The investment grade credit markets experienced another week that was largely positive in nature, although spreads are still wide to historical averages. Bright spots included tighter spreads and higher commodity prices. The spread on the Bloomberg Barclays US Corporate Index closed Thursday at 279, 16 basis points tighter from the end of the week prior. The tone is mixed as we go to print on Friday morning amid a brutally high unemployment report.
The primary market continues its record breaking pace. Not only was March the busiest month for new issuance on record with $259.2 billion in volume, but this week also set the record for weekly supply with $110.9 billion through Thursday; and it is not yet over with several deals in the market on Friday morning. Last week has now fallen to the #2 spot in the record books as this was the second week in a row of record breaking supply. Issuance this week was led by Oracle who printed $20bln on Monday and T-Mobile with a $19bln print on Thursday that boasted an order book of $74bln. The majority of issuers to this point are still comprised of companies that would be considered high quality borrowers. These companies are simply acting in a prudent and reasonable manner, shoring up their balance sheets amid an environment of uncertainty.
Investment grade credit was hit outflows again but a substantially smaller amount than in prior weeks. According to data compiled by Wells Fargo, outflows for the week of March 26-April 1 were -$4.6bln which brings the year-to-date total to -$32.5bln. As we have alluded to in previous commentaries, flows can do a lot to help stabilize the market and if they turn positive then the path of least resistance is tighter credit spreads.
This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The index is unmanaged and does not take into account fees, expenses, and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.
Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$2.0 billion and year to date flows stand at -$24.9 billion. New issuance for the week was zero and year to date issuance is at $71.5 billion. (Bloomberg) High Yield Market Highlights
U.S. junk bonds are off the lows after this week’s strong gains but may struggle as equity markets falter. Spreads have backed off from the 1,000 bps distressed level where they started the week, and robust ETF inflows help boost sentiment.
Investors pulled $2b from retail funds in the week. This was the sixth straight week of outflows from U.S. high-yield funds
Junk yields dropped below 11% to close at 10.33%, down 67bps, the biggest decline in percentage terms since June 2000
Spreads closed at 959bps after the biggest drop in nine months
Returns were up for three consecutive sessions
BB yields fell 44bps to close at 8.31% and spreads tightened 45bps at +746
Single-B yields fell 84bps to 10.01%, the biggest drop since 2008, and spreads tightened the most in nine months, to 937bps
Energy sector yields dropped 63bps to 22.38%, the third day of decline and the longest declining streak in 10 weeks
Spreads tightened for a foruth straight session closing at +2,161, down 54bps, the longest declining streak in 11 weeks
(Bloomberg) What’s in Congress’s $2 Trillion Coronavirus Stimulus Package
The bill provides direct help to citizens, businesses, hospitals and state and local governments.
Big Businesses: About $500 billion can be used to back loans and assistance to companies, including $50 billion for loans to U.S. airlines, as well as state and local governments.
Small Businesses: More than $350 billion to aid small businesses.
Hospitals: A $150 billion boost for hospitals and other health-care providers for equipment and supplies.
Individuals: Direct payments to lower- and middle-income Americans of $1,200 for each adult, as well as $500 for each child. Senate Minority Leader Chuck Schumer said checks would be cut April 6.
Unemployed: Unemployment insurance extension to four months, bolstered by $600 weekly. Eligibility would be expanded to cover more workers.
Restrictions on Business Aid: Any company receiving a government loan would be subject to a ban on stock buybacks through the term of the loan plus one additional year. They also would have to limit executive bonuses and take steps to protect workers.
Transparency: The Treasury Department would have to disclose the terms of loans or other aid to companies, and a new Treasury inspector general would oversee the lending program.
(Bloomberg) Distressed Debt Balloons to Almost $1 Trillion, Nears 2008 Peak
The amount of distressed debt in the U.S. has quadrupled in less than a week to nearly $1 trillion, reaching levels not seen since 2008 as the collapse of oil prices and fallout from the coronavirus shutters entire industries across the globe.
In total, the tally has ballooned to $934 billion of U.S. corporate bonds that yield at least 10 percentage points above Treasuries and loans that trade for less than 80 cents on the dollar, according to data compiled by Bloomberg.
