Category: Insight

08 Dec 2017

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.0 billion and year to date flows stand at -$17.0 billion.  New issuance for the week was $11.4 billion and year to date HY is at $267 billion, which is up 26% over the same period last year. 

(Bloomberg)  High Yield Corporates Stalled as Monthly Returns Again Flat

  • High yield corporate bonds, much like their high grade counterparts, continue to move sideways in 4Q to a U.S. Congress undertaking tax reform for stimulus clues. Communications sector spreads moved wider for the year, while miners and other basic industries remain the best performers for 2017.
  • High yield corporates continue to lack direction with the Bloomberg Barclays U.S. High Yield Index total returns almost flat for November and 4Q, much like the investment grade counterpart. Corporate bond gains stalled as interest rates rose under the Federal Reserve’s less accommodative bias, while credit spreads near their tightest in three years exhausted momentum to narrow further, awaiting cues from a Congress debating tax reform.
  • High yield gained a solid 7.2% year-to-date in line with the five year average. CCC rated debt has led gains, with 10% in total returns as stronger commodity prices and refinancing-friendly interest rates have benefited distressed issuers.
  • Corporate junk spreads retraced early November trends to end just 6 bps wider for the month as gauged by the Bloomberg Barclays U.S. High Yield index OAS to Treasuries. Communications, the most indebted sector at 20% of the index struggled again, averaging spreads that were 41 bps wider for the month. It’s now the only sector trading at wider spreads than at the start of 2017. At the other end, metals and mining issuers led basic industries sector spreads to 150 bps tighter for the year on rising commodity prices.
  • Bonds of Frontier Communications, among the largest issuers in the sector, averaged almost 8% total return losses in November as the company continues to struggle with high debt loads following the acquisition of Verizon assets early last year. Frontier returns have fallen 13% year-to-date.

(Wall Street Journal)  Cineworld to Buy Regal in $3.6 Billion Movie Theater Deal

  • British movie theater operator Cineworld Group PLC has agreed to buy American counterpart Regal Entertainment Group for $3.6 billion, creating the world’s second-largest cinema operator.
  • Cineworld said the deal would give it a meaningful footprint in the U.S.—the biggest box office market—and create a company with more than 9,000 screens.
  • It added that the combined group’s scale will help it mitigate any volatility in particular markets and match the global nature of rivals, including industry leader AMC Entertainment Holdings Inc.


  • Optum, a leading health services company, and DaVita Medical Group, one of the nation’s leading independent medical groups and a subsidiary of DaVita Inc. are combining. The agreement, entered into on December 5, 2017, calls for Optum to acquire DaVita Medical Group for approximately $4.9 billion in cash. The transaction is expected to close in 2018 and is subject to regulatory approval and other customary closing conditions.
  • DaVita Medical Group will join with Optum’s physician-led primary, specialty, in-home, urgent- and surgery-care delivery services business. The combination will improve care quality, cost and patient satisfaction through integrated ambulatory care delivery systems enabled by information technology and supportive clinical services. Optum’s data, analytics, technologies and clinical expertise will help DaVita Medical Group physicians deliver even higher quality care more effectively to the patients they serve. With medical groups in California, Colorado, Florida, Nevada, New Mexico and Washington, DaVita Medical Group will expand the market reach of Optum’s strategic care delivery portfolio, including Surgical Care Affiliates, MedExpress and HouseCalls. Patients will further benefit from the sharing of best practices across both organizations.
  • “I am so proud of the DaVita Medical Group accomplishments, including our excellent clinical outcomes as reflected in our star ratings performance, our strong emphasis on growing physician leaders, our teammate engagement and advancing the care model,” said Kent Thiry, chairman and CEO of DaVita Inc.
  • “Combining DaVita Medical Group and Optum advances our shared goal of supporting physicians in delivering exceptional patient care in innovative and efficient ways while working with more than 300 health care payers across Optum in ways that better meet the needs of their members,” said Larry C. Renfro, CEO of Optum.

(Reuters)  Toshiba, Western Digital aiming to settle chip dispute next week

  • Toshiba Corp and Western Digital Corp have agreed in principle to settle a dispute over the Japanese firm’s plans to sell its $18 billion chip unit and aim to have a final agreement in place next week, sources familiar with the matter said.
  • The board of the embattled Japanese conglomerate approved a framework for a settlement on Wednesday, one of the sources said.
  • The potential for Western Digital – Toshiba’s partner in its main semiconductor plant and jilted suitor in the auction – to block a deal has been seen as the main obstacle to the planned sale of the unit to a Bain Capital-led consortium.
  • The settlement under discussion calls for Western Digital to drop arbitration claims seeking to stop the sale in exchange for Toshiba allowing it to invest in a new production line for advanced flash memory chips that is slated to start next year, two sources said.
01 Dec 2017

CAM High Yield Weekly Insights

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.3 billion and year to date flows stand at -$15.9 billion. New issuance for the week was $6.3 billion and year to date HY is at $255 billion, which is up 22% over the same period last year.

