Category: Investment Grade Weekly

10 Mar 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Lipper, for the week ended March 8th, investment grade funds posted a net inflow of $3.482bn. Per Lipper data, the year-to-date net inflow into investment grade funds is $29.434bn through March 8th. Per Bloomberg, investment grade corporate issuance through Thursday was just over $50bn –that total will grow for the full week with at least two new deals still pending as of Friday morning. Year-to-date investment grade corporate issuance will finish the week at ~$330bn. Per Wells Fargo, 2017 investment grade issuance is outpacing 2016 issuance by +11%.

(Bloomberg, Press Release) Toll Brothers, Inc. Prices $300 Million of Senior Notes

  • The Notes have a coupon of 4.875% and will pay interest semi-annually on March 15 and September 15, commencing September 15, 2017.
  • The Company expects to use the net proceeds from the Offering for general corporate purposes, which may include repayment of indebtedness.

(Bloomberg, Moodys) Moody’s Upgrades Vulcan Materials to Investment Grade

  • Moody’s Investors Service (“Moody’s”) upgraded the senior unsecured debt ratings of Vulcan Materials Company (“Vulcan”) to Baa3 from Ba1. The rating outlook is stable.
  • The upgrade reflects continued improvement in Vulcan’s financial ratios resulting from debt reduction and improved operating performance. The company’s adjusted debt-to-EBITDA declined to 2.5x for the year-end 2016 from 2.8x at year-end 2015 and 3.7x at year-end 2014. Adjusted operating margins have also improved over the same periods, increasing to 19.5% from 17.3% and 11.4%, respectively. Moreover, the rating upgrade reflects Moody’s belief that Vulcan has the willingness and ability to defend its investment grade rating in a downturn.

(Bloomberg, Kepler Cheuvreux) BASF Likely to Acquire Agro Assets Divested Due to M&A: Kepler

  • Agro M&A to continue as Bayer/Monsanto and Dow/DuPont have to sell assets to obtain regulatory approval for their respective deals, Kepler Cheuvreux says in note.
    • Says BASF could approach regulatory bodies to express their interest in assets that are expected to be sold by Bayer and Dow/DuPont
    • Sumitomo could look to add to its agrochemical set-up
    • Private equity or generic firms such as FMC or Nufarm may also be interested
    • Bayer likely to divest their Liberty Link franchise, along with cotton and other selected seeds
    • Dow’s Mycogen seed assets likely to be put up for sale
    • This is a portfolio of corn, soya, sunflower, and canola with sales of $1.5b
    • Dow’s portfolio could sell for $7.5b or to 5x sales
    • Bayer’s Liberty Link alone may be worth up to EU4.8b
    • BASF is one of the top candidates for these “stranded” assets

(Bloomberg, Reuters) Bayer, Monsanto Said to Start $2.5b Asset Sales Next Week: Rtrs

  • Bayer and Monsanto plan to start selling assets worth ~$2.5b to get regulatory clearance for their merger, Reuters reports, citing unidentified people close to matter.
    • Bayer’s advisers plan to send information packages next week to possible buyers: Reuters
    • Bayer, Monsanto declined to comment to Reuters
    • NOTE: Feb. 23, Bayer/Monsanto Deal More Than 80% Likely to Close: Citi
24 Feb 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Lipper, for the week ended February 22nd, taxable bond funds posted a net inflow of $3.987bn. The weekly average inflow thus far in 2017 remains just north of $4bn per week. Per Bloomberg, investment grade corporate issuance through Thursday was $13.925bn. February issuance stands at $75bn, while year-to-date investment grade issuance has now topped $231bn, up about 21% year-over-year.

(Bloomberg) Fitch Upgrades Pioneer Natural Resources to ‘BBB’

  • The upgrade reflects Fitch’s view that the company will be able to execute its medium-term growth targets given its competitive full-cycle breakeven oil price, favorable hedge position and policy, and strong liquidity position, while reducing gross debt and maintaining a leverage profile generally consistent with or better than similarly rated North American (N.A.) exploration and production (E&P) peers. Fitch’s base case currently forecasts that in 2019 Pioneer’s core Permian production will exceed 300 thousand boe per day (mboepd), gross debt/EBITDA will be below 1x, and liquidity will remain strong.

