Category: Weekly Insights

26 Jan 2018
Insight, Investment Grade Weekly, Weekly Insights CAM Team 0 comment

Investment Grade Weekly 01/26/2018

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week of January 18-January 24 were $3.6 billion, the second largest in the last 2 months. This comes on the heels of a $5.1 billion inflow the week prior, which was the largest in the past 3 months. Note that these are total flows across four investment strategies: Short, Intermediate, Long and Total Return. Per Bloomberg, investment grade corporate issuance for the week through January 25 was a meager $7.55bln. As of Friday morning, there are two small financial deals pending, but it looks as though we will close the week with less than $10b in issuance. The dearth of issuance is due to earnings season and the primary market should resurrect over the course of the next several weeks. As we go to print, the Bloomberg Barclays US IG Corporate Bond Index is trading at an OAS of 88, relative to the 2017 tight of 93.

 

(LA Times) Burger King ad explains net neutrality with flame-grilled Whoppers

  • https://www.youtube.com/watch?v=ltzy5vRmN8Q
  • Burger King is delivering its own hot take on the net neutrality showdown that has enflamed the U.S., using flame-grilled Whoppers.
  • Burger King’s new ad has become a sensation, with more than a million views on YouTube and it’s lighting up Twitter.
  • Net neutrality is the principle that internet providers treat all web traffic equally, and it’s pretty much how the internet has worked since its creation.
  • The Federal Communications Commission last month repealed the Obama-era rules, giving internet service providers such as Verizon, Comcast and AT&T permission to slow or block websites and apps as they see fit or charge more for faster speeds.
  • The FCC decision has led to a fierce pushback by consumers, law enforcement and major corporations.
  • Last week, a group of attorneys general for 21 states and the District of Columbia sued to block the rules. So did Mozilla, the maker of the Firefox browser; public-interest group Free Press; and New America’s Open Technology Institute. Others may file suit as well, and a major tech-industry lobbying group that includes Google has said it will support litigation.
  • This week, Montana became the first state to bar telecommunications companies from receiving state contracts if they interfere with internet traffic or favor higher-paying sites or apps.

 

(Bloomberg) Beware the $500 Billion Bond Exodus as Offshore Cash Comes Home

  • For years, the likes of Apple Inc. and Microsoft Corp. have stashed billions of dollars offshore to slash their U.S. tax bills. Now, the tax-code rewrite could throw that into reverse.
  • The implications for the financial markets are huge. The great on-shoring could prompt multinationals — which have parked much of their overseas profits in Treasuries and U.S. investment-grade corporate debt — to lighten up on bonds and use the money to goose their stock prices. Think buybacks and dividends.
  • It’s hard to say how much money the companies might repatriate, but the size of their overseas stash is staggering. An estimated $3.1 trillion of corporate cash is now held offshore. Led by the tech giants, a handful of the biggest companies sit on over a half-trillion dollars in U.S. securities. In other words, they dwarf most mutual funds and hedge funds.
  • While multinationals may be less inclined to sell their corporate bonds, at least initially, the impact could be more acute, analysts say. In recent years, firms such as Apple and Oracle Corp. have become some of the top buyers of company debt. Apple alone holds over $150 billion in the bonds, exceeding even the world’s biggest debt funds. The market itself is also less liquid, which means it takes far less to move the needle.
  • Big multinationals have good reason to bide their time, according to Richard Lane, a senior analyst at Moody’s Investors Service. Because their debt investments are so extensive, companies could end up inflicting losses on themselves with any large-scale selling.

 


(Reuters) GE reignites break-up talk after $11 billion insurance, tax hit

  • General Electric Co (GE.N) indicated it is looking closely at breaking itself up on Tuesday as the conglomerate announced more than $11 billion in charges from its long-term care insurance portfolio and new U.S. tax laws.
  • Chief Executive John Flannery has previously raised the idea of selling pieces of the largest U.S. industrial company, but went slightly further on Tuesday, saying GE is “looking aggressively” at a spin-off or other ways to maximize the value of GE’s power, aviation and healthcare units.
  • “I would categorize it as an examination of options and it’s (the) kind of thing that could result in many, many different permutations, including separately traded assets really in any one of our units, if that’s what made sense,” he said in response to an analyst question on a conference call, without giving any details.
  • Flannery already is eliminating thousands of jobs and cutting $3.5 billion in costs as he tries to solve problems he inherited when he became CEO on Aug. 1, including falling sales of power turbines, a build-up of inventory and declining profit margins in some businesses. His turnaround effort is still likely to take a year or more to play out.
  • Some Wall Street analysts saw Tuesday’s remarks as a sign that GE may already have figured out valuation, timing or disclosure requirements for a spin-off.
19 Jan 2018
High Yield Weekly, Insight, Weekly Insights CAM Team 0 comment

High Yield Weekly 01/19/2018

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$1.2 billion and year to date flows stand at $1.0 billion. New issuance for the week was $6.9 billion and year to date HY is at $11 billion, which is up 32% over the same period last year.