(Bloomberg) Junk Investors Welcomed Debut Offerings as Yields Held Steady

  • Junk bond issuers kicked off the week on a busy note, adding $2.5b to the pipeline; Starwood Property drove by and priced $500m at the tight end of talk.
  • Two of the four issuers, MATW and MPVDCN, were tapping the debt markets for the first time, suggesting investors were willing to consider unknown credits
  • Junk yields were steady as oil prices held firm and were off a tad from the 29-mo. high on Friday; stocks were near new highs
  • GNC Holdings dropped its $500m 5NC3 notes offering and boosted its loan as bond investors strongly resisted adding on a retail name to their portfolios indicating investors were cautious in assessing risk
  • The supportive environment for high yield continued amid steady stocks, strong oil and light supply
  • Other factors that backed high yield remained strong: the Moody’s Liquidity Stress Indicator was at a new record low of 2.6% as of mid-November, suggesting strong corporate liquidity and issuers having ready access to capital markets
  • Corporate default rates declined and the covenant stress index slipped to 2.3% in Oct., suggesting low risk of issuers violating financial maintenance covenants
  • Steady economy, declining default rates, low volatility, rising oil prices and steady stocks augur well for high yield  

(Bloomberg) Rare Expansion for Corporate Junk on Busy Issuance, Downgrade

  • The U.S. corporate high yield market has expanded in November, only the fourth monthly size gain in the past year as gauged by the Bloomberg Barclays U.S. Corporate High Yield Bond Index. Active primary, as well as a number of downgrades, will increase the net roster along with the index capitalization in the Dec. 1 rebalancing.
  • Membership in the Bloomberg Barclays U.S. Corporate High Yield Bond Index is due to expand by a net 14 securities in the Dec. 1 rebalancing, only the fourth instance of roster growth in the past 12 rebalancing cycles. The primary market heated up in November on rising oil prices and credit spreads near the tightest levels in three years. The median net membership change over the past 12 rebalancings remains at negative 11 bonds.
  • The Bloomberg Barclays U.S. Corporate High Yield Bond Index capitalization will add an estimated $4 billion in the Dec. 1 rebalancing, with $24 billion in bonds joining vs. $20 billion exiting. New issues account for $19 billion, with energy companies particularly active in the primary market as crude oil rose above $55 a barrel. 

(Deal Reporter) Regal, Cineworld Said to Reach Agreement on $23/Share

  • Cineworld and Regal reached an agreement in principle on RGC takeout price of $23/share
  • Talks are still ongoing and not the final agreement yet, though deal expected in next few days
  • Offer price not likely to be further improved, seen as firm
  • Funding for Cineworld’s bid for Regal Entertainment looks “stretched,” citing a top Cineworld holder, who said there’s a question of how much leverage the combined company can handle.
  • RGC/Cineworld implied post-deal net debt to Ebitda, prior to any equity raise, likely >7x vs AMC’s 5.6x
  • Cineworld in process of meeting with large holders this week, holders that will have input on the company’s likely equity offering  

(Modern Healthcare) Healthcare industry braces for multiple hits from Senate tax bill

  • The sprawling tax cut legislation speeding through Congress is likely to result in major changes in healthcare, including significant insurance coverage losses, higher premiums, tighter access to capital, and greater margin pressure.
  • Experts caution that the legislation will have big downstream effects on funding for Medicare, Medicaid, Affordable Care Act subsidies and other federal and state healthcare programs. That’s because the projected $1.5 trillion increase in the federal budget deficit resulting from the tax cuts would put pressure on Congress to slash healthcare spending.
  • Indeed, Sen. Marco Rubio (R-Fla.) said Wednesday that cutting taxes must be followed by restructuring and shrinking spending on entitlement programs, including reducing benefits and raising the eligibility age for Medicare and Social Security.
  • Insurers and providers strongly oppose the Senate tax bill’s provision, likely to be adopted by the House, that would immediately repeal the Affordable Care Act’s tax penalty on people who don’t obtain health insurance. They warn that would hurt market stability by leading healthier people to drop coverage, thus driving up premiums and pushing insurers to exit the exchange market. 
  • Healthcare industry analysts also are worried about the Senate bill’s repeal of the federal deduction for state and local taxes paid by individuals. That likely would create pressure in states with relatively high state and local taxes, like California and New York, to reduce taxes, leading to less revenue for funding Medicaid and other healthcare programs.
  • And that could hurt providers and insurers. “We already are in a world where operating margins are being pressured and are generally declining,” said Martin Arrick, managing director of S&P Global Ratings’ not-for-profit group. “This will be one more event that puts additional pressure on provider margins.” 