(Bloomberg) Merck Takes $1.9B Writedown as Hepatitis C Market Shrinks

  • Merck & Co., one of the U.S.’s biggest drugmakers, will write down most of what it paid for a promising, experimental hepatitis C drug in 2014, partly because of the extreme success of other new therapies has left a shrinking market.
  • In a filing Thursday, Merck said it would take a $2.9 billion charge, or $1.9 billion after taxes, on uprifosbuvir, which it bought in 2014 in its $3.9 billion acquisition of Idenix Pharmaceuticals Inc. and is still in clinical trials. Merck said it now values the drug at $240 million.
  • The market for treatments for hepatitis C, a virus that attacks the liver and can lead to cirrhosis or liver cancer, has been declining recently, with fewer patients to treat following major breakthroughs in science that brought to market highly effective, fast-working cures.

(Bloomberg) HP’s Earnings Show the PC Market Is Finally Starting to Recover

  • Prior to HP Inc’s January quarter earnings report, there were already plenty of signs that the hard-luck PC market was beginning to stabilize. Shipment estimates from major research firms, as well as earnings reports from the likes of Microsoft, Intel, AMD, Seagate and Western Digital, pointed to a market whose sales declines were narrowing considerably from the steep levels seen during the first half of 2016.
  • HP’s numbers went beyond that, however. They suggest the steady arrival of compelling new hardware and form factors, together with an aging installed base and favorable annual comparisons, is positioning the PC industry to deliver positive growth over the near-term.
  • HP Inc., which contains the former Hewlett-Packard’s PC and printing businesses, reported fiscal first quarter revenue of $12.68 billion (up 4% annually) and adjusted EPS of $0.38. The former trounced a consensus analyst estimate of $11.83 billion, while the latter slightly beat a $0.37 consensus.
  • HP also guided for second quarter EPS of $0.37 to $0.40, in line with a $0.38 pre-earnings consensus. Fiscal 2017 (ends in October) EPS guidance of $1.55 to $1.65 was reiterated.
  • Shares rose 8.6% to $17.60 on Thursday, hitting their highest levels since the old HP broke up in late 2015.
17 Feb 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Lipper, for the week ended February 15th, investment grade funds posted a net inflow of $3.054bn. The total year-to-date net inflow into investment grade funds ended the week at $20.342bn. Per Bloomberg, investment grade corporate issuance through Thursday was $25.05bn. Year-to-date investment grade issuance has now topped $218bn, up over 60% from this point last year.

(Bloomberg) 600 MHz Spectrum Auction Highlights Telco Demand Shift

  • The 600 MHz auction’s assignment phase will end no later than March 30, 24 days after it begins, as the spectrum sale nears a close. Carriers including AT&T, T-Mobile and Verizon and others such as Dish and Comcast bid $19.6 billion for the licenses in the forward portion of the auction and now will compete for their exact frequency allocations in the assignment phase of the auction.
  • Once bidding ends, the FCC will announce the winners and down payments will then be due within 10 days.
  • Broadcasters including 21st Century Fox, Gray TV, Tribune and Sinclair won’t receive proceeds at least until payments are made by forward auction bidders. Broadcasters will be paid out when license applications from winning forward auction bidders are approved on a rolling, per-license basis.

(Press Release, Conference Call) Masco reported 4Q and full year results

  • Masco has around $600mm in cash over in Europe and other jurisdictions
  • The company is seeing strong demand in their Repair & Remodeling products across all product lines and price points. R&R accounts for 83% of total sales (unchanged)
  • 2016 Revenue influenced by:
    • Decreased by $68mm (1% of revenue) due to currency translation.
      • Currency translation is expected to affect sales by $100mm during 2017
    • Decreased by $21mm (.3% of revenue) due to warranty reserve increase in their Milgard window business in Q3
  • Masco is still focusing on bolt-on strategies in either their plumbing or decorative architecture segments, which has been unchanged over the past several quarters
    • One change, in their comment, was that they are also looking at other areas, but the focus is still on plumbing and decorative architecture
  • Masco returned $585mm to its shareholders through dividends and share repurchases during 2016 (compared to $546mm in FCF)

