Category: Insight

10 Feb 2017

CAM High Yield Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, flows week to date were $1.0 billion and year to date flows stand at $4.0 billion. New issuance for the week was $9.3 billion and year to date HY is at $31.5 billion.

(Reuters) Tax reforms might impact U.S. bond market

  • US corporate tax reform proposals are causing consternation among bond market players, who fear their implementation will drastically reduce issuance levels
  • President Donald Trump has plans to cut corporate tax rates, allow repatriation of cash stuck in overseas accounts, and eliminate companies’ ability to deduct debt interest expenses from tax – actions some think would hugely reduce companies’ current reliance on debt
  • “The elimination of tax deductibility will not be the death knell for the corporate bond market all of a sudden,” said Matthew Minnetian, a portfolio manager at Alliance Bernstein
  • “I’d be very surprised to see capital structures change overnight, and if you look at the cost of debt versus the return on equity, the cost of debt is still very low.”

(New York Times) Trump Says Health Law Replacement May Not Be Ready Until 2018

  • President Trump said in an interview that aired on Sunday that a replacement health care law was not likely to be ready until either the end of this year or in 2018, a major shift from promises by both him and Republican leaders to repeal and replace the law as soon as possible
  • “Maybe it’ll take till sometime into next year, but we’re certainly going to be in the process,” Mr. Trump said during an interview with Bill O’Reilly of Fox News, after Mr. O’Reilly asked the president whether Americans could “expect a new health care plan rolled out by the Trump administration this year.”
  • “It statutorily takes awhile to get,” Mr. Trump said. “We’re going to be putting it in fairly soon, I think that, yes, I would like to say by the end of the year at least the rudiments but we should have something within the year and the following year.”

(Fierce Wireless) Mobile video to grow almost 900% by 2021, Cisco predicts

  • Worldwide consumption of mobile video will grow nearly ninefold from 2016 to 2021, Cisco predicted, and will account for 78% of all mobile traffic by the end of that time period, up from 60% last year
  • “With the proliferation of IoT, live mobile video, augmented and virtual reality applications, and more innovative experiences for consumers and business users alike, 5G technology will have significant relevance not just for mobility but rather for networking as a whole,” said Doug Webster, Cisco’s vice president of service provider marketing. “As a result, broader and more extensive architectural transformations involving programmability and automation will also be needed to support the capabilities 5G enables, and to address not just today’s demands but also the extensive possibilities on the horizon.”

(Globe Newswire) CoreCivic Reports Fourth Quarter and Full Year 2016 Results

  • “The final quarter of 2016 was exceptionally busy, with many significant accomplishments of which we are proud. During the quarter we formally launched the CoreCivic brand which more appropriately reflects the range of solutions we can provide, substantially completed the expansion of our Red Rock Correctional Center, entered into two new contracts with Immigration and Customs Enforcement to help address their emergent bed capacity needs, and extended our contract with the Federal Bureau of Prisons at our McRae Correctional Facility, to name a few of those accomplishments,” said Damon T. Hininger, CoreCivic’s President and Chief Executive Officer. “We see many opportunities to work with new and existing partners to deliver real estate solutions that address each partner’s unique needs, and we have the expertise and flexibility to deliver those solutions in an innovative and cost-effective manner.”
  • Revenue of $464.1 million for 4Q increased 3.6% from the prior year quarter
  • Total revenue of $1.85 billion in 2016 versus $1.79 billion in 2015

(Bloomberg) Junk May Slam Into $1 Trillion Wall as Maturities Hit Record

  • A record $1 trillion of junk debt will mature by 2021, leaving high-risk companies to hunt for new cash at a time when markets are likely to be less welcoming, according to Moody’s Investors Service
  • Speculative-grade companies have $1.06 trillion of debt maturing between 2017 and 2021, with the bulk of it, $933 billion, coming due after 2019, Moody’s said Wednesday in a report
  • More than 30 percent of the high-yield bonds coming due are rated Caa1 or below by Moody’s, at least seven levels below investment grade. More than 8 percent of leveraged loans are rated Caa1 or below, up from 5.8 percent in the equivalent 2016 study. The telecommunications sector has the most debt coming due over the next five years with $81 billion

(Bloomberg) OPEC Keeps Its Promise About Crude Oil Cuts, IEA Says

  • OPEC achieved the best compliance rate in its history at the outset of an accord to clear the oil glut
  • The Organization of Petroleum Exporting Countries implemented 90 percent of promised output cuts in January
03 Feb 2017

CAM High Yield Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, flows week to date were $1.4 billion and year to date flows stand at $3.0 billion. New issuance for the week was $3.9 billion and year to date HY is at $21.6 billion.