20 Nov 2017

CAM Investment Grade Weekly Insights

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

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

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

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

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

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

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

High Yield Weekly Insight 11/17/2017

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$5.0 billion and year to date flows stand at -$15.3 billion. New issuance for the week was $6.2 billion and year to date HY is at $243 billion, which is up 20% over the same period last year.

 (Bloomberg) Lows Are in for High Yield Spreads as Cycle Moves in Double Time

  •  High yield’s 326-bp option-adjusted spread (OAS) of Oct. 24 may mark the lows of this cycle amid muted fundamental gains and low absolute yields. That spread compares with the 323-bp nadir of the last tightening cycle that ended in 2014. The current tightening cycle has been almost twice as rapid as the last.
  • A nascent correction in high yield, which saw OAS widen 53 bps from multiyear lows in late October, may have room to run. The progression of the rally from early 2016 wides to today’s levels echoes the prior 2011-14 cycle, albeit at twice the pace. The first leg of the correction from the June 2014 lows pushed spreads back above 400 bps and reached 552 bps within six months, mostly mirroring the early stages of the oil-price unwind. Catalysts for a continued selloff are less explicit this go-round.
  • Spread-widening from the Oct. 24 tights has been paced by weakness in communications and non-cyclicals, while energy has led after trailing for much of 2017. Bonds from Frontier and CenturyLink in wirelines, and those of Community Health in healthcare, have shown some of the steepest losses. The two sectors represent about 33% of the overall high yield index.
  • Leverage has shown modest improvement vs. year-ago levels, lower by about a quarter turn, though it remains high in historic terms. That contrasts with the spread move from early 2016 that dropped OAS to prior-cycle lows. Further, the pace of improvement in fundamentals — from leverage to interest coverage — has flattened as oil prices have normalized, with leverage across most sectors actually near flat to higher over the last year. 


(PR Newswire) Suburban Propane Announces Financial Results


  • Adjusted EBITDA increased $20.0 million, or 9.0%, to $243.0 million in fiscal 2017 from $223.0 million in the prior year. Net income for fiscal 2017 was $38.0 million, compared to $14.4 million in fiscal 2016. Revenues for fiscal 2017 of $1,187.9 million increased $141.8 million, or 13.6%, compared to the prior year, primarily due to higher retail selling prices associated with higher wholesale costs, combined with higher volumes sold. Retail propane gallons sold in fiscal 2017 increased 6.0 million gallons, or 1.4%, to 420.8 million gallons.
  • In announcing these results, President and Chief Executive Officer Michael A. Stivala said, “Fiscal 2017 presented another challenging operating environment as a result of the impact on customer demand arising from the unprecedented, second consecutive record warm winter heating season, as well as the devastating effects of the two Category 4 hurricanes.  Through it all, the resiliency of our people, and our preparedness coming into the year, contributed to a meaningful improvement in our operating performance; including a 9% increase in Adjusted EBITDA compared to the prior year.”
  • Concluding his remarks, Mr. Stivala said, “As we enter fiscal 2018, one of our goals will be to focus on restoring our balance sheet strength to best position the business for long-term profitable growth.  With the previously announced reduction in our annualized distribution rate, we have reduced our annual cash requirements to a level that provides added downside protection in the event of a sustained period of warm weather and, with an improvement in weather, should provide enhanced flexibility to reduce debt and make investments in line with our strategic initiatives.  We have adapted our business model to the recent warm weather trends, as evidenced by the improvement in earnings for fiscal 2017 and, as we enter a new heating season, our people are prepared to continue providing the highest level of service quality and total value to our customers in each market we serve.”  

(Financial Times) Altice to pull back on acquisitions and focus on cutting debt 

  • Altice has promised to get its debt under control after ruling out more blockbuster takeovers and expensive content rights after an alarming collapse in its share price over the past two weeks.
  • Dennis Okhuijsen, chief financial officer, told investors at the Morgan Stanley Technology, Media & Telecom Conference that the telecom company would now focus its efforts on deleveraging the business. “We are very focused on no M&A and to go back to the basics,” he said. “We take deleveraging very seriously,” he added, raising the prospect of non-core asset sales, including its mobile masts.   Mr. Okhuijsen also ruled out spending more money on content.
  • Altice shares have fallen sharply since it issued a poorly received trading statement two weeks ago. Michel Combes, chief executive, resigned last week as part of a management shake-up that saw founder Patrick Drahi take the reins of the company.
  • The collapse in the shares has called its aggressive acquisition strategy into question only months after it was linked with a $185bn bid for US cable company Charter Communications.