(Bloomberg) High Yield Supply

  • The primary market for dollar-denominated high yield bonds has been active so far in 2018 as credit spreads narrowed to the tightest level in a decade. Most deals continue to be refinancing-related with energy issuers particularly eager to take advantage of firmer oil prices.
  • High yield dollar-debt issuers are actively tapping the primary markets at the start of the year, tallying total volume of $9.7 billion through Jan. 15 vs. a 10-year median of $8 billion over equivalent past periods. Demand appears strong, with many issues reportedly oversubscribed as secondary-market credit spreads reached a low of 318 bps on Jan. 9 — the tightest in a decade as gauged by the Bloomberg Barclays U.S. Corporate High Yield Bond Index option-adjusted spread to U.S. Treasuries.
  • Issuers in the energy and materials sectors continue to lead offerings in 2018, with a 67% share of the year-to-date volume vs. the 24% share of total debt outstanding in the Bloomberg Barclays U.S. Corporate High Yield Bond Index for these sectors. Most were refinancing deals as issuers take advantage of firmer oil and metal prices to extend maturity profiles and shore up balance sheets after the 2015-16 commodities slump. Energy index spreads have narrowed to mid-2014 levels, currently at 347 bps.
  • Companies Impacted: Sunoco LP has led issuance so far in 2018, with $2.2 billion in refinancing related 144A notes, while energy sector peer Ensco PLC sold $1 billion in global debt, also refi related. In the materials sector, Olin Corp sold $500 million senior debt, also a financing.

 

(Bloomberg) Teva to Become the Fourth-Largest Global High Yield Issuer

  • Moody’s downgraded Teva’s unsecured bonds two notches to Ba2, two levels below investment grade. This will trigger the removal of $17 billion in debt outstanding from the Bloomberg Barclays U.S. Corporate Bond Index, a subcomponent of the U.S. Aggregate Index, in the Feb. 1 rebalancing.
  • Moody’s downgrade of Teva’s debt means almost $25.6 billion face value in dollar and euro-denominated bonds will join the Bloomberg Barclays Global High Yield Corporate Bond index on Feb. 1. That’s about $23.5 billion market value at current prices, or about 1.2% index weight, which will make Teva the fourth-largest issuer in the index behind HCA, Sprint and Telecom Italia. Compared with the index, Teva’s bonds average higher ratings and lower yield, which should have a positive impact on index quality.

 

(Bloomberg) Frontier Asks Lenders for a Break as It Looks to Add More Debt

  • The rural telecom service is asking lenders to cut it a break on some of the terms governing its $18 billion in bonds and loans so it can raise new funds, potentially setting the stage for refinancing parts of its crippling debt load.
  • On a call with senior lenders and then in a regulatory filing Wednesday, Frontier executives proposed adding new debt at the junior level and enhancing protections for senior creditors. To that end, the company wants to eliminate a restriction on the amount of total debt it could incur as a percentage of earnings, according to the filing. Instead, the cap on that ratio would apply only to first-lien debt.
  • The changes “will afford the company greater flexibility in executing on operational initiatives and in optimizing its access to the debt markets,” Frontier said in an emailed statement.
  • Among other changes, the plan would set Frontier’s first-lien leverage ratio at 1.5 times Ebitda, dropping to 1.35 times in 2020, and limit additional first-lien debt to $800 million, according to the filing. Ebitda, or earnings before interest, taxes, depreciation and amortization, is a key measure of company’s ability to service its debt.
  • On the lender call, organized by JPMorgan Chase & Co., Frontier executives said they’d offer lenders a consent fee of 15 basis points in exchange for the amendments, according to participants.

 

(PR Newswire) Noble Corporation Announces Pricing And Upsizing Of Offering Of Senior Guaranteed Notes

  • Noble Corporation announced today that its indirect, wholly-owned subsidiary, Noble Holding International Limited (“NHIL”), has priced an offering of $750,000,000 aggregate principal amount of 7.875% senior unsecured guaranteed notes due 2026 (the “Notes”). The offering was upsized from a previously announced amount of $500,000,000. NHIL intends to use the net proceeds of approximately $738,750,000, together with cash on hand, to pay the purchase price and accrued interest (together with fees and expenses) in the tender offers (the “Tender Offers”) to purchase for cash up to $750,000,000 aggregate purchase price, excluding accrued interest, of NHIL’s outstanding 4.00% Senior Notes due 2018, 4.90% Senior Notes due 2020, 4.625% Senior Notes due 2021, 3.95% Senior Notes due 2022 and 7.75% Senior Notes due 2024 and the outstanding 7.50% Senior Notes due 2019. If the Tender Offers are not consummated, or the aggregate purchase price of the notes tendered in the Tender Offers and accepted for payment is less than the net proceeds of the Notes offering, NHIL will use the remainder of those proceeds for general corporate purposes, which may include the further retirement of debt, including, but not limited to, the purchase of debt in open market or privately negotiated transactions. The Notes offering is expected to close on or about January 31, 2018, subject to customary closing conditions.
12 Jan 2018
High Yield Weekly, Weekly Insights CAM 0 comment

High Yield Weekly Insights 01/12/2018

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $1.2 billion and year to date flows stand at $2.2 billion.  New issuance for the week was $4.1 billion.

The high yield market is strong out of the gate in 2018. 