The coronavirus pandemic has caused the worst sell-off since the global financial crisis and deepened stress in credit markets. Driven by some of the lowest oil prices since the early 2000s, the amount of distressed bonds has surged to the highest level since April 2009.
Most of the distressed debt outstanding stems from U.S. energy companies battered by less travel demand and an all-out price war between Saudi Arabia and Russia. The capital-intensive industry, which financed its shale production largely through debt, suddenly faces the prospect of deeper losses after oil plunged below $20 a barrel. Last month, it traded above $50.
The amount of distressed debt tied to the oil and gas sector stands at over $161 billion, up from $128 billion a week ago. One of the biggest casualties has been Occidental Petroleum Corp., which has seen its funding costs skyrocket and its credit rating cut to make it the biggest fallen angel in the current downgrade cycle. Oxy’s bonds led the list of high-yield losers on Wednesday, with four of its issues among the top 10 decliners.
Energy isn’t alone. Every sector except utilities is under stress, with distressed ratios growing by double or triple digits. Telecommunications, retail, entertainment and healthcare industries make up the bulk of distressed debt. Retailers such as Neiman Marcus Group Inc. and theater chains such as AMC Entertainment Holdings Inc. have been hit hard as companies are forced to close and customers are told to stay home.
S. junk bonds entered distressed territory for the first time since the global financial crisis after spreads on the securities topped 1,000 basis points at the end of last week. The index move marks a period of turmoil in the credit markets as investors flee funds that buy all types of corporate debt.
(Bloomberg) Ford Becomes Largest Fallen Angel After S&P Downgrade to Junk
Ford Motor Co. was cut to junk by S&P Global Ratings as the coronavirus pandemic delivers a shock to the global auto industry and renders the carmaker the largest fallen angel to date.
S&P downgraded Ford’s credit rating one notch to BB+ and may cut it further, according to a statement. The move follows Moody’s Investors Service, which dropped its rating Ford for the second time in sixth months earlier Wednesday. Its two high-yield ratings will remove its $35.8 billion of debt from the Bloomberg Barclays investment-grade index at the end of the month.
Ford is one of many auto companies facing what Moody’s calls an unprecedented “credit shock,” with the coronavirus outbreak also posing a major threat to peers including General Motors Co. and Volkswagen AG. But Ford is particularly at risk because of the problems it’s been having with executing an $11billion restructuring that’s yet to improve performance.
“Ford is managing through the coronavirus crisis in a way that safeguards our business, our workforce, our customers and our dealers,” the company said in an emailed statement. “We plan to emerge from this crisis as a stronger company.”
This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The index is unmanaged and does not take into account fees, expenses, and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.
What a difference a few days makes. The investment grade credit market, like equities, went out with a whimper last week. On Monday, with the stimulus package in limbo, a deluge of supply pushed spreads out to their widest levels of the year, and the Bloomberg Barclays Corporate Index closed at 373. The next few days saw a much improved tone, and even in the face of a historically large primary calendar, spreads ratcheted in 71 basis points to close Thursday at 302. To put this 71 basis point move into context, it was larger than the yearly range of the corporate index for each of the preceding three years, and it took only three days; truly a stunning reversal. Even with the improved tone, through Thursday, the index was down -5.96% year-to-date while the S&P 500 was down -18.21%.
The primary market continues to bustle with activity and through Thursday it easily smashed the record for its busiest week in history. $98.9 billion had priced through Thursday eclipsing the previous weekly record of $74.8 billion, according to data compiled by Bloomberg. There are several deals in the market as we go to print on Friday morning which will push the final weekly total north of $100 billion. The bulk of the issuance this week was from highly rated issuers with “A” credit ratings but we started to see some BAA-rated issuers get into the mix as the week wore on. There is one lower quality BAA issuer in the market on Friday morning which is really the first of its kind in recent weeks so we will get an idea about how the market feels about lending to more challenged credit stories.
Investment grade credit was hit with major outflows for the fourth consecutive week. Flows for the week of March 19-25 were -$43.3bln according to data compiled by Wells Fargo. The four week total was nearly -$100bln. Year-to-date flows are now negative to the tune of -$28bln. We would like to think that with an improved tone that many of the panic sellers and leveraged fast money has exited a space that is more suited for strategic permanent capital. Improving flows can only help to further strengthen the tone in the credit markets.
