Category: Insight

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.1 billion and year to date flows stand at $1.2 billion.  New issuance for the week was $12.5 billion and year to date issuance is at $48.2 billion.

(Bloomberg)  High Yield Market Highlights 

• New issues have been well-received
• Yet it’s looking like a risk-off day as stock futures slide on renewed fears of the spread of the coronavirus
• Junk- bond yields have fallen 24bps in the past week. At 5.28%, they’re just 30bps off the 5.5-year low hit on Jan. 21
• Spreads have tightened 34bps over the same period to 356bps over Treasuries
• Even riskier debt has rallied with yields on CAAs falling below 10% for the first time in two weeks to 9.95%
• Junk- bond investors are pouring money back into exchange-traded funds again
• HYG and JNK, the two biggest high-yield ETFs, reported a combined inflow of $325m yesterday after $630m the previous day

(New York Times)  Some Takeaways From Trump’s State of the Union Address

• President Trump framed his third year in office as an unmistakable success and his fourth as more of the same.
• A partisan atmosphere loomed over the House floor from the very start of Mr. Trump’s speech, when Republican lawmakers chanted “four more years” after the president stepped up to the rostrum. The hostility carried through to the end, when House Speaker Nancy Pelosi ripped up a copy of the address after he finished delivering it.
• He proclaimed that the economy was setting records, that American enemies were on the defense, and that the American spirit had been renewed.
• “In just three short years, we have shattered the mentality of American decline and we have rejected the downsizing of America’s destiny,” he said. “We are moving forward at a pace that was unimaginable just a short time ago and we are never going back.”
• Trump dived into the state of the economy at the top of the speech, making broad declarations about tax cuts, deregulation and the renegotiation of the North American Free Trade Agreement, the new version of which he signed into law last week.
• Trump addressed two pieces of potential health care legislation that remain a top priority for both parties in the coming months: surprise billing and prescription drugs.
• After signing an initial trade deal with China last month, Mr. Trump pointed on Tuesday to the tariffs he has imposed on the country in order to take on its “massive theft of America’s jobs.” He said that “our strategy has worked.”
• Trump’s attention on foreign policy later swung to the Middle East, when he highlighted two people his administration killed in recent months: Abu Bakr al-Baghdadi, the leader of the Islamic State, and Maj. Gen. Qassim Suleimani, the powerful Iranian commander.

(Wall Street Journal)  Ford’s Operating Income Plunges

• Ford Motor Co. said fourth-quarter operating income sank by two-thirds, and it issued a lower-than-expected profit outlook for 2020, the latest signs of trouble for Chief Executive Jim Hackett’s turnaround plan.
• Ford said operating income for the October-to-December period was $485 million, down from $1.5 billion a year earlier. Earnings per share adjusted for one-time items were 12 cents, well short of analysts’ estimate of 17 cents.
• The company’s financial standing has continued to weaken under Mr. Hackett, who was brought in nearly three years ago to revive the auto maker’s profit growth and give it a stronger vision for the future.
• Revenue for the full year dropped 3% to $155.9 billion.
• “Financially, it wasn’t OK,” finance chief Tim Stone said of the 2019 results during a discussion with reporters at Ford’s headquarters. “Strategically. . .I think we made strong progress.”
• Ford pinned the shortfall in part on lower production volumes in North America stemming from problems with launches of key models, including the redesigned Explorer and Escape sport-utility vehicles and its Super Duty pickup truck. It also cited higher warranty costs and a bonus payout to United Auto Workers that totaled about $600 million.
• The auto maker forecast operating profit this year of $5.6 billion to $6.6 billion, compared with $6.38 billion last year. That equals an earnings-per-share range of 94 cents to $1.20, which is lower than the average analysts’ estimate of $1.30, according to S&P Global Market Intelligence.
• Hackett’s strategy to revitalize Ford — which includes a multiyear, multibillion-dollar restructuring — hasn’t returned the company to earnings growth or restored profitability overseas, where Ford is closing plants and shedding thousands of workers to cut costs.
• “Financially, the company’s 2019 performance was short of our original expectations, mostly because our operational execution — which we usually do very well — wasn’t nearly good enough,” Mr. Hackett said. “We recognize, take accountability for and have made changes because of this.”
• In a bright spot for the year, Ford trimmed its losses in overseas markets. It halved its China loss, to $771 million from $1.55 billion, which it attributed to cost cutting. In Europe, the company had a $47 million loss for the year, down from a $398 million loss a year earlier.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$2.7 billion.  New issuance for the week was $8.2 billion and year to date HY is at $35.7 billion.

