Category: High Yield Weekly

CAM High Yield Market Note

7/5/2019

(Bloomberg) High Yield Market Highlights

• Retail funds estimated to have received $885m through Tuesday, JPMorgan strategists wrote, citing Lipper data. High-yield bond ETFs recorded inflows of ~$1b in the last four sessions, data compiled by Bloomberg show.
• Issuance slowed ahead of the Fourth of July holiday and is expected to resume next week
• Returns rebounded in a holiday-shortened session Wednesday across ratings, with BBs leading the rally.
• Spreads tightened and yields dropped in thin trading
• U.S. high yield trading on July 3 was the slowest day in 2019 and volumes dropped the most in almost three months
• YTD returns climbed back again to close at 10.257% from 10.146%
• BBs are still the best performers, with a YTD return of 10.832%, followed by single Bs at 10.42%
• Triple-C YTD returns stand at 7.68%
• Loans lag bonds with YTD returns of 5.83%  

• (Wall Street Journal) Oil-Field Services Firm Seeks Chapter 11

• Weatherford International said it would file for bankruptcy protection after bondholders approved a restructuring agreement that will reduce its total debt by about 70%.
• The company said it expected to file its chapter 11 petition in U.S. Bankruptcy Court in Houston in what would be one of the biggest oil patch bankruptcies in years.
• Unsecured bondholders are in line to get all but 1% of the equity in the reorganized business, while shares in the existing company will be canceled.
• Weatherford, which has about 26,000 employees world-wide, had said in May that it planned to file for bankruptcy after having reached an agreement with creditors holding 62% of its bond debt. The balance-sheet restructuring will reduce its total debt to about $2.5 billion from $8.3 billion, nearly all of which is made up of unsecured bonds. Under the proposed plan, which requires court approval, the bondholders are expected to recover about 63% of what they are owed based on the proposed valuation of the company. Weatherford blamed its bankruptcy filing, in part, on volatility in oil and natural gas prices.
• As oil-and-gas companies’ spending on exploration, development and production of oil and natural gas has decreased, so has demand for Weatherford’s services and products, the company said in a filing with the Securities and Exchange Commission. Weatherford said its cash flows from operations have been negative the past three fiscal years.

(Wall Street Journal) OPEC Agrees to Extend Output-Cut Pact

• OPEC agreed to roll over its production cuts into the first quarter of 2020, the cartel’s officials said, but the new pact exposed deepening geopolitical fractures among members of the group.
• The discussions over long-term cooperation plans highlighted the risks of the cartel’s alliance with Russia: OPEC needs the partnership to compete with U.S. shale producers, but longstanding members say they feel ostracized by the alliance.
• OPEC reached a consensus on oil output without much drama Monday, but the cartel hit an impasse when it sought agreement on whether it should continue working with Russia and its allies to balance oil markets once the nine-month plan expires.
• Iran initially objected, but after talks lasting five hours and involving a separate meeting between Iranian and Saudi officials both sides reached a compromise on long-term cooperation with Russia, OPEC officials said.
• Over the weekend, Russian President Vladimir Putin revealed that Saudi Arabia — OPEC’s de facto leader — and Russia had already agreed to maintain the output cuts at current volumes, which run at around 1.2 million barrels a day. The news left some in OPEC feeling overshadowed by two of the world’s largest oil producers, OPEC officials said.

(Bloomberg) T-Mobile on Cusp of Justice Department Approval for Sprint

• T-Mobile U.S. Inc. is on the cusp of securing U.S. Justice Department approval for its $26.5 billion merger with Sprint Corp., after establishing the general outlines of asset sales to Dish Network Corp., according to people familiar with the matter.
• The Justice Department is hammering out final issues with T-Mobile on an agreement aimed at ensuring Dish can become a strong fourth competitor in the U.S. wireless market, said the people, who asked to not be identified because the matter isn’t public. While the sticking points aren’t insurmountable, the Justice Department has yet to bless the arrangement to allow Sprint’s acquisition to proceed.
• T-Mobile is trying to offer just enough concessions to gain approval but not so many that it creates a formidable rival while the Justice Department is aiming to maximize competition, the people said.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $1.7 billion and year to date flows stand at $10.0 billion.  New issuance for the week was $6.5 billion and year to date HY is at $113.2 billion, which is +19% over the same period last year.

(Bloomberg)  High Yield Market Highlights

• Junk bonds look susceptible to weakness in stock futures and oil, following gains in the prior session amid fund inflows.
• Junk yields dropped, spreads tightened across ratings yesterday amid equity and oil strength
• Lipper’s reported inflow into U.S. high yield funds was the biggest in 10 weeks
• Investors demanding appropriate risk premium was evident in pricing of US Renal Care‘s CCC-tranche
• Priced at the wide end of talk to get investors on board and changed issuer-friendly covenants to protect investors
• Junk bond returns YTD stood at 8.89%
• BBs were at YTD peak of 9.229%
• Single-Bs at 8.986%
• CCCs stood at 7.106%
• Energy returns turned negative for the second straight session, with YTD dropping to 6.089%
• Loans were at 5.698%

(Reuters)  Trump blames Iran for tanker attacks, stoking fears of confrontation

• S. President Donald Trump blamed Iran on Friday for attacks on two oil tankers at the entrance to the Gulf despite Tehran’s denials, stoking fears of a confrontation in the vital oil shipping route.
• Iran has dismissed earlier U.S. charges that it was behind Thursday’s attacks that crippled two tankers and has previously threatened to block the Strait of Hormuz, through which a fifth of globally consumed oil passes, if its oil exports were halted.
• Thursday’s blasts followed a similar attacks a month earlier on four tankers, which Washington also blamed on Tehran.

