Category: Investment Grade Weekly

08 Feb 2019

CAM Investment Grade Weekly Insights

CAM Investment Grade Weekly

It was a mixed week for Investment Grade Credit. The spread on the Corporate Index marched tighter on Monday and Tuesday before closing wider on both Wednesday and Thursday. The wider close on Wednesday snapped a remarkable streak of 22 straight trading days where the index closed tighter than the prior day. Still, even with two days of slightly wider spreads, the index remains one basis point tighter than where it opened the week and investor sentiment in the corporate credit space remains strong.

The market tone to start the day on Friday is, like the two prior days, somewhat softer. All told, we view this as healthy after the unabated “student body left” tightening that we experienced for 3+ weeks. Ebbs and flows in the market tend to create opportunities for patient investors with longer time horizons.

According to Wells Fargo, IG fund flows during the week of January 31-February 6 were +$5.9 billion. This was the largest inflow since October 2017 according to the data that is tracked by Wells Fargo, bringing YTD fund flows to +$10.759bln.

Issuance slowed this week compared to last, as $10.350bln in new corporate bonds were priced, bringing the year-to-date total to $114.713bln. Monthly volume projections for February are calling for ~$90bln of issuance during the month, according to data compiled by Bloomberg. New issue concessions continue to hover in the low single digits as investor demand for new issues remains robust.


(Bloomberg) Greed Is Back as Debt Markets Face an $8.6 Trillion Hangover

  • Prayers for a sudden return to dovish monetary policies have been answered, and now investors are living with the aftermath: a world awash with $8.6 trillion in negative-yielding debt.
  • That’s one reason money managers are wading once more into the fringes of fixed-income markets across the globe.
  • Consider the action over the past week: Serial defaulter Ecuador managed to sell $1 billion in new bonds even as the government is in talks for International Monetary Fund financing. Crisis-prone Greece received blockbuster orders for its 2.5 billion-euro ($2.9 billion) sale. And the decidedly frontier republic of Uzbekistan, encouraged by risk-on markets, is meeting investors for a debut international offering.
  • No wonder the world’s largest funds are betting the explosive rally in developing-economy debt still has legs.
  • Meanwhile, U.S. high-yield is in the throes of a rebound, as traders bet easier monetary policy will prolong the business cycle. Lower-rated borrowers are in vogue after the asset class posted the biggest monthly gain in seven years.


(WSJ) The Bond and Stock Markets Need to Talk

  • Investors buying bonds should start checking what their colleagues in the stock market are doing.
  • Yields on 10-year U.S. government bonds hover below 2.7%. This is extremely low considering that sovereign debt tracks where the central bank is expected to set interest rates—which the Federal Reserve now pegs between 2.25% and 2.5%—plus a premium for locking up the money long term.
  • The Treasury yield is even more strikingly at odds with the S&P 500, which has climbed back from its December lows during the fourth-quarter earnings season. The technology-heavy Nasdaq is even close to exiting its recent bear market.
  • In the U.S., it is likely bond investors who have got too pessimistic: Derivatives markets price in a 98% chance that interest rates will be at their current level or lower in a year’s time, according to CME Group. Only three months ago, they predicted that the Fed would tighten policy at least twice this year.
  • One possibility is that the legendary pessimism of fixed-income investors is correct and stocks are treading on perilous ground because the U.S. economy is in worse shape than it looks.
  • Yet if January’s improvement in economic data is pointing in the right direction, writing off rate rises with such certainty is perilous. Fed chairman Jerome Powell’s transformation from hawk to dove in January is likely explained—at least in part—by the equity rout late in 2018. If stocks keep rallying, he may very well nudge rates up again at least once.
  • European stock investors, by contrast, should heed the advice of the bond market: The region’s equities have slightly outperformed U.S. ones in recent months, glossing over Europe’s greater vulnerability to the Chinese slowdown. And with rates already at record lows, the European Central Bank has little ammunition left.
  • Treasurys aren’t in for a dramatic selloff, because inflation is being kept in long-term check by weak labor bargaining power. However, investors’ confidence that the Fed will sit on its hands for a full year looks misplaced.


31 Jan 2019


It was another strong week for IG credit. The OAS on the Bloomberg Barclays Corporate Index opened the week at 147 and tightened to 143 through the close on Thursday evening. The tone remains positive in the market this Friday morning as the 2019 risk rally continues. The OAS on the index finished 2018 at 153 and closed as wide as 157 on January 3rd, during the first holiday shortened week of 2019. Since January 3rd, the spread on the corporate index has closed tighter 8 of the last 10 trading days, moving from 157 to 143. For historical context, the three and five year average OAS for the index is 124 and 126, respectively, while the average since OAS since 1988 inception is 134.

According to Wells Fargo, IG fund flows during the week of January 10-January 16 were +$547mm. Per Wells data, YTD fund flows stand at +$2.7 billion. To recap 2018’s action, flows during the month of December were the second largest notional outflow on record at -$26bln and the largest since June of 2013 when -$27.4bln flowed from IG funds.

The primary market is alive and well, as $25.65bln in corporate bonds were printed during the week. According to data compiled by Bloomberg, borrowers are paying less than 5bps in new issue concession, down from as much as 25bps at the beginning of the year. Narrowing concessions support the thesis that the market is wide open and investor demand is robust. Corporate issuance in the month of January has now topped $77bln.