(Bloomberg)  High Yield Market Highlights

• S. junk-bonds are heading for their second weekly loss amid fears about the spreading coronavirus from China. Investors pulled $2.7 billion from high-yield retail funds, the biggest cash withdrawal in almost six months, and exchange-traded funds are continuing to leak cash.
• Junk-bond returns turned negative for the second time this week posting a loss of 0.16% Thursday. The CAA index posted losses of 0.17% and is also set for its second weekly declines
• Those falls may extend Friday with stock futures lower. Oil prices are higher this morning, but fell to an almost six-month low on Thursday, weighing on the high-yield energy index
• Junk bond yields rose 9 basis points to 5.49%, the biggest weekly jump since October, while spreads widened 11 basis points to 382 basis points over Treasuries
• Single-B yields jumped 10 basis points to 5.46%, while CAA yields rose 9 basis points to 10.32%
• The two biggest high-yield ETFs — HYG and JNK — saw a combined outflow of $547 million in the last session as outflows continue

(Business Wire)  Arconic Reports Financial Results

• Arconic Inc. reported fourth quarter 2019 and full year 2019 results. The Company reported fourth quarter revenues of $3.4 billion, down 2% year over year. Organic revenue was up 1% year over year on growth in the aerospace, packaging and industrial markets and favorable product pricing, largely offset by weakness in the automotive, commercial transportation, and building and construction markets.
• Operating income excluding special items was $444 million, up 37% year over year, driven by net cost reductions, favorable product pricing, and favorable aluminum and raw material costs, partially offset by lower volumes in automotive and commercial transportation. Full year 2019 operating income was $1.0 billion versus $1.3 billion in the full year 2018. Operating income excluding special items for full year 2019 was $1.8 billion versus $1.4 billion in the full year 2018, driven by favorable product pricing; net cost reductions; volume growth in aerospace, packaging and commercial transportation markets; and favorable aluminum and raw material costs. These impacts were partially offset by unfavorable product mix.
• Arconic Chairman and Chief Executive Officer John Plant said, “In 2019, the Arconic team delivered improved revenue, adjusted operating income, adjusted operating income margin, adjusted free cash flow and adjusted earnings per share. Arconic’s 2019 return on net assets improved by 450 basis points year over year to 13.7%.”

(Bloomberg)  Fed Holds Main Rate as Powell Stresses Need to Hit 2% Inflation

• The Federal Reserve kept its key interest rate unchanged and continued to signal policy would stay on hold for the time being, while stressing the importance of lifting inflation to officials’ target.
• The central bank also made a technical adjustment to the rate it pays on reserve balances and said it would extend at least through April a program aimed at smoothing volatility in
  money markets.
• “We believe monetary policy is well positioned to serve the American people by supporting continued economic growth,” Chairman Jerome Powell told a press conference Wednesday in Washington.
• Officials kept the target range of the benchmark federal funds rate at 1.5% to 1.75% and called that stance “appropriate to support sustained expansion of economic activity.”
• S. stocks erased gains while yields on the 10-year Treasury note declined and the dollar fluctuated. Traders extended bets the Fed would cut rates toward the end of this year.
• “The Fed has made it clear that the barriers to move in either direction are quite high,” said said Daniel Ahn, the chief U.S. economist at BNP Paribas. “But we believe the wall
  for a cut is lower than the wall for a hike.” He detected a “dovish tilt” in Powell’s efforts to stress the Fed was uncomfortable with inflation running persistently too low.
• Policy makers changed their statement to say that the current stance of monetary policy is appropriate to support “inflation returning to the committee’s symmetric 2% objective.” Previously they had said policy was supporting inflation “near” the goal.
• Powell explained in his press conference that the change was made to send “a clearer signal” that the committee was not comfortable with inflation running persistently below target. “We wanted to underscore our commitment to 2% not being a ceiling,” he said.
• Their preferred gauge of price pressures — the personal consumption expenditures price index — rose 1.5% for the 12 months ending in November. Powell said inflation was expected to move closer to 2% over the next few months thanks to so-called base effects, “as unusually low readings from early 2019 drop out of the calculation.”