(Bloomberg)  Dish, Charter and Altice Eye T-Mobile and Sprint Assets

• Dish Network Corp., Charter Communications Inc. and Altice USA Inc. are among bidders for assets T-Mobile US Inc. plans to sell to win regulatory approval for its $26.5 billion takeover of Sprint Corp., according to people familiar with the matter.
• The companies are on a shortlist of bidders favored by the Justice Department, said the people, who asked to not be identified because the matter isn’t public. The antitrust division would be comfortable with cable companies buying the assets because they are better positioned to become viable competitors with their own networks, one of the people said.
• T-Mobile and Sprint have agreed to sell prepaid wireless brand Boost to appease the Federal Communications Commission, which also has to approve the deal. To win over the Justice Department, the companies are also discussing offloading another prepaid brand and enough spectrum to help set up a viable fourth competitor if the deal goes through.
• They are working with a shortlist of potential buyers acceptable to the Justice Department with the aim of having the antitrust enforcer sign off on the winner as part of their approval efforts, the people said.

(Business Wire)  The GEO Group Amends Senior Revolving Credit Facility Extending Maturity to May 2024; Size and Pricing Remain Unchanged

• The GEO Group announced the closing of an extension and amendment to its Senior Revolving Credit Facility. The maturity for the amended Revolver has been extended to May 17, 2024. The borrowing capacity under the amended Revolver will remain at $900 million, and its pricing will remain unchanged currently bearing interest at LIBOR plus 2.25%.
• GEO currently has approximately $492 million in outstanding borrowings along with approximately $62 million set aside for letters of credit under the amended Revolver, leaving approximately $346 million in available borrowing capacity.
• George C. Zoley, GEO’s Chairman of the Board, Chief Executive Officer and Founder, said: “The extension and amendment of our senior revolving credit facility, with consistent terms and unchanged pricing, is indicative of our long-standing ability to access cost-effective capital. Our amended revolver will position our company to continue to pursue quality growth opportunities. We remain optimistic about the strong fundamentals and the increasing demand for our high-quality services across GEO’s diversified business segments.”

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.8 billion and year to date flows stand at $8.2 billion.  New issuance for the week was $3.2 billion and year to date HY is at $106.7 billion, which is +16% over the same period last year.

(Bloomberg)  High Yield Market Highlights

• S. junk bonds have positive momentum after three straight days of gains despite the biggest fund outflows since December. Rising oil and equity markets are supportive and all eyes are on this morning’s U.S. employment report for clues on the strength of the economy.
• The primary looks to be wide open after a number of borrowers, including first-time issuer GrubHub, increased the size of offerings this week
• Five of the seven deals priced this week were drive-by deals, signaling that junk investors were scrambling for supply
• Risk assets got a boost yesterday from reports that U.S.- Mexico talks were progressing towards a deal
• This followed Chair Powell reiterating earlier this week that the central bank is standing by to act if the trade war causes disruption
• Junk bond YTD returns are 8.117%, the best asset in fixed income
• BBs were at 8.344%
• Single-B stood at 8.19%
• CCCs were still the worst performers at 6.767% YTD
• Loans were at 5.578%
• Investment grade bonds were at 7.376%

(CAM Note)  Moody’s Downgraded the Debt of Tenneco by One Notch

• The senior unsecured debt is now rated B3.
• Moody’s cited an expected slower pace of deleveraging, weaker financial performance, and a soft auto production environment.

(Business Wire)  The GEO Group Negotiating with State of Victoria to Increase Capacity at the Ravenhall Correctional Centre by 300 Beds

• The GEO Group, Inc. announced that its subsidiary, The GEO Group Australia Pty Ltd (“GEO Australia”) is currently in negotiation discussions with the State of Victoria to increase the capacity at the Ravenhall Correctional Centre by an additional 300 beds increasing the Centre’s capacity to 1,600 beds. The 300-bed capacity increase is expected to generate incremental annualized revenues of $19 million.
• The Ravenhall Correctional Centre was developed by a GEO led consortium. The $700 million project was financed under a Public-Private Partnership structure, which included a capital investment from GEO of approximately $90 million with returns on investment consistent with GEO’s company-owned facilities. GEO Australia operates the Centre, which opened in late 2017, under a 25-year contract with the State of Victoria.
• George C. Zoley, Chairman of the Board and Chief Executive Officer of GEO, said: “We appreciate the trust placed in our company by the State of Victoria, which is a reflection of our partnership with the State since 1999 with the opening of the Fulham Correctional Centre. We are looking forward to working with the Department of Justice and Community Safety to further strengthen our longstanding partnership.”

(Market Watch)  Junk bond canary soothes fears around yield curve recession signal

• The muted selloff in the market for high-yield corporate debt brings some calm to investors rattled by the Treasury market’s potential signal of a recession.
• Analysts skeptical of calls for a trade-induced economic downturn say the resilience of so-called junk bonds shows the U.S. expansion has room to run, and that the growth worries emanating from an inversion of the Treasury yield have gone too far.
• In recent weeks, the Trump administration’s stridency in pursuing more protectionist trade policies, imposing tariffs on China and threatening to slap levies on Mexico, have cast a shadow over the U.S. economy, on course for its longest period of sustained growth in post-World War II history.
• “So far, credit spreads have remained well behaved, which also suggests to us that the probability of an imminent slowdown is not high,” said Sean Darby, chief equity strategist for Jefferies.
• One reason why some market watchers are dismissing the yield curve’s recession warning is because its predictive powers come from its ability to detect when businesses struggle to find credit. But debt-bloated firms have continued to issue bonds this year, suggesting financial conditions still remain supportive of growth.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.02 billion and year to date flows stand at $12.5 billion.  New issuance for the week was $7.2 billion and year to date HY is at $102.1 billion, which is +16% over the same period last year.