07 Dec 2018


It was another volatile week in the credit markets with wider spreads and lower rates. Through the close on Thursday evening, the Bloomberg Barclays Corporate Index was 8 basis points wider on the week while the 10yr Treasury is 9 basis points lower on the week as we go to print on Friday morning. The corporate index has now reached its widest levels year to date and is trading at an OAS of 145, its widest level since August of 2016. To put this into perspective, the index has had an average OAS of 108 over the past 12 months and 125 over the past 5 years. The long term average OAS is 133 dating back to 1988.

According to Wells Fargo, IG fund flows during the week of November 29-December 5 were +$0.5 billion. Per Wells data, YTD fund flows are +$82.665bln.

Investment grade borrowers printed a mere $4bln during a week where spreads inched wider day by day. The credit markets were also closed on Wednesday as a national day of mourning for formal President George H.W. Bush. According to Bloomberg, YTD corporate issuance has been $1.070 trillion.  Issuance is now down 11% YTD when compared to 2017 numbers.

30 Nov 2018


Credit markets are struggling to find footing, as the Bloomberg Barclays Corporate Bond Index opened Friday at an OAS of 135 which is the widest level of 2018. Investment grade credit has drifted wider since November 8, when the index closed at an OAS of 113. The move wider in credit over that timeframe has almost entirely been offset by rates, at least for the intermediate portion of the curve, as the 10yr Treasury has moved from 3.23% to 3.01%. Note that the front end of the yield curve has flattened substantially during the month of November and the spread between the 2yr and 5yr Treasury is down to a mere 3.3 basis points as we go to print. The investment grade corporate bond market currently has little appetite for idiosyncratic risk and we are seeing that reflected in the spreads of bonds for companies under duress, like General Electric, which continues to trade wider, seemingly day after day. BBB credit too has underperformed relative to single-A credit. Since November 8, the Corporate Index is 22 wider, while the BBB-rated portion of the index is 28 wider. The A-rated portion of the index has outperformed over that time period, having moved 17 wider.

According to Wells Fargo, IG fund flows during the week of November 22-November 28 were -$3.2 billion, which was the second largest outflow YTD. Per Wells data, YTD fund flows are +$82.148bln.

The IG primary market was fairly active this week and the primary market remains open to issuers of all stripes even in the face of widening spreads. According to Bloomberg, new corporate issuance on the week was $30.325bln while issuance for the month of November topped $84bln. YTD corporate issuance has been $1.066 trillion.



(WSJ) Bond Indexes Bend Under Weight of Treasury Debt

  • The surge in U.S. government borrowing is beginning to warp bond indexes, posing a challenge for investors looking for the best returns when interest rates are rising.
  • The problem: Treasurys tend to offer investors lower yields and produce weaker returns than other kinds of bonds, such as high-quality company debt or securities backed by mortgage payments. Yet as the government steps up borrowing to fund last year’s tax cuts, index funds end up holding more Treasurys, squeezing out the securities that pay higher rates of interest.
  • The U.S. government is borrowing $129 billion this week, up 28% from the same series of note auctions a year ago. The increased borrowing means Treasurys now amount to almost 40% of the value in the leading bond market investment benchmark—the Bloomberg Barclays U.S. aggregate index—which fund managers use to gauge their success. That is up from around 20% in 2006, before the start of the financial crisis.
  • Some analysts said investors should consider the growing weight of Treasurys in indexes before purchasing mutual funds. Actively managed bond funds have performed better than their index-tracking peers recently, a trend some analysts credit to their efforts to pare back Treasury holdings. Rising rates erode the value of outstanding bonds, because newly issued debt offers higher payouts. And Federal Reserve officials have penciled in additional increases into 2020.
  • “The value from active management is going to be more important,” said Kathleen Gaffney, director of diversified fixed income at Eaton Vance , who bought dollar-denominated corporate bonds in emerging markets because U.S. corporate yields remain low by historic measures. “You’re not going to want market risk.”
  • Through the first six months of this year, active managers topped indexes in five of 14 categories including municipal bonds and short- and intermediate taxable bonds, according to data from S&P Dow Jones Indices. That is coming off a 2017 in which actively managed funds had their best year since 2012, when active managers beat passive funds in nine of 13 categories the firm then measured.
  • Should yields continue to rise, advocates of active portfolio management say investors would be better served by a human being shielding them from the parts of the bond market most likely to suffer losses versus an index which includes all bonds, without regard to their potential risks. “Most of the stuff I own’s probably not in the agg,” said Jerry Paul, who has recently purchased preferred stocks for his ICON Flexible Bond Fund, which has returned 0.3% this year, beating the Bloomberg Barclays index.
  • Many expect to persist. The Treasury Department projected to run trillion-dollar deficits for the foreseeable future. As issuance increases, funds that use the Bloomberg Barclays aggregate index as a guidepost for portfolio composition will wind up owning increasingly large amounts of Treasury debt. Independent bond analyst David Ader predicts Treasurys will make up half of the U.S. bond market and the indexes that track it by 2028.
  • Still, because many individuals invest in bond funds to protect against losses in their stock portfolios, there are advantages to indexes that reflect the constituency of bond market borrowers instead of optimizing returns, said Josh Barrickman, who manages Vanguard Group’s bond index fund. While corporate bonds, for example, offer higher yields than Treasurys, U.S. government debt tends to post high returns during periods when investors shun risk, he said.
  • The changing composition of bond market indexes can exert a powerful force over what resides within their bond mutual funds without their becoming aware of it, according to fund managers and analysts. Treasury Department data shows that the category of investors that represents mutual funds bought about one half of the $2 trillion of U.S. government notes and bonds sold at auction last year. That is up from about one-fifth of the $2.2 trillion sold in 2010.
  • As the supply of Treasury debt rises, the government will have to spend more to pay interest. Some investors say the rising supply of bonds has also helped push yields higher, which can pressure stocks by offering investors a way to get more yield with less risk.
  • “It’s going to reflect itself as a drag on the economy and on potential equity market returns,” said Craig Bishop, a bond strategist with RBC Wealth Management.
  • Should slowing growth lead business conditions to worsen, corporations have the option of borrowing less. Not so the U.S. government. Because legally mandated spending on unemployment insurance and other safety net programs tends to rise when growth slows, wider budget deficits and more Treasury debt could ensue. That means many bond investors could face conditions where there is no alternative to holding a rising share of government debt.