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.9 billion.  New issuance for the week was $13.2 billion and year to date HY is at $27.4 billion.

(Bloomberg)  High Yield Market Highlights

• S. junk bonds posted a third straight day of losses as issuance neared $32 billion, the most for a January in more than a decade.
• Borrowers are rushing to take advantage of low rates before the window closes
• Markets may see support today as stock futures climb on economic data and investors set aside concerns about a deadly virus from China hampering growth
• Yields rose 8bps to 5.17%, a three week high, as stocks fluctuated and oil dropped to an eight-week low
• Spreads widened 8bps to +340, a six week high
• Energy yields jumped 30bps to 8.56%, the biggest increase in more than five months
• Energy index posted a loss of 0.675%, the biggest loss since October,
• CAA yields were back at 10%, returns were negative for a third day
• Retail funds have reported three straight weeks of inflow, the longest streak in almost three months

(Wall Street Journal)  Glut Pushes Natural Gas Prices Below $2 

• The price of natural gas typically rises this time of year as temperatures plunge and homeowners dial up their thermostats. Instead, the price of the heating and electricity-generating fuel has dropped to multiyear lows.
• On Tuesday, natural-gas futures fell below $2 per million British thermal units to their lowest level in nearly four years, highlighting how a persistent glut has buffeted energy investors and producers. This winter’s mild weather has joined an oversupply of the commodity to push natural-gas prices down to levels not seen since March 2016. On Tuesday, futures fell 5.4% to $1.895 per MMBtu.
• The shale boom, spurred by horizontal drilling and hydraulic fracturing techniques, has transformed the U.S. energy industry and flooded the market with oil and natural gas in recent years. The decline in prices has hit shares of energy companies, raising calls for them to curtail production. But few analysts see signs of the glut abating soon: The U.S. Energy Information Administration predicts dry natural-gas production in the U.S. will rise by 2.9% in 2020.
• The fall in prices has come faster than analysts and traders had predicted. Colder winter temperatures typically drive up prices as homeowners demand more fuel to heat their houses. However, warmer-than-expected weather this season has helped drive prices down, adding to investors’ grim outlook.
• On Tuesday, oil-field services company Halliburton Co. said it swung to a loss in 2019 on a decline in revenue that it blamed on diminished drilling onshore in North America, which in turn was due to low commodity prices.
• “Gas prices in the U.S. are below break-even levels,” Chief Executive Jeffrey Miller told analysts and investors. Mr. Miller said that he expects a 10% reduction in spending among the oil-field services company’s customers in North America, with the bulk of those cuts coming in gas-producing regions. Halliburton has been idling equipment to match customers’ reduced needs, he said.