This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The index is unmanaged and does not take into account fees, expenses, and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.
We hope this commentary finds you all safe and healthy. We wish we would be able to provide you more frequent commentary however things have been changing so rapidly that any update we could provide would have been deemed irrelevant by the time the ink dried on the page. We will seek to provide you with commentary weekly or as is relevant.
The investment grade credit market has just capped off one of the most volatile two week periods in the history of its existence. The impact of a global pandemic as well as the Saudi-Russia oil standoff has weighed heavily on risk assets of all stripes, and although high quality investment grade typically behaves as a safe haven, even it has not been able to escape the grasp of panicked sellers. Through the week ended March 20, the YTD gross total return on the Bloomberg Barclays US Corporate Index was -10.58%. For context, the S&P 500 was down -28.33% over the same time period. CAM does not provide intra-monthly performance for our portfolios but we are generally more conservatively positioned relative to the corporate index. Recall that CAM has a significant structural underweight on BAA-rated credit by capping our exposure at 30% while the index has a BAA concentration of nearly 50%. CAM also targets a minimum rating of A3 for its portfolio. In a risk off panic, such as the one we have experienced as of late, it is BAA-rated debt that typically underperforms relative to A-rated debt and that has been consistent with what the market has experienced so far in 2020. Year-to-date, A-rated credit has outperformed BAA-rated credit as spreads on the A-rated portion of the index have widened 270 basis points while BAA-rated credit has underperformed to the tune of 46 basis points, having widened 316 basis points thus far in 2020. The AAA/AA portion of the corporate index has held up even better, having outperformed the BAA-rated portion of the index by 126 basis points year to date on a spread basis. To be sure, a pandemic driven global recession is not bullish for investment grade credit, however, it is important to remember that we are talking about high quality investment grade rated companies. This portion of a portfolio is designed to be the ballast that, over time, will reduce volatility and correlations with other asset classes in the context of a well-diversified portfolio. A recession is not good for any asset class and there will be some investment grade companies that are more affected than others. By and large the majority of these companies will see themselves through to the other side and the vast majority of companies will continue to pay interest and debts owed to bondholders. It is also important to remember that, in the framework of a capital structure, bondholders are ahead of equity holders as it is the bondholders that have first claim on the assets of a company. We are already seeing numerous companies change their behavior by suspending share buybacks and cutting dividends in order to protect their balance sheets so that they can continue to make good on their financial obligations that are not negotiable – payments to bondholders.
As far as our portfolio positioning is concerned, we are not infallible and we have some credits that have been impacted by the economic consequences of the pandemic. We are closely monitoring these situations as we always do. We are fortunate in that we have zero exposure to gaming, lodging, leisure or restaurants, as these have been particularly hard hit by the pandemic. We have some exposure to the energy sector but we are materially underweight relative to the corporate index. We have some exposure to airlines but no exposure to unsecured bonds – our only exposure to airlines is through bonds that are secured by the aircraft themselves. Our high quality bias and our bottom up research process leaves us feeling positive about the positioning of our portfolio relative to the index and we are constantly monitoring the portfolio for opportunities to better position, which for us usually means to more conservatively position.
Market Recap
Remarkably, the investment grade primary market remains alive and well as the week of March 16-20 ended up as the third busiest of all time with 23 borrowers bringing over $62bln in new debt. This flurry of issuance was important for the psyche of the market in our view as it once again proved that the investment grade market is never closed to high quality issuers. This was true during the depths of the financial crisis and it is true now. So why, may you ask, would issuers choose to print deals amid such volatility? First, it is really just the prudent thing to do if a company has access – faced with an uncertain near term economic outlook; it makes sense to bolster the balance sheet. Second, due to the drop in Treasuries, debt remains cheap. Take Coca-Cola for example, which was able to issue 10yr debt with a coupon of 3.45% on Friday. That is a very reasonable interest rate when viewed through a historical context. It is also reasonable compensation for investors who are faced with declining yields throughout the world.
