Category: Insight

23 Jan 2020


In the fourth quarter of 2019, the Bloomberg Barclays US Corporate High Yield Index (“Index”) return was 2.62% bringing the year to date (“YTD”) return to 14.32%. The CAM High Yield Composite gross total return for the fourth quarter was 2.37% bringing the YTD return to 16.31%. The S&P 500 stock index return was 9.06% (including dividends reinvested) for Q4, and the YTD return stands at 31.48%. The 10 year US Treasury rate (“10 year”) drifted higher throughout the quarter finishing at 1.92%, up 0.26% from the beginning of the quarter. During the quarter, the Index option adjusted spread (“OAS”) tightened 37 basis points moving from 373 basis points to 336 basis points. During the fourth quarter, each quality segment of the High Yield Market participated in the spread tightening as BB rated securities tightened 33 basis points, B rated securities tightened 46 basis points, and CCC rated securities, tightened 22 basis points. 

The Banking, Finance, and Basic Industry sectors were the best performers during the quarter, posting returns of 3.56%, 3.54%, and 3.25%, respectively. On the other hand, REITs, Communications, and Other Financial were the worst performing sectors, posting returns of 1.30%, 1.74%, and 2.00%, respectively. At the industry level, autos, wirelines, pharma, and oil field services all posted the best returns. The automotive industry (4.97%) posted the highest return. The lowest performing industries during the quarter were tobacco, retail REITs, leisure, and cable. The tobacco industry (-3.08%) posted the lowest return. 

During the fourth quarter, the high yield primary market posted $81.4 billion in issuance. Issuance within Consumer Discretionary was the strongest with 18% of the total during the quarter. The 2019 fourth quarter level of issuance was much more than the $16.9 billion posted during the fourth quarter of 2018. Wall Street strategists are calling for slightly less overall issuance in 2020. However, the issuance is likely to remain focused on refinancing. 

The Federal Reserve held two meetings during Q4 2019, and the Federal Funds Target Rate was reduced 0.25% at October meeting and held steady at the December meeting. The rate reduction marked the third move lower of the Target Rate in 2019. While the past four Fed meetings had dissenting members, the vote to hold steady was unanimous among the voting members. Chairman Powell commented, “our economic outlook remains a favorable one despite global developments and ongoing risks. As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy likely will remain appropriate.” Although Chair Powell’s comments point to the Fed continuing to hold rates flat; as of this writing, investors are pricing in a 54% probability of a cut by the FOMC during 2020.i While we are interest rate agnostic and do not attempt to time interest rate movements, we are very aware of the impact Fed policy has on the markets. Therefore, we will continue to monitor this very important theme throughout 2020. 

While the Target Rate moves tend to have a more immediate impact on the short end of the yield curve, yields on intermediate Treasuries increased 26 basis points over the quarter, as the 10-year Treasury yield was at 1.66% on September 30th, and 1.92% at the end of the quarter. The 5-year Treasury increased 15 basis points over the quarter, moving from 1.54% on September 30th, to 1.69% at the end of the quarter. Intermediate term yields more often reflect GDP and expectations for future economic growth and inflation rather than actions taken by the FOMC to adjust the Target Rate. Inflation as measured by core CPI has been testing the upper bound of the last several years. The most recent print was 2.3% as of the December 11th report. The revised third quarter GDP print was 2.1% (quarter over quarter annualized rate). The consensus view of economists suggests a GDP for 2019 around 1.8% with inflation expectations around 2.1%. 

The chart above shows that two year to ten year Treasury spread has reached the highest level in over a year. It seems like ages since a main theme was yield curve inversion. The dip in the ratio through August was “driven by deepening pessimism over the global outlook amid rising trade tensions and a string of weak manufacturing data.”ii Since that time, China and the U.S. have reached agreement on Phase 1 of a trade deal, the Fed has begun lowering rates for the first time in over a decade, and investor sentiment has improved.

President Trump was impeached by the House of Representatives in December. The market shrugged off the news fully expecting the Senate to provide an acquittal. Meanwhile, the agreed upon Phase 1 trade deal “will see lower U.S. tariffs on Chinese goods and higher Chinese purchases of U.S. farm, energy and manufactured goods.”iii Additionally, intellectual property protections are to be increased by the Chinese. Across the Atlantic, Brexit is looking more and more likely. Britain’s exit from the European Union still has some hurdles to jump, but U.K. Prime Minister Boris Johnson is pressing to deliver by the January 31, 2020 cutoff.

Being a more conservative asset manager, Cincinnati Asset Management is structurally underweight CCC and lower rated securities. This positioning has served our clients well in 2019. As noted above, our High Yield Composite gross total return has outperformed the Index over the YTD measurement period. With the market remaining robust during the fourth quarter, our cash position remained the largest drag on our overall performance. Further, our structurally underweight of CCC rated securities was a headwind as that group saw a pop in Q4 after lagging in Q2 and Q3. Additionally, our underweight positioning in the energy exploration & production and oil field services industries were a drag on our performance. Further, our credit selections within the consumer non-cyclical sector and wireline industry hurt performance. However, our underweight in the cable industry and our overweight in the consumer cyclical sector were bright spots. Further, our credit selections within the midstream and automotive industries were a benefit to performance. 