 

 (Bloomberg)  High-Yield Bond Spread at Lowest Since 2007 After Five-Day Rally

  • S. high-yield bond spreads hit a post-financial crisis low amid investor euphoria stoked by rising equity and commodity markets. Spreads have fallen for five consecutive sessions, the longest winning streak since February 2017, according to data compiled by Bloomberg.
  • Bloomberg Barclays High Yield index spread dropped to 320bps, lowest since July 2007, down 23bps since Jan. 1
  • Index compression already exceeds JPMorgan’s projected 20bps of HY spread tightening this year
  • BAML predicts HY spread will go as low as 290bps by yearend
  • Strong equities, low volatility, firm energy prices are driving the junk bond rally, helped by steady economic growth, low corporate default rates

 

(Bloomberg)  One-Tenth of High-Yield Communications Bonds Are Distressed

  • Led by Frontier, about 9.7% of the market value of high yield communications bonds are distressed, according to analysis by Bloomberg Intelligence analysts Stephen Flynn and Philip Brendel.
  • Largest portion belongs to Frontier, with almost $10b in market value of distressed notes, analysts say
  • Other large issuers: Windstream with $2.8b principal, iHeart with ~$10b and Intelsat $6b
  • While Windstream scrapped its dividend last year, Frontier continues to pay cash dividends on common stock, which Flynn and Brendel call “an odd combination” alongside its distressed debt
  • iHeart’s junior creditors will likely be fighting for scraps, as their influence in negotiations is likely minimal; pricing on unsecured debt could be “extremely volatile”

 

(RTT News)  Sunoco Announces $1.75 Bln Private Offering Of Senior Notes

  • Sunoco LP announced a private offering of senior notes due 2023, senior notes due 2026 and senior notes due 2028 in an aggregate principal amount of $1.75 billion. Sunoco Finance Corp., a wholly owned direct subsidiary of Sunoco, will serve as co-issuer of the notes.
  • Sunoco said it intends to use the net proceeds from the offering, together with the consideration it receives from its previously announced sale of certain company-operated retail fuel outlets to 7-Eleven, Inc., to redeem in full its 5.500 percent senior notes due 2020 at a call premium of 102.750 percent plus accrued and unpaid interest.
  • The company will also redeem each of its 6.250 percent senior notes due 2021 as well as 6.375 percent senior notes due 2023 at a make-whole premium plus accrued and unpaid interest.
  • In addition, Sunoco intends to repay in full and terminate its existing senior secured term loan agreement, repay a portion of the outstanding borrowings under its existing $1.5 billion revolving credit facility, pay all closing costs and taxes in connection with the 7-Eleven Transaction, redeem all of its outstanding Series A Preferred Units, and also fund the repurchase of a portion of its outstanding common units.

(CAM Note)  Sunoco ended up pricing $2.2 billion in notes across 5, 8, and 10 year maturities.

 

(Reuters)  Drahi hits Altice reset button to court wary investors

  • Altice founder Patrick Drahi is reshaping his telecoms and cable group for the second time in as many months by splitting its U.S. and European operations, hoping to end a drastic downward share-price spiral.
  • Heavily indebted Altice said it would spin off its U.S. arm, which owns the country’s fourth-biggest cable operator, to existing investors, and would prioritize efforts to turn around its European operations including French telecoms operator SFR.
  • Altice USA will pay a parting dividend of $1.5 billion to the European arm, to be named Altice Europe. Divestments of non-core assets, some of which are already under way, should also help to pay down debt, Altice said on Tuesday.
  • “We’re very focused on the operating story, specifically in France and Portugal,” Dexter Goei, Altice Chief Executive, told reporters during a call. “Over the medium and longer term, I‘m certain this question will be asked again and maybe we’ll have a different response.”
  • The two companies will be led by separate management teams with Franco-Israeli billionaire Drahi retaining control of both and garnering a large share of the dividend as well as of a $2 billion share buyback planned by Altice USA.
  • Dennis Okhuijsen, Altice’s current chief financial officer, will become CEO of Altice Europe and Dexter Goei will continue to serve as chief executive of Altice USA.
  • Altice has grown rapidly through acquisitions in the United States and Europe, helped by cheap debt that has risen to around $60 billion — more than five times its annual core operating profit.
  • In the United States, Drahi spent $28 billion in 2015 to buy cable companies Suddenlink and Cablevision, and even flirted with a $185 billion bid for cable giant Charter.
12 Jan 2018
Investment Grade Weekly, Weekly Insights Kathryn Bailey 0 comment

Investment Grade Weekly Insight 01/12/2018

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week of January 4-January 10 were $5.1 billion, the largest inflow in over 3 months. Note that these are total flows across four investment strategies: Short, Intermediate, Long and Total Return. Per Bloomberg, investment grade corporate issuance for the week through January 11 was $25.425bln. As we go to print, the Bloomberg Barclays US IG Corporate Bond Index is trading at an OAS of 90, relative to the 2017 tight of 93.

(Bloomberg) IG Sales May Rise as Banks Begin to Exit Blackouts

  • On the cusp of a long holiday weekend, high-grade issuers may choose to remain on the sidelines to close out the week. Activity has been muted with the week standing at just over $25b, falling shy of estimates calling for at least $30b.
  • Expect an increase in sales next week as more U.S. banks emerge from earnings blackouts.
  • JPMorgan (JPM) and Wells Fargo (WFC) both reported 4Q earnings this morning. Citibank (C) comes Tuesday, Bank of America (BAC) and Goldman Sachs (GS) report Wednesday and Morgan Stanley (MS) is Thursday.


