Category: Insight

18 May 2018
High Yield Weekly CAM 0 comment

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.8 billion and year to date flows stand at -$26.5 billion.  New issuance for the week was $1.6 billion and year to date HY is at $84.8 billion, which is -23% over the same period last year. 

 

(Bloomberg)  High Yield Market Highlights

  • Despite all the hullabaloo about rising rates, U.S. high yield investors bought three CCC-rated deals in the primary, led by Valeant.
  • Valeant dropped a senior secured tranche, increased size of a term loan
  • Bond priced at tight end of talk, received orders of more than $5.5b
  • SRS Distribution and Hearthside funded aggressive buyouts by private equity
  • Investors showed restraint, demanding appropriate risk premia
  • Both deals priced at wide end of talk
  • Both made material covenant changes to strengthen investor protection
  • Investors ignored outflows from retail funds
  • CCCs beat BBs and single-Bs with a return of 2.03% YTD
  • IG’s YTD return is negative 4.15%
  • Lack of supply, combined with low default rate and decent corporate earnings, boosts risk-on sentiment for junk bonds
  • High yield is expected to be tested in the second half of the year by supply from Blackstone funding the buyout of financial and risk businesses from Thomson Reuters, Carlyle Group funding for acquisition of specialty chemicals business from AkzoNobel

 

(Multichannel News)  Charter’s Enterprise Unit Earmarks $1B-Plus for Fiber Plan

  • Spectrum Enterprise, a unit of Charter Communications focuses on the large business services segment, said it will invest more than $1 billion in 2018 to increase the density of its national fiber network.
  • Charter said this will be the second straight year in which the company has invested in excess of $1 billion exclusively in Spectrum Enterprise, which will be looking to expand on a network of nearly 200,000 fiber-lit buildings.
  • Spectrum Enterprise will absorb the bulk of the upfront costs of fiber construction for most new enterprise clients in its footprint for solutions such as Fiber Internet Access, Ethernet and voice trunks.
  • The investment will also come to add fiber density as wired networks become a significant backhaul channel for a coming wave of 5G-based services and other bandwidth-intensive offerings.
  • “As fiber connectivity has become fundamental to economic growth, we are focused on making our fiber infrastructure more accessible to clients, and reshaping their experience to align with the evolving realities of today’s modern enterprise,” Phil Meeks, EVP and president of Spectrum Enterprise, said in a statement. “Advanced video and virtual reality solutions, cloud, IoT and the future of 5G all depend on a reliable and highly-dense fiber network. Our commitment is to ensure that our clients have the most robust fiber network and solutions to grow today and take advantage of future technologies that have immense demands on bandwidth.”

 

(PR Newswire)  Steel Dynamics to Acquire CSN Heartland Flat Roll Operations

  • Steel Dynamics, Inc. announced that it has entered into a definitive agreement to acquire Heartland from CSN Steel, S.L.U., a wholly-owned subsidiary of Companhia Siderurgica Nacional.  Located in Terre Haute, Indiana, Heartland produces various types of higher-margin, flat roll steel by further processing hot roll coils into pickle and oil, cold roll, and galvanized products.  Steel Dynamics has agreed to purchase Heartland for $400 millionin cash inclusive of $60 million of normalized working capital, subject to customary transaction purchase price adjustments.  Steel Dynamics believes the purchase price approximates current replacement value.  The transaction is expected to be accretive to near-term earnings and cash flow per share.  The acquisition will expand Steel Dynamics’ annual flat roll steel shipping capacity to 8.4 million tons and total shipping capability to 12.4 million tons.  The additional exposure to lighter-gauge and greater width flat roll steel offerings will broaden the Company’s value-added product portfolio, enhancing Steel Dynamics position as a leading North American steel producer.
  • “The acquisition of Heartland represents a step in the continuation of our growth strategy,” said Mark D. Millett, Chief Executive Officer. “It levers our core strengths, and at the same time fulfills our initiatives to further increase value-added product and market diversification.  We look forward to welcoming the Heartland employees and customers into the Steel Dynamics family, and working with them to drive future growth and success.
  • “We have positioned our capital structure and organizational framework for growth,” continued Millett, “and we believe this acquisition will result in numerous future earnings benefits both to Heartland’s current operations and to our Midwest flat roll operations.  In combination with our current operations, Heartland brings a tremendous amount of operating flexibility and optionality.  As a part of our broader business platform, Heartland is expected to provide numerous synergies with our existing operations, and we look forward to levering these opportunities in the future.”

 

(Bloomberg)  Teva Rises After Berkshire Hathaway Boosts Stake in Drugmaker

  • Teva Pharmaceutical shares rose after Warren Buffett’s Berkshire Hathaway Inc. more than doubled its stake in the struggling Israeli drugmaker, a vote of confidence in Chief Executive Officer Kare Schultz’s turnaround effort.
  • Berkshire Hathaway owns 40.5 million American depositary receipts in Teva, Buffett’s company said in a regulatory filing Tuesday. The Omaha, Nebraska-based company made its initial investment in Teva last year.
  • Saddled with debt, Teva has been cutting its workforce and closing factories to cut costs. The company this month raised its 2018 profit forecast as Schultz’s belt-tightening program begins to take hold. Teva has been hurt by falling margins on knockoff drugs and rapidly declining sales for its best-selling product, the multiple sclerosis drug Copaxone.
  • Buffett, 87, has handed some of his stock-picking duties to Todd Combs and Ted Weschler, who together oversee about $25 billion. Berkshire hired Combs in late 2010 and Weschler about a year later. Buffett said in February that the Teva investment was made by one of his deputy stock pickers and he didn’t know the reasoning behind the decision.