(Bloomberg) Salesforce Soars as Management Mutes Market Skepticism


  • Inc. rose as much as 9.5 percent Wednesday, the most since February 2016, after third-quarter sales and a top-line beat report muted some of Wall Street’s concerns about the broader demand environment. Several analysts raised their price target on the stock, including Alliance Bernstein, who believes the report should help lift software stocks. Meanwhile, Raymond James cut their bullish target as shares “aren’t immune from broader macro trends.”


(Bloomberg) Ford Digs Further Out of Trump’s Doghouse as GM Takes Its Turn


  • Ford Motor Co. and General Motors Co. both need to overhaul their U.S. manufacturing base to cope with consumers’ drastic switch to SUVs from sedans. Only one is poised to make that adjustment without ticking off the president.
  • In a significant rework of its U.S. production plans, Ford will eliminate shifts at factories in Trump country. But it plans to retain all the 1,150 workers affected by shifting their jobs to Michigan and Kentucky plants making big SUVs or supplying transmissions to pickups. That’s fortunate not only for employees, but for Ford’s relations with a touchy White House.
  • GM, on the other hand, is caught with way too much capacity to make out-of-vogue sedans, so it has little choice but to go the more painful route of shuttering factories and firing workers. Inevitable or not, the decision has infuriated Donald Trump. He’s renewed a threat to slap auto imports with 25 percent tariffs and enlisted federal agencies to look for ways to cut the carmaker’s subsidies.
  • “Ford has been in Trump’s cross-hairs before, and this should help keep them out,” said Michelle Krebs, a senior analyst with researcher Autotrader. Ford “had their time in the barrel” in 2016, when Trump lambasted its plans to move small-car production to Mexico. The company abandoned that strategy last year and canceled a new car factory it was building there.
09 Nov 2018

CAM Investment Grade Weekly Insights

CAM Investment Grade Weekly

Credit spreads look to finish the week tighter, as the Bloomberg Barclays Corporate Bond Index opened Friday at an OAS of 114 after starting the week at 117. As we go to print, the 10yr Treasury sits at 3.223%, which is 1 basis point higher relative to its close a week prior.

According to Wells Fargo, IG fund flows during the week of November 1-November 7 were +$2.7 billion with short duration funds posting a record +$3.6 billion inflow. Per Wells data, YTD fund flows are +$98.796bln.

According to Bloomberg, new corporate issuance on the week was $22bln. YTD corporate issuance has been $1.011 trillion.



(Bloomberg) Oil Teeters Near Record Losing Streak After Entering Bear Market

  • Oil extended a run of declines after falling into a bear market, heading for its longest losing streak on record.
  • Futures in New York fell for a 10th day, extending a dramatic plunge that’s dragged prices down more than 20 percent from a four-year high reached in early October. In London, Brent sank to a seven-month low below $70 a barrel. The drop comes days before the Organization of Petroleum Exporting Countries meets with partners in Abu Dhabi, having signaled it may cut output next year.
  • Oil’s decline has been exacerbated by a U.S. decision to allow eight countries to continue importing from Iran, which it slapped with sanctions earlier this week. That decision, as well as pledges by Saudi Arabia and other producers to pump more and gains in American supply and stockpiles, have turned fears of a supply crunch into talk of an oversupply.

(Bloomberg) California Wildfire Quadruples in Size, and PG&E Falls


  • A wildfire in Northern California’s Sierra Nevada foothills quadrupled in size late Thursday as winds threaten to make it spread faster. The state’s largest utility, PG&E Corp., fell 10 percent in early trading.
  • The blaze near Chico has left more than 23,000 homes and businesses without power, according to PG&E’s website. Residents in several towns were evacuated. The National Weather Service warns flames will spread rapidly as high pressure across the region has parched the air and fueled gusts of up to 65 miles per hour.
  • As of 8 p.m. Thursday, the foothills fire had grown to 20,000 acres up from 5,000 earlier in the day. Two fires have broken out in Ventura County, just north of Los Angeles, consuming about 12,000 acres, and causing residents there to flee the flames.
  • PG&E is struggling to cope with losses from deadly fires last year that could cost the utility as much as $17.32 billion in liabilities, according to a JPMorgan Chase & Co. estimate. Investors are still waiting on the state’s investigation into the Tubbs fire, the deadliest of last year’s wine country fires.