(Bloomberg) Ford’s Dozing Engineers Side With Google in Full Autonomy Push

  • As Ford Motor Co. has been developing self-driving cars, the U.S. automaker has started noticing a problem during test drives: Engineers monitoring the robot rides are dozing off.
  • Company researchers have tried to roust the engineers with bells, buzzers, warning lights, vibrating seats and shaking steering wheels.
  • BMW, Mercedes-Benz and Volkswagen AG’s Audi plan to roll out semi-autonomous cars starting next year that require drivers to take over with as little as 10 seconds notice.
  • Ford plans to skip that level altogether. The automaker has aligned with Alphabet Inc.’s Waymo, which made similar discoveries related to human inattention while researching Google’s driverless car.
03 Feb 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Lipper, for the week ended February 1st, investment grade funds posted a net inflow of $2.657bn. The total year-to-date net inflow into investment grade funds ended the week at $12.355bn. Per Bloomberg, investment grade corporate issuance through Thursday was $45.8bn. For the month of January, new issuance came in at $178.45bn, one of the largest months on record.

(Conference Call, CAM Notes) Simon Property Group Reports Full Year 2016 Earnings

  • Conference Call Highlights:
    • SPG currently has 434 department store spaces in their portfolio
      • 1 current vacancy
    • Also of the recently announced department store closures, 1 was in their portfolio
    • SPG says they saw more stores closings in 2015 than 2016 (non-department)
    • On Traffic:
      • Gift cards sales were up 14% which, SPG believes, is a good indicator of traffic
      • Premium Outlet traffic (counted by cars entering parking lot) was up 1.5% YoY
    • David Simon stated on the call that they believe retailers are spending a lot of capital on internet sales, “and between that and the promotions required to get them to buy online between the cost of shipping and the returns, it’s not a great model for them.”
    • Mall & Premium outlets catering to foreign buyers were negatively affected by the strong dollar during the quarter (same as last)
    • Retail centers outside of tourist oriented malls were stable during the quarter
    • As far as development pipeline:
      • Redevelopment expansion projects are happening at 29 properties for approximately $1.1bn (their share)
      • Five outlets are currently under construction (all open in 2017):
      • Domestic: Norfolk, VA
      • The Clarksville Premium Outlet (D.C.) opened in late October and, “had the strongest open of any premium outlet in a long time.”
      • Internationally: France, South Korea, Malaysia and Canada.
      • One new mall is currently under construction: The Shops of Clearfork (Fort Worth) which is anchored by Niemen is to open in the fall of 2017
      • Brickell City Centre (Miami) opened in the 4th quarter

(Bloomberg) Apple, Microsoft Borrow Now Instead of Waiting for Tax Reform

  • This year, tax reform could give U.S. companies access to hundreds of billions of dollars they have stashed overseas. Many corporations can’t wait that long.
  • Apple Inc. and Microsoft Corp. combined sold $27 billion of debt this week to fund their daily operations, repay maturing debt, and buy back shares. Those bond sales might be unnecessary if new tax laws come this year, because under President Donald Trump’s proposed plan, companies could pay a one-time 10 percent levy to bring back money held overseas, less than a third of the current rate.
  • Whenever companies can bring back cash, corporate bond issuance will likely drop, by as much as $150 billion a year, Bank of America Corp. estimated in November. That’s equal to more than 10 percent of the U.S. investment-grade debt issued last year, according to data compiled by Bloomberg. The companies with the most overseas cash tend to be in the technology and pharmaceutical industries.
  • The U.S. last saw a tax holiday under a 2004 law. As part of that legislation, companies were allowed to bring back foreign earnings for one tax year at essentially a rate of 5.25 percent if they reinvested the funds in programs like worker hiring or capital investments. Although that holiday had a time frame of a single tax year, a program like the House Republicans’ could be implemented almost immediately, and last at least 10 years, Mills said.
  • For now, companies don’t mind heading back to the debt markets, considering the low yields and minimal volatility, said Dave Novosel, a bond analyst at research firm Gimme Credit.
  • “Markets are still pretty good. Why not take advantage of it?,” Novosel said. “A month from now, or two months from now, things might not be as good depending on what happens with Trump and Congress.”
27 Jan 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Lipper, for the week ended January 25th, investment grade funds posted a net inflow of $1.589bn. The total year-to-date net inflow into investment grade funds ended the week at $9.697bn. Per Bloomberg, investment grade corporate issuance through Thursday was ~$25bn. Thus far, $146.8bn of investment grade corporate bonds have been issued in January.