 

(CNBC)  Williams to buy rest of Williams Partners in $10.5 billion deal

  • Pipeline operator The Williams Cos. said on Thursday it would buy the remaining 26 percent stake that it does not already own in its master limited partnership, William Partners, for $10.5 billion. Williams would give 1.494 of its shares for each share of Williams Partners, with the offer representing a premium of 6.4 percent based on Wednesday’s closing price.
  • The company said the deal will immediately add to cash available to dividends extending the period for which the company is not expected to be cash taxpayer through 2024.
  • The deal simplifies Williams’ corporate structure, streamlines governance and maintains investment-grade credit ratings, the company said.
  • (CAM Note) Moody’s and Fitch has moved the debt of Williams Companies to under review for upgrade on the news.
11 May 2018
Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week of May 3-May 9 were positive, with an inflow of $912 million.  According to data analyzed by Wells Fargo, IG funds have garnered $60.031 billion in net inflows YTD.

According to Bloomberg, $44.039bn in new corporate debt priced during the week.  This brings the YTD total to $478.934bn.  Per Bloomberg, this has been the highest weekly volume total since the week ended March 9, which included the $40 billion 9-part CVS deal to fund the Aetna transaction.


(Bloomberg) U.S. Yield Curve Flattest Since August 2007 as Long Bonds Soar

  • The Treasury yield curve from 5 to 30 years flattened Thursday to the lowest level since August 2007, as a combination of weaker-than-expected U.S. inflation and solid demand for a record bond auction bolstered investor confidence in owning long-dated securities.
  • The spread narrowed by more than 4 basis points, the most since February, dropping through a previous intraday low from April to 27.7 basis points. The gap between 2- and 10-year Treasuries also shrank in a bull flattening move.
  • Investors and Federal Reserve officials alike have been on guard for the curve flattening toward inversion, which has historically preceded recessions. Yet bond traders are still pricing in more than two additional quarter-point rate hikes by year-end, betting policy makers will stick to their tightening path.

 

(WSJ) Cord-Cutting Pain Spreads to High-Yield Bond Market

  • The consumer stampede to streaming media from traditional broadcasters is claiming an unexpected victim: high-yield bond investors.
  • Telecommunications, cable and satellite companies have borrowed hundreds of billions of dollars in junk debt to build networks that would allow them to dominate their markets for decades to come.
  • The proliferation of internet-based providers is upending that expectation, forcing investors to question the safety of bonds they bought from companies such as satellite broadcaster Dish Network, cable giant Charter Communications, and landline telecommunications company Frontier Communications.
  • Defaults are low right now in telecommunications and media bonds, and some companies that offer broadband and wireless access actually benefit from the move toward streaming media.

 

(Bloomberg) U.S. Economic Growth Can Withstand the Threat From Rising Prices

  • Want ads for truck drivers to haul crude oil in Texas are touting salaries as high as $150,000 a year. Some nurses are getting $25,000 signing bonuses. The U.S. unemployment rate just fell to 3.9 percent, one tick away from its lowest since the 1960s. And on May 8 the Bureau of Labor Statistics reported there are 6.5 million unfilled jobs in the U.S., the most on record. Some employers say they’re feeling the squeeze. “Rising labor costs remain the primary contributing factor to our margin erosion,” Chatham Lodging Trust, a company in West Palm Beach, Fla., that owns more than 130 hotels either by itself or in joint ventures, said on May 1.
  • Is the U.S. economy overheating? Yes and no. There are plenty of inflationary bottlenecks, and not only in the labor market. Backlogs of orders are the highest since 2004, according to the Institute for Supply Management. Transportation costs have jumped in part because of driver shortages. Strong U.S. oil and gas production has helped push up the prices of essential inputs such as steel pipe and specialty sands used in fracking.
  • On the other hand, the bottlenecks aren’t yet causing high inflation across the economy, which would require the Federal Reserve to speed up its interest rate hikes. The U.S. central bank passed up the opportunity to raise the federal funds rate at its May 1-2 meeting while noting that the rate of inflation has “moved close” to the bank’s 2 percent target. “In my judgment, the Fed is ready to accelerate [rate hikes] if they need to, but they’re not getting ahead, which I think is appropriate,” says Josh Wright, chief economist at ICIMS Inc., which makes software to find and hire talent.
  • Some of the factors driving up the U.S. inflation rate—in particular, the jump in crude oil prices to about $70 a barrel from less than $50 a year ago—have external causes and don’t reflect overheating in the domestic economy. Rising commodity prices caused in part by new steel tariffs cost General Motors Co.and Fiat Chrysler Automobiles NV at least $200 million each in the first quarter. Tariffs have also helped drive lumber prices to a record. Other external factors are the high price of imported alumina for aluminum smelters and the weather-related runup in prices of vanilla from Madagascar and cocoa from Ivory Coast and Ghana.
  • The U.S. economy performed below capacity for so long that it can be hard for managers to remember how to operate without lots of spare resources. Half of the surveyed members of the National Federation of Independent Business say there are “few or no” qualified workers for job openings. Yet on May 8 the NFIB reported that in April the net percentage of small-business owners who reported improved earnings trends was the highest in the survey’s history. “There is no question that small business is booming,” William Dunkelberg, NFIB’s chief economist, said in a statement. (Big companies are, too: First-quarter earnings for companies in the S&P 500 are expected to be 24 percent higher than a year earlier, Bloomberg calculated on May 9.)
  • Sectors with strong pay growth generally confront special circumstances. Those truck drivers being offered as much as $150,000? They’re being hired by oil producers in the Permian Basin who are desperate to get their crude to market. Hospitals, whose median expenditures for contract labor rose 19 percent in the past year, face their own special problems, according to John Morrow, a managing director of Franklin Trust Ratings who analyzes hospitals. People whose skills are in high demand and work under temporary contract rather than salary can take full advantage of shortages for their talents, according to Morrow. “This is a level of skill that requires advanced-level training that involves medicine, technology, and science, and all of those things are costly,” he says.
  • An important sign that rising costs remain manageable is that most companies haven’t passed them along to customers. Walmart Inc., the nation’s largest private employer, raised starting wages to $11 an hour in January and announced annual bonuses of as much as $1,000. But it’s cutting prices to remain competitive with Amazon.com Inc. and low-cost supermarket chains Aldi Inc. and Lidl US LLC. The same goes for packaged-goods companies. General Mills Inc. has acknowledged that attempts to hike prices for its Progresso soup and Yoplait yogurt ultimately hurt sales by driving shoppers to other brands. In freight transportation, BNSF Railway Co. has picked up market share from Union Pacific Corp. by underpricing it.
  • “We have to be a little bit cautious in inferring that wage growth is going to be a major constraint for business,” says Gregory Daco, head of U.S. macroeconomics for Oxford Economics Ltd. While some economists warn that rising inflation is a “late-cycle” phenomenon—i.e., a precursor of recession—“we don’t have clear evidence that we’re at the end rather than the middle of the cycle,” says Michael Englund, chief economist of Action Economics LLC in Boulder, Colo.
  • A key statistic to watch is unit labor costs, which are wages adjusted for productivity. They rose at an annual rate of 2.7 percent in the first quarter. But over the past year as a whole, the increase was only 1.1 percent. As long as companies’ unit labor costs don’t rise faster than the prices they charge, tight labor markets won’t be a problem.
  • The Fed’s preferred measure of inflation, the price index for personal consumption expenditures, is going to look high for a few months because a brief dip in prices for clothing, hotel rooms, airline fares, and other items has ended, says Ian Shepherdson, chief economist of Pantheon Macroeconomics. That might influence the Fed, he says. There’s a risk that Fed rate setters could react too quickly to signs of overheating. “As inflation climbs, so too will the risk of recession, because at some point policymakers will feel impelled to respond,” Ellen Zentner, chief U.S. economist of Morgan Stanley, wrote in a note to clients on May 2.
11 May 2018
High Yield Weekly CAM 0 comment