(Bloomberg)  Junk Bond Volume Nears $30 Billion in Refi Frenzy

• The U.S. junk-bond market is on track for its busiest January in at least a decade with volume poised to exceed $30 billion as companies rush to refinance at cheap rates.
• At least seven issuers are looking to sell debt on Thursday after an already hectic pace. Those deals will potentially take new issue volume to $30.8 billion, the most for any January since 2006, according to data compiled by Bloomberg
• Companies are mostly selling debt to refinance. Some of those issuers are replacing loans with bonds
• Garda World Security, owned by private-equity firm BC Partners, is marketing $400 million 7 year senior secured notes to take out a term loan
• It’s at least the third company to do so this month amid more favorable pricing — in some cases — for bonds
• Another BC Partners portfolio company, Presidio, priced secured bonds at a cheaper rate than loans last week
• Grocer Albertsons also sold $2.35 billion of bonds on Wednesday to refinance loans
• The primary market appears open to the deals in the lowest CAA junk rating tier. Community Health and Altice are in market with bonds that have at least one rating in that range
• Junk-bond spreads widened to a two-week high on Wednesday, and may weaken more as stocks fall and oil prices fall to an almost eight-week low of $55.51 a barrel

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $2.0 billion.  New issuance for the week was $8.1 billion and year to date HY is at $14.2 billion.

(Bloomberg)  High Yield Market Highlights

• Triple C-rated debt is leading the rally in high-yield as returns for the year jump to 1.23% and yields on the lowest tier of junk fall below 10% for the first time in seven months.
• Triple C spreads tightened 10bps to 823bps over Treasuries, according to Bloomberg Barclays index data. That’s a more than five-month low and extends a recovery from over 1,000 bps in November
• Energy is powering CCC. The energy index yield fell to 7.99%, a new six-month low
• Junk-bond yields dropped to 5.01%, just 5bps off the 5.5-year low of 4.96%. They may fall further as stock futures rise amid easing trade tensions and a solid start to the earnings season. Oil is also up this morning to almost $59 a barrel

(Bloomberg)  Encompass Health Boosts Fiscal Year Operating Revenue View

• Encompass Health boosted its operating revenue forecast for the full year; the guidance midpoint met the average analyst estimate.
• Encompass sees FY operating revenue $4.59 billion to $4.61 billion, saw $4.5 billion to $4.6 billion, estimate $4.59 billion (range $4.57 billion to $4.61 billion)
• Encompass sees FY adjusted EPS from continuing operations $3.90 to $3.94, saw $3.71 to $3.85
• Encompass sees FY adjusted Ebitda $962 million to $967 million, saw $940.0 million to $960.0 million, estimate $952.2 million (range $942.0 million to $957.0 million)
• Encompass sees 2020 Adjusted EPS Continuing Operations $3.50 to $3.72, Est. $3.68

(Bloomberg)  WSP Is Said to Approach Engineering Firm Aecom About Deal

• Canada’s WSP Global Inc. has approached rival engineering services firm Aecom about a possible deal, according to people familiar with the matter. There’s no guarantee that the overture will lead to a transaction, said the people, who asked to not be identified
  because the matter isn’t public.
• Aecom, which had been targeted by activist investor Starboard Value last year, agreed in October to sell its management services division to a group of private equity firms
  for $2.4 billion.
• The potential acquisition would give WSP more exposure to the U.S. and could lead to cost savings of about $200 million, Deutsche Bank analyst Chad Dillard wrote in a note to clients Tuesday.
• Aecom’s services include consulting, planning, architecture, engineering and construction management, according to its website. While it has a growing backlog thanks to a steady stream of government and infrastructure contracts, profits have stagnated in recent years due to inefficiencies and construction contract
  losses, according to a Bloomberg Intelligence report in December.

(Wall Street Journal)  MGM, Blackstone Strike Casino Deal

• MGM Resorts International said a joint venture that includes Blackstone Group Inc. would buy the real estate of the MGM Grand and Mandalay Bay resorts and casinos on the Las Vegas Strip, in a deal valuing the properties at $4.6 billion.
• The deal values MGM Grand’s real-estate assets at about $2.5 billion and Mandalay Bay’s at just over $2 billion.
• Blackstone will own slightly less than half of the properties through the private-equity and real-estate giant’s nonlisted real-estate investment trust, while MGM Growth Properties LLC, a publicly traded REIT, will own the remainder.
• MGM Resorts spun off MGM Growth Properties in 2016 and still controls the REIT, which owns some MGM real estate including Mandalay Bay’s.
• MGM Resorts expects to receive cash proceeds of about $2.4 billion from the deal, as well as $85 million in MGM Growth partnership units.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.9 billion and new issuance for the week $6.1 billion.