(New York Times) Trump Fires Acting Attorney General

  • President Trump fired his acting attorney general on Monday night, removing her as the nation’s top law enforcement officer after she defiantly refused to defend his executive order closing the nation’s borders to refugees and people from predominantly Muslim countries
  • The president replaced Ms. Yates with Dana J. Boente, the United States attorney for the Eastern District of Virginia, saying that he would serve as attorney general until Congress acts to confirm Senator Jeff Sessions of Alabama
  • Ms. Yates’s order was a remarkable rebuke by a government official to a sitting president. Ms. Yates’s decision had effectively overruled a finding by the Justice Department’s Office of Legal Counsel, which had already approved the executive order “with respect to form and legality.”

(Company Release) Huntsman’s Pori, Finland Facility Experiences Fire

  • A fire started at Huntsman Corporation’s titanium dioxide manufacturing facility in Pori, Finland. All Huntsman associates at the site have been accounted for and there were no injuries. The fire brigade responded quickly and extinguished the fire.
  • Pori has a capacity of 130,000 metric tons, which represents approximately 15% of Huntsman’s total titanium dioxide capacity and approximately 10% of total European demand. The site is insured for property damage as well as earnings losses.

(The Hollywood Reporter) Charter Preparing to Claim Fox News Breached Carriage Deal

  • The legal fight over Charter Communications’ television carriage contracts is expanding and will soon involve deals made by other cable and satellite companies. Charter has told a New York judge about its intention to sue Fox News over the “most favored nations” provision of its distribution agreement.
  • Fox News has asserted breach of contract and fraud in the way Charter told regulators and shareholders of being the acquiring company only to hold up TWC’s contracts as surviving. Charter looks to dismiss Fox News’ fraud claim and is arguing that it is customary for a bigger operator, with more customers, to pay lower rates

(TMoNews) T-Mobile named No. 1 in Customer Service Satisfaction by Nielsen

  • T-Mobile’s customer service has been named the best in the wireless industry.
  • Nielsen Mobile Insights gave T-Mobile the top spot in Customer Service Satisfaction at the end of 2016, with Verizon, AT&T, and then Sprint following. T-Mobile beat out its competition in the Likelihood to Recommend, Net Promoter Score, and Overall Customer Satisfaction categories, too.
  • T-Mobile has been named No. 1 in customer satisfaction by Nielsen Mobile Insights before, and John Legere and Co. are pretty pleased to win it again. Here’s the CEO’s statement on the news:
    “We have the best damn care team in the business – at this point, that’s not even up for debate. But like everyone else at this company, our care team takes ‘we won’t stop’ pretty literally. They’ve got their sights on being the #1 care team in any industry, anywhere – not just wireless. That was so 2016.”

(Bloomberg) Weatherford Surges on Plans to Sell Assets And Be More ‘Boring’

  • Weatherford rose the most in more than two months after announcing plans to pair up with the world’s biggest onshore driller and sell assets for as much as $2 billion
  • Weatherford’s interim Chief Executive Officer Krishna Shivram is working on multiple fronts to revitalize the troubled oilfield service company as the oil industry begins to dig out from the worst downturn in a generation. He plans to sell Weatherford’s U.S. onshore fracking business and its land-rigs unit to cut debt and streamline its service offerings, shed more workers and boost sales through an alliance with Nabors Industries Ltd
  • “You will see a new, revitalized Weatherford with disciplined growth and improved returns, with no surprises and better predictability,” Shivram told analysts and investors Thursday on a conference call

(Business Wire) HCA Reports Fourth Quarter 2016 Results

  • Revenues in the fourth quarter totaled $10.641 billion, compared to $10.249 billion in the fourth quarter of 2015
  • Adjusted EBITDA for the fourth quarter of 2016 increased 3.6 percent to $2.206 billion compared to $2.131 billion in the prior year period
  • Fourth quarter same facility revenue growth of 3.4 percent was driven by an increase of 1.5 percent in same facility equivalent admissions and an increase of 1.9 percent in same facility revenue per equivalent admission in the fourth quarter of 2016
03 Feb 2017

CAM Investment Grade Weekly Insights

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

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

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

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

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

CAM High Yield Weekly Insights

 

Fund Flows & Issuance: According to Wells Fargo, flows week to date were $0.7 billion and year to date flows stand at $1.5 billion. New issuance for the week was $9 billion and year to date HY is at $17.6 billion.