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 -$25.6 billion.  New issuance for the week was $4.7 billion and year to date HY is at $83.2 billion, which is -20% over the same period last year.   

 

(Bloomberg)  High Yield Market Highlights 

  • CCC yields saw the biggest drop since October 2017 as U.S. high yield firmed with rising oil and growing appetite for risk assets.
  • High yield spread fell to 336bps from 343bps at the start of the week
  • Investors, starved of supply, shrugged off outflows from retail funds
  • Most of the Primary issuance was the $3.2b issued on Wednesday
  • High-yield is best performing asset class in fixed income, led by CCCs
  • CCCs beats BBs, single-Bs, with positive YTD return of 1.90%
  • IG bonds have lost 3.46% this year
  • CCC spread also tightened most in 6 months yesterday
  • Moody’s said the U.S. speculative-grade default rate was projected to decline to 1.5% by April 2019

 

(Bloomberg)  Arconic Cuts Outlook on Higher Aluminum Costs

  • Arconic Inc. sold off after the company slashed its forecast because of rising aluminum prices and business inefficiencies.
  • Adjusted profit will be 18 percent less than the previous estimate, the New York-based metals maker said in a statement. That trailed the lowest estimate of analysts surveyed by Bloomberg.
  • “It is clear that we have areas in need of operational improvement,” Chief Executive Officer Chip Blankenship, who took the reins in January, said in the statement. “We are updating our full year 2018 guidance due to rising aluminum prices and my deeper understanding of our operations.”
  • The comments reflect Blankenship’s challenge as he looks to revitalize Arconic after a bitter battle with Elliott Management Corp. last year. He has already pledged to review Arconic’s strategy and portfolio while moving the headquarters to a lower-cost location. More recently, growing tensions over aluminum and steel tariffs, as well as U.S. sanctions on Russian aluminum giant United Co. Rusal, have roiled metals producers and their customers.

 

(Hollywood Reporter)  AMC Entertainment Posts Higher First-Quarter Earnings, Beats Estimates

  • Cinema giant AMC Entertainment posted higher first-quarter earnings and revenues on the strength of Black Panther and Jumanji‘s box-office returns and its Nordic Cinema Group Holding acquisition internationally.
  • Net earnings for the three months to March 31 climbed to $17.7 million against a year-earlier $8.4 million. Overall revenues rose 8 percent to $1.387 billion, exceeding a $1.35 billion analyst forecast.
  • “We are truly heartened by AMC’s start to 2018 and couldn’t be more excited about the prospects for the year after the record-breaking success of Avengers: Infinity Warearly in the second quarter,” AMC CEO Adam Aron said in a statement.
  • During an analyst call that followed the release of his latest results, the AMC boss took a bullish stance on his company’s prospects going forward, as Aron pointed to a bounce-back in early 2018 box office on the strength of Black Panther and Avengers ticket receipts after the “painful depths” of the summer 2017 multiplex business.
  • The exec argued market analysts who had questioned the prospects of movie theaters amid the rise of streaming content competition like Netflix and Amazon Prime had been proven wrong. “When Hollywood makes movies that people want to see, they flock to our theaters and they do so in huge numbers,” Aron added.

 

(Business Wire)  B&G Foods Reports Financial Results for First Quarter 2018

  • Base business net sales for the first quarter of 2018 increased $1.1 million, or 0.3%, to $411.1 million from $410.0 million for the first quarter of 2017. The $1.1 million increase was attributable to an increase in net pricing of $1.2 million, or 0.3%, partially offset by a decrease in unit volume of $0.1 million.
  • For the first quarter of 2018, adjusted EBITDA, which excludes acquisition-related and non-recurring expenses and the non-cash accounting impact of the Company’s inventory reduction plan, was $89.4 million, a decrease of 2.9%, or $2.6 million, compared to $92.0 million for the first quarter of 2017. Adjusted EBITDA as a percentage of net sales was 20.7% for the first quarter of 2018.
  • Robert C. Cantwell, President and Chief Executive Officer of B&G Foods stated, “When we laid out our vision for 2018 earlier this year, we expressed our belief that during 2018 we would return to modest growth, stable margins and strong free cash flow generation, benefiting in part from our inventory reduction plan, and we delivered on those expectations in the first quarter.”
  • B&G Foods reaffirmed its guidance for full year 2018. Net sales are expected to be approximately $1.720 billion to $1.755 billion, adjusted EBITDA is expected to be approximately $347.5 million to $365.0 million and adjusted diluted earnings per share is expected to be approximately $2.05 to $2.25.
07 May 2018
High Yield Weekly CAM 0 comment

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.7 billion and year to date flows stand at -$24.4 billion.  New issuance for the week was $3.2 billion and year to date HY is at $78.5 billion, which is -21% over the same period last year. 

