Author: Rich Balestra - Portfolio Manager

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$2.1 billion and year to date flows stand at -$39.6 billion.  New issuance for the week was $5.0 billion and year to date HY is at $158.1 billion, which is -30% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• Junk bond returns took a beating yesterday, with CCCs losing most and yields rising across ratings amid fund outflows, equity volatility and disappointing earnings. This morning’s drop in U.S. equity futures keeps the pressure on.
• Junk bond spreads widened and yields rose across the risk spectrum as equities dropped more than 4% mid week and the VIX jumped 27%
• Stocks recovered a bit, while VIX remains above 20
• October saw the fourth biggest outflow on record and MTD outflow was $5.4b
• While high yield investors turned cautious, lack of supply is supportive
• This was the slowest October since 2015 with $8.4 billion MTD of issuance
• YTD volume at $158b was the lowest since 2009

(Reuters)  Leverage rising on US buyout loans after regulation relaxed

• Leverage ratios on private equity-backed deals are rising again as banks compete more aggressively for lucrative private equity loans after regulators relaxed leveraged lending guidelines earlier this year.
• The guidelines were put in place in 2013 to limit systemic risk and prevent a re-run of the financial crisis, but were relaxed in February
• In the first nine months of 2018, the guidelines’ original limit of 6.0 times leverage was exceeded by a record 73.1% of private equity buyout loans, up from 64.2% in 2017. This exceeds the previous peak of the market in 2007 immediately before the financial crisis, when 61.5% of deals were levered at that level, according to LPC data.
• “The shackles have been taken off,” a banker said.
• Strong investor demand for floating rate leveraged loans is exceeding a limited supply of deals as cash continues to pour into the asset class in a rising interest rate environment. Toppy equity markets mean that private equity firms are paying high enterprise valuations, which is producing more highly leveraged loans as banks compete for mandates.
• The most aggressive highly leveraged deals are also setting new records with 41.4% of sponsored deals carrying leverage of more than 7.0 times. This eclipses the market’s previous high in 2007, when 38.5% of deals reached that level.
• When the guidelines came into effect in 2013, deals with debt-to-Ebitda leverage ratios of more than 6.0 times received unwelcome extra scrutiny from regulators including the Office of the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corp.
• Regulated banks were instructed to make sure that all the company’s secured debt, or half of total debt, could be paid down within five to seven years and explain any exceptions on ‘criticized’ deals.
• This immediately handed a competitive advantage to institutions not subject to the guidelines, which were able to lead more highly leveraged loans than regulated banks.
• That edge disappeared in September, when the Fed and the OCC said the guidelines are not technically rules, following February’s comments by Comptroller of the Currency Joseph Otting that banks could underwrite outside the guidelines as long as they did so prudently and had capital to support it.

(Bloomberg)  NeoTract Welcomes UK Government Announcement to Remove Barriers to Adoption of the UroLift® System

• A new Government scheme announced today selects the UroLift^®System as one of seven innovations across all specialisms that are the most transformative for NHS patients
• The UroLift System will now benefit from support from the Accelerated Access Collaborative to rapidly increase its uptake in the NHS. This enables transformative products to reach patients as quickly as possible through streamlined regulatory and market access decisions.
• Neil Barber, Consultant Urologist, Frimley Health NHS Foundation Trust, was the first surgeon to routinely offer the UroLift System on the NHS. Mr. Barber said, “I am very pleased by this news. Having been involved in the initial European randomized clinical trial, the potential benefits of the UroLift System to both patients and the NHS quickly became very clear.

(Bloomberg)  At Sell-Off’s Core Is an Earnings Season That’s Consoling No One

• A quarter of the way through earnings season and 10 months into what is sure to be the biggest year for profit growth this decade, the numbers are strong. The market doesn’t care.
• It sounds astonishing: at a time when S&P 500 operating income is surging more than twice the historical average, stocks have gone nowhere, with both the Dow Jones Industrial Average and S&P 500 erasing their annual gain on Wednesday.
• Confidence in the present is quickly becoming panic about the future, as signs of a tottering real estate market, concern about China’s fragile economy and budding indications of inflation blot out optimism that had lifted the S&P 500 almost 10 percent through September. The VIX is at its highest since February.
• Aspects of the carnage are different from past corrections. The S&P 500 has declined in 19 of 24 days since peaking in September, with bad days landing at almost twice the frequency of the last three corrections. Unlike earlier selloffs, bulls are fighting the Fed. The central bank has lifted rates eight times since 2015 and given no indication it will let up.
• To the extent earnings matter anymore, it’s not this year’s but next year’s, where forecasts for an 11 percent gain are coming under the strictest of scrutiny. Partly it’s the “peak earnings” argument that says the deceleration to roughly half this year’s rate will leave investors with no reason to buy. But it’s also concern that the estimates themselves won’t hold up.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.5 billion and year to date flows stand at -$37.5 billion.  New issuance for the week was zero and year to date HY is at $153.0 billion, which is -32% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• Junk bonds yields rose back towards the recent three-month high amid continuing equity volatility and soft oil prices, despite positive fund flow data.
• Yesterday, Junk bonds fell 0.23%, the most for a day in more than a week
• They were the no new issues for the week
• Month-to-date volume is $5.775b, slowest October since 2015
• High yield was still the best performer in fixed income with a YTD gain of 1.65%
• CCCs beat IG, BBs and single-Bs with 5.16% YTD return, though CCCs also saw the biggest one-day decline in more than a week
• IG returns were negative 3.30% YTD

