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Still Bright

15 November 2019 by jbchevrel

This week, Turkey has traded with global risk and the 5y CDS is little changed, around 310bp. The risk is still skewed towards tightening on Turkey, as the picture didn’t change much since my last comment (Sep 26 ‘Bright), although the CDS has already tightened 60bp, since then. The fact that the economy there has grown by 1.2%q in Q2 had positively surprised expectations, thus slowing the annual pace of contraction (from -2.4%y in Q1 revised from -2.6%y to -1.5%y). Current account dynamics have tremendously improved, there is no visible negative catalyst on the policy side, and the yield hunt environment will keep being extremely supportive of turkey fixed income, as a whole. On the former, the c-a deficit may well stabilize at 1% of GDP this year & next one. Exports rose +8.1%y from +9.2%y in Q1 and the slowing in imports has eased (-16.9%y from -28.9%y) so basically net exports have added +5.7% to GDP growth. For reference, the current account deficit had peaked at about 7% of GDP in the middle of 2018, around what many refer to as the ‘TRY crisis’. Another very positive development that can be expected going forward is the continued reduction in the private sector leverage. Looking at foreign currency denominated liabilities of the corporate sector, it has fallen by ~$20B over the past 12m and the external debt of banks has also fallen by ~$25B. The mitigant to this brighter private sector picture is the public sector picture, where spending has weighed on budget deficit. Liabilities coming due within next 12m @ ~$180B (~1/4 of GDP). Adding to this mitigant, FX reserves adequacy has not really improved. CBT reserves are ~$75B. CBT net foreign assets are ~$30B. But capital inflows, which have been weakish YTD as the ‘TRY crisis’ is still in all memories, may well pick up in the coming quarters. The boost to GDP going forward may well come from investment, in a yield hunt environment where 10y T 170 Bund -60. The contraction in investment had not improved in Q2. It actually worsened (from -12.4%y to -22.8%y since Q1) across sectors (construction -29.2%y machinery -16.5%y etc). Adding to that, with inflation supposedly under control, in good part thanks to the ‘FX-passthru-induced’ virtuous circle, household spending is likely to keep resilient. Why would it not be. It was stable in Q2, just a tad down -1.1%y, so better than what the Bloomberg consensus had built, on the back of higher frequency indicators (credit growth, d-g sales, cons. goods imports, cons. confidence index, etc).

Potash Cut Again

14 November 2019 by jbchevrel

K+S Aktiengesellschaft (SDFGR) is a German fertilizers manufacturer/marketer which serves both the agriculture and the industry, globally. SDFGR also produces salts, for different applications (de-icing, food, industry, chemistry). The name is a member of the XOver since s31. Today it reported disappointing Q3 results, pushing the 5y CDS c25bp wider on the day. SDFGR cut its potash production again by 200k tons and further cuts may come in Jan-20 if producers can’t reach agreement with China. Capex guidance was also cut, it is still possible to see positive FCF this year, although analysts see <€100m. EBITDA came lower than expected due to depreciation and hedging costs. The new full-year 2019 forecasts are for EBITDA of €650m (prev €730m - €830m cons €717.8m), revenues to increase “slightly” this year and adj. FCF to be positive (prev >€100m). Back in October, the falling potash prices highlighted SDFGR exposure to the commodity cycle. The potash is the potassium fertilisers used in agriculture. Now the 5y CDS has widened from 180bp the week after the roll to 300bp now. Weak potash demand has led to production cuts across the industry and SDFGR had to cut their earnings guidance ahead of today’s release, putting the company's deleveraging targets at risk (debt/ebitda <3x by end-20 from ~6x in 17 --ultimate target is to go back to IG by 2023). S&P had cut the rating by one notch to BB- and said SDFGR must show leverage below 5x and FCF >€50m for an upgrade. Moody’s had mentioned a 4x leverage goal needs to be hit for an upgrade from the current Ba2 rating. Liquidity-wise, they have ~€500m cash & cash equivalents on b/s and they got earlier this year a new ~€1B 5y secured bank facility. The previous credit line of €1B due to expire Jul-20 had also been renewed in €0.8B and a €160m 5y bullet loan was granted. Going forward, SDFGR’s strategy is to re-focus on higher-margin goods, so not incl. potash. Weather remains another potential risk, as the German drought had been largely responsible for the subdued 18 earnings, although they invested in new wastewater storage facilities since then.


13 November 2019 by jbchevrel

SES SA (SESGFP) offers global satellite