Category: Investment Grade Weekly

26 Jan 2018

Investment Grade Weekly 01/26/2018

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week of January 18-January 24 were $3.6 billion, the second largest in the last 2 months. This comes on the heels of a $5.1 billion inflow the week prior, which was the largest in the past 3 months. Note that these are total flows across four investment strategies: Short, Intermediate, Long and Total Return. Per Bloomberg, investment grade corporate issuance for the week through January 25 was a meager $7.55bln. As of Friday morning, there are two small financial deals pending, but it looks as though we will close the week with less than $10b in issuance. The dearth of issuance is due to earnings season and the primary market should resurrect over the course of the next several weeks. As we go to print, the Bloomberg Barclays US IG Corporate Bond Index is trading at an OAS of 88, relative to the 2017 tight of 93.


(LA Times) Burger King ad explains net neutrality with flame-grilled Whoppers

  • Burger King is delivering its own hot take on the net neutrality showdown that has enflamed the U.S., using flame-grilled Whoppers.
  • Burger King’s new ad has become a sensation, with more than a million views on YouTube and it’s lighting up Twitter.
  • Net neutrality is the principle that internet providers treat all web traffic equally, and it’s pretty much how the internet has worked since its creation.
  • The Federal Communications Commission last month repealed the Obama-era rules, giving internet service providers such as Verizon, Comcast and AT&T permission to slow or block websites and apps as they see fit or charge more for faster speeds.
  • The FCC decision has led to a fierce pushback by consumers, law enforcement and major corporations.
  • Last week, a group of attorneys general for 21 states and the District of Columbia sued to block the rules. So did Mozilla, the maker of the Firefox browser; public-interest group Free Press; and New America’s Open Technology Institute. Others may file suit as well, and a major tech-industry lobbying group that includes Google has said it will support litigation.
  • This week, Montana became the first state to bar telecommunications companies from receiving state contracts if they interfere with internet traffic or favor higher-paying sites or apps.


(Bloomberg) Beware the $500 Billion Bond Exodus as Offshore Cash Comes Home

  • For years, the likes of Apple Inc. and Microsoft Corp. have stashed billions of dollars offshore to slash their U.S. tax bills. Now, the tax-code rewrite could throw that into reverse.
  • The implications for the financial markets are huge. The great on-shoring could prompt multinationals — which have parked much of their overseas profits in Treasuries and U.S. investment-grade corporate debt — to lighten up on bonds and use the money to goose their stock prices. Think buybacks and dividends.
  • It’s hard to say how much money the companies might repatriate, but the size of their overseas stash is staggering. An estimated $3.1 trillion of corporate cash is now held offshore. Led by the tech giants, a handful of the biggest companies sit on over a half-trillion dollars in U.S. securities. In other words, they dwarf most mutual funds and hedge funds.
  • While multinationals may be less inclined to sell their corporate bonds, at least initially, the impact could be more acute, analysts say. In recent years, firms such as Apple and Oracle Corp. have become some of the top buyers of company debt. Apple alone holds over $150 billion in the bonds, exceeding even the world’s biggest debt funds. The market itself is also less liquid, which means it takes far less to move the needle.
  • Big multinationals have good reason to bide their time, according to Richard Lane, a senior analyst at Moody’s Investors Service. Because their debt investments are so extensive, companies could end up inflicting losses on themselves with any large-scale selling.


(Reuters) GE reignites break-up talk after $11 billion insurance, tax hit

  • General Electric Co (GE.N) indicated it is looking closely at breaking itself up on Tuesday as the conglomerate announced more than $11 billion in charges from its long-term care insurance portfolio and new U.S. tax laws.
  • Chief Executive John Flannery has previously raised the idea of selling pieces of the largest U.S. industrial company, but went slightly further on Tuesday, saying GE is “looking aggressively” at a spin-off or other ways to maximize the value of GE’s power, aviation and healthcare units.
  • “I would categorize it as an examination of options and it’s (the) kind of thing that could result in many, many different permutations, including separately traded assets really in any one of our units, if that’s what made sense,” he said in response to an analyst question on a conference call, without giving any details.
  • Flannery already is eliminating thousands of jobs and cutting $3.5 billion in costs as he tries to solve problems he inherited when he became CEO on Aug. 1, including falling sales of power turbines, a build-up of inventory and declining profit margins in some businesses. His turnaround effort is still likely to take a year or more to play out.
  • Some Wall Street analysts saw Tuesday’s remarks as a sign that GE may already have figured out valuation, timing or disclosure requirements for a spin-off.
12 Jan 2018

Investment Grade Weekly Insight 01/12/2018

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week of January 4-January 10 were $5.1 billion, the largest inflow in over 3 months. Note that these are total flows across four investment strategies: Short, Intermediate, Long and Total Return. Per Bloomberg, investment grade corporate issuance for the week through January 11 was $25.425bln. As we go to print, the Bloomberg Barclays US IG Corporate Bond Index is trading at an OAS of 90, relative to the 2017 tight of 93.

(Bloomberg) IG Sales May Rise as Banks Begin to Exit Blackouts

  • On the cusp of a long holiday weekend, high-grade issuers may choose to remain on the sidelines to close out the week. Activity has been muted with the week standing at just over $25b, falling shy of estimates calling for at least $30b.
  • Expect an increase in sales next week as more U.S. banks emerge from earnings blackouts.
  • JPMorgan (JPM) and Wells Fargo (WFC) both reported 4Q earnings this morning. Citibank (C) comes Tuesday, Bank of America (BAC) and Goldman Sachs (GS) report Wednesday and Morgan Stanley (MS) is Thursday.

(Bloomberg) Junk Euphoria Unshaken as Funds See Biggest Inflow Since Dec.’16

  • Investors reiterated their confidence in junk bonds by investing in high yield funds. Lipper reported an inflow of $2.65b into U.S. high yield funds, the biggest weekly inflow since Dec. 2016.
    • Investor euphoria led to the return of pay-in-kind notes offering in the primary yesterday, with Ardagh pricing at the tight end of talk with orders of more than $1.25b, about 3x the size of the offering. The Ardagh bonds traded at 102.875 after pricing at par
    • Investors shrugged off aggressive use of proceeds, suggesting risk appetite was strong. Ardagh raised debt to “provide liquidity to shareholders.” CSC Holdings is marketing bonds to fund a dividend to parent Altice USA
    • Recent new issues have been flooded with big orders. Ensco priced through talk and increased the offering size to $1b with orders more than 4x the original size of the offering. Sunoco’s $2.2b 3-part notes got orders for ~$6b earlier in the week
    • Issuance volume was on pace with 2017 with $5.5b pricing MTD
    • While junk yields seemed weary and stalled a bit as they come off 2-mo. lows; there appeared to be no clear catalyst yet that could derail junk bonds in the near term, as stocks climbed to new highs, oil set new 37-mo. high and volatility was still near multi-year lows
    • High yield continued to be backed by an overall supportive environment:Moody’s Liquidity Stress Indicator kicked off 2018 with a new low of 2.5%, suggesting junk issuers were backed by steady economic growth and buoyant credit markets as investors scramble for yield
    • Corporate default rates declined, another critical pillar factor for high yield
    • Steady economy, declining default rates, low volatility, steady oil prices and stocks augur well for high yield
        • Eight deals for $5.5b MTD
        • 510 deals for $275.393b in 2017



05 Jan 2018

Investment Grade Weekly Insights 01/05/2018

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week of December 28-January 3 were $3.0 billion, the largest inflow in six weeks. Per Bloomberg, investment grade corporate issuance for the week through January 4 was $21.05bln. As of today, the Bloomberg Barclays US IG Corporate Bond Index is trading at an OAS of 94, which is +1 from the 2017 tight of 93. In 2007, spreads bottomed at an OAS of 82. The all-time tight is 54, which occurred in March of 1997.

