Author: Rich Balestra - Portfolio Manager

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $1.4 billion and year to date flows stand at $11.1 billion.  New issuance for the week was $4.6 billion and year to date HY is at $42.7 billion, which is -12% over the same period last year.

(Bloomberg)  High Yield Market Highlights

• S. junk bonds extended this week’s rally, as dedicated funds received fresh cash inflows.
• Yields held firm as oil rallied to close at a 4-month high after rising for 4 straight sessions
• Returns were at new YTD highs across ratings, with high-yield index at 6.52%
• Triple Cs were best performers yesterday, held top rank YTD, with 6.83% gain
• BBs returned 6.35%, single-Bs 6.45%
• Loans lagged high yield bonds, with YTD return of 4.2%
• S. junk operating against backdrop of strong technicals as reflected in slow issuance activity, net inflows into retail funds, low default rate, steady corporate earnings

(Fierce Wireless)  New details cause FCC to pause T-Mobile/Sprint merger for third time

• The FCC has stopped the clock on a proposed merger between wireless carriers Sprint and T-Mobile. The agency said it has received “significant new information” regarding the deal and has opened up a three-week period ending March 28 for public comment. The pause comes on day 122 of the 180-day review period the FCC holds for mergers.
• Opposition to the merger gained momentum when the Wireless Internet Service Providers Association (WISPA) joined a coalition of rural wireless providers that oppose the merger. The 4Competition Coalition is comprised of 25 organizations, including WISPA, Dish, C Spire and the Rural Wireless Association (RWA). The coalition has argued that the merger, which would reduce the number of nationwide wireless carriers to from four to three if successful, would hamper rural consumers’ access to wireless service. “The combined company would have significant new incentive and ability to raise prices and preemptively stamp out competition from newcomers. And the merger would result in the loss of tens of thousands of jobs in the process,” the coalition claims on its website.
• Earlier this week, T-Mobile filed new plans for the combined company to provide residential broadband service. T-Mobile CEO John Legere seemed to respond to the opposition in a blog post this week, which claimed that the combined company will pose a competitive challenge to cable broadband providers.
• “We’ll give millions of Americans—especially those in underserved rural areas—more choices and options for connecting to the internet and participating in the digital economy,” Legere wrote. “With the New T-Mobile and our unique 5G capabilities, we’ll be able to offer a fast and reliable alternative for in-home broadband.”

(Company Filing and CAM)  AMC Entertainment notes downgraded to CCC+ by S&P 

• AMC launched a potential refinancing of their existing credit facilities. They intend to use a portion of the net proceeds of such refinancing to redeem all of the outstanding 5.875% Senior Subordinated Notes due 2022 and 6.00% Senior Secured Notes due 2023 pursuant to the provisions of the indentures pursuant to which such notes were issued. There can be no assurance as to whether and when such refinancing and redemption will occur and on what terms such refinancing will occur, if at all.
• While the refinancing is for the most part leverage neutral, S&P lowered the ratings on the existing senior subordinated notes due to the added secured debt placed above the notes in the capital structure.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.2 billion and year to date flows stand at $9.7 billion.  New issuance for the week was $5.0 billion and year to date HY is at $38.0 billion, which is -6% over the same period last year.

(Bloomberg)  High Yield Market Highlights

• S. junk bond yields jumped the most in four weeks, closing at a two-week high, as returns turned negative across ratings for a third consecutive session, the worst run since January. Triple C bonds suffered the biggest decline since December.
• Yields rose in 5 of the last 9 trading sessions as S&P 500 dropped the most in 4 weeks to close at 3-week low
• Equity fell for 4 straight sessions for first time since December
• VIX rose for 4 straight sessions for the first time since October, closing at a 5-week high
• Nervous junk bond investors withdrew cash from high yield funds, the first negative flow since January
• Resilience of high yield was evident in steady pricing of new issues
• Biggest LBO deal YTD, Power Solutions, had $15b in orders for senior secured and unsecured tranche combined, after just two days of roadshow
• Junk bonds still remain best-performing in fixed income, with YTD return of 6.07%
• CCC bonds fell 0.18% yesterday, have gained 6.38% YTD
• High yield maintained lead over loans, which returned 4.16% YTD
• S. junk bonds operate against the backdrop of strong technicals as reflected in slow issuance, low default rate, steady corporate earnings