(CNBC)  Sears files for bankruptcy, and Eddie Lampert steps down as CEO

• Sears Holdings filed for bankruptcy protection early Monday after years of staying afloat through financial maneuvering and relying on billions of CEO Eddie Lampert’s own money. Lampert, who has served as CEO for the past five years, will step down from that post, effective immediately, but remain chairman.
• As part of the bankruptcy, Sears will shutter 142 stores toward the end of the year. It expects to begin liquidation sales shortly.
• Over the years, Lampert shed Sears assets and spun out real estate to pay down the debt. The company still has roughly 700 stores, which have at times been barren, unstocked by vendors who have lost their trust. Many of the stores have never been visited by younger generations of shoppers.
• Lampert, who has a controlling ownership stake in Sears, personally holds some 31 percent of its shares outstanding, according to FactSet. His hedge fund ESL Investments owns about 19 percent.
• But even with the bankruptcy filing, Lampert continues to invest in Sears. The retailer said Monday morning ESL is negotiating a $300 million debtor-in-possession loan to support it through its bankruptcy. That loan comes on top of an additional $300 million it has secured from investment banks.
• Lampert also expressed regret he couldn’t get the necessary parties to agree to his last efforts to stave off bankruptcy.
• The board was in a perilous position. Its special committee had been tasked with approving Lampert’s latest plan, a bid to buy his storied Kenmore appliance business and other brands.
• Approving Lampert’s offer would have helped Sears make its payment. But that would also thrust the board into the spotlight, potentially opening them to the threat of litigation from shareholders who might allege Lampert has stripped the business bare.

(CNBC)  Talk of a US recession in 2020 is a little premature 

• Several analysts have come out of the woodwork in the last few weeks predicting not just a U.S. growth slowdown, but the start of a recession in 2020.
• Is the fiscally turbocharged U.S. growth about to come to an end? The economy is growing at a robust pace of around 3 percent for 2018 and is set to grow at 2.5 percent in 2019 (according to IMF’s latest world economic outlook): a moderation due to waning fiscal impulse and trade wars. But when does a late cycle economy transition into an economy that’s verging on a recession?
• While inflation has been rising, wage growth of sub-3 percent is still far from pre-great financial crisis levels north of 4 percent. In a note published last week, Goldman Sachs Chief U.S. Economist Jan Hatzius remarked that despite the unemployment rate standing the lowest level in 48 years (at 3.7 percent), core personal consumption expenditure (PCE) inflation — the metric the Federal Reserve looks at — has remained steady at around 2 percent.
• Rising wages would typically be associated with a squeeze in corporate profits. Perkins calculates that rising wages have been matched by productivity so there hasn’t been a corporate squeeze yet. In fact profit share, as a percentage of gross domestic product, is about 10 percent higher than it was 20 years ago, according to Perkins. Top-line earnings are still growing.
• That leaves us with asset valuations. Aggregate global debt continues to climb, U.S. asset prices are about 50 percent higher in aggregate than five years ago. And the market is certainly starting to get a little jittery if last week is anything to go by.
• Crucially however, the economy and companies’ revenues are still growing. The labor market is not showing signs of overheating. Therefore, the recession call might be premature.

(MarketWatch)  Fresenius Medical Care cuts view as income falls

• Fresenius Medical Care cut its targets for 2018, as it reported an 8% fall in third-quarter net income.
• According to preliminary figures released late Tuesday, net income at the German company fell 8% and sales decreased 6%.
• On the back of the results, Fresenius Medical Care cut its target for net income growth in 2018 to between 11% to 12%, from a previously guided range of between 13% to 15%. It also now expects revenue growth at between 2% to 3%, down from a previous target of between 5% to 7%.
• Fresenius said its third-quarter results were affected by weaker-than-expected volumes at its Dialysis Services business and contributions to campaigns in the U.S. opposing state ballot initiatives.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $2.3 billion and year to date flows stand at -$34.0 billion.  New issuance for the week was $4.7 billion and year to date HY is at $151.7 billion, which is -27% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• The lowest-rated junk bonds came under pressure, with CCC-rated debt yields hitting a six-month high, as global bond markets sold off. The spread on the Bloomberg Barclays High Yield Index meanwhile hit a fresh 11-year low.
• Triple-C yield jumped to almost 9.3% after the biggest rise in more than seven years
• Treasury moves and drifting stocks pressured junk bonds across ratings, rate-sensitive BBs and single-Bs were hit hardest
• Stocks lost steam amid concerns that Fed hikes, coupled with WTI at a new multi-year high, may cause economic slowdown
• Lack of supply continued, with just Covanta Holding pricing a $400m 8NC3 offering at the tight end of talk after receiving orders of more than $1b
• Junk bond spreads dropped to new lows as the 5Y and 10Y Treasury yields hit a fresh multi-year high yesterday

(Digitimes)  HDD demand for enterprise data centers remains robust, says WD executive

• HDD demand for enterprise data centers continues to be strong, according to Christopher Bergey, executive VP at Western Digital (WD).
• In the enterprise data center segment, HDD demand has as high as 40% annual growth, Bergey said. There is still a gap between SSD and HDD prices, though the industry’s transition to 3D NAND manufacturing has been dragging down SSD prices, Bergey indicated.
• Traditional hard drive storage is well suited for handling massive big data analytics to support machine learning, while solid state storage provides fast read and write speeds to allow fast and efficient decision making, Bergey said.
• Bergey continued that it is difficult to assume SSDs will completely replace HDDs given that the latter has its lower cost per unit storage. While SSDs are set to become a broadly use storage technology, the market for HDDs will become more condensed, Bergey suggested.
• WD is also a SSD provider. Sales of both the company’s SSD and HDD lines continue their growth momentum, Bergey said.