The Bloomberg Barclays US Corporate High Yield Index ended the fourth quarter with a yield of 5.19%. This yield is an average that is barbelled by the CCC-rated cohort yielding 10.43% and a BB rated slice yielding 3.63%. Equity volatility, as measured by the Chicago Board Options Exchange Volatility Index (“VIX”), remained fairly muted ending the quarter just under 14 down about 2 points. The fourth quarter had seven issuers default on their debt. The twelve month default rate was 2.63% and has been driven by default volume in the energy and metals & mining sectors. Excluding those two sectors from the data, the default rate would fall to only 1.26%.iv Additionally, fundamentals of high yield companies continue to be mostly good. From a technical perspective, supply has increased from the low levels posted in 2018, and flows have been positive relative to the negative flows of 2018. Due to the historically below average default rates, the higher yields available relative to other spread product, and the diversification benefit in the High Yield Market, it is very much an area of select opportunity that deserves to be represented in many client portfolio allocations. 

With the High Yield Market remaining very firm in terms of performance, it is important that we exercise discipline and selectivity in our credit choices moving forward. With the market seemingly tight on a yield and spread basis relative to the last couple of decades, we are on the lookout for pitfalls as well as opportunities for our clients. The market needs to be carefully monitored to evaluate that the given compensation for the perceived level of risk remains appropriate on a security by security basis. It is important to focus on credit research and buy bonds of corporations that can withstand economic headwinds and also enjoy improved credit metrics in a stable to improving economy. As always, we will continue our search for value and adjust positions as we uncover compelling situations. 

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The index is unmanaged and does not take into account fees, expenses, and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.

i Bloomberg January 2, 2020, 4:00 PM EDT: World Interest Rate Probability (WIRP)
ii Bloomberg December 19, 2019: “Yield Curve Hits Steepest Since 2018 as Inflation Risks Eyed”
iii Reuters December 19, 2019: “China says in touch with U.S. on signing of Phase 1 trade deal”
iv JP Morgan January 2, 2020: “Default Monitor”

23 Jan 2020

2019 Q4 Investment Grade Commentary

Investment grade credit ended 2019 on a high note with another quarter of positive total returns. The Bloomberg Barclays US Corporate Index closed the year at an option adjusted spread of 93, a whopping 22 basis points tighter on the quarter. Treasuries of all stripes sold off during the quarter which mitigated the impact of tighter spreads. The 10yr Treasury closed 2019 at 1.92% after opening the 4th quarter at 1.66%, an increase of 26 basis points. The dichotomy of returns between 2018 and 2019 was stark. While 2018 was a disappointing year with the worst returns for corporate credit in a decade, 2019 was a complete reversal with the best returns in over a decade. For the full year 2019 the Bloomberg Barclays US Corporate Index had a total return of +14.54%. This compares to CAM’s gross total return of +12.78% for the Investment Grade Strategy. 

2020 Outlook 

As long-time readers know, our specialty at CAM is bottom-up credit research. We seek to invest in the most attractive corporate credit opportunities for our clients at any given time with the goal of generating superior risk adjusted returns. Preservation of capital is always at the forefront of our decision making process, which is one of the reasons we are always structurally underweight the riskier BBB portion of the investment grade credit market. We are not in the businesses of making speculative market bets, such as wagering on the direction of interest rates, but we certainly do have a framework and house view that we use to aid in our decision making process. To that end, we thought it would be helpful to explore some of the themes that we believe could influence the direction of the market in 2020. We expect four distinct factors could impact the fortune of the investment grade corporate credit market in the coming year: issuance, fund flows, foreign demand and fundamentals. 

Issuance is Key 

Net issuance is a metric that we track to gauge the availability of new investment opportunities. Net issuance is simply the gross amount of new corporate bond issuance less the amount of debt that matures or that is redeemed through call options or tender offers. Both gross and net issuance have been falling since 2017. 

The net issuance forecast for 2020 is substantially lower relative to 2019 and some predictions have 2020 net issuance coming in at or near 2012 levels A few of the major investment banks are particularly bearish in their forecasts: Morgan Stanley expects net issuance to be down 22%, Bank of America down 21% and J.P. Morgan down a staggering 36%. i The decline in net issuance could be meaningful for the support of credit spreads. If continued inflows into corporate credit meet substantially lower new issuance this could create a supply-demand imbalance. This imbalance would create an environment that lends support to tighter credit spreads. 