(Environment Analyst) Construction boom fuels AECOM 

  • AECOM has reported a year of revenue growth, record orders and free cash flow in its latest financial results. However, the strong performance of its construction services offset a decline in design and consulting.
  • AECOM’s full year revenue of $18.2bn for the twelve months ending 30 September 2017 was 4.6% up on the prior year, boosted by a particularly strong fourth quarter which saw revenue up 12% year-on-year to $4.9bn. Organic growth of 3% for the twelve month period was boosted by a further $270m contribution from acquisitions.
  • Net income jumped 158% to $421m. As a result the firm was able to reduce its debt by 9.9%. Although still a substantial figure at $3.1bn, AECOM’s debt has now fallen by $1.4bn since the closing of the URS acquisition in Q4 2014.    



10 Nov 2017
IG News Items 11102017

CAM Investment Grade Weekly Insights

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

(Bloomberg) Investment-Grade Borrowers Power Through Thick Market

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

(Bloomberg) CenturyLink Dividend Doubts Send Shares, Bonds Plummeting

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

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

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

 IG News Items 11102017

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

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

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

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

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

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

CAM High Yield Weekly Insights

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$1.1 billion and year to date flows stand at -$9.1 billion. New issuance for the week was $5.1 billion and year to date HY is at $237 billion, which is up 18% over the same period last year.

 (Bloomberg) Junk Bonds on Wait and Watch Mode

  •  Junk bonds slowed down a bit amid lack of clarity on the new tax initiatives, together with concerns about rate risk and the future of the monetary policy as William Dudley, the president of NY Fed, announced his retirement.
  • The Federal Reserve will miss three of its governors next year, leading to new faces on the committee
  • While junk bonds have lost some spring in their step, there has been no material change yet to the supportive backdrop as oil prices saw the biggest jump in more than 3 months and closed at a new 28-mo. High
  • The unveiling of the new tax policy by the House rattled highly leveraged companies, as the new proposal considered a cap on interest deductibility
  • Clearly, investors are still backing risk as Windstream increased its bond offering and priced at the tight end of talk even as the issuer was dealing with threats of litigation amid an overall struggling communications industry

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

  • Teva Pharmaceutical Industries Ltd. Chief Executive Officer Kare Schultz is finding himself in the hot seat in his first week on the job with rapidly shrinking options to halt the slide in the Israeli company’s securities after its debt was cut to junk overnight.
  • Fitch Ratings cited the “significant operational stress” that the world’s biggest maker of copycat drugs faces at a time when it needs to pay down debt, and pared its rating by two levels to non-investment grade late on Monday. Teva’s debt obligations are almost three times its market value following an ill-timed $40 billion acquisition last year of Allergan Plc’s generics business.
  • “We find it troubling that management, which presumably met with Fitch before the downgrade, was not able to convince the rating agency that it would take more dramatic deleveraging actions in order to preserve investment grade ratings,” Carol Levenson, an analyst at bond research firm Gimme Credit, said in a report.

  (Business Wire) B&G Foods to Appoint Bruce C. Wacha as Chief Financial Officer

  • B&G Foods, Inc. announced today that it will appoint Executive Vice President of Corporate Strategy and Business Development, Bruce C. Wacha, to Executive Vice President of Finance and Chief Financial Officer, effective November 27, 2017. As Chief Financial Officer, Mr. Wacha will oversee the Company’s finance organization and be responsible for all financial and accounting matters. He will also continue to oversee the Company’s corporate strategy and business development, including mergers & acquisitions, capital markets transactions and investor relations. He will continue to serve on the Company’s executive management team, reporting to President and Chief Executive Officer, Robert C. Cantwell.
  • “Since joining our executive team in August, Bruce has demonstrated excellent leadership skills, financial expertise and an excellent work ethic,” stated Mr. Cantwell. “I’m delighted to announce Bruce’s appointment to CFO. Bruce is an experienced and talented executive and after working with Bruce the past few months I am confident that he is the right person to lead our finance organization and help us achieve our growth objectives.”
  • Mr. Wacha joined B&G Foods from Amira Nature Foods, where he spent three years as that company’s chief financial officer and executive director of the board of directors. Prior to joining Amira Nature Foods, Mr. Wacha spent more than 15 years in the financial services industry at Deutsche Bank Securities, Merrill Lynch and Prudential Securities, where he advised corporate clients across the food, beverage and consumer products landscape. Mr. Wacha earned a bachelor of arts and a master of business administration from Columbia University’s Columbia College and Columbia Business School.