(CNBC)  DaVita shares rise after California bill capping dialysis payments is vetoed

• Shares of dialysis clinic operator DaVita rose more than 3 percent on Monday after California’s governor vetoed a bill that would have cut into its sales.
• The bill, which was vetoed by Gov. Jerry Brown on Sunday, would have limited reimbursements for financial assistance to dialysis patients. That assistance is used by companies to maximize their reimbursements and can drive up premium costs.
• CEO Javier Rodriguez said in a statement the bill “would have harmed thousands of dialysis patients in California by allowing health plans to discriminate against low-income dialysis patients who rely on charitable assistance to pay their insurance premiums.” He also noted the company was “deeply relieved” the bill was vetoed.
• Though this is seemingly a win for DaVita, one of the largest kidney care provider in the U.S., but it all depends on what happens next month. California voters will have a chance to vote on a ballot that would limit how much revenue dialysis providers can earn from commercially insured individuals.

(Bloomberg)  Sky High Valuations in CCC Bonds

• Although the riskiest U.S. corporate bonds have been a great bet this year, some money managers think high valuations mean it’s finally time to sell.
• Company bonds that are the most likely to default, rated in the CCC tier, have gained more than 6% this year including interest, while the rest of the junk-bond universe is up just 2.2%. But Bank of America analysts recently warned that the riskiest junk bonds seem to be losing momentum, and investors should consider switching into safer securities.
• Bank of America strategists led by Oleg Melentyev advised investors last week to trim their exposure to CCC debt, saying that most of the bonds’ gains relative to higher-rated speculative-grade debt occurred in the first half of the year. The current extra return investors are getting to hold the notes isn’t “the right level of compensation for the amount of credit risk investors are taking,” they wrote.

(Bloomberg)  Teleflex Buys Essential Medical; Terms Not Disclosed 

• Teleflex says it acquired privately-held Essential Medical Inc., developer of the “Manta” device.
• Company sees deal modestly adding to constant currency revenue growth and gross margins over multi-year period after the anticipated FDA premarket approval of the Manta device in 2019
• Device “specifically designed for closure of large bore arteriotomies following procedures utilizing devices or sheaths ranging in size from 10F to 18F (with maximum outer diameters up to 25F)”

(Business Wire)  Arconic Announces Sale of Its Texarkana, Texas, Rolling Mill

• Arconic announced today that it has reached an agreement to sell its Texarkana, Texas rolling mill to Ta Chen International, Inc., a U.S. subsidiary of aluminum and stainless steel distributor Ta Chen Stainless Pipe Co., Ltd. Under the terms of the transaction, Arconic will sell Texarkana for approximately $300 million in cash, plus additional contingent consideration of up to $50 million. The transaction is expected to close in the fourth quarter of 2018, subject to receipt of certain regulatory approvals and other customary closing conditions. The Company expects to record a gain on the sale.

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$1.3 billion and year to date flows stand at -$36.4 billion. New issuance for the week was $4.0 billion and year to date HY is at $146.6 billion, which is -27% over the same period last year. 

(Bloomberg) High Yield Market Highlights

• Junk bonds are leading the fixed income pack with a near 2.5 percent return at the end of third quarter, shrugging off fund outflows as issuance remains sparse.
• U.S. corporate high-yield funds saw a $1.3b outflow for the week ended September 26, biggest outflow in more than 10 weeks
• CCCs are the best performing asset in fixed income with YTD return of 5.88%
• Investors appeared wary of aggressive LBO funding after Refinitiv and AkzoNobel, as Envision Healthcare’s $1.625b senior notes offering to fund its buyout by KKR was met with resistance to loose covenants, forcing a cut in the size of the offering by $400m and moving funds to term loan
• Besides issuer-friendly covenants, Envision was weighed down by stalled negotiations with UnitedHealthcare as it threatened to drop the firm from its network
• YTD supply of $147b is the slowest since 2009

(Company Release) CenturyLink Chief Financial Officer Sunit Patel to depart company

• CenturyLink announced that Executive Vice President and Chief Financial Officer Sunit Patel has resigned from CenturyLink after accepting an executive leadership role at another company. Patel’s resignation is effective Sept. 28. CenturyLink will initiate a search process for his replacement that will include both internal and external candidates.
• Neel Dev, CenturyLink’s group vice president of finance, has been named interim CFO effective upon Patel’s departure. Dev served as the integration planning lead for Level 3 in the recent CenturyLink acquisition and currently has responsibility for business unit finance support, supply chain and procurement, capital governance management, budgeting and financial performance analysis and management. He has been part of Patel’s leadership team for 14 years and has more than 20 years of experience in the telecommunications industry, in both financial and operational roles.
• “Sunit has made significant contributions to CenturyLink and Level 3 as CFO, and he has been a valuable partner to both companies and to me,” said Jeff Storey, president and chief executive officer of CenturyLink. “Additionally, Sunit did a great job in building bench strength and an excellent leadership team across the finance organization. As Sunit focused on our external stakeholders, Neel has been our de facto operational CFO and part of my management team for the past ten years. I am highly confident he will continue our drumbeat of financial discipline across CenturyLink with a focus on synergy attainment, operating efficiency and profitable growth.”  