Inflows & the Incremental Buyer 

IG fund flows have been broadly positive dating back to the beginning of 2016. The only period of sustained outflows from investment grade in the past four years was during the fourth quarter of 2018 which was a time of peak BBB hysteria.ii iii Over $300bln of new money flowed into IG mutual funds, ETFs and total return funds in 2019, according to data compiled by Wells Fargo Securities. The biggest story of 2019 as it relates to flows is the reemergence of the foreign investor, who has become the most important incremental buyer of IG corporates. 

Foreign investors were largely quiet in 2018 but in 2019 they poured $114bln into the U.S. IG market through the end of the 3rd quarter.iv Two factors have led to resurgence in foreign demand: First, for those investors that hedge foreign currency, the three Fed rate cuts in 2019 have made hedging much more attractive, as hedging costs are closely tied to short-term rates. Second, and perhaps the larger factor, is the negative yields that foreign investors have faced in their domestic markets. Negative yielding debt reached its zenith in August of 2019 at over $17 trillion. Although it has come down substantially, it remained over $11 trillion at year-end relative to $8 trillion at the beginning of 2019.

Obtaining precise information on foreign holdings is difficult due to the myriad of ways that this group can invest in the U.S. markets; but what was once a bit player in our market has now become the single largest class of investor, holding an estimated 30-40% of outstanding dollar denominated IG corporate bonds. To put that into perspective the next largest holder is life insurance companies at just over Simply put, inflows are important in order to provide technical support to the credit market, but the real bellwether for flows is the foreign buyer. If foreign money continues to flow into the $USD market, we would expect continued support for credit spreads. However, if foreign investor sentiment sours, it will create a headwind for spreads. 

Best of Times & Worst of Times 

Although corporate credit performed well in 2019, credit metrics for the index at large have deteriorated and leverage ratios are near all-time highs. We would typically be apt to view such a development through a bearish lens; but the reality is that much of the increase in leverage reflects conscious choices by firms rather than a weakening of business fundamentals. Incentivized by the minimal additional cost incurred for funding a BBB-rated balance sheet relative to an A-rated one, many firms have sacrificed their higher credit ratings to fund priorities such as acquisitions and share repurchases. Investor demand for credit and a prolonged period of historically low interest rates have reduced the financial penalty for moving down the credit spectrum. 

Interestingly, a vast majority of BBB-rated debt has remained in the upper notches of that category. According to data compiled by S&P, just 16% of BBB- rated debt is in the lowest BBB minus category while 47% is mid-BBB and 36% is rated BBB+.vii There will surely be some losers in this bunch which makes the BBB story an idiosyncratic one; managers need to choose credits carefully in this space and focus on those which can weather a downturn without putting credit metrics in serious peril. The median GDP forecast for 2020 is 1.8%.viii If this comes to fruition then most IG-rated companies will be able to maintain stable to improving credit metrics for the year which would be another positive for credit spreads. If growth underwhelms, it would not surprise us to see spread widening in more cyclical sectors and in the lower tier of investment grade credit. This is where our individual credit selection factors in heavily. 

Risky Business 

At over a decade in length, we are in the midst of the longest credit cycle on record yet the current backdrop suggests that it may have more room to run. Investment grade as an asset class is still compelling as part of an overall asset allocation but even the most bullish investor cannot expect 2020 to be a repeat of 2019 as far as returns are concerned. The fact is that there is not much room for error and there are several risks that will continue to loom large on the horizon in 2020. 

  • Private equity companies are starting the year with a record $1.5 trillion in unspent capital. This is not a new story and remarkably this same “record” headline could have been written at the start of each of the last four years!ix Private equity is not bad, per se, but when they become involved with investment grade rated companies it is usually to the detriment of bond investors. Understanding the intricacies of each business in the portfolio and the covenants within each bond indenture can help to avoid a bad outcome. 
  • Policy risk remains high. The Federal Reserve has telegraphed a relatively neutral policy in 2020, which is typically the stance that is taken in an election year, but any deviation from this path could be a shock for markets. The events leading up to the November election and its results both have the ability to effect the direction of credit spreads and the risks are skewed to the downside at current valuations. 
  • Trade disputes have serious potential to derail domestic and global economic growth. The reality is that until uncertainty is removed, the market is subject to volatility and headline risk associated with global trade. The implications at the sector level are particularly severe in some instances and we are positioning the portfolio to mitigate this risk accordingly. 

As always please do not hesitate to call or write us with questions or concerns. We will continue to provide the best customer service possible and to prudently manage your portfolios to the best of our ability. Thank you for your partnership and continued interest. We wish you a happy and prosperous new year. 