(WSJ) Apple Sues Qualcomm Over Licensing Practices

  • The suit, filed Friday in federal district court in the Southern District of California, claims that Qualcomm leveraged its monopoly position as a manufacturer of baseband chips, a critical component used in cellphones, to seek “onerous, unreasonable and costly” terms for patents, and that Qualcomm blocked Apple’s ability to choose another supplier for chipsets.
  • The complaint seeks $1 billion in rebate payments that Apple says Qualcomm has withheld as retribution for Apple’s participation in an investigation by South Korea’s antitrust regulator.
  • Apple said in a statement that it sued Qualcomm “after years of disagreement over what constitutes a fair and reasonable royalty.”

(Bloomberg) Ford Seen as ‘Canary’ With Record Leases Spurring Used Glut

  • A glut of used vehicles has started to depress prices. That trend will intensify as Americans will return 3.36 million leased cars and trucks this year, another jump after a 33 percent surge in 2016, according to J.D. Power. The fallout has already begun, with Ford Motor Co. shaving $300 million from its financial-services arm’s profit forecast for this year.
  • “Ford is the canary in the coal mine,” said Maryann Keller, a former Wall Street analyst who’s now an auto industry consultant in Stamford, Connecticut.
  • This drag may be hitting the rest of the industry, too. A National Automobile Dealers Association index of used-vehicle prices declined each of the last six months of last year. When auto lenders lease out vehicles, they charge the customer a monthly payment and make an assumption of the car or truck’s value when it will be returned for resale. If vehicles are depreciating more than expected, losses can pile up.
  • “We haven’t seen anything that suggests that what’s happening to our portfolio is different from what’s happening across the industry,” Bob Shanks, Ford’s chief financial officer, told analysts in November.
  • Another way automakers could cope is by expanding their offerings of certified pre-owned vehicles — used cars with extended warranties — to try to bolster prices.
  • The question for auto companies is whether pulling those levers will offset any losses from overlooking the true cost of using hefty incentives and discounted leases to boost new-vehicle sales.

(Bloomberg) Dow Sees DuPont Merger Closing in 1H, CEO Says on Conf. Call

  • Dow Chemical says DuPont merger could be a “2Q close”; confident that company can solve EU antitrust concerns, CEO Andrew Liveris said during conf. call.
  • Says other jurisdictions will “fall in line” after EU
  • Sees Trump using executive orders to lift regulatory burdens
  • Sees DOW benefiting from infrastructure plan, Keystone Pipeline decision
  • DOW is a big U.S. exporter, so Trump border tax “big positive”
  • Sees Trump lifting regulatory burdens in 30-60 days
  • Sees new plant delays maintaining ethylene operating rates
20 Jan 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Lipper, for the week ended January 18th, investment grade funds posted a net inflow of $1.893bn. The total year-to-date net inflow into investment grade funds ended the week at $8.108bn. Per Bloomberg, investment grade corporate issuance through Thursday was ~$29bn. Thus far, $121.8bn of investment grade corporate bonds have been issued in January, besting consensus estimates of $112bn.

(Press Release) IBM Reports 2016 Fourth-Quarter and Full-Year Results

  • Highlights
    • Diluted EPS from continuing operations: GAAP of $4.73; Operating (non-GAAP) of $5.01
    • Revenue from continuing operations of $21.8 billion
    • Strategic imperatives revenue for full-year 2016 of $32.8 billion up 13 percent (up 14 percent adjusting for currency) represents 41 percent of IBM revenue
    • Cloud revenue of $13.7 billion for full-year 2016, up 35 percent
      • Cloud as-a-service annual exit run rate of $8.6 billion at year end, up 61 percent year to year (up 63 percent adjusting for currency)
    • 2017 EPS Expectations: GAAP of at least $11.95; Operating (non-GAAP) of at least $13.80
  • “In 2016, our strategic imperatives grew to represent more than 40 percent of our total revenue and we have established ourselves as the industry’s leading cognitive solutions and cloud platform company,” said Ginni Rometty, IBM chairman, president and chief executive officer. “IBM Watson is the world’s leading AI platform for business, and emerging solutions such as IBM Blockchain are enabling new levels of trust in transactions of every kind. More and more clients are choosing the IBM Cloud because of its differentiated capabilities, which are helping to transform industries, such as financial services, airlines and retail.”