Flows have not been the friend for credit investors with long time horizons these past two weeks and the flows themselves have been an even bigger driver of performance than the pandemic in our view. Outflows from IG credit for the week of March 12-18 were an eye-watering -42.7bln according to data compiled by Wells Fargo. This represents the largest outflow on record and is nearly 5x larger than the previous record for a weekly outflow. Investment grade credit is liquid, especially compared to the majority of other fixed income products, such as municipals, but it is not liquid enough to withstand an outflow of this magnitude without serious dislocation, and that is exactly what occurred over the past week. Liquidity for investment grade was easily as bad as it has been since the financial crisis and quite possibly worse based on the opinion of our team at CAM. To be clear, yes the pandemic will weigh on credit metrics for many IG companies, but the underperformance of the IG market over the past week was much more about flows than concerns about creditworthiness. This was panic selling plain and simple. If the market gets to a point where flows are positive or even neutral then the path of least resistance is tighter spreads. The dislocation has created opportunity for committed investment grade buyers especially at the front end of the curve as you can now purchase the 5-6-7 year bonds of some issuers at yields that are greater than their bonds that mature at 10yrs and beyond.
The Federal Reserve continues to act aggressively and decisively as it announced support for numerous market segments on Monday morning. Of particular interest to us is that the Fed will now be buying investment grade rated corporate bonds. The Fed will operate a Primary Market Corporate Credit Facility and a Secondary Market Corporate Support Facility. Through the Primary Facility the Fed will purchase IG rated corporate bonds with maturities of 4 years or less. Through the Secondary Facility, the Fed will purchase IG rated corporate bonds maturing in 5 years or less and it will also be providing liquidity for fixed income ETFs which should go a long way to correcting some of the price discovery problems we saw in the IG market last week. This package by the Fed had the immediate effect of driving IG credit spreads significantly tighter, but more importantly than that it gave the market some much needed confidence. The next step to instilling some semblance of calm into the capital markets would be the passage of a substantial relief package by the Senate. They failed to come to an agreement Sunday evening and for the second time Monday afternoon but we are hopeful that they will come to terms by the end of this week.
As we continue to navigate these turbulent times we wish the best for the health of you and your families. Thank you for your continued interest.
This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The index is unmanaged and does not take into account fees, expenses, and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.
Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$5.3 billion and year to date flows stand at -$22.9 billion. New issuance for the week was zero and year to date issuance is at $71.5 billion.
(Bloomberg) High Yield Market Highlights
U.S. junk bonds may pare losses Friday with stock futures higher and oil extending a recovery. But the asset class has lost the most in any month so far since 2008, and investors pulled billions of dollars of cash from funds.
Yet the junk-bond index has posted losses for 11 straight sessions, with 2.63% on Thursday alone. The asset class has lost 17.6% year-to-date and 16.46% in March, the biggest monthly loss since 2008
High-yield spreads widened 72bps Thursday to 976bps. Single-B spreads widened 78bps to 990bps. That’s very close to the 1,000bps that’s typically considered distressed
In less than two weeks, the amount of distressed debt in the U.S. has doubled to a half-trillion dollars as the collapse of oil prices and the fallout from the coronavirus shutters entire industries.
Junk-bond yields jumped 63bps to close at 10.75%, the highest since September 2009
Energy-bond yields surged to a new 20-year high of 23.69%, with the index losing more than 37% this month
High-yield bonds with more than $1.37b outstanding are trading above upcoming call prices, making it attractive for issuers to redeem the securities in the next three months. But that’s down 70% from the prior week, and the primary market hasn’t seen a deal price since March 4
Banks that agreed to help private equity firms and highly leveraged companies fund recent acquisitions may have to come up with billions of dollars of their own cash
to finance the deals if the market for risky debt remains shut.
Underwriters across Wall Street have committed to providing more than $30 billion to junk-rated companies by mid-year, according to data compiled by Bloomberg and people with knowledge of the matter who asked not to be identified because not authorized to speak publicly.
But with the markets for leveraged loans and high-yield bonds virtually shut since the Covid-19 pandemic triggered fears of a global recession, the banks now face the prospect that they might not be able to offload the risk before the takeovers are scheduled to close.
The exposure is a small fraction of the commitments they held heading into the 2008 financial crisis. Still, it could force banks to take losses or tie up capital for months just as
dozens of companies are drawing credit lines or seeking fresh financing to cope with the coronavirus fallout.
