Geysers Power Company, LLC Announces Senior Secured Notes Offerings

• Geysers Power Company, LLC (“GPC”), an indirect wholly owned subsidiary of Calpine Corporation and the owner of 13 Geysers geothermal power plants and related assets, announced that it intends to offer Senior Secured Notes, Series A, due 2039 and Senior Secured Notes, Series B, due 2039 in a private placement to qualified institutional buyers. Prior to consummating the notes offerings, GPC and certain other Calpine Corporation subsidiaries (collectively, the “Geysers Entities”) involved in the geothermal power generation business will each be released from current guarantee obligations in respect of Calpine Corporation’s indebtedness and the related liens encumbering the Geysers Assets will be released and no longer available to satisfy creditors of Calpine Corporation. The notes will be guaranteed by the Geysers Entities. The notes and related guarantees will be secured equally and ratably with the indebtedness under a new seven-year senior secured revolving credit facility and a new ten-year senior secured term loan facility in an estimated aggregate principal amount of up to $320.0 million and $400.0 million, respectively (which GPC intends to enter into concurrently with the consummation of this offering) and other indebtedness that is permitted to be secured by such assets, by a first-priority lien on substantially all of GPC’s and the guarantors’ existing and future assets, subject to certain exceptions and permitted liens.
• GPC intends to use the proceeds from the offerings, together with borrowings under the new term loan facility and letters of credit issued under the new revolving credit facility, to (i) fund a debt service reserve account and a major maintenance reserve account, (ii) pay costs associated with the offerings and entry into the new revolving credit facility and the new term loan facility, (iii) pay a dividend to Calpine Corporation (the majority of which Calpine Corporation intends to use to repay a portion of its existing indebtedness, and any excess funds from such dividend may be used by Calpine Corporation for general corporate purposes) and (iv) fund working capital, ongoing capital requirements and general corporate purposes of the Geysers Entities.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.1 billion and year to date flows stand at $17.0 billion.  New issuance for the week was $1.1 billion and year to date HY is at $199.5 billion, which is +30% over the same period last year.

(Bloomberg)  High Yield Market Highlights

• The U.S. high-yield bond market is set to extend its first weekly gain in three weeks as trade-talk optimism boosts stock futures and after reports of a missile attack on an Iranian tanker pushed the price of Brent crude to $60 per barrel.
• Junk bonds posted gains for the second straight session on Thursday, with the Bloomberg Barclays U.S. high-yield index up 0.08% this week and 10.97% YTD; yields have dropped one basis point this week to 5.89%
• BBs gained 0.03% to take YTD returns to 12.615% and yields dropped to close at 4.20%
• Single-B yields saw the biggest drop in more than three weeks on Thursday to close at 5.98%, with YTD climbing to 11.294%
• CCC yields jumped to a more than eight-month high of 11.17% while returns rose by 0.05% to take the YTD to 4.51%
• Sentiment remains cautious as investors pulled cash from U.S. high-yield funds
• The primary market activity gained pace yesterday after a sluggish start to the week, pricing three deals

(The Philadelphia Inquirer)  Aramark has a new CEO, activist investor becomes vice chair of the board

• Aramark Corp. on Monday named John J. Zillmer, an executive associated with an activist investor who controls 20% of the Philadelphia company, chief executive, replacing Eric Foss.
• The food- and uniform-services giant also announced a revamped board of directors, with the appointment of five new independent directors, all with consumer goods and food industry experience.
• Zillmer had previously spent 18 years at Aramark, rising to be president of global food & support services before departing in 2004. After leaving Aramark, Zillmer, 64, served as CEO of Allied Waste Industries and Univar Solutions, a global chemical and ingredients distributor.
• “I am extremely excited about the opportunity to rejoin Aramark at such a dynamic time in the company’s history,” Zillmer said in a news release. “I look forward to working closely with the board and the Aramark team to drive growth and value for our employees, customers, partners, and shareholders.”
• Even though Zillmer left Aramark in 2004, he has maintained his residency in Philadelphia. Current and former Aramark employees who know Zillmer from his previous time at the company said they were pleased to have him back and confident that he would take the company in the right direction.
• Paul C. Hilal, whose Mantle Ridge L.P. is Aramark’s largest shareholder, will be vice chairman. Hilal and Zillmer both serve on the board of CSX Corp., another of Hilal’s targets. Zillmer is non-executive chairman of CSX’s board. Zillmer also joined Aramark’s board, where Steve Sadove remains chairman.
• The moves come six weeks after Foss abruptly retired from the Philadelphia company, shortly after activist investor Hilal disclosed that Mantle Ridge had acquired 9.8% of Aramark’s shares and additional interest that gives Mantle Ridge 20% of the company.