(NYT) Morgan Stanley Nearly Doubled Profit From Year Earlier Fourth Quarter

  • Morgan Stanley roared in the fourth quarter, but it also exposed the limits of animal spirits. The bank led by James Gorman almost doubled its profit in the period from a year earlier to $1.7 billion. As at rivals, though, return on equity remains subpar.
  • Some banking businesses do not fare well when too much hangs in the balance, as occurred with an OPEC meeting, an Italian constitutional referendum and the American election late last year. Fees from new stock sales, for example, fell 5 percent from the third quarter at Morgan Stanley, 19 percent at JPMorgan Chase and 34 percent at Bank of America.
  • Trading desks ought to have been reaping the benefit from market mood swings. They certainly performed better in last year’s final quarter than during the same span in 2015. Morgan Stanley’s fixed-income, currency and commodities dealers raked in, at $1.5 billion, nearly three times as much revenue.
  • Profitability also remains subdued. With annualized return on equity of 8.7 percent in the fourth quarter, Mr. Gorman is inching toward his 2017 goal of 9 percent to 11 percent. For now, Morgan Stanley keeps failing to cover its cost of capital, generally assumed to be 10 percent for large banks.
  • Business may pick up in time, but that story has been told for years. What could power earnings is largely beyond Wall Street’s control: more and faster interest-rate increases from the Federal Reserve and financial rule changes from Washington.
  • Morgan Stanley is well placed to benefit from both. It is growing its lending business and its mostly domestic wealth-management unit accounts for an increasing share of the company’s profit. With a capital ratio of 16.8 percent, the bank holds more excess than rivals and thus has plenty to return to shareholders if regulators allow.

(Bloomberg) Key Republicans at Tom Price Hearing Still Wary on Health Law Repeal

  • A hearing on President-elect Donald Trump’s choice for health secretary became an arena Wednesday for key Republicans to stress their opposition to overturning the current health law without a clear replacement.
  • The panel was considering the selection of Rep. Tom Price (R., Ga.), but much of the session focused on GOP plans for undoing the health law. Sens. Lamar Alexander (R., Tenn.) and Susan Collins (R., Me.) pointedly told Mr. Price their concerns about an initial Republican strategy of repealing the law without an agreed alternative in hand.
  • Mr. Alexander, who chairs the Senate Health, Education, Labor and Pensions Committee, warned that the fragile insurance market in his state means he cannot support anything that would trigger further disruption. He finished on a similar note, telling Mr. Price he was confident he had secured his agreement.
  • “What I heard from you, I believe I’m correct about this, is that while we intend to repair the damage of Obamacare and that will eventually mean repealing parts of it—major parts of it—that won’t become effective until there are practical, concrete alternatives in place to give Americans access to health care,” he said.
  • The GOP-controlled Senate and House have taken their first procedural steps toward repealing the ACA, passing a budget that directs lawmakers to start drafting legislation to dismantle much of the law. But Republicans’ 52-48 Senate majority offers little room for defections as they move ahead.

(Bloomberg Intelligence) Dakota Access Still Has Path to Completion Despite Corps’ Review

  • The Dakota Access Pipeline project may be delayed by a new Army Corps environmental review, but that isn’t likely to stop the project from being completed.
  • The pipeline lost a court bid to block the Army Corps from preparing an environmental impact statement on the lake crossing, opening up the project to a period of public comment and review ending Feb. 20.
  • While publication of the EIS notice somewhat hems in the incoming Trump administration, the new president’s appointees may still withdraw it or reverse course.
  • In the interim, the federal district court in Washington could also agree with Dakota Access that the easement was actually granted in July, negating the EIS process completely.
  • If the EIS process is allowed to go to completion, that process may last as long as six months.
13 Jan 2017

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Lipper, for the week ended January 11th, investment grade funds posted a net inflow of $4.029bn. The total year-to-date net inflow into investment grade funds ended the week at $6.215bn. Per Bloomberg, investment grade corporate issuance through Thursday was $38.8bn. Thus far, $92.8bn of investment grade corporate bonds have been issued in January, while consensus estimates call for $112bn for the full first month of the year.