The deals run the gamut of sectors and geographies, ranging from an $11 billion financing for the leveraged buyout of ThyssenKrupp’s elevator unit in Europe to a $500 million debt deal for Culligan’s acquisition of water-filtration company AquaVenture.
Representatives for lead arrangers including Morgan Stanley, JPMorgan Chase & Co., Deutsche Bank AG, Bank of America Corp., Citigroup Inc. and Barclays Plc declined to comment.
For the vast majority of deals, the acquisitions themselves are not in doubt. If the banks are unable to syndicate the loans to institutional investors before closing, they are typically required to come up with the cash, and may try to offload the debt at a later date.
It was a difficult week for the Corporate Bond market as fear and uncertainty related to COVID-19, a precipitous drop in oil, and an inter-meeting rate cut by the U.S. Federal Reserve drove Treasuries lower and spreads wider.
When we look at the Investment Grade market the option adjusted spread on the Bloomberg Barclays US Corporate Index was 122 at month-end February 2020, while on Friday, March 13, 2020 it closed at 216. This was one of the quickest and most volatile spread moves in the history of the investment grade credit market.
(Source: Bloomberg)
There was a corresponding move lower in Treasuries across the board – this helped to mitigate some, but not all, of the impact of widening spreads.
(Source: Bloomberg)
To provide some context on the performance of the investment grade credit market, through the end of the day on Friday March 13, the Bloomberg Barclays US Corporate Index posted a YTD gross total return of -1.88%. Comparatively, the S&P 500 YTD gross total return was -15.73% (Source: Bloomberg). While we are not happy to see negative returns in the corporate bond market, the asset class has performed as expected during a period of extreme volatility, and it has held up materially better than equities and other risk assets.
CAM does not provide intra-monthly performance figures, however as of March 13, 2020 we note that CAM’s portfolio has the following defensive characteristics relative to the Index. CAM is significantly underweight in BBB rated corporate credit relative to the Index. CAM caps its exposure to BBB-rated credit at 30% while the Corporate Index’s exposure was 49.14% as of March 13. Interestingly, the BBB concentration of the Index is down slightly YTD but that is merely because some large issuers, like Kraft-Heinz, were downgraded from BBB to junk status – an example of the type of investment CAM seeks to avoid through its bottom up research process. The second and third major factors that will impact CAM’s performance relative to the Index relate to individual credit selection and avoidance of certain industries which have been particularly hard hit by COVID-19, such as Leisure. To be sure, we have individual credits within our portfolio that have been affected by both COVID-19 and the decline in the oil market and we are constantly monitoring and evaluating those situations through active management of the portfolio.
It was also an exceptionally difficult week for the High Yield market with a one-two punch of fear and uncertainty related to COVID-19 as well as a complete flush of the oil market due to the lack of an OPEC agreement. The option adjusted spread on the Bloomberg Barclays US Corporate High Yield Index spiked above 700 for the first time since the commodity fueled rout of 2016. The Index YTD gross total return was -8.84% through the end of Friday March 13 (Source: Bloomberg).
(Source: Bloomberg)
Again, CAM does not provide intra-monthly performance figures, but our High Yield portfolio has the following defensive characteristics relative to the Index. CAM had over 10% of its portfolio in cash at the start of the current sell-off in February and CAM is underweight, or zero weight, some sectors of the market that were particularly hard hit by this sell off, such as Oil Field services. To be sure, our portfolio’s gross total return was negative as of February 29, 2020, and subsequent drawdown has been widespread. We have a number of credits that have experienced increased volatility and as always we are closely monitoring those situations as well as all the credits in our portfolio. Currently, we are comfortable with the individual credit metrics of our holdings and we believe the overall portfolio is well positioned should the economy enter a recessionary environment. Our cash balance also affords us the ability to be opportunistic on behalf of our clients as those situations arise.
The High Yield market can be extremely volatile in times of stress. It is not as deep or as liquid as the Investment Grade credit market and that is one of the reasons that spreads can gap wider so quickly. The growth of ETFs has exacerbated this problem as they are often forced to sell in the face of investor liquidations. We would caution that during times like these it can be difficult to achieve favorable pricing when looking to sell a high yield security; and depending on your risk tolerance it can often be a good opportunity to buy. We ask that our investors continue to trust that we will professionally manage your portfolios with a long-term objective and through the extent of the current downturn to the best of our ability.