(WSJ) Who Are the Big Players in the Bond Market? Small Investors

  • Ordinary investors are a growing force keeping longer-term bond yields low, even as the Federal Reserve has raised interest rates. They are helping cap borrowing costs for individuals, corporations and state and local governments, while boosting the appeal of riskier assets such as stocks, which have climbed to record after record in recent months.
  • John Nederhiser exemplifies the current crop of bond buyers. While professional money managers fret about interest-rate increases, rising budget deficits and inflation, the 58-year-old accountant in Gresham, Ore., said such concerns won’t deter him from continuing to add to his fixed-income holdings. “Pretty much what I’m going to do is stay the course,” he said.
  • An aging population means investors like Mr. Nederhiser are likely to remain a factor, as people typically increase bondholdings as they approach retirement. The population of U.S. residents age 65 or older has grown more than 40% since 2000 to 49.2 million in 2016, according to the Census Bureau, which could signal steady demand for the debt. The median age for investors with fixed-income holdings ranging from mutual funds to individual bonds is 53, according to the Investment Company Institute’s annual mutual-fund shareholder survey, up from 49 in 2007.
  • Some older investors have lived through periods where inflation climbed above 10% and where it cratered below zero, while watching plunges in technology stocks and home prices dent their accumulated wealth. For some, that has led to a pragmatic appreciation of bonds’ steady income and relative stability.
  • The sanguinity of ordinary bondholders stands in contrast with 2017 statements from some more famous investors such as Bill Gross and Jeff Gundlach, both dubbed “the Bond King” at various times. Mr. Gross and Mr. Gundlach each created a stir last year by intimating a broad selloff might be approaching.
  • Much of the support individual investors are giving to the Treasury market is as a result of their investments in diversified bond funds, not an insatiable hunger for government debt. That is because government debt now makes up more than one-third of the Bloomberg Barclays U.S. Aggregate bond index, a popular reference point that guides how many portfolio managers assemble their holdings.
  • The amount of Treasurys in the index has risen from roughly one-quarter in 2007, before the financial crisis led to an explosion in government borrowing and a slowdown in issuance from corporate and mortgage borrowers. The proportion of Treasurys may rise further as the Fed pares back its $4.2 trillion in holdings of government and mortgage debt, which indexes don’t count since the Fed’s portfolio sits outside of the open market.
  • With government bond yields already near modern lows, some analysts see complacency as among the biggest risks. And some investors find it difficult to settle for single-digit bond yields when the S&P 500 index has posted double-digit returns for the seventh time in the past nine years.
  • It remains to be seen if retail investors will hang on to bonds should yields start to skyrocket. During the 2013 “taper tantrum,” which followed then-Fed Chairman Ben Bernanke’s statement that the central bank was preparing to stop its bond purchases. Bond funds suffered net outflows for eight consecutive months afterward, while the yield on the 10-year note almost doubled to around 3%.


(Barron’s) Intel: Don’t Anticipate Any Impact to Business

  • Intel (INTC) executives this afternoon held a conference call to address reports today, initiated by The Register, that the company had a “bug” or flaw in its chips that raised security issues, a charge the company had this afternoon rejected.
  • Led by Intel executive Steve Smith, the head of the company’s data center engineering, the company said repeatedly its chips are “performing as designed” and that info appearing today had contained mis-information.
  • “There were some info in media that was, I’ll call it, ahead of time,” said Smith, referring to the fact Intel said it had been working “for some time now” with security researchers and with operating system vendors and computer makers to prepare “mitigation” of security risks. The reports in media were “potentially misleading,” said Smith, “so wanted to clarify.”
  • Added Smith, “Since our products are performing to specification, we don’t anticipate a material impact to our business or our products, because they continue to operate properly.”
  • “We don’t expect any financial implication around Intel’s products,” Smith later reiterated.


(Bloomberg Markets) Morgan Stanley Wealth Exits Junk Bonds, Warns on Recession Risk

  • It’s too late in this market cycle to bet on high-yield bonds, according to Morgan Stanley Wealth Management.
  • So, the $2 trillion money management arm is completely slashing junk bond allocation. True, tax cuts are expected to inject fresh momentum into high-flying stocks, but the boost may be short-lived and mask balance-sheet weaknesses, Mike Wilson, chief investment officer, wrote in a note distributed Wednesday.
  • “While the tax cuts just enacted in the U.S. may lead to better growth in the short term, they may also bring forth the excesses we typically see before a recession — which is something credit markets figure out before equities,” according to the note. “We recently took our remaining high yield positions to zero as we prepare for deterioration in lower-quality earnings in the U.S. led by lower operating margins.”
  • Though Morgan Stanley doesn’t expect a recession in 2018, it sees the risks rising. Between tightening monetary policy and fewer positive surprises in earnings and economic data, any remaining upside is likely to be speculative, according to the firm.
  • “We think it will be much tougher to make money in 2018 and 2019 than in 2016 and 2017 as the risk of a recession and outright bear market comes closer,” Wilson wrote. “Late-cycle dynamics have become even more evident.”





08 Dec 2017

Investment Grade Weekly Insight 12/08/2017

Fund Flows & Issuance: According to Wells Fargo, IG fund flows on the week were $1.357bln. This brings the YTD total to +$318.643bln in total inflows into the investment grade markets. IG fund flows remain on pace for the strongest year on record. Per Goldman Sachs, year-to-date cumulative inflows into IG mutual funds account for just 13% of AUM while ETFs continue to grow at the expense of mutual funds –ETFs account for 32% of AUM growth thus far in 2017. According to Bloomberg, investment grade corporate issuance for the week through Thursday was $17.315bln, and YTD total corporate bond issuance was $1.32t. Investment grade corporate bond issuance thus far in 2017 is nearly flat, trailing 2016 issuance by 1% year-to-date. The Bloomberg Barclays US IG Corporate Bond Index is trading at an OAS of 97 as we go to press on Friday morning. The OAS hit 94 for 5 sessions in October, so we are still modestly wider than the tightest levels that we have seen thus far in 2017 and within distance of the tightest level since 2007 when spreads bottomed at an OAS of 82. We have quite a ways to go if we were to flirt with all-time tights of 54, last seen in March of 1997.

(Bloomberg) Expect Negative Excess Returns in Global Credit: MS’s Richmond

  • Investors can expect negative excess returns across global credit in 2018, and we are later in the credit cycle than people generally realize, Adam Richmond, Morgan Stanley’s head of credit research, said on a panel yesterday at the Bloomberg Intelligence Credit Outlook Forum.
    • “You don’t need a recession to get negative returns late in a cycle,” Richmond said
      • Haven’t been three straight years of positive excess returns in credit since 1996; 2017 will be the third year, so it may be due for a year of negative excess returns
    • Richmond predicts spread widening in credit across the globe. Caution is required, this is a global phenomenon
      • Volatility was artificially compressed by central bank policy and now the dynamics are changing. It’s not just the Fed that is entering rate-hike phases; ECB, PBOC, BOE are moving in that direction too. Even the BOJ is increasing its yield-curve target later next year
    • “But from a valuation perspective it’s a challenge wherever you look in the world”
    • “We can’t tell investors to just sit in cash, so our answer is, be invested, but this is the time in the cycle to be very picky and to be up-in-quality, and so while it’s boring and investors don’t want to hide out in defensive credits, we think you’re supposed to do that”
      • Take IG over HY. Investors may want to be in Single-As over BBBs in IG bonds. Focus on sectors that will be relatively unscathed through a credit cycle, such as U.S. financials. “This is very much not going to be a financially-driven credit cycle, so this sector will behave more defensively”

(Bloomberg Law) Forget AT&T-Time Warner. Watch These Non-Media Mega-Deals

  • Media mergers are big news lately with the Justice Department’s lawsuit to stop AT&T Inc. from merging with Time Warner Inc. and Sinclair Broadcast Group Inc.’s effort to buy Tribune Media Co.
  • But the laser focus on media consolidation may cause the big mergers in other industries to disappear under the radar. There are notable mega-mergers (well above $10 billion) slated to close next year in agriculture, aerospace, oil, and apparel. CVS Health Corp.’s bid to buy Aetna Inc. for $67.5 billion can be added to that list, although it has not yet had its initial antitrust review.
    • Bayer-Monsanto is the last of three seed-pesticide company pairings announced in 2015-16. The transaction faces continued resistance since it was announced in September 2016. Bayer’s agreed price has since dropped from $66 billion to $63.5 billion.
    • Eyewear giants Essilor International SA and Luxottica Group SPA announced a 45 billion euro ($53 billion) merger in January. Their businesses are largely complementary, but antitrust regulators are still focusing on potential losses in competition. Essilor is the largest supplier of ophthalmic lenses worldwide, and Luxottica is the largest supplier of eyewear worldwide.
    • Industrial gas giants Linde AG and Praxair Inc. announced a deal on June 1, 2017 for $41 billion to create the world’s largest industrial gas supplier. The combined company would leapfrog current market leader Air Liquide SA, which merged with Airgas Inc. in 2016 for $13 billion.
    • United Technologies Corp. announced a $23 billion bid for Rockwell Collins Inc. on Sept. 4, 2017. The deal unites two aerospace behemoths that together equip commercial and military aircraft from “tip to tail.”