(Bloomberg)  CenturyLink Finds ‘Material’ Accounting Issues With Level 3

• CenturyLink Inc. discovered a “material weakness” in accounting involving the value of assets acquired with the 2017 purchase of Level 3 Communications and notified regulators that its 10-K filing will be late.
• CenturyLink said it found problems with “internal controls” in its books involving recording and “measuring fair value of assets and liabilities” it took over with the Level 3
  acquisition, according to a filing Monday. The rural telephone company said it needs to audit the accounting before it can report its year-end numbers, but that the problem won’t cause any material changes to the results it reported Feb. 13.
• Monroe, Louisiana-based CenturyLink bought Level 3 to strengthen its sales to businesses and cope with a long-running decline in landline demand. The company — one of the largest junk-bond issuers in the U.S. — is part of a challenging industry that includes Windstream Holdings Inc., which filed for bankruptcy protection last month.

(Bloomberg)  Digital Colony Is Said to Weigh Bid for Zayo 

• Digital Colony, a communications infrastructure-focused firm formed by Tom Barrack’s Colony Capital Inc. and Digital Bridge Holdings LLC, is part of a potential buyer group weighing a bid for Zayo Group Holdings Inc., according to a person with knowledge of the matter.
• The group, led by Digital Colony and investment firm EQT, has fully committed debt financing, said the person, who asked not to be named because the matter is private. A Digital Colony representative didn’t immediately respond to a request for comment, and an EQT representative declined to comment.
• Zayo is a Boulder, Colorado-based owner of fiber networks across North America and Europe on Wednesday said it’s “evaluating strategic alternatives.”
• Zayo, led by Chief Executive Officer Dan Caruso, postponed its analyst day, and said it will take “a minimum of several weeks to months” to consider its options, though there’s no set timetable nor assurance a strategic alternative will result.

(Bloomberg)  T-Mobile’s Sprint Deal Draws State Concerns Over Consumer Harm

• State antitrust enforcers are expressing deep concerns that T-Mobile US Inc.’s proposed takeover of Sprint Corp. could raise prices for consumers, signaling they might seek to thwart the deal.
• Some state attorneys general who are investigating the $26 billion transaction took the unusual step this week of publicly voicing worries that the combination could harm competition, offering insight for the first time into how they view the tie- up.
• Maryland Attorney General Brian Frosh, a Democrat, said combining T-Mobile and Sprint would further concentrate an already consolidated industry by leaving just three national carriers. “That’s dangerous for competition. That’s dangerous for consumers,” Frosh said in an interview on the sidelines of an annual conference in Washington for state attorneys general.
• The comments come after more than a dozen states joined to investigate the deal in parallel with the Justice Department and the Federal Communications Commission, which are nearing the end of their reviews.
• The tie-up has been widely criticized by consumer groups and Democratic lawmakers who want officials to oppose the deal. The states can sue to block the merger on antitrust grounds even if federal officials approve the takeover.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.2 billion and year to date flows stand at $11.0 billion.  New issuance for the week was $2.2 billion and year to date HY is at $31.4 billion, which is -10% over the same period last year.

(Bloomberg)  High Yield Market Highlights 

• U.S. junk bond supply has revved up, with $21 billion priced in February making it the busiest month since March 2018. It was the highest-volume second month in four years.
• 30 deals priced, all oversubscribed multiple times, most priced at lower end of talk
• About 26% of the supply was to fund LBO suggesting strong demand for risk
• About 25% was rated CCC, some funding dividend distributions to equity sponsors
• About 54% of total supply was drive-by offerings
• S. high yield returned most YTD since 2001, up 6.26% after the best January since 2009
• Triple-Cs led the gains in junk bonds with 6.96%, also best since 2001
• CCCs January performance was best in almost 3 years, at 5.28%
• Junk bond yields dropped across ratings closing February near 4-month lows, with the exception of BBs, which closed at a 10-month low of 5%
• CCC yields and spreads dropped most for the month, closing at 10.52% and +780bps, respectively
• CCC spreads fell below +800 for first time since early December
• Low default, better-than-feared corporate earnings, firm oil and above all a dovish Fed boosted risk assets