(Bloomberg) Lithium Giant Staying Nimble in Fickle Car-Battery Market


  • The world’s largest lithium producer is planning to expand production in Australia, chasing the market for a form of the metal increasingly being used by the makers of electric car batteries.
  • Albemarle Corp. will halt plans to expand its lithium carbonate production in Chile, the company said on Thursday. Instead, it will plow funding into a Western Australia project that produces lithium hydroxide, a rarer form of the metal that’s growing in use and currently sells for higher prices than the carbonate form.
  • Lithium hydroxide works better with cathodes containing higher levels of nickel, helping cars go further on a single charge. Global demand for lithium overall is expected to almost triple by 2025, according to Bloomberg NEF, as carmakers such as Tesla Inc. look to boost sales of battered-powered vehicles.
  • Lithium miners, meanwhile, have struggled to meet demand, and prices for the metal have tripled in just four years.
  • “The challenge at this point in the cycle is that lithium companies must ramp their capital spending amidst a backdrop of some uncertainty around lithium pricing,” Chris Berry, a New York-based analyst and founder of research firm House Mountain Partners LLC, said by phone on Thursday. “For Albemarle to maintain its market share with such robust lithium demand growth, the company needs to execute their capacity expansion plans perfectly.”
  • Albemarle is planning to boost its overall production of lithium across its operations in Chile, China and Australia to 225,000 tons per year in 2025 from 65,000 tons in 2017, the company said in its earnings report. In just four years, lithium has gone from being Albemarle’s least important product to representing 44.5 percent of the company’s revenue in 2017.
  • On Thursday, the Charlotte, North Carolina-based company posted mixed third quarter results that sent shares down 2 percent at 4:15 p.m. to $105.57 in New York trading. Capital expenditures were up, reaching record levels, but Albemarle missed estimates for sales.



06 Nov 2018

CAM Investment Grade Weekly Insights

CAM Investment Grade Weekly

It was another week of volatility in risk assets, but the tone improved throughout, and was cemented by an above-consensus monthly employment report on Friday morning. Credit spreads are at 3-month wides as the Bloomberg Barclays Corporate Index sits at an OAS of 119. As we go to print, positive economic data has sent the 10yr Treasury to its highest level of the week, at 3.17%.

According to Wells Fargo, IG fund flows during the week of October 25-October 31 were a mere $192 million. Per Wells data, this extended MTD outflows to -$7.4bln and marks the first monthly outflow for IG credit funds since January of 2016. Even still, IG fund flows remain firmly positive YTD at +$96.150bln, with short duration funds garnering the lion share of those flows.

According to Bloomberg, new corporate issuance on the week was $17.55bln. YTD corporate issuance has been $989.109bln.


(Bloomberg) General Electric Cut by Moody’s on Weakness in Power Unit

  • General Electric’s long-term and senior unsecured rating was cut to Baa1 from A2 by Moody’s as the rating agency cites “the adverse impact on GE’s cash flows from the deteriorating performance of the Power business.”
    • Impact from power business will be considerable and could last some time
    • Weaker than expected performance of power business also due to co.’s “misjudgment of financial prospects and operational missteps”
    • Outlook stable predicated on Moody’s view that co. will be able to contend with the challenges posed by its power business

(Bloomberg) California Utilities to Reach 50% Renewable Power Target in 2020


  • Three large utilities in California are ahead of schedule to hit their targets under a law requiring them to source 33 percent of their electricity from renewables by 2020, according to a California Public Utilities Commission report.
    • All three investor-owned utilities beat the state-mandated target of 27 percent for 2017
      • PG&E: 33%
      • Edison: 32%
      • Sempra: 44%
    • Renewable power contract prices, which peaked at more than $160/MWh in 2007, fell in 2017 to an average of $47/MWh, the report found
  • NOTE: Utilities are required by California law to derive 60 percent of their electricity from renewable sources by 2030


(Bloomberg) Exxon, Chevron Surprise Wall Street as Permian Boosts Results


  • Exxon Mobil Corp. and Chevron Corp. delivered their strongest third-quarter results in four years, capping a week in which Big Oil enjoyed profits not seen since the days of $100 crude.
  • Exxon shares climbed as the American supermajor appeared to emerge from years of production setbacks after failed bets on Russia and Canada that undercut its previously gold-plated reputation among investors. Chevron’s stock also pushed higher.
  • Exxon’s oil and natural gas output surpassed expectations for the first time in 10 quarters, rebounding from a decade-low reached in the second quarter. Earnings climbed 57 percent. At rival Chevron, record production combined with higher crude prices to double profit to $4 billion. Both companies cited growth in the Permian Basin of West Texas and New Mexico as key.



29 Oct 2018

CAM Investment Grade Weekly Insights

CAM Investment Grade Weekly

Amid the backdrop of a volatile equity market, corporate credit spreads are meaningfully wider on the week as we go to print, with credit spreads at least 5 wider across the board. On Friday afternoon, the 10yr Treasury stood at 3.08%, which is 11 basis points lower on the week.

According to Wells Fargo, IG fund flows during the week of October 18-October 24 were -$1.6bln. Per Wells data, this was the fourth consecutive weekly outflow for a cumulative total of -$7.2bln over that time period.  IG fund flows are now +$96.342 billion YTD.

According to Bloomberg, new corporate issuance on the week was less than $6bln. This was an underwhelming issuance figure relative to market expectations of $15-20bln, with the weak tone of the market keeping issuers at bay.  Issuance for the month of October stands at $75bln while YTD issuance is $971.559bln.




