Category: Investment Grade Weekly

09 Jun 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Lipper, for the week ended June 7, investment grade funds posted a net inflow of $3.731bn. Per Lipper data, the year-to-date net inflow into investment grade funds was $61.689bn. Per Bloomberg, investment grade corporate issuance for the week topped $18bn. Through the week, YTD total corporate bond issuance was $665.12bn, which is up ~3% from 2016.

Bloomberg Barclays US IG Corporate Bond Index OAS started the day on Friday 113:

  • 2017 wide/tight: 122/111
  • 2016 wide/tight: 215 (a new wide since Jan. 2012)/122
  • 2015 wide/tight: 171/122
  • 2014 wide/tight: 137/97
  • All time wide/tight back to 1989: 555 (Dec. 2008)/54 (March 1997)

(WSJ) Amazon Fights Wal-Mart for Low-Income Shoppers

  • Amazon.com Inc. is dropping its membership price for low-income shoppers, going after a Wal-Mart Stores Inc. stronghold.
  • The online retailer giant said Tuesday that it will offer a nearly 20% segment of the U.S. population—people who obtain government assistance with cards typically used for food stamps—a $5.99 monthly Prime membership, less than the $10.99 a month or $99 annual plan for other consumers.
  • The new Prime offering takes direct aim at Wal-Mart, which counts on shoppers who receive government assistance for a large percentage of sales. Wal-Mart generated about $13 billion in sales last year from shoppers using the Supplemental Nutrition Assistance Program, or SNAP, accounting for around 18% of the money spent through the program nationwide.
  • Those customers also spend additional income while in Wal-Mart stores.
  • Amazon will require cards typically used for food stamps as an initial measure to determine participant eligibility, although they can’t yet be widely used for shopping online.

(Bloomberg) U.S. Natural Gas Heads for Weekly Gain on Hot Weather Outlook

  • Natural gas for July delivery +1.8c to $3.046 at 9:23am (Friday) on Nymex, setting pace for first weekly gain in four weeks.
  • Temperatures may above normal from West Coast to Great Lakes region June 19-23: the Weather Company
  • “A little bit of hot weather seems to be providing some support,” says Gene McGillian, manager of market research at Tradition Energy
  • The fact “that we’re basically getting ready to enter the prime months of summer cooling season might be putting some hesitation on the minds of the sellers”

(Bloomberg) From ‘King Arthur’ to ‘Mummy,’ Summer Is a Bummer in Hollywood

  • Even “Wonder Woman” may not be able to save the summer for Hollywood.
  • The acclaimed superhero movie is only the second big hit in an otherwise dismal season for the film industry, which typically counts on May to early September for about 40 percent of the year’s revenue. A rash of box-office disappointments, starting with “King Arthur: Legend of the Sword” and continuing through “Baywatch,” is likely to repeat this weekend, whenUniversal Pictures’ “The Mummy” lurches into theaters.
  • Even if the rest of this season’s films perform in line with estimates, summer 2017 is likely to just edge out 2014 — the worst summer for blockbuster films since 1976, by some measures, according to Doug Creutz, a Cowen & Co.
  • As some blockbuster films fall short, the market for smaller films is also getting squeezed, Creutz said. “Baywatch,” “Snatched” and “Diary of a Wimpy Kid: The Long Haul” underperformed his estimates by more than 50 percent. Concentration at the box office, with fewer movies sharing a majority of the spoils, has intensified.
  • The best solution for the industry is probably just to make better movies, said Wunderlich’s Harrigan. “The movie business is not a zero-sum game,” Harrigan said. “If you get good movies the box office will improve.”

(Bloomberg Intelligence) Chubb’s 9x Fixed-Charge Coverage Is Above Allstate, Hartford

  • Chubb and Travelers’ superior fixed-charge coverage, at over 9x, stems from their steady profitability and moderate leverage. Their coverage ratios are about two percentage points above Allstate and Hartford, which operate at a mid-7x level.
  • Allstate’s leverage is higher, at 23%, and its results haven’t been as steady as Chubb’s. Hartford’s profitability has suffered from weak results in its personal auto line, which it’s revamping. AIG incurred a loss in 2016 as it boosted reserves repeatedly.
  • Peer Comparison: Chubb’s leverage and fixed charge coverage ratios are in-line with Travelers and superior to the other three insurers’. Chubb is rated A3/A/A, similar to Travelers (A2/A/A+) and Allstate (A3/BBB+). AIG is rated Baa1/BBB+/BBB+ negative, and Hartford is rated Baa2/BBB+.

(Bloomberg BNA) Dow-DuPont Merger Inches Toward Finish Line With Australian OK

  • DuPont Co. and the Dow Chemical Co. are one step closer to closing their $78.5 billion merger after Australia cleared the deal on June 8, but they still face three important hurdles.
  • The deal is still being weighed by a few major merger review authorities — the U.S. Justice Department, India, and Canada. The tie-up is the first stage in a planned division of the combined Dow-DuPont business into three separate companies in agriculture, materials science, and specialty products.
  • Under the companies’ agreement, the deadline to complete the merger is Aug. 31. Dow’s Director of Public Affairs, Rachelle Schikorra, confirmed to Bloomberg BNA that companies expect the merger is on track to close in August with the intended spin-offs completed 18 months thereafter.
  • The deadline for public comment in India was April 10. Following public comment, the Competition Commission of India as a standard operating procedure asks for information from the parties and must generally reach a final determination 45 days after it receives the companies’ submissions.
  • Because the process in the U.S. and Canada is confidential, information on where the companies stand in those merger reviews is unavailable. Canada’s antitrust agency publicly announces its merger decisions on a monthly basis only, but a spokeswoman confirmed that the bureau is still reviewing the merger.
02 Jun 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: Corporate bond issuance for the week topped $25bn, which is higher than most market participants had expected in a holiday-shortened week. Through the end of this week, YTD total corporate bond issuance was $646bn+ (Source: Bloomberg).

(NYP) Cable giant Charter snubbed a buyout bid from Verizon

  • Verizon boss Lowell McAdam, his company facing slowing sales of mobile phones, made a proposal to acquire cable-TV giant Charter Communications in recent months, three sources told The Post.
  • The offer — valued at between $350 and $400 a share, and well over $100 billion, according to two of the sources familiar with the move — was rejected by Liberty Media-controlled Charter because it was too low — and because Charter was not ready to sell.
  • Verizon, whose archrival AT&T has moved to expand beyond the wireless world by buying DirecTV and Time Warner, also recently expressed interest in another Liberty Media property, Sirius XM Holdings, sources said.
  • Verizon’s interest in SiriusXM didn’t get as far as a bid, the sources said.
  • Also standing in the way of Liberty Media agreeing to a deal for any of its units is the tax implications, which would be unpalatable to its billionaire chairman John Malone, sources said.

(Business Wire) Chevron Highlights 2016 Performance and Future Plans at Annual Meeting of Stockholders

  • Chevron Corporation (NYSE: CVX) today provided an overview of the company’s 2016 operational and social performance and future growth plans for the company at its 2017 Annual Meeting of Stockholders in Midland, Texas.
  • “2016 was a transition year for Chevron and the industry,” said John Watson, chairman of the board and chief executive officer. “We took significant actions to reduce costs, limit cash consumption and protect the balance sheet. As oil prices improved, recovery in earnings was evident in the second half of the year. This progress has continued into 2017.”
  • Watson reiterated that he is confident about the company’s future. “We are well positioned with a strong portfolio and the right business model, including a profitable downstream and chemical business and an upstream portfolio of shorter cycle opportunities, highlighted by our enviable position in the Permian Basin,” said Watson. “Our long-term strength is also underpinned by projects in Kazakhstan, Australia, the deepwater Gulf of Mexico, and attractive future options in West Africa, South America, Asia and North America.”