(Reuters)  Trump says U.S., China have reached substantial phase-1 trade deal

• S. President Donald Trump on Friday outlined the first phase of a deal to end a trade war with China and suspended a threatened tariff hike, but officials on both sides said much more work needed to be done before an accord could be agreed.
• The emerging deal, covering agriculture, currency and some aspects of intellectual property protections, would represent the biggest step by the two countries in 15 months to end a tariff tit-for-tat that has whipsawed financial markets and slowed global growth.
• But Friday’s announcement did not include many details and Trump said it could take up to five weeks to get a pact written.
• He acknowledged the agreement could fall apart during that period, though he expressed confidence that it would not.
• “I think we have a fundamental understanding on the key issues. We’ve gone through a significant amount of paper, but there is more work to do,” U.S. Treasury Secretary Steven Mnuchin said as the two sides gathered with Trump at the White House. “We will not sign an agreement unless we get and can tell the president that this is on paper.”
• With Chinese Vice Premier Liu He sitting across a desk from him in the Oval Office after two days of talks between negotiators, the president told reporters that the two sides were very close to ending their trade dispute.
• China’s official state-owned news organization Xinhua said that both sides “agreed to make the efforts towards a final agreement.”
• Trump, who is eager to show farmers in political swing states that he has their backs, lauded China for agreeing to buy as much as $50 billion in agricultural products. But he left tariffs on hundreds of billions of dollars of Chinese products in place.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.1 billion and year to date flows stand at $18.0 billion.  New issuance for the week was $5.9 billion and year to date HY is at $193.9 billion, which is +33% over the same period last year.

(Bloomberg)  High Yield Market Highlights

• S. junk bonds are headed for their first weekly loss since mid-August after posting negative returns for three straight sessions and seeing fund outflows in the week.
• The 0.06% decline Thursday was led by the energy sector and extended a weekly loss to 0.21% and pushing yields to 5.67%, Bloomberg Barclays index data show
• Triple-Cs led the slump with a 0.12% drop, their eighth straight decline; yields on the debt climbed 6bps to 10.64%
• Single-B yields dropped 1bp to 5.68%
• BB yields rose 1bp to 4.10%
• Energy index has recorded losses for four consecutive sessions and seven of the last 10
• Investor caution spurred demand for higher- quality issuers as was evident in the pricing of AMN Healthcare on Thursday, which priced $300m at a yield of 4.625%, less than the initial talk of a 4.75% area
• Earlier in the week, Qorvo and Beacon Roofing, both BB credits, priced at the lower end of talk after drawing orders more than 3x the deal size
• On the other end of the spectrum, B1/B rated Shutterfly bonds are now pricing at a discount of 95 with an 8.5% coupon to fund its buyout by Apollo. The acquisition closed Sept. 25

(Bloomberg)  New Twist in Red-Hot Junk Debt Market:  Some Deals Are Flopping

• At a quick glance, everything seems wonderful in the world of risky credit. In September alone, companies have raked in more than $52 billion by tapping the U.S. leveraged-loan and high-yield bond markets.
• In recent weeks, a slew of companies — typically those considered the riskiest of the risky — have been forced to either ratchet up interest rates or dangle sweeteners to drum up investor demand and complete deals. A few more — including at least four this month — have been yanked from the market entirely.
• One common refrain coming from investors is that they don’t want to touch companies with excessive debt, especially those from struggling sectors or with businesses that could suffer more in a downturn. Particularly problematic: companies rated B3 by Moody’s Investors Service, one step away from the junk market’s riskiest tier.
• “If you’re looking to finance an LBO in the wrong sector or a business vulnerable to a slowdown, that’s tougher,” said John Cokinos, co-head of leveraged finance at RBC Capital Markets. “The loan market has limited appetite for new B3 rated deals, and the high-yield market is pushing back on highly levered deals.”
• September was the busiest month of the year for leveraged-loan launches as well as for speculative-grade bond pricings. And yields on junk bonds reached the lowest in almost two years. That points to a risk-on market for investors looking for greater returns in a world with $15 trillion of negative-yielding debt.
• But those days may be numbered with a slowdown weighing on investors’ minds.
• The pushback on recent LBOs is a sharp contrast to a year ago, when multibillion-dollar buyout financings — including those for Refinitiv and Envision Healthcare — were flying off the shelf despite some of the worst investor protections ever seen. Since then, though, there’s been a clear shift toward quality.
• To be sure, debt perceived as more resilient in a weaker economy has flown off the shelf, reinforcing the flight-to-quality that has dominated the market for the last few weeks. There was a frenzy, for example, for junk bonds issued by chicken chain Popeyes. They sold earlier this month at one of the lowest-ever yields for eight-year securities at just 3.875%.
• “For repeat and seasoned high-quality issuers in both high yield and leveraged loans, there’s a strong investor bid,” Cokinos said.