(Bloomberg) Junk Euphoria Unshaken as Funds See Biggest Inflow Since Dec.’16

  • Investors reiterated their confidence in junk bonds by investing in high yield funds. Lipper reported an inflow of $2.65b into U.S. high yield funds, the biggest weekly inflow since Dec. 2016.
    • Investor euphoria led to the return of pay-in-kind notes offering in the primary yesterday, with Ardagh pricing at the tight end of talk with orders of more than $1.25b, about 3x the size of the offering. The Ardagh bonds traded at 102.875 after pricing at par
    • Investors shrugged off aggressive use of proceeds, suggesting risk appetite was strong. Ardagh raised debt to “provide liquidity to shareholders.” CSC Holdings is marketing bonds to fund a dividend to parent Altice USA
    • Recent new issues have been flooded with big orders. Ensco priced through talk and increased the offering size to $1b with orders more than 4x the original size of the offering. Sunoco’s $2.2b 3-part notes got orders for ~$6b earlier in the week
    • Issuance volume was on pace with 2017 with $5.5b pricing MTD
    • While junk yields seemed weary and stalled a bit as they come off 2-mo. lows; there appeared to be no clear catalyst yet that could derail junk bonds in the near term, as stocks climbed to new highs, oil set new 37-mo. high and volatility was still near multi-year lows
    • High yield continued to be backed by an overall supportive environment:Moody’s Liquidity Stress Indicator kicked off 2018 with a new low of 2.5%, suggesting junk issuers were backed by steady economic growth and buoyant credit markets as investors scramble for yield
    • Corporate default rates declined, another critical pillar factor for high yield
    • Steady economy, declining default rates, low volatility, steady oil prices and stocks augur well for high yield
      • ISSUANCE STATS
        • Eight deals for $5.5b MTD
        • 510 deals for $275.393b in 2017

 

 

05 Jan 2018
Investment Grade Weekly, Weekly Insights Kathryn Bailey 0 comment

Investment Grade Weekly Insights 01/05/2018

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week of December 28-January 3 were $3.0 billion, the largest inflow in six weeks. Per Bloomberg, investment grade corporate issuance for the week through January 4 was $21.05bln. As of today, the Bloomberg Barclays US IG Corporate Bond Index is trading at an OAS of 94, which is +1 from the 2017 tight of 93. In 2007, spreads bottomed at an OAS of 82. The all-time tight is 54, which occurred in March of 1997.

(WSJ) Who Are the Big Players in the Bond Market? Small Investors

  • Ordinary investors are a growing force keeping longer-term bond yields low, even as the Federal Reserve has raised interest rates. They are helping cap borrowing costs for individuals, corporations and state and local governments, while boosting the appeal of riskier assets such as stocks, which have climbed to record after record in recent months.
  • John Nederhiser exemplifies the current crop of bond buyers. While professional money managers fret about interest-rate increases, rising budget deficits and inflation, the 58-year-old accountant in Gresham, Ore., said such concerns won’t deter him from continuing to add to his fixed-income holdings. “Pretty much what I’m going to do is stay the course,” he said.
  • An aging population means investors like Mr. Nederhiser are likely to remain a factor, as people typically increase bondholdings as they approach retirement. The population of U.S. residents age 65 or older has grown more than 40% since 2000 to 49.2 million in 2016, according to the Census Bureau, which could signal steady demand for the debt. The median age for investors with fixed-income holdings ranging from mutual funds to individual bonds is 53, according to the Investment Company Institute’s annual mutual-fund shareholder survey, up from 49 in 2007.
  • Some older investors have lived through periods where inflation climbed above 10% and where it cratered below zero, while watching plunges in technology stocks and home prices dent their accumulated wealth. For some, that has led to a pragmatic appreciation of bonds’ steady income and relative stability.
  • The sanguinity of ordinary bondholders stands in contrast with 2017 statements from some more famous investors such as Bill Gross and Jeff Gundlach, both dubbed “the Bond King” at various times. Mr. Gross and Mr. Gundlach each created a stir last year by intimating a broad selloff might be approaching.
  • Much of the support individual investors are giving to the Treasury market is as a result of their investments in diversified bond funds, not an insatiable hunger for government debt. That is because government debt now makes up more than one-third of the Bloomberg Barclays U.S. Aggregate bond index, a popular reference point that guides how many portfolio managers assemble their holdings.
  • The amount of Treasurys in the index has risen from roughly one-quarter in 2007, before the financial crisis led to an explosion in government borrowing and a slowdown in issuance from corporate and mortgage borrowers. The proportion of Treasurys may rise further as the Fed pares back its $4.2 trillion in holdings of government and mortgage debt, which indexes don’t count since the Fed’s portfolio sits outside of the open market.
  • With government bond yields already near modern lows, some analysts see complacency as among the biggest risks. And some investors find it difficult to settle for single-digit bond yields when the S&P 500 index has posted double-digit returns for the seventh time in the past nine years.
  • It remains to be seen if retail investors will hang on to bonds should yields start to skyrocket. During the 2013 “taper tantrum,” which followed then-Fed Chairman Ben Bernanke’s statement that the central bank was preparing to stop its bond purchases. Bond funds suffered net outflows for eight consecutive months afterward, while the yield on the 10-year note almost doubled to around 3%.

 

(Barron’s) Intel: Don’t Anticipate Any Impact to Business

  • Intel (INTC) executives this afternoon held a conference call to address reports today, initiated by The Register, that the company had a “bug” or flaw in its chips that raised security issues, a charge the company had this afternoon rejected.
  • Led by Intel executive Steve Smith, the head of the company’s data center engineering, the company said repeatedly its chips are “performing as designed” and that info appearing today had contained mis-information.
  • “There were some info in media that was, I’ll call it, ahead of time,” said Smith, referring to the fact Intel said it had been working “for some time now” with security researchers and with operating system vendors and computer makers to prepare “mitigation” of security risks. The reports in media were “potentially misleading,” said Smith, “so wanted to clarify.”
  • Added Smith, “Since our products are performing to specification, we don’t anticipate a material impact to our business or our products, because they continue to operate properly.”
  • “We don’t expect any financial implication around Intel’s products,” Smith later reiterated.