(Moody’s) B&G Foods Unsecured Debt Rating Raised One Notch to B2

(Variety) Theater Chain AMC Entertainment Slides to $42.7 Million Loss, Blames Box Office

  • Citing lousy box office performance, AMC Entertainment Holdings has reported a third-quarter loss of $42.7 million, compared with earnings of $30.4 million for the 2016 quarter.
  • “We have been predicting weakness in the third quarter industry box office, due to the quantity and subject matter of the films that were scheduled to be released,” said Adam Aron, president and CEO. “Not surprisingly, our foreshadow was accurate.”
  • The third quarter was one of the roughest in recent years for the domestic box office with Sony’s “The Dark Tower” and STXfilms’ “Valerian and the City of a Thousand Planets” falling short of expectations. August box office was the lowest in a decade.
  • “In our view, the weakness of the summer box office is not indicative of a long-term trend, especially immediately after two and a half years of record box office performance and just before what we expect will be strong and robust consumer demand through year end,” he said. “We are similarly confident and excited about the film slate that is coming in 2018 and again in 2019. Accordingly, we remain optimistic about the viability and strength of the movie theatre industry generally, and of AMC specifically.”
03 Nov 2017

CAM Investment Grade Weekly Insights

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

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

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

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

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

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

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

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

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

(Bloomberg) Hurricane Rebound Comes Up Short in Payrolls

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

CAM High Yield Weekly Insights

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.6 billion and year to date flows stand at -$8.0 billion. New issuance for the week was $2.7 billion and year to date HY is at $231 billion, which is up 19% over the same period last year.

(Bloomberg) Historical Fundamentals: High Yield Corporates

  • 3Q is poised to deliver a sixth-straight quarter of Ebitda margin expansion across the high yield index, though such gains have resulted in only a marginal improvement in leverage trends. Double Bs have seen more fundamental improvement vs. single B, while commodity sectors have been notable outperformers. Almost half the Russell 1000 has reported 3Q results to date.
  • Double B total debt-to-Ebitda is modestly lower vs. year-ago levels, though remains almost half a turn above the 10-year average. Basic industries, consumer cyclicals and transportation have leverage below the long-term average, while other sectors are higher, notably energy and technology. The BB technology sector has become a more frequent issuer over the last decade amid mergers such as Dell-EMC and increased leverage at more cyclical memory suppliers such as Western Digital and Micron.
  • Ebitda margin has increased almost 200 bps vs. year-ago levels, given 3Q quarter-to-date earnings reports, paced by gains in the energy sector, where margins have expanded to 21.5% from 4.2% for 3Q16. Only consumer staples have seen margins decline over the period, though leverage for the sector is also lower on both a gross and net basis. Free cash flow trends across single B corporates are relatively unchanged on the year, though up from the flat-to-negative levels of 2013-15.

(The Verge) T-Mobile makes Sprint new offer in hopes of saving merger

  • T-Mobile and Sprint aren’t calling it quits on their potential merger yet despite recent disagreements over which side would have control over the combined company. The Wall Street Journal reports that T-Mobile US has restarted talks by presenting Sprint with a revised offer, and it’s still possible that a deal could be struck “within weeks.” T-Mobile CEO John Legere and Sprint CEO Marcelo Claure spoke on Wednesday, with Legere making it clear that T-Mobile doesn’t want the deal to collapse.
  • Earlier this week, SoftBank chairman Masayoshi Son reportedly wanted to walk away from negotiations after his shareholders expressed concern about handing over control of Sprint if the merger were successful. Deutsche Telekom would presumably hold a majority stake in a combined T-Mobile/Sprint, but SoftBank has reportedly been exploring ways to guarantee itself a powerful say in the company’s direction.

(Business Wire) Community Health Systems, Inc. Announces Third Quarter 2017 Results

  • Net operating revenues for the three months ended September 30, 2017, totaled $3.666 billion, a 16.3 percent decrease, compared with $4.380 billion for the same period in 2016. Adjusted EBITDA for the three months ended September 30, 2017, was $331 million compared with $465 million for the same period in 2016, representing a 28.8 percent decrease.
  • The consolidated operating results for the three months ended September 30, 2017, reflect a 14.8 percent decrease in total admissions, and a 15.5 percent decrease in total adjusted admissions, compared with the same period in 2016. On a same-store basis, both admissions and adjusted admissions decreased 2.3 percent during the three months ended September 30, 2017, compared with the same period in 2016. On a same-store basis, net operating revenues decreased 1.5 percent during the three months ended September 30, 2017, compared with the same period in 2016.
  • Commenting on the results, Wayne T. Smith, chairman and chief executive officer of Community Health Systems, Inc., said, “Numerous factors affected our operating and financial results in the third quarter, including lower volumes, divestiture activity and extreme weather events. Hurricanes Harvey and Irma directly impacted operations at a significant number of our hospitals, forcing evacuations at some facilities and requiring others to take extraordinary measures to remain operational during these storms.”
  • Smith added, “Looking forward, we remain focused on strategic initiatives that we believe will yield positive results in the future. We’ve made substantial progress in our portfolio rationalization initiative with 30 hospital divestitures now complete. Our goal is to emerge from this process with a sustainable group of hospitals that are positioned for long-term success and growth.”