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The index is unmanaged and does not take into account fees, expenses, and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.

i Bloomberg News, December 30, 2019 “U.S. Corporate Bond Sales to Slow in 2020 With Speed Bumps Ahead”
ii The Wall Street Journal, September 20, 2019 “There Have Never Been So Many Bonds That Are Almost Junk”
iii Bloomberg, October 11, 2018 “A $1 Trillion Powder Keg Threatens the Corporate Bond Market”
iv Bloomberg News, December 26, 2019 “The Corporate Bond Market’s $100 Billion Buyer Is Here to Stay”
v Bloomberg Barclays Global Aggregate Negative Yielding Debt Index
vi Federal Reserve System
vii S&P Global Ratings, December 16, 2019 “U.S. Corporate Credit Outlook 2020 Balancing Act”
viii Bloomberg Terminal, January 2, 2020 “US GDP Economic Forecast”
ix Bloomberg News, January 2, 2020 “Private Equity Is Starting 2020 With More Cash Than Ever Before”

17 Jan 2020

CAM Investment Grade Weekly Insights

It was another busy week in the corporate credit markets; inflows remained robust, the new issue calendar continued to hum and the secondary market featured buyers grabbing for yield.  Risk markets have been incredibly resilient as they have shrugged off geopolitical turmoil and they seem to have little interest in impeachment or the upcoming presidential primaries and election.  The spread on the corporate index is one basis point tighter on the week, currently trading at 95.  The range in spreads on the index thus far in 2020 has been tight at just three basis points.



The primary market was busy again with more than $35bln in new debt coming to market on the heels of $60bln+ the week prior.  Demand was very strong as order books were well oversubscribed, even for companies with marginal credit metrics.  It is early in the year but so far new issue supply is 32% higher relative to last year, according to data compiled by Bloomberg.  Recall that CAM’s projection as well as the general consensus is calling for overall supply in 2020 to be down relative to 2019 especially on a net basis.  We expect that issuers will look to be quite active in the first half of the year and that issuance will be more subdued in the second half due to the uncertainty that typically accompanies a presidential election.  The consensus supply number for January is $120bln, according to data compiled by Bloomberg, so next week should be another solid week for issuance but will likely be somewhat lower than the previous two weeks due to earnings blackout periods.

According to Wells Fargo, IG fund flows during the week of January 9-15 were +$5.5bln.  This brings year-to-date IG fund flows to over $15.5bln, a strong start to the year.


(Bloomberg) That $1 Trillion BBB Powder Keg Worries Credit Investors Again


  • Investors raised doubts about BBB debt in late 2018, when General Electric Co. was in crisis, its bonds tanked, and investors fretted about market turmoil from mass downgrades. Those fears proved misplaced last year, when investors stampeded into BBB notes and crushed risk premiums on the securities to around their lowest level since the financial crisis. Those narrow risk premiums are what worry at least some money managers.
  • Because BBBs make up more than half the $8.4 trillion investment-grade corporate markets in both the U.S. and Europe, there’s that much more debt at risk of possibly falling to speculative grade. In 1993, BBBs were more like a quarter of the market.
  • Signs of trouble for BBB companies have started brewing this year. Italian infrastructure company Atlantia SpA lost its last remaining investment-grade rating this week, and Boeing Co.’s biggest Max supplier, Spirit AeroSystems Holdings Inc., has also fallen into junk.
  • Some money managers are focusing on finding bargains among BBB notes. Many of the largest BBB constituents gorged on debt to fund M&A, bringing their total obligations in 2018 to around $1 trillion, according to a Bloomberg analysis. Some of those companies have put debt reduction at the forefront, selling assets and cutting dividends to free up cash. That helped make GE, AT&T and AB InBev among 2019’s best corporate bond investments.



17 Jan 2020

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $2.0 billion.  New issuance for the week was $8.1 billion and year to date HY is at $14.2 billion.


(Bloomberg)  High Yield Market Highlights

  • Triple C-rated debt is leading the rally in high-yield as returns for the year jump to 1.23% and yields on the lowest tier of junk fall below 10% for the first time in seven months.
  • Triple C spreads tightened 10bps to 823bps over Treasuries, according to Bloomberg Barclays index data. That’s a more than five-month low and extends a recovery from over 1,000 bps in November
  • Energy is powering CCC. The energy index yield fell to 7.99%, a new six-month low
  • Junk-bond yields dropped to 5.01%, just 5bps off the 5.5-year low of 4.96%. They may fall further as stock futures rise amid easing trade tensions and a solid start to the earnings season. Oil is also up this morning to almost $59 a barrel


(Bloomberg)  Encompass Health Boosts Fiscal Year Operating Revenue View

  • Encompass Health boosted its operating revenue forecast for the full year; the guidance midpoint met the average analyst estimate.
  • Encompass sees FY operating revenue $4.59 billion to $4.61 billion, saw $4.5 billion to $4.6 billion, estimate $4.59 billion (range $4.57 billion to $4.61 billion)
  • Encompass sees FY adjusted EPS from continuing operations $3.90 to $3.94, saw $3.71 to $3.85
  • Encompass sees FY adjusted Ebitda $962 million to $967 million, saw $940.0 million to $960.0 million, estimate $952.2 million (range $942.0 million to $957.0 million)
  • Encompass sees 2020 Adjusted EPS Continuing Operations $3.50 to $3.72, Est. $3.68