(Bloomberg)  The Unusual Debt Maneuver That Inched Peabody Closer to Coal JV 

• Peabody Energy Corp.’s plan to merge some of its operations with those of Arch Coal Inc. needed help from investors. They’d either have to agree to refinance its debt or amend its credit agreement to allow the deal.
• It struck out on the first option, scrapping proposed loan and bond refinancings after investors pushed back. In the end, it figured out a way to bypass the syndicated loan market altogether — with an unusual move that’s now angering some of the company’s lenders.
• The biggest U.S. coal producer increased the size of a revolving credit facility to $565 million, making it the largest slice of the company’s existing loan package and giving those lenders enough clout to approve the loan agreement amendment Peabody needed, according to people with knowledge of the matter. The amendment helps pave the way for Peabody’s planned joint venture with Arch Coal, which it is seeking to help it produce the commodity more competitively amid waning demand from the electricity industry.
• Investors in its existing term loan were not impressed by the move, which prevented them from potentially being able to extract a higher interest rate or earning a fee for agreeing to the amendment. The loan’s price dropped to around 95 cents after Peabody announced the completed amendment on Sept. 17, the steepest decline since it obtained the $400 million debt in 2018. In an unusual step, Peabody also announced in a separate filing on that day that it had switched the administrative agent on the loan agreement to JPMorgan from Goldman Sachs Group Inc. The administrative agent typically shepherds through any amendments to borrowing accords.
• Peabody’s credit agreements covering its loans had given it leeway to upsize the company’s $350 million revolving facility due in 2020 by $215 million. Peabody said Sept. 17 it had successfully upsized that borrowing and obtained the loan agreement amendment. By upsizing the revolver, the lenders of that facility held the majority of voting power, which allowed the loan amendment to pass without needing consent from existing term-loan investors, said the people familiar with the matter, who asked not to be identified because the matter is private.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $3.2 billion and year to date flows stand at $18.1 billion.  New issuance for the week was $9.9 billion and year to date HY is at $188.0 billion, which is +32% over the same period last year.

(Bloomberg)  High Yield Market Highlights

• After the biggest week of inflows since February, U.S. junk bonds are poised to edge higher again Friday, capping the fifth straight week of gains. The CDX HY index is up slightly as stock futures gain and oil rallies. Another $1 billion of deals are set to price today.
• Investors continued to put money into high-yield bond funds with Refinitiv’s Lipper reporting an inflow of $3.2b for the week ended Sept. 18. That’s the most since February.
• HYG and JNK — the two-biggest high-yield ETFs, posted a combined $340m of inflows for Thursday
• There has been a steady stream of new supply in the market this week
• At least three deals are slated to price Friday
• Bloomberg Barclays index yields continued to head south, dropping to a new 20-month low of 5.57%; spreads are at a 3-month low of +355
• Single-B yields also hit a new 20-month low of 5.57% after falling by 1bps
• BB yields dropped 4bps to close at 4.03%
• CCC yields bucked the trend and rose for the third straight session to close at 10.62%, up 7bps
• Junk bond returns rebounded yesterday as oil recovered and posted a gain of 0.029%, taking YTD returns to 11.757%
• BBs were at 12.8% after a gain of 0.05%
• Single Bs were at a new 2019 high of 12.394% after a gain of 0.06%
• CCCs posted negative returns for the third straight session at 0.17%, taking the YTD down to 6.58%

(Bloomberg)  Unhinged Money Markets Trigger Fed Action to Alleviate Stress

• The Federal Reserve took action to calm money markets on Tuesday, injecting billions in cash to quell a surge in short-term rates that was pushing up its policy benchmark rate and threatening to drive up borrowing costs for companies and consumers.
• While the spike wasn’t evidence of any sort of imminent financial crisis, it highlighted how the Fed was losing control over short-term lending, one of its key tools for implementing monetary policy. It also indicated Wall Street is struggling to absorb record sales of Treasury debt to fund a swelling U.S. budget deficit. What’s more, many dealers have curtailed trading because of safeguards implemented after the 2008 crisis, making these markets more prone to volatility.
• Money markets saw funding shortages Monday and Tuesday, driving the rate on one-day loans backed by Treasury bonds — known as repurchase agreements, or repos — as high as 10%, about four times greater than last week’s levels, according to ICAP data.
• More importantly, the turmoil in the repo market caused a key benchmark for policy makers — known as the effective fed funds rate — to jump to 2.25%, an increase that, if left unchecked, could have started impacting broader borrowing costs in the economy. Because that’s at the top of the range where Fed officials want the rate to be, they are likely to make yet another tweak to a key part of their policy tool set to try to get things back on track when they meet Wednesday to set benchmark rates.
• But the central bank didn’t wait until then to do something, resorting to a money-market operation it hasn’t deployed in a decade. The New York Fed bought $53.2 billion of securities on Tuesday, hoping to quell the liquidity squeeze. It appeared to help. For instance, the cost to borrow dollars for one week while lending euros retreated after almost doubling Monday.