(Bloomberg) AB InBev Cuts Payout in Half as Rising Rates Squeeze Debtors

  • Anheuser-Busch InBev NV, the world’s largest brewer, cut its dividend in half as it seeks to pay down its $109 billion debt mountain, much of it taken on to acquire rival SABMiller Plc in 2016.
  • The Budweiser maker justified its move by pointing to the plunge in emerging-market currencies, which is crimping its cash flow. Third-quarter profit missed analysts’ expectations and sales growth slowed to the weakest pace in more than a year. The stock plunged as much as 9.2 percent amid a global selloff.
  • The most generous dividend-payer in the food-and-beverage industry is pulling back to protect itself as the U.S. Federal Reserve increases borrowing costs. The move comes as a number of payments are increasingly in doubt, including that of General Electric Co. Consumer-goods makers with the highest dividend yields include Kraft Heinz Co. and General Mills Inc. Such debt-laden companies are struggling to reduce leverage amid competition from small upstarts.
  • AB InBev said the new dividend policy will make it easier to reach its goal of reaching a debt level that’s equivalent to two times earnings before interest, taxes, depreciation and amortization. The brewer may be trying to strengthen its finances in case acquisition opportunities arrive, wrote Nico von Stackelberg, an analyst at Liberum.
  • “ABI needs a strong balance sheet to have the debt market’s confidence to do big deals,” he wrote, saying it could allow the brewer to bid for assets from the Castel family if they come on the market. Bordeaux-based Castel Group owns beer assets in addition to businesses in wine and soft drinks.
  • The Budweiser maker will use the entire $4 billion it saves to pay down debt, Chief Financial Officer Felipe Dutra told journalists on a call. AB InBev has $1.5 billion of borrowings maturing this year, $3 billion next year and $6 billion in 2020, he said.

(Bloomberg) Japan’s Insurers Aren’t Hedging Their Foreign Bonds Anymore: RBC


  • Japanese life insurers are holding more unhedged foreign bonds and their hedge ratios are falling, according to RBC Chief Currency Strategist Adam Cole, supporting his bearish view on the yen.
    • Notable participants are Nippon Life, Meiji Yasuda and Mitsui, Cole wrote in note; main exception is Kampo
    • The trend was “instrumental in turning us bearish” on the yen and is only becoming “more entrenched”
    • Life insurers will ramp up purchases of unhedged bonds when the yen is strong
    • RBC sees long-term USD/JPY target of 125; pair traded at ~111.95 as of 9:50am ET
    • The desire to cut hedges on existing foreign bonds holding is probably why dips in USD/JPY have been shallow lately, even in severe risk-offs


01 Oct 2018

CAM Investment Grade Weekly Insights

CAM Investment Grade Weekly

Corporate credit spreads are largely unchanged on the week. As expected, the Fed increased the Federal Funds Target Rate by 25 basis points on Thursday to an upper bound of 2.25%.  This was the third rate hike of 2018 and the 8th increase in the current tightening cycle which began in December of 2015.  Notably, the 10yr Treasury has trended modestly lower on the back of the Fed announcement –it was as high as 3.07% at noon on Thursday but today it is at 3.04% as we go to print.

According to Wells Fargo, IG fund flows decelerated once again during the week of September 20-September 26 and were +$779 million during the week. IG fund flows are now +$97.141 billion YTD.

According to Bloomberg, issuance on the week is going to come in at $12.7bln, as there is a small deal pending this Friday morning. This brings the September new issuance tally to $122.9bln and the YTD tally to over $895bn. September has now passed January as the month with the most issuance so far in 2018.


(Bloomberg) Why Comcast Is Paying Dearly for Britain’s Sky

  • Pay-TV subscriptions are still growing in Europe, and Comcast’s $39 billion purchase of Sky Plc gives it global reach.
  • The Sky deal would propel Comcast’s debt to at least $100 billion, placing the company among a small group that have borrowed that much, including AT&T Inc., which in June closed on its $85 billion purchase of Time Warner Inc. The debt could go even higher now that Fox on Sept. 26 said it will sell Comcast its 39 percent stake in Sky, worth more than $15 billion—a decision that required approval from Walt Disney Co., which is buying most of Fox.
  • Comcast executives say they’re confident they can generate enough cash flow to pay down their debt over time. For now, the company’s credit ratings are unchanged, though an S&P Global Ratings analyst has given it a negative outlook. But the success of the deal depends on continued strength at its U.S. business and the combined TV giants fending off the global rise of streaming rivals Netflix Inc. and Inc.
  • Sky is essentially Comcast’s European twin, with about 23 million customers, mostly in the U.K. and Ireland. With Sky, the U.S. company would almost double its customer base. Like Comcast and its X1, Sky sells a box called Sky Q, which has a slick interface that makes it easier to find what to watch—and provides a rich source of data on customer viewing habits. Unlike Comcast, Sky is still gaining video customers.
  • The two companies could benefit from being under the same roof. For instance, Comcast and Sky could have their studios team up to create more original TV shows for Sky’s online service. That could provide a bulwark against the rise of Netflix, Amazon, and Home Box Office Inc., which are spending billions of dollars in a global race for online TV customers, especially in Europe. Perhaps most important, as more Americans drop their cable-TV subscriptions, Sky offers Comcast a foothold on a continent where cord-cutting hasn’t taken off yet.