(Bloomberg)  High Yield Market Highlights

• S. high-yield bonds are set for the longest streak of weekly gains since the first half of 2019 as the global hunt for yield continues to bolster the market.
• The Bloomberg Barclays U.S. high-yield index has posted gains each day this week as yields held steady at 5.11% through Thursday, one basis point lower on the week.
• The high-yield energy index weighed on performance as oil prices lost steam earlier in the week. The securities posted losses for the second consecutive day on Thursday, losing 0.13%; yields on energy bonds ended at 8.12%.
• Even while oil prices dropped back to levels before the Mideast tensions began, issuance activity was driven by energy borrowers.

(Reuters)  Fed focuses on repo market exit strategy after avoiding year-end crunch 

• Wall Street’s worst fears of a year-end funding squeeze never materialized thanks in large part to the quarter-trillion dollars the Federal Reserve stuffed into the market to ensure nothing became gummed up.
• The question now, though, is what it will take for the U.S. central bank to withdraw from its daily liquidity operations in the $2.2 trillion market for repurchase agreements, or repos – after it became a dominant player in a short three months.
• “The repo operations are a band-aid, but the wound isn’t healed fully,” said Gennadiy Goldberg, an interest rate strategist at TD Securities.
• The New York Fed began injecting billions of dollars of liquidity into the repo market in mid-September, when a confluence of events sent the cost of overnight loans as high as 10%, more than four times the Fed’s rate at the time. A month later, the Fed moved to expand its balance sheet – and boost the level of reserves – by snapping up $60 billion a month in U.S. Treasury bills.
• The Fed will continue pumping tens of billions a day into the repo market through at least the end of January. Its ability to exit from the repo market after that time will depend on how long it takes the central bank to make the balance sheet large enough so there are adequate reserves in the banking system – and the repo operations are no longer needed.
• “It seems implausible to me that the Fed will be able to stop their repo operations by the end of January,” said Mark Cabana, head of U.S. rates strategy at Bank of America Merrill Lynch.

(Company Report)  Tenneco Inc. plans to streamline its leadership structure

• The Company announced that Brian Kesseler, Tenneco’s Co-Chief Executive Officer and a member of the Board of Directors, will assume the newly consolidated role of Chief Executive Officer of Tenneco. Kesseler will oversee the operations of the New Tenneco business, in addition to continuing to oversee the DRiV business. Roger Wood will no longer serve as Tenneco’s Co-Chief Executive Officer and is stepping down as a Director of the Company, effective immediately.
• Jason Hollar will continue to serve as Executive Vice President and Chief Financial Officer of Tenneco overseeing the financial organizations of both DRiV and New Tenneco.
• “On behalf of the Board of Directors, I would like to thank Roger for his dedication to Tenneco during a critical time for our company,” said Gregg M. Sherrill, Chairman of the Tenneco Board. “We appreciate his service and contributions in leading the New Tenneco business as we began the integration of the Federal-Mogul acquisition. As we pursue the separation of our businesses, the Board determined that consolidating our leadership structure now will help improve Tenneco’s operational efficiency and achieve our near-term financial performance objectives. We wish Roger the very best in his future endeavors.”
• During 2020, Tenneco will be focused on the execution of its accelerated performance improvement plan to facilitate the expected separation of the businesses.
• As previously discussed in the Company’s third quarter release on October 31, 2019, current end-market conditions are affecting the Company’s ability to complete a separation in the mid-year 2020 time range. The Company expects that these trends will continue throughout this year. The Company is ready to separate the businesses as soon as favorable conditions are present.