(Bloomberg) AT&T Commits to Time Warner Deal Even as Judge Delays Deadline

  • The U.S. Justice Department’s antitrust lawsuit to blockAT&T Inc. from buying Time Warner Inc. will go to trial March 19, a later date than the companies had sought to begin their epic legal fight with the government.
  • With the trial more than three months off, AT&T and Time Warner will have to extend their self-imposed April 22 deadline for completing the $85.4 billion deal. U.S. District Judge Richard Leon said Thursday in Washington that the companies should push back the cutoff date by 60 to 90 days to give him time to make a decision.
  • “We will promptly discuss the court’s post-trial schedule with Time Warner,” AT&T General Counsel David McAtee said in a statement. “We are committed to this transaction and look forward to presenting our case in March.”
  • If approved, the deal would reshape the media landscape by uniting a telecom giant with the owner of CNN, Warner Bros., TNT, TBS and HBO. AT&T, the owner of DirecTV, is the largest pay-TV distributor, as well as a powerhouse in mobile phones and landlines. The Justice Department has argued that letting AT&T own the films and TV shows that flow down its pipes would harm consumers and competitors.
  • Under their current agreement, if AT&T and Time Warner fail to complete their deal by April 22, they can choose to extend the deadline or either party can walk away. If the judge blocks the deal, AT&T must pay Time Warner a breakup fee of $500 million.
  • “This is not a normal case from many perspectives,” Leon said from the bench Thursday. He estimated the trial would take about three weeks. “This is going to be a lot of hard work and a lot of sacrifice.”


(Bloomberg) U.S. Payrolls Rise 228,000; Wages Gain Less Than Forecast

  • The U.S. added more jobs than forecast in November and the unemployment rate held at an almost 17-year low, though below-forecast wage gains suggest the labor market still has slack to absorb.
  • Payrolls rose 228,000, above the median economist estimate of 195,000, after a downwardly revised 244,000 advance, Labor Department figures showed Friday. Average hourly earnings increased 2.5 percent from a year earlier, less than the 2.7 percent projection, and October’s figures were revised lower.
  • The data provide a clearer picture of the labor market after volatility caused by two hurricanes mostly dissipated, though there may have been some lingering effects. While the job market remains a bulwark for the economy and investors see a Federal Reserve interest-rate hike next week as a near- certainty, the lack of acceleration in wages remains a puzzle that could factor into the pace of increases in 2018.
  • Average hourly earnings rose 0.2 percent from the prior month following a revised 0.1 percent drop, the report showed. Analysts had penciled in a gain of 0.3 percent for November. The gain from a year earlier followed a downwardly revised 2.3 percent advance for October.
  • Economists expect that in time, wages will post a sustained pickup, which has remained elusive in this expansion even though labor-market slack is steadily disappearing. Faster gains in paychecks would boost consumer spending, which accounts for about 70 percent of the economy. Jerome Powell, President Donald Trump’s nominee to head the Fed, said last month at hisconfirmation hearing that he doesn’t see wages signaling any tightness in the labor market.
20 Nov 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, IG fund flows on the week were $3.590bln. This brings the YTD total to +$311.602bln in total inflows into the investment grade markets which is nearly double the full-year record inflows that occurred in 2012. According to Bloomberg, investment grade corporate issuance for the week through Thursday was $28.005bln, and YTD total corporate bond issuance was $1.267t. Investment grade corporate bond issuance thus far in 2017 is flat y/y when compared to 2016. As we to go to press on Friday morning there is ~$1bln in pending corporate bond issuance slated to print today, as issuers seek to take advantage of a decidedly stronger tone in the market compared to the early portion of the week.

(Bloomberg) Calpers Considers More Than Doubling Bond Allocation to 44%

  • The California Public Employees’ Retirement System, the largest U.S. pension fund, is considering more than doubling its bond allocation to reduce risk and volatility as the stock bull market approaches nine years.
  • Calpers is looking at a menu of options for its fixed-income target ranging from the current 19 percent to as much as 44 percent, according to a presentation for a board workshop in Sacramento coming up Monday. Equities could be cut to as little as 34 percent from 50 percent. Stocks were the best-performing asset class in fiscal 2017, returning almost 20 percent.
  • Bond yields remain at low levels because of persistent weak inflation, central bank easy money policies and global investors chasing income. Raising the allocation would reduce the fund’s discount rate, or average expected return, to 6.5 percent from the 7 percent annual target adopted last year. A lower target would probably require bigger contributions from taxpayers and public agencies to cover pension obligations, a shift that board member JJ Jelincic said he would oppose.
  • “We’ve cut the return expectation to the point that employers are screaming, ‘We can’t afford it. We can’t afford it,’ ” Jelincic said. “I personally would be willing to take on a little more risk.”
  • The average allocation for public pensions is about 23 percent to fixed income and 49 percent to stocks, according to Nasra data.
  • The Calpers board is scheduled to vote on the allocation in December. Almost all of the fixed-income and stock holdings are managed in-house while more complex assets, such as private equity and real estate, are overseen by outside consultants. Allocations to private equity and real assets would stay at 8 percent and 13 percent, respectively, under all scenarios under consideration.
  • The allocation revisions occur every four years. Calpers is working to provide for a growing wave of longer-living retirees.

(New York Post) Charter’s CEO butts heads with biggest shareholder

  • There’s a battle raging inside Charter Communications, and the outcome could decide whether the cable giant continues its acquisition spree — or gets gobbled up itself.
  • Charter’s Chief Executive Tom Rutledge — who last year swallowed Time Warner Cable and renamed it Spectrum, making Charter the nation’s third-biggest pay-TV operator — insists that he can increase Charter’s dominance with still more purchases, sources said.
  • The Post reported in June that Charter was weighing an approach to Cox Communications, an Atlanta-based regional cable provider. More recently, rumors have circulated that Charter has been in talks to do a deal with Altice, which most recently scooped up New York-based Cablevision.
  • But 76-year-old billionaire John Malone, who is Charter’s biggest shareholder with control of 27 percent of its stock, is meanwhile showing signs that he’s willing to head in the other direction — namely, a sale of Charter at the right price, insiders say.
  • “I think Malone is a seller,” one source told The Post. The source added that “Malone, though, doesn’t control Charter,” and “the board is totally behind Rutledge.”
  • The Post reported exclusively Nov. 1 that SoftBank, the Japan-based buyout fund that owns Sprint, had rekindled on-again, off-again talks to acquire Charter.
  • SoftBank’s billionaire boss Masayoshi Son “has tried in multiple ways to energize Charter,” the source said. “It is an ongoing engagement.”
  • High-level talks have occurred, with SoftBank recently offering $540 a share for Charter, a source said.
  • Although a deal isn’t imminent, “I wouldn’t count Malone out,” a telecom executive told The Post. “There is a 50-percent chance a SoftBank-Charter deal happens in six months.”
  • Apart from keeping his status as a cable bigwig, insiders say, Rutledge appears to be clinging to stock options that, according to securities filings, would pay out tens of millions of dollars if Charter shares rise above the $564 mark.
  • “My guess is Rutledge has a few quarters to increase the share price,” the telecom exec said.

(MacTrast) Amazon Said to Have Cancelled Its “Skinny Bundle” TV Service

  • Amazon has reportedly cancelled its plans to launch a “skinny bundle” of streaming television channels. Reuters says Amazon was unable to convince networks to allow the online merchant to offer only some of their channels in the base package.
  • Apple was reportedly looking to offer a similar type of bundle, but ran into the same issues with content providers. Media firms such as Viacom and Disney, which own multiple networks, do not want streaming services to pick and choose which channels they offer, instead requiring the services to also include their weaker channels along with the more popular channels.
  • The online retailer will instead focus on expanding its Amazon Channels service, which offers separate subscriptions such as HBO, Showtime, Starz, and other premium networks to its prime members.
10 Nov 2017
IG News Items 11102017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, IG fund flows on the week were $3.598bln. This brings the YTD total to +$286.112bln in total inflows into the investment grade markets. According to Bloomberg, investment grade corporate issuance for the week was $47.265bln, and YTD total corporate bond issuance was $1.239t. Investment grade corporate bond issuance thus far in 2017 is down 1% y/y when compared to 2016.