(Company Release) CyrusOne Inc. Prices Public Offering of Common Stock

• CyrusOne announced that it has priced a public offering of 8,000,000 shares of its common stock, of which 5,500,000 shares were offered directly by CyrusOne, and 2,500,000 shares were offered, at the request of CyrusOne, by the Forward Purchaser, at a price to the public of $62.00 per share. CyrusOne granted the underwriters an option to purchase up to 1,200,000 additional shares of its common stock in connection with the offering.
• In connection with the offering of CyrusOne’s common stock, CyrusOne entered into a forward sale agreement with Morgan Stanley (who is referred to in such capacity as the “Forward Purchaser”), with respect to 2,500,000 shares of CyrusOne’s common stock covered by the offering.
• Pursuant to the terms of the forward sale agreement, and subject to CyrusOne’s right to elect cash or net share settlement under the forward sale agreement, CyrusOne intends to issue and sell, upon physical settlement of such forward sale agreement, 2,500,000 shares of its common stock to the Forward Purchaser in exchange for cash proceeds per share equal to the applicable forward sale price, which will initially be the public offering price, less underwriting discounts and commissions, and will be subject to certain adjustments as provided in the forward sale agreement. CyrusOne expects to physically settle the forward sale agreement in full and receive proceeds by September 15, 2019.
• The Operating Partnership intends to use such proceeds to repay borrowings under the senior unsecured revolving credit facility, fund growth capital expenditures related to recently signed leases and for general corporate purposes, which may include funding future acquisitions, investments or capital expenditures.

(CAM Note) On the back of the stock issuance, S&P upgraded the debt of CyrusOne by one notch. The debt is now investment grade at S&P.

(CNBC) Health Management Associates to pay $260 million to settle criminal charges for allegedly defrauding Medicare, Medicaid

• Health Management Associates has agreed to pay more than $260 million to settle fraud charges that included paying kickbacks to physicians and ripping off federal health programs, the Justice Department said.
• HMA, which was acquired by the for-profit hospital Community Health Systems in 2014, paid physicians in exchange for patient referrals and submitted inflated claims for emergency department fees to federal health insurance programs, prosecutors said.
• The agreement announced Tuesday also resolves several outstanding civil claims against the hospital operator, the DOJ said. An HMA subsidiary that operated under the name Carlisle Regional Medical Center additionally agreed to plead guilty to one count of conspiracy to commit health-care fraud.
• “HMA pressured emergency room physicians, including through threats of termination, to increase the number of inpatient admissions from emergency departments — even when those admissions were medically unnecessary,” Assistant Attorney General Brian Benczkowski said in a statement. “Hospital operators that improperly influence a physician’s medical decision-making in pursuit of profits do so at their own peril.”

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $0.3 billion and year to date flows stand at -$35.0 billion. New issuance for the week was $6.4 billion and year to date HY is at $142.6 billion, which is -26% over the same period last year. 

 (Bloomberg) High Yield Market Highlights

• Supply shortage is the continuing theme for U.S. junk bonds, aggravated by more cash flowing into dedicated funds.
• AkzoNobel priced at the tight end of price talk yesterday as investors shrugged off aggressive issuer-friendly covenants
• Orders exceeded $2.5b for the $600m offering
• Covenants allow flexibility to convert asset sale proceeds into restricted payments; permit dividend distribution to sponsor without deleveraging
• Oversubscription on new issues have become common as investors scramble for yield
• This week, orders for Refinitiv’s $2.8b USD tranche exceeded $10b
• Diamondback Energy’s drive-by offering got orders above $2b for a $500m offering, which was increased to $750m
• IGT and Clearway Energy had 3x-4x the size of the offering and priced at tight end of talk
• YTD supply is $142b, down 26% from same time last year, lowest since 2009
• Junk bond spreads, yields little changed across ratings
• CCCs beat BBs and single-Bs and remained the best performing asset, with YTD returns of 5.59%, a new YTD high
• IG down 2.62% YTD
• High yield supported by low default rate, strong corporate earnings, steady U.S. growth
• Moody’s expects default rate to fall to 2.6% by year-end and 2.2% in August 2019

(Bloomberg) Supply Dearth Elevates Junk Bonds to Top Fixed Income Performer

• Buy U.S. junk bonds — they’re not selling enough of them.
• Investors who followed that logic this year are enjoying the best returns anywhere in fixed-income, as high-yield issuance runs much slower than in 2017.
• September, traditionally a busy month for supply, has been the slowest since 2011
• Volume is down after years of refinancing and a lack of LBO activity
• Some financing is being done in the loan market instead of bonds
• The shortage has pushed investors to reach for yield and give less regard to risk

(Reuters) Cheniere signs 15-year LNG deal with oil trading giant Vitol

• U.S.-based Cheniere Energy Inc said that it has signed a 15-year agreement to supply liquefied natural gas (LNG) to the world’s largest oil trader Vitol Group that has been steadily ramping up its presence in that market.
• The move by Vitol is part of a long-term objective shared by many major commodity traders to increase their traded gas volumes as emerging markets seek cleaner fuels for power generation.
• China in particular has soaked up what many analysts expected to be a significant LNG glut this year as it replaces some of its coal furnaces with gas-fuelled ones.
• Part of the drive for traders is that the LNG market is becoming increasingly liquid with more spot deals, presenting arbitrage opportunities and supply imbalances that traders thrive off.
• Cheniere said it will sell 700,000 tonnes of LNG per year to Vitol, starting in 2018 with a purchase price pegged to the Henry Hub monthly average, plus a fee.