(Globe Newswire) Pinnacle Foods Inc. Launches Proposed Refinancing

  • On the heels of a strong finish to 2016, Pinnacle Foods intends to launch a refinancing of its outstanding indebtedness under its senior secured credit facilities
  • The proposed refinancing is expected to result in interest expense comparable to or slightly below 2016, despite the impact of the rising interest rate environment on the Company’s floating rate debt. It is also expected to improve the Company’s debt maturity profile

(Washington Post) Trump signs executive order on the Affordable Care Act

  • President Trump signed an executive order giving federal agencies broad powers to unwind regulations created under the Affordable Care Act
  • The executive order, signed in the Oval Office as one of the new president’s first actions, directs agencies to grant relief to all constituencies affected by the sprawling 2010 health-care law: consumers, insurers, hospitals, doctors, pharmaceutical companies, states and others

(Press Release) Northern California County Selects Zayo for School District Connectivity

  • The Office of Education for a northern California county has selected Zayo Group Holdings, Inc. for a dark fiber network that will connect 28 school districts. The 183-mile network includes 173 miles of network in place or already under construction and 10 miles of new build, which will be leveraged for follow-on tenants
  • “Dark fiber is a highly scalable, cost-effective solution that provides the county with dedicated, high-capacity infrastructure,” said Dave Jones, executive vice president of Dark Fiber Solutions at Zayo. “They appreciate the flexibility of a solution they can manage themselves to meet the dynamic, long-terms needs of the county.”

(PR Newswire) Royal Caribbean Reports Over 25% Increase In Earnings And Anticipates Fifth Consecutive Year Of Double Digit Earnings Growth In 2017

  • The company’s booked position for 2017 is better than last year’s record high, and at higher rates. Strength from North American consumers is driving exceptionally positive trends for North American and European products
  • “Our global portfolio of products is demonstrating strength across virtually all key markets, positioning us to deliver strong yield growth in 2017,” said Jason T. Liberty, chief financial officer. “Strong topline growth combined with continued focus on cost management will generate another year of record setting results. Even with significant pressure from FX and fuel, we will deliver another stellar year.”

(Bloomberg) United Rentals to Acquire Competitor NES in $965 Million Deal

  • United Rentals Inc. agreed to buy NES Rentals Holdings II for $965 million to bolster its equipment-leasing operations in regions such as the U.S. East Coast and Midwest
  • Buying NES, which generated sales last year of $369 million, “will augment our revenue, earnings, Ebitda, free cash flow and overall scale,”Michael Kneeland, chief executive officer of United Rentals, said in the statement

(Bloomberg) Spectrum Brands Reports 1Q Results

  • 1Q net sales $1.21b, est. $1.22b (range $1.21b-$1.25b)
  • 1Q gross margin 37.1%, est. 36.6%
  • Sees FY17 free cash flow $575m to $590m, est. $567.6m

(Bloomberg) Verizon Exploring Possible Combination With Charter

  • A combination of Verizon and Charter would follow several recent industry mega-mergers, including Charter’s acquisition of Time Warner Cable and Bright House Networks, which made the Stamford, Connecticut-based company, partly owned by billionaire John Malone, the second-largest cable operator in the U.S. behind Comcast. Verizon, while facing a slowdown in its core wireless business, is the No. 1 mobile carrier and No. 2 telecommunications provider