(CNN)  Coordinated strikes knock out half of Saudi oil capacity, more than 5 million barrels a day

• Coordinated strikes on key Saudi Arabian oil facilities, among the world’s largest and most important energy production centers, have disrupted about half of the kingdom’s oil capacity, or 5% of the daily global oil supply.
• Yemen’s Houthi rebels on Saturday took responsibility for the attacks, saying 10 drones targeted state-owned Saudi Aramco oil facilities in Abqaiq and Khurais, according to the Houthi-run Al-Masirah news agency.
• Yet key questions about the attacks remain unanswered. US Secretary of State Mike Pompeo pinned the strikes directly on Iran, which backs the Houthi rebels. But he said there was “no evidence the attacks came from Yemen.”
• Preliminary indications are that the attacks likely originated from Iraq, a source with knowledge of the incident told CNN. Iran wields significant influence in southern Iraq, which is situated much closer than Yemen to the affected Saudi sites.

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $2.6 billion and year to date flows stand at $16.0 billion. New issuance for the week was $9.3 billion and year to date HY is at $177.1 billion, which is +31% over the same period last year.

 (Bloomberg) High Yield Market Highlights 

• U.S. high-yield is set for a strong opening with stock futures up after a new round of stimulus from the ECB yesterday, and spreads holding up amid a surge in new issues.
• U.S. junk bonds have had a blockbuster week pricing over $9 billion in new issuance
• Bankers have tested investor appetite for lower rated debt and riskier structures this week after double B issuers kicked off the primary market after Labor Day. But investors are being selective
• Junk bond returns have also rebounded to close at a new peak of 11.58% for the year, after posting a gain of 0.55%
• CCCs gained the most for the second straight session at 0.22%, taking YTD returns to 6.79%
• BBs YTD stood at 12.75% after gaining 0.023%
• Single Bs also hit a 2019 high of 11.9% after gains of 0.05%
• Yields dipped 1bps to 5.65%, while spreads tightened to near seven-week lows of +365 after tightening 7bps
• CCC yields dropped the most in three weeks to close at a five-week low of 10.69%, while spreads tightened 15bps to +878

(Reuters) China exempts some U.S. goods from retaliatory tariffs as fresh talks loom 

• China announced its first batch of tariff exemptions for 16 types of U.S. products, days ahead of a planned meeting between trade negotiators from the two countries to try and de-escalate their bruising tariff row.
• The exemptions will apply to U.S. goods including some anti-cancer drugs and lubricants, as well as the animal feed ingredients whey and fish meal, the Ministry of Finance said in a statement on its website on Wednesday.
• Beijing said in May that it would start a waiver program, amid growing worries over the cost of the protracted trade war on its already slowing economy.
• Some analysts view the move as a friendly gesture but don’t see it as a signal that both sides are readying a deal.
• Indeed, the exempted list pales in comparison to over 5,000 types of U.S. products that are already subject to China’s additional tariffs. Moreover, major U.S. imports, such as soybeans and pork, are still subject to hefty additional duties, as China ramped up imports from Brazil and other supplying countries.
• Beijing has said it would work on exempting some U.S. products from tariffs if they are not easily substituted from elsewhere.

(PR Newswire) Encompass Health prices offering of senior notes

• Encompass Health Corporation announced the pricing of its underwritten public offering of $500 million in aggregate principal amount of its 4.500% senior notes due 2028 at a public offering price of 100% of the principal amount and $500 million in aggregate principal amount of its 4.750% senior notes due 2030 at a public offering price of 100% of the principal amount. The Company will pay interest on both series of the notes semi-annually in arrears on February 1 and August 1 of each year, beginning on February 1, 2020. The notes will be jointly and severally guaranteed on a senior unsecured basis by all of its existing and future subsidiaries that guarantee borrowings under the Company’s credit agreement and other capital markets debt.
• The Company intends to use the net proceeds from this offering to fund the purchase of equity from management investors of its home health and hospice segment, to fund a call of $400 million of its senior notes due 2024 and to repay borrowings under its revolving credit facility.