(Bloomberg)  High Yield Market Highlights 

• Junk bonds will draw support from stabilizing equity and oil markets today, helped by better fund flows, after the heaviest bout of issuance in 14 months. Futures point to a firm open, following a bruising week for risk assets.
• Yesterday’s close was the lowest since March 8
• Futures on the S&P 500, Dow Jones and Nasdaq rose today in the wake of steep declines a day earlier
• Oil’s also opening firmer this morning, after suffering the biggest weekly drop since December
• However, concerns are mounting that the trade dispute could cripple global growth
• S. corporate high-yield funds swung to a small inflow of about $20mm for the week
• High-yield index fell 0.25% yesterday, the biggest loss since May 13
• Spread widened 10bps to 398bps
• Index yield rose to 6.38% from 6.35%
• The junk market is digesting $25b in new bonds, the most monthly supply since March 2018

(The Street)  Sprint-T-Mobile US Merger Gets FCC Approval After 5G Network Development Pledge

• Sprint Corp. and T-Mobile shares surged Monday after U.S. Federal Communications Commission chairman Ajit Pai said he would recommend approval of their  $26 billion merger plans.
• The FCC agreed to the tie-up following pledges from both companies to build 5G networks around the country, while ensuring “robust” infrastructure in rural areas, and to also enhance in-home broadband offerings to its customer base.
• “Two of the FCC’s top priorities are closing the digital divide in rural America and advancing United States leadership in 5G, the next generation of wireless connectivity,” Pai said in a statement. “The commitments made today by T-Mobile and Sprint would substantially advance each of these critical objectives.”
• “I’m also pleased that the companies have committed to a robust buildout of their mid-band spectrum holdings,” he added. “Demonstrating that 5G will indeed benefit rural Americans, T-Mobile and Sprint have promised that their network would cover at least two-thirds of our nation’s rural population with high-speed, mid-band 5G, which could improve the economy and quality of life in many small towns across the country.”

(Globe Newswire)  Toll Brothers Reports FY 2019 2nd Quarter Results

• Toll Brothers, Inc., the nation’s leading builder of luxury homes, announced results for its second quarter ended April 30, 2019.
• Net income and earnings per share were $129.3 million and $0.87 per share diluted, compared to net income of $111.8 million and $0.72 per share diluted in FY 2018’s second quarter.
• Pre-tax income grew 15% to $176.2 million, compared to $152.7 million in FY 2018’s second quarter.
• Home sales revenues were $1.71 billion, up 7%; home building deliveries were 1,911, up 1%.
• Net signed contract value was $2.00 billion, down 16%; contract units were 2,424, down 9%.
• Backlog value at second-quarter end was $5.66 billion, down 11%; units in backlog totaled 6,467, down 8%.
• Home sales gross margin was 19.7%; Adjusted Home Sales Gross Margin, which excludes interest and inventory write-downs (“Adjusted Home Sales Gross Margin”), was 23.5%.
• Douglas C. Yearley, Jr., Toll Brothers’ chairman and chief executive officer, stated: “We are pleased with this quarter’s results, which exceeded our expectations for revenues, margins, and profits.  Revenues, net income and earnings per share rose 7%, 16%, and 21%, respectively, compared to one year ago.
• “We are encouraged by the improvement in demand as the quarter progressed.  FY 2019’s April contracts surpassed FY 2018’s April on both a gross and per-community basis.  Although the Spring selling season bloomed late, it built momentum.  We view this as a positive sign for the overall health of the new home market.
• “We continue to look for opportunities to grow and leverage our industry-leading brand as we expand our geographic footprint, product lines, and price points. Yesterday, we announced our entry into metro Atlanta with the acquisition of Sharp Residential.  Atlanta was the largest U.S. housing market where we did not operate, and Sharp was one of Atlanta’s largest private home builders. This quarter we also opened our first communities in Salt Lake City, Utah and Portland, Oregon, which are markets we have entered organically and where we are already seeing healthy buyer interest.
• “According to recent reports, builder sentiment in May rose to a 7-month high and single-family housing starts in April were up 6.2% versus March.  The industry is being buoyed by low interest rates, a strong employment picture, and a still-limited supply of new homes in many markets.  With a positive macroeconomic backdrop, record low unemployment, continued wage growth, and solid consumer confidence, we are optimistic about the opportunities ahead.”

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$2.5 billion and year to date flows stand at $12.5 billion.  New issuance for the week was $4.0 billion and year to date HY is at $94.9 billion, which is +12% over the same period last year.

(Bloomberg)  High Yield Market Highlights

• S. junk bonds gained 0.19% yesterday, the most in 7 weeks, as stocks rallied and the VIX fell. This morning’s equity retreat and the biggest fund outflows since December call into the question the sustainability of the move higher.
• Junk bond yields dropped across ratings, with the biggest decline in 5 weeks, but nervous investors pulled cash out of retail funds for a second week
• Lipper reported an outflow of $2.57b from U.S. high yield for week ended May 15, the most since December, amid trade war jitters
• Berry Global is set to price a smaller than expected deal today
• Three new deals priced yesterday. All priced at the lower end talk
• Junk bond energy saw the best performance in 6 weeks after posting losses for more than 10 weeks, with 0.25% yesterday
• High-yield energy YTD return was 8.67%
• High-yield returns ex-energy also turned positive, with YTD at 8.086%
• BBs at 7.99%, single-Bs 8.25%
• CCCs at 7.964% YTD
• Loans lag junk bonds, with a 5.67% YTD gain

(Reuters)  U.S. states accuse Teva, other drugmakers, of price-fixing: lawsuit 

• S. states filed a lawsuit accusing Teva Pharmaceuticals USA Inc of orchestrating a sweeping scheme with 19 other drug companies to inflate drug prices – sometimes by more than 1,000% – and stifle competition for generic drugs, state prosecutors said on Saturday.
• Soaring drug prices from both branded and generic manufacturers have sparked outrage and investigations in the United States. The criticism has come from across the political spectrum, from President Donald Trump, a Republican, to progressive Democrats including U.S. Senator Elizabeth Warren, who is running for president.
• The 20 drug companies engaged in illegal conspiracies to divide up the market for drugs to avoid competing and, in some cases, conspired to either prevent prices from dropping or to raise them, according to the complaint by 44 U.S. states, filed on Friday in the U.S. District Court in Connecticut.
• “The allegations in this new complaint, and in the litigation more generally, are just that – allegations,” Teva said in a statement. “Teva continues to review the issue internally and has not engaged in any conduct that would lead to civil or criminal liability.”
• “Apparently unsatisfied with the status quo of ‘fair share’ and the mere avoidance of price erosion, Teva and its co-conspirators embarked on one of the most egregious and damaging price-fixing conspiracies in the history of the United States,” the complaint said.