(Bloomberg) Dialysis Provider Donation Disclosure Rule Blocked

  • A federal rule requiring kidney dialysis providers such as U.S. Renal Care Inc. and DaVita Inc. to disclose their donations to charities that provide premium assistance for dialysis patients can’t be enforced by the HHS
  • Judge Amos L. Mazzant of the U.S. District Court for the Eastern District of Texas entered a preliminary injunction against the rule Jan. 25, finding the Department of Health and Human Services didn’t follow the proper rulemaking procedure when implementing the rule. The court further said the rule, if implemented, would harm dialysis patients by leaving them with no insurance coverage for their treatment
  • Dialysis providers generally receive more reimbursement for dialysis treatments covered by private insurance, including plans on Affordable Care Act exchanges, than by Medicare or Medicaid plans. Providers said the HHS rule was flawed because it had the effect of allowing private insurers to refuse to cover patients once they learned that the patients received premium assistance from those charitable donations
27 Jan 2017

CAM Investment Grade Weekly Insights

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

(WSJ) Apple Sues Qualcomm Over Licensing Practices

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

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

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

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

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

CAM High Yield Weekly Insights

 

Fund Flows & Issuance: According to Wells Fargo, flows week to date were -$0.3 billion and year to date flows stand at $0.8 billion. New issuance for the week was $7.2 billion and year to date HY is at $8.6 billion.

(Food Business News) B&G Foods ready to make another Green Giant-size acquisition

  • B&G doubled its corporate infrastructure with the Green Giant deal and “set ourselves to really continue an acquisition path in a big way,” said Bob Cantwell, chief executive officer and president
  • “We still believe that the right answer for B&G is to get bigger managing smaller things. That really differentiates ourselves against everybody else, but certainly, be ready to buy more things like Green Giant of that size, $500-plus million, because we’re certainly capable of doing that.”
  • “If there’s an acquisition out there that really fits B&G, we’re going to be ready. We’re ready for it today. We’d prefer a little time just to absorb everything we have, but we’re not going to lose out on an acquisition that’s an absolute fit for B&G today.”

(Washington Post) Trump vows ‘insurance for everybody’ in Obamacare replacement plan

  • President-elect Donald Trump said in a weekend interview that he is nearing completion of a plan to replace President Obama’s signature health-care law with the goal of “insurance for everybody,” while also vowing to force drug companies to negotiate directly with the government on prices in Medicare and Medicaid
  • In addition to his replacement plan for the ACA, also known as Obamacare, Trump said he will target pharmaceutical companies over drug prices. “They’re politically protected, but not anymore”
  • “We’re going to have insurance for everybody,” Trump said. “There was a philosophy in some circles that if you can’t pay for it, you don’t get it. That’s not going to happen with us.” People covered under the law “can expect to have great health care
  • Trump said his plan for replacing most aspects of Obama’s health-care law is all but finished. Although he was coy about its details — “lower numbers, much lower deductibles” — he said he is ready to unveil it alongside Ryan and Senate Majority Leader Mitch McConnell (R-Ky.)
  • “It’s very much formulated down to the final strokes. We haven’t put it in quite yet but we’re going to be doing it soon,” Trump said. He noted that he is waiting for his nominee for secretary of health and human services, Rep. Tom Price (R-Ga.), to be confirmed

(Broadcasting & Cable) Spectrum Auction: TV’s New Exit Price Plummets to $10B

  • That is a huge drop from the previous round and sounds like a number wireless operators might be able to love, or at least meet, so long as the average price in the top markets also meets the second prong for closing the auction successfully. It is a far cry from the $86 billion broadcaster asking price when the auction began, though that was for much more spectrum
  • That $10 billion is how much the government will have to pay—actually it will be wireless companies if/when the auction finally closes for good—to move broadcasters off 84 MHz of spectrum so it can offer it to forward auction bidders for wireless broadband. That is down from the $43 billion broadcasters wanted for 108 MHz in stage 3 of the auction

(Bloomberg) IEA Sees Significant Gains in U.S. Shale Oil as Prices Rise

  • Oil-price gains will trigger a “significant” increase in U.S. shale output as OPEC and other producers rein in supply, according to the head of the International Energy Agency
  • “U.S. shale-oil production will definitely react strongly,” said Executive Director Fatih Birol. “At $50, $55, we’ve already seen a lot of activity,” Birol said. “U.S. oil production will continue to increase in significant terms.”
  • The oil industry is becoming more cost-efficient and a “big chunk” of global output is now profitable at $50 to $55 a barrel, citing Brazil, Mexico and China as countries that will also boost production. There’ll be “lots more” supply in late 2017 or early 2018, he said
  • Oil prices have risen about 20 percent since the Organization of Petroleum Exporting Countries reached a deal to curtail supply last year. The Nov. 30 agreement prompted a surge in activity in the U.S. — not an OPEC member — where oil and gas producers increased drilling the most since April 2014