(Fortune) State Street Takes On Wall Street’s Gender Gap

  • The financial services industry has long faced a pipeline problem in recruiting and promoting women—and its culture is one of the biggest obstacles. In the 1980s and ’90s, as asset management became a dominant branch of the economy, the sector earned a reputation as a particularly frat-house-like branch of the corporate boys’ club.
  • State Street wasn’t immune to such behavior. Since the early 1990s, 30 gender discrimination complaints have been filed against the firm at the Massachusetts Commission Against Discrimination. Most have been dismissed or settled, but a few have attracted embarrassing publicity.
  • Company veterans say such incidents were overblown in the press and involved just a few bad apples. Still, such history may be reflected in the fact that there are few women among State Street’s top leaders, most of whom began their careers at least 20 years ago. At the time, “the image of the industry was so tarnished,” notes Evelyn Murphy, former lieutenant governor of Massachusetts and founder of the WAGE Project, a campaign to end the gender pay gap. “For women who were graduating from business schools and colleges, [finance] was not an inviting place to go work.”
  • Despite the reputational troubles, ­financial services companies have largely caught up with corporate America when it comes to women in management. The problem is that women stall at the vice presidential rank. Imagine State Street’s 35,000 employees as a pyramid. At the bottom, there are roughly 17,000 associates and fund accountants, of whom 53% are women. A couple of levels up are assistant vice presidents—middle managers, essentially—and again, there’s a relatively high share of women, at 42%. But the numbers keep declining as you climb. At the top of the pyramid—senior vice presidents and above—only 27% of the positions are filled by women.
  • In 2012 the company announced its first explicit gender-parity goals. Aiming for fifty-fifty at the top right away seemed entirely unrealistic. Instead, State Street aimed for 27% women in senior management roles within three years, up from 24% at the time. They raised the target to 28% in 2015; they’re due to raise it again this year. The percentage of women at the SVP level and higher has steadily risen, and there are now three women on the firm’s 15-­person management committee, up from just one in 2010.
  • Earlier this year, State Street promoted six people to the executive vice president ranks, of whom three were women—the first time in company history that women accounted for 50% of executive-level promotions. The milestone brought Hooley satisfaction. “It’s been eight frustrating years, but I think we’re finally starting to make some traction,” he says.

(Bloomberg) American Tower Said to Explore Purchase of Spain’s Cellnex

  • American Tower Corp. is exploring a bid for Cellnex Telecom SAto expand in Europe as the Spanish tower operator’s main shareholder considers selling assets as part of a merger, according to people familiar with the matter. Cellnex surged in Madrid trading.
  • Any offer from American Tower would hinge on the successful combination of the Spanish company’s largest shareholder, Abertis Infraestructuras SA, with Atlantia SpA, the people said, asking not to be identified as the information is private. Atlantia would determine whether to sell the Abertis assets once the deal is concluded, one of the people said. The Italian company has said it expects the deal to close in the fourth quarter.
  • Cellnex shares rose 5.1 percent to $18.84 at 10:33 a.m. in Madrid on Wednesday after earlier gaining as much as 7.3 percent, the biggest intraday jump since 2015. The shares had risen about 31 percent this year through Tuesday, giving the company a market value of about 4.2 billion euros ($4.7 billion).
  • American Tower, which has a market value of about $56 billion, has yet to make a formal offer for the Spanish firm, another person said. No final agreements have been reached with any of the parties, and the discussions may not result in a deal, the people said.

(Bloomberg) The Whistleblower Behind Caterpillar’s Massive Tax Headache Could Make $600 Million

  • In the the spring of 2008, finance executives fromCaterpillar Inc. gathered for a few days of meetings in the Peoria Civic Center, a few blocks from company headquarters. Early in the proceedings, Eugene Fife, chairman of the audit committee, reminded the attendees that they cradled Caterpillar’s reputation in their hands.
  • It would take just one or two wayward stewards to wreak havoc, Fife said, even at a company as mighty as Caterpillar, the world’s largest maker of bulldozers and other construction equipment. Anyone aware of financial malfeasance or trickery was obliged to report it immediately. Later, then-Chief Executive Officer Jim Owens pressed the point, saying he slept well because he couldn’t imagine Caterpillar experiencing the sorts of ethical lapses that had doomed Enron Corp. and other companies.
  • Listening with dismay was Daniel Schlicksup, an accountant who’d been with Caterpillar for 16 years. He’d been telling his bosses that the company was engaged in an overseas tax arrangement that, by his reckoning, had helped it illegally avoid more than $1 billion in taxes. Now, as Owens spoke, Schlicksup concluded that no one had passed his warnings to the CEO. “I thought to myself, ‘Jim, it’s happening here,’  ” Schlicksup later said in sworn testimony. “ ‘You just don’t know it.’  ”
  • His missives began a chain reaction that’s still in motion. The IRS, aided by documents Schlicksup provided, concluded in 2013 that Caterpillar had employed an “abusive” tax strategy; the agency later demanded $2 billion in back taxes and penalties. In early 2014 a U.S. Senate investigative committee, with input from Schlicksup, grilled executives and concluded the company had avoided taxes on more than $8 billion in revenue.
  • Schlicksup, now 55, parted ways with Caterpillar five years ago. The company has portrayed him in court filings as a paranoid, self-righteous employee who buried his own future there. But if the IRS collects what it claims it is owed, Schlicksup might end up the best-paid whistleblower of all time, with a potential paycheck of $600 million, while Caterpillar, the 92-year-old pride of Peoria, will experience something unfamiliar: public humiliation.
  • For all its complexity, the basics are easy enough to understand: Caterpillar essentially flipped the parts profit allocation so the new Swiss entity would be credited with 85 percent of the income on those sales. The company then paid taxes on those earnings at rates ranging from 4 percent to 6 percent, as negotiated with the Swiss tax authorities.
  • Caterpillar wound up effectively keeping two sets of books. The public one attributed the bulk of parts profits to Geneva, with its puny tax rate. An internal ledger known as “accountable profits” tracked the operating income of the divisions and calculated employee bonuses accordingly, says a 2014 report on CSARL by the Senate Permanent Subcommittee on Investigations. Under former Senator Carl Levin, a Michigan Democrat, the subcommittee scrutinized tax avoidance strategies at Cat, Apple, HP, and Microsoft.
  • In court filings, Caterpillar says it took Schlicksup seriously, but he was just wrong. “Caterpillar has investigated every one of Mr. Schlicksup’s complaints and has been satisfied with the investigative process and the conclusions drawn,” the company told OSHA. “Mr. Schlicksup, however, was, and continues to be, unwilling to accept that investigations are initiated, closed, and owned by Caterpillar and that he is not entitled to know the outcomes of investigations.”
26 May 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: Fund flows remain positive but final data for the week is not yet available as we go to print. Issuance was strong ahead of the holiday shortened week which saw $48.775bn in investment grade corporate primary issuance. Through the end of this week, YTD total corporate bond issuance was $621.145bn. As we near the close of the week, the BofAML US Corporate IG Index is at +118 vs +117, tying the tight YTD and the tightest level since Sept. 2014, was also seen May 15-16 (Source: Bloomberg).

(Bloomberg Intelligence, CAM notes from conference call) Broad-Based Demand Fuels Toll’s Volume Gains, Prices Slip on Mix

  • Toll Brothers’ 2017 homebuilding revenue may top the midpoint of revenue guidance calling for an 11% gain. Closings are likely to skew toward the high end of the range, signaling growth of more than 20%, while average selling prices fall about 6% (driven solely by mix). Volume growth is being fueled by broad-based demand, particularly in California, where Toll will open 18 communities in 2017 as part of its 7% community count growth target. In addition, Toll’s lower-priced products should support faster turnover.
  • Regions: Toll Brothers’ homebuilding operations are divided into five regions and City Living. As of fiscal 2016, California accounted for 28% of revenue, followed by the West (18%), Mid-Atlantic (17%), South (16%), North (16%) and City Living (5%).
    • 2017 Outlook per conference call & investor presentation:
      • 9500 – 7,450 home closings (Previously 6,700-7,500)
      • ASP of $775-825k (unchanged)
      • Revenue of $5.4-6.1bn (Previously $5.19-6.19bn)
      • Community count growth similar to 2016 (unchanged)
      • Gross margins of 24.8% – 25.3% (unchanged)
      • SG&A Margin of 10.6% of revenues (unchanged)
      • JV income between $160-200mm (unchanged)

(CNET) Sports-free digital TV for $10 a month? Viacom may be trying

  • Hunting for a streaming TV option that doesn’t make you pay for ESPN? Viacom may be aiming to deliver.
  • The TV company, which owns networks like Comedy Central, MTV and Nickelodeon, is talking with rival programmers AMC and Discovery about a possible digital-TV bundle that could cost as little as $10 a month, according to a report late Monday in the New York Post.
  • Scripps, which operates channels like HGTV, is also a possible partner.
  • It would add a fresh option in the ballooning marketplace for live, online TV options. In the past year, YouTube, Hulu and DirecTV have rolled out livestreaming television subscriptions that go up against traditional cable as well as existing digital competitors like Sling TV and PlayStation Vue.
  • But Viacom’s potential bundle would be unique from all the rest in a major way: You wouldn’t be paying for the most expensive kind of TV out there, like sports on ESPN.