(Business Wire) Spectrum Brands Holdings Announces Management Changes

• Spectrum Brands Holdings, Inc., a global consumer products company offering a broad portfolio of leading brands and focused on driving innovation and providing exceptional customer service, announced that Jeremy W. Smeltser, 44, will join the Company on October 1 as Executive Vice President. Mr. Smeltser will succeed Doug Martin, 57, as Executive Vice President and Chief Financial Officer on or prior to December 20, 2019. Mr. Smeltser will report to Chairman and Chief Executive Officer David Maura.
• The Company also announced two executive leadership promotions. Senior Vice President and Chief Operating Officer Randal D. Lewis, 53, has been promoted to Executive Vice President and COO, effective today, and Rebeckah Long, 45, has been named Senior Vice President, Global Human Resources, effective October 1, and will continue to report to Randy Lewis.
• Mr. Smeltser most recently was Vice President and CFO from 2015-2018 for SPX FLOW, Inc. following its spinoff from SPX Corporation, where he was Vice President and CFO from 2012-2015.
• “We’re excited to welcome Jeremy to the Spectrum Brands management team as we execute on our strategies to deliver earnings and cash flow growth in 2020 and beyond, and we look forward to his contributions to our Company’s bright future,” said Mr. Maura. “He is a seasoned public company CFO with a well-developed career path over the last 22 years. He has served at several corporations similar in size and global reach to Spectrum Brands. Jeremy shares our passion for servant leadership in building a fully aligned organization, rooted in a culture of ownership and accountability. Jeremy has an impressive track record in delivering major cost and efficiency improvements across the business platform, and brings a wealth of experience in M&A and other capital structure activities.”

(CNN) Ford debt has been downgraded to junk

• Moody’s downgraded Ford’s credit to junk Monday evening. It said the automaker faces considerable business challenges, and its poor financial performance badly positions Ford to take on its planned $11 billion restructuring.
• “Ford is undertaking this restructuring from a weak position as measures of cash flow and profit margins are below our expectations, and below the performance of investment-grade rated auto peers,” Moody’s said.
• During the Great Recession, Ford and other US automakers suffered massive losses and junk bond credit ratings, which can raise the cost of borrowing. But the industry has been profitable for about 10 years.
• Ford in 2012 was upgraded to investment grade, which is what a credit rating is called when it is not considered a junk bond.
• The company responded that it is taking the proper steps to improve its business, and that it has the cash necessary to do so.
• “Ford remains very confident in our plan and progress. Our underlying business is strong, our balance sheet is solid and we have plenty of liquidity to invest in our compelling strategy for the future,” said company in a statement.

CAM High Yield Market Note

9/6/2019

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.2 billion and year to date flows stand at $13.4 billion. New issuance for the week was $2.8 billion and year to date HY is at $167.8 billion, which is +28% over the same period last year.

(Bloomberg) High Yield Market Highlights

• U.S. junk bonds are poised to extend their third straight week of gains as stock futures edged higher ahead of the monthly jobs report and remarks by Chair Jerome Powell in Zurich. Yields dropped to an 11-week low on Thursday to 5.7%, and spreads tightened to a five-week low of +388bps.
• Investor demand for the debt bolstered issuance even as retail funds faced outflows.
• Supply kept up its steady momentum and five of six deals were BB credits; all were drive-by offerings pricing at the lower end of price talk
• The primary is expected to maintain momentum this month, with September issuance of about $20-$25b, according to preliminary estimates from three dealers
• The Bloomberg Barclays High Yield Index saw the biggest drop in yields in two weeks, with bonds posting gains across all ratings. Returns in the index climbed to a fresh year-to-date high of 11.17%
• CCC yields closed at 10.86%, a drop of 3bps
• Spreads ended at +913bps, biggest decline in two weeks
• BB returns rose to 12.625%, a new 2019 high and the best in high yield, after gaining 0.136%
• Single-B yields also dropped to a 11-week low to 5.84%, the biggest fall in two weeks
• Single-Bs are at 11.43%, also a YTD high, after +0.18%
• CCCs were at 5.672% after a gain of 0.057%

Reuters) To cut or not? Dueling Fed views boost pressure on Powell

• The Federal Reserve should use its meeting in two weeks to aggressively cut interest rates, one U.S. central banker said on Tuesday.
• Less than an hour later, a second U.S. central banker said he saw no need to use up the Fed’s precious firepower when the economy is growing, inflation looks stable and labor markets are in good shape.
• The dueling views – from St. Louis Fed President James Bullard, who called for a half-a-percentage-point rate cut, and Boston Fed President Eric Rosengren, who saw no immediate need for any move – show the tight spot Fed Chair Jerome Powell finds himself in as the Fed’s next policy-setting meeting approaches.
• On one hand, the escalating U.S.-China trade war and a global economic slowdown have begun to pinch U.S. business spending and manufacturing output, posing a threat to the broader U.S. economy.
• But Americans continue to spend, wages are rising and employers keep adding jobs, suggesting a downturn is not on the horizon.
• Although Powell has said the Fed will act “as appropriate” to keep the economy growing, there is plenty of disagreement among his fellow rate-setters about what that two-word phrase means in practice.  