(Business Wire) Mediacom Communications Makes Iowa First Gigabit State in the Nation

  • Nearly 1 million households in the more than 300 Iowa communities passed by Mediacom’s fiber-rich digital network will be able to enjoy download speeds that are up to 40 times faster than the minimum broadband definition set by the Federal Communications Commission
  • “In addition to enhancing speeds for residential and small business customers today, the Gigasphere platform we have deployed also lays the groundwork for offering multi-Gig services in the future,” said Mediacom’s Chief Technology Officer, JR Walden. “This next generation technology is an excellent complement to the Gigabit+ Fiber SolutionsTM that Mediacom Business has been offering local businesses in our markets for many years.”
20 Jan 2017

CAM Investment Grade Weekly Insights

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

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

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

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

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

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

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

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

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

CAM High Yield Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, flows week to date were $0.3 billion and year to date flows stand at $1.1 billion. New issuance for the week was $1.2 billion and year to date HY is at $1.4 billion.

(Business Wire) Williams and Williams Partners Announce Financial Repositioning for Long-Term, Sustainable Growth

  • Williams and Williams Partners L.P. announced an agreement to permanently waive payment obligations under the incentive distribution rights held by Williams and convert Williams’ economic general partner interest into a non-economic interest for 289 million newly issued Williams Partners common units
  • The estimated transaction value is approximately $11.4 billion. Following the IDR Waiver, Williams will hold approximately 660 million Williams Partners common units, representing approximately 72% of the common units outstanding
  • Williams also announced that it expects to purchase newly issued common units of Williams Partners at a price of $36.08586 per unit. Williams expects to fund the unit purchase with equity. With respect to units issued to Williams in the private placement, Williams Partners will not be required to pay distributions for the quarter ended December 31, 2016 and the prorated portion of the first quarter of 2017 up to closing of the private placement
  • As a result of the measures announced today, Williams expects that Williams Partners will not be required to access the public equity markets for the next several years. In addition, the Transactions result in debt reduction at Williams Partners and a meaningful increase in its cash coverage ratio to approximately 1.2x in 2017 and maintenance of strong coverage in excess of 1.1x thereafter
  • Strengthening Williams Partners’ coverage and credit profile through the Transactions will benefit stakeholders in Williams Partners, including Williams. In addition, maintaining Williams Partners as a strong, separate entity provides on-going strategic and financial flexibility to Williams, enabling it to capitalize on future opportunities to grow both organically and inorganically

(Business Wire) Parsley Energy Buys Permian Properties for $607 Million

  • Parsley Energy Inc. is buying oil and gas properties in America’s hottest shale play for $607 million as it seeks to boost production by almost 60 percent this year
  • The acquisition comprises 23,000 net acres of land adjacent to the company’s existing operations in the Midland and Southern Delaware portions of the Permian Basin
  • The Permian shale formation straddling West Texas and New Mexico has been a hot spot for deals and the center of a revival in U.S. oil drilling as producers have managed to make a profit in the region even during the worst price crash in a generation

Sabine Pass Liquefaction was recently upgraded to BBB- by Fitch. This makes the Sabine bonds rated investment grade by two of the three major rating agencies.