 

(Bloomberg)  High Yield Market Highlights

  • Junk bond issuance and inflows have resumed, with CCC-rated LBO supply highlighting the strength of risk appetite. Lipper reported an inflow for week ended May 2 after an outflow the prior week.
  • Four deals for $1.34b priced yesterday, two of them CCC credits
  • GFL Environmental, rated CCC, did a drive-by to fund an LBO by an investor consortium led by BC Partners
  • Strong fundamentals and steady growth are boosting junk bonds
  • Oil is hovering near a 3 year high amid reports that OPEC was likely to extend production cuts into 2019
  • Consensus at Milken Institute conference this week was that the credit markets would have a few more years of a smooth run as global growth was steady and fundamentals were sound
  • Credit cycle will extend, and there’s no fear of imminent recession
  • CCCs continued to top BBs, B, stocks and IG, with YTD positive returns of 1.25%
  • Stocks report negative returns YTD 1.06% and IG negative 3.38%
  • Moody’s notes that the number of companies rated B3 or lower declined and was down 22% from a year ago and 35% from its peak in 2016
  • “Decreasing number of lower-rated corporate issuers is a sign of declining or low default rate risk in the year ahead,” Moody’s analyst Julia Churson wrote
  • Moody’s forecasts default rate to decline to 1.7% by March 2019, helped by rising corporate earnings, abetted by fiscal stimulus

 

(Wall Street Journal)  Watch Out: Junk Bonds Getting Junkier

  • One thing owners of junk bonds are usually sure of is that when the borrower defaults, they will get a veto on cash going to shareholders, to junior debtors or into new deals.
  • Not any more. Junk bonds financing private-equity firm KKR & Co.’s latest buyout subvert the usual order by allowing such payments to go ahead even after a formal default.
  • The $1.4 billion of bonds, to repay temporary borrowing for the buyout of Unilever PLC’s margarine business, mark a new low in the quality of covenants protecting lenders and are yet another sign of the wall of money chasing the higher yield on offer from junk bonds.
  • Several recent bonds have allowed what are known as restricted payments even when a company is in technical default — so that, for example, a planned takeover or joint venture wouldn’t be derailed.
  • Flora Food Group, Unilever’s business, appears to be the first explicitly to allow them after a formal “event of default,” which should put creditors at the front of the line.
  • This matters when it comes to assessing the risk of the market as a whole. Junk-bond enthusiasts tend to highlight the yield spread over Treasurys, which in the U.S. is much higher now than it was at the end of the last bull market in 2007 and about where it stood in 2014.
  • But the weakening of covenants means that losses are likely to be bigger if there is another wave of defaults, which ought to justify lower prices, and so higher spreads over Treasurys.

 

(New York Times)  Sprint and T-Mobile C.E.O.s Are in Washington to Sell Their Merger

  • From the moment T-Mobile and Sprint announced their $26.5 billion merger on Sunday, the wireless carriers have positioned their proposed deal with an eye toward Washington. After all, regulators in the Obama administration blocked one of their previous efforts to combine.
  • This time around, the chief executives of the companies emphasized that merging would help them to:
  • Build a next-generation wireless network, one robust enough to keep up with China in a growing technological arms race; Create thousands of jobs, especially in rural areas; Keep prices low for consumers, especially as cable companies like Comcast try to enter the market.
  • The heads of both companies began a charm offensive in Washington on Tuesday

 

(Knowledge@Wharton)  T-Mobile and Sprint: Will the Deal Go Through?

  • T-Mobile and Sprint, the nation’s third and fourth largest wireless telecom companies, have been trying to tie the knot for years. But concerns that regulators won’t approve a merger because it would reduce competition have kept them apart. Their antitrust concerns are not unfounded: In 2011, the U.S. Justice Department torpedoed AT&T’s planned $39 billion acquisition of T-Mobile. Three years later, Obama’s FCC chairman, Tom Wheeler, bluntly told Sprint he was skeptical such a deal would be approved.
  • That was then, this is now. Today’s FCC is more business friendly, chaired by Republican Ajit Pai and with a GOP majority among its commissioners.
  • But has the environment changed sufficiently that T-Mobile’s acquisition of Sprint will not be dead on arrival in Washington? “I’d be very surprised if Ajit went along with this,” said Gerald Faulhaber, Wharton professor emeritus of business economics and public policy and former FCC chief economist.
  • This is the third time that T-Mobile and Sprint reportedly talked about merging — and the same challenges remain. “I’d be surprised if the third time is a charm. Market shares are pretty high. Post-merger, you’d have three firms with more than 30% of the market each. Under the orthodox approach that the merger guidelines take, that would be a clearly challengeable merger,” said Herbert Hovenkamp, a Penn Integrates Knowledge professor at the University of Pennsylvania, with dual appointments at Wharton and Penn Law
  • Hovenkamp pointed to another hurdle: Unlike other wireless telecom mergers that need approval by both the FCC and Justice Department, this one also needs to be greenlit by The Committee on Foreign Investment in the United States (CFIUS). That’s because T-Mobile is owned by Germany’s Deutsche Telekom and Sprint is majority owned by SoftBank of Japan. “We’ve got three agencies this time that need to approve this merger,” he said.
  • Moreover, the committee, which falls under the U.S. Treasury, is subject to the presidential executive order, Hovenkamp said. In March, the Trump administration sank the acquisition of U.S. chipmaker Qualcomm by Broadcom, a U.S. chipmaker acquired by a Singaporean company that is now relocating back to America. Trump “could probably do that this time again,” he said. “There’s a whole lot of uncertainty facing this merger.”

