Category: Investment Grade Weekly

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week were $3.5bln. This brings the YTD total to +$239.6bln in total inflows. According to Bloomberg, investment grade corporate issuance for the week was $15.845bln, and YTD total corporate bond issuance was $1.04t. Investment grade corporate bond issuance thus far in 2017 is down 4% y/y when compared to 2016.

(Bloomberg) China’s Credit Rating Cut as S&P Cites Risk From Debt Growth

• S&P Global Ratings cut China’s sovereign credit rating for the first time since 1999, citing the risks from soaring debt, and revised its outlook to stable from negative.
• The sovereign rating was cut by one step, to A+ from AA-, the company said in a statement late Thursday. The analysts also lowered their rating on three foreign banks that primarily operate in China, saying HSBC China, Hang Seng China and DBS Bank China Ltd. would be unlikely to avoid default should the nation default on its sovereign debt.
• “China’s prolonged period of strong credit growth has increased its economic and financial risks,” S&P said. “Although this credit growth had contributed to strong real gross domestic product growth and higher asset prices, we believe it has also diminished financial stability to some extent.”

(Bloomberg) Teva Pharmaceutical Downgraded to ‘BBB-‘ From ‘BBB’ By S&P

• Teva announced that it had obtained amendments to restrictive financial covenants under its credit facilities, S&P Global Ratings says.
  
  • Although the amendments enable the company to more easily satisfy its leverage covenant requirement, it also leads S&P to reexamine its previous view that Teva will be able to reduce leverage to below 4x by 2018
  • In light of the revised covenants, S&P revised its forecast for 2017 and 2018
    
    • “While we continue to recognize the company’s commitment to reducing leverage, we believe it will take longer than previously expected due to ongoing pricing pressures in the generics industry that we project will continue well into 2018. We now expect 2018 leverage of about 4.6x, in contrast to our prior expectation that it would decline below 4x next year”
  • S&P cut all of its ratings on the company, including corporate credit rating to ’BBB-’ from ’BBB’. The outlook is stable.
  • The stable outlook reflects S&P’s expectation the company will reduce leverage more slowly than previously anticipated, with adjusted leverage of well over 4x over the next two years given continued generic pricing pressure and the introduction of generic competition to Copaxone in 2018.

(Reuters) Teva sells rest of women’s health business for $1.4 billion

• Teva Pharmaceuticals said on Monday it would sell the remaining assets in its specialty women’s health business for $1.38 billion in two separate transactions.
• The company, Israel’s biggest and the world’s largest maker of generic drugs, said it would use proceeds from the sales, along with those from its recently announced sale of contraceptive brand Paragard, to repay debt.
• Monday’s announcement, coupled with Teva’s announcement last week that it would sell Paragard to a unit of Cooper Companies for $1.1 billion, demonstrates the company’s commitment to delivering on its promise to generate net proceeds of at least $2 billion from the divestitures, Teva acting CEO Yitzhak Peterburg said. “With these initial divestitures we have exceeded expectations,” he added.
• Teva last week poached Lundbeck’s Kare Schultz as its new CEO, handing the industry veteran the urgent task of convincing investors of the struggling Israeli firm’s future.
• Teva has said it plans to pay down $5 billion of debt by year-end and is selling off businesses such as its women’s health business and European oncology and pain unit.

(Bloomberg) Clicks Likely Derail Bricks That Fail to Evolve

• Retailers focusing on a fast flow of goods and unpredictable inventory finds at lower prices are taking share from traditional stores.
• The rise of online shopping, information sharing and social media have created transparency in the retail marketplace. This has consumers opting for treasure hunts and values, in-store and online, and forgoing browsing stores.
• TJX, Ross, Burlington Stores, Costco, Wayfair, Overstock.com, Hayneedle and Zulily are sellers that use treasure hunts and value in their business model.

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week were $2.6nln. This brings the YTD total to +$213bln in total inflows. According to Bloomberg, investment grade corporate issuance for the week was just shy of $4bln, as issuers have decided to wait until after Labor Day before coming to market. Through the week, YTD total corporate bond issuance was $932.88bn. Investment grade issuance thus far in 2017 is down 2% y/y when compared to 2016.

(WSJ) Wal-Mart and Google Partner to Challenge Amazon

• Google and Wal-Mart Stores Inc. are joining forces in a partnership that includes enabling voice-ordered purchases from the retail giant on Google’s virtual assistant, challenging rival Amazon.com Inc.’s grip on the next wave of e-commerce.
• Wal-Mart said Wednesday that next month it will join Google’s online-shopping marketplace, Google Express.
• While the deal will add hundreds of thousands of Wal-Mart items to Google Express, it will also give Wal-Mart access to voice ordering. The deal won’t alter how consumers receive their orders, because Wal-Mart will fulfill purchases made through Google Express.
• Wal-Mart said it will share consumers’ purchase history with Google to enable users to quickly reorder items, a primary function of voice-controlled orders for commodity shopping.
• “How do you help people who are going to be interacting more and more with devices get their weekly shopping tasks taken care of?” Google Express chief Brian Elliott said in an interview, citing a key reason for the partnership.