(PR Newswire) Vulcan Announces Agreement to Acquire Aggregates USA LLC

  • Vulcan Materials Company (NYSE:VMC), the nation’s largest producer of construction aggregates, today announced that it has reached a definitive agreement with SPO Partners to acquire its aggregates business, Aggregates USA LLC for $900 million in cash. Aggregates USA LLC operates 31 facilities serving high growth markets in Georgia, Florida, Tennessee, South Carolina and Virginia.
  • “We are pleased to have reached agreement with SPO Partners for these strategic assets, which enhance our ability to serve high growth markets throughout the southeastern U.S.,” said Vulcan’s Chairman and Chief Executive Officer Tom Hill. “With the addition of these quarries and related assets, Vulcan will be able to capitalize on continuing increases in state highway funding programs in Georgia, Florida, South Carolina, Tennessee, and Virginia, and on the continued private sector growth across the region. This transaction will provide Vulcan with long-term high quality reserves across the entire portfolio. Aggregates USA operates efficient, high productivity facilities run by strong teams, and we welcome them to our Company.”
  • The acquisition complements and expands Vulcan’s service offerings in Georgia with three granite quarries – two of which have rail capabilities extending the Company’s reach into important markets – along with 16 rail distribution yards in Georgia, South Carolina and Florida. In addition, the acquisition includes 12 limestone quarries in eastern Tennessee and southwest Virginia. Vulcan may divest several quarries in Tennessee to a third party in order to expedite the regulatory approval process.

(FitchRatings) Fitch Affirms Albemarle Corp.’s IDR at ‘BBB-‘; Outlook Revised to Positive

  • Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) of Albemarle Corp. (NYSE: ALB) at ‘BBB-‘. The Rating Outlook is revised to Positive from Stable. Albemarle’s ratings reflect its exposure to the growing lithium industry, the relative stability of its bromine and catalysts businesses, strong FCF generation and increased financial flexibility.
  • Albemarle’s credit metrics have improved considerably since the Rockwood transaction was finalized in early 2015 due primarily to strong growth in the company’s lithium business and the repayment of greater than $2 billion of debt using proceeds from several divestitures including the sale of its Chemetall business in 2016. Fitch projects Albemarle’s FFO Adjust Leverage will stay within the 2.5x-3.0x range through 2019 and forecasts strong FCF generation that should average between $150 million to 200 million on a normalized basis. Albemarle plans to spend greater than $2 billion in CapEx through 2021 with the bulk of that spending used to increase capacity in its lithium business. While Fitch projects the company should be able to comfortably self-fund these expenditures, Albemarle has also stated its intent to utilize its strengthened balance sheet to pursue acquisitions in the lithium space and return cash to its shareholders in the form of growing dividends and/or share repurchases. However, Fitch believes the company will balance such priorities against its goal of maintaining a net leverage ratio in the 2.0-2.5x range.
  • The Positive Outlook reflects Fitch’s view that Albemarle’s positive operating momentum and strengthened balance sheet paired with a demonstrated track record of adhering to a credit conscious capital allocation policy as the company pursues its strategic goals would likely lead to a positive rating action in the coming 12-18 months.
19 May 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Lipper, for the week ended May 17, investment grade funds posted a net inflow of $3.101bn. Per Lipper data, the year-to-date net inflow into investment grade funds was $54.889bn. Per Bloomberg, with one deal pending on Friday morning, investment grade corporate issuance through Thursday of this week was $25.3bn. Qualcomm is pending and could print up to $10-12bn on Friday, which would up this total substantially. Through Thursday, YTD total corporate bond issuance now trails 2016 at $573.87bn, which is down 4% year over year.

(Bloomberg) PG&E Issuer Credit Ratings Raised to A- From BBB+ by S&P

  • The higher ratings are based on reduced business risk stemming from the company’s long-term efforts to regain the confidence of its regulators and manage the financial fallout the 2010 San Bruno gas transmission explosion, S&P says.
    • CPUC approved multi-year rate increases: S&P
    • Outlook stable

(Bloomberg Intelligence) Vulcan’s Growth Is Tied to U.S. Highway Bill and M&A

  • Vulcan Materials is sensitive to variations in the U.S. economic cycle, with a strategy to extend its domestic reach across key states. The U.S. highway bill is a key driver for the construction aggregates company, given its road-building focus. President Donald Trump’s proposal for infrastructure investments of about $1 trillion adds to Vulcan’s sharp rise in demand since the end of 2013, resulting from growth in residential and commercial construction. Vulcan can probably increase acquisitions in 2017-18.
  • The company may be able to target not only small caps, but eventually bigger fish, management said on its 1Q earnings call. Since the last financial crisis, Vulcan has acquired about 20 small and medium companies in the U.S.
  • In 2017, Vulcan Materials’ margins may expand further on growing demand for aggregates accompanied by a forecast 5-7% increase in selling prices. The focus on discipline over efficiency in operating areas to maximize per-hour productivity has contributed to continued margin improvement. Its Ebitda margin has widened in the past two years as the U.S. economy recovered. In 2016, the overall business delivered adjusted Ebitda margin of 26.8%. This represents an improvement of 275 bps over the prior year.

(NYT) With Amazon In Cross Hairs, Walmart Posts Gains Online

  • Walmart has always excelled at selling products in its cavernous stores. It appears to be getting its head around selling online, too.
  • On Thursday, the company said e-commerce sales had grown 63 percent in the United States in the latest quarter. The unexpected leap offered the strongest evidence yet that Walmart, the country’s largest retailer, is making headway in its effort to be as prominent online as it is across the American landscape.
  • “This is extraordinary growth, and we’re pleased with the traction we’re generating across our e-commerce offerings,” said Brett Biggs, Walmart’s executive vice president and chief financial officer.
  • Walmart completed its purchase of Jet in September. Smaller digital acquisitions followed, including ModCloth, a women’s clothing retailer, and the outdoor apparel site Moosejaw.
  • The deal for Jet was also widely seen as a play for its founder, Marc Lore, a serial digital entrepreneur who could help fix Walmart’s online strategy. Mr. Lore was put in charge of running Walmart.com after the acquisition, spearheading the face-off between the world’s largest brick-and-mortar retailer and its biggest online competitor.
  • There is no doubt, though, that the company still has a ways to go before coming close to Amazon in e-commerce. Activity on Amazon, which recorded about $136 billion in annual sales last year, accounts for more than half of all online shopping in the United States.
  • Walmart provides a growth figure only for its online business, and does not specify revenue.

(TheStreet) As Apple Battles Qualcomm, Don’t Overlook its Patent Dispute With Nokia

  • Apple’s royalty dispute with Qualcomm has been a distraction from the 10th anniversary edition of the iPhone due out later this year.
  • Qualcomm ratcheted up the litigation this week when it filed suit against Apple contract manufacturers Foxconn, Pegatron, Wistron, and Compal, for skipping royalty payments. The chipmaker said in April that Apple is withholding payments to its contract manufacturers to cover the royalties they owe Qualcomm. Moreover, Qualcomm alleges that Apple ordered the companies to withhold the funds, and has indemnified them.
  • Messy as the fight with Qualcomm has become, Wells Fargo analyst Maynard Um suggests that Apple’s dispute with Nokia is a bigger near-term concern. Nokia filed suit in two German venues, a U.S. District Court in Texas and other venues in December, alleging patent violations.
  • “While most of the focus has been on [Qualcomm] given the recent headlines, we believe the Nokia litigation is more important with the potential for initial news flow as early as the end of calendar 2017,” Um wrote.
  • Nokia has filed complaints in Munich and Mannheim, Germany that could have rulings this year this year. Other disputes, such as a complaint in the Netherlands, could reach outcomes soon after.
  • Um estimates that Nokia previously received just 0.2% of the price of the device in which Apple uses its technology. Nokia is unlikely to score the 2.7% rate that Qualcomm receives, Um suggested. If Nokia could obtain a 1.5% rate, it could reduce Apple’s earnings per share by 20 cents.
05 May 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Lipper, for the week ended May 3, investment grade funds posted a net inflow of $1.051bn. Per Lipper data, the year-to-date net inflow into investment grade funds was $49.087bn. Per Bloomberg, with one deal pending on Friday morning, investment grade corporate issuance for the week is expected to come in at $37.525bn, while YTD volume has now topped $514bn. IG corporate bond issuance is now up 5% year over year.