 

 

 

07 May 2018
Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Fund Flows & Issuance:  According to Wells Fargo, IG fund flows for the week of April 26-May 2 were positive, with an inflow of $2.6 billion. According to data analyzed by Wells Fargo, IG funds have garnered $59.1 billion in net inflows YTD.

According to Bloomberg, $21.775bn in new corporate debt priced during the week. This brings the YTD total to $430.595bn.

The Bloomberg Barclays US IG Corporate Bond Index closed on Thursday with an OAS of 111, a new YTD wide. The 10yr treasury rallied this week and now sits at 2.914% as we go to print, after reaching a high of 3.026% the week prior.


 (Bloomberg) U.S. Payrolls Rebound to 164,000 Gain; Jobless Rate Hits 3.9%

  • U.S. hiring rebounded in April and the unemployment rate dropped below 4 percent for the first time since 2000, while wage gains unexpectedly cooled, suggesting the labor market still has slack to absorb.
  • Payrolls rose 164,000 after an upwardly revised 135,000 advance, Labor Department figures showed Friday. The jobless rate fell to 3.9 percent, the lowest since December 2000, after six months at 4.1 percent. Average hourlyearnings increased 0.1 percent from the prior month and 2.6 percent from a year earlier, both less than projected.
  • Despite the softer-than-expected wage reading, an unemployment rate drifting further below Federal Reserve officials’ estimates of levels sustainable in the long run may in their view add to upward pressure on wages and inflation. That would keep the central bank on track to raise interest rates in June for the second time this year and potentially one or two more times after that in 2018.
  • The results may also reinforce forecasts for a rebound in economic growth this quarter after a slowdown in the first three months of the year, with the labor market supporting gains in consumer spending that may be further fueled by tax cuts. Companies in industries from services to manufacturing are hungry for workers, indicating hiring is likely to stay solid.
  • The median estimate of analysts was for a gain of 193,000 jobs, with projections ranging from 145,000 to 255,000. Revisions to prior reports added a total of 30,000 jobs to payrolls in the previous two months, according to the figures, resulting in a three-month average of 208,000.


(Bloomberg) High-Grade Index Sets New 2018 Wide

  • Credit continues to leak wider, underscored by the Bloomberg Barclays IG OAS index setting a new 2018 wide mark of +111 Thursday, a level not seen since September. The HY index also closed at the widest level in nearly a month. The IG primary market was active yesterday with more than $8 billion pricing, dominated by corporate borrowers.


(Bloomberg) Flipkart Board Is Said to Approve $15 Billion Walmart Deal

  • The board of Flipkart Online Services Pvt has approved an agreement to sell about 75 percent of the company to a Walmart Inc.-led group for approximately $15 billion, according to people familiar with the matter, an enormous bet by the American retailer on international expansion.
  • Under the proposed deal, SoftBank Group Corp. will sell all of the 20-plus percent stake it holds in Flipkart through an investment fund at a valuation of roughly $20 billion, said the people, asking not to be named because the matter is private. Google-parent Alphabet Inc. is likely to participate in the investment with Walmart, said one of the people. A final close is expected within 10 days, though terms could still change and a deal isn’t certain, they said.
  • That would seal a Walmart triumph over Amazon.com Inc., which has been trying to take control of Flipkart with a competing offer. Flipkart’s board ultimately decided a deal with Walmart is more likely to win regulatory approval because Amazon is the No. 2 e-commerce operator in India behind Flipkart and its primary competitor. Amazon is out of the running unless Walmart hits unforeseen trouble.
  • If completed, the deal will give Bentonville, Arkansas-based Walmart a leading position in the growing market of 1.3 billion people and a chance to rebuild its reputation online. The world’s largest retailer has struggled against Amazon as consumers increase their spending on the internet. India is the next big potential prize after the U.S. and China, where foreign retailers have made little progress against Alibaba Group Holding Ltd.
27 Apr 2018
Investment Grade Weekly Kathryn Bailey 0 comment

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week of April 19-April 25 were positive, with an inflow of $3.5bn, driven primarily by ETFs, which posted their largest net inflow in over a year. According to data analyzed by Wells Fargo, IG funds have garnered $56.4 billion in net inflows YTD.

According to Bloomberg, $20.95bn in new corporate debt priced during the week. This brings the YTD total to $413.12bn.  Historically, May is typically a robust month for new corporate bond issuance and the general consensus on the street is that issuance will pick up in the month of May as companies exit earnings blackout.

The Bloomberg Barclays US IG Corporate Bond Index closed on Thursday with an OAS of 108, while the 10yr treasury breached the 3.00% threshold this week for the first time since January of 2014.


 

(Bloomberg) BofA Says Rising Rates Boost Appeal of High-Grade Bonds For Now

  • The highest Treasury yield since 2014 is good news for the investment-grade corporate bond market, bringing back investors who’ve been put off by low payouts previously, Hans Mikkelsen, high-grade bond strategist at Bank of America Merrill Lynch, said in phone interview.
  • “If you look at credit spreads, rates at these levels are positive for the investment-grade market, especially in the back end of the yield curve,” Mikkelsen said. “This market actually has quite a lot of yield-sensitive investors who buy more when rates go up, which makes it different than other asset classes.”
  • These include insurance companies, pension funds, and foreign buyers, which will buy more since the rate rise this time is modest, controlled, and fairly contained, he said. “It would take a much further uptick for them to sell.”
  • On the other hand, If returns deteriorate, “there might be more of a negative feedback loop” for bond funds and ETFs, because those funds would typically buy less, Mikkelsen added. “And if we went to 4% within two weeks, that wouldn’t be good either, as interest-rate volatility and uncertainty matters more to IG investors than the interest rate level itself.”
  • Investment-grade spreads widened last night following the market close Wednesday. Treasury yields have fallen from highs yesterday, with 10-year back below 3%