(Bloomberg) Bayer Faces In-Depth EU Review of $66 Billion Monsanto Deal

• EU sets Jan. 8 deadline for last in trio of mega-mergers
• EU flags concerns over higher prices and reduced innovation
  
  • The European Commission flagged worries that the deal to create the world’s largest pesticides and seeds company risked raising prices for farmers, lowering quality and reducing choice and innovation. It set a Jan. 8 deadline for its merger investigation.
  • Bayer said it had expected an extended review “due to the size and scope of the transaction.” The company said the deal “will be highly beneficial for farmers and consumers” and it will work constructively with the EU.
  • Monsanto said it was committed to working with regulators globally “with a view to receiving approval of the proposed transaction by the end of 2017.” It said it looked forward to supporting growers’ efforts to be more productive, profitable and sustainable.
  • The combined firm will have the largest portfolio of pesticides products and the strongest global market positions in seeds and traits. The EU said it will check if rivals’ access to distributors and farmers could worsen if the company were to link sales of pesticides or seeds to digital services that provide tailored advice or aggregated data to farmers.
  • Regulators’ concerns over innovation for agricultural chemicals saw DuPont Co. offer to sell part of its pesticides business and related research and development operations before it won EU approval to merge with Dow Chemical Co. earlier this year. China National Chemical Corp. also had to make concessions before the EU would clear its $43 billion takeover of Swiss pesticide maker Syngenta AG.

(Business Journal) Airbus to deliver first US-built A320 to Spirit Airlines this week

• The Miramar-based, low-cost airline touts its fleet as being the “youngest of any major U.S. airline,” operating more than 420 flights to destinations in the United States, Caribbean and Latin America. As of March 31, the airline had 100 aircraft. Orders placed in late December 2016 and renegotiated in the first quarter of 2017 will add 73 aircraft to Spirit’s fleet by the end of 2021, according to documents the company filed with the U.S. Securities and Exchange Commission.

(WSJ) Chevron CEO John Watson to Step Down

• The transition is expected to be announced next month, although Mr. Watson’s successor hasn’t yet been finalized by the board and plans could change, the people said. Mr. Watson isn’t expected to depart immediately and is likely to remain after the announcement for an orderly transition, the people said.
• His likely departure underscores the dramatic shift under way at big oil companies as they adapt to a prolonged period of lower prices brought about by the U.S. shale boom. While the companies once favored swashbuckling leaders who bet billions on megamergers and pricey projects in far-flung regions, many are now turning to executives adept at squeezing every last dollar from a barrel through refining, and shorter-term investments that turn a profit faster.
• The leading candidate to succeed Mr. Watson, 60, is Michael Wirth, 56, a refining specialist who earlier this year was elevated to the position of vice chairman at the oil company, the second largest in the U.S. behind Exxon Mobil Corp. , the people said.
• Chevron directors see Mr. Wirth’s years of experience wringing costs out of big plants that process fuel and chemicals as a critical need in a new era for oil markets defined by $50-a-barrel crude, the people said.
• “Big oil is turning toward very disciplined, returns-centric leaders who can manage razor-thin margins in disruptive, volatile markets,” said Les Csorba, who advises energy companies on CEO succession at executive search firm Heidrick & Struggles International , and wasn’t involved in Mr. Watson’s succession. “This is the answer for these companies as low prices continue.”

Fund Flows & Issuance: According to Lipper, for the week ended August 9, investment grade funds posted a net inflow of $2.464bn. This marks 34 straight weeks of inflows and inflows in 70 of the last 75 weeks. Per Lipper data, the year-to-date net inflow into investment grade funds was $81.490bn. According to Bloomberg, investment grade corporate issuance for the week was $43.55bn, as 26 issuers tapped the market across 48 tranches. Through the week, YTD total corporate bond issuance was $899.475bn. Investment grade issuance thus far in 2017 is down 4.5% y/y when compared to 2016.

(Bloomberg) IG NIC ANALYSIS: Softer Backdrop Prompts New Issue Concessions

• High-grade bond issuers shrugged off a soft broader market tone for the second day running, pricing $4.25b Thursday.
• Given the geopolitical tensions between the U.S. and North Korea, the recent deluge of primary supply, and wider credit spreads, many investment-grade bond deals are requiring new issue concessions. Thursday’s three corporate bond sellers, all rated BBB, provided no exceptions.
• Deals priced with low-mid single digit concessions as issuers look to navigate the more uncertain primary market terrain.
  • Thermo Fisher Scientific Inc. (TMO) Baa2/BBB/BBB Mkt Cap $69.1b Healthcare/Medical Equipment
    
    • New Issue Concession: 10y: 8bps, 30y: 10bps
  • The Priceline Group Inc. (PCLN) Baa1/BBB+ Mkt Cap $91.1b Communications/Media
    •  New Issue Concession: 5bps
  • O’Reilly Automotive Inc (ORLY) Baa1/BBB+ Mkt Cap $17.6b Consumer/Auto Retailer
    
    • New Issue Concession: 5bps

(Bloomberg) Cimarex Reports Second Quarter 2017 Results

• Second Quarter Production up 9% sequentially; Oil Production up 11% sequentially
• Successful Wolfcamp Downspacing test in the Delaware Basin
  
  • 16 wells per section in Reeves County Upper Wolfcamp
• E&D Capital unchanged for 2017; Production guidance raised slightly
• Cimarex invested $296 million in exploration and development during the second quarter, 53 percent in the Permian Basin and 45 percent in the Mid-Continent. Cimarex completed 51 gross (18 net) wells during the quarter. At June 30, 2017, 98 gross (29 net) wells were waiting on completion. Cimarex is currently operating 14 drilling rigs.
• Of note, Cimarex completed a successful four-well downspacing project testing 16 wells per section in the Upper Wolfcamp. Located in Reeves County, the Pagoda State project was brought on production in late April. The four 10,000-foot lateral wells had an average peak 30-day initial production of 1,922 BOE per day of which 956 barrels per day (50 percent) is oil. Please see our latest presentation (posted at www.cimarex.com) for more detail.