(Bloomberg) Teflon Chemical Cases Face Uncertain Fate If Dow, DuPont Merge

  • Uncertainty cloaks DuPont Co.’s liability for 3,500 toxic tort lawsuits over a Teflon-related chemical as the company proceeds toward a merger with Dow Chemical Co.
  • PFOA has been found in drinking water in West Virginia and Ohio, near the Parkersburg plant. In the first three of those 3,500-plus cases, DuPont lost to residents of that area who claimed DuPont’s PFOA was responsible for their cancer.
  • DuPont’s spinoff, Chemours Co., will defend the PFOA cases although DuPont has been the named defendant.
  • Tom Claps, litigation analyst at Susquehanna Financial Group LLLP, said his company estimates DuPont will be liable for about $550 million for settlement of the current 3,500-plus PFOA cases. Chemours is required to reimburse DuPont for that amount, as the companies agreed in 2015.
  • “However, DuPont must write the initial PFOA checks to plaintiffs in these cases, and will then go after Chemours for reimbursement,” Claps said.
  • According to the Environmental Protection Agency, PFOA was found in blood serum in 99 percent of the U.S. general population between 1999 and 2012, but that percentage has been decreasing as domestic companies phase out production of the chemical.
  • The agency issued a health advisory in 2016 limiting PFOA exposure to 0.07 parts per billion after studies in test animals showed the chemical has adverse health effects, including cancers and impacts on development and the immune system.

(Moody’s, CAM notes) Constellation Brands Raised to Investment Grade by Moody’s

  • The rating upgrade reflects Constellation’s strong brand portfolio and favorable category trends, and its commitment to manage its net debt/EBITDA leverage to around 3.5x compared to a historical targeted range of 3x to 4x.
  • Moody’s expects that Constellation will maintain strong liquidity, characterized by over $1.4 billion in annual operating cash flow and $1.15 billion in revolving credit facilities with substantial borrowing availability.
  • With this Moody’s upgrade, Constellation is now rated investment grade by all three rating agencies.

(Bloomberg) ‘End of Covenants’ Sparks Revolt Over Erosion of Bond Safeguards

  • The first time Adam Cohen’s Covenant Review sounded the alarm in October about a new passage creeping into bond offerings, it described the junk-rated deal from Rackspace Hosting Inc. as “outrageous” and “unprecedented.” Investors bought it anyway.
  • To Cohen, it seemed no one was paying attention to the fine print. So he blasted out a report titled “The End of Covenants,” ultimately fingering 18 deals with the disputed passage.
  • “I had to do something dire,” said Cohen, founder and chief executive officer of his New York-based firm. “By sending out something with the ridiculous title of ‘The End of Covenants,’ people figured out, ‘Wait, something’s going on here.’”
  • Bonds typically come with a lengthy array of standard covenants that protect bondholders by requiring company managers to maintain certain financial ratios, limit asset sales and meet certain deadlines. If they don’t, it can be deemed a voluntary default that entitles bondholders to penalty payments. The “no premium on default” passage casts doubt on those payments, according to Cohen’s firm.
  • Such language may be less jarring to junk-bond owners, who accept more risk and allow corporate managers more leeway in return for higher yields. Mainstream investors weren’t so forgiving.
  • Chatter about the covenants spread through buy-side e-mail chains and chatrooms Monday and Tuesday, with some investors urging others to contact banks to oppose the language.
  • The firestorm that erupted by the middle of this week pushed issuers including Marsh & McLennan, GM and Broadcom Ltd. to drop the idea. The report had struck a nerve with buyers of high-grade bonds, who already have fewer protections and aren’t eager to go down the path that led to five years of eroding protection for junk-bond covenants, as tracked by Moody’s Investors Service.