(Globe Newswire)  Windstream Holdings, Inc. Files for Voluntary Reorganization Under Chapter 11 of the U.S. Bankruptcy Code Following Judge Furman’s Decision

• The Company intends to use the court-supervised process to address debt maturities that have been accelerated as a result of the recent decision by Judge Jesse Furman in the Southern District of New York against Windstream Services, LLC, a subsidiary of the Company.
• “Following a comprehensive review of our options, including an appeal, the Board of Directors and management team determined that filing for voluntary Chapter 11 protection is a necessary step to address the financial impact of Judge Furman’s decision and the impact it would have on consumers and businesses across the states in which we operate,” said Tony Thomas, president and chief executive officer of Windstream. “Taking this proactive step will ensure that Windstream has access to the capital and resources we need to continue building on Windstream’s strong operational momentum while we engage in constructive discussions with our creditors regarding the terms of a consensual plan of reorganization. We acted decisively to secure the long-term financial stability of Windstream, and we are confident that, upon completion of the reorganization process, we will be even better positioned to invest in our business, expand our speed and capabilities for our customers and compete for the long term.
• As previously announced on February 15, 2019, Judge Furman ruled that Windstream Services, LLC’s 2015 spinoff of certain telecommunications network assets into a real estate investment trust (REIT) violated its agreements with bondholders. The decision arose from challenges by Aurelius Capital Management (“Aurelius”) and U.S. Bank National Association that the spinoff was invalid under the terms of those agreements.
• The effect of Judge Furman’s decision was that an event of default under the relevant indenture had occurred that had not been cured or waived. The acceleration of the obligations outstanding under such indenture gave rise to a cross-default under the indentures governing Windstream’s other series of secured and unsecured notes. In addition, the decision gave rise to a cross-default under the credit agreement governing Windstream’s secured term and revolving loan obligations.

(PR Newswire)  S&P Global Ratings Upgrades Equinix to Investment Grade (‘BBB-‘) On Improving Credit Quality

• Equinix, the global interconnection and data center company, announced that S&P Global Ratings (“S&P”) has upgraded all of Equinix’s ratings with S&P by one notch to the investment grade rating of “BBB-“, including its issuer credit rating, its global multi-currency credit facility and term loan ratings, and all of the company’s senior unsecured notes.
• “We are very pleased to have received an investment grade credit rating from S&P, which reflects increased confidence in improving leverage levels and our demonstrated commitment to fund expansion in a disciplined and balanced manner,” said Keith Taylor, Chief Financial Officer, Equinix.

(PR Newswire)  Huntsman Receives Investment Grade Ratings from Moody’s and Fitch

• Huntsman Corporation announced that Moody’s Investors Service, Inc. has upgraded our senior unsecured rating from “Ba1” to “Baa3” with a “stable outlook”.  In addition, Fitch Ratings, Inc. published an initial Long-term Issuer Default Rating for the Company of “BBB-” with a “positive outlook”.
• Peter Huntsman, Chairman, President and CEO commented: “We are pleased to receive today the formal recognition of Investment Grade.  This has been our objective for many years and reflects the significant transformation of our balance sheet and downstream portfolio of businesses. This action will further strengthen our shareholder base, provide greater flexibility with our balance sheet and allow us to continue to expand our downstream businesses.”

CAM High Yield Market Note

2/22/2019

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.6 billion and year to date flows stand at $10.7 billion.  New issuance for the week was $2.1 billion and year to date HY is at $29.1 billion, which is -12% over the same period last year.

(Bloomberg)  High Yield Market Highlights

• S. junk bond spreads and yields were resilient amid wavering stocks as oil prices held steady and funds reported more cash inflows. Spreads continued to tighten after falling below 400 basis points for the first time since mid-November and yields were flat to little changed.
• This was the fourth straight week of inflows and the seventh of the last eight weeks
• Junk bond index rose for eighth straight day to new record high
• Return is 5.7% YTD, making it the best fixed income performer
• CCCs turned negative yesterday, have returned 6.03% YTD
• High yield beats IG, which returned 2.44% YTD, and leveraged loans which are up 3.53%
• Supply continued to trickle in, with a drive by offering from USAC
• Size was increased by $250m after receiving orders of more than $2b for a $500m offering
• Priced at lower end of talk
• Several deals have priced this week, all were drive bys, had orders more than 3x size of offering, suggesting risk appetite is strong
• Supply expected to remain light overall as there has been no big acquisitions or buyouts recently and a good part of refinancing has already been done
• S. junk bonds operate against the backdrop of strong technicals as reflected in slow issuance activity, net cash inflows, low default rate, steady corporate earnings

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.3 billion and year to date flows stand at $8.6 billion.  New issuance for the week was $7.2 billion and year to date HY is at $26.9 billion, which is -10% over the same period last year.