(Health Imaging) TriMedx to buy Aramark healthcare division, including imaging tech services, for $300M

• TriMedx announced plans to buy the healthcare technologies division of Aramark Corporation for $300 million. The two companies have signed a definitive agreement and expect the transaction to be completed by the end of the year.
• Aramark’s Healthcare Technologies business, which it acquired in 2001, maintains and services imaging equipment and provides management programs for clinical equipment. TriMedx specializes in clinical asset management and clinical engineering services.
• “We are excited to bring our technology and service model to a greater number of healthcare providers, delivering a comprehensive and differentiated clinical asset management program in an ever-changing environment,” said Henry Hummel, CEO of TriMedx, in a company statement. “We look forward to Aramark HCT’s talented associates joining the TRIMEDX team to support our strategic operating model focused on partnering with healthcare providers to drive measurable and persistent value.”
• Aramark executives announced plans to use the proceeds of the sale to pay down debt and buy back $50 million in shares.
• “Today’s action is another demonstration of the clear and focused strategy we are following that has substantially elevated our operating performance and is driving Aramark’s success,” said Eric J. Foss, chairman, president and CEO, in a prepared statement. “The divestiture of our Healthcare Technologies business will further focus our portfolio around our core food, facilities and uniforms businesses. I want to thank and congratulate our HCT team members for their contributions to Aramark and wish them continued success.”

(Business Wire) AMC Entertainment Closes on $600 Million Strategic Investment from Silver Lake 

• AMC issues $600 million Senior Unsecured Convertible Notes due 2024 to Silver Lake bearing interest at 2.95% and convertible into AMC Class A common stock at $20.50 per share, before giving effect to the special dividend noted below; with ongoing cash interest expense of the Notes to be more than offset by the cash dividend savings no longer being paid on the AMC shares repurchased from Wanda.
• On September 28, 2018, AMC will pay a special dividend of $1.55 per share to all AMC Class A and Class B common shareholders of record as of September 25, 2018. The special dividend will not be paid to Wanda on the shares repurchased by AMC.
• Silver Lake, a private equity firm with over $40 billion of invested or committed capital, and a global leader in technology investing, receives one seat on the AMC Board and a two-year right of first refusal on certain future transfers of AMC shares by Wanda.
• With support from Silver Lake in identifying candidates, AMC will add a new independent Director to its Board who will have significant technology experience and knowledge.
• Wanda and Silver Lake are both wholly committed to continuing AMC’s current growth strategies under the leadership of AMC CEO and President Adam Aron and AMC’s senior management team.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.2 billion and year to date flows stand at -$34.6 billion.  New issuance for the week was $2.7 billion and year to date HY is at $136.1 billion, which is -23% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• The junk-bond index spread fell to just by 13 basis points wide of the post-crisis low as equities neared record highs and volatility declined for a fourth consecutive session.
• Bloomberg Barclays US Corporate High Yield Bond Index spread fell to 324bps, from 336bps 1 week earlier
• Post-crisis low was 311bps on Jan. 26
• Lipper reported an outflow from U.S. high yield funds for week ended September 12, the second consecutive week of outflow
• Supply slowed, with just $6b pricing MTD, another $6b waiting to price, led by Thomson Reuters
• MTD volume of $6b was a drop of more than 66% over comparable last year
• YTD volume stood at $136b, 23% drop year-over-year
• Supply-starved investors made beeline to Refinitiv/Thomson Reuters with orders of ~$6b for the 1st lien USD tranche, $4b for the USD senior unsecured tranche amid expectations that it would price tighter than initial price talk of 7% area and 9% area, respectively
• Risk appetite evident in demand for Carvana, a CCC-credit, which had orders more than 3x the size of the offering
• This followed Pacific Drilling adding a PIK tranche, first since May
• CCCs continued to outperform BBs and single-Bs with YTD return of 5.17%
• Investment-grade bonds are down 2.23% YTD
• Junk bonds supported by low default rate, strong earnings, steady U.S. growth
• Moody’s expects default rate to fall to 2.6% by year-end and 2.2% in August 2019

(Bloomberg)  United Rentals Expands Footprint With $2.1 Billion Purchase

• United Rentals Inc. agreed to buy competitor BlueLine Rental for $2.1 billion to bolster its industrial- equipment reach across North America.
• The cash purchase will add about 46,000 rental assets to the buyer’s fleet in areas such as the U.S. coasts and Ontario, the companies said in a statement. The deal with private- equity firm Platinum Equity, which was approved by United Rentals’ board, is expected to close in the fourth quarter.
• United Rentals, already the country’s largest equipment- rental company by market share, has been looking to augment its growth across North America with targeted acquisitions. Since the beginning of last year, it has purchased Miami-based Neff Corp. for $1.3 billion, Chicago’s NES Rentals Holdings II for $965 million and BakerCorp International Holdings Inc., based in Seal Beach, California, for $715 million.
• The latest deal will add 114 BlueLine locations to United Rentals’ stable across 25 U.S. states, Canada and Puerto Rico.
• The transaction, which isn’t conditioned on financing and will be funded with newly issued debt and bank borrowing, will immediately increase United Rentals’ earnings, the company said.
• “The deal makes strategic sense for United Rentals, but will keep a brake on its credit profile and bond-performance potential in the near term,” Joel Levington, a credit analyst for Bloomberg Intelligence, said in a note.
• United Rentals plans to pause its $1.25 billion share repurchase program when the deal closes to allow the company to integrate the acquisition and “assess other potential uses of capital.”