(Bloomberg)  Looming U.S. Junk Bond Risk May Shrink With Fed’s Help 

• One of the biggest risks in the junk bond market is showing signs of diminishing, with help from the Federal Reserve.
• Nearly a third of the $1.2 trillion U.S. high-yield market matures in the next four years, a record high proportion, according to Barclays Plc strategists led by Bradley Rogoff. Junk-rated companies have to refinance that debt, pay it off, or face bankruptcy.
• They have years to sort out that risk, but many are doing it now: companies have issued more than $80 billion of bonds this year that listed refinancing as one of the uses of proceeds, according to data compiled by Bloomberg, accounting for more than 70% of issuance this year.
• “Companies are extending maturities out, and that’s healthy,” said Scott Roberts, head of high-yield debt at Invesco Ltd. Refinancing is a better use of debt than buying back shares, he added. “I’ve seen frothy before and this is not it.”
• Corporations have ample incentive to deal with future debt maturities soon: on average they can reduce interest costs by issuing securities at current yields, the Barclays strategists said. Those relatively low borrowing costs are in part because of the Fed, which has paused its rate hikes, spurring money managers to pile into junk bonds in search of yield. Even with recent declines in high-yield securities, the debt has gained 8.3% this year through Friday, according to Bloomberg Barclays index data.
• “I feel good about this high-yield market and we are trying to push issuers to take advantage of it,” said Richard Zogheb, global head of debt capital markets at Citigroup Inc. “Investors are so excited now that the underlying rate environment is more dovish, and that’s really good news for high-yield borrowers.”
• Investment bankers say companies are taking notice of the opportunities to issue, and not just for refinancing. Corporations sold around $12 billion of U.S. junk bonds last week, the highest level in around 20 months, according to data compiled by Bloomberg.

(Bloomberg)  China Downplays Chances for Trade Talks While U.S. Plays ‘Little Tricks’

• China’s state media signaled a lack of interest in resuming trade talks with the U.S. under the current threat to escalate tariffs, while the government said stimulus will be stepped up to buttress the domestic economy.
• Without new moves that show the U.S. is sincere, it is meaningless for its officials to come to China and have trade talks, according to a commentary by the blog Taoran Notes, which was carried by state-run Xinhua News Agency and the People’s Daily, the Communist Party’s mouthpiece. The Ministry of Commerce spokesman said Thursday he had no information about any U.S. officials coming to Beijing for further talks.
• The indications that negotiations are paused will focus attention on the next opportunity for Presidents Xi Jinping and Donald Trump to meet — at the Group of Twenty meeting in Japan next month. Their meeting in Argentina in December last year put negotiations back on track, only for them to fall apart again this month in Washington.
• S. Treasury Secretary Steven Mnuchin said this week that American officials “most likely will go to Beijing at some point” in the near future to continue trade talks, before later saying he has “no plans yet to go to China.”

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.7 billion and year to date flows stand at $16.2 billion.  New issuance for the week was $12.8 billion and year to date HY is at $90.8 billion, which is +14% over the same period last year.

(Bloomberg)  High Yield Market Highlights

• S. junk issuers continue to rush in as if the window is closing, pricing another $3 billion in bonds yesterday despite secondary market weakness. This week’s $12 billion total makes it the busiest since September 2017.
• The high-yield index fell 0.22%, the biggest decline since March 8 and the fourth straight day of losses, as stocks fell and VIX rose
• Yesterday’s new issuance was oversubscribed as investors fought for allocation
• Junk bond returns dropped across ratings for 4 straight sessions, the first time since early March, with the exception of BBs which turned positive one day of the week
• Yields surged across the risk spectrum and saw the biggest jump in almost seven weeks
• BB yields rose to a more than 3-month high, saw biggest rise in 12 weeks
• Energy returns were negative for the 10th session with a 1-day break on Friday last, the longest streak since December 13-26
• Energy return YTD 9.040%, ex-energy 8.19%
• CCCs lost most, falling 0.23%
• CCCs are up 8.6% YTD
• Junk bond returns are 8.31% YTD
• BBs have returned 8.03%, single-Bs 8.41%
• Loans have returned 5.61% YTD

(Business Wire)  AmeriGas Reports Second Quarter Results

• GAAP net income of $219.1 million, compared with $191.8 million in the prior-year period; adjusted net income of $203.1 million, compared with $222.7 million in the prior-year period
• Adjusted EBITDA of $290.3 million, compared with $309.5 million in the prior-year period
• AmeriGas expects to be at the low end of its fiscal 2019 Adjusted EBITDA guidance range of $610 million – $650 million
• Hugh J. Gallagher, president and chief executive officer of AmeriGas, said, “Overall, AmeriGas experienced weather that was colder than the prior year, however our results were impacted by warm weather during the critical heating months in the southeastern U.S. During the quarter, we remained focused on our growth drivers and built on our history of solid volume and customer additions in our Cylinder Exchange and National Accounts programs. Our team did a great job managing expenses throughout the entire heating season and we continue to look for additional opportunities to improve efficiencies. AmeriGas remains on pace to deliver adjusted EBITDA towards the low end of its guidance range.
• While degree days for the quarter were 4% colder than normal and 5% colder than last year, January and February were a combined 17% warmer than normal in the southeastern U.S.
• Retail volumes sold decreased by 4% primarily due to warm weather in the southeastern U.S. during critical heating months