(Bloomberg) U.S. Job Gains Rebound; Unemployment Falls to Pre-Crisis Low

  • U.S. payroll gains rebounded in April by more than forecast and the jobless rate unexpectedly fell to 4.4 percent, signaling that the labor market remains healthy and should support continued increases in consumer spending.
  • The 211,000 increase followed a 79,000 advance in March that was lower than previously estimated, a Labor Department report showed Friday. The median forecast in a Bloomberg survey of economists called for a 190,000 gain. While the unemployment rate is now the lowest since May 2007, wages were a soft spot in the report, climbing 2.5 percent from a year earlier.
  • The brighter figures follow a weaker-than-expected reading in March, when payrolls were partly depressed by a snowstorm that slammed the Northeast during the survey week. Strengthening business sentiment might be translating into hiring, and the data should keep Federal Reserve policy makers on track to raise interest rates in the coming months after officials declared the first-quarter slowdown to be temporary.

(Fitch Ratings) Fitch Rates Eli Lilly’s Notes Offering ‘A’; Outlook Stable

  • Fitch Ratings has assigned an ‘A’ rating to Eli Lilly & Co. Inc.’s (Lilly) senior unsecured notes offering. The company intends to use the net proceeds for general corporate purposes including the refinancing of existing borrowings. The Rating Outlook is Stable. Lilly had roughly $10.2 billion of debt outstanding at March 31, 2017.
    • –Lilly is facing increasing but relatively manageable patent expiries, with roughly 26% of total sales at risk through 2019, excluding Alimta. Nearly 30% of those sales comes from Forteo, a biologic, which is expected to experience relatively lesser sales decline than a traditional small molecule drug once its patent expires in December 2018.
    • –Fitch expects Lilly will generate low- to mid-single-digit organic revenue growth during 2017-2019 with the patent expiries offset by continued strength in established and new products.
    • –Lilly needs to rebuild its late-stage pipeline following recent approvals and a few setbacks in development. We think this is achievable through advancing mid-stage development candidates and rolling in acquired/partnered products.
    • –Lilly’s leaner cost structure and improving product sales mix should support margin expansion in 2017.
    • –Fitch forecasts that Lilly will generate solid free cash flow of $1 billion (FCF; cash flow from operations minus capital expenditures and dividend payments) in 2017.
    • –The ‘A’ rating incorporates moderate share repurchases, targeted acquisitions and incremental dividend increases through the forecast period.

(TheStreet) Apple Can Return $300 Billion to Shareholders Even Without a Tax Holiday

  • As a sign of Apple’s “strong confidence in our future,” CEO Tim Cook pledged to boost its capital returns to shareholders through March 2019 from the previously-announced $250 billion to $300 billion, during the company’s first-quarter earnings call after the close Tuesday.
  • Apple reported $256.8 billion in cash and equivalents in the quarter, with $239.6 billion of it outside the U.S.
  • “With Apple’s cash pile growing to over $250 billion, questions regarding repatriation tax policies and buybacks return,” said Moody’s Investors Service analyst Gerald Granovsky in an emailed statement about Apple’s cash dilemma. “Expansion of the shareholder return program by $50 billion puts more pressure on the company to raise debt absent repatriation.”
  • For Apple and other blue chip tech companies, paying low single-digit interest on debt to fund moves is much cheaper than repatriating cash at a 35% corporate tax rate.
  • The company has increased its leverage in recent years to cover shareholder returns and other expenses, even as its cash balance has topped a quarter of a trillion dollars.
  • Apple issued $11 billion in debt during the second fiscal quarter, and reported long-term debt of $84.5 billion. The growth in debt over the last half decade is noteworthy. In the second fiscal quarter of 2015, Apple’s long term debt was $40.1 billion — less than half its current total. In the second fiscal quarter of 2013, according to FactSet, Apple had no long-term debt.
  • President Trump supports a 15% corporate tax rate, and Secretary of the Treasury Steven Mnuchin said in late April that the administration is in talks on a proposal. “We’re working with the House and Senate on that, but I will say it will be a very competitive rate that will bring back trillions of dollars,” Mnuchin said at a White House briefing.

(WSJ) Southern Seeks $3.7 Billion From Toshiba for Georgia Nuclear Plant

  • The chief executive of Southern Co. SO on Wednesday said the utility will need $3.7 billion and cooperation from Toshiba Corp. to complete a nuclear power plant in Georgia that was being built by bankrupt Toshiba unit Westinghouse Electric Co.
  • But even if it obtains those commitments, Southern isn’t sure it can finish the half-built Georgia reactors, Thomas A. Fanning, Southern’s chairman and chief executive, said in an interview with The Wall Street Journal.
  • “We are working with Toshiba to receive complete assurance as to the $3.7 billion guarantee that they owe us, whether we finish the project or not,” said Mr. Fanning.
  • Toshiba has said it has about 650 billion yen ($5.8 billion) in parent-company guarantees made on Westinghouse’s behalf, including guarantees to make payments that would be required if Westinghouse can’t complete the nuclear-reactor projects. Toshiba has said it plans to take write-downs to account for these guarantees when it reports results for the year ended March 2017. It hasn’t released those results yet but says it is likely to report a net loss of about ¥1 trillion for that year.

(Conference Call, CAM Notes) Union Pacific 2017Q1 Recap

  • Union Pacific reported results that beat consensus estimates across the board. The operating environment saw an improvement this quarter as Agricultural products, Coal, Industrial Products, and Intermodal saw positive volume with Coal seeing a 16% increase in carloads over Q1 2016. With these improved results and expected U.S. growth, 2017 is shaping up to be a better year than 2016; however, many of the industries showing strength are vulnerable to market conditions. UNP is expecting single digit volume growth, pricing slightly above inflation, and productivity savings of $350-400mm to help lead the company to a solid year (unchanged). Politically, the company could see a significant boast by a lowering of the corporate tax rate as railroads tend to be among the largest tax payers, and they have a possible headwind if the US were to withdraw from NAFTA.
  • The company reiterated their “less than 2.0x” leverage target. With dividends and share repurchases outpacing FCF, UNP is expecting EBITDA growth to help them remain below this target.