(Bloomberg) Investment-Grade Borrowers Power Through Thick Market

  • High-grade issuers continue to shrug off broader market weakness and forge ahead with funding plans. More than 30 investment-grade issuers have tapped the USD market this week, powering through soft market conditions and high supply. 
    • Each session this week has kicked off with a multi-tranche corporate deal; Apple Inc. (AAPL) $7b 6-part Monday, Oracle Corp. (ORCL) $10b 5-part Tuesday and Johnson & Johnson (JNJ) $4.5b 5-part on Wednesday
    • Utilities are having an active week, which was forecast with the completion of this year’s EEI conference. 
    • Weekly volume is set to top $40b in total volume, a feat not accomplished since early September

(Bloomberg) CenturyLink Dividend Doubts Send Shares, Bonds Plummeting

  • CenturyLink Inc.’s shares and bonds plummeted after the telecommunications and Internet provider reduced its full-year forecast, boosting fears among investors that a dividend cut will follow.
  • The company said 2017 results would fall short of guidance it provided in February because of lower-than-expected revenue growth as more people gave up on landlines. The shares plunged to their lowest value in seven years and the bonds were the biggest decliners in high-yield debt.
  • Analysts peppered company officials with questions on an earnings conference call Wednesday night over the level of the dividend. They asked whether the current payout — 54 cents a quarter — can be maintained even as the company repays debt for its $34 billion acquisition of Level 3 Communications Inc. Regulators last month approved the deal, which CenturyLink hopes will stabilize its business among growing competition from cable companies.
  • “CenturyLink’s near-term liquidity is OK,” said Stephen Flynn, a Bloomberg Intelligence analyst. “That said, CenturyLink does have a very large debt load and debt obligations step up significantly starting in 2020.”
  • CenturyLink executives said on the conference call that they expect cost savings and accelerated growth from the Level 3 acquisition to support the current shareholder payout.
  • “We are confident we can continue to pay the dividend while investing in growth and in our network,” Chief Executive Officer Glen Post said on the call.

(Bloomberg) Ebitda Mocked in Sign of How Frothy Debt Markets Have Become

  • In an anything-goes world for debt, there’s a new definition for Ebitda: Eventually Busted, Interesting Theory, Deeply Aspirational.
  • That’s the tongue-in-cheek assessment of a Moody’s analyst who’s been tracking earnings projections used by companies lately when asking investors for loans. Ebitda really means earnings before interest, taxes, depreciation and amortization, but borrowers have been stretching the limits of what’s acceptable when they tweak their accounting to boost the figure.
  • The adjustments — known as “add-backs” in Wall Street lingo — make companies look more creditworthy by increasing revenue and earnings forecasts. They’re legitimate when companies use them to factor out foreseeable or one-time events that might unfairly reduce the number. But in this frothy market, the size and vagueness of some add-backs seen in offering documents are raising eyebrows:
    • Eating Recovery Center, which helps people with diet disorders, almost doubled Ebitda through add-backs for a debt sale last month to help finance CCMP Capital’s purchase of a controlling stake in the company. Almost half of the add-backs were calculated on the basis that the company will “capture the true earnings potential” of its expanded treatment centers.
    • When whitening-agent firm Kronos Worldwide Inc. asked lenders for 400 million euros last month ($470 million), its earnings formula allowed wiggle room for half a dozen specific future actions, such as mergers, “and any operational changes.” Kronos didn’t say what that means.
    • Avantor Inc.’s $7.5 billion financing, also last month, pitched an adjusted earnings figure amounting to a 91 percent hike. The industrial supplierclaimed allowances such as shares awarded to employees as compensation, and operational benefits from a merger.
    • GoDaddy Inc.’s offering back in February included 21 ways the web-hosting registration service could adjust Ebitda upward, including repeatable savings and synergies from anything it does, or expects to do, in “good faith” for a two-year period.
  • Derek Gluckman, senior covenant officer at Moody’s Investors Service who floated the cheeky definition for Ebitda, said frustrated investors have little choice but to buy because of the overheated market. “We are seeing the prolonged effects of the persistent supply-demand imbalance for loans, which favors the borrowers enormously,” Gluckman said.
  • Traditional add-backs let borrowers include future savings from cost-cutting or increases in revenue in their Ebitda. There’s nothing illegal or underhanded about the practice, and the offerings clearly lay out exceptions to potential creditors.
  • But in a market that’s already in danger of boiling over, aggressive attempts to make companies appear more creditworthy could be masking the true amount of leverage in the system — and the pain for investors if the loans go sour. On top of that, the Trump administration is seeking to dial backregulations aimed at curtailing leverage, and a move is afoot in Congress to review and perhaps kill the current guidance from government agencies.
  • Add-backs without caps or restrictions for synergies and cost savings spread to 44 percent of new loan deals in the third quarter, from 27.1 percent in the first, according to research firm Covenant Review. In 2017, and each of the two preceding years, 91 percent to 94 percent of North American bonds had at least one Ebitda add-back considered aggressive by Moody’s.
  • More aggressive add-backs are one part of a trend toward weakening protections. The quality of covenants, or protections afforded to lenders, in junk bonds is hovering above a record low, according to Moody’s. Leverage levels are also near historical highs at 5.3 times in September, S&P Global Ratings said this week.

 IG News Items 11102017

(Fierce Wireless) Sprint’s Claure: Tower companies ‘going to be very happy’ with our capex

  • The nation’s fourth-largest wireless network operator has lowered its capex guidance several times over the last two years, raising the eyebrows of analysts who have questioned its ability to keep pace with the network upgrades of its rivals. But Son said on Monday that SoftBank not only will increase its stake in Sprint from 83% to 85%, but it will also roughly triple Sprint’s capex to a range of $5 billion to $6 billion beginning in a few quarters.
  • Sprint has also been criticized for trying to cut costs by focusing on small cells to densify its network, minimizing its spending on traditional towers. But that strategy hasn’t always been as effective as the carrier hoped, and Claure said Sprint will make macrocells a higher priority as capex ramps up.
  • “The last year and a half, two years have been a great learning experience. We’ve tried to disrupt the way networks get built. We’ve been successful in certain areas and, to be fair, we haven’t been successful in others,” he conceded. “So we’re going to go toward a more traditional network build-out. Our friends at the tower companies I think are going to be very happy.”
  • Claure added that fewer than half of its towers currently access the carrier’s valuable 2.5 GHz spectrum. Sprint expects all its macrosites to support triband spectrum.
  • Sprint still faces a mountain of debt, of course: It’s $38 billion in debt, about half of which will come due over the next four years. But Claure said the carrier’s ongoing cost-cutting efforts continue to prove successful, and its innovative financial mechanisms such as its handset-leasing program and its ever-improving cash position will help finance the network investments.

(Bloomberg) Teva’s Schultz Faces Dwindling Choices as Rating Cut to Junk

  • Teva Pharmaceutical Industries Ltd. Chief Executive OfficerKare Schultz is finding himself in the hot seat in his first week on the job with rapidly shrinking options to halt the slide in the Israeli company’s securities after its debt was cut to junk overnight.
  • Fitch Ratings cited the “significant operational stress” that the world’s biggest maker of copycat drugs faces at a time when it needs to pay down debt, and pared its rating by two levels to non-investment grade late on Monday. Teva’s debt obligations are almost three times its market value following an ill-timed $40 billion acquisition last year of Allergan Plc’s generics business.
  • “We find it troubling that management, which presumably met with Fitch before the downgrade, was not able to convince the rating agency that it would take more dramatic deleveraging actions in order to preserve investment grade ratings,” Carol Levenson, an analyst at bond research firm Gimme Credit, said in a report.
  • Kare Schultz
  • The company will have to either sell assets or find external sources of financing to meet its obligations, Fitch said. Sales of Teva’s biggest drug, Copaxone, are under siege after a cheaper copycat version of the multiple sclerosis medicine entered the U.S. market last month. Schultz, who took the helm at the start of this month, has pledged to increase profits and cash flow.
  • While Teva has enough free cash flow and proceeds from asset sales to pay down short-term debt, tackling longer-term leverage could be much more difficult. With the stock down 70 percent this year, issuing straight equity is an increasingly less attractive financing option. That may leave hybrid securities like mandatory convertibles the best source of new capital, Levenson said.
  • Fitch downgraded the company’s debt rating to BB from BBB-. Standard & Poor’s and Moody’s Investors Service have both assigned it the lowest investment-grade rating, and all three have warned another downgrade is possible.
    • Teva Bonds Already Trading at High-Yield Levels
      • Teva’s most liquid 10-year equivalent bonds are the Baa3/BBB- rated 3.15% unsecured notes due in October 2026, which have fallen 10 points from recent highs to the mid-80s, implying a yield of 5.2%, +290 bps. Using Bloomberg Barclays HY Index, BB bond spreads are less than 10 bps wide of 10-year lows of +192 bps on Oct. 24 and single B spreads of about +330 bps. Teva 2.2% unsecured notes due July 2021 are trading at a spread of +250 bps. In yield terms, Teva 2.2% unsecured notes due July 2021 are approaching 4.5%. (11/08/17)