(PR Newswire)  TransDigm Group Reports Fiscal 2019 Second Quarter Results 

• During the quarter, on March 14, 2019, TransDigm completed the acquisition of Esterline Technologies Corporation, a supplier of products to the global aerospace and defense industry.
• Also during the quarter, on February 13, 2019TransDigm completed the private offerings of $4.0 billion aggregate principal amount of 6.25% Senior Secured Notes due 2026 and $550 million aggregate principal amount of 7.50% Senior Subordinated Notes due 2027.
• The net proceeds of the $4.0 billionsecured notes were used to both fund the purchase price of the Esterline acquisition and to allow for substantial near term financial flexibility.
• The net proceeds from the $550 millionof subordinated notes were used to redeem all of the Company’s outstanding senior subordinated notes due 2020 and replaced them with notes due 2027.
• These events above significantly impacted certain year-over-year comparisons.
• Net sales for the quarter rose 28.2%, or $262.8 million, to $1,195.9 millionfrom $933.1 million in the comparable quarter a year ago. Organic sales growth was 11.0%. Acquisition sales contributed $160.4 million, of which $122.0 million were from Esterline for the 17 days of ownership in the quarter.
• EBITDA for the quarter increased 15.9% to $509.4 millionfrom $439.4 million for the comparable quarter a year ago.  EBITDA As Defined for the period increased 23.5% to $571.8 million compared with $463.1 million in the comparable quarter a year ago.  EBITDA As Defined as a percentage of net sales for the quarter was 47.8%. Esterline contributed $26.7 million of EBITDA As Defined in the current quarter. Excluding Esterline,  EBITDA As Defined as a percentage of net sales for the quarter was 50.8%.
• “We are pleased with our second quarter results and the strength of our base business,” stated Kevin Stein, TransDigm Group’s President and Chief Executive Officer. “Organic revenue growth was 11% in the quarter driven by good growth across all major end markets. Our core EBITDA As Defined, excluding the dilutive impact of Esterline and the acquisitions completed in fiscal 2018, continued to expand sequentially and over the prior year period to 51.5% in the quarter.
• In addition to the focus on our base business, it was a busy quarter with the completion of the Esterline acquisition, our largest acquisition to date. Our second quarter results include $122 millionof revenue and $27 million of EBITDA As Defined reflecting 17 days of Esterline ownership. Please note the implied Esterline margin from this short period is higher than should be expected for the balance of the fiscal year primarily due to an elevated level of shipments at quarter end.”
• He continued, “Lastly, our decision in the quarter to borrow substantial additional funds impacted our quarterly net income, but we believe the significant near term flexibility and attractive cost will serve us well in the future.”

(Bloomberg)  EQT and Digital Colony Agree to Buy Zayo for $14.3 Billion

• Fiber network owner Zayo Group Holdings Inc. has agreed to be acquired by Digital Colony Partners and EQT Partners for $14.3 billion including debt in a deal that will
  take the fiber-network owner private.
• The deal values Zayo at $35 per share in cash and includes $5.9 billion in debt, Zayo said in a statement Wednesday, confirming an earlier Bloomberg report.
• Zayo struggled through organizational changes and concerns that the market for fiber lines was becoming overcrowded. In March, Zayo announced that they were evaluating strategic alternatives.
• “I am confident this partnership with EQT and Digital Colony will empower Zayo to accelerate its growth and strengthen its industry leadership,” Chief Executive Officer Dan Caruso said in the statement.
• The transaction is scheduled to close in the first half of 2020, pending regulatory clearance and approval by Zayo shareholders.

(Bloomberg)  Investors Suing JPMorgan May Redefine the Leveraged Loan Market

• A group suing JPMorgan Chase & Co. and other Wall Street banks over a loan that went sour four years ago is alleging the underwriters engaged in securities fraud. If successful, the lawsuit could radically transform the $1.2 trillion leveraged lending market.
• The defendants say there’s one key problem — unlike bonds, loans aren’t securities. As a result, they’ve filed a petition asking the court to dismiss the suit on those exact grounds.
• “There are absolutely enormous market consequences if a court determines that leveraged loans are securities,” said J. Paul Forrester, a partner at law firm Mayer Brown who’s not involved in the litigation. “Leveraged loans and lenders would be potentially subject to the same offering and disclosure requirements as securities and would face the same regulatory oversight and enforcement consequences.”
• The suit stems from a $1.8 billion loan that JPMorgan and others arranged for Millennium Health LLC — then owned by private-equity firm TA Associates — and sold to investors in 2014. Within a matter of months, lenders saw the value of their loan plunge as the company disclosed that federal authorities were investigating their billing practices. Millennium agreed to pay $256 million to resolve the probe, and would go on to file for bankruptcy.
• JPMorgan knew U.S. officials were investigating Millennium when it sold the loan, but didn’t tell investors who were about to buy the debt, Bloomberg reported in 2015. The bankers did not provide the information because Millennium told them it wasn’t material at the time.
• “Styled as ‘leveraged loans,’ the debt obligations that defendants sold to the investors back in April 2014 have all the attributes of and, in fact, constituted credit agency-rated and tradeable debt ‘securities,’” the lender trustee wrotein the 2017 suit. As such, the defendants are liable “for sponsoring the materially false presentation of Millennium’s financial condition and business practices.”
• “The sophisticated entities that lent Millennium money now try to classify the loan as a ‘security’ and the loan syndication as a ‘securities distribution’ in an attempt to manufacture a securities fraud claim where none is viable, and to avoid the express language of the contracts into which they willingly entered,” JPMorgan and Citigroup wrote in a memorandum last month.

CAM High Yield Market Note

5/3/2019

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $0.07 billion and year to date flows stand at $16.9 billion. New issuance for the week was $5.0 billion and year to date HY is at $77.9 billion, which is +1% over the same period last year.