We believe it is important in times like these to remind our investors of our investment philosophy and process at CAM. While volatile markets present challenges as well as opportunities, the way we manage money remains very consistent. We are conservative investors of domestic corporate bonds with a “bottom-up value” investment discipline, stressing first and foremost the preservation of capital, with an important secondary focus on total return. We seek to deliver these results by identifying quality businesses that we are comfortable owning in all markets.
We take the responsibility of managing your money very seriously and we will always do our best to perform that task to the highest standard of care. We sympathize with our clients in uncertain times such as these and we hope that you and your families stay safe and healthy.
This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. High Yield bonds present risks specific to below investment grade fixed income securities. Valuation may result in uncertainties and greater volatility, less liquidity, widening credit spreads, and a lack of price transparency. Investments in fixed income securities may be affected by changes in the creditworthiness of the issuer and are subject to nonpayment of principal and interest. The value of fixed income securities also may decline because of real or perceived concerns about the issuer’s ability to make principal and interest payments. Past performance is not a guarantee of future results. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The Index is unmanaged and does not take into account fees, expenses, and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.
The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable, or that the investment decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.
Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.1 billion and year to date flows stand at $2.0 billion. New issuance for the week was $3.1 billion and year to date issuance is at $63.7 billion.
(Bloomberg) High Yield Market Highlights
It’s looking like a risk-off day in the junk-bond market as stock futures fall amid renewed concerns about the spread of the coronavirus outside China.
CAA yields, meanwhile, have crossed the 10% mark for the first time in three weeks.
Issuers are likely to remain on the sidelines Friday and the calendar is light, though Bausch Health is expected to emerge with a $3.25b junk-bond that’s part of a broader $8b refinancing
Yields rose 4bps to 5.13%, the biggest jump in three weeks though the index posted a modest gain of 0.018%
BA yields rose 4ps to 3.64%, single-B yields rose to 5%
(Bloomberg) Macy’s, Renault Add to Fallen Angel Fear With Downgrades to Junk
The credit-rating downgrades of Macy’s Inc. and Renault SA to junk status are rekindling fears among investors of a potential uptick in so-called fallen angels after a run of relative tranquility in the U.S. corporate bond market.
The American retailer and French carmaker each lost an investment-grade rating Tuesday, affecting billions of dollars of debt. They follow Kraft Heinz Co., the iconic U.S. packaged-food company, which was downgraded to junk by two credit raters last Friday as its turnaround shows little signs of progress.
Even though Macy’s and Renault were downgraded for idiosyncratic reasons and will still trade in investment-grade indexes unless another credit-rating company follows suit, their cuts bring back to the fore what had been a central concern among investors less than two years ago: That a slowing global economy could hamper companies’ ability to service their obligations, especially those that had taken on significant debt loads to finance deals.
While many firms took actions to reduce debt levels in 2019, several are still proving to be susceptible to ratings risk. Kraft Heinz alone, with around $21 billion of debt leaving the Bloomberg Barclays investment-grade index at the end of this month, nearly eclipses last year’s fallen angel volume of just under $22 billion, according to Bank of America Corp. strategists. Macy’s has about $8 billion of total debt, while Renault’s roughly $66 billion is predominantly denominated in euros and yen, according to data compiled by Bloomberg.
By year-end, the volume of fallen angels is likely to dwarf that of 2019, according UBS Group AG strategists led by Matthew Mish. They predict there could be as much as $90 billion of investment-grade debt downgraded to high yield this year. Guggenheim Partners has said as much as 20% of BBBs in the U.S., or $660 billion, will get cut to junk in the next downgrade wave.
(Reuters) U.S. labor market remains strong; manufacturing likely stabilizing
The number of Americans filing for unemployment benefits rose modestly last week, suggesting sustained labor market strength that could help to support the economy amid risks from the coronavirus and weak business investment.
There was encouraging news on the struggling manufacturing sector, with other data on Thursday showing factory activity in the mid-Atlantic region accelerated to a three-year high in February, likely as tensions in the 19-month trade war between the United States and China diminished.
But the coronavirus, which has killed more than 2,000 people, mostly in China, and Boeing’s suspension last month of the production of its troubled 737 MAX jetliner, grounded in March 2019 after two fatal crashes, continue to loom over the manufacturing sector.