 

(Bloomberg Markets) Morgan Stanley Wealth Exits Junk Bonds, Warns on Recession Risk

  • It’s too late in this market cycle to bet on high-yield bonds, according to Morgan Stanley Wealth Management.
  • So, the $2 trillion money management arm is completely slashing junk bond allocation. True, tax cuts are expected to inject fresh momentum into high-flying stocks, but the boost may be short-lived and mask balance-sheet weaknesses, Mike Wilson, chief investment officer, wrote in a note distributed Wednesday.
  • “While the tax cuts just enacted in the U.S. may lead to better growth in the short term, they may also bring forth the excesses we typically see before a recession — which is something credit markets figure out before equities,” according to the note. “We recently took our remaining high yield positions to zero as we prepare for deterioration in lower-quality earnings in the U.S. led by lower operating margins.”
  • Though Morgan Stanley doesn’t expect a recession in 2018, it sees the risks rising. Between tightening monetary policy and fewer positive surprises in earnings and economic data, any remaining upside is likely to be speculative, according to the firm.
  • “We think it will be much tougher to make money in 2018 and 2019 than in 2016 and 2017 as the risk of a recession and outright bear market comes closer,” Wilson wrote. “Late-cycle dynamics have become even more evident.”

 

 

 

 

21 Dec 2017
High Yield Weekly, Weekly Insights CAM 0 comment

High Yield Weekly Insight 12/21/2017

(CNN) White House, GOP celebrate passing sweeping tax bill

  • Republican lawmakers joined President Donald Trump on Wednesday afternoon to celebrate their largest legislative achievement of 2017, in a public ceremony spotlighting the most sweeping overhaul of the US tax system in more than 30 years.
  • The bill passed the House Wednesday 224-201, with no Democrats backing it. The measure now heads to the Trump’s desk for his signature.
  • In a vote in the early Wednesday morning hours, the Senate approved the final version of the first overhaul of the US tax code in more than 30 years. The bill passed along party lines, 51-48, with the final result announced by Vice President Mike Pence, who presided over the vote.
  • The plan drops the corporate tax rate down from 35% to 21%, repeals the corporate alternative minimum tax, nearly doubles the standard deduction for individuals and restructures the way pass-through businesses are taxed.
  • The bill keeps seven personal income tax brackets and lowers that tax rates for most brackets.

 

(Reuters) Humana, private-equity firms buy Kindred Healthcare for $4 billion

  • U.S. health insurer Humana and two private-equity firms agreed to buy home health-care and long-term care operator Kindred Healthcare on Tuesday for about $4 billion, the latest expansion by a U.S. health insurer into patient care.
  • Humana, TPG Capital, and Welsh, Carson, Anderson & Stowe will pay $9 per share in cash for the home health-care provider and hospice operator, a 4.7 percent premium over the stock’s Friday close, and split the company into two parts.
  • Humana, the fourth-largest U.S. health insurer, will pay $800 million for a 40 percent stake in Kindred at Home, which will contain Kindred’s 40,000 caregivers that serve about 130,000 patients daily. It will not have a stake in the second Kindred unit, which will contain long-term acute care and rehabilitation assets.
  • Humana’s insurance business is focused on individuals in the U.S. government’s Medicare program for the elderly and disabled, and the acquisition builds on Humana’s focus on using health providers in members’ homes to improve health outcomes and save costs.
  • The deal comes after deals by competitors Aetna and UnitedHealth that will expand the reach of those insurers into healthcare services in locations and sites that charge less than hospitals.

 

(Bloomberg) Mattel Pays Up to Refinance Debt at Tough Time for Toymakers

  • Mattel Inc. sold $1 billion of bonds due 2025 with a yield of 6.75 percent as investors demanded the struggling toymaker pay a premium to refinance short-term debt.
  • While the pricing was at the tighter end of initial talk of up to 7 percent, it’s more than 2 percentage points above the average for similarly rated bonds, according to Bloomberg Barclays indexes. The maker of Barbie dolls and Hot Wheels cars was cut to junk by two major bond-grading firms recently.
  • Mattel, in its first bond offering this year, sold the debt at a difficult time for the toy industry. The company lowered its full-year sales and guidance in October, prompting Chief Executive Officer Margo Georgiadis to increase Mattel’s cost-cutting plan by threefold and suspend its dividend. Fourth-quarter sales could also be hurt by underperforming brands and retailers exerting tighter control over their inventories, Mattel said in a filing.
  • The proceeds of the bonds, which can’t be bought back for three years, will refinance debt due next year and repay Mattel’s commercial paper borrowings, the filing said. The company also plans to replace its revolving credit facility with a new $1.6 billion credit line secured by assets including its inventory.
  • The lower forecasts led Moody’s Investors Service, S&P Global Ratings and Fitch Ratings to downgrade the toymaker. Moody’s, assigning the second-highest junk rating with a stable outlook, cited the bankruptcy of retailer Toys “R” Us Inc. for Mattel’s drop in sales during the several “critical weeks” at the end of the third quarter ahead of the holiday shopping season. S&P cut the company one level to BB-, three steps below investment grade. Fitch rates it one step higher at BB.