 

(Advisor Perspectives) Dan Fuss – Only Two Things Can Stop Rates from Rising

 

  • As his 60-year tenure attests, Dan Fuss is one of the most respected bond investors. In my interview with Fuss last week, he explained why it would take either a geopolitical crisis or an economic collapse to drive rates lower. Fuss also said investors should exercise caution in bond ETF markets that are exposed to liquidity shocks.
  • According to Fuss, existing deflationary forces in the global economy would not be enough to drive rates lower.
  • This is not the first time Fuss has forecasted higher rates. In October 2017, Fuss advised investors to exercise caution by building reserves, and suggested that they position themselves for an environment of rising interest rates. He also did so in October 2015, March 2015, and October 2013, causing his fund to miss the full benefit of bond rally in 2014. In April 2012 he made a similar, but incorrect, prediction.

(WPO) What Comcast’s $31 Billion Offer for a U.K. TV Company Tells Us About the Cable Giant’s Ambitions

 

  • Comcast said Wednesday that it’s offering $31 billion to buy the British TV provider Sky, officially starting a bidding war between the U.S. cable giant and 21st Century Fox, which has offered $16.5 billion for the company.
  • But why is a U.K.-based television company such a sought-after piece of property, and what could a deal mean for Comcast’s customers?
  • The answer can be found in Comcast chief executive Brian Roberts’s remarks to investors on an earnings call Wednesday morning.
  • “It’s a unique asset,” Roberts said. “It fits well with the assets we’ve already got. … A benefit is, you’d get new geographies and additional scale that gives you optionality.”
  • In other words, a deal would give Comcast access to a bigger overseas audience and — according to industry analysts — new TV programming.
  • Media and entertainment companies are increasingly consolidating — Time Warner, for example, is seeking to merge with AT&T for $85 billion. And it looks as though Comcast also is seeking additional opportunities in this space
  • But unlike AT&T-Time Warner, which AT&T casts as a make-or-break bet as the telco tries to compete with Google and Facebook with a data-driven ad business, Comcast is emphasizing the optional nature of its offer for Sky. It’s simply a good opportunity and the best use of Comcast’s money right now, Roberts told analysts on the call.
27 Apr 2018
High Yield Weekly CAM 0 comment

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$2.0 billion and year to date flows stand at -$25.1 billion.  New issuance for the week was $6.2 billion and year to date HY is at $75.2 billion, which is -22% over the same period last year. 

 

(Bloomberg)  High Yield Market Highlights

  • Despite another week of substantial fund outflow, junk bonds appear to have found support. BB yields fell the most in more than five months as Treasuries firmed, equities rebounded, the VIX fell and oil steadied.
  • Stung by the recent rise in Treasury yields and equity volatility, nervous high yield investors once again withdrew cash from high yield funds
  • High yield primary looked resilient as new issues saw strong demand this week
  • WeWork, a single-B credit with uncertain cash flow, got orders of ~$2.5b-$3b
  • Flora Food increased size of issuance and priced at tight end of talk
  • Jagged Peak Energy had orders 5x the size of the original offering, also priced at tight end of talk
  • CCCs continued to outperform BBs and single-Bs, with positive YTW returns of 1.11%, reflecting willingness of investors to add credit risk

 

(Reuters)  T-Mobile, Sprint make progress in talks, aim for deal next week

  • S. wireless carriers T-Mobile US Inc and Sprint Corp have made progress in negotiating merger terms and are aiming to successfully complete deal talks as early as next week, people familiar with the matter said on Thursday.
  • The combined company would have more than 127 million customers and could create more formidable competition for the No.1 and No.2 wireless players, Verizon Communications Inc and AT&T Inc, amid a race to expand offerings in 5G, the next generation of wireless technology.
  • T-Mobile majority-owner Deutsche Telekom and Japan’s SoftBank Group Corp, which controls Sprint, are considering an agreement that would dictate how they exercise voting control over the combined company, two of the sources said.
  • This could allow Deutsche Telekom to consolidate the combined company on its books, even without owning a majority stake, the sources added. Deutsche Telekom owns more than 63 percent of T-Mobile, while SoftBank owns 84.7 percent of Sprint.
  • Deutsche Telekom and T-Mobile are also in the process of finalising the debt financing package they will use to fund the deal, the sources said.

 

(Business Wire)  Spectrum Brands Holdings Reports Fiscal 2018 Second Quarter Results 

  • Spectrum Brands reported results from continuing operations for the second quarter of fiscal 2018 and lowered its fiscal 2018 full-year guidance.
  • Separately this morning, the Company announced that Executive Chairman David M. Maura has been named Chief Executive Officer, effective immediately, replacing Andreas Rouvé, who has stepped down as CEO and a Director, and that its Board of Directors has authorized a new three-year, $1 billion share repurchase program.
  • Spectrum Brands announced on January 3, 2018 that it was exploring strategic options for its Global Batteries & Appliances (GBA) businesses with the intention to sell the units by December 31, 2018. As a result, effective with the Company’s fiscal 2018 first quarter financial results, the GBA segment has been reclassified as held for sale and is now reported as discontinued operations for the second quarter and six months of fiscal 2018 and the comparable prior-year periods.
  • “While our second quarter performance was very disappointing, we believe it is in no way reflective of the underlying earnings power of our continuing operations,” said David Maura, Chief Executive Officer of Spectrum Brands Holdings.
  • “The challenges related to our two greenfield manufacturing and distribution projects were meaningfully greater than we expected. As we brought our East Coast distribution center into our new Hardware & Home Improvement facility in Edgerton, Kansas at the end of February, we experienced facility-wide disruptions which hampered distribution capabilities materially in March,” Maura said. “Our Global Auto Care facility in Dayton struggled at higher production levels in March, which led to significant inefficiencies and shipping challenges.
  • “Given these issues, sales of about $30 million from in-house orders could not be shipped by quarter-end due to higher customer order backlogs at our HHI and GAC facilities, and we are working to return them to normal efficiency levels,” he said. “In addition, cold and wet weather in March hurt Home & Garden revenues by about $10 million as POS declined and retailers delayed orders into April.
  • “Our Pet business was impacted, as expected, by the exit of a European pet food customer tolling agreement and from lost rawhide distribution from our recall of last spring that we will lap in June,” Maura said. “Together, these items total about $12 million of revenues in our Pet business.
  • “In addition, external cost headwinds and mix combined to deliver a significant negative impact on our sales and margins,” Maura said. “While we expect improvement in the back half of the year, the magnitude of our second quarter shortfall and manufacturing and distribution center start-up inefficiencies has caused us to lower our full-year adjusted EBITDA guidance from continuing operations by $57 million at the mid-point and adjusted free cash flow on a total company basis by $135 million.”
20 Apr 2018
Investment Grade Weekly Kathryn Bailey 0 comment

CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week of April 12-April 18 were negative, posting an outflow of $1.2bn. According to data analyzed by Wells Fargo, IG funds have garnered $53 billion in net inflows YTD, which is less than half the amount of net inflows recorded in the first four months of 2017.

The IG new issue calendar saw its most active week since the week ending March 9th.  U.S. banks led the way as they began to bring new bond deals coincident with earnings reports.  According to Bloomberg, $36.4bn in new corporate debt priced during the week.  This brings the YTD total to $392.17bn, which is down 14% year over year.  2018 issuance will see a significant impact pending regulatory reviews of large M&A deal such as AT&T/Time Warner and Bayer/Monsanto, among others.

The Bloomberg Barclays US IG Corporate Bond Index opened on Friday with an OAS of 106.


 

(Bloomberg) Dealers Kicking Abbott Debt to Curb Missed Out on Outperformance

  • Abbott Laboratories’ debt has outperformed peers in 2018 following Moody’s upgrade and positive outlook in February.
  • The Abbott Labs’ bonds have outperformed similarly dated BBB tier health-care and pharmaceutical debt by about 90 bps in 2018, including issues from Thermo Fisher, CVS and Mylan, driven by debt pay down and an upgrade by Moody’s in February.
  • Dealers have been net sellers of Abbott debt over the past three months, notably at the front-end of the curve, including the 2.35% bonds due in 2019, 2.9% bonds due in 2021 and 3.75% bonds of 2026.

 

 

(WSJ) Morgan Stanley Posts Record Earnings, Revenue

 

    • Morgan Stanley MS on Wednesday reported record quarterly profits, the last of the big U.S. banks to benefit from a potent cocktail of lower taxes, active markets, lower expenses and economies growing in lockstep.
    • The Wall Street firm’s first-quarter profits of $2.6 billion and revenues of $11.1 billion were both record highs after reflecting accounting adjustments and jettisoned businesses. Morgan Stanley’s traders had their best quarter since 2009, riding a wave of increased volume and volatility that also aided rivals, including Goldman Sachs Group Inc. and JPMorgan Chase & Co.
  • Combined profits at the six largest U.S. banks, which all reported first-quarter results in recent days, rose 24% from a year ago, outpacing an 18% rise in revenues. Meanwhile, the banks’ level of profitability as measured by the return they generate on their equity—a key gauge for shareholders—rose to its highest level in years.

 

  • The first quarter is typically the strongest of the year for banks. Investors put on new positions, which boost trading results, and companies raise money to fund new projects, which spurs lending and underwriting.

 

(WSJ, Press Release) Crown Castle Reports First Quarter 2018 Results and Raises Outlook for Full Year 2018

 

  • “After another quarter of very good financial and operating performance in the first quarter, we remain excited about the opportunities for our business to support growing data demand in the U.S.,” stated Jay Brown, Crown Castle’s Chief Executive Officer.
  • “We continue to see tremendous activity across our unique portfolio of infrastructure assets. In our tower business, we have recently signed comprehensive leasing agreements with several of our largest customers, which we believe signals the beginning of a sustained period of infrastructure investments by our customers.
  • In our fiber business, the volume of small cell bookings in the first quarter was comparable to what we booked during all of 2016, resulting in an increase in our contracted pipeline to more than 30,000 nodes. We also continue to make very good progress on integrating our recent fiber acquisitions.
  • We believe our unique value proposition as a shared communications infrastructure provider will allow us to translate the growing demand for data into growth in cash flows and, thus, deliver on our 7% to 8% annual growth target in dividends per share.”+
  • Crown Castle owns, operates and leases more than 40,000 cell towers and approximately 60,000 route miles of fiber supporting small cells and fiber solutions across every major U.S. market. This nationwide portfolio of communications infrastructure connects cities and communities to essential data, technology and wireless service – bringing information, ideas and innovations to the people and businesses that need them.

 


 

(Bloomberg) Global Yield Surge Defies Skepticism on Inflation’s Momentum

 

  • Rising inflation expectations in the world’s biggest economy are pushing up U.S. benchmark yields, putting pressure on rates to climb around the world and causing more than a few heads to swivel.
  • Federal Reserve officials may be attempting to tamp down concern of a U.S. price surge, but it hasn’t stopped yields from Tokyo to Frankfurt and New Yorkticking higher. In fact the yield of a $51 trillion Bloomberg Barclays index of global sovereigns and corporate debt is nearing a four-year high of 1.949 percent.