(Bloomberg) Fixed 5G was tested by the cable industry, and it came up a bit short

  • One of the hottest topics in the wireless industry right now is whether fixed 5G will be able to replace wired connections like DSL, DOCSIS or fiber. The motivation behind this question is obvious: 5G operators might be able to beam high-speed wireless services into wired rivals’ homes (literally going over the top) to steal broadband internet customers away from providers like Charter and Comcast.
  • A wide range of tests and reports by wireless carriers and vendors have found plenty to get excited about in 5G—there’s lots of slideware featuring blazing fast speeds and limitless potential. But a new report from two leading players in the cable industry offers a decidedly more pragmatic picture of the fixed 5G space.
  • Although the millimeter wave spectrum bands (generally those above 28 GHz) were initially targeted for 5G deployments, T-Mobile, Sprint and others are now pushing to deploy 5G in bands 6 GHz and below. Indeed, T-Mobile has said its 5G deployment, kicking off in 2019, will go all the way down to 600 MHz.
  • However, lower spectrum bands generally transmit less data across farther geographic distances, while higher spectrum bands transmit more data across shorter geographic distances.
  • For cable players specifically, the 3.5 GHz CBRS band has generated a significant amount of attention, with Charter detailing its wide range of fixed wireless tests in the band. In their report, Arris and CableLabs noted that the 3.5 GHz band can provide “100s of Mbps of broadband capability” in NLOS conditions at distances up to 800 meters—and those speeds could be raised to up to 10 Gbps through channel aggregation of the full 70 MHz available in a licensed scenario.
  • Despite the burgeoning possibilities in the 3.5 GHz band, the report concludes that lower spectrum bands like 3.5 GHz simply won’t be able to keep pace with consumers’ growing demands for data, and will likely be used for backup connections. “For Fixed Wireless Access to be able to compete with Wired Solution, it has to be able to provide Gbps peak rates on both the Downlink and the Uplink. To achieve these peak data rates in a Wireless Access network the only wireless bandwidth available with sufficient contiguous spectrum to meet 3+ Gbps SG [service group] downstream service—if the spectral efficiencies remain under 10 bps/Hz—lies well into LOS-delivered (and near millimeter wave) frequencies (28 GHz, 37 GHz, 39 GHz, 60 GHz and 64-71 GHz). These frequencies offer huge amounts of bandwidth (the unlicensed bands alone in the 60 GHz range can deliver 128 Gbps),” the report states.
  • “But these frequencies present some clear technical, operational, and aesthetic challenges,” the authors add.
  • Although they have been long neglected, millimeter-wave bands have gained substantial notoriety in recent years. Indeed, Verizon and AT&T have spent several billion dollars this year acquiring millimeter-wave spectrum licenses.
  • And for good reason: As the report points out, speeds in millimeter wave transmissions can seem almost magical. “Link capacities of approximately 750 Mbps were achievable in LOS conditions, which were degraded to just under 490 Mbps in adverse weather conditions,” the report states, citing CableLabs tests of transmissions in the 37 GHz band. “Also of particular interest was the maximum link length that can be achieved to deliver service where a LOS link extending approximately 2600 feet while delivering nearly 190 Mbps was demonstrated.”
  • However, the report outlines the significant challenges players face in deploying millimeter-wave systems. In its 37 GHz tests, CableLabs found that speeds decreased to around 200 Mbps at 150 feet if signals have to travel through foliage – and those figures slow to below 100 Mbps at 150 feet in dense foliage.
  • Rain, snow, wind, window tinting, moving vans and other commonplace objects can all conspire to dramatically reduce the effectiveness of millimeter wave transmissions. “The impact of deciduous and conifer trees (under gusty wind conditions) suggest that the leaf density from the conifer more frequently produces heavy link losses and these, more so at higher carrier frequencies,” the report thoughtfully notes.
  • Thus, as is explained in the report, it’s still early days in 5G. Fixed applications in millimeter wave bands are some of the first applications of the technology, but that’s certainly not the only application. And advances in MIMO, beamforming, edge computing and other, related technologies may well push 5G calculations into more appealing territory.
  • Nonetheless, it’s definitely worth looking at 5G with a clear pair of eyes.
03 Nov 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, IG fund flows on the week were $5.362bln. This brings the YTD total to +$282.514bln in total inflows into the investment grade markets. According to Bloomberg, investment grade corporate issuance for the week was $24.35bln, and YTD total corporate bond issuance was $1.19t. Investment grade corporate bond issuance thus far in 2017 is down 3% y/y when compared to 2016.

(WSJ) Mr. Ordinary: Who Is Jerome Powell, Trump’s Federal Reserve Pick?

  • When a business-school student sought out Jerome Powell several years ago for career advice, Mr. Powell, President Donald Trump’s pick to become the 16th chairman of the Federal Reserve, offered his philosophy on getting ahead.
  • His advice: Keep your head down and work hard, according to the student, Sean Gillispie, today a software product director in the Washington area. Mr. Powell told him he would be surprised “how many otherwise competent people self-sabotage with poor behavior,” Mr. Gillispie recalls.
  • In recent years, there have been two kinds of Fed chairmen: commanding personalities such as Paul Volcker and Alan Greenspan, whose views on inflation and interest rates dominated central banking from the 1980s through the mid-2000s; and the consensus-driven leaders, Ben Bernanke and Janet Yellen, who guided the central bank toward more open decision-making and de-emphasized the power of the chairman.
  • Mr. Powell, judging by his nearly 40-year career in government, law and banking, is likely to be in the latter group. That means a Powell Fed might look a lot like it has since Mr. Greenspan retired in 2006.
  • Such continuity would be welcome in the markets, which don’t like uncertainty, and at the Fed, one of the world’s most powerful economic policy-making bodies. It also could please Mr. Trump, who has spoken approvingly of record stock prices and declining unemployment.
  • “I would be surprised if [Mr. Powell] walked away at the end of his term with a huge stamp of reshaping the Fed,” says Charles Plosser, who as president of the Federal Reserve Bank of Philadelphia until 2015 worked closely with Mr. Powell. “He’s not likely to lead Federal Reserve reform and innovation on monetary policy, but that does not mean he won’t be a good chair.”
  • Unlike Ms. Yellen and Mr. Bernanke, Mr. Powell doesn’t hold a degree in economics—which would make him the first chairman since the late 1970s without such a credential. Although he has worked as an investor, lawyer and bank regulator, he has no experience leading a large organization.
  • The Fed is no simple bureaucracy. It has a seven-member board, 12 regional banks, a secretive decision-making process and 2,700 employees involved in interest-rate decisions, bank regulation and managing the nation’s currency circulation. It also serves as the Treasury’s fiscal agent in managing the nation’s debt.
  • It is in the process of raising short-term interest rates from near-zero levels and of gradually winding down a $4.2 trillion portfolio of mortgage and Treasury securities built up during and after the financial crisis. Mr. Powell was part of a group in 2013 that pressed Mr. Bernanke to wind down the bond-purchase programs, although he has never dissented in 44 meetings on the Fed board.
  • Mr. Powell’s most notable mark on monetary policy at the Fed was his involvement in bond-buying phase out. Worried that investors believed the programs would continue indefinitely, he joined with two other Fed governors, Betsy Duke and Jeremy Stein, to persuade Mr. Bernanke to scale the program back. The effort was typical of Mr. Powell’s style—conducted almost entirely behind the scenes and with little fanfare.
  • One person who has worked with several Fed officials in recent years says he often heard about petty personal rivalries or feuds between board members, but these people never had a bad word for Mr. Powell.
  • “He is remarkably undogmatic,” says Jeremy Stein, a Harvard University economics professor, Democrat and former Fed governor whose office was adjacent to Mr. Powell’s. “He listens more than he talks.”
  • Mr. Powell has held several different roles on a board that has been plagued with vacancies in several years. He earned respect from colleagues for tackling unheralded operational tasks and technical issues, including managing payment-processing systems. He also boosted morale this summer when he oversaw the implementation of a relaxed summer dress code.

(Moody’s) Moody’s downgrades CenturyLink to Ba3; outlook negative

  • Moody’s Investors Service, (Moody’s) has downgraded CenturyLink, Inc.’s (CenturyLink) corporate family rating (CFR) to Ba3 from Ba2, downgraded its senior unsecured rating to B2 from Ba3, and confirmed its senior secured rating at Ba3. The downgrade reflects CenturyLink’s higher leverage related to its imminent acquisition of Level 3 Communications, Inc. (Level 3).
  • The senior unsecured ratings of Qwest Corporation and Embarq Corporation were downgraded to Ba2 from Ba1.