 

(PR Newswire) Crown Holdings Announces Acquisition of Signode Industrial Group Holdings

  • Crown Holdings, a global leader in consumer packaging, announced that it has entered into an agreement to acquire Signode Industrial Group Holdings, a leading global provider of transit packaging systems and solutions, from The Carlyle Group, in a cash transaction valued at $3.91 billion subject to customary closing adjustments. The acquisition, which is subject to review by various competition authorities, is expected to close during the first quarter of 2018 and to significantly increase free cash flow. Debt financing has been fully committed in support of the transaction.
  • With pro forma sales and adjusted EBITDA of $2.3 billion and $384 million, respectively, for the twelve months ended November 30, 2017, Signode is the world’s leading supplier of transit packaging systems and solutions, which consist of strap, stretch and protective packaging consumables and the application equipment and tooling for each. Based in Glenview, Illinois, Signode’s global footprint includes operations in 40 countries across 6 continents, with sales to customers in approximately 60 countries.
  • Commenting on the transaction, Timothy J. Donahue, President and Chief Executive Officer of Crown, stated, “With this acquisition, we add a portfolio of premier transit and protective packaging franchises to our existing metal packaging business, thereby broadening and diversifying our customer base and significantly increasing our cash flow. Signode’s products supply critical in-transit protection to high value, high volume goods across a number of end-markets, including metals, food and beverage, corrugated, construction and agriculture, among others. Combined with its highly engineered equipment and service business, Signode offers full solutions to meet customers’ transit packaging needs. In addition to its equipment and protective packaging businesses, geographic and product mix provide a strong platform for value-creating growth.”
15 Dec 2017
High Yield Weekly, Weekly Insights CAM Bond Funds 0 comment

High Yield Weekly Insight 12/15/2017

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.4 billion and year to date flows stand at -$18.5 billion.  New issuance for the week was $6.0 billion and year to date HY is at $273 billion, which is up 23% over the same period last year.

(Bloomberg)  Corporate Credit Impacts of Proposed Tax Legistlation

  • As Republicans target the passage of tax policy by year-end, high yield issuers may be net losers, while the benefits of accelerated depreciation are irregularly distributed. The potential for a cap on the deductibility of net interest expense will be felt more broadly.
  • Capital-intensive industries, including materials and energy, and the highly levered communications sector potentially have the most to lose from tax-reform proposals limiting interest deductibility. Strong cash flow and lower average debt loads vs. revenues leave technology and consumer staples with limited exposure. Carry-forward provisions would benefit more cyclical sectors, allowing companies to apply interest expense not deducted in a low-earnings year to earnings over some future period.
  • Issuers such as Sprint and Charter among communications issuers, and Halliburton and Chesapeake within energy, are among those that would lose some interest deductibility under the Senate proposal.
  • The percentage of issuers with interest expenses exceeding 30% of operating income, however defined, climbs steadily as ratings fall. While a negligible number of issuers rated between AA and BBB would be unable to deduct the full amount of interest expenses, assuming the use of Ebitda, almost all triple-C issuers would be affected.
  • Methodology differences between the House and Senate bills regarding interest deductibility could have wide-ranging effects for issuers. Both Congressional bodies entertain adjusted results, though the House plan to use a measure closer to Ebitda would mean about 25% of all companies would see some effect vs. about 40% under the Senate plan.

(New York Times)  Fed Raises Interest Rates as Focus Turns to 2018

  • The Federal Reserve, in a widely expected decision, raised its benchmark rate by a quarter of a percentage point, to a range of 1.25 percent to 1.5 percent.
  • The Fed also predicted stronger economic growth over the next three years. It forecast 2.5 percent growth in 2018, well above its previous forecast of 2.1 percent growth in 2018, published in September. Janet L. Yellen, the Fed chairwoman, said the faster growth forecasts reflected an assessment of the $1.5 trillion tax cut moving through Congress.
  • Officials did not deviate from their 2018 outlook for interest rates or inflation and continued to signal three interest rate increases next year.

(Business Wire)  T-Mobile announces the acquisition of TV tech pioneer, Layer3 TV, Inc.

  • T-Mobile US, Inc. president and CEO John Legere unveiled the next phase in the Un-carrier’s mobile video strategy, announcing plans to launch a disruptive new TV service in 2018. To fuel that, Legere also announced the Un-carrier has signed a definitive agreement to acquire TV technology innovator Layer3 TV, Inc. and will work with Layer3 TV’s leading technology and talent to create T-Mobile’s new TV service.
  • “People love their TV, but they hate their TV providers. And worse, they have no real choice but to simply take it – the crappy customer service, clunky technology and outrageous bills loaded with fees! That’s where we come in. We’re gonna fix the pain points and bring real choice to consumers across the country,” said John Legere, president and CEO of T-Mobile. “It only makes sense for the Un-carrier to do to TV what we’re doing to wireless: change it for good! Personally, I can’t wait to start fighting for consumers here!”
  • The Un-carrier will build TV for people who love TV but are tired of the multi-year service contracts, confusing sky-high bills, exploding bundles, clunky technologies, outdated UIs, closed systems and lousy customer service of today’s traditional TV providers. And people are tired of all the bull that comes bundled with Big Cable and Satellite TV – America’s #1 most-hated industry. In fact, 8 of the 10 brands with the lowest customer satisfaction scores in America are cable and TV providers1.
  • “We’re in the midst of the Golden Age of TV, and yet people have never been more frustrated by the status quo created by Big Cable and Satellite TV,” said Mike Sievert, Chief Operating Officer of T-Mobile. “That’s because the world is changing – with mobile video, streaming services, cord cutting, original content and more — and yet, the old guard simply can’t – or won’t – evolve. It’s time for a disruptor to shake things up and give people real choice like only the Un-carrier can.”