(Bloomberg)  High Yield Market Highlights

• Yields on U.S. speculative-grade bonds are set to decline for the fifth week, even as the rally was tempered a bit on Thursday. Fund managers, meanwhile, had their straight week of inflows.
• AVOL priced its drive-by offering amid drifting stocks after boosting its total size by $350m to $1.1b
• Two CCC rated credits priced, one of them to fund a dividend distribution to equity sponsors
• S. high yield continued to operate against the backdrop of strong technicals as reflected in the slow issuance activity and net cash inflows into high-yield retail funds, low default rate, and steady corporate earnings
• Junk bonds, with 5.25% returns YTD, continue to outperform other fixed income assets
• CCCs were leading high yield with 5.85% returns YTD
• Junk bonds leaped ahead leveraged loans this year, which have returned 3.09% YTD

(Bloomberg)  Return of the Junk-Bond Dividend Deal Shows It’s Risk On Again 

• Need more proof that investor appetite for risk-taking is returning in the U.S. junk-bond market? Take a look at the debt being offering by Ascend Learning, the educational software maker acquired two years ago by Blackstone Group and the Canada Pension Plan Investment Board in a leveraged buyout.
• The $300 million high-yield offering is the first since July that will be used to fund a dividend to a company’s owners, a purpose that’s typically seen by investors as riskier than other types of deals. It was the first such deal to launch since Bruin E&P Partners sold $600 million of notes in July to, among other things, fund a payout to its equity sponsors, data compiled by Bloomberg show.
• It’s just the latest sign that investors have returned to the market with a vengeance after fleeing for safer asset classes at the end of 2018.

(Bloomberg)  Fear Goes Missing in the Biggest U.S. Junk Rally in a Decade 

• Traders are going all-in on the best new year rally in U.S. junk bonds since 2009, cutting hedges that help cushion nasty shocks like hawkish monetary moves and weak
  corporate earnings.
• At-the-money implied volatility in the $14.9 billion iShares iBoxx High Yield Corporate Bond ETF has more than halved since the December maelstrom and now sits below historic averages.
• While a resurgence in risk appetite and benign technical have powered a 4.9 percent return this year alone, the rally’s staying power is in question.

(Fortune)  T-Mobile CEO to Congress: We Won’t Use Huawei Equipment After Sprint Acquisition 

• T-Mobile US Chief Executive Officer John Legere says his company doesn’t use equipment from Huawei Technologies Co., and won’t after buying Sprint Corp. to form a bigger No. 3 in the U.S. wireless market.
• “Let me be clear—we do not use Huawei or ZTE network equipment in any area of our network. Period. And we will never use it in our 5G network,” Legere said in written testimony prepared for a hearing Wednesday before the House communications subcommittee.
• The statement is in response to critics who’ve raised the issue of the Chinese equipment maker as a risk to national security to build opposition to the proposed $26.5 billion merger.
• Sprint parent SoftBank Group has “significant ties” to Huawei, as does T-Mobile parent Deutsche Telekom AG, according to Carri Bennet, general counsel for the Rural Wireless Association that represents smaller competitors to the merging parties.
• “Allowing a Japanese-influenced company and German-influenced company to merger when both have significant 5G ties to Huawei appears to run counter to U.S. national security concerns,” Bennet said in testimony submitted for the hearing.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $4.0 billion and year to date flows stand at $8.2 billion.  New issuance for the week was $3.7 billion and year to date HY is at $19.7 billion, which is -27% over the same period last year.