(Bloomberg) Abbott Laboratories EU3.42b Debt Offering in 3 Parts


  • Use Of Proceeds: To repay all or portions of Abbott’s outstanding 2.00% notes due 2020, 4.125% notes due 2020, 3.25% notes due 2023, 3.4% notes due 2023, and 3.75% notes due 2026, and for fees, expenses, and other costs associated therewith
  • CAM Comment: According to BVAL the OAS on ABT 3.75% 2026 has tightened 25bps in the month of September 2018


(Bloomberg) All four of the Vogtle 3 & 4 co-owners vote to move forward with construction of nuclear expansion project


  • All four of the Vogtle 3 & 4 project co-owners (Georgia Power, Oglethorpe Power, MEAG Power and Dalton Utilities) have voted to continue construction of the two new nuclear units near Waynesboro, Ga.
  • The new units are the first to be built in the United States in more than 30 years and the only new nuclear units currently under construction in America. Expected on-line in November 2021 (Unit 3) and November 2022 (Unit 4), the new units are expected to generate enough emission-free electricity to power approximately 500,000 homes and businesses.


(Bloomberg) AerCap takes Delivery of its First Boeing 737 MAX


  • AerCap Holdings N.V. has today announced that it has taken delivery of its first 737 MAX 8. The aircraft will be leased to China Southern Airlines, the first of 5 aircraft to go on lease to the airline from AerCap’s 737 MAX order book with Boeing.
  • AerCap has a total of 104 Boeing 737 MAX aircraft owned and on order, delivering through 2022.


(Bloomberg) Bill Ford Sees No Crisis While Fitch Warns of Challenging Times


  • Ford Motor Co. has work to do to reverse its declining fortunes but isn’t a company in crisis, Executive Chairman Bill Ford said Thursday, while the Fitch Ratings service warned of challenging times ahead for the automaker.
  • “I don’t think it’s even close to a crisis — we’re making good profitability,” Ford told reporters at a centennial celebration of the company’s Rouge manufacturing complex near its headquarters in Dearborn, Michigan. “Do we still have work to do? Yes, we do. But we are investing heavily in the product. We’re investing heavily in the future. And there’s nothing that we want to do that we can’t do.”
  • Fitch Ratings today warned of risks Ford faces in its $11 billion restructuring, which the automaker said could take five years. Moody’s Investor Service lowered Ford’s credit rating last month to one notch above junk on concerns about executing that overhaul.
  • “The company has entered a challenging period, despite a strong liquidity position,” Stephen Brown, Fitch senior director, wrote in a note on Ford. “With the recent cost pressures, there is less headroom in the ratings, which heightens the potential for a negative rating action if it appears the transformation program is not meeting expected milestones.”





21 Sep 2018

CAM Investment Grade Weekly Insights

CAM Investment Grade Weekly

Corporate credit spreads are generically 3 bps tighter on the week and the 10-yr Treasury is 8 bps higher than last weeks close. At 3.08%, the 10-yr is close to retesting year-to-date highs of 3.11%.

According to Wells Fargo, IG fund flows decelerated during the week of September 13-September 19 and were +$1.0 billion. IG fund flows are now +$96.361 billion YTD.

According to Bloomberg, issuance on the week topped $29bln which brings the September new issuance tally to $110.2bln and the YTD tally to $883.134bn.

(WSJ) Comcast, Fox to Settle $35 Billion Takeover Battle for Sky in Weekend Auction

  • Comcast Corp. and 21st Century Fox Inc. will settle their takeover battle for Sky PLC in a weekend auction run by British regulators, setting up a dramatic climax to a 21-month sale process that has pitted some of the world’s biggest media giants against each other.
  • The U.K. Takeover Panel, which polices deal making in the country, laid out Thursday rules for the auction. It is a process the regulator hasn’t run many times previously—and never before with such a large company as the prize. London-listed Sky has a market value of some $35 billion.
  • Auctions of big, publicly traded companies are extremely rare elsewhere, too. In 1988, private-equity giant KKR & Co. won a tumultuous auction for tobacco and food giant RJR Nabisco. It beat out a group led by the company’s management in a $25 billion deal, ending a takeover battle immortalized in the book and film “Barbarians at the Gate.”
  • The Sky auction pits Rupert Murdoch’s 21st Century Fox, which already owns 39% of Sky, against Comcast. Walt Disney Co. has separately agreed to buy a big chunk of Fox, including its Sky stake, for $71 billion.
  • That puts Disney Chief Executive Bob Iger and Mr. Murdoch on the same team, bidding against Comcast CEO Brian Roberts. Because Fox already owns a big stake in Sky, the Disney-Fox team has an interest in driving up the bidding, even if it doesn’t ultimately win. That would make the stake more valuable should it decide to sell it to Comcast.
  • Mr. Murdoch has long sought to consolidate his holding in London-based Sky. Disney and Comcast see Sky as a way to expand internationally. The broadcaster also sells wireless, TV and internet services throughout Europe, and it is a media company that produces its own news, entertainment and sports programming.
  • The auction will run through the day Saturday, and consist of a maximum three rounds of bidding. The winner will be announced shortly after the auction ends Saturday evening. If there is a third and final round, it will be conducted with sealed bids—secret, final offers made to the regulator.
  • Fox first offered in December 2016 to buy the rest of Sky it didn’t already own for £10.75 ($14.22) a share. After Fox’s merger proposal hit regulatory and political delays, Comcast made a surprise offer last February, for £12.50 a share.
  • Comcast made the most recent offer in July, for £14.75 ($19.49) a share, valuing Sky at $34 billion. That is above Fox’s current bid, also made in July, of £14 a share.

(Bloomberg) Sempra Energy to Sell U.S. Solar Assets to Consolidated Edison


  • Sempra Energy today announced that it has entered into an agreement to sell its U.S. non-utility operating solar assets, solar and battery storage development projects and one wind facility to Consolidated Edison, Inc. for $1.54 billion in cash, subject to adjustments for working capital and pre-closing cash contributions.
  • “This sale represents an important step forward in the portfolio-optimization plan we announced in June to support market growth opportunities,” said Joseph A. Householder, president and chief operating officer of Sempra Energy. “We plan to work closely with Consolidated Edison to ensure a smooth transition.”