Minutes of the Federal Reserve’s Jan. 28-29 meeting published on Wednesday showed policymakers “expected economic growth to continue at a moderate pace,” but expressed concern about possible economic risks from the coronavirus, which has also infected thousands globally.
“Manufacturing growth may be past its trough,” said Oren Klachkin, lead U.S. economist at Oxford Economics in New York. “However, looking ahead we continue to believe that activity will advance at a lackluster pace as global growth and trade policy headwinds are unlikely to significantly relent and the negative impact of the coronavirus will be felt via global supply chains interlinkages.”
(Bloomberg) Aecom Conference Cancellation May Increase Deal Rumblings
Reports on Aecom not attending two industrial conferences this week are being “seen as a positive indication that the company might be in later-stage negotiations for a deal,” Baird analyst Andrew Wittmann wrote in a note.
Baird confirmed that Aecom canceled from a Citi conference, and is not in attendance at a Barclays conference
Wittmann noted previous reports that Aecom had been approached by WSP Global regarding a deal
Corporate credit spreads were wider across the board this week but lower Treasury rates were the bigger story and more than offset the move wider in spreads. After closing the week prior at a spread of 96, the Bloomberg Barclays Corporate Index closed Thursday evening at a spread of 97, but spreads are weak and drifting wider as we go to print on Friday morning. Global risk markets are skittish among renewed fears that coronavirus may not be adequately contained. Frankly, we are a bit mystified at how easily markets dismissed virus fears to this point. It is not so much the virus itself but the fact that the second largest economy in the world has been closed for business for the better part of a month. This has serious consequences for growth across the globe due to the interconnected nature of the global economy. Treasuries were volatile over the course of the past week. The 10yr closed at 1.58% last Friday and it is wrapped around 1.45% as we go to print, coincident with its lowest levels of 2019. Meanwhile, the 30yr Treasury fell as much as 7 basis points on Friday morning to an all-time low of 1.89%.
The primary market had a very solid week especially considering it was shortened by one day due to a market holiday on Monday. Weekly issuance topped $35bln pushing the month-to-date total north of $86bln. Year-to-date issuance is now closing in on $220bln which is ahead of 2019’s pace by more than +23% according to data compiled by Bloomberg. Issuance is off to a strong start in 2020 but we would expect this pace to slow in the second half of the year as the presidential election approaches.
According to Wells Fargo, IG fund flows during the week of February 13-19 were +$7.4bln. This marks one of the strongest starts to a year on record. Year-to-date IG fund flows have now eclipsed $71bln.
Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $2.4 billion and year to date flows stand at $3.7 billion. New issuance for the week was $12.4 billion and year to date issuance is at $60.6 billion.
(Bloomberg) High Yield Market Highlights
Zayo Group Holdings Inc. is readying more than $3 billion of junk bonds, one of the biggest buyout financings since 2018 that may test investor appetite for riskier debt in the CAA tier.
The new notes, along with a leveraged loan package totaling more than $5b, will finance Zayo’s buyout by private equity firms Digital Colony Partners and EQT Partners
The bond portion of the offering may include $1b of seven-year secured notes and $2.1b of unsecured eight-year bonds, and marketing begins next Tuesday
It’s hitting the market after two straight weeks of gains for junk- bonds, which looks set to continue on Friday as stock futures edge higher and oil climbs
Triple C rated bonds have lagged the broader high-yield market so far this year, returning 0.942% through Thursday while the larger junk universe rose 1.11%
Yet CAA index yields have still fallen to a nine-month low of 9.71% and posted positive returns for three consecutive sessions this week. Other issuers, including Hecla Mining, have also priced debt in this rating range
Investors have plenty of cash to put to work too after corporate high-yield funds reported inflows
BA and single-B yields have fallen to a three- week low of 3.59% and 5%, respectively
BAs have gained for ten straight sessions, taking year-to-date returns to 1.175%
(Bloomberg) Natural Gas Tumbles to 4-Year Low on ‘Epic’ U.S. Demand Loss
Natural gas futures sank to a four-year low as the latest U.S. forecasts all but eliminated bulls’ hopes for a late-winter cold push.