(Bloomberg) American Water Capital $1.35b Debt Offering in Two Parts

• American Water Works Co., Inc. provides drinking water, wastewater, and other water-related services in multiple states and Ontario, Canada. The Company’s primary business involves the ownership of regulated water and wastewater utilities that provide water and wastewater services to residential, commercial, and industrial customers.
• Tranches
  
  • $600m 10Y (09/01/2027) at +73
  • $750m 30Y (09/01/2047) at +93
• UOP: To lend funds to American Water and its regulated operating subsidiaries and to (1) repay $524m principal of the issuer’s 6.085% notes due 2017 upon maturity on Oct. 15, 2017, (2) redeem up to $327m aggregate principal amount of the issuer’s outstanding long-term debt securities due 2018 and 2021 and which have a weighted-average interest rate of 5.71% and (3) repay commercial paper obligations

Fund Flows & Issuance: According to Lipper, for the week ended August 2, investment grade funds posted a net inflow of $1.485m. This marks 33 straight weeks of inflows and inflows in 69 of the last 74 weeks. Per Lipper data, the year-to-date net inflow into investment grade funds was $79.026bn. According to Bloomberg, investment grade corporate issuance for the week was $25.49bn. Through the week, YTD total corporate bond issuance was $855.925bn. Investment grade issuance thus far in 2017 is nearly identical to the total seen through this period in 2016.

(Bloomberg) Teva 10Y, 30Y Bond Spreads Again Get Crushed

• Teva Pharmaceutical bonds are seeing high volume for the second day amid reports that bond covenants may be breached. Its 3.15 percent coupon bond due 2026 tops the most active list, according to Trace data.
• Client and affiliate flows account for 85 percent of the volume. Client buying is near 2.3 times selling. Its spread has widened to +190 area compared with +170 around close of business Thursday and +140 area last Friday. The wider spreads may have enticed clients to be better buyers than sellers today.
• Teva was cut to BBB- by Fitch, outlook negative, this morning. Yesterday Moody’s cut Teva to Baa3 from Baa2 while S&P said its ratings on the company are not affected by the report of lower-than-expected second-quarter results and reduced 2017 guidance.
• The dramatic repricing has brought the investment-grade name closer to junk comparables.

(Bloomberg) SoftBank Default Risks Jump as Son Mulls Charter Takeover

• The possibility that SoftBank Group Corp. will pile on even more debt if founder Masayoshi Son goes ahead with a bid for Charter Communications Inc. is starting to spook the bond market.
• The cost to insure SoftBank’s debt against nonpayment has jumped 17.2 basis points this week to 156.7 basis points on Wednesday, the highest level since Jan. 9, after people familiar with the matter said the company has as much as $65 billion in financing lined up as Son weighs whether to make an offer. Theyield premium on the firm’s 6 percent dollar perpetual bonds has surged 31 basis points in the period, Bloomberg-compiled prices show.
• Going through with an acquisition of Charter would cause SoftBank’s already bloated debt burden to balloon even further. The ratio of debt to earnings before interest, taxes, depreciation and amortization at billionaire Son’s company is about 5.67, more than double the median of its telecom peers, according to data compiled by Bloomberg. Charter on Sunday rebuffed Son’s initial proposal to combine the company with Sprint Corp., which SoftBank controls.

(Bloomberg) IG NEW ISSUE SECONDARY: TMT Issues Trading Wider Despite NICs

• This week’s Technology Media and Telecommunications bonds were among the new issues that widened the most in secondary trading, according to Trace.
• Comcast Corp’s bonds last traded 7-8bps, Verizon Communications’ new 16y is off 2bps and last week’s AT&T jumbo $22.5b transaction is also trading 5-11bps back of issue levels.
• Comcast & AT&T’s bonds are trading wider despite many of their tranches pricing with double-digit new issue concessions. These issuers have a plethora of debt outstanding suggesting healthy new issue concessions would be required to sell the bonds. Concessions, however, are beginning to creep back into the market across sectors as Kinder Morgan (20bps), Capital One NA (10bps) paid up to price their deals. We have been in a low yield, tight credit spread environment for an extended period and these recent prints could be signaling a degree of investor pushback.

Fund Flows & Issuance: According to Lipper, for the week ended July 26, investment grade funds posted a net inflow of $2.319m. This marks 32 straight weeks of inflows and inflows in 68 of the last 73 weeks. Per Lipper data, the year-to-date net inflow into investment grade funds was $77.541bn. According to Bloomberg, investment grade corporate issuance for the week was $36.35bn. Through the week, YTD total corporate bond issuance was $830.435bn, which is down 1% when compared to 2016.