(Business Wire)  HCA Healthcare Chairman and CEO Milton Johnson to Retire 

• Sam Hazen, the company’s president and chief operating officer, will succeed R. Milton Johnson as CEO on January 1, 2019; he has also been appointed a member of the board of directors
• Johnson will retire as CEO, effective December 31, 2018; he will continue as chairman of the board of directors through the company’s 2019 annual shareholders’ meeting on April 26, 2019
• At the company’s 2019 annual shareholders’ meeting, Johnson will retire from the board of directors; on that same date, the board of directors plans to appoint Thomas F. Frist III, a current board member, to be chairman of the board of directors.
• Hazen has been with the company for almost 36 years. Prior to his present position as president/COO, he served as the company’s chief operating officer, president-operations, Western Group president and Western Group CFO.

(Reuters)  Dalian Wanda trims AMC stake 

• Chinese billionaire Wang Jianlin’s real estate-to-media conglomerate Dalian Wanda Group is exploring a deal to cut its stake in AMC Entertainment Holdings, the world’s largest cinema operator.
• The move is the latest sign of how Wanda, like many of its Chinese peers, is under pressure from the country’s regulators to reduce overseas holdings after embarking on a major acquisition spree in the United States and Europe.
• Wanda is exploring a deal in which AMC would borrow hundreds of millions of dollars through a convertible bond, and then use that money to buy back some of Wanda’s 60 percent stake, sources said yesterday. Wanda controls AMC through its ownership of Class B shares, and aims to retain control after any deal, the sources added.
• Private equity firms, including Silver Lake Partners and Apollo Global Management, are in talks with AMC about making the debt investment, the sources said. They could obtain board representation at AMC as part of any deal, the sources added.

(Bloomberg)  Hershey to Acquire Pirate Brands From B&G Foods 

• Hershey agreed to acquire Pirate Brands, including the Pirate’s Booty, Smart Puffs and Original Tings brands, from B&G Foods for $420 million.
• Hershey expects the acquisition to add to its financial targets
• Transaction will be financed with cash on hand and short-term borrowings
• Deal expected to close in the fourth quarter of 2018

CAM High Yield Market Note

9/7/2018

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.7 billion and year to date flows stand at -$34.7 billion. New issuance for the week was $2.2 billion and year to date HY is at $133.4 billion, which is -23% over the same period last year. 

(Bloomberg) High Yield Market Highlights

• Junk bonds remained impervious to drifting stocks, rising VIX and falling oil prices as the supply-starved primary priced three drive-by bond offerings yesterday, suggesting healthy appetite for risk.
• Junk investors shrugged off outflows from retail funds
• Lipper reported outflows for week ended September 5, the first negative in five weeks
• Dollar books on Thomson Reuters, rated CCC, are already oversubscribed 4-5 times, amid expectation that it will price tighter than initial price talk
• Investors ignored high leverage, focused on cash flow, subscriber base
• Earlier in the week, Intelsat, rated triple-C, got orders of more than $4b for a $2b offering
• Supply is expected to pick up momentum
• September is typically busiest or second busiest month
• Supporting high yield are earnings, low default rate
• CCCs beat BBs and single-Bs with YTD return of 4.60%
• Investment-grade bonds were down 2.1% YTD

• (PR Newswire)   U.S. Concrete Strengthens Aggregates Operations with Strategic Acquisition in Texas

• US Concrete a leading national supplier of ready-mixed concrete and aggregates, today announced that it has expanded its aggregates business in Texas with the acquisition of Leon River Aggregate Materials, LLC (“Leon River”), a sand and gravel producer based in Proctor, Texas. The acquisition adds over 400 acres of land with reserves to the Company’s operations and a state-of-the-art processing plant to achieve the highest efficiencies.
• Furthermore, U.S. Concrete also announced that it has completed the divestiture of its Dallas/Fort Worth area lime operations to Lhoist North America, which includes two fixed plants, lime tankers and raw material tankers.
• “We are excited to strengthen our aggregates operations in West Texas and to use the processing facility to produce high-quality materials that will be used in many of the market’s ongoing and planned construction projects,” said William J. Sandbrook, Chairman, President and CEO of U.S. Concrete. “The lime divestiture gives us the ability to further our strategic focus of optimizing our portfolio of assets and allocating money directly to growing our aggregates business while concurrently improving our balance sheet by reducing debt.”  