(Bloomberg)  Freeport Returns to Copper Focus, Grasberg Next Hitch

  • Resolving its Contract of Work dispute covering its Grasberg mine with the Indonesian government is the key to current operations and Freeport-McMoRan’s future prospects. Grasberg accounted for a third of Ebitda in 2016 and Grasberg Block Cave will be the world’s largest underground mine when developed. Freeport, rated B1/BB-, is on positive outlook from Moody’s, with its bonds trading in-line with Ba2 metals and mining peers.
  • Fighting off low commodity prices, Freeport-McMoRan has restructured to return its focus to its leading copper business. Freeport reached its $10 billion net-debt target in 3Q through execution of its operating plans, aided by recovering copper prices. A contract dispute and production shortfalls at its Indonesian Grasberg mine have hampered Freeport’s progress and may affect long-term prospects. Once Grasberg is resolved, the company will evaluate capital allocation among growth projects and dividends.
  • Freeport-McMoRan reported 3Q adjusted Ebitda of $1.6 billion as the price of copper increased by 35% vs. 3Q16. This was the company’s best quarter since 4Q14 and put Freeport on pace for its best year since 2014.
  • Freeport-McMoRan’s 3Q cash from operations exceeded capital spending and shareholder rewards for the sixth straight quarter as outlays have been significantly reduced. Freeport devoted $314 million to capital expenditures in 3Q and plans to spend $1.5 billion in 2017, down vs. $1.8 billion at the start of the year. This would be the lowest on an annual basis since 2010. Assuming normal operations at Grasberg, Freeport expects 2017 cash from operations of $4.3 billion, based on a copper price of $3 a pound for 4Q.
08 Dec 2017
Investment Grade Weekly, Weekly Insights Kathryn Bailey 0 comment

Investment Grade Weekly Insight 12/08/2017

Fund Flows & Issuance: According to Wells Fargo, IG fund flows on the week were $1.357bln. This brings the YTD total to +$318.643bln in total inflows into the investment grade markets. IG fund flows remain on pace for the strongest year on record. Per Goldman Sachs, year-to-date cumulative inflows into IG mutual funds account for just 13% of AUM while ETFs continue to grow at the expense of mutual funds –ETFs account for 32% of AUM growth thus far in 2017. According to Bloomberg, investment grade corporate issuance for the week through Thursday was $17.315bln, and YTD total corporate bond issuance was $1.32t. Investment grade corporate bond issuance thus far in 2017 is nearly flat, trailing 2016 issuance by 1% year-to-date. The Bloomberg Barclays US IG Corporate Bond Index is trading at an OAS of 97 as we go to press on Friday morning. The OAS hit 94 for 5 sessions in October, so we are still modestly wider than the tightest levels that we have seen thus far in 2017 and within distance of the tightest level since 2007 when spreads bottomed at an OAS of 82. We have quite a ways to go if we were to flirt with all-time tights of 54, last seen in March of 1997.

(Bloomberg) Expect Negative Excess Returns in Global Credit: MS’s Richmond

  • Investors can expect negative excess returns across global credit in 2018, and we are later in the credit cycle than people generally realize, Adam Richmond, Morgan Stanley’s head of credit research, said on a panel yesterday at the Bloomberg Intelligence Credit Outlook Forum.
    • “You don’t need a recession to get negative returns late in a cycle,” Richmond said
      • Haven’t been three straight years of positive excess returns in credit since 1996; 2017 will be the third year, so it may be due for a year of negative excess returns
    • Richmond predicts spread widening in credit across the globe. Caution is required, this is a global phenomenon
      • Volatility was artificially compressed by central bank policy and now the dynamics are changing. It’s not just the Fed that is entering rate-hike phases; ECB, PBOC, BOE are moving in that direction too. Even the BOJ is increasing its yield-curve target later next year
    • “But from a valuation perspective it’s a challenge wherever you look in the world”
    • “We can’t tell investors to just sit in cash, so our answer is, be invested, but this is the time in the cycle to be very picky and to be up-in-quality, and so while it’s boring and investors don’t want to hide out in defensive credits, we think you’re supposed to do that”
      • Take IG over HY. Investors may want to be in Single-As over BBBs in IG bonds. Focus on sectors that will be relatively unscathed through a credit cycle, such as U.S. financials. “This is very much not going to be a financially-driven credit cycle, so this sector will behave more defensively”