 

  • Yet even as April’s surge in raw materials drives inflation bets and those higher yields, the moves are relatively gentle. Treasury long-bond rates remain below February highs, and that suggests bond traders are so far taking events in stride.
  • “Actually there’s no overconcern yet in the market of inflation drifting dramatically higher — if you look at long, medium or short Treasuries,” said Joe Lovrics, Citigroup Inc.’s Iberia Markets head in Madrid. “In fact there’s a growing group talking about the U.S. economy actually cooling now.”
  • Although Fed official Loretta Mester mentioned inflation 18 times in a preparedspeech Thursday, she concluded it probably won’t pick up sharply even as unemployment is likely to fall below 4 percent this year and remain there through 2019.
  • In Europe, where the European Central Bank’s unconventional stimulus has been crushing rates since 2015, ECB President Mario Draghi is seen taking longer to lay out its plan to exit that program as protectionism threatens the euro-area outlook, economists said in a Bloomberg survey.
  • While there has been some market excitement this year over the potential return of inflation and a possible bond bear market, a number of other factors having been fueling yield increases, according to Lovrics.
  • “We’ve had an unexpected rally in oil, tax stimulus, strong employment in the U.S. plus Fed remarks about rising inflation, and this kind of feeds on itself,” he said.
17 Apr 2018
High Yield Weekly CAM 0 comment

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 -$23.6 billion.  New issuance for the week was $3.7 billion and year to date HY is at $65.0 billion, which is -27% over the same period last year. 

 

(Bloomberg)  High Yield Market Highlights

  • Junk bond spreads tightened the most in nine weeks and CCC yields fell to a 5-week low as U.S. funds saw inflows and the year-to-date return turned positive.
  • Yields dropped across ratings in 6 of the last 9 sessions and have fallen for 4 consecutive sessions this week, amid strong technicals boosted by light supply, and WTI oil at a 40-month high
  • Spreads have narrowed in seven of last nine sessions
  • Year-to-date returns for junk bonds turned positive for the first time since early February, with a gain of 0.05% in the index, compared to a 2.38% loss in IG
  • Resilient junk bonds brought investors home after more than 10 weeks of no material inflow
  • Rebounding equities, steadily declining volatility — with the VIX hovering near and below 20 for last two weeks — boosted junk bonds
  • Supply is expected to be light as the earnings season was in progress
  • New issue pricing reinforced the strength of high yield as Drax Finco and J.B. Poindexter priced at the tight end of talk, with orders more than 3x the offer
  • Earlier this week, TopBuild advanced its pricing schedule, increased the size of the offer, priced at the middle of talk, suggesting junk investors were not avoiding risk
  • CCCs continued to outperform BBs and single Bs, with positive YTD returns of 1.25%, BBs were the worst with negative YTD returns of 0.92%, single-Bs turned positive with 0.54%

 

(Reuters)  Icahn to sell Federal-Mogul to Tenneco for $5.4 billion 

  • Activist investor Carl Icahn said on Tuesday he was selling auto parts maker Federal-Mogul to Tenneco Inc in a $5.4 billion deal, unloading an investment he has held for nearly two decades and picking up a new stake in Tenneco.
  • Tenneco plans to separate into two independent, publicly traded companies – one focusing on powertrain products and the other on auto parts such as suspensions and axle dampers – after the deal closes.
  • The new bulked up powertrain technology company will likely benefit from the fact that internal combustion engine parts and tailpipe exhaust scrubbing technology will be needed by automakers for a long time to come, before they can be replaced by newer technologies such as fully electric cars.
  • The aftermarket parts company would provide a potentially steady cash flow.
  • “Going to market with well-recognized brands, more product categories, greater coverage and expanded distribution capabilities is a strong formula for capturing growth, particularly in China,” Tenneco Executive Chairman Gregg Sherrill said.

 

(Forbes)  Why T-Mobile And Sprint Are Rekindling Their Merger Talks

  • Sprint and T-Mobile appear to be back at the negotiating table, marking the third time that the two companies are exploring a potential combination. While a potential merger is likely a net positive for both companies and the broader U.S. wireless industry, it remains unclear as to how much has changed since the two companies called off their last round of merger talks in 2017.
  • The biggest reason the two carriers are looking to restart talks is likely to avoid the duplication of future capital expenditures, as the wireless industry transitions from 4G technology to next-generation 5G technology. Sprint has a deep portfolio of 2.5 GHz spectrum holdings that could be used for 5G deployment, allowing the combined company to avoid some outlays that they may otherwise have to undertake individually. Moreover, wireless is a very high fixed cost business, on account of sizable network operation and maintenance costs as well as sales and marketing expenses. The present value of synergies stemming from a deal could stand at upwards of $20 billion.Additionally, the carriers may also have better pricing power in a saturating wireless market if a deal goes through.
  • The last round of talks fell through in late 2017, as the two companies were unable to agree on who would have control over the combined entity, and it’s not clear how much has changed since last year. T-Mobile’s majority owner Deutsche Telekom (which owns a ~63% stake) apparently views its ability to consolidate T-Mobile’s earnings with its financials as key, given that the U.S. carrier is one of its most valuable assets. This means that the company could be willing to put in more money to increase its effective stake in the joint entity and retain control. While Sprint is likely to have less bargaining leverage in a potential deal, considering its comparatively challenging financial position, with over $30 billion in long-term debt, its parent Softbank may still want to keep control of the joint entity. Softbank has been doubling down on the Internet of Things space, and it’s likely that it views Sprint as a crucial part of this plan, given its nationwide wireless network in the U.S.

 

(Wall Street Journal)  Wynn Resorts in Early Talks to Sell Boston-Area Casino Project to MGM

  • Wynn Resorts has been in talks to sell its partially built Boston-area casino project to rival MGM Resorts International, MGM according to people familiar with the matter, as Massachusetts regulators continue their investigation into the company’s handling of sexual-misconduct allegations against founder Steve Wynn.
  • The talks, which are over the Wynn Boston Harbor property and no other parts of the company’s gambling empire, are at an early stage and may not result in a deal, the people said.
  • Regulatory issues surrounding any potential deal would be complex, since Massachusetts forbids companies from operating more than one casino in the state, and MGM is planning to open one in Springfield soon, they added.
  • Wynn Resorts estimates the Massachusetts project, scheduled to open next year, will cost a total of $2.5 billion to build, making it one of the largest U.S. casino projects ever undertaken outside Las Vegas.
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