(Fitch) Fitch Downgrades CenturyLink’s Ratings to ‘BB’ / Affirms Level 3

  • Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDRs) assigned to CenturyLink, Inc. (CenturyLink) and its subsidiaries to ‘BB’ from ‘BB+’ and removed the ratings from Negative Watch. In addition, Fitch has affirmed the IDRs for Level 3 Communications, Inc. (LVLT) and its subsidiary, Level 3 Financing, Inc. The Outlook is Stable for all ratings. The rating action is due to CenturyLink’s completion of the acquisition of LVLT, which closed on Nov. 1, 2017 following approval by the Federal Communications Commission.
  • The $9.9 billion in secured financing is guaranteed by certain existing CenturyLink subsidiaries (including Embarq Corp.), except for Qwest Corporation (QC), and by a new holding company, Level 3 Parent, LLC, which is now LVLT’s parent. The stock of both LVLT and QC has been pledged as collateral for the facilities. LVLT and its subsidiaries will not provide guarantees to HoldCo or the acquisition debt, and its existing debt will remain outstanding.
  • Based on the one-notch downgrade of CenturyLink’s IDR to ‘BB’, Fitch has taken the following rating actions:
    • –A one-notch downgrade of CenturyLink’s and Qwest Capital Funding’s senior unsecured debt to ‘BB’/’RR4’. The one-notch downgrade is consistent with Fitch’s notching treatment of issue ratings with ‘RR4’ recoveries, reflecting a rating at the same level as the IDR.

(Bloomberg) Teva Lowers Debt Repayment Forecast to $3.5B: McClellan

  • Teva has no current plan to raise new equity; will consider raising equity with new management, Interim CFO Michael McClellan says on conference call with analysts.
    • Credit rating downgrade would raise rates on Teva term loans: CFO
    • Teva’s $6b term loans would face 25 basis point rise
    • Asset sales to generate $2.3b in net proceeds, majority to be collected this year: outgoing interim CEO Peterburg
    • CEO Schultz plans to focus on key generic launches, scale of operations, strengthening operations, stabilizing operating profit and cash flow
    • Teva will do “whatever is needed to improve performance:” Chairman Barer

(Bloomberg) Hurricane Rebound Comes Up Short in Payrolls

  • The October jobs report was well above trend, as a rebound from hurricane interruptions lifted hiring, albeit by not as much as the consensus of economists anticipated. However, significant upward revisions to August and September mean the net hiring gain was considerably stronger than the October headline would otherwise suggest.
  • The important takeaway from this report is that there has been little interruption of the underlying hiring trend due to recent hurricanes. In fact, the categories most impacted by storms — such as leisure and hospitality — posted complete recoveries. The underlying hiring pace of job creation (roughly 160k) exceeds the natural growth rate of the labor force, whereby the unemployment rate continues to grind lower. This is a critical development for policy makers, because unemployment is now running well below their estimate of the neutral level. As a result, Fed officials will be less concerned about the backsliding of inflation, which continues to perplex forecasters.
  • Tighter labor conditions will ultimately drive wages and consumer inflation higher. While the level of unemployment at which this occurs may be lower than policy makers currently estimate, it will almost certainly occur if unemployment descends into 3% territory; this appears likely over the next few quarters.
  • It is difficult to discern if wage pressures are flaring up in the latest jobs report, as average hourly earnings recoiled from a hurricane-driven surge in September. Nonetheless, other metrics of labor cost pressures, such as the employment cost index reported earlier this week, are reapproaching post-recession highs — thereby signaling that labor inflation is indeed mounting, albeit gradually.
  • Unfortunately, the hurricane distortions evident in both the September and October jobs reports leave policy makers with just one clean labor assessment ahead of their Dec. 13 rate decision. However, the latest GDP results, swift post-storm recovery in an array of data and solid employment gains all give the green light to policy makers to continue normalizing interest rates, particularly given that financial conditions continue to ease.
27 Oct 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, IG fund flows on the week were $3.2bln. This brings the YTD total to +$277.152bln in total inflows into the investment grade markets. According to Bloomberg, investment grade corporate issuance for the week was $33.71bln, and YTD total corporate bond issuance was $1.163t. Investment grade corporate bond issuance thus far in 2017 is down 3% y/y when compared to 2016.

(Nikkei Asian Review) Abe’s coalition retains two-thirds majority in Japan election

  • Japanese Prime Minister Shinzo Abe’s ruling coalition held on to a two-thirds majority of the seats in Japan’s lower house after Sunday’s general election, putting the prime minister in a position to move toward revising the country’s pacifist constitution.
  • Abe’s Liberal Democratic Party and coalition partner Komeito easily saw off a challenge from a divided opposition, gaining 313 seats of the contested 465 seats.
  • Abe’s victory gives the prime minister a fresh mandate to pursue his cherished goal of reforming Japan’s postwar constitution and to continue his economic-stimulus measures. If he wins a fresh three-year term as LDP leader at a party congress next year, he could govern until 2021, making him Japan’s longest serving prime minister since World War II.
  • Following the coalition’s victory, Abenomics will get a new start. In the coming months, the prime minister will prepare a 2 trillion yen policy package that is to include making education free.

(TheStreet) Charter and Comcast Shares Get Punished for Cord Cutting

  • Over-the-top video services such as Netflix and Amazon Prime are eating away at pay-TV’s customer base, but Comcast says cord-cutting isn’t the end of the world.
  • Comcast badly wants to hold onto its video subscribers, although Chairman and CEO Brian Roberts told investors during a Thursday morning investor call that the cable operator has been preparing for the world of cord cutting.
  • “We anticipated this shift,” Roberts said. Comcast invested in its Emmy-winning X1 entertainment operating system that allows users to watch Netflix or Alphabet’s (GOOGL – Get Report) YouTube via its platform, developed a remote control that recognizes voice commands and launched the Xfinity streaming app, among other initiatives that enhance its video service.
  • When customers cut the cord to Comcast’s pay-tv offering, Roberts and other executives suggested, they don’t kill the cable operator’s model.
  • “Broadband connectivity, both residential and business — that’s now a $20 billion-year business,” Roberts said.
  • “That is a big portion of our company. That’s growing at double-digit revenue growth, and it is very accretive to our margin.” Over the next five years, he added, broadband usage will only increase with the growth of the Internet of things, smart home applications, virtual reality, 4K video, smart electrical grids and other applications.
  • Cord cutting actually improves some of Comcast’s metrics, cable unit CEO David Watson told investors.
  • While Comcast still wants customers to buy a package of video, mobile phone service, home security and other services, as the company has said that the bundle of services reduces customer defections. Or course, the package also boosts revenues. At the same time, though, Comcast actually has higher profit margins if consumers cut out other services. “The economics are very encouraging if they do select broadband only,” Watson said, noting not only the higher profit margins but also the lower cost to deliver just broadband.

(TheStreet) Coca-Cola Proves It’s Not Irrelevant

  • Coca-Cola Co. reported better-than-feared third-quarter earnings on Wednesday, Oct. 25, as the beverage company continues to reinvent itself for more health-focused consumers.
  • While Coca-Cola continues to “drive relevance” in its core brands like Coke, CEO James Quincey told analysts on the conference call that expanding its portfolio of smaller brands is crucial to the company’s success.
  • “The consumer landscape is changing,” he said. “We see an increasing number of smaller, faster competitors” catering to consumers seeking more variety. “In order to thrive in this kind of environment, we need to be more entrepreneurial and agile.” The Topo Chico acquisition is one such effort at “growing our portfolio multiple ways.”
  • Topo Chico, part of Coca-Cola’s venturing and emerging brands unit, will follow the same playbook Coca-Cola used after acquiring Honest Tea, maintaining the brand’s entrepreneurial spirit while rapidly expanding its reach.
  • “Growing premium beverage such as adult craft beverages,” like mixers, is another priority, Quincey added. Coca-Cola introduced a premium mixer brand, Royal Bliss, in Spain, and also relaunched Schweppes mixers in the U.K.
  • Strong North American performance came after Coca-Cola’s biggest competitor, PepsiCo Inc. , reported weak results in the region. Quincey downplayed the comparison, saying that in the highly competitive North American market, “it’s not just one large competitor we face-there are lots of competitors, large, medium, and small.”