(Bloomberg) Frontier Faces Tough Road With Declines, Dividend Cut

  • While subscriber trends are improving in acquired Verizon markets, Frontier Communications still faces steep revenue declines. Management will need to continue delivering on initiatives to bolster gross subscriber additions and reduce churn. In legacy markets, this may not happen until 2018. Even after customer trends improve, stabilizing revenue will remain a challenge, given the company’s large exposure to declining legacy services. Cost synergies from the acquisition should help stabilize its Ebitda margin.
  • The company cut its common dividend by 62% in May to help pay down debt amid declines in profit and free cash flow. Near term, this saves cash to use toward improving leverage. Yet the same risks remain long term, and Frontier will have to stabilize revenue and profit.
  • Customer revenue in acquired markets declined 14.2% in 3Q, after falling 17% in 2Q, highlighting the long path to stabilization. This compares with a 8.1% drop in legacy market revenue.
30 Oct 2017

Q3 2017 High Yield Commentary

During the third quarter of 2017, albeit at a slower pace, the High Yield Market continued the positive return trend of the first and second quarters. The Bloomberg Barclays US Corporate High Yield Index return was 1.98% for the third quarter. Positive returns of 2.70% and 2.17% were posted for the first and second quarters of 2017, respectively. Year to date the Index has returned 7.00% which leads many asset classes in the fixed income world. As seen in the first quarter of 2017, the lowest quality cohort of CCC rated securities once again outperformed their higher quality counterparts. The widely discussed reach for yield was once again on display. It is important to note that during 2008 and 2015, the lowest quality cohort of CCC rated securities recorded negative returns of 49.53% and 12.11%, respectively.
We highlight these returns to point out that with outsized positive returns come outsized possible losses, and the volatility of the CCC rated cohort may not be appropriate for many clients’ risk profile and tolerance levels. While the 10 year US Treasury finished the quarter essentially where it started, the Index spread tightened 17 basis points moving from 364 basis points to 347 basis points over Treasuries. While the Index spread continues to grind tighter toward the multi‐year low of 323 basis points reached in 2014, it is still a ways off from the 233 basis points reached in 2007. Each quality cohort participated in the spread tightening as BB rated securities tightened 21 basis points, B rated securities tightened 21 basis points, and CCC rated securities tightened 33 basis points.

The Energy Sector was back to its winning ways of 2016 during the third quarter of 2017. The Independent Energy and Oil Field Services Industries provided the tailwind that the Energy Sector needed after the negative returns posted in the second quarter. The Transportation, Utility, and Industrial Sectors were other top performers. The Communications Sector had a bit of tough time during the quarter as the Wireline Industry was the major drag on performance. Finally, the Consumer Non‐Cyclical Sector was one of the bottom performers as Amazon’s takeover of Whole Foods injected much uncertainty into the future landscape of the Supermarket Industry. Additionally, the Healthcare Industry saw more credit specific weakness in some of the hospital operators.


During the third quarter, high yield issuance continued to be fairly robust at $79.8 billion versus $98.7 billion and $77.2 billion during the first and second quarters, respectively. For the third quarter, issuance by broad rating category was essentially divvied up in line by market size of each broad rating category. Year to date issuance stood at $255.6 billion. This pace is very likely to exceed 2016’s total issuance of $286.2 billion.

Even as the Federal Reserve has increased the Federal Funds Target Rate twice this year, yields on intermediate Treasuries have declined with the 10‐year Treasury at 2.33% at September 30, roughly flat from 2.31% at the beginning of the quarter and down from 2.45% at the beginning of the year.

Intermediate term yields more often reflect GDP and expectations for future economic growth and inflation rather than actions taken by the FOMC to adjust the Target Rate. Although the revised second quarter GDP print was 3.1%, the consensus view of most economists suggests a GDP in the 2% range with inflation expectations at or below 2%. It is easy to understand that the “search for yield” that we have witnessed continues and that the high yield market is benefitting from that search.

The most recent FOMC meeting was on September 20th 2017. While the Committee voted to maintain the current Fed Funds Target Rate, they did note that they will initiate a balance sheet normalization program in October i. We expect the program to be a very long and slow process as to best mitigate the risk of riling the markets. The Fed’s current “dot plot” is projecting one hike in December and three additional hikes in 2018. While not all of the projected hikes might come to fruition, the Fed continues to move in the direction of easing up on the accelerator. This is unique relative to the other major central banks. The ECB, BOE, and BOJ have all continued to increase their balance sheets since 2015.