• (Bloomberg) U.S. Junk Bond Market Springs Back to Life With Three New Deals

• High-yield borrowers are jumping back into the market after a three-week hiatus with at least a trio of issuers expected to price bonds on Wednesday.

• Restaurant chain operator Yum! Brands, E&P company Murphy Oil and data storage manager Iron Mountain announced new offerings and are each targeting 10-year bonds
• The deals follow the reopening of the high-yield market on Tuesday by Icahn Enterprises, which was the first junk bond to price in three weeks
• Borrowers are selling new bonds mostly to refinance and repay existing debt following a recovery in spreads from August’s sell-off. High-yield bond spreads have rallied to two-month lows of 396bps over U.S. Treasuries after widening to 444bps last month, according to Bloomberg Barclays data
• Icahn’s new $500 million 4.75% 2024 bond edged higher in secondary trading to 100.125, according to Trace pricing. It priced at par.
• The deal was well received. It saw investor orders of more than $1.5 billion, helped by its higher double B ratings.
• Two of today’s offerings have similar ratings, which will likely appeal to investors looking to buy higher credit quality bonds.

(Bloomberg) With 49 Deals in 30 Hours, U.S. Corporate Bond Market Ignites

• A record number of companies borrowed in the U.S. investment-grade bond market this week as plunging yields spurred another wave of refinancing. And the frenzy isn’t letting up. Since Tuesday, corporations including Coca-Cola Co., Walt Disney Co., and Apple Inc. have sold or are selling notes, bringing the total number of sellers to 49.
• Completed sales totaled $54 billion through Wednesday, putting this week on track to be the busiest ever for corporate bond deals. At least another $70 billion are projected for the rest of the month, and the activity is spilling over to junk bonds and leveraged loans as well. With more than $16 trillion of bonds in Europe and Asia paying negative yields, investors worldwide are snatching up debt that offers higher returns, keeping demand strong in the U.S.
• For investment-grade companies, the average yield on bonds was 2.77% as of Wednesday, according to Bloomberg Barclays index data. In late November, that figure was above 4.3%. For a company selling $1 billion of debt, that amounts to $15.3 million of annual interest savings, before taxes. Junk-bond yields have dropped too, with notes rated in the BB tier, the uppermost high-yield levels, paying a near record-low 4.07%.
• It’s not clear how long that will last — on Thursday, U.S. Treasury yields surged, with the 10-year note jumping as much as 0.12 percentage point to 1.59%.
• In the leveraged loan market, 17 deals totaling more than $16 billion have launched this week, making it the busiest week since October. Investment-grade and high-yield bankers are telling clients that the good times may not last.
• “If someone has near-term financing needs, they should be looking to take advantage of this window,” said Jenny Lee, co-head of leveraged loan and high-yield capital markets at JPMorgan Chase & Co. “Things potentially could shut down or get more difficult as we head toward the back half of this year.”

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.1 billion and year to date flows stand at $12.6 billion. New issuance for the week was $0.0 billion and year to date HY is at $165.0 billion, which is +26% over the same period last year.

 (Bloomberg) High Yield Market Highlights 

• U.S. junk bonds have recouped this month’s losses and look set to extend higher as stock futures rise ahead of Chair Jay Powell’s Jackson Hole speech.
• Funds have reported net inflows of $10.4b YTD vs outflows of more than $20b for the same period last year
• Month to date, the high-yield index is flat, following a 0.15% gain yesterday
• Junk bonds gained across the risk spectrum for five straight sessions, with CCCs gaining 0.17%, the most in high yield yesterday, compared to 0.15% for BBs and single-Bs respectively
• The energy index led the CCC rally, posting gains for five consecutive sessions for the first time in more than eight weeks, with a YTD return of 3.21% after a gain of 0.4% yesterday
• Junk bond yields dropped for five straight sessions to close at a fresh 2-month low of 5.78%
• Spreads were steady, tightening around 3-4bps across ratings and moving in tandem with the 5Y UST yields which were up 3bps
• Junk bond return YTD is 10.55%, close to the 2019 peak of 10.57%
• BB returns hit a new 2019 peak at 11.92% after posting returns of 0.15%
• Single-Bs, second best in high yield, were 10.74%, just 2bps off the YTD peak of 10.76%, after gaining 0.15% yesterday
• CCC YTD returns were 5.47% after 0.17% returns yesterday
• Summer lull descended on the primary
• August priced $9.65b over 11 deals, the slowest month of this year
• Supply is expected to resume after Labor Day