(Bloomberg) Valeant Sells $2.1 Billion in Assets to Ease Debt Burden

  • Valeant Pharmaceuticals agreed to sell about $2.1 billion in assets in two deals, an important first step in the struggling drugmaker’s endeavor to get cash and begin easing its debt burden
  • L’Oreal SA, the Paris-based cosmetic giant, will pay Valeant $1.3 billion for three skin-care brands. Valeant will also sell its Dendreon Pharmaceuticals unit to closely held Chinese conglomerate Sanpower Group Co. for about $820 million. Valeant’s shares and bonds jumped after the news
  • The agreements mark Valeant’s biggest divestitures in almost three years, and a start to its efforts to pay down about $30 billion in debt. It’s a significant break for Chief Executive Officer Joe Papa, who took over in May to help turn around a company that had been embroiled in scandals about high prices and accounting that led to legal and regulatory investigations
  • Proceeds from both sales will be used to permanently repay term-loan debt under Valeant’s senior credit facility, according to the company. The Sanpower transaction is expected to close in the first half of this year, while the sale to L’Oreal should close in the first quarter

(Bloomberg) Sprint Debt Upgraded by Moody’s on Better Performance, Liquidity

  • “Despite the heavy promotional activity, profitability has remained stable due to Sprint’s cost-reduction initiatives,” Moody’s said, adding that annual savings could top $2 billion. The more solid footing “has reduced Sprint’s refinance risk and its dependence upon the often-volatile high-yield bond market,” Moody’s said. Sprint also benefits from implicit support of its parent, SoftBank Group Corp., the report said.
  • Sprint has struggled to improve its finances under Chief Executive OfficerMarcelo Claure. The unprofitable carrier, based in Overland Park, Kansas, has had to borrow money using assets including airwave licenses as collateral to help finance the business. Through promotions such as half-off pricing, it has curbed subscriber defections and turned in its first annual increase in seven years.

(New York Times) Senate Takes Major Step Toward Repealing Health Care Law

  • In a 51 to 48 vote, the Senate took their first major step toward repealing the Affordable Care Act, approving a budget blueprint that would allow the health care law to be gutted without the threat of a filibuster.
13 Jan 2017

CAM Investment Grade Weekly Insights

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

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

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

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

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

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

  • The first time Adam Cohen’s Covenant Review sounded the alarm in October about a new passage creeping into bond offerings, it described the junk-rated deal from Rackspace Hosting Inc. as “outrageous” and “unprecedented.” Investors bought it anyway.
  • To Cohen, it seemed no one was paying attention to the fine print. So he blasted out a report titled “The End of Covenants,” ultimately fingering 18 deals with the disputed passage.
  • “I had to do something dire,” said Cohen, founder and chief executive officer of his New York-based firm. “By sending out something with the ridiculous title of ‘The End of Covenants,’ people figured out, ‘Wait, something’s going on here.’”
  • Bonds typically come with a lengthy array of standard covenants that protect bondholders by requiring company managers to maintain certain financial ratios, limit asset sales and meet certain deadlines. If they don’t, it can be deemed a voluntary default that entitles bondholders to penalty payments. The “no premium on default” passage casts doubt on those payments, according to Cohen’s firm.
  • Such language may be less jarring to junk-bond owners, who accept more risk and allow corporate managers more leeway in return for higher yields. Mainstream investors weren’t so forgiving.
  • Chatter about the covenants spread through buy-side e-mail chains and chatrooms Monday and Tuesday, with some investors urging others to contact banks to oppose the language.
  • The firestorm that erupted by the middle of this week pushed issuers including Marsh & McLennan, GM and Broadcom Ltd. to drop the idea. The report had struck a nerve with buyers of high-grade bonds, who already have fewer protections and aren’t eager to go down the path that led to five years of eroding protection for junk-bond covenants, as tracked by Moody’s Investors Service.
31 Dec 2016

Q4 2016 Investment Grade Commentary

Corporate Bond investors are compensated for two risks; interest rate risk and credit risk. The first, interest rate risk, is approximated by US Treasury yields. The second, credit risk, is the remuneration for the business risk of the underlying company; this remuneration is expressed as the premium received in excess of the US Treasury yield. 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 ‐ to roll down the yield curve, and (3) avoiding credit events that result in permanent impairment of capital.