(Moody’s) Moody’s upgrades PG&E Corporation and Pacific Gas & Electric; outlook revised to stable

• Moody’s Investors Service, (“Moody’s”) today upgraded PG&E Corporation’s (PCG) senior unsecured rating to A3 from Baa1.The senior unsecured rating at Pacific Gas & Electric Company (PG&E), PCG’s principal utility operating subsidiary, was upgraded to A2 from A3. PG&E’s commercial paper rating was also upgraded to Prime-1 (P-1) from Prime-2 (P-2). The outlook on both companies was revised to stable from positive.

(Bloomberg) AT&T Sells Year’s Biggest Bond Deal and Market Wanted Even More

• AT&T Inc. sold $22.5 billion of bonds in a multi-part offering on Thursday, drawing almost three times as many orders as there were securities for sale, according to a person with knowledge of the matter. It’s not only the largest investment-grade deal of the year, but the third-biggest in history behind offerings from Verizon Communications Inc. and Anheuser-Busch InBev SA. The sale is likely the last funding AT&T needs for its $85.4 billion takeover of Time Warner Inc.
• The longest portion of the sale, which came in seven parts, is a 41-year bond that yields about 2.4 percentage points above Treasuries, down from initial talk of 2.55 percentage points, another person said. With the U.S. offering higher yields than Europe and Japan, it has become a destination for foreign investors to park their money, a trend that AT&T benefited from.

(FBN) Illinois Tool Works Sees Margin Expansion and Earnings Growth

• Multi-industrial company Illinois Tool Works (NYSE: ITW) delivered another good quarter of earnings and raised full-year guidance across the board. It was a positive quarter for the company, driven by its automotive segment and recovery in some of its more cyclical segments (specifically welding, test and measurement, and electronics). That said, management served notice of a relative slowdown in the third quarter.

(Bloomberg) Caterpillar Outlook Bright as Sales, Margins Rebound

• A global recovery in Caterpillar’s key markets is picking up steam — earlier than expected — after four years of plummeting sales as global growth accelerates. Aftermarket demand is leading the charge, yet construction equipment is strong and 2Q mining orders doubled. Almost $2 billion in cost cuts, with more to come, is generating much higher-than-historical operating leverage as volume rises. Market-share gains achieved in the downturn are another potential driver as mining and construction markets rebound.
• As the leader in construction and mining machinery, Caterpillar is a major beneficiary of a global recovery. The company may face a one-time charge of $2 billion related to alleged tax violations at a Swiss-based subsidiary and a higher tax rate.

Fund Flows & Issuance: According to Lipper, for the week ended July 19, investment grade funds posted a net inflow of $3.817m down from $2.299bn the prior week. This marks 31 straight weeks of inflows and inflows in 67 of the last 72 weeks. Per Lipper data, the year-to-date net inflow into investment grade funds was $75.222bn. According to Bloomberg, investment grade corporate issuance for the week was $47.7bn. Through the week, YTD total corporate bond issuance was $794.085bn, which is down 3% when compared to 2016.

(Bloomberg) Abbott Boosts Full Year Forecast as Deals Fall Into Place

• The company raised its full-year guidance after showing strength in its pain control and diabetes businesses. Abbott closed its $29 billion deal for St. Jude Medical in January, doubling the size of its medical technology division and expanding beyond devices used to clear clogged heart arteries. Its diagnostics business, about to swell with the addition of Alere Inc. after a protracted battle, is showing strength as well.
• The legacy St. Jude business grew at about a 4 percent pace in the quarter, after breaking even for the past four years, Abbott Chief Executive Officer Miles White said during a conference call with analysts. That trend should continue or accelerate, he said, as the company continues to roll out new products like an MRI-safe defibrillator, helping it regain sales lost to rivals that already offer the technology.
• “Our forecast, or deal model, was built on the expectation of sequential improvement in their sales going forward,” he said. “We are seeing that.”
• The smaller operations secured by the St. Jude deal are posting the greatest gains. Demand for devices to control pain propelled growth of 49 percent, while sales of tools that deal with the heart’s electrical pathways rose 10 percent. The company’s focus on diabetes, with Bigfoot Biomedical picking Abbott’s Freestyle Libre for its artificial pancreas, yielded 21 percent growth.
• The outsized performances are easing the pain caused by slowing markets in the company’s former key industries, like heart stents, which was down 6 percent, and devices like pacemakers and defibrillators, which fell 9.2 percent.
• Abbott raised its full-year guidance range to $2.43 to $2.53 per share, excluding some items. That’s up from a previous forecast of $2.40 to $2.50 per share.

(WSJ) Lessons From Microsoft’s Success in the Cloud

• Microsoft Corp.’s success in the cloud is driving the growth of the overall business. That’s because it is the business. Cloud isn’t a satellite orbiting around the data-center sun. The numbers speak for themselves. As the Journal’s Jay Greene reports, Microsoft’s “Intelligent Cloud segment, which includes Azure, rose 11% to $7.4 billion. In the Productivity and Business Processes segment, which includes the Office franchise, revenue climbed 21% to $8.4 billion.”
• Microsoft doesn’t disclose revenue figures Azure and Office 365, but it said revenue from these businesses rose 97% and 43% respectively, surprising CFO Amy Hood. “Azure was the primary source of our outperformance in the quarter,” she said in an interview. “It’s higher than I was expecting.”\
• Microsoft has gained traction in the cloud, one might argue, because it has accepted the idea that it isn’t the only platform that customers use. CIOs employ other clouds and they still have plenty of use for the data center. Microsoft has crafted a hybrid approach around those customer intentions. More recently, it has looked to build data and intelligence into its cloud infrastructure, platforms and applications. As the Journal notes, “Microsoft is working to connect its business products to LinkedIn, giving sales representatives using its Dynamics software, for example, tools to easily mine the professional social network to prospect for leads.” As this process continues, expect the cloud to fade into the background, much as the electric grid has faded into the background. In a few years, we won’t think about cloud computing any more than we think about “electrical toasters.” The cloud will be an invisible and ubiquitous dimension of most elements of business.