Frigid weather in parts of the Midwest and West this week won’t stick around for long, according to Commodity Weather Group LLC. Mild temperatures are poised to blanket the eastern half of the country in late February, a shift from previous outlooks that showed a lingering chill.
Unusually warm winter weather has wreaked havoc on gas demand, allowing an onslaught of supply from shale basins to overwhelm the market. American liquefied natural gas cargoes, a key outlet for production, are at risk of being curtailed as the coronavirus outbreak in China curbs consumption in the world’s second-largest economy. The resulting collapse in global gas prices is squeezing profits for U.S. exporters.
“The lack of heating demand is epic. It’s a worst-case scenario,” John Kilduff, founding partner at hedge fund Again Capital LLC in New York, said by phone. “We continue to have a very weak demand environment that’s persisted all winter.”
The gas glut has been especially severe in the Permian Basin, where local prices for March delivery have dropped below zero. Output from the West Texas and New Mexico shale play, where gas is extracted as a byproduct of oil drilling, is increasing so fast there isn’t enough space on pipelines to take it away.
(Reuters) T-Mobile-Sprint merger wins approval from U.S. judge
T-Mobile edged closer to a takeover of Sprint Corp after a federal judge on Tuesday approved the deal, rejecting a claim by a group of states that said the proposed transaction would violate antitrust laws and raise prices.
During a two-week trial in December, T-Mobile and Sprint argued the merger will better equip the new company to compete with top players Verizon Communications Inc and AT&T Inc as the third-largest U.S. wireless carrier, creating a more efficient company with low prices and faster internet speeds.
Finalizing a deal will be a boon to Japan’s Softbank Group Corp, Sprint’s controlling shareholder, as the conglomerate offloads a troubled asset that has lost subscribers at a faster rate and as it seeks to secure funding for a second Vision Fund.
Sprint and T-Mobile said in a statement that they would move to finalize the merger, which is still subject to closing conditions and possible additional court proceedings.
A spokesman for the California Public Utilities Commission, the last regulatory body to decide on the merger, said its review of the deal is expected to conclude in July.
(Wall Street Journal) MGM Resorts Chief Set To Step Down
MGM Resorts International Chief Executive Jim Murren will leave the global casino operator after its board picks his successor, the company said.
Mr. Murren, who is also stepping down as chairman, has led the company since 2008. He is leaving before his contract expires at the end of 2021.
“When I thought through how I could best serve MGM going forward, I thought it was pretty clear that a leader should help lead a company into the next decade or two,” Mr. Murren said on a conference call with Wall Street analysts on Wednesday. “I wanted to make sure the board had the time, which it will use promptly, to do a robust search and find my successor.”
MGM Resorts, which has a market value of $17 billion, didn’t give a firm date for Mr. Murren’s departure. The board has formed a search committee to find a new CEO, the company said. Mr. Murren said he anticipates being on MGM Resorts’ next quarterly earnings call, in about three months.
The company has sold off much of its real estate, including deals with MGM Growth Properties, a real-estate investment trust MGM Resorts spun off in 2016, and other property deals. The company’s “asset-light” strategy is intended to pull cash out of the company’s valuable real estate, including prime locations on the Las Vegas Strip.
MGM Resorts’ remaining company-owned real estate includes MGM Springfield in Massachusetts, a 50% stake in CityCenter in Las Vegas and more than half of MGM Growth Properties.
Spreads for corporate credit were generally tighter on the week. After closing the week prior at a spread of 102, the Bloomberg Barclays Corporate Index closed Thursday evening at a spread of 96. The tone at mid-day Friday is mixed as risk markets continue to weigh the impact of coronavirus. Treasuries were volatile over the course of the past week. The 10yr closed at 1.51% last Friday which was its lowest level of the year. The benchmark rate then closed as high as 1.65% this Wednesday and is now fluttering around 1.58% on Friday afternoon.
The primary market had a fair week as corporate borrowers issued over $21bln in new debt. 2020 issuance has eclipsed $154bln according to data compiled by Bloomberg.
According to Wells Fargo, IG fund flows during the week of January 30-February 5 were +$9.0bln making it the largest 5-week total for fund flows on record. This brings year-to-date IG fund flows to over $36bln. Both domestic and global investors continue to favor U.S. credit markets as one of the last bastions for reasonably safe yield.