(Bloomberg) Pay-TV Users Are Bailing Faster Than Ever, Clouding Media Stocks

  • U.S. cable and satellite-TV providers suffered their worst first quarter of subscriber losses in history, raising fresh concerns that cord-cutting will accelerate and drag down media stocks.
  • Charter Communications Inc., Dish Network Corp., AT&T Inc.’s DirecTV and Verizon Communications Inc. combined to lose almost half a million video subscribers in the period, as more consumers spurned the cost and clutter of traditional pay-TV packages for cheaper online alternatives. Only Comcast Corp. added customers.
  • The results indicate that consumers may be growing more aware of on-demand streaming services like Netflix and Amazon and the increased depth their content offerings — and that may be spurring more cord-cutting in 2017. Major pay-TV operators lost 1.4 million subscribers last year, according to Bloomberg Intelligence.
  • Consumers are also getting more knowledgeable about online live-TV services as well. At least a half dozen companies, including Hulu, AT&T, Dish, Sony Corp. and Google’s YouTube are convinced they can lure people back to live TV packages by offering a slimmer selection of channels at a lower cost than the average cable package. They’ve also all tried to improve upon the presentation of on-demand programs.
  • At Charter, which has been busy working to integrate the acquisitions of Time Warner Cable and Bright House Networks, executives are seeing a shift in market share from satellite providers DirecTV to Dish to cable operators, according to Chief Executive Officer Tom Rutledge.
  • “There is a general decline in the marketplace that is mostly price-driven, and I think that those trends are unlikely to change in the near term but not to particularly accelerate,” Rutledge said on a conference call Tuesday. Shares of Charter fell as much as 3.2 percent to $333.20 in New York Tuesday, the biggest intraday decline in three months.
  • The Stamford, Connecticut-based company, backed by billionaire John Malone, is expected to rebound as customers sign up for new packages at new prices. Rutledge also said he’s confident that Charter can also differentiate its service offerings from over-the-top video providers that have become so popular with consumers.
  • “None of them have a product that is better than ours that we can see in the marketplace,” said Rutledge. “So, we expect to succeed in the marketplace going forward.”
  • One bright spot for Charter in the first quarter was its internet business. After all, to subscribe to online video services that have become increasingly popular around the world, you need fast a broadband connection.
  • The company added 428,000 residential internet subscribers in the quarter on a pro forma basis, compared with 520,000 a year earlier. Three analysts surveyed by Bloomberg predicted a gain of 388,000 customers, on average.
  • The company is also planning to integrate Netflix Inc.’s service into its user interface and is in talks with YouTube to do the same, just as Comcast has done recently.

(Bloomberg) Here’s Why Skinny TV is Still an Experiment for Companies

  • Companies like Dish Network Corp., Sling TV LLC, AT&T Inc., YouTube and Verizon Communications Inc. have been trying to pull together “skinny” cable packages that would charge a reasonable price for just the channels customers really watch, without all the niche programming. Hulu LLC is the latest to offer a “skinny” package, unveiling plans for a $40-a-month service, Hulu with Live TV, on Wednesday. That makes at least seven contenders on the market or planning to enter, but providers are still trying to figure out how to streamline their offerings while making a profit.
  • Take AT&T’s DirecTV Now package, introduced late last year and starting at $35 a month. The basic package, called “Live a Little,” features 19 television networks that regularly average at least 1 million viewers—a pretty big audience on cable. Network owners traditionally charge distributors a monthly fee for each subscriber—depending on the size and demographics of their audiences. If you added up the monthly charges for those 19 networks, you’d get $23 a month, according to estimates from JPMorgan Chase & Co.
  • So AT&T should be able to make a pretty good profit with a $35 subscription, right? Wrong. An additional $11 a month goes to pay for 33 more channels that you may or may not want but that network owners push distributors to include in the bundle. If AT&T wants to offer Walt Disney Co.’s ESPN in its streaming package, Disney offers discounts to ensure it also buys the streaming rights for ESPN2, Disney XD and Disney Junior. The list of channels start to pile up pretty quickly.
  • When you add that $11 to the $23 AT&T pays for more popular channels, AT&T walks away with less than $1 in profit. This puts companies that want to offer a “skinny bundle” in a bind. Raise prices much more than $35 and their streaming services won’t be that competitive against traditional cable. On the other hand, if they leave out some networks to pad profits or cut prices, they may not be as attractive to viewers who want to be able to watch ESPN, TNT, FX and HGTV. DirecTV Now made one big sacrifice, introducing its service without CBS—the most-watched network—after failing to come to terms on a price.
  • That’s why companies continue to tinker with new “skinny” bundle packages. The right channels at the right price point make a big difference to the bottom line.
28 Apr 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Lipper, for the week ended April 26, investment grade funds posted a net inflow of $4.699bn. Per Lipper data, the year-to-date net inflow into investment grade funds was $48.036bn. Per Bloomberg, investment grade corporate issuance for the week was $22.4bn, while volume for the month of April was $78.45bn. IG corporate bond issuance started the year at a robust pace but that has now somewhat abated, still, issuance is slightly outpacing last year and is up 1% year over year.

(Bloomberg, Conference Call) Masco Corporation Reports First Quarter 2017 Results

  • Masco Corporation (NYSE: MAS), one of the world’s leading manufacturers of branded home improvement and building products, reported strong net sales and operating profit growth in the first quarter of 2017.
  • “Our strong operating performance continued in the first quarter of 2017 as our leading brands coupled with our innovative products and programs drove demand with consumers and pros alike, resulting in profitable growth across our portfolio,” said Masco President and CEO, Keith Allman.
  • Conference Call Highlights:
    • Masco has no exposure to Canadian lumber tariffs
    • The company is seeing some cost inflation; however, it takes two quarters to flow through the financial statements
    • The company is seeing strong demand in their Repair & Remodeling products across all product lines and price points. R&R accounts for 83% of total sales (unchanged)
    • Masco is still focusing on bolt-on strategies in either their plumbing or decorative architecture segments, which has been unchanged over the past several quarters
      • The company looked at the paint assets divested from the Valspar/Sherwin-Williams transaction, but they weren’t a good strategic fit
    • Masco returned $124mm to its shareholders through dividends and share repurchases for the quarter

(Bloomberg) Comcast Leaps to a Record as ‘Get Out’ Helps Film Unit Shine

  • Comcast Corp.’s foray into Hollywood is paying off, with box-office hits “Get Out” and “Fifty Shades Darker” boosting first-quarter profits and sending shares to a record.
  • The shares rose as much 3.9 percent to $40.29 in New York Thursday, the highest price since at least 1983.
  • The results offer the latest proof of Comcast’s ascent to the heights of the American entertainment industry, a trajectory that seemed unlikely when the Philadelphia-based company bought NBCUniversal in 2011. Comcast is showing it can compete head-on with Walt Disney Co. for TV audiences, moviegoers and theme-park tourists.
  • Comcast executives attributed the turnaround largely to the company’s new video platform, called X1, which makes it easier to search for shows and movies, as well as YouTube and Netflix, from their cable set-top box. X1 is in about half of Comcast homes.
  • At the same time, the company is continuing to add residential high-speed internet subscribers. Comcast signed up 397,000 new broadband customers in the quarter, shy of the average prediction of 400,000 from three analysts. It signed up 403,000 broadband subscribers in the same quarter a year ago.


(Bloomberg) Microsoft Momentum Slows on Weaker Sales of Surface Tablets

  • Satya Nadella’s plan to reshape Microsoft Corp. as a cloud-computing company hit a snag in the third quarter, when lackluster sales of Surface tablets and weaker demand for corporate services kept revenue growth in check.
  • Adjusted sales in the period that ended in March rose to $23.56 billion, falling slightly short of analysts’ average estimate. The miss was enough to give investors pause — the software maker’s shares slipped 1.9 percent following the report, after rising to an all-time high at Thursday’s close in New York.
  • Even as some non-cloud businesses underperformed, the company posted another quarter of brisk demand for internet-based versions of Office software and its Azure service for running and storing customers’ data and applications. Azure sales rose 93 percent, while commercial Office 365 — cloud-based versions of Word, Excel and other productivity software — increased 45 percent. Microsoft spent last year pouring billions into data centers to run these services and is now signing up customers to fill them. Meanwhile, the personal-computer market, a drag on Microsoft results for the past several years, has begun to stabilize.

(WSJ) Southern’s Georgia Power Objects to Westinghouse Bankruptcy Loan

  • Georgia Power Co. has taken issue with Westinghouse Electric Co.’s proposed $800 million bankruptcy loan, saying the financing could threaten the construction of the first new nuclear reactors to be built in the U.S. in decades.
  • Westinghouse filed for chapter 11 bankruptcy at the end of March and wants to borrow money to keep its other businesses healthy, while it contends with the fallout of nuclear construction projects that are years behind schedule and billions of dollars over budget.
  • With a Friday deadline looming for Georgia Power to decide whether to continue construction at the Vogtle Electric Generating Plant, it and other plant owners are protesting Westinghouse’s efforts to pledge intellectual property as collateral for the loan deal.
  • If Westinghouse’s bankruptcy loan goes through as planned, the company’s lenders would be in position to “foreclose on the intellectual property, which could seriously disrupt or even potentially halt construction,” lawyers for Georgia Power, the largest subsidiary of Southern Co., warned in a court filing.
  • Based on Westinghouse’s AP1000 nuclear power plant design, the new Vogtle reactors are the first of what is supposed to be a new generation of commercial nuclear plants to be built in the U.S.
  • U.S. Commerce Secretary Wilbur Ross told The Wall Street Journal this week that the fate of Westinghouse’s nuclear business is a matter of national security. Asked if he would consider using public funds to assist Westinghouse, Mr. Ross said he believed the company’s bankruptcy funding was “adequate” for the immediate future. Any change to the financing, however, could change that assessment.