(Bloomberg Law) Forget AT&T-Time Warner. Watch These Non-Media Mega-Deals

  • Media mergers are big news lately with the Justice Department’s lawsuit to stop AT&T Inc. from merging with Time Warner Inc. and Sinclair Broadcast Group Inc.’s effort to buy Tribune Media Co.
  • But the laser focus on media consolidation may cause the big mergers in other industries to disappear under the radar. There are notable mega-mergers (well above $10 billion) slated to close next year in agriculture, aerospace, oil, and apparel. CVS Health Corp.’s bid to buy Aetna Inc. for $67.5 billion can be added to that list, although it has not yet had its initial antitrust review.
    • Bayer-Monsanto is the last of three seed-pesticide company pairings announced in 2015-16. The transaction faces continued resistance since it was announced in September 2016. Bayer’s agreed price has since dropped from $66 billion to $63.5 billion.
    • Eyewear giants Essilor International SA and Luxottica Group SPA announced a 45 billion euro ($53 billion) merger in January. Their businesses are largely complementary, but antitrust regulators are still focusing on potential losses in competition. Essilor is the largest supplier of ophthalmic lenses worldwide, and Luxottica is the largest supplier of eyewear worldwide.
    • Industrial gas giants Linde AG and Praxair Inc. announced a deal on June 1, 2017 for $41 billion to create the world’s largest industrial gas supplier. The combined company would leapfrog current market leader Air Liquide SA, which merged with Airgas Inc. in 2016 for $13 billion.
    • United Technologies Corp. announced a $23 billion bid for Rockwell Collins Inc. on Sept. 4, 2017. The deal unites two aerospace behemoths that together equip commercial and military aircraft from “tip to tail.”

(Bloomberg) AT&T Commits to Time Warner Deal Even as Judge Delays Deadline

  • The U.S. Justice Department’s antitrust lawsuit to blockAT&T Inc. from buying Time Warner Inc. will go to trial March 19, a later date than the companies had sought to begin their epic legal fight with the government.
  • With the trial more than three months off, AT&T and Time Warner will have to extend their self-imposed April 22 deadline for completing the $85.4 billion deal. U.S. District Judge Richard Leon said Thursday in Washington that the companies should push back the cutoff date by 60 to 90 days to give him time to make a decision.
  • “We will promptly discuss the court’s post-trial schedule with Time Warner,” AT&T General Counsel David McAtee said in a statement. “We are committed to this transaction and look forward to presenting our case in March.”
  • If approved, the deal would reshape the media landscape by uniting a telecom giant with the owner of CNN, Warner Bros., TNT, TBS and HBO. AT&T, the owner of DirecTV, is the largest pay-TV distributor, as well as a powerhouse in mobile phones and landlines. The Justice Department has argued that letting AT&T own the films and TV shows that flow down its pipes would harm consumers and competitors.
  • Under their current agreement, if AT&T and Time Warner fail to complete their deal by April 22, they can choose to extend the deadline or either party can walk away. If the judge blocks the deal, AT&T must pay Time Warner a breakup fee of $500 million.
  • “This is not a normal case from many perspectives,” Leon said from the bench Thursday. He estimated the trial would take about three weeks. “This is going to be a lot of hard work and a lot of sacrifice.”

 

(Bloomberg) U.S. Payrolls Rise 228,000; Wages Gain Less Than Forecast

  • The U.S. added more jobs than forecast in November and the unemployment rate held at an almost 17-year low, though below-forecast wage gains suggest the labor market still has slack to absorb.
  • Payrolls rose 228,000, above the median economist estimate of 195,000, after a downwardly revised 244,000 advance, Labor Department figures showed Friday. Average hourly earnings increased 2.5 percent from a year earlier, less than the 2.7 percent projection, and October’s figures were revised lower.
  • The data provide a clearer picture of the labor market after volatility caused by two hurricanes mostly dissipated, though there may have been some lingering effects. While the job market remains a bulwark for the economy and investors see a Federal Reserve interest-rate hike next week as a near- certainty, the lack of acceleration in wages remains a puzzle that could factor into the pace of increases in 2018.
  • Average hourly earnings rose 0.2 percent from the prior month following a revised 0.1 percent drop, the report showed. Analysts had penciled in a gain of 0.3 percent for November. The gain from a year earlier followed a downwardly revised 2.3 percent advance for October.
  • Economists expect that in time, wages will post a sustained pickup, which has remained elusive in this expansion even though labor-market slack is steadily disappearing. Faster gains in paychecks would boost consumer spending, which accounts for about 70 percent of the economy. Jerome Powell, President Donald Trump’s nominee to head the Fed, said last month at hisconfirmation hearing that he doesn’t see wages signaling any tightness in the labor market.
08 Dec 2017
High Yield Weekly, Weekly Insights CAM Bond Funds 0 comment

CAM High Yield Weekly Insights

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

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

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

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

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

(Business Wire)  DAVITA SELLS DAVITA MEDICAL GROUP TO OPTUM FOR ABOUT $4.9B CASH 

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

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

  • Toshiba Corp and Western Digital Corp have agreed in principle to settle a dispute over the Japanese firm’s plans to sell its $18 billion chip unit and aim to have a final agreement in place next week, sources familiar with the matter said.
  • The board of the embattled Japanese conglomerate approved a framework for a settlement on Wednesday, one of the sources said.
  • The potential for Western Digital – Toshiba’s partner in its main semiconductor plant and jilted suitor in the auction – to block a deal has been seen as the main obstacle to the planned sale of the unit to a Bain Capital-led consortium.
  • The settlement under discussion calls for Western Digital to drop arbitration claims seeking to stop the sale in exchange for Toshiba allowing it to invest in a new production line for advanced flash memory chips that is slated to start next year, two sources said.
01 Dec 2017
High Yield Weekly, Weekly Insights Kathryn Bailey 0 comment

CAM High Yield Weekly Insights

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

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

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

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

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

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

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

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

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

 

 

©Cincinnati Asset Management. All Right Reserved 2023.