(Bloomberg) CyrusOne Explores a Sale After Bidder Approach

• CyrusOne Inc. is considering a potential sale after receiving takeover interest, according to people familiar with the matter, as digital infrastructure companies such as data center operators increasingly garner buyout interest from rivals and private buyers.
• The Dallas-based company is working with an adviser to evaluate strategic options after a recent approach from at least one potential suitor, said the people, who asked to not be identified because the matter isn’t public.
• A bidder group including KKR & Co., Stonepeak Infrastructure Partners and I Squared Capital is in the preliminary stages of weighing a bid for the company, said one of the people. Other potential bidders are interested too, the people said. No decision has been made and CyrusOne could opt to remain independent, they said.
• CyrusOne rose as high as 16.6% on the news, its biggest gain since going public in 2013. The shares were up 11.7% to $72.79 at 11:36 a.m. in New York on Friday, giving the company a market value of about $8.2 billion.
• A representative for KKR declined to comment. Representatives for Stonepeak, I Squared and CyrusOne didn’t respond to requests for comment.
• Founded in 2001, CyrusOne has a network of 48 data centers serving about 1,000 customers in the U.S., U.K., Singapore and Germany, according to its annual report. It is one of at least five real estate investment trusts that specialize in data centers, which help companies safely store data. Others include Equinix Inc. and Digital Realty Trust Inc.

(Bloomberg) Junk-Debt Market’s Flight to Quality Is About to Heat Up Again

• Companies selling debt in the U.S. leveraged loan and junk bond markets after Labor Day may find investors have a stronger appetite for quality than risk.
• The deal pipeline for both types of debt indicates higher rated, well-known companies plan to seek financing in the coming months. They are likely to be well-received by investors worried about a recession yet still looking for yield.
• “Investors are likely to remain highly selective but will be buyers in size for the structures that compare favorably to paper available in the secondary market,” said Jeff Cohen, Credit Suisse’s global head of leveraged finance capital markets.
• Amid negative sentiment due to the trade war and a possible global recession, riskier loan sales have struggled in the $1.2 trillion market. The loan market has seen five borrowings scrapped in recent weeks: Vewd Software USA LLC, Golden Hippo, Glass Mountain Pipeline Holdings LLC, Life Time Inc. and Chief Power Finance LLC.
• High-yield bore the brunt of this month’s sell-off, but has since clawed backsome of those losses.
• The high-yield market hasn’t seen a deal price since Aug. 12, yet about $20 billion of issuance may come in September, Bank of America Corp.’s Oleg Melentyev said. That compares to $23 billion in September 2018, and $40 billion in both 2016 and 2017. The market is about $1.24 trillion in size.

(Bloomberg) Cracks Forming in Leveraged Loan Market as Another Deal Pulled 

• The froth may not be off leveraged loans just yet, but with five deals falling through in the past few weeks, the market is definitely a little less giddy.
• This time it’s Vewd Software. The streaming-service provider joins marketing firm Golden Hippo, Glass Mountain Pipeline Holdings LLC, Chief Power Finance LLC and fitness-center builder Life Time Inc. in dipping its toe in the water and finding borrowing conditions too cold.
• The leveraged loan market has been a favorite of private equity firms, funding payouts to partners and buyouts of targeted companies at record-low borrowing costs for a decade, doubling in size to about $1.2 trillion. Now it’s experiencing a rare moment of sobriety. Investors who smell a recession are shying away from companies that just a few months ago might have been an easier sell.
• It’s not just failed offerings that are flashing yellow caution lights. Some borrowers have come to market and had to pay more than they originally planned. The possibility of continued rate cuts by the Federal Reserve has made floating-rate deals less attractive, and companies vulnerable to trade wars have had to promise higher yields.
• The market has seen “widely divergent pricing outcomes,” said Jeff Cohen, global head of leveraged finance capital markets at Credit Suisse Group AG.
• DNA-testing firm Ancestry.com Inc., for example, increased the pricing of a loan financing a dividend to its private equity owners and reduced the size of the payout by $200 million.

CAM High Yield Market Note

8/16/2019

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $0.6 billion and year to date flows stand at $12.5 billion. New issuance for the week was $5.4 billion and year to date HY is at $165.0 billion, which is +26% over the same period last year.

(Bloomberg) High Yield Market Highlights

• U.S. junk bonds are set to open higher at the end of a volatile week as stock futures climb alongside modest gains Europe and Asia. Providing support are higher oil prices and Lipper reporting a net fund flow into U.S. high yield funds following a large decline in the prior week.
• Yields and spreads were slightly higher, particularly for Triple-Cs, where spreads widened 11bps to 949bps and yields closed at a fresh 7-month high of and 11.16%
• Investors have moved up in quality as reflected in performance of BBs, with YTD returns at 10.9% and investment grade at 13.3%
• Investors yanked more cash from high-yield ETFs
• HYG reported an outflow of $514m in the latest session, the biggest outflow since Aug. 5
• Junk bond returns were negative for a second session, down 0.01%, weighed by CCCs and energy index
• Bloomberg Barclays High Yield Index was negative in three of the last four sessions taking YTD returns down to 9.477%
• Energy index YTD returns fell to 1.473% from 6.1% at end of July, a loss of more than 4.5% in August, taking CCCs down too
• CCC YTD return is 4.016% after a loss of 0.05% yesterday, the most in the high yield index
• CCCs MTD loss is 3.5%
• BBs YTD gain is 10.94%, best in high yield, after posting a gain of 0.004%, the only positive yesterday
• Single-Bs lost 0.02% taking the YTD returns to 9.62%