(Bloomberg) Scripps Talks Said to Be Advanced, Deal Soon as This Month

• Negotiations to acquire media company Scripps Networks Interactive Inc. are advanced and a deal could be announced as soon as this month, people familiar with the matter said.
• Both Discovery Communications Inc. and Viacom Inc. are vying to buy Scripps, and are likely to fund the deal with a mixture of cash and shares, the people said, asking not to be identified as the details aren’t public. No final decisions have been made and talks may still fall apart, they said.
• Shares in Scripps rose as much as 4.1 percent in New York to a high of $80.02. They had already climbed about 14 percent this week on news of the possible combinations, giving the Knoxville, Texas-based company a market valuation of about $10 billion. Viacom was up less than 1 percent to $36.31 at 2:40 p.m., while Discovery fell less than 1 percent to $26.98. Representatives for Discovery, Viacom and Scripps declined to comment.
• Buying Scripps could help the larger media companies cut costs, gain negotiating leverage with distributors and expand internationally as their U.S. TV businesses faces new pressures. Network owners are grappling with a decline in subscriptions for cable and satellite services as they lose viewers to online video services and social networks.

(Bloomberg) BNY Mellon Ups Revenue View, Shows 2Q Momentum: Earnings Outlook

• Post-2Q Earnings Outlook: BNY Mellon showed a further acceleration in revenue in 2Q, with trends in fee income and managed assets boding well for 2H.
• Fee growth of 4% for investment services and 6% in investment management marks another rise after 1Q’s pickup, while both assets under custody and management hit record levels.
• The updated 2017 view includes spread income growth at the high-end of its prior 4-6% range and a cost rise of about 1%, with a caveat that this would be “challenging.”

Fund Flows & Issuance: According to Lipper, for the week ended June 28, investment grade funds posted a net inflow of $2.299m down from $2.535bn the prior week. Per Lipper data, the year-to-date net inflow into investment grade funds was $71.045bn. According to Bloomberg, investment grade corporate issuance for the week was $26.49bn. Through the week, YTD total corporate bond issuance was $746.385bn, which is down 5.5% when compared to 2016.

(WSJ) Visa Takes War on Cash to Restaurants

• Visa Inc. has a new offer for small merchants: take thousands of dollars from the card giant to upgrade their payment technology. In return, the businesses must stop accepting cash.
• The company unveiled the initiative on Wednesday as part of a broader effort to steer Americans away from using old-fashioned paper money. Visa says it is planning to give $10,000 apiece to up to 50 restaurants and food vendors to pay for their technology and marketing costs, as long as the businesses pledge to start what Visa executive Jack Forestell calls a “journey to cashless.”
• Consumers at those stores would be able to pay for goods or services only with debit or credit cards or with their cellphones. In exchange, Visa is offering to pay for upgrades to merchants’ technology at the checkout line so that they can accept contactless payments, such as Apple Pay . The $10,000 incentive can also help cover some of the merchants’ marketing expenses.
• Visa has long considered cash one of its biggest competitors and has been taking steps to chip away at it. Getting rid of cash is a priority for Visa Chief Executive Al Kelly, who took over late last year, especially as cash and check transactions continue to grow globally.
• “We’re focused on putting cash out of business,” Mr. Kelly said at Visa’s investor day last month, adding that converting check and cash to digital and electronic payments is the company’s “number-one growth lever.”
• Still, cash remains a formidable competitor. Check and cash transactions totaled $17 trillion world-wide in 2016, up about 2% from a year prior, according to Visa.
• Cards have made a dent in cash in the U.S., but cash remains the most widely used payment form among Americans, accounting for 32% of all consumer transactions in 2015, compared with 27% for debit cards and 21% for credit cards, according to a November report by the Federal Reserve Bank of San Francisco.

(Moody’s) HCA’s Increased ABL Reduces Likelihood of Upgrade of Senior Secured Notes

• HCA Inc. (subsidiary of HCA Healthcare, Inc.) recently amended and extended its asset-based revolving credit facility (ABL). The facility was upsized to $3.75 bilion from $3.25 billion and the expiration date was extended to June 2022. In addition, HCA amended and extended its $2 billion revolving credit facility. The expiration date of the revolving credit facility was extended to 2022 from 2019. There are no changes to any ratings including the Ba2 Corporate Family Rating, the Baa2 rating on the ABL, the Ba1 on the senior secured debt and the B1 on the unsecured notes. The rating outlook is positive.
• Absent any further changes to the capital structure, there is reduced likelihood that the senior secured debt (including notes and credit facilities) would be upgraded to investment grade if Moody’s upgrades HCA’s CFR to Ba1. This is due to changes in the HCA’s capital structure and attributes of Moody’s Loss Given Default Methodology.