(Bloomberg) High Yield Market Highlights

• U.S. junk bond returns turned negative across all ratings yesterday, with the index falling most since March 8 as stocks and oil prices fell. Equity futures rose this morning as bright spots appeared in corporate earnings ahead of jobs data.
• Yields jumped across the risk spectrum, marking the biggest increase in eight weeks as oil closed at a 4-week low
• Yields had been at 12-month lows
• Energy sector yields hit a 3-week high and returns were negative for 6 straight sessions, for the first time since mid-December
• Despite this, investors made a beeline to new bonds in the primary market
• U.S. high-yield funds reported a modest inflow this week ended
• Flows turned negative last week, for the first time time in seven weeks
• Junk bond returns dropped to 8.69% YTD, still the best since 2009 for the comparable period
• Energy returns dropped below 10% to close at 9.61% after six consecutive sessions of negative returns
• CCC were still on top of the pack, with 9.175%
• BBs stood at 8.75% and single-Bs at 8.378%
• Loans at 5.746% and IG at 5.367% 

• (Bloomberg) The Junkiest Corporate Bonds Divide Wall Street

• Bank of America sees a further “melt-up” in triple-C debt, while Citigroup urges caution.
• Triple-C debt has returned 9 percent this year, according to Bloomberg Barclays data, compared with a 2.8 percent gain for the aggregate bond index. At first glance, that seems pretty good. But the broad high-yield index, which includes less risky borrowers, is up almost the same amount, at 8.6 percent.
• Ordinarily, such a return on the broad index would equate to gains of close to 15 percent for triple-C debt, according to strategists at Citigroup Inc. “The inability of triple-C credits to materially outperform has puzzled many investors,” Michael Anderson and Philip Dobrinov wrote. This means one of two things: Either triple-C securities are cheap, or bond traders aren’t fully buying into the risk-on environment.
• Bank of America Corp in an April 26 report, strategists Oleg Melentyev and Eric Yu made a bold proclamation: “A further CCC melt-up still appears inevitable to us.”
• The two sides: Those who favor triple-C debt argue that there’s a bit more juice left to squeeze out of this high-yield rally, even if the rebound from last year looks extreme and unsustainable. The bearish strategists are cautious about wading into triple-C debt and break down which kinds of companies make up the index. According to Citigroup, about half is health-care, energy, retail and communications companies — precisely those that have too much leverage or face a much-changed business climate from even a few years ago.

(Company Filing) Western Digital Announces Financial Results for Third Quarter Fiscal Year 2019

• Western Digital Corp reported revenue of $3.7 billion for its third fiscal quarter ended March 29, 2019. The operating loss was $394 million with a net loss of $581 million. Excluding certain non-GAAP adjustments, the company achieved non-GAAP operating income of $186 million and non-GAAP net income of $49 million. Both the GAAP and non-GAAP results include lower of cost or market inventory charges of approximately $110 million in cost of revenue, primarily related to certain flash memory products that contain DRAM components.
• In the year-ago quarter, the company reported revenue of $5.0 billion, operating income of $914 million and net income of $61 million. Non-GAAP operating income in the year-ago quarter was $1.3 billion and non-GAAP net income was $1.1 billion.
• The company generated $204 million in cash from operations during the third fiscal quarter of 2019, ending with $3.8 billion of total cash, cash equivalents and available-for-sale securities. The company returned $146 million to shareholders through dividends. On February 14, 2019, the company declared a cash dividend of $0.50 per share of its common stock, which was paid to shareholders on April 15, 2019.
• “Market conditions have generally been consistent with our expectations, and while the business environment remains soft, there are initial indications of improving trends,” said Steve Milligan, chief executive officer, Western Digital. “Our expectation for the demand environment to further improve for both flash and hard drive products for the balance of calendar 2019 is largely unchanged. We are executing well on enhancing our product portfolio, driving technology advancements, rightsizing our factory production levels and lowering our cost and expense structure, all of which position us to emerge stronger as market conditions improve.”

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

• GEO reported first quarter 2019 net income attributable to GEO of $40.7 million compared to $35.0 million for the first quarter 2018. GEO reported total revenues for the first quarter 2019 of $610.7 million up from $564.9 million for the first quarter 2018. First quarter 2019 results reflect a $1.5 million loss on real estate assets. Excluding this loss, GEO reported first quarter 2019 Adjusted Net Income of $42.2 million.
• GEO reported first quarter 2019 Normalized Funds From Operations (“Normalized FFO”) of $60.3 million compared to $52.6 million in the first quarter 2018. GEO reported first quarter 2019 Adjusted Funds From Operations (“AFFO”) of $80.3 million, compared to $69.8 million in the first quarter 2018.
• George C. Zoley, Chairman and Chief Executive Officer of GEO, said, “We are pleased with our strong quarterly financial and operational performance, as well as, our improved outlook for the balance of the year. We have taken important steps to reactivate our idle capacity, and we are proud of the continued success of our GEO Continuum of Care enhanced rehabilitation and post-release programs. We remain focused on effectively allocating capital to enhance long-term value for our shareholders, and we believe we will continue to have access to cost-effective capital to support the growth and expansion of our high-quality services.”    

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.7 billion and year to date flows stand at $16.9 billion.  New issuance for the week was $1.2 billion and year to date HY is at $72.2 billion, which is -2% over the same period last year.

(Bloomberg)  High Yield Market Highlights

• Gains in U.S. junk bonds have started to sputter, with the Bloomberg Barclays high-yield index poised for its weakest two-week stretch since the start of March. The oil rally, a big driver in recent days, lost its momentum and cautious investors pulled cash out of high-yield funds.
• The reported an outflow was the first in seven weeks
• Returns turned slightly negative on Thursday with the exception of CCCs, which have gained each day this week
• Returns in the energy sector also turned negative, and could be poised for the same on Friday as WTI prices were down this morning by the most since March 1
• While there was caution, investors made a beeline to new issues
• The market remains ripe for borrowers. While investors withdrew cash from funds this week, retail funds have seen net inflows of ~$17 billion YTD amid a supply shortage
• The month is on track to be the slowest April since 2017
• Junk bond YTD returns dropped to 8.62%, still the best since 2009
• CCC returns rose to 9.016%, the best asset class in fixed income
• BBs stood at 8.28% and single-Bs at 8.64%
• Energy returns dropped to 10.29% while ex-energy rose at 8.53%
• Loans lagged junk bonds with 5.53% YTD