(Bloomberg)  WSP Is Said to Approach Engineering Firm Aecom About Deal

  • Canada’s WSP Global Inc. has approached rival engineering services firm Aecom about a possible deal, according to people familiar with the matter. There’s no guarantee that the overture will lead to a transaction, said the people, who asked to not be identified
    because the matter isn’t public.
  • Aecom, which had been targeted by activist investor Starboard Value last year, agreed in October to sell its management services division to a group of private equity firms
    for $2.4 billion.
  • The potential acquisition would give WSP more exposure to the U.S. and could lead to cost savings of about $200 million, Deutsche Bank analyst Chad Dillard wrote in a note to clients Tuesday.
  • Aecom’s services include consulting, planning, architecture, engineering and construction management, according to its website. While it has a growing backlog thanks to a steady stream of government and infrastructure contracts, profits have stagnated in recent years due to inefficiencies and construction contract
    losses, according to a Bloomberg Intelligence report in December.


(Wall Street Journal)  MGM, Blackstone Strike Casino Deal

  • MGM Resorts International said a joint venture that includes Blackstone Group Inc. would buy the real estate of the MGM Grand and Mandalay Bay resorts and casinos on the Las Vegas Strip, in a deal valuing the properties at $4.6 billion.
  • The deal values MGM Grand’s real-estate assets at about $2.5 billion and Mandalay Bay’s at just over $2 billion.
  • Blackstone will own slightly less than half of the properties through the private-equity and real-estate giant’s nonlisted real-estate investment trust, while MGM Growth Properties LLC, a publicly traded REIT, will own the remainder.
  • MGM Resorts spun off MGM Growth Properties in 2016 and still controls the REIT, which owns some MGM real estate including Mandalay Bay’s.
  • MGM Resorts expects to receive cash proceeds of about $2.4 billion from the deal, as well as $85 million in MGM Growth partnership units.
10 Jan 2020

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.9 billion and new issuance for the week $6.1 billion.


(Bloomberg)  High Yield Market Highlights

  • S. high-yield bonds are set for the longest streak of weekly gains since the first half of 2019 as the global hunt for yield continues to bolster the market.
  • The Bloomberg Barclays U.S. high-yield index has posted gains each day this week as yields held steady at 5.11% through Thursday, one basis point lower on the week.
  • The high-yield energy index weighed on performance as oil prices lost steam earlier in the week. The securities posted losses for the second consecutive day on Thursday, losing 0.13%; yields on energy bonds ended at 8.12%.
  • Even while oil prices dropped back to levels before the Mideast tensions began, issuance activity was driven by energy borrowers.


(Reuters)  Fed focuses on repo market exit strategy after avoiding year-end crunch 

  • Wall Street’s worst fears of a year-end funding squeeze never materialized thanks in large part to the quarter-trillion dollars the Federal Reserve stuffed into the market to ensure nothing became gummed up.
  • The question now, though, is what it will take for the U.S. central bank to withdraw from its daily liquidity operations in the $2.2 trillion market for repurchase agreements, or repos – after it became a dominant player in a short three months.
  • “The repo operations are a band-aid, but the wound isn’t healed fully,” said Gennadiy Goldberg, an interest rate strategist at TD Securities.
  • The New York Fed began injecting billions of dollars of liquidity into the repo market in mid-September, when a confluence of events sent the cost of overnight loans as high as 10%, more than four times the Fed’s rate at the time. A month later, the Fed moved to expand its balance sheet – and boost the level of reserves – by snapping up $60 billion a month in U.S. Treasury bills.
  • The Fed will continue pumping tens of billions a day into the repo market through at least the end of January. Its ability to exit from the repo market after that time will depend on how long it takes the central bank to make the balance sheet large enough so there are adequate reserves in the banking system – and the repo operations are no longer needed.
  • “It seems implausible to me that the Fed will be able to stop their repo operations by the end of January,” said Mark Cabana, head of U.S. rates strategy at Bank of America Merrill Lynch.