(Bloomberg) Lear Full Year Sales Forecast Beats Highest Estimate

  • Lear forecast sales for the full year; the guidance beat the highest analyst estimate.
    • Sees FY sales $20.4 billion, estimate $20.06 billion (range $19.61 billion to $20.33 billion) (Bloomberg data)
    • 3Q net sales $4.98 billion, estimate $4.84 billion (range $4.65 billion to $4.95 billion) (BD)
    • 3Q adjusted EPS $3.96, estimate $3.74 (range $3.42 to $3.97) (BD)
    • Boosts Yr Views for Sales, Earnings, and Free Cash Flow
  • Lear’s credit profile may continue to be among the strongest of the auto suppliers covered by BI Credit in 2017. Downturn analysis shows the company’s profile weakening, but remaining well within raters’ targets and its maximum leverage covenant. Maintenance of current credit metrics may be sufficient for further upgrades of Lear’s bonds, based on rating providers’ comments. The company’s bonds trade wider than Delphi and BorgWarner, despite having outperformed them over the past year. (Bloomberg Intelligence – 09/25/17)

(Bloomberg) U.S. Notches Solid 3% Economic Growth, Despite Hurricanes

  • The U.S. economy grew robustly in the third quarter despite two hurricanes, propelled by steady spending from American businesses and households.
  • Gross domestic product, the broadest measure of goods and services made in the U.S., expanded at a 3% annual rate in July through September, the Commerce Department said Friday. Economists surveyed by The Wall Street Journal had projected a 2.7% gain.
  • Output expanded at 3.1% rate in the second quarter. This marks the economy’s best six-month stretch since mid-2014.
  • The third quarter’s strong growth is particularly impressive because two hurricanes—Harvey and Irma—temporarily shut down major population centers in Texas and Florida in August and September. The Commerce Department said in its report Friday that the storms likely suppressed business activity such as oil and gas extraction in Texas and agriculture production in Florida. But the agency added, “it is not possible to estimate the overall impact of Hurricanes Harvey and Irma on 2017 third-quarter GDP.”
06 Oct 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, IG fund flows on the week were the 4th largest inflow on record, at $6.3bln. This brings the YTD total to +$248.232bln in total inflows into the investment grade markets. According to Bloomberg, investment grade corporate issuance for the week was $16.15bln, and YTD total corporate bond issuance was $1.077t. Investment grade corporate bond issuance thus far in 2017 is down 5% y/y when compared to 2016. October issuance is off to a slow start, relative to what we have seen through much of 2017, but this can be attributed to earnings blackout as well as the timing of the release of employment data.

(Bloomberg) Disney-Altice Deal Shows Operators Will Still Pay for Sports

  • Walt Disney Co. and cable provider Altice USA Inc. reached a preliminary programming agreement that will enable 2.4 million New York-area pay-TV subscribers to continue to get ABC, ESPN and the Disney Channel.
  • The two sides “have extended the deadline accordingly to try and finalize the terms,” according to a joint email on Sunday. No details were included in the statement. The preliminary terms were struck at the last minute, as Disney was about to cut off broadcasting to Altice subscribers Sunday night.
  • Disney won price increases for its major channels, though not as much as the Burbank, California-based entertainment giant originally asked, according to two people familiar with the terms who asked not to be named because the discussions are private. Altice also agreed to pick up two collegiate sports networks, the people said.
  • The agreement, if finalized, shows that pay-TV operators are still willing to pay for pricey sports channels even in an age of video streaming and declining viewership. The talks were seen as a litmus test of the business model that’s fueled Disney’s profit for years: charging ever-higher fees for ESPN even though many consumers don’t watch sports, and using the network’s popularity to force pay-TV providers to carry other programming.

(WSJ) Monsanto Boosted by Continued Adoption of New Products

  • Monsanto has been introducing soybean varieties that are genetically engineered to resist a more powerful combination of herbicides. More than 20 million U.S. acres were sown with the new seeds, the company said Wednesday, and it expects to have the supply for 40 million acres across next year’s planting season.
  • For the quarter Monsanto reported income of $20 million, or 5 cents a share, up from a loss of $191 million, or 44 cents a share, a year ago. Revenue grew 4.8% to $2.69 billion. On an adjusted basis, earnings were 20 cents a share.
  • The positive adjusted profit was far higher than the loss of 41 cents that analysts had projected. Monsanto said the better-than-expected results were due to tax benefits and a pretax benefit of $200 million due to corn licenses in Brazil.

(Bloomberg) PepsiCo Makes E-Commerce Bet as Amazon Roils Food Industry

  • The food-and-beverage giant has created a 200-person business unit that’s tasked with spurring online growth in a fast-evolving grocery landscape. So far, it’s working. PepsiCo is on pace to hit $1 billion in annualized e-commerce sales this year, Chief Financial Officer Hugh Johnston said in an interview.
  • That’s about double the rate a year earlier, even if it remains a small piece of the pie. PepsiCo has total revenue of about $63 billion a year.
  • “That business is just really growing like crazy,” said Johnston, who also serves on Microsoft Corp.’s board. “We run it more like a tech company than we do a consumer-products company, and it’s a real star of the portfolio for us right now.”
  • To further set the online business apart, it’s located in midtown Manhattan — about an hour from the company’s suburban headquarters in Purchase, New York.
  • The group is focused on marketing and packaging PepsiCo’s products for online sellers, including Inc. and Boxed Wholesale, as well as traditional brick-and-mortar grocers that are trying to boost their digital footprint. The division was founded about two years ago, but PepsiCo has been quiet about it until now.
  • PepsiCo faces more pressure to go big in e-commerce because grocery sales of soft drinks have weakened, especially in North America. And the overall food industry is bracing for a wave of change. Grocery companies have been rocked this year by Amazon’s $13.7 billion purchase of Whole Foods Market, a deal that sent shares of traditional supermarkets tumbling.

(WSJ) Corona is the New King of Beers

  • U.S. beer sales are in a funk, but Americans are still clamoring for Mexican suds.
  • Constellation Brands Inc., STZ the U.S. distributor of Corona and Modelo, reported a 13% jump in beer sales in the summer months. The gains come as market leaders Budweiser and Bud Light are hemorrhaging volume and even craft beer—which until two years ago was growing in the double digits—is experiencing a shakeout.
  • “It’s a little bit of a misnomer to think that the growth in the beer category, to the extent that there is any, is coming from imports” from around the globe, said the company’s chief executive, Robert Sands, on a conference call Thursday to discuss the latest results. “It is not. It is coming from Constellation’s portfolio of Mexican beers.”
  • The company has expanded beyond its roots as a bulk wine distributor, adding well-known brands such as Robert Mondavi and spirits like Svedka vodka. It now gets two thirds of its revenue from the beer division, which also includes Ballast Point, a craft brewer it acquired for $1 billion in 2015. In the latest quarter, Constellation purchased the small Florida craft brewery Funky Buddha.
  • Constellation plans a national launch next year for a new version of Corona called Corona Premier, as well as a rollout of a product called Corona Familiar in major Hispanic markets—a key demographic for the brand.
  • Constellation attributed 60% of its growth to expanded distribution, and Mr. Sands said Thursday that he’s still unsatisfied on that front. “We don’t have the distribution that we ought to have as a company,” he said. “There’s a big growth runway ahead of us.”

(Bloomberg) Lilly Jumps to Two-Year High After Cancer Drug Patent Upheld

  • Eli Lilly’s patent for its lung cancer drug Alimta was upheld, the Patent Trial and Appeal Board said in an opinion. Shares rise as much as 2.5% to the highest since September 2015.
    • Patent expires in May 2022; Alimta is LLY’s third-biggest drug behind Humalog and Cialis, making up $532.9m or 9.1% of total pharma sales in 2Q: Bloomberg data
    • Teva, Apotex, Neptune Generics and others had filed the challenge; other companies later joined the petition
    • The PTAB decision can be appealed to the U.S. Court of Appeals for the Federal Circuit, which had already upheld the validity of the patent in January