(Bloomberg) Fitch Upgrades Merck’s Rating to ‘A+’; Outlook Stable


  • Fitch Ratings-Chicago-20 September 2018: Fitch Ratings has upgraded Merck & Co., Inc.’s (Merck) Long-Term Issuer Default Rating (IDR) to ‘A+’ from ‘A’. The Rating Outlook is Stable. The ratings apply to roughly $23.5 billion of debt outstanding at Jun. 30, 2018. A complete list of Fitch’s rating actions follow at the end of this press release.
    • Leverage Consistent with ‘A+’ Rating: Merck has reduced its leverage (total debt/EBITDA) since year-end 2015 through a combination of EBITDA growth and debt reduction. Merck’s leverage was 1.4x at June 30, 2018, compared to 1.8 at Dec. 31, 2015. The company reduced debt by roughly $2.9 billion and increased EBITDA by approximately $2.1 billion during the same period. Improving operations, particularly with the performance of Keytruda (cancer), has helped drive EBITDA growth.
    • New Products/ Growth Opportunities: Products approved during the last three years should help to drive intermediate- to long-term, top-line growth for Merck. In addition, Keytruda (cancer) continues to expand, supported by an ongoing stream of clinical data. However, it will continue to face competition from Bristol-Myers and Pfizer/Bayer, which have similar-acting drugs. Merck is also evaluating Keytruda’s safety and efficacy in other cancers and in combination with other cancer therapies. Recent approvals to treat diabetes, cancer and infectious diseases should help to augment long-term growth and diversify sources of revenue.
    • Expanding Late-Stage Pipeline: Fitch expects Merck to continue to build its late-stage pipeline with new therapies to treat cancers, infectious diseases and cardiovascular disorders. While the majority of these projects are internally developed, Merck also partners with innovator firms to take advantage of technological advancements that were discovered externally. Given the breadth and pace of new drug discovery and development, Fitch believes that it is advantageous for firms to look externally as well as internally to optimally build their pipelines.
    • Patent Exposure Manageable: Merck is facing generic and biosimilar competition to Zetia, Vytorin and Remicade. However, Fitch views the risk as manageable with roughly 9% of firm sales at risk. Remicade, which accounts for about 2.1% of total firm sales, is a biologic that will likely continue to experience less rapid sales losses to biosimilar competition, compared to traditional small-molecule pharmaceuticals when a generic enters the market. Interestingly, Merck recently launched its own biosimilar version of Remicade in the U.S. Vytorin and Zetia are small molecules and account for roughly 5.2% of total revenues. Sales erosion for these two drugs has been rapid.
    • Solid Free Cash Flow Expected: Fitch forecasts that Merck will generate $4.0 billion – $4.2 billion in free cash flow (FCF) during 2018. Gradually increasing margins driven by an improving sales mix and decent cost control should augment moderate near-term, top-line growth. Fitch expects FCF to incrementally increase during the multi-year forecast period due to moderately improving margins and stronger top-line growth
    • Targeted Acquisition Likely: Fitch looks for Merck to pursue mainly targeted acquisitions in the intermediate term. The company has improved its operational and financial prospects through successfully gaining regulatory approvals on late-stage pipeline projects and has continued to back fill its pipeline with new and advancing projects. An improved growth and profitability profile decreases the need for the company to execute large strategic business combinations in order to fill pipeline gaps or offset sales losses from patent expiries.
    • Payers Increasingly Demanding Value: While drug pricing is always near the top of contentious issues in healthcare, it has become increasingly so during the past three years. Some of the scrutiny has been self-inflicted by a few firms pursuing significant price increases on long-established drugs. Other concerns surround the high price points of recently approved innovative drugs. Regardless, pharmaceutical manufacturers will increasingly need to demonstrate the value of their therapies to payers, patients and providers with strong clinical outcomes driven by increased safety and efficacy. This dynamic will place further pressure on the research and development efforts of innovative biopharmaceutical firms.

(Bloomberg) Lilly’s Elanco Rises After $1.5 Billion Animal-Health IPO 


  • Pricing the deal higher than expected is a good sign in what will be a test of investor appetite for large, standalone animal-health businesses. The first one to be taken public by a pharmaceutical giant has rewarded investors with a tripling in stock price. Elanco faces the challenge of showing that it can follow suit five years after rival Pfizer Inc. listed its animal-health business, Zoetis Inc.
  • LLY expects to completely sell down its stake in Elanco in 2019 (CAM Comment)