(Bloomberg) Implications of Tax Policy Changes on IG Industrials

• Potential changes in tax laws could have credit implications for high grade industrials. The 28 high grade industrials tracked at BI have accumulated $55 billion of cash, largely in non-U.S. subsidiaries, mainly to avoid current repatriation laws. Cash-to-revenue averaged as low as 8% for the peers as recently as 2008, but topped 28% at year-end. That suggests about $27 billion could be repatriated, possibly earmarked for share repurchases and dividends, akin to 2004’s tax holiday.
• Honeywell, Illinois Tool Works, Cummins and Rockwell Automation are among the group outliers, with above-average ratios, suggesting they may have more opportunity to bring cash home.

(WSJ) Corporate Bond Markets Asleep at the Wheel

• There’s a fine line in financial markets between resilience and complacency. Corporate bonds are sitting right on it.
• Global government bonds have been shaken as central banks, most notably the European Central Bank, have signaled that the clock is ticking on ultra-loose monetary policy. Ten-year German bond yields have risen about 0.3 percentage point from their late-June lows, pushing up U.S. Treasury yields too.
• Yet corporate bonds haven’t even blinked. Indeed, the yield spread on European and U.S. investment-grade bonds versus underlying government debt has actually compressed since the turmoil started, Bank of America Merrill Lynch indexes show. Yields have risen, just not by as much as on government bonds. At 0.99 percentage point in Europe and 1.12 points in the U.S., investment-grade spreads are close to their tightest level since the global financial crisis.
• And credit conditions may be shifting. Activist investors are making waves in Europe: perhaps the best example is Dan Loeb at hedge fund Third Point targeting consumer giant Nestlé , pitting shareholder interests against those of bondholders. The company promised to double its leverage ratio to fund stock buybacks, yet spreads on its bonds barely reacted. Better earnings prospects should support corporate bonds; but the real benefit will accrue to shareholders, not bondholders. Spreads do offer some protection against falling bond prices, but little against a deterioration in credit quality.
• Corporate bonds have benefited greatly from central-bank support and benign credit conditions. Shifting tides mean relying on those factors persisting looks risky.

Fund Flows & Issuance: According to Lipper, for the week ended June 28, investment grade funds posted a net inflow of $724.337m down from $1.55bn the prior week. Per Lipper data, the year-to-date net inflow into investment grade funds was $66.571bn. According to Bloomberg, investment grade corporate issuance for the week remained muted, weighing in at $14.8bn. Through the week, YTD total corporate bond issuance was $714.145bn. Per Bloomberg data, U.S. investment grade credit spreads are at the tightest level since 2014:

• Bloomberg Barclays US IG Corporate Bond Index OAS at 109, a new tight YTD and the tightest level since Sept. 2014, vs 110
  
  • 2017 wide/tight: 122/109
  • 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)

(Bloomberg) Martin Marietta Will Buy Bluegrass Materials for $1.625b in Cash

• Martin Marietta sees deal closing in 4Q, is expected to add to EPS and cash flow in first full year.
  • MLM sees annual run-rate cost savings of ~$15m.
  • Bluegrass Materials is largest closely held, pure-play aggregates company in U.S.; MLM says Bluegrass has leading positions in some of nation’s highest growth markets.
  • Bluegrass CEO says co. “ran a thorough, competitive process.”

(Bloomberg) Bayer Seeks EU Blessing for $66 Billion Monsanto Takeover

• Bayer AG asked the European Union to approve its $66 billion combination with Monsanto Co., the last of a trio of mega-deals reshaping the global agrochemicals industry.
• The German chemical giant’s filing kickstarts an initial review with an Aug. 7 deadline. Bayer said it’s still seeking to close the deal “before the end of 2017,” a sign that it’s hoping to sidestep a lengthy second phase probe that could add a further four months to the process.
• Bayer has already filed for approval in the U.S. and the Justice Department could require additional asset sales to resolve competition concerns. BASF SE and Syngenta are among companies that have submitted preliminary bids for assets that Bayer plans to sell in order to get regulatory approval for its takeover, according to people familiar with the matter.
• Agricultural businesses have been dogged by falling crop prices globally. Falling crop prices and a quest for greater efficiency triggered a cascade of deals in the industry.

(Forbes) Oracle’s Q4 Cloudburst: Why Larry Ellison’s All-In Cloud Strategy Is Paying Off

• After a few years of lofty talk but lackluster performance, Oracle’s blowout Q4 results prove beyond a doubt that Larry Ellison’s 10-year-old decision to rewrite all of Oracle’s IP for the cloud is giving the company a unique competitive advantage in being fully vested across all three layers of the cloud: SaaS, PaaS and IaaS.
• Ellison, who in recent quarters has called out Workday as Oracle’s primary SaaS competitor, did not mention Workday in his prepared remarks but focused instead on how Oracle is now ahead of Salesforce.com on the cloud metric of Annual Recurring Revenue, or ARR. “Last fiscal year we sold more than $2 billion in cloud annually recurring revenue. This is the second year in a row that we sold more cloud ARR than salesforce.com,” Ellison said. “We are now well on our way to passing them and becoming number one in the enterprise SaaS market.”
• Ellison based that prediction on the breadth of Oracle’s suite of SaaS applications versus those offered by Salesforce, noting that Oracle offers cloud apps for financials, procurement, supply chain, manufacturing, human resources, payroll, marketing, sales and service, whereas “Salesforce in contrast only competes in three of these nine market areas.”
• With regard to IaaS market leader Amazon, Ellison didn’t speak specifically about the IaaS layer, but positioned Oracle’s combination of world leadership in databases (PaaS) with its next-gen technology for IaaS as the way Oracle will cut into the huge lead AWS currently enjoys. “During this new fiscal year, we expect both our PaaS and IaaS businesses to accelerate into hyper-growth, the same kind of growth we are seeing with SaaS. As our customers begin to migrate their millions of Oracle databases to Generation 2 of the Oracle Public Cloud…we expect that our Oracle PaaS and IaaS businesses will grow so fast that they will be even bigger than our SaaS business.”
• Ellison’s linkage of Oracle’s emerging IaaS business with its PaaS business is significant because, as he says in the comment above, Oracle is the world’s leading database vendor by a wide margin—so if Oracle can pull lots of those on-premise customers into the Oracle Cloud and away from the aggressive marketing of Amazon and Microsoft, that would be a huge win.