(WSJ, Press Release) Teva Comments on Anticipated At-Risk U.S. Launch of Generic

  • Teva Pharmaceutical Industries Ltd. today commented that any launch by Mylan of a generic version of COPAXONE(R) 40mg/ml (glatiramer acetate) prior to final resolution of the pending patent appeals and other patent litigation should be considered an “at-risk” launch, which could subject Mylan to significant damages among other remedies. Additionally, Mylan also announced approval of a generic glatiramer acetate 20mg/mL.
  • “We have planned for the eventual introduction of a generic competitor to glatiramer acetate,” said Dr. Yitzhak Peterburg, Teva’s Interim President and CEO. “We remain confident in patient and physician loyalty to Teva’s COPAXONE(R) due to its recognized efficacy, safety and tolerability profile, and we will continue to promote and support the product. As we are closing the third quarter, it is too soon to officially comment on any change to our full year business outlook.”
  • Two appeals will be argued before a single panel of judges of the U.S. Court of Appeals for the Federal Circuit. In the first case, Teva is appealing the December 2016 inter partes review decisions of the Patent Trial Appeal Board that found all of the claims of three COPAXONE(R) patents to be unpatentable. In the second case, Teva is appealing the January 2017 decision of the U.S. District Court for the District of Delaware, which declared certain claims of four COPAXONE(R) patents invalid. The two appeals have been fully briefed and await the scheduling of oral arguments. In additional litigation, Teva brought suit against five Abbreviated New Drug Application (ANDA) filers, including Mylan, for infringement of a patent covering a manufacturing process for glatiramer acetate product.
  • Due to the anticipated launch of another generic 20mg glatiramer acetate product and the anticipated launch of a first generic 40mg glatiramer acetate product, Teva’s early assessment of the impact of these launches to its earnings for the fourth quarter ended December 31, 2017 is that it could be affected by at least $0.25 cents per share. These conditions are subject to change based on the discount; adoption rate; and other factors of the competitive products. Teva will provide additional details on its 3(rd) Quarter Earnings Conference Call on November 2, 2017.

(Bloomberg) Hurricanes Wash Out More Than Payrolls in September

  • U.S. payrolls fell 33k in September, considerably weaker than the consensus estimate, which called for an 80k increase. The month of August was revised to a rise of 169k (previously estimated to have been a 156k gain). The two-month payroll net revision was -38k. The 3Q average of 91k currently stands less than half the 2Q average of 187k, and weaker than the 12-month average of 148k.
  • The hurricanes had an outsized impact on employment. Absences from work due to bad weather (1474k) and weather-related curtailments of average weekly hours (2934k) significantly exceeded their respective historical averages (10-year averages stood at 44k and 236k, respectively, before the report). Average hourly earnings were also vulnerable to storm-distortion. Acute demand for utility workers resulted in a spike in average hourly earnings in the sector, large enough to influence the overall outcome. Average weekly hours for utility workers also jumped. The leisure and hospitality industry bore the brunt of the storms’ impact on employment.
29 Sep 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, IG fund flows decelerated on the week, but were still positive at $2.3bln. This brings the YTD total to +$241.961bln in total inflows into the investment grade markets. According to Bloomberg, investment grade corporate issuance for the week was $20.725bln, and YTD total corporate bond issuance was $1.06t. Investment grade corporate bond issuance thus far in 2017 is down 5% y/y when compared to 2016.

(Bloomberg, El Mostrador) Albemarle Said to Be Interested in Potash’s SQM Stake: Mostrador

  • Lithium-producer Albemarle is among the companies interested in acquiring Potash Corp.’s 32% stake in Soc. Quimica y Minera de Chile, says El Mostrador, citing unidentified sources with knowledge of the situation.
    • There’s also interest from Chinese, European and South Korean companies, news website says
    • Albemarle and SQM are the only two lithium producers in Chile
    • Acquisition of a stake in a company that has an ongoing dispute with the Chilean state would complicate Albemarle’s lithium operations in the country, sources tell Mostrador
    • Process is in a preliminary phase and would start formally in October after Potash receives at least two bids; process would last about four months, Mostrador says
  • The decision by the main shareholder of SQM to put on sale the 32% that controls in the nonmetallic mining leaves Corfo in a complicated situation. If successful, the purchase would leave the US giant with a dominant position in the lithium business in Chile, something that would be politically unviable for the government, sources close to the operation say. Lawyers who know the industry indicate that blocking the operation would be possible for the State of Chile, but it would not be an easy process or free of controversy.

(Bloomberg) FTC Approves Abbott’s Acquisition of Alere

  • The FTC on Thursday approved pharmaceutical company Abbott Laboratories’ bid to purchase Alere , a manufacturer of rapid point-of-care diagnostic tests, on the condition that Abbott sells two point-of-care medical testing units.
  • The deal, first proposed in February 2016, hit several snags on its route to approval over issues regarding the Alere’s accounting and sales practices. Abbott was able to reach a deal to buy Alere in April for around $5.3 billion, below its initial $5.8 billion offer.
    • The transaction establishes Abbott as the global leader in point of care testing – the fastest-growing segment of the $50 billion in vitro diagnostics market – and further strengthens the company’s diagnostics presence. The addition of this business aligns with Abbott’s long-standing strategy of shaping the company for growth and complements the leadership positions it has built across its other businesses, which include medical devices, nutritionals and established pharmaceuticals.

(Bloomberg) Chubb to Face Up to $1.3 Billion in Losses From Harvey, Irma

  • Chubb Ltd. said losses from Hurricanes Harvey and Irma could total as much as $1.3 billion after taxes.
  • Harvey, which hit Texas in August and caused flooding in Houston, will cost the insurer about $520 million, the company said Wednesday in astatement. Claims expenses from Irma, the storm that slammed southern Florida earlier this month, could be $640 million to $760 million. Those figures dwarf the $107 million in after-tax catastrophe losses the insurer took during the third quarter of 2016.
  • “For Chubb, these large losses should be manageable within the context of its earnings, capital position and ratings,” David Havens, an analyst at Imperial Capital, said Wednesday in a note. “But this is a big number.”
  • “It’s a little on the high side for storm losses,” Paul Newsome, an analyst at Sandler O’Neill & Partners, said by phone. “They’re real losses and affect the book value, but most investors will normalize for these large events because they are very episodic.”

(Bloomberg) A $6.4 Billion Windfall Awaits Big U.S. Banks in Trump’s Tax Cut

  • The six largest U.S. banks could see net income rise $6.4 billion, or 7 percent, if President Donald Trump and Republicans in Congress can push through their proposed corporate tax rate cut.
  • Banks stand to benefit more than other industries because they typically have fewer deductions. The top six firms — JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley — paid an average of 26 percent in federal taxes last year, almost twice the average for nonfinancial companies, according to data compiled by Bloomberg. The Republican framework released Wednesday calls for lowering the corporate rate to 20 percent from 35 percent.
  • The estimates for the tax savings are based on the firms paying a 20 percent effective U.S. federal rate, assuming current deductions are no longer allowed. While earlier versions of Republican tax proposals have talked about eliminating some deductions, the latest plan has scant information on such changes. If some deductions are kept, banks would end up with a lower effective tax rate and their savings would be even greater.

(WSJ) U.S. Seeks to Undo Parker Hannifin’s Clarcor Deal on Antitrust Grounds

  • The Justice Department on Tuesday filed an antitrust lawsuit challenging Parker Hannifin Corp.’s $4.3 billion acquisition of Clarcor Inc., alleging the deal created an unlawful monopoly.
  • The department, in a legal challenge filed in a Delaware federal court, argued that Parker Hannifin’s acquisition, completed in February, had eliminated the company’s only competitor in the market for products that filter fuel for airplanes. Aircraft fuel must be filtered to remove particles that could cause engine failure.
  • The case marks the first merger challenge brought by the Justice Department under the Trump administration. The lawsuit asks a federal judge to order Parker Hannifin to sell off either its own aviation fuel filtration business or Clarcor’s to restore the previous competition in the market.
  • “Parker Hannifin’s acquisition of its only U.S. rival for these types of aviation fuel filtration products has effectively created a monopoly in these critical safety products, depriving their customers of the benefits of competition,” said Andrew Finch, the acting head of the Justice Department’s Antitrust Division.
  • The lawsuit alleged the company and Clarcor competed vigorously before the merger, resulting in better prices and more innovation for customers. Now, Parker Hannifin has “the power to raise prices without fear of losing a significant amount of sales,” the lawsuit said.
  • The department also alleged Parker Hannifin didn’t provide significant documents or data to the Justice Department while it was investigating the transaction.
  • The lawsuit comes at a time of transition for antitrust enforcement, as Republican officials begin to take over from Democrats who served during the Obama administration.
  • Antitrust enforcement often isn’t considered a partisan exercise, but Republicans have tended to take a more free-market approach. Whether the Trump administration will continue on that path is unclear. , given that President Donald Trump has at times embraced a populist sentiment that can be suspicious of big businesses growing more powerful.
  • Mr. Trump’s nominee to lead the department’s antitrust enforcement efforts, Makan Delrahim, hasn’t yet been confirmed by the Senate, but political deputies selected by Mr. Delrahim are already in place and conducting Justice Department business.