(FBN) Crown Castle International Corp. Makes a Big Bet on Small Cells

  • Crown Castle exceeded the high end of management’s guidance ranges on many metrics, including revenue and AFFO profits.
    • Site rental revenue showed 4% organic year-over-year growth, with the remaining increases coming from new site acquisitions.
    • Small-cell revenue jumped 41% higher and now accounts for 15% of Crown Castle’s total sales. That’s up from 11% in the year-ago quarter.
    • Crown Castle is emphasizing its small-cell operations in a big way, backed by large capital investments. Sixty-one percent of this quarter’s discretionary capital expenses, or $151 million, were funneled into construction and infrastructure improvements in the small-cell segment. That’s up from 43% or $79 million in the first quarter of 2016.
    • Crown Castle is planning to double its network of small-cell stations over the next 28 to 24 months. The network model of small wireless stations supported by direct fiber-optic backbone connections promises to match the traditional cell tower market in terms of long-term revenue footprint.

(WSJ) Coke to Cut 20% of Corporate Workers as It Battles Soda Slump

  • Coca-Cola Co. executives said Tuesday they plan to eliminate roughly 20% of corporate staff, as the beverage giant battles a slump in soda sales and expands a long-running cost-cutting program.
  • James Quincey, a company veteran who will take over as chief executive from Muhtar Kent next week, said the Atlanta-based company will cut 1,200 jobs to run a “more focused, lean corporate center.”
  • Coke’s beverage volumes were flat in the first quarter globally, dragged down by the macroeconomic conditions in some Latin American markets and the shift of the Easter holiday into the second quarter. Soda volumes world-wide fell 1%.
  • Mr. Kent said the company remains on track to meet its revenue and profit targets for the year.
  • The beverage giant has been aiming to cut sugar from its products and diversify beyond soda as more countries consider special taxes on high-calorie drinks to combat rising obesity and diabetes, and as consumers switch to healthier beverages.
  • On Tuesday, Mr. Quincey said the company is adjusting its growth model to meet people’s changing tastes and preferences.

(Bloomberg) Spirits Maker Castle Said to Eye Sale Amid Takeover Interest

  • Castle Brands Inc., a producer of whiskey, vodka and other spirits, is exploring a sale and may draw interest from potential buyers including Corona-maker Constellation Brands Inc. and Sazerac Co., according to people familiar with the matter.
  • The New York-based company is working with advisers at Perella Weinberg Partners on a potential sale, the people said, asking not to be identified as the information is private. Castle Brands may also attract bigger rivals, such as Diageo Plc, the world’s largest distiller, and Pernod Ricard SA, the people said. Heaven Hill Distilleries Inc. may also consider a bid, the people said. Castle Brands had a market value of about $260 million at the close of trading on Tuesday.
  • Sales of distilled spirits in the U.S. may outperform the 3.7 percent annual growth rate they’ve maintained since 2007 on the back of reduced regulatory restrictions on product availability under the Donald Trump administration and new emphasis on luxury and super-premium products, according to a report from Bloomberg Intelligence.

(Bloomberg) Entergy Sees ‘Strong’ Power Demand by Refiners in Rest of 2017

  • Entergy CFO Drew Marsh cites wider crack spreads and end to turnarounds for forecast, commenting on 1Q earnings call.
    • Says “premature” to lower 2017 forecast after 1Q EPS miss; adds no change to spending plan if federal taxes cut
    • CEO Leo Denault says co. may propose smaller peaker, renewables in New Orleans
    • Seeking to lower CO2 emissions regardless of President Trump’s executive order
    • Co. says all steps on track for Indian point closing; litigation ended
13 Apr 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: Per Bloomberg, investment grade corporate issuance for the holiday shortened week was $11bn. Investment grade corporate issuance so far for the month of April is $31.1bn.

(Forbes) Defying Critics, Apple Continues To Gain On PC Rivals

  • If you read enough tech news, you “know” that Apple is blowing it with the Mac. For months now, the headlines have been clear: “How Apple Alienated Mac Loyalists,” Bloomberg wrote back in December. And just yesterday on FORBES, Ewan Spence reported on a Laptop Mag report about Apple’s dwindling customer satisfaction ranking in “Apple Losing Out As Consumers Reject New MacBook Pro.” With this kind of drumbeat, it wouldn’t be surprising to learn Apple is indeed losing market share. Except that it isn’t. On the contrary, the two firms that track PC sales both agree Apple is gaining share in the PC market — as it has nearly every quarter for the past several years.
  • Here are the figures for Q1 of 2017: Gartner says Apple sales were up 4.5% over a year ago and market share rose from 6.3% to 6.8% worldwide. That puts Apple in Gartner’s top 5 ahead of flagging Acer. Apple’s total is just 7% behind fourth-place Asus in shipments, suggesting the Mac maker could leapfrog it as well soon. IDC has slightly different figures, with Apple’s Mac total rising 4.1% and share growing from 6.7% to 7.0%. In Gartner’s math, Apple is already fourth. Both agree Apple delivered a bit over 4.2 million computers, a figure which Apple always clarifies by offering a precise number with earnings. (Those are due in a few weeks.)
  • Notably, Gartner thinks the PC market contracted by 2.4% over 2016 while IDC sees it growing by a mild 0.6%. Part of that difference is methodology: Gartner doesn’t include Chromebooks in its numbers but does include 2-in-1s like the Surface (iPad Pros? nope). IDC includes Chromebooks, which it credited for at least part of the overall increase, but excludes all detachable tablets — so that means Surface and iPad Pro are out.
  • But no matter how you slice and dice the data, it’s good news for Apple, which saw 4%+ unit growth against a flat or shrinking PC landscape. While Apple remains a small slice of the market, it helps to have some perspective on how that slice has grown. Back in 2010, the PC market was a robust 351 million units for the year (per Gartner). Apple wasn’t in the top 5, but searching through its earnings reports yields a total of 14.4 million Macs that year. That was good for just over 4% of the PC market.


(Moody’s) Moody’s says AT&T’s $1.6 billion acquisition of Straight Path is positive

  • Moody’s Investors Service, (“Moody’s”) said AT&T Inc.’s (Baa1, review for downgrade) planned acquisition of Straight Path is positive. AT&T announced yesterday a definitive agreement to purchase Straight Path Communications for $1.25 billion in stock plus certain liabilities of Straight Path that values the transaction at approximately $1.6 billion. Straight Path is one of the largest holders of wireless spectrum licenses in the 28 GHz and 39 GHz bands, which AT&T intends to deploy in conjunction with its proposed 5G wireless architecture.
  • We view this transaction as a strategic positive as it gives AT&T access to key infrastructure elements to pursue its 5G wireless capabilities and keeps AT&T on pace with Verizon in this effort. The relatively small purchase price will result in a very large spectrum position for AT&T, at least on par with Verizon’s 5G holdings following its 2016 acquisition of XO Communications.
  • We believe that 5G wireless services are unlikely to reach scaled deployment for at least 3 years. Carriers have articulated plans to deploy 5G as a fixed wireless solution initially, with more advanced mobile applications to follow. We think the technology will be competitive with traditional broadband services, but we think the economics of a fixed 5G architecture may not be competitive with cable broadband’s embedded cost structure. Therefore, we think that wireless carriers must offer additional functionality with 5G to differentiate it from traditional broadband in order to drive the inevitably higher price points that will lead to a profitable business.
  • Despite its large pending acquisition of Time Warner, AT&T continues to assemble assets that support its core wireless business. In addition to the Straight Path transaction, AT&T announced in January that it will acquire FiberTower, a holder of 24 GHz and 39 GHz licenses for an undisclosed amount. We view these deals as strategic positives, but not material to the near term (0 to 3 years) financial performance. However, these small strategic asset purchases are essential to AT&T remaining competitive and perpetuating its market share.