(Bloomberg) Pfizer’s Glasdegib Gets FDA Orphan Status in Leukemia

• FDA designated Pfizer’s drug as orphan treatment for acute myeloid leukemia.
  
  • FDA awarded designation to the treatment, which has generic name glasdegib, on June 28.
  • Orphan drugs are entitled to 7 years market exclusivity if approved by FDA for rare disease.

Fund Flows & Issuance: According to Lipper, for the week ended June 21, investment grade funds posted a net inflow of $1.55bn down from $2.603bn the prior week. Per Lipper data, the year-to-date net inflow into investment grade funds was $65.843bn. Per Bloomberg, investment grade corporate issuance for the week was $19.675bn, which was underwhelming relative to consensus. Through the week, YTD total corporate bond issuance was $700.045bn, which trails 2016 by 3%. Barring a Friday turnaround, WTI crude oil is headed for its fifth consecutive weekly drop, and while IG remains just off YTD tights, weakening oil prices are likely weighing on primary issuance.

(Bloomberg) Celanese, Blackstone to Form Venture for Cigarette Filter Fiber

• Celanese Corp. and Blackstone Group agreed to form a joint venture to create a global supplier of acetate tow, a derivative of wood pulp used in making cigarette filters and other products.
• The business will combine Celanese’s Cellulose Derivatives and Blackstone’s Rhodia Acetow units, the companies said Sunday in a joint statement. Celanese will own 70 percent of the venture and Blackstone the remaining 30 percent, and the as-yet-unnamed venture will distribute $1.6 billion to Celanese when it closes.
• A tasteless, odorless form of cellulose, acetate tow is also used to make products such as marker tips, air fresheners and perfume dispensers. The new entity is expected to have 2017 pro forma revenue of about $1.3 billion with about 2,400 employees and will benefit from synergies in supply procurement, innovation, energy, equipment and other services, according to the statement.
• “The combination of these tow assets will enhance our ability to serve customers more efficiently and reliably from a global production footprint while also creating growth opportunities for employees,” said Mark Rohr, chief executive officer of Celanese.
• Celanese will name three members of the new company’s five-member board. Blackstone will pick the other two.

(BNA) Linde and Praxair Prepared for Long Haul in Antitrust Fight

• Linde AG and Praxair Inc. are girding for a long antitrust fight across multiple countries for their proposed merger of equals, and have given themselves a generous two years to close the deal.
• The two companies announced their proposed merger on June 1. The combined entity, with a current value in excess of $70 billion, would become the biggest player in a concentrated industrial gases market worldwide. It would outrank current market leader Air Liquide SA, which combined with Airgas Inc. in 2016 for $13 billion. The remaining players in the market have less than half the market position of either large firm, according to Bloomberg Intelligence.
• By setting a closing deadline far in the future, Linde and Praxair have avoided having their contract expire before their deal clears regulatory hurdles. But they face other risks, including changes in the market and extra costs to sealing the deal, Jones Day partner Chip MacDonald told Bloomberg BNA.
• MacDonald, who handles bank and broker dealer mergers with a complex regulatory overlay, said he doesn’t see parties setting longer deadlines in his own practice. A one-year expiration keeps everybody focused on closing the deal, including regulators, he noted.
• Most notable examples include scuttled mega-mergers between Staples Inc. and Office Depot Inc., Sysco Corp. and US Foods Holding Corp., and Electrolux AB and General Electric Co.
• U.S. regulators examined those mergers based on a narrow slice of “national accounts” served by limited big players. When regulators draw the market on that basis, it is the scale and scope of the operation that matters, not operational overlap that can be cured by divesting a few facilities or product lines.
• “The gas industry’s growth is defined by new projects at customers’ sites,” said Bloomberg Intelligence senior analyst Jason Miner in an analysis. “It’s this pipeline of potential on-site sales, rather than overlaps in installed footprints, that would likely drive regulatory concerns in a Praxair-Linde combination.”

(Bloomberg, Reuters) AT&T Awaiting Justice Department Details for Time Warner Deal

• AT&T senior executive VP Bob Quinn said the company is still unsure what final conditions may be needed as part of the approval process.
• The Justice Department is continuing its review of the $85.4 billion acquisition of Time Warner Inc. by telecom company AT&T , with AT&T still awaiting details about any final requirements to get the deal done, Reuters reports.
• Speaking with C-SPAN this week AT&T senior executive VP for external and legislative affairs Bob Quinn said the company is still unsure what final conditions may be needed as part of the approval process.
• “That conversation is just beginning really. We’ve gotten through the point where we’re produced all the data and answered all the questions and I think that process will kick off this summer,” Quinn said, according to Reuters.