As we have discussed previously, high yield spreads continue to tighten at the same time the restrictive covenant protections contained in the indentures became more relaxed. The weakening of covenant protections has made its way to the loan market as large companies are increasingly able to finance their business with covenant‐lite terms ii. Additionally, weakened covenants are not simply a US phenomenon. International debt deals are increasingly covenant‐lite as well iii. This type of activity is not without consequences. J.Crew Group took advantage of covenants in their indenture to remove collateral value from some creditors. This type of activity is not happening across the board. Some creditors are successful in pushing back against companies while other creditors are not as lucky iv. More and more, a professional manager is needed to select bonds of quality – bonds that compensate the investor for the risks he undertakes in a high yield portfolio.

Being a more conservative asset manager, Cincinnati Asset Management remains significantly underweight CCC and lower rated securities. This underweight contributed to our High Yield Composite performance lagging the return of the Bloomberg Barclays US Corporate High Yield Index (1.66% versus 1.98%) during the third quarter. Over the quarter, we continued to be cautious in our investment strategy, maintaining higher cash balances as we become more selective in our security purchases. Given the positive market performance, these cash balances served as a drag on our performance. We were also underweight the Energy Sector which was the best performing sector for the third quarter. On the other hand, some top contributors of our performance were our credit selections across the Capital Goods Sector as well as the Technology Sector.

The Bloomberg Barclays US Corporate High Yield Index ended the third quarter with a yield of 5.45%. This yield is an average that is barbelled by the CCC rated cohort yielding about 8.5% and a BB rated cohort yielding about 4%. These yields are being earned in an environment that is fairly attractive. There has been a significant amount of central bank stimulus. High Yield has displayed a fundamental backdrop that is stable to improving. The default rate of 1.27% is significantly below the historical average and expected to remain low over the next year. Additionally, the default volume during the third quarter was the lowest amount since the fourth quarter of 2013v. Due to the higher income available in the High Yield market, it is still an area of select opportunity relative to other fixed income products.

Over the near term, we plan to be rather selective. Changes to the Affordable Care Act are on the back burner at best, but tax reform is now front and center. Tax reform does have the ability to be a positive factor for the High Yield Market. That said, the continued tightening of credit spreads needs to be carefully monitored to evaluate that the given compensation for the perceived level of risk remains appropriate on a security by security basis. It is important to focus on credit research and buy bonds of corporations that can withstand economic headwinds and also enjoy improved credit metrics in a stable to improving economy. As always, we will continue our search for value and adjust positions as we uncover compelling situations.

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.

i FOMC Statement September 20, 2017
ii Bloomberg September 26, 2017: “That Junk Loan is Now Basically a Junk Bond”
iii Bloomberg September 29,2017: “High Yield Investors Sweat for Return in Europe Sellers Market”
iv Wall Street Journal September 21, 2017: “Deal to Save J.Crew from Bankruptcy Angers High Yield Debt Investors”
v J.P. Morgan October 2, 2017: “Default Monitor”

30 Oct 2017

Q3 2017 Investment Grade Commentary

The third quarter of 2017 was a reprise of what we experienced in the first two quarters of the year investment grade corporate bond yields were lower and credit spreads were tighter. As far as fundamentals are concerned, the majority of investment grade corporate issuers are displaying earnings growth and balance sheets are generally in good health. Demand for investment grade bonds has been robust in 2017, and issuers have responded in kind by issuing $1.06 trillion in new investment grade corporate bonds, though this pace of issuance trailed 2016 by 5%. During the quarter, the A Rated corporate credit spread tightened from 0.88% to 0.80% (down 8bps), the BBB rated corporate credit spread tightened from 1.41% to 1.31% (down 10bps) and the Bloomberg Barclays US Investment Grade Corporate Index credit spread tightened from 1.09% to 1.01% (down 8bps)ii. To provide some context, the all‐time tight for the Bloomberg Barclays US IG Corporate Index is 0.54%, last seen in March of 1997, while the all‐ time wide is 5.55%, last seen in December of 2008.

As you can see from the chart above, credit spreads are near multi‐year lows. During times like these, when spreads have continued to move tighter, our experience shows that our client portfolios are best served by investing in high quality companies with durable earnings and free cash flow. In other words, we would rather forgo the extra compensation afforded from a lower quality credit and instead focus on investing in a stable to improving credit. Preservation of capital is a key tenet of our strategy, and we do not feel that the current level of credit spreads is providing adequate compensation for the riskier portions of the investment grade corporate bond market. At CAM, we focus on bottom up research through the fundamental analysis of individual companies and we do continue to see pockets of value in the investment grade market, particularly in the higher quality portions of the market.