(SEC Filing 8k) Abbot Deleveraging


  • Abbott Ireland Financing DAC, a wholly-owned subsidiary of Abbott Laboratories (“Abbott”), intends to offer senior unsecured notes in an offering exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), subject to market and other conditions. Abbott will fully and irrevocably guarantee the notes on a senior unsecured basis. Abbott intends to use the net proceeds from the offering of the notes to refinance all or portions of Abbott’s outstanding 2.00% Notes due 2020, 4.125% Notes due 2020, 3.25% Notes due 2023, 3.4% Notes due 2023, and 3.75% Notes due 2026, and for fees, expenses, and other costs associated therewith.
  • Abbott’s forthcoming EUR issuance is expected Monday and proceeds will be used to reduce USD debt. We expect this to be a leverage neutral transaction, but would not be surprised to see ABT reduce more USD debt than the proceeds (CAM Comment)
  • On the last earnings call (7/18/18), CEO Miles White commented “And you say at some point, well, how far would you take debt down? How far would you pay down debt? What are you going to do when you hit the point where you think that that’s enough? And I’m going to give a couple of answers to that. A lot of people seem to get comfortable somewhere between $15 billion and $20 billion. I remember with $15 billion worth of debt is still a hell of a lot of debt.” and further emphasized, “So I think our platter right now says we can afford to just be opportunistic. I don’t have big M&A on the radar screen or big transactions on the radar screen I’d say from a capital or cash allocation standpoint. I’m going to keep paying down debt, because I think that’s a prudent path for now.” (CAM comment)
  • ABT had just over $20bn of debt after repaying just over $7bn in the first six months of this year as of the end of last quarter ended June 30, 2018. (CAM Comment)







14 Sep 2018

CAM Investment Grade Weekly Insights

CAM Investment Grade Weekly

The corporate credit market has had a positive tone this week and the majority of individual credits are at least 3-4 basis points tighter since the week began, while some higher beta credits are close to 10 basis points tighter. Ten year Treasuries are higher on the week and flirting with 3% as we go to print on Friday morning.

According to Wells Fargo, IG fund flows strengthened during the week of September 6-September 12 were +$2.7 billion. Short duration funds continue to garner the lion share of assets.  IG fund flows are now +$95.882 billion YTD.

Issuance on the week topped $27bln which brings the September new issuance tally to $81bln and the YTD tally to $853.934bn (source: Bloomberg).

(WSJ) 5G Needs a Lot More Cell Towers. Some Residents Aren’t Happy.

  • Residents of Denver’s Riviera apartments were surprised earlier this year when a roughly 30-foot-tall green pole appeared a few feet in front of their building entrance. The pole, installed by Verizon Communications Inc. and laden with cellular antennas, was designed to improve cellphone service in the area, but the residents complained about the placement.
  • Months later, it was gone. But that was just a small taste of what’s to come across the country: Millions of Americans will soon encounter similar poles or notice antennas sprouting on existing structures, like utility poles, street lamps and traffic lights, all over their neighborhoods. All four national cellphone companies are pushing to build out their networks with a profusion of small, local cells to keep their data-hungry customers satisfied and lay the groundwork for fifth-generation, or 5G, service.
  • Those plans face pushback in many places, and not just from residents. Officials in some cities say they don’t have enough staff to process applications for dozens or even hundreds of new installations. In some smaller towns, officials say they lack the expertise to review the new technology, though they’re working fast to get up to speed.
  • More than 100,000 small cells are already wired up across the U.S., according to industry research firm S&P Global . Cellphone companies plan to boost their capacity with several hundred thousand more cells to improve existing service and prepare for 5G service, which they see as a potential competitor for cable and fiber optics, among other things.
  • Some of the local resistance is rooted in how small cells work. Companies can usually find space on private property for large cell towers with a range of several miles. Small cells reach only a few hundred feet, so carriers need many more sites, usually on public land, for the system to work.
  • Cellphone companies don’t have much choice if they want to keep up with their customers’ appetite for data, says Jonathan Adelstein, chief executive of the Wireless Infrastructure Association, whose members include wireless carriers. “People wonder why they might be having a dropped call or slow video,” Mr. Adelstein says. “Then they have a vocal minority that are ruining it for everybody” by opposing the expansion of cellular networks.

(Bloomberg Intelligence) Despite Florence, Progressive’s 2H Looks Solid: Earnings Outlook


    • Progressive is on track to post robust EPS growth in 3Q after delivering strong results in both July and August. While September’s catastrophe costs could rise from a year ago due to Hurricane Florence and any other events before quarter-end, this would likely be substantially offset by the more than $200 million drop in the company’s August catastrophe losses vs. August 2017. Progressive has just 1% share of homeowners business in the Carolinas, which should help ease the impact from Florence.
  • Progressive’s results continued to benefit from expanding underlying underwriting margins in August, coming in at 9.7% vs. 8.8% a year earlier. Year-to-date, this metric is up 160 bps to 11.8%. Written-premium growth remained robust at 17%, down modestly vs. July’s 21%, but up vs. 16% in August 2017.



(Bloomberg) JPMorgan Predicts the Next Financial Crisis Will Strike in 2020


  • A decade after the collapse of Lehman Brothers sparked a plunge in markets and a raft of emergency measures, strategists at the bank have created a model aimed at gauging the timing and severity of the next financial crisis. And they reckon investors should pencil it in for 2020.
  • The good news is, the next one will probably generate a somewhat less painful hit than past episodes, according to their analysis. The bad news? Diminished financial market liquidity since the 2008 implosion is a “wildcard” that’s tough to game out.
  • The JPMorgan model calculates outcomes based on the length of the economic expansion, the potential duration of the next recession, the degree of leverage, asset-price valuations and the level of deregulation and financial innovation before the crisis. Assuming an average-length recession, the model came up with the following peak-to-trough performance estimates for different asset classes in the next crisis, according to the note.
    • A U.S. stock slide of about 20 percent.
    • A jump in U.S. corporate-bond yield premiums of about 1.15 percentage points.
    • A 35 percent tumble in energy prices and 29 percent slump in base metals.
    • A 2.79 percentage point widening in spreads on emerging-nation government debt.
    • A 48 percent slide in emerging-market stocks, and a 14.4 percent drop in emerging currencies.