(Bloomberg) Medtronic Announces $5B Share Buyback; Boosts Qtr Dividend 7%

• Medtronic qtr cash dividend raised to 46c/shr from 43c vs. estimate 47c, the company said in a press release.
  
  • Dividend is payble on July 26 to holders of record at the close of business July 7
  • Buyback replaces previous 2015 repurchase authorization
  • NOTE: 15 buys, 12 holds, 0 sells before today; avg PT $92.35

(Bloomberg) Dow-DuPont Wins U.S. Antitrust Nod to Create Chemicals Giant
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(Bloomberg) Committee Approves Extension of Nuclear Production Tax Credit
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Fund Flows & Issuance: According to Lipper, for the week ended June 14, investment grade funds posted a net inflow of $2.603bn. Per Lipper data, the year-to-date net inflow into investment grade funds was $64.293bn. Per Bloomberg, investment grade corporate issuance for the week was $13.75bn. Through the week, YTD total corporate bond issuance was $680.37bn, which now trails 2016 by 5.5%. The FOMC meeting on Wednesday was a big factor in the lackluster primary calendar this week.

(CNBC) Eli Lilly CEO David Ricks weighs in on drug costs and health reform

• CEO David Ricks on Thursday zeroed in on drug costs and the need for faster regulatory approvals as the debate over health-care reform rages on.
• “We hope this is a moment where we can make improvements in the health care system for everyday Americans,” he told CNBC in an interview at the Heartland Summit in Minnesota.
• One issue being talked about, according to Ricks, is why individual payers in high-deductible plans are paying the list price for medications.
• “Because we’re providing deep rebates to payers in the system who enjoy those, but the small guy, the consumer on the street, doesn’t get that same benefit,” Ricks said.
• He also advocated for faster FDA approval on generic drugs and “innovative breakthroughs,” in areas such as Alzheimer’s and cancer treatment, to help increase competition in the pharmaceutical industry.
• Drug costs have become an increasingly visible issue following the controversial price hikes orchestrated by pharma bro Martin Shkreli and the uproar over Mylan’s skyrocketing EpiPen costs, among other developments.

(Bloomberg) Banks Leave Savers Waiting After Being Quick to Raise Loan Rates

• Federal Reserve officials raised the benchmark lending rate to a range of 1 percent to 1.25 percent on Wednesday; the central bank’s third such move in six months. In the hours since the decision was announced, U.S. banks including Citigroup Inc., U.S. Bancorp and SunTrust Banks Inc. announced that they’ll pass on the higher interest rates to borrowers, without disclosing plans to provide better rates for deposit customers.
• After years of stubbornly low interest rates, U.S. banks have been slow to increase offers for deposit accounts. They are seeking to benefit from a fatter margin between what they charge for loans and what they pay out to customers who provide the funds.
• “We do think that there’s going to be a little bit more pressure on the retail side after this rate hike, and then certainly into the future,” Terry Dolan, chief financial officer at U.S. Bancorp, the country’s largest regional bank, said at an investor conference on Tuesday. So far, he said, the bank has “seen really no change in deposit betas on the retail side.”
• At least one large U.S. bank has broken ranks. Goldman Sachs Group Inc. raised its deposit rate to 1.2 percent this month, among the highest rates offered by firms tracked on Bankrate.com, a website that monitors 4,800 financial institutions.

(Bloomberg) Dow-DuPont Wins U.S. Antitrust Nod to Create Chemicals Giant

• Dow Chemical Co. and DuPont Co. won U.S. antitrust approval for their $73 billion merger, overcoming one of the last remaining hurdles to a deal that would create a global chemicals giant.
• DuPont agreed to sell off some of its herbicide and insecticide products to resolve government concerns that the combination would harm competition and raise prices for customers, according to a settlement filed Thursday in federal court in Washington. Dow will sell a plastics packaging unit.
• The takeover is among a trio of mega-deals that would reshape the global agrochemicals industry if approved by regulators around the world. Bayer AG is seeking approval to buy Monsanto Co., while China National Chemical Corp.’s agreement to buy Syngenta AG is nearing completion. If cleared, the transactions together would consolidate the industry into four major players, including BASF SE.
• The deals have drawn complaints from farmers and environmental activists who say the the combined companies’ control of pesticide and seed markets might increase prices for farmers.
• The U.S. approval of the Dow-DuPont tie-up follows the European Union’sclearance of the deal in March, when DuPont agreed to divest part of its pesticide business, including research and development. The companies also won clearance from India and are awaiting approval from Canada.

(Bloomberg) Committee Approves Extension of Nuclear Production Tax Credit

• House Ways and Means votes to approve legislation sought by the nuclear industry power that would extend an unused tax credit for new nuclear reactors.
  
  • H.R. 1551 extends Nuclear Production Tax credit past current sunset date of 2021
  • Bill also tweaks legislation to allow nonprofit public power co-owners of plants and other partners to use the credit by allocating their pro-rated share of the credit to private partners
  • Legislation is seen as beneficial to Southern Co. and Scana Corp., which have reactors under construction that could qualify for the credit
  • NOTE: Under current law, 1.8-cents-per-kilowatt-hour credit is capped at 6,000 megawatts and only available to nuclear power plants placed in service before January 2021