(Bloomberg)  High Yield Market Highlights

• Funds reported the highest weekly cash inflows since mid-2016.
• Investor exuberance was evident as CCC rated Clear Channel priced at lower end of talk after receiving orders of more than $5b for a $2.2b deal, which grew to $2.235b
• Price talk tightened from the initial whisper of 10%.
• CommScope priced a 3-part offering at the tight end of talk after receiving orders of ~$8b
• Yields and spreads came under pressure, as the supply surge combined with tumbling stocks and lower oil
• Yields and spreads rose across ratings and saw the biggest jump in almost seven weeks
• Junk bond returns turned negative across the risk spectrum for first time in almost 2 weeks
• High yield still is the best- performing asset in fixed income, with 4.93% return YTD
• CCCs remains on top, with YTD return of 5.73%
• High yield also ahead of leveraged loans, which have returned 2.84% YTD

(Bloomberg)  Arconic Replaces CEO Again, Extending Tumult After Apollo Snub 

• Arconic Inc. named current Chairman John Plant to serve as chief executive officer, ousting Chip Blankenship just a little more than a year after he took the helm at the embattled manufacturer.
• Plant, the company’s fourth CEO in less than two years, is expected to serve in the top post for a year, the company said in a statement Wednesday. Elmer Doty, a director, was named chief operating officer, while Arthur Collins Jr., also on the
  board, becomes lead director.
• The management overhaul comes about two weeks after Arconic backed out of late-stage talks to sell itself to Apollo Global Management, an announcement that sent the shares tumbling the most in eight months.
• Arconic plans to provide an update on its strategy and portfolio review when it reports earnings on February 8th.

(Bloomberg)  Arconic to Split Into Two Companies, Slash Dividend in Revamp 

• Arconic Inc. plans to break into two separate companies and will slash its dividend by two-thirds, marking a dramatic overhaul of the aerospace manufacturer in the wake of its failed sale to a private equity firm.
• The company will separate into Engineered Products & Forgings and Global Rolled Products businesses, one of which will be spun off, Arconic said Friday in a statement.
• The parts maker will consider a sale of any operations that don’t fit into one of those businesses.

(Verdict Foodservice)  Aramark reports $4.3bn revenue in Q1 2019 

• US-based foodservice company Aramark has reported revenue of $4.3bn in the first quarter of 2019 ending 28 December 2018, an 8% increase from the same period in the previous year.
• The catering company has also reported operating income of $373.36m, a 72% rise from $216.87m for the same period in the previous year.
• Aramark chairman, president and CEO Eric J Foss said: “2019 is off to a good start, with broad-based momentum across the portfolio, driven by strong base business performance and progress in our integration of Avendra and AmerPride.
• “We continue to elevate the consumer experience by enhancing our product offerings, obsessing on service excellence, and innovating with new technologies.”
• “Aramark benefits from an advantaged business model and excellent financial flexibility. As we look ahead to the full year, we expect to deliver solid financial performance that will drive sustainable shareholder value.”
• Furthermore, the foodservice company has received $293m of proceeds from the sale of its Healthcare Technologies business. It used a majority of the proceedings to reduce debt.

(PR Newswire)  Suburban Propane Partners, L.P. Announces First Quarter Results

• In announcing results, President and Chief Executive Officer Michael A. Stivalasaid, “Positive momentum from fiscal 2018 carried into the fiscal 2019 first quarter.  The first quarter of fiscal 2019 was characterized by colder-than-normal temperatures early in the quarter followed by significantly warmer temperatures during the month of December as compared to the prior year.  Despite this inconsistent weather during the quarter, we were very pleased to deliver another solid performance with results that were flat to the prior year first quarter. Our operations personnel continue to do an excellent job delivering outstanding service to our customers and the communities we serve, adapting our business plans to the weather-driven demand and executing on our customer base growth and retention initiatives.”
• Stivala continued, “There is still a significant amount of the heating season in front of us.  Our business is extremely well-positioned to meet the needs of our customers while, at the same time, pursuing growth through new market expansion and strategic acquisitions.”
• Revenues in the first quarter of fiscal 2019 of $377.1 million increased $3.8 million, or 1.0%, compared to the prior year first quarter, primarily due to higher average retail selling prices. Cost of products sold for the first quarter of fiscal 2019 of $182.6 million increased $17.4 million, or 10.5%, compared to the prior year first quarter.
• Combined operating and general and administrative expenses of $115.9 million for the first quarter of fiscal 2019 increased a modest $0.7 million, or 0.6%, compared to the prior year first quarter, primarily due to higher vehicle maintenance and fuel costs.