(Bloomberg Gadfly) Walmart Fights Amazon With Cheap When People Want Easy

  • Wal-Mart Stores Inc. on Wednesday unveiled a new discount program to entice customers to pick up online orders from its stores. The idea is: If it’s cheaper for Walmart to get stuff to its 5,000 stores, rather than millions of individual households, than why not pass along part of that discount? It has the extra benefit of getting customers back into stores to buy more.
  • In an era where Amazon.com Inc. has trained shoppers to be so lazy that they can order cardboard boxes and packing tape an hour before they are ready to pack up their goods and move to another apartment, it’s unclear consumers are going to want to work that hard just to save Walmart, and themselves, a buck or two.
  • For many of Walmart’s low-income customers, every penny counts. But the retailer has said one reason it bought Jet.com last year was that Walmart’s online customers tended to be wealthier shoppers who would spend more for the higher-end brands Jet.com could offer.
  • It can’t hurt for Walmart to try the discount program out — testing and learning about what its customers want. But it will likely realize that instead of trying to figure out how to make things easier for Walmart, it should worry more about making things easier for people to shop with the retailer. If not, any advantage Walmart is building online will have a short shelf life.
07 Apr 2017
IG Note 20170407 Image

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Lipper, for the week ended April 5th, investment grade funds posted a net inflow of $4.3bn. Per Lipper data, the year-to-date net inflow into investment grade funds was $43.39bn through April 5th. Per Bloomberg, investment grade corporate issuance through Thursday was $20.1bn with 19 issuers pricing 37 tranches on the week. Investment grade corporate issuance is slightly outpacing 2016 with 2017 corporate issuance up 3% year-to-date. Volume is expected to be lower next week with Easter/Passover holidays.

(Bloomberg) Comcast Jumps Into Wireless With $45 Service Undercutting Rivals

  • Comcast Corp. unveiled a wireless service that offers unlimited data on Verizon Communications Inc.’s network for less than nearly every other competitor and said the venture will be profitable once it reaches hundreds of thousands of subscribers.
  • While the pricing plans have some strings attached and are available only to Comcast’s internet and TV customers, the initial $45 unlimited offer is the lowest among the top U.S. wireless carriers and is likely to further escalate a price war that has ravaged the industry. Shares of the cable giant rose the most in more than two months.
  • “The more products you add, the lower the churn,” said Greg Butz, president of Comcast Mobile, using the industry term for monthly subscriber defections.
  • Comcast’s entry into wireless comes at a crucial moment for the cable giant. AT&T has moved aggressively onto its turf, offering low-cost TV packages that can be watched on-the-go and don’t count toward monthly data limits. And advances in wireless 5G technology could make surfing the web on phones as fast and reliable as high-speed internet connections at home — a service that has been a major growth area for Comcast.
  • Depending on its success in wireless, Comcast could get more ambitious and pursue an acquisition of a wireless carrier such as T-Mobile US Inc., according to some analysts. For now, Comcast says that selling wireless through Verizon’s network is the long-term strategy.
    • Unlimited Plans by Carrier (Source: Bloomberg)

IG Note 20170407 Image

(Bloomberg) Monsanto Gets Boost as Takeover by Bayer Looks More Likely

  • Monsanto Co., the world’s largest seed company, is getting a boost from increased optimism that Bayer’s $66 billion takeover of the company will go through, as similarly huge transactions between competitors inch toward the finish line.
  • Shares of St. Louis-based Monsanto climbed for a third straight day on Wednesday.
  • The Bayer-Monsanto combination has more than a 90 percent likelihood of completion, analysts at Citi Research said in a report Wednesday. That outlook comes after Dow Chemical Co.’s $77 billion bid to merge with DuPont Co. cleared antitrust hurdles in the European Union last week, and China National Chemical Corp. just received a green light on its $43 billion acquisition of Swiss pesticide maker Syngenta from the U.S. and the European Union.
  • Monsanto Chief Executive Officer Hugh Grant reiterated Wednesday in a call with analysts that a finished deal is expected by year-end. Bayer is planning to place regulatory filings with the European Commission this quarter, and there’s progress with a second round of inquiries with the U.S. Justice Department, he said. Those procedures signal that the deal is progressing, said William Selesky, an analyst at Argus Research Corp. in New York.
  • Monsanto’s shares are also up on speculation that the agricultural economy may be better than initially thought. The company on Wednesday reported record fiscal second-quarter earnings amid signs that U.S. farmers are preparing to sow record acreage with soybeans this year.

(Bloomberg) Mexican Beer Boom Sends Shares of Constellation Brands Soaring

  • The growing U.S. thirst for imported Mexican beer help send Constellation Brands Inc.’s stock on its biggest rally in three years, even as simmering border tensions threaten to undercut demand.
  • The company, which sells Corona, Modelo and other top Mexican brands,posted a 17 percent gain in beer sales last quarter. Constellation’s Ballast Point Brewing & Spirits, which it acquired for $1 billion in 2015, also helped boost revenue.
  • In the wake of the growth, Constellation delivered an annual forecast that beat analysts’ estimates. It also raised its quarterly dividend by about 30 percent. The bullish outlook helped allay concerns that the Trump administration will hurt Mexican importers by imposing a border tax or ripping up the North American Free Trade Agreement. Because of its heavy reliance on Mexican beer, Constellation has been seen as one of the most vulnerable companies to policy changes.
  • “Our beer business continues to be a powerhouse for growth,” Chief Executive Officer Rob Sands said in a statement. Constellation was the “No. 1 growth contributor to the U.S. beer industry for the year,” he said.
  • The company’s wine and spirit sales aren’t growing as quickly as beer. They climbed 6 percent last quarter, helped by the acquisition of the Meiomi and Prisoner brands.

(Bloomberg, Company Press Release) QVC Group to Become Asset-Backed Stock

  • Liberty Interactive Corporation (“Liberty Interactive”) (Nasdaq: QVCA, QVCB, LVNTA, LVNTB) and General Communication, Inc. (“GCI”) (Nasdaq: GNCMA) today announced that they have entered into a definitive agreement (the “Agreement”) whereby Liberty Interactive will acquire GCI through a reorganization in which certain Liberty Ventures Group (“Liberty Ventures”) assets and liabilities will be contributed to GCI in exchange for a controlling interest in GCI.
  • “We are pleased to announce this transaction with GCI,” said Greg Maffei, Liberty Interactive President and CEO. “GCI is the largest communications provider in Alaska, generates solid cash flow with upside potential and is a strong fit with the largest businesses in Liberty Ventures. This transaction will ultimately create a standalone Liberty Ventures, reducing the tracking stock discount and enabling an asset-backed QVC Group.”
  • Liberty Interactive believes an asset-backed QVC Group will provide the following benefits:
    • Establish leading pure play discovery based retail and eCommerce company
      • Liberty Interactive expected to be renamed QVC Group, Inc.
    • Make QVC Group eligible for possible inclusion in stock indices through elimination of tracking stock structure
    • Reduce the tracking stock discount
    • Increase near-term and annual liquidity through reattribution (discussed below) of approximately $329 million(1) of cash and approximately $130 million annual free cash flow from tax savings related to exchangeable bonds that will grow
      • Cash can be used for investments, stock repurchases and debt reduction
    • Establish a strong currency that will be a more effective tool for management compensation and retention and for potential future acquisitions
    • Maintain strong ability and liquidity to service all debt

(Bloomberg) Plenty of Beauty in U.S. Jobs Data Beneath Ugly Headline Number

  • For the March U.S. employment report, with its ugly headline payrolls number, it’s what’s inside that counts.
  • While the gain of 98,000 jobs in a survey of businesses and government agencies was the weakest since May and below all analysts’ forecasts, many accompanying details showed a solid labor market. The jobless rate, derived from a separate survey of households, fell to the lowest in almost a decade even as workforce participation was unchanged, while a measure of underemployment reached a fresh post-recession low, boding well for further wage increases.
  • The March data from the Labor Department on Friday also were challenged by weather anomalies — a storm in the Northeast during the survey week and more seasonable temperatures after two warmer months — that had economists bracing for at least some slowdown in payrolls from a strong start to the year. The reassuring figures elsewhere in the report keep the Federal Reserve on track to continue plans for two more interest-rate increases this year as the labor market continues to tighten.
  • The two-month revisions to payrolls subtracted 38,000 jobs, leaving the average so far in 2017 at 178,000. That’s in line with the 187,000 monthly average for all of last year.
  • Whether the tight job market triggers the long-awaited wage gains in this almost-eight-year-old economic expansion remains a puzzle. Average hourly earnings increased 2.7 percent in March from a year earlier, just a touch above the average since the start of 2016. That, more than weaker-than-expected employment, might merit more attention in the months ahead.