The fourth quarter of 2016 saw a substantial increase in Treasury yields as they generally trended higher at the beginning of the quarter and moved sharply higher towards the end of the quarter. The movement higher in Treasury yields did not begin on November 8th (election day in the US) but accelerated at that point before peaking in mid ‐December. Offsetting the higher yields in Treasuries, corporate credit spreads continued their persistent tightening since the mid‐February widest levels of the year and ended near the tightest levels of the year. Specifically, the 10 Year Treasury began the quarter at 1.60%, peaked at 2.60% (up 100 bps) on December 15th and ended the quarter at 2.45% (up 85 bps). The A Rated Corporate credit spread tightened from 1.12% to 1.01% (down 11bps) and the BBB Rated Corporate credit spread tightened from 1.78% to 1.60% (down 18bps). When looking at movement of interest rates and credit spreads together, the sharp rise in Treasury yields was only partially offset by tighter credit spreads, thus yields for Investment Grade corporate bonds ended the quarter higher than where they started. While both US Treasuries and Investment Grade corporate bonds both ended the quarter with higher yields, Investment Grade corporate bonds outperformed by a considerable margin.

During the quarter, Investment Grade corporate bonds provided some protection to investors as US Treasury yields rose. The Barclays US Investment Grade Corporate Index returned ‐2.83% vs ‐4.47% for the Barclays US Treasury 5‐10 year index i. When looking at the performance of US Investment Grade corporate bonds the two primary factors that led to their outperforming comparable US Treasuries during the quarter were:

 

  • higher starting yields
  • tightening of credit spreads across the corporate credit curve

Our Investment Grade Corporate Bond composite provided a gross total return of ‐3.62%, which trailed the Barclays US Investment Grade Corporate Index, but outperformed the comparable US Treasury index. For the quarter, our underperformance relative to the US Investment Grade corporate benchmark can be primarily attributed to our focus on the 5 – 10 year part of the credit curve, the much shorter end of the curve was less impacted by increasing rates, and our underweight to the BBB credit quality segment relative to the benchmark.

For 2016 our Investment Grade Corporate Bond composite provided a gross total return of +4.03% vs the Barclays Investment Grade Corporate Index total return of +6.11%. Our limiting of bonds rated BBB to 30% of a portfolio vs approximately 53% for the benchmarkii, was a primary factor for the full year underperformance. The dispersion of performance in the benchmark across credit quality is highlighted below:

Since our portfolios tend to hold fewer BBB rated bonds and more A & AA rated bonds, one can see how this influenced our performance relative to the benchmark. This contrasts with our 2015 outperformance of the benchmark (+1.01% vs ‐0.68%) which can be partially attributed for the exact opposite reason of widening credit spreads and our long time policy of limiting BBB rated bonds.

As the year ended, we saw a continuation of many of the same themes we have written about in our previous commentaries. The continual tightening of credit spreads, which has provided better relative returns than US Treasuries, continued unabated since mid‐February. New corporate bond issuance set a new record in 2016 with nearly $1.3 Trillion of new Investment Grade issuance providing the supply to meet robust investor demand iii. Companies have been very eager and aggressive to issue bonds to lock in coupon rates near all‐ time historic lows (chart above).

As we enter 2017 a great deal of concern and speculation has centered on the future direction of interest rates due to potential new policy actions by a new administration in Washington DC. We as a firm do not utilize interest rate anticipation or forecasting in our investment process thus, we do not have an official firm view on the direction of rates. We do understand the concern investors have with the uncertainty of the direction of interest rates, but it is a risk we have no control over. What we do have control over is the composition of a portfolio as it relates to the credit quality it exhibits and assessing the risks associated with each company’s capacity to pay its future interest payments and ultimately return of principal to investors. As an investment manager solely focused on assessing this credit risk, this is where believe we have the ability to add value to a fixed income portfolio where an allocation to US corporate credit has been made. It is important to note that credit spreads are at levels that are tighter than their 30 year average. There is risk of potential corporate bond volatility due to these credit spreads mean reverting, which is something investors should be aware of as we move forward. If this credit spread widening were to unfold, we believe a portfolio with a corporate bond manager like CAM that underweights the riskiest credit quality of Investment Grade bonds and focuses on understanding the credit risks of the companies it owns, should help alleviate some of the potential volatility relative to other Investment Grade fixed income sectors. It is important to note that higher Treasury yields have historically provided a buffer to adverse interest rate movements ‐‐with absolute yields at the lower end of long‐term ranges, small rate changes can have a larger impact on bond values as there is less cushion to absorb adverse outcomes.

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 Barclays Indices: Global Family of Indices December 2016

ii Bloomberg Barclays Indices: Global Family of Indices December 2016

iii http://www.sifma.org/research/statistics.aspx