• (Digitimes) Samsung, SK Hynix reportedly to defer expansion plans

• Samsung Electronics and SK Hynix both intend to defer their capacity expansion plans, as a slowdown in customer demand will be dragging down DRAM and NAND flash memory prices through the first half of 2019, according to industry sources.
• The global NAND flash market has remained in oversupply in the third quarter of 2018 despite the period being the traditional peak season, the sources said. Suppliers’ continued ramp-ups of 64- and 72-layer 3D NAND flash output coupled with the limited demand growth due to the saturated notebook and smartphone markets are being identified as the factors bringing down the memory prices.
• Meanwhile, the industry supply chain is flooded with substandard NAND flash chips, which have made a further negative impact on the memory prices, the sources noted. NAND flash contract prices are likely to fall by a larger-than-expected 10-15% sequentially in the third quarter and another 15% in the fourth, the sources said.
• Industry leader Samsung, which used to supply 3D NAND chips for its own SSDs and other products, has started shipping the memory externally in the third quarter of 2018, according to the sources. Samsung is also slowing down the pace of expanding its 3D NAND chip output, with new production capacity unlikely to go online until the first half of 2019, the sources said.
• Samsung has also put on hold its plans to build additional new production capacity for DRAM chips at its fabs in Hwaseong and Pyeongtaek, the sources continued. The chip vendor previously planned to build an additional 30,000 wafers monthly for DRAM memory starting the third quarter of 2018, the sources said.

(Barron’s) Western Digital, Seagate Slump on Gloomy Evercore Forecast

• Shares of Western Digital (WDC) and Seagate Technology (STX) were battered Tuesday after a report from Evercore ISI warned of declining profit margins for both makers of hard drives and flash memory storage devices.
• Seagate’s stock was down 8.6% to $48.92; Western Digital dropped 6.2% to $59.33.
• Evercore downgraded its rating to “underperform” for Seagate while lowering its price target to $45 from $55. It wasn’t much better for Western Digital, whose stock was lowered to “in line.” The price target was sliced to $75 from $100.
• “With topline likely flattish at best, GMs [gross profit margins] heading lower, and worse than expected NAND [flash memory] pricing driving increased potential for cannibalization of HDDs [hard disk drives], we see risk to the downside for Seagate after an excellent run,” Evercore analyst C.J. Muse warned in a note to clients Tuesday. “With NAND pricing expected to decline more aggressively through 1H19 … we simply find it hard to see [Western Digital] shares working into year-end.”
• Muse expects average selling prices for NAND flash memory to dip by a “low double digit” percentage in the first half of 2019, as they did from late 2014 through early 2015.

• (Bloomberg) Seagate Downgraded to Underperform at Evercore ISI

• Evercore ISI analyst C.J. Muse downgraded the recommendation on Seagate Technology to underperform from in-line.
• PT lowered to $45 from $55, implies 16% decrease from last close.
• Analysts raised their consensus one-year target price for the stock by 6.1 percent in the past three months.
• Investors who followed Muse’s recommendation received a 0 percent return in the past year, compared with a 79 percent return on the shares. 

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $0.4 billion and year to date flows stand at -$33.5 billion. New issuance for the week was $0.0 billion and year to date HY is at $131.2 billion, which is -24% over the same period last year. 

(Bloomberg) High Yield Market Highlights

• U.S. high-yield bond activity was muted this week, with no pricings or launches to speak of in the market. Issuance so far this year is the lowest YTD total since 2010
• YTD total return is 2.05%
• Yields gained across ratings

(Reuters) Aluminum products maker Arconic in talks to sell itself

• Aluminum products maker Arconic Inc is discussing acquisition offers for the entire company, even though it announced a sale process last month only for its building and construction systems unit, people familiar with the matter said.
• The move comes after Arconic, which was spun out of Alcoa Corp in 2016, said in February it would carry out a “strategy and portfolio review,” to be completed by the end of 2018, but has provided little detail about what this entails.
• Arconic is speaking with private equity firms that have shown interest in acquiring the company, including a consortium of Blackstone Group LP and Carlyle Group LP, another consortium of KKR & Co and Onex Corp, as well as Apollo Global Management LLC, the sources said.  

(Chicago Business Journal) After scotched $3.9B merger, Sinclair-Tribune in dueling lawsuits

• After the proposed $3.9 billion acquisition of Tribune Media Company by Sinclair Broadcast Group Inc. went south earlier this month, the two media giants have filed dueling lawsuits.
• On Aug. 9, Chicago-based Tribune Media sued Maryland-based Sinclair for $1 billion for breach of contract and misconduct “to hold Sinclair accountable” after the $3.9 billion deal fell apart.
• It fell apart mainly because in July FCC Chairman Ajit Pai expressed “serious concerns” about the Sinclair-Tribune Media deal and ordered a hearing on the deal in front of an administrative law judge that essentially killed the deal.
• Sinclair fired back at Tribune Media, filing a countersuit in the Delaware Court of Chancery, claiming that the Chicago media company “is seeking to capitalize on an unfavorable and unexpected reaction from the Federal Communications Commission to capture a windfall for Tribune.”
• In a statement, Chris Ripley, president and CEO, says Sinclair “fully complied with our obligations under the merger agreement and worked tirelessly to close the transaction.”  