(Bloomberg) Oil Climbs After U.S. Strike Against Syria Roils Global Markets

  • Crude headed for its second weekly gain after briefly spiking in reaction to the first military strike undertaken by President Donald Trump’s administration.
  • Futures surged more than 2 percent to the highest in a month in early trading Friday after a U.S. cruise-missile strike against Syria. Gains eased after a weak jobs report fueled concern about the strength of the U.S. economy. Russia’sdeal with OPEC to cut crude supply hasn’t delivered as much as expected, according to Deputy Prime Minister Arkady Dvorkovich. OPEC ministers will gather in Vienna on May 25 to decide whether to extend the accord.
31 Mar 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Lipper, for the week ended March 29th, investment grade funds posted a net inflow of $3.966bn. Per Lipper data, the year-to-date net inflow into investment grade funds was $39.090bn through March 29th. Per Barclays, investment grade corporate issuance through Thursday was $21.25bn. For the month of March, $128.57bn in investment grade deals priced. This compares to $128.58bn in March of 2016. Q12017 was the largest IG corporate issuance quarter on record at $397bn. Dealers on the street are expecting issuance to abate somewhat in the April, which stands to reason given earnings blackout periods.

(Bloomberg) DuPont, FMC to Swap Crop Protection and Health & Nutrition Units

  • DuPont agrees divest its Crop Protection business, including certain R&D capabilities, and to buy FMC’s Health & Nutrition business.
    • Deal includes $1.6b to DD to reflect difference in value ($1.2b cash, $425m working capital)
    • Sale satisfies DD’s EC commitments regarding Dow merger
    • FMC buying DD’s Cereal Broadleaf Herbicides, Chewing Insecticides portfolios, including Rynaxypyr, Cyazypyr, Indoxacarb; assets being divested generated 2016 rev. ~$1.4b
    • DD buying FMC’s Health & Nutrition business, which generated 2016 rev. >$700m from 2 main segments: texturants as food ingredients, pharmaceutical excipients
    • FMC sees immediately accretive to adj. EPS on closing; will update outlook on earnings call scheduled for May 2
    • DD/FMC deal close due in 4Q, subject to DD/DOW merger, regulatory approvals
    • DOW/DD extend outside date of deal to Aug. 31; see deal closing between Aug. 1 and Sept. 1
    • Material Science Company now expected to be first spin-off
    • Evercore, Goldman advising DD
    • Dyal, Citi advising FMC; Citi provided financing advice, committed debt facilities

(Bloomberg) Union Pacific Rattles Its Cash Coffer With $1 Billion Debt Issue

  • Union Pacific’s $500 million debt offering of 10-year and $500 million of 30-year bonds has the use of proceeds earmarked for general corporate purposes, including refinancing maturities, working capital and buybacks. The rail operator has about $500 million of maturities in 2017. The incremental $500 million of debt may put adjusted debt-to-Ebitda at about 1.8x, assuming the company meets consensus 2017 Ebitda. This level of leverage is below its 2x target and in-line with single A rated peer Canadian National.

(Bloomberg) Oil Set for Biggest Weekly Gain in 2017 as OPEC Eyes Extension

  • Oil headed for its biggest weekly increase this year amid speculation OPEC will extend its deal to curb output and ease a global glut.
  • Futures are up 4.7 percent in New York this week, climbing back above $50 a barrel after Kuwait Oil Minister Issam Almarzooq reiterated support for prolonging a six-month deal to trim supply past June. Still, prices are down 6.5 percent this quarter, their biggest three-month loss since late 2015, as U.S. crude stockpiles continue to pile up.
  • The latest comments from Kuwait’s oil minister are bolstering confidence in OPEC’s commitment to drain swollen stockpiles ahead of the group’s next formal ministerial meeting on May 25 in Vienna. Five producers from the Organization of Petroleum Exporting Countries joined with non-member Oman on Sunday to voice support for an extension. Optimism over the cuts had wavered recently amid a surge in U.S. supply, with the nation boosting crude output last week to the highest in more than a year.
  • “OPEC is fully aware that running down the crude overhang will take more than six months, so a rollover of the deal is still the most likely outcome,” said Amrita Sen, chief oil analyst at Energy Aspects Ltd. “Overall balances are heading in the right direction, but only crude stock draws will help prices break out of the current range-bound trading.”
17 Mar 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Lipper, for the week ended March 15th, investment grade funds posted a net inflow of $451.607m. Per Lipper data, the year-to-date net inflow into investment grade funds is just shy of $30bn through March 15th. Per Wells Fargo, investment grade corporate issuance through Thursday was 25.4bn, up +14% y/y.

(Bloomberg) Fed Notches a Win in Central Bank Battle With Markets on Outlook

  • That’s the takeaway from the past three weeks, which have shown the Federal Reserve regaining command of the outlook for U.S. monetary policy. Traders have moved more into step with Fed officials’ dot-plot chart for projected interest-rate increases — a big contrast from last year, when the market called the central bank out on its plans for four rate hikes.
  • The difference can be most clearly seen with the Fed, which began 2016 with an expectation to raise its benchmark four times. Futures traders gave that outcome just 14 percent odds, and proved right to do so — in the end, there was only the one quarter-point move. This year began with the market again disbelieving the Fed and its outlook for three hikes, placing minority odds on that many moves. Now, the probability is around 57 percent.
  • “The latest market reactions to the FOMC decision seems to suggest that there is a great deal of credibility in the r* being low,” said Stephen Jen, the London-based chief executive of hedge fund Eurizon SLJ Capital Ltd., using the economics term for equilibrium interest rate.
  • For now at least, the mood music is shifting the way of central banks as policy makers adapt to the improving world economy. That offers officials a respite to work on the next big challenge: whether and how to shrink their gargantuan balance sheets.

(8-K Filing) VEPCO brings a new 10yr bond

  • On March 13, 2017, Virginia Electric and Power Company (the Company) entered into an underwriting agreement (the Underwriting Agreement) with Deutsche Bank Securities Inc., J.P. Morgan Securities LLC and Wells Fargo Securities, LLC, as Representatives for the underwriters named in the Underwriting Agreement, for the sale of $750,000,000 aggregate principal amount of the Company’s 2017 Series A 3.50% Senior Notes due 2027. Such Senior Notes, which are designated the 2017 Series A 3.50% Senior Notes due 2027, are Senior Debt Securities that were registered by the Company pursuant to a registration statement on Form S-3 under Rule 415 under the Securities Act of 1933, as amended, which registration statement became effective on December 19, 2014 (File No. 333-201153). A copy of the Underwriting Agreement, including exhibits thereto, is filed as Exhibit 1.1 to this Form 8-K.

(Bloomberg) Oil Set for Weekly Gain as Saudis Say Willing to Extend Curbs

  • Nationwide crude inventories decline from record weekly level
  • Saudi Arabia says output cuts may be extended beyond June
  • Oil last week broke below $50 a barrel for the first time since December as rising U.S. output countered production curbs by members of the Organization of Petroleum Exporting Countries and other nations. While markets are still struggling to clear a surge in supply from OPEC at the end of 2016, compliance with the cuts remains above 90 percent, the International Energy Agency said.
  • “The recovery at this stage remains fragile,” said Ole Sloth Hansen, head of commodity strategy at Saxo Bank A/S in Copenhagen. “The market managed to find support at key levels following a small drop in U.S. crude inventories. We are very likely to see an extension to the current production-cut deal if the aim is to bring stocks down to the five-year average.”