(PR Newswire)  Steel Dynamics Reports First Quarter 2019 Results 

• Steel Dynamics, Inc. announced first quarter 2019 financial results.  The company reported first quarter 2019 net sales of $2.8 billionand net income of $204 million.
• Comparatively, prior year first quarter net income was $228 million, with net sales of $2.6 billion.  Sequential fourth quarter 2018 net income was $270 million, which included additional company-wide performance-based compensation and lower earnings associated with planned maintenance outages at the company’s liquid pig iron production facility and its two flat roll steel mills.  Excluding these items, the company’s fourth quarter adjusted net income was $302 million.
• “The team delivered a strong first quarter performance in a somewhat challenging flat roll steel pricing environment,” said Mark D. Millett, President and Chief Executive Officer.  “A downward trend in flat roll steel prices began in the second half of 2018, and continued through mid-first quarter 2019, reaching an inflection point in February 2019.  The teams were able to increase shipments and offset some of the margin compression, resulting in first quarter 2019 consolidated operating income of $292 millionand adjusted EBITDA of $382 million.  The continued stabilization and improvement in flat roll steel prices are having a positive impact, resulting in increased flat roll order activity and solid order backlogs.  We are seeing continued strength in the automotive, energy and industrial sectors, and as evidenced by strong steel fabrication backlogs, strength in non-residential construction.”
• The company generated cash flow from operations of $182 millionduring the first quarter 2019 and maintained liquidity of $2.2 billion at March 31, 2019.  On March 1, 2019, the company used available cash of $93 million to fund the purchase of a 75 percent controlling interest of United Steel Supply, a leading distributor of painted Galvalume® flat roll steel used for roofing and siding applications.
• As evidence of the confidence in the company’s sustainable long-term cash flow generation capability, the board of directors approved a 28 percent increase in the company’s first quarter 2019 cash dividend, reflecting the strength of the company’s capital foundation and liquidity profile.  The company also repurchased $84 millionof its common stock during the first quarter of 2019.

(Investor’s Business Daily)  New-Home Sales Surge To 16-Month High

• New home sales unexpectedly rose 4.5% in March to a 692,000 annual rate, the best since November 2017, the Commerce Department reported Tuesday. Home sales have picked up in recent months as the Fed suspended rate hikes and mortgage rates fell, hitting a one-year low last month. That’s given new life to homebuilder stocks. Pulte Group (PHM) reported better-than-expected first-quarter earnings early Tuesday.
• Earlier on Tuesday, Pulte Group reported flat first-quarter EPS of 59 cents a share, 12 cents ahead of estimates. Revenue rose 1.4% to $2.0 billion. Still, new orders were valued at $2.7 billion, down from $2.9 billion a year ago.
• Pulte CEO Ryan Marshall said, “Helped by the recent decline in mortgage rates, homebuyers have been steadily returning to the market after a period of slowing demand that began in the second half of 2018.”
• Lower rates should allow housing to help cushion the landing for an economy that has slowed somewhat as tax-cut stimulus fades. Still, most economists expect the pace of improvement to be modest.

(Bloomberg)  High Yield Market Highlights

• S. junk bond returns turned negative yesterday across ratings for the first time in almost four weeks. Yields were off their near 12-month low as equities faltered and oil lost momentum.
• Issuers were undeterred, selling 5 deals for $2.6b, the busiest day in more than 4 weeks, with triple Cs accounting for almost 70% of the volume
• Junk bond returns remain best since 2009, with 8.47% year- to-date
• Retail funds estimate inflow of $926m at Tuesday’s close, JPMorgan wrote, citing Lipper
• Funds have reported inflows for the last five consecutive weeks
• 1Q saw an inflow of $13b, most since 3Q12’s $13.8b
• Energy returns stood at 9.93% YTD
• Ex-energy dropped to 8.2% after losing 0.06%
• Single-Bs and CCC returns were at 8.55% and 8.59% YTD, respectively
• BBs were at 8.2%
• Loans lagged bonds at 5.265%
• Steady growth, low default rate, and strong technicals provide friendly turf for junk bonds
• Moody’s global high-yield default rate dropped to 1.9% for the 12-month period ended March 2019, lowest since October 2011
• S. high-yield default rate is expected to close 2019 at 2.2%

(PR Newswire)  U.S. Concrete Names Ronnie Pruitt President and COO

• S. Concrete, Inc., a leading supplier of ready-mixed concrete and aggregates in active construction markets across the country, announced today that Chief Operating Officer (“COO”), Ronnie Pruitt, 48, has been named President and COO, effective April 15, 2019. Mr. Pruitt will continue to report to Chairman and CEO, William J. Sandbrook, and in this expanded role will take over many corporate functions that support the Company’s operational business units.
• Pruitt, who has been with U.S. Concrete since 2015, has over 25 years of industry experience.  Prior to joining U.S. Concrete, Mr. Pruitt served as Vice President of Martin Marietta Materials, Inc., and as Vice President of Cement Production and Vice President of Sales and Marketing of Texas Industries, Inc.
• “Ronnie has been instrumental in the strategic growth of our Company including very successfully integrating Polaris Materials, a major aggregates acquisition. His leadership and record of success with our ready-mixed concrete and aggregates operations has earned him this expanded role,” said U.S. Concrete Chairman and CEO William J. Sandbrook. “Ronnie is a champion for the health and safety of our employees, is dedicated to our environmental and sustainability initiatives and is laser focused on creating enhanced shareholder value through operational excellence. I am proud of Ronnie’s success and look forward to his enhanced contributions in his expanded role.”

(CNET)  T-Mobile’s John Legere denies Justice Department pushback on Sprint merger

• The Justice Department’s antitrust division is determining whether a combination of the US’ third- and fourth-largest wireless service providers would pose a threat to competition, according to a Tuesday report by The Wall Street Journal. Earlier this month, staffers reportedly shared concerns about the deal and the carriers’ arguments that merging would lead to key efficiencies for the company.
• Legere tweeted that the premise of the Journal’s story “is simply untrue,” adding the company has no further comment.
• Last year, the two carriers announced their $26 billion deal to merge. It may still take several weeks for a final decision to be made, as several state attorneys general are reviewing the deal and the Federal Communications Commission is seeking more data from the companies about the proposed merger, according to the Journal.