(Modern Healthcare) California Assembly passes bill to cap dialysis reimbursement

• In a major blow to dialysis giants DaVita Healthcare Partners and Fresenius Medical Care, the California Assembly late Wednesday passed a bill to crack down on third-party premium assistance for dialysis and cap providers’ reimbursement to Medicare rates if they don’t comply with the mandate.
• The legislation now has a good chance of getting signed into law by Democratic Gov. Jerry Brown. It would serve as a landmark victory for insurers and unions in the long-brewing battle with the dialysis industry. The bill takes aim at the American Kidney Fund, a not-for-profit that subsidizes individual market premiums for dialysis patients who are covered by Medicare and Medicaid. DaVita and Fresenius are major contributors to the organization, and insurers accuse them of using Obamacare’s guaranteed issue provision to game the system and steer patients into plans that will bring in more profits.
• The bill isn’t the only battle DaVita and Fresenius are fighting in California. There is also Proposition 8, a ballot measure pushed by one of the country’s largest hospital unions, Service Employees International Union–United Healthcare Workers West (SEIU). The measure would slash dialysis reimbursement to 115% of cost, and a healthcare coalition backed by DaVita and Fresenius said the measure could bleed losses for the dialysis corporations, hospitals and even state and federal coffers.
• The union tried to secure similar ballot initiatives in Arizona and Ohio but failed. In California, dialysis and union groups have spent more than $40 million in the advertising fight over the initiative.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.0 billion and year to date flows stand at -$34.0 billion.  New issuance for the week was $0.0 billion and year to date HY is at $131.2 billion, which is -24% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• The U.S. junk bond primary market seems closed for business for the rest of August, as is typical for this time of year since at least 2014. No no issues were priced this week for the third time in 2018. This has been the slowest August since at least 2015, with just $14.7b pricing.
• Yields dropped for five straight sessions across ratings and spreads tightened amid light trading
• CCCs continued to beat BBs and single-Bs, BB returns turned positive this week for the first time in seven months
• CCCs were on top with a YTD return of 4.51%
• Investment- grade bonds were down 1.55% YTD

(USA Today)  U.S. prison strike prompts solidarity rallies

• A nationwide prison strike is ongoing, and while there’s no official count of the number of inmates who have acted thus far, solidarity rallies have popped up across the U.S. in an attempt to pressure the nation’s criminal justice system.
• The goal of protesters is to put an end to what organizers refer to as “modern-day slavery,” a practice where inmates are paid slave wages for labor. Such is the case in California, where prisoners are assisting in efforts to fight wildfires and being paid as little as $2 per day.
• “I think the outcome is likely to be greater public awareness about the difficult and inhumane conditions that many prisoners face across the country – an elevated public attention to the broad issues as well as some of the more specific concerns that prisoners themselves have raised,” said Toussaint Losier, assistant professor of Afro-American Studies at the University of Massachusetts and author of “Rethinking the American Prison Movement.”
• While inmates inside detention centers peacefully protest, activists outside of the penal system are working to raise awareness by holding rallies in various city squares and outside correctional facilities.
• The demands, a total of 10, were arranged by the inmate-based organization Jailhouse Lawyers Speak. The demands include the immediate improvement of prison policies, an increase in prisoner wages and rescinding laws that prevent imprisoned persons from having a chance at parole.
• The inmates also are calling for more rehabilitation services and voting rights.
• The final day of the strike – Sept. 9 – also carries symbolism. That’s the day in 1971 that the Attica Prison riots began in New York, eventually leaving more than 40 people dead when police stormed in to re-take the facility.

(Bloomberg)  Skittish In the Leveraged Loan Market

• For much of the past year,loan investors have been pushovers. Now, they’re showing signs of pushing back.
• Money managers have demanded better terms on a spate of deals this week, including a $1.475 billion loan for the buyout of chemicals company SI Group. Prices for the debt have fallen in August. And underwriters had to boost rates on 16% of the leveraged loan deals they were syndicating to lure investors, data compiled by Bloomberg show. That’s the worst since 2015, when oil prices were nosediving and credit markets broadly sold off as they braced for Fed tightening.
• The market is still strong by many measures, but cracks may be developing in one of the best performing fixed-income markets in the U.S. this year. The pipeline of loans linked to acquisitions for syndication after the Sept. 3 Labor Day holiday is about twice the size of last year’s, with about $27 billion teed up as of last week — so supply is likely to be strong.
• With the Federal Reserve hiking rates, money managers have piled into investments like loans, which pay higher interest as central banks tighten, and into collateralized loan obligations. That demand has lifted the size of the U.S. leveraged loan market to around $1.3 trillion — now larger than the high-yield bond market — and spurred some companies to take out loans instead of selling bonds.
• But that trend may reverse as the Fed shows signs of being closer to the end of its rate hiking process

(CAM Note)  Suburban Propane’s rating outlook moved from negative to stable at S&P

• The revised outlook was due in part to credit positive steps that Suburban has taken to reduce distributions, reduce leverage, increase flexibility, and stabilize margins.

(CNN)  Toll Brothers’ record shows the American housing boom has no end in sight

• Unemployment keeps falling and home prices keep going up. It’s a great recipe for a strong housing market.
• Nothing has been able to stop the housing boom — not even higher interest rates.
• Luxury home builder Toll Brothers (TOL) said Tuesday that demand for its houses was strong across the country — the company signed a record number of contracts last quarter.
• Toll Brothers reported quarterly financial results that easily topped forecasts and raised its outlook for the year, citing a backlog of new homes for the third quarter.
• Higher rates do not seem to be an issue for prospective buyers, mainly because the job market remains strong and housing prices are rising.
• The only weak spot was California, where demand cooled a bit.