While credit spreads tightened during the quarter, the movement in Treasury yields was modestly higher as the 10 Year Treasury yield began the quarter at 2.31% and ended it at 2.33% (up 2bps). The 10 Year Treasury started the year at a yield of 2.45%, so while short term rates have increased as the Fed has implemented two rate increases so far in 2017 (i.e. the 2 Year Treasury ended the quarter 27 basis points higher from where it started the year), intermediate Treasury yields remain lower on the year. When short term rates increase and intermediate/long term rates stay stable or decrease, we refer to this as a flattening of the yield curve. This continuation of lower intermediate Treasury yields and tighter credit spreads resulted in lower corporate bond yields at the end of the quarter, relative to where yields started the year. The Bloomberg Barclays US Investment Grade Corporate Index returned +1.34% for the quarter, outperforming the Bloomberg Barclays US Treasury 5‐10 year index return of +0.46%iii. The CAM Investment Grade Corporate Bond composite provided a gross total return of +1.23% for the quarter which slightly underperformed the Investment Grade Corporate index but outperformed the US Treasury index.

See Accompanying Footnotes

New issuance in the quarter saw issuers price nearly $350 billion in new investment grade corporate bonds, bringing the YTD total to $1.06 trillioniv. We have now eclipsed the $1 trillion mark for the sixth straight year, which speaks to the persistent, global demand from investors searching for yield and income for their portfolios. With low‐ to‐negative yields in global fixed income securities, the US Investment Grade corporate bond market still provides a good alternative for global investors (see chart)v.

The Federal Open Market Committee (FOMC) opted not to raise rates at its September meeting, with the market focused squarely on the December meeting. During its September meeting, the FOMC did provide the long awaited details on its program to gradually reduce the size of its balance sheet. The FED is merely reducing the reinvestment of principal payments from the Federal Reserve’s securities; it is not actively selling its holdings. The FOMC has provided a roadmap of its policy normalization efforts along with a schedule of how it plans to gradually reduce its balance sheet over time (see chart)vi. Like most policy actions, the FOMC has showing a willingness to be flexible, pending new information and economic data, so time will tell if the securities reduction schedule is actually implemented as planned.

While the FOMC has begun a gradual effort to tighten monetary policy, the ECB too has discussed scaling back its monetary easing as soon as January 2018, but the plan is vague at this point and the world will be watching closely for more details when they meet again near the end of October. Meanwhile, the BOJ recently pushed back the window for achieving its 2% inflation target for the sixth time; to around fiscal year 2019, meaning the bank will not embark on policy tightening in the near termvii. Bottom line, we are only in the very early innings of a more concerted effort to tighten monetary policy by global central bankers.

A recurring theme for us in our quarterly notes this year has been the lack of market volatility thus far in 2017, and the third quarter of the year was no different from the previous two in that volatility remained low (previous commentaries can be found at Volatility is a fact of life in the capital markets and we know at some point it will return to the forefront. We feel that the best way we can position client portfolios is to focus on the risks that are within our control –namely the quality of the companies in which we invest. While volatility in See Accompanying Footnotes

credit spreads or interest rates is difficult, if not impossible to predict, it is important to understand the impact that higher yields would have on the corporate bond market especially as it relates to a corporation’s balance sheet, cash flows and credit quality. Corporate bond investors are compensated for two risks; interest rate risk and credit risk. In our experience, investors spend a large portion of their time focusing on the risk they can’t control ‐ interest rate risk, and very little time on the risk that can be controlled – credit risk. We as a manager believe that we can provide the most value in terms of assessing credit risk. In our view, the key to earning a positive return over the long‐term is not dependent on the path of interest rates but a function of: (1) time (a horizon of at least 5 years), (2) an upward sloping yield curve (not only the treasury curve but also the credit curve) ‐ to roll down the yield curve, and (3) avoiding credit events that result in permanent impairment of capital. Understanding and assessing credit risk is at the core of what Cincinnati Asset Management has provided their clients for nearly 28 years.

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.

i Bloomberg September 28, 2017 “Investment‐Grade Issuance Total”
ii Barclay’s Credit Research: Daily Credit Call
iii Bloomberg Barclay’s Indices
iv Bloomberg September 29, 2017 “Robust High‐Grade Bonds Sales of September Likely to Fade” v Federal Reserve Flow of Funds
vi Federal Reserve Bank of New York September 20, 2017 “Statement Regarding Reinvestment in treasury Securities and Agency Mortgage Backed Securities”
vii Japan Times July 20, 2017 “BOJ delays window for achieving 2% inflation target”