(Company Filing)  Western Digital Appoints Robert Eulau As Chief Financial Officer

• Western Digital Corp. announced the appointment of Robert Eulau to lead the company’s finance organization as executive vice president and chief financial officer (CFO), reporting to Steve Milligan, Western Digital’s chief executive officer (CEO). Eulau will join Western Digital on April 22, 2019 to begin his transition into the new role and will formally take over the CFO role from Mark Long on May 9, 2019. Eulau, who joins Western Digital with more than 30 years’ experience in financial and operational leadership roles in the technology industry, succeeds Long, who, as previously announced, will be leaving the company in June 2019.
• “Western Digital occupies an increasingly strategic position in today’s data-driven world. Bob Eulau’s background in optimizing financial and operational performance, paired with his strong leadership skills, will help position us to make the most of exciting short- and long-term growth opportunities,” said Milligan. “I’m thrilled to be adding an executive of Bob’s caliber to our leadership team and I look forward to working with him.”
• “I’m honored to join Western Digital at such an important time in the company’s history,” said Eulau. “The team has built a strong platform for growth and value creation, and I look forward to helping maximize the many opportunities ahead for the company.”
• Eulau was most recently CEO at Sanmina Corporation where he previously served for eight years as CFO. Previously, Eulau held chief financial officer positions at Alien Technology Corporation and Rambus Incorporated, and held a number of financial leadership roles at Hewlett-Packard Company. Eulau earned a Master’s in Business Administration (Finance/Accounting) from The University of Chicago and a Bachelor’s in Mathematics from Pomona College. He will be based at the company’s San Jose, CA headquarters location.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $1.9 billion and year to date flows stand at $15.2 billion.  New issuance for the week was $3.8 billion and year to date HY is at $61.8 billion, which is 4% over the same period last year.

(Bloomberg)  High Yield Market Highlights

• S. junk bonds saw the biggest fund inflow in 10 weeks as the rally extended with yields dropping across the risk spectrum.
• Junk bonds have seen cash inflows for four consecutive weeks and in 10 of the last 12 weeks
• Retail funds have reported net inflows of ~$15b YTD vs the $19b outflows for the same period in 2018
• Yields were near 6-month lows and spreads held firm near the October levels as oil was above $60 and equities rebounded
• On Staples’ aggressive $2.125b 2-part offering to fund a dividend distribution to equity sponsors, a secured tranche had orders of more than $2.5b, while the unsecured tranche was about deal size
• Staples is out with initial price talk of 10% area for a $1.375b 8-year unsecured tranche and about 7.5% on a $750m 7- year secured bond
• Junk bond returns rose to 7.64% YTD making it still the best since 2003
• CCCs slid to 7.54% YTD after posting negative returns yesterday
• Single-Bs beat CCCs with 7.65%
• BBs return is 7.5%
• IG returns are 4.78%
• Loans have gained 4.54%
• The energy sector posted the best 1Q return since 2009 with 8.3% and it continued to be the best performing sector YTD, with 9.32%
• Low default, steady oil, a dovish Fed, strong technicals — reflected in net inflows and slow issuance — boost risk assets

(Reuters)  UGI to buy rest of AmeriGas Partners in $2.44 billion deal

• Energy distributor UGI Corp said on Tuesday it would buy the remaining nearly 75 percent it does not own in retail propane marketer AmeriGas Partners LP in a cash-and-stock deal valued at $2.44 billion.
• Pennsylvania-based UGI also cut its fiscal 2019 profit forecast because of a warmer-than-normal winter in Europe
• In the AmeriGas deal, shareholders will receive 0.50 shares of UGI in addition to $7.63 in cash for each share owned, the companies said in a statement.
• The offer represents a premium of 13.5 percent to AmeriGas’s Monday closing price. The company’s shares were up 13 percent in morning trade on Tuesday.
• “This transaction significantly enhances UGI’s free cash flow, one of the key elements of our long-term success,” UGI Chief Executive Officer John L. Walsh said on a conference call with analysts.
• “It will allow us to increase our dividend by a cumulative 25 percent,” he added.

(Business Wire)  U.S. Department of Energy extends AECOM-led joint venture contract at the Savannah River Site for an additional 18 months

• AECOM, a premier, fully integrated global infrastructure firm, announced today that the U.S. Department of Energy’s (DOE’s) Savannah River Operations Office in Aiken, South Carolina, extended the current liquid waste management contract with AECOM-led Savannah River Remediation LLC. The approximate US$750 million extension will run from April 1, 2019, to September 30, 2020. The value of the contract extension was included in AECOM’s backlog in the second quarter of fiscal 2019.
• “We are pleased that the DOE has decided to extend Savannah River Remediation’s contract,” said John Vollmer, president of AECOM’s Management Services group. “AECOM has a long history of supporting the DOE at the Savannah River Site and extensive experience in liquid waste disposition. We are committed to safely managing the radioactive waste system at the site while reducing the state of South Carolina’s critical environmental risk.”
• During the contract extension period, services that the AECOM-led joint venture will perform are operating the Defense Waste Processing Facility and Saltstone Production Facility, and continuing progress on the Tank Closure Cesium Removal demonstration and construction project and the construction of Saltstone Disposal Unit 7.

(Wall Street Journal)  T-Mobile Spells Out CFO Exit Plan

• T-Mobile US filed an amended employment agreement for its finance chief that spells out a plan for him to leave the company as it awaits regulatory review of a proposed merger with rival Sprint Corp.
• CFO Braxton Carter has been a key figure in the mobile carrier’s pending deal to buy Sprint. A spokeswoman for T-Mobile declined to comment on whether a successor had been chosen.
• Carter’s last day at T-Mobile will be decided by the status of the merger, the company said in a regulatory filing with the Securities and Exchange Commission. Mr. Carter is scheduled to leave at one of three fixed dates, depending which arrives first: the end of 2019; 20 days after the first quarterly filing of the merged company; or 20 days after an announcement the deal is off.
• Analysts speculated about the departure of Mr. Carter in September, when T-Mobile said Sunit Patel would join the company to lead its expected integration with Sprint. Mr. Patel had been chief financial officer at CenturyLink Inc.