(Business Wire) Aramark Reports Third Quarter Results

• Consolidated Revenue was $4.0 billion in the quarter, an increase of 1.0%. Adjusted Revenue grew 5.8% over the prior-year, attributed to a 3.7% growth in the legacy business and a 2.1% increase related to an accounting rule change.
• Operating Income was $189 million, up 1% compared to the prior-year period. Adjusted Operating Income increased 4% on a constant currency basis, driven by operational improvements and acquisition synergies, offset by higher total incentive-based compensation and the deliberate exit of non-core custodial accounts in Europe.
• The Company made continued progress in de-leveraging by reducing its net debt position by $672 million compared to the prior year. Total trailing 12-month net debt to covenant adjusted EBITDA was 4.1x at the end of the quarter, a 0.5x improvement versus the end of the third quarter of 2018. Through nine months, Free Cash Flow improved $158 million compared to prior year. This increase can be attributed to a disciplined management of working capital and investment spend. At quarter-end the Company had approximately $1.1 billion in cash and availability on its revolving credit facility.

• The Company maintains the following performance outlook for Fiscal 2019:
• Legacy business revenue growth expectations of approximately 3%.
• Adjusted EPS of $2.20 to $2.30 per share. This includes four cents of unfavorable currency impact.
• Free cash flow of $500 million. This includes approximately $50 million in cash outlay related to the divestiture of the Healthcare Technologies business and approximately $50 millionin spending on the integrations of Avendra and AmeriPride.
• Net debt to covenant adjusted EBITDA of 3.8x by the end of the fiscal year. 

• (Business Wire) AMC Entertainment Announces Second Quarter 2019 Results

• “AMC delivered strong results for the second quarter of 2019, achieving 4.4% year-over-year total revenue growth to $1.506 billion, driven by record attendance in both our U.S. and international markets. Importantly, total Adjusted EBITDA grew 7.3% year-over-year after adjusting 2018 for the non-cash accounting impact of ASC 842,” said Adam Aron, CEO and President of AMC.
• Aron continued, “In a quarter that generated the second largest domestic industry box office for any quarter in the past 100 years, we are especially gratified that AMC outperformed the rest of the U.S. industry (meaning comparing AMC with the rest of the U.S. industry, excluding AMC) in attendance per screen by 800 basis points and in admissions revenue per screen by 400 basis points. Additionally, AMC generated record U.S. food and beverage per patron of $5.58 and total food and beverage per patron of $5.08, representing year-over-year growth of 5.5% and 3.9%, respectively.
• (CAM Note) Additional AMC Highlights

• In the 3rd quarter two blockbusters currently playing are Spiderman and Lion King.  July is 6.7% ahead of July 2018. Lion King is already the 12th top grossing movie of all time.
• AMC 2 qtr 2019 attendance +3.9% to 92 million tickets sold.
• Deleveraging is the #1 priority now. Following aggressive cap-x program to modernize theatres and install reclining seats, upgraded food and beverage concession areas, install premium large format screens (over $2 Billion since 2014) cap-x will now decrease. 2018 was $460MM. 2019 guidance is $415MM. 2020 guidance is $300MM. 2021-2023 guidance is between $250MM-$300MM.
• This frees up cash flow for debt reduction.
• No maturities for the next 5 years

(CAM Note) Cheniere Reported Second Quarter Financial Results

• European gas electric generation nearly doubled in 2qtr 2019 versus 2qtr 2018.  More natural gas capacity coming on line.
• A senior secured deal private placement with Allianz Insurance is expected to have IG ratings to replace some of their bank debt.
• Signed a marketing tolling agreement with Apache to sell their natural gas (LNG).  They are working with other large producers to sign similar agreements as well to sell their gas “off shore” in the LNG market given low Henry Hub prices.
• In 2Q2019 104 cargoes exported totaling 361 Tbtus versus 310 Tbtu in 1Q2019.
• Corpus train 1 made its first shipments. Train 2 is under test. Completion expected by September, at which time shipments will commence. Train 3 in permitting; expect full permitting to be completed by December.
• $2.9 – $3.2 billion in ebitda 2019 full year guidance. Stated they’re committed to paying down debt to garner IG bond ratings.