Category: Insight

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.”

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.”

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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.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.2 billion and year to date flows stand at -$24.2 billion.  New issuance for the week was $1.8 billion and year to date HY is at $60.0 billion, which is -28% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• Junk bond yields continued to head south as they dropped to a two-month low at close, with the biggest decline in more than seven weeks. Yields fell across ratings for three consecutive sessions.
• Spreads also tightened across ratings and saw the largest move in more than seven weeks as stocks continued to climb; the VIX dropped to a two-week low
• Strength and resilience of the market was also reflected in the pricing of two drive-by offerings amid 11 weeks of outflows from retail funds
• Two drive-by bond offerings were from the energy sector – Resolute Energy and Targa Resources; Targa Resources had orders of more than $3b and priced in the middle of talk
• Primary market priced four deals for $1.8b, which suggested junk bond investors were not heading to the exit
• While yields dropped and spreads tightened, junk investors have turned increasingly cautious and selective in credit-picking, a mood reflected in the pricing of American Greetings Corp yesterday
• AM was the second deal this week after McDermott International to price at a deep discount and offer double-digit yields
• CCCs continued to beat BBs and single-Bs with positive YTD returns of 0.55%
• CCCs still beat stocks and investment-grade bonds, with IG’s YTD returns negative 2.68%
• BBs were the worst with negative YTD returns of 1.41%, followed by single-Bs negative 0.24%
• The default rate should move lower in 2018 amid a growing economy and improving credit conditions in the commodity sector, Moody’s John Puchalla wrote in note

(Business Wire)  Wireless Carrier Selects Zayo for Significant National Expansion

• A major wireless carrier has selected Zayo for fiber-to-the-tower (FTT) to new macro towers in 30 markets across 21 states. The deal is an expansion of an agreement announced in September 2016. Inclusive of both contracts, Zayo will connect thousands of macro towers for the customer. The contract is Zayo’s largest mobile infrastructure contract to date.
• The solution includes deployment of dark fiber infrastructure, in some cases replacing legacy Ethernet. The new infrastructure will support the carrier’s strategy of improving coverage and capacity across its network to accommodate increasing traffic and to prepare for 5G. The deployment will leverage Zayo’s existing fiber network and includes construction of hundreds of route miles of fiber.
• “This undertaking is the result of a trusted relationship with the customer,” said Dan Caruso, chairman and CEO of Zayo. “As they continue to densify to meet the growing demand for bandwidth, dark fiber provides the optimal long-term solution.”
• This agreement pertains to macro towers. Under other contracts, Zayo is deploying small cell infrastructure for this customer. In many cases, these are full turnkey implementations, including RF design, site acquisition, permitting and installation of equipment.

(Bloomberg)  AMC Cinemas Tiptoes Into Saudi Arabia as Theater Ban Lifted

• AMC Entertainment, controlled by China’s Dalian Wanda, was granted the first cinema license in Saudi Arabia and plans to open 100 theaters with the country’s Public Investment Fund.
• AMC, the world’s largest exhibitor, and the Development & Investment Entertainment Co., a subsidiary of Saudi Arabia’s PIF, plan to open as many as 40 cinemas within five years and 60 more by 2030, according to a statement Wednesday from the Leawood, Kansas-based company.
• There are no commercial theaters in Saudi Arabia and plans to open them present challenges for the conservative kingdom, such as whether men and women can sit together and what types of movies will play. The partners are aiming for “50 percent market share of the Saudi Arabian movie theater industry,” the parties said. The first AMC in Saudi Arabia will open in the capital Riyadh on April 18.
• The announcement coincides with the U.S. visit by Crown Prince Mohammed bin Salman, who is looking to burnish his image as the leader of a more open Saudi economy.

(Modern Healthcare)  Dialysis industry on alert as Calif. union pushes for reimbursement cap

• A California fight between dialysis clinics and a major hospital workers’ union has healthcare industry investors and stakeholders jittery as the union gets ready to push a ballot initiative to cap private insurance reimbursements for dialysis.
• The Service Employees International Union–United Healthcare Workers West, one of the country’s largest hospital workers’ unions, has gathered more than 600,000 voter signatures for a statewide ballot measure to cut off dialysis clinics’ commercial insurance reimbursement at 115% of care costs, which would slash their current rates.
• The union claims the proposal would pressure clinics to improve care for dialysis patients by reinvesting extra revenue into staffing and other efforts to raise standards in order to bump up the cost of care.
• But critics of the initiative say the measure could spur reverberating losses for corporate dialysis giants, hospitals and even state and federal coffers.
• Most of dialysis market in California belongs to Colorado-based DaVita Healthcare Partners and the German company Fresenius Medical Care, who have about 70% of the state market share. The 30% remaining market share belongs to independent or not-for-profit clinics. California has just under 600 dialysis clinics.
• California has an extra high rate of growth in dialysis patients — about 5% every year — and there are already more than 68,000 dialysis patients in the state.
• But SEIU members say dialysis clinic regulations are far too lax, and facilities have been plagued by issues like rat and cockroach infestations or staffing shortages that leave technicians with only minutes to clean up stations before another patient receives treatment.
• “With regards to staffing it’s a free-for-all,” said union member and longtime dialysis technician Emanuel Gonzales, who is helping to lead the union campaign and has worked in several dialysis centers across San Bernardino County and the Inland Empire in California. “They pretty much operate anyway they like. If something happens, they could blame workers.”