(Company Report)  Tenneco Inc. plans to streamline its leadership structure

  • The Company announced that Brian Kesseler, Tenneco’s Co-Chief Executive Officer and a member of the Board of Directors, will assume the newly consolidated role of Chief Executive Officer of Tenneco. Kesseler will oversee the operations of the New Tenneco business, in addition to continuing to oversee the DRiV business. Roger Wood will no longer serve as Tenneco’s Co-Chief Executive Officer and is stepping down as a Director of the Company, effective immediately.
  • Jason Hollar will continue to serve as Executive Vice President and Chief Financial Officer of Tenneco overseeing the financial organizations of both DRiV and New Tenneco.
  • “On behalf of the Board of Directors, I would like to thank Roger for his dedication to Tenneco during a critical time for our company,” said Gregg M. Sherrill, Chairman of the Tenneco Board. “We appreciate his service and contributions in leading the New Tenneco business as we began the integration of the Federal-Mogul acquisition. As we pursue the separation of our businesses, the Board determined that consolidating our leadership structure now will help improve Tenneco’s operational efficiency and achieve our near-term financial performance objectives. We wish Roger the very best in his future endeavors.”
  • During 2020, Tenneco will be focused on the execution of its accelerated performance improvement plan to facilitate the expected separation of the businesses.
  • As previously discussed in the Company’s third quarter release on October 31, 2019, current end-market conditions are affecting the Company’s ability to complete a separation in the mid-year 2020 time range. The Company expects that these trends will continue throughout this year. The Company is ready to separate the businesses as soon as favorable conditions are present.
20 Dec 2019

CAM Investment Grade Weekly Insights

Another week has come and gone and corporate bonds continue to inch tighter into year end.  The OAS on the Bloomberg Barclays Corporate Index opened the week at 99 and closed at 95 on Thursday.  Spreads are now at their tightest levels of 2019 and the narrowest since February of 2018 when the OAS on the index closed as low as 85.  Price action in rates was relatively muted during the week amid low volumes but Treasuries are set to finish the week a few basis points higher.  The 10yr opened the week at 1.87% and is trading at 1.91% as we go to print.

As expected, the primary market during the week was as quiet as a church mouse.  December supply stands at a paltry $18.9bln according to data compiled by Bloomberg.  2019 issuance stands at $1,110bln which trails 2018 by 4%.  As we look ahead to 2020, we expect robust supply right of the gates in January but the street consensus for 2020 as a whole is that supply will be down 5% relative to 2019.  Further, net supply, which accounts for issuance less the 2020 maturity of outstanding bonds, will be down substantially from prior years.  If these forecasts come to fruition then the supply backdrop could lend technical support to credit spreads in 2020.  Supply, however, is merely one piece of the puzzle.

According to Wells Fargo, IG fund flows during the week of December 12-18 were +$0.85bln.  This brings YTD IG fund flows to +$295bln.  2019 flows are up over 11% relative to 2018.

13 Dec 2019

CAM Investment Grade Weekly Insights

The grind continues as the OAS on the Bloomberg Barclays Corporate Index breached 100 for the first time in 2019 with a 99 close on Thursday evening.  The index has not traded inside of 100 since March of 2018 and has averaged a spread of 127 over the past 5-years and 113 over the past 3-years.  Treasuries were again volatile on the week, especially Friday, which saw a range of 15 basis points on the 10yr Treasury.  However, as we type this during the late afternoon on Friday it appears that the 10yr is going to end the week almost entirely unchanged from the prior weeks close.

The primary market has entered year-end Holiday mode. Less than $4bln in new debt was brought to market during the week.   The first half of next week is the last chance for meaningful issuance in the month of December.  According to data compiled by Bloomberg, 2019 issuance stands at $1,110bln which trails 2018 by 4%.

According to Wells Fargo, IG fund flows during the week of December 5-11 were +$5.4bln.  This brings YTD IG fund flows to +$282bln.  2019 flows are up over 10% relative to 2018.




29 Nov 2019

CAM High Yield Weekly Insights

CAM High Yield Market Note



This is an abbreviated Note due to the Thanksgiving holiday. Happy Thanksgiving!


Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $0.2 billion and year to date flows stand at $23.5 billion. New issuance for the week was $12.8 billion and year to date HY is at $251.1 billion, which is +55% over the same period last year.



(Bloomberg) Single and Double B Junk Bond Returns Hit 2019 Peak Amid Rally


  • Junk bond returns are creeping back to record highs after three consecutive days of gains.
  • Junk bond year-to-date returns rose to 11.928%, inching closer to the highs of just over 12% reached earlier this month. Index yields were unchanged, closing at a two-week low of 5.64%
  • BB returns hit a year-to-date peak of 13.944%, while single B returns set a new high at 12.553%
  • CCCs are also catching a bid, boosted by a lift in energy bonds, after posting gains for three straight sessions to take year-to-date returns to 4.101%. That comes less than a week after CCC spreads jumped above 1,000bps over U.S. Treasuries for the first time in more than three years 
15 Nov 2019

CAM Investment Grade Weekly Insights

Credit spreads are set to finish the week generally unchanged but may be a touch wider in some spots when it is all said and done.  The spread on the Bloomberg Barclays Corporate Index opened the holiday shortened week at 105 and closed at 106 on Thursday.  There is positive sentiment in the markets on Friday morning amid China-US trade innuendo out of Washington.  For the second week in a row we have seen a relatively significant move in treasuries; last week it was higher rates and this week lower.  The 10yr Treasury closed the prior week at 1.94% and is now 1.83%, 11 basis points lower on the week as we go to print.

The primary market posted an impressive haul this week, especially considering the fact that the market was closed on Monday.  It was the second largest volume week of the year thanks to a big boost from AbbVie, which printed a $30bln deal that featured 10 different maturities.  With one deal pending this morning, weekly issuance will come in at the $50bln mark.  Oddly enough both the largest and second largest issuance weeks in 2019 have both come on holiday shortened weeks.  The largest volume week was the week of Labor Day when nearly $75bln of new debt was priced in just four days. According to data compiled by Bloomberg, 2019 issuance stands at $1,065bln which trails 2018 by -4.4%.

According to Wells Fargo, IG fund flows during the week of November 7-November 13 were +$2.8bln.  This brings YTD IG fund flows to +$252bln.  2019 flows are up 9.5% relative to 2018.



Bloomberg) AbbVie Propels High-Grade Issuance to Year’s Second-Biggest Week

  • It’s the second-biggest week of the year for U.S. investment-grade issuance, which at about $50 billion in volume trails only the record-setting start to September.
    • AbbVie’s $30 billion deal on Tuesday clocked in as the year’s largest bond sale and the fourth-biggest ever, helping to establish this week’s second-place finish
      • Supply for the week stands at $49.4 billion as of Thursday with more deals potentially coming Friday given a shorter window to sell debt after Monday’s Veteran Day close
      • The first week of September saw $75 billion of high-grade bond sales, the most for any comparable period since records began in 1972
      • This week overtook the five days to May 9, when IBM and Bristol Myers brought $39 billion in acquisition-related supply in a 24-hour span


(Bloomberg) Here’s How KKR Might Just Pull Off the Biggest LBO in History

  • One of the private equity industry’s titans called it a “stretch,” and it’s been dismissed as a pipe dream by a bevy of analysts.
  • Yet interviews in recent days with debt-market specialists suggest that KKR & Co. could find a narrow path to finance what would be the biggest leveraged buyout in history: a potential take-private deal for pharmacy chain Walgreens Boots Alliance Inc. that analysts have estimated would need to be funded with at least $50 billion of debt.
  • The challenge for any Walgreens suitor will be raising the necessary money via the markets of choice for private equity firms — junk-rated loans and bonds — which have become fragile after an unprecedented borrowing binge left investors with a hangover. Debt funds that financed more than $3.5 trillion of leveraged buyouts in the past decade have become pickier, leaving banks stuck holding more than $2 billion of unsold loans on their balance sheets as recently as last month.
  • But a road map may be hidden in two other recent debt-fueled takeovers: Dell Technologies Inc.’s $67 billion takeover of EMC Corp. in 2016 and Charter Communications Inc.’s $78.7 billion acquisition of Time Warner Cable Inc. that same year.
  • Junk-rated Dell and Charter both borrowed heavily in the investment-grade bond market by issuing secured debt. T-Mobile US Inc. is going down a similar route to help pay for its purchase of Sprint Corp.
  • In Charter’s case, it pledged security to new and existing bonds issued by higher-rated Time Warner to ensure the debt remained investment-grade. Dell used a similar strategy when it bought investment-grade rated EMC. Walgreens’s debt could be segregated into two borrowing structures at a holding company level and an operating company portion, with investment-grade debt placed on the latter.
  • In doing so, Dell and Charter won access to the most stable part of the corporate debt market, where investors are still buying heavily as an alternative to low or negative-yielding assets elsewhere. At the same time, they limited their reliance on leveraged finance markets, where sentiment can shift quickly and prove costly.
  • Both companies did tap those markets, but with more manageable offerings. Bankers who asked not to be identified estimated that Walgreens would be able to raise between $10 billion and $20 billion of junk-rated debt to fund a buyout.
  • Other market participants, who asked not to be named because they weren’t authorized to speak publicly, said KKR still might need to find a deep-pocketed third-party investor to help put more equity into the deal.
  • Or it may seek to spin off a portion of Walgreens to lessen its financing needs. The company’s European operations could potentially bring in $18 billion to $20 billion, CreditSights analyst James Goldstein said in a phone interview.


08 Nov 2019

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $1.6 billion and year to date flows stand at $24.4 billion.  New issuance for the week was $3.8 billion and year to date HY is at $219.3 billion, which is +37% over the same period last year.


(Bloomberg)  High Yield Market Highlights 

  • S. junk bonds rebounded as equities rallied to a record high and the 10Y UST yield jumped. The debt may open on a softer note as stock futures declined and oil prices dropped amid uncertainty over supply cuts.
  • The debt’s returns turned positive on Thursday after a two-day losing streak as equities climbed to a new high. Year-to-date returns were 12.01%, just 9bps off the 2019 peak
  • Gains were across ratings, with single-Bs posting the most at 0.1% and YTD at 12.39%
  • Junk bond yields were little changed. Single-Bs dropped 6bps to close at 5.68% and BBs closed at 3.88%, down 2bps
  • Spreads held firm across ratings moving in tandem with UST yields
  • There was lull in the primary market with just two drive-by deals for $1.1b pricing yesterday
  • Yesterday’s deals took the November volume to $4.98b
  • As investors turned cautious of weaker credits, Wesco’s $2.18b bond offering faced some resistance and its pricing was delayed


(Reuters)  U.S. may not need to impose auto tariffs this month 

  • The United States may not need to impose tariffs on imported vehicles later this month after holding “good conversations” with automakers in the European Union, Japan and Korea, U.S. Commerce Secretary Wilbur Ross said in an interview published on Sunday.
  • The United States must decide by Nov. 14 whether to impose threatened U.S. national security tariffs of as much as 25% on vehicles and parts. The tariffs have already been delayed once by six months, and trade experts say that could happen again.
  • “We have had very good conversations with our European friends, with our Japanese friends, with our Korean friends, and those are the major auto producing sectors,” Ross said.
  • “Our hope is that the negotiations we have been having with individual companies about their capital investment plans will bear enough fruit that it may not be necessary to put the 232 (tariffs) fully into effect, may not even be necessary to put it partly in effect,” he added.


(Business Wire)  The GEO Group Reports Third Quarter 2019 Results

  • GEO reported third quarter 2019 net income attributable to GEO of $45.9 million, compared to $39.3 million, for the third quarter 2018. GEO reported total revenues for the third quarter 2019 of $631.6 million up from $583.5 million for the third quarter 2018.
  • GEO reported third quarter 2019 Normalized Funds From Operations (“Normalized FFO”) of $70.3 million, compared to $62.9 million, for the third quarter 2018. GEO reported third quarter 2019 Adjusted Funds From Operations (“AFFO”) of $85.6 million, compared to $77.9 million, for the third quarter 2018.
  • George C. Zoley, Chairman and Chief Executive Officer of GEO, said, “We are pleased with our strong quarterly financial performance, which reflect strong fundamentals and growing earnings. During the quarter, we reactivated 4,600 previously idle beds, which are expected to drive future cash flow growth. We are proud to have published our first-ever Human Rights and ESG report in September, highlighting our long-standing commitment to respecting the human rights of all those in our care, as well as, the continued success of our GEO Continuum of Care enhanced rehabilitation and post-release programs. We believe that our current dividend payment is supported by stable and predictable cash flows, and we expect to continue to apply our growing excess cash flow towards paying down debt.”
  • During the third quarter 2019, GEO repurchased approximately $34 million of senior unsecured notes due 2022. GEO also closed on a $44 million, 15-year real estate loan bearing interest at 4.22 percent annually. At the end of the third quarter, GEO had approximately $395 million in available borrowing capacity under its $900 million revolving credit facility, which matures in May 2024.


(Business Wire)  Arconic Reports Third Quarter 2019 Results

  • The Company continues to target the completion of the separation in the second quarter 2020. We expect the Form 10 filing to be available in the fourth quarter 2019. The Engineered Products and Forgings businesses (engine products, fastening systems, engineered structures and forged wheels) will remain in the existing company (Remain Co.), which will be renamed Howmet Aerospace Inc. at separation. The Global Rolled Products businesses (global rolled products, aluminum extrusions and building and construction systems) will comprise Spin Co. and will be named Arconic Corporation at separation.
  • Arconic Inc. reported third quarter 2019 results, for which the Company reported revenues of $3.6 billion, up 1% year over year. Organic revenue was up 6% year over year on strong volumes across all key markets and favorable pricing in the Engineered Products and Forgings segment, and volume growth in packaging, industrial, and aerospace markets as well as favorable pricing in the Global Rolled Products segment.
  • Third quarter 2019 operating income was $326 million, versus operating income of $345 million in the third quarter 2018. Operating income excluding special items was $475 million, up 36% year over year, as favorable product pricing, higher volume, favorable aluminum prices, and net cost reductions more than offset operational challenges in the aluminum extrusions business and unfavorable product mix.
  • Arconic Chairman and Chief Executive Officer John Plant said, “In the third quarter 2019, the Arconic team delivered improved quarterly revenue, adjusted operating income, adjusted operating income margin, adjusted free cash flow and adjusted earnings per share on a year-over-year basis. Arconic’s third quarter 2019 return on net assets improved by 550 basis points year over year. We expect this positive year-over-year trend to continue in the fourth quarter. Based on our performance through the first nine months of 2019 and our outlook for the remainder of 2019, we are increasing our full-year adjusted earnings per share guidance for the third time in 2019.”
  • Arconic ended the third quarter 2019 with cash on hand of $1.3 billion. Cash provided from operations was $52 million; cash used for financing activities totaled $202 million, reflecting the impact of the accelerated share repurchase program of $200 million; and cash provided from investing activities was $117 million. Adjusted Free Cash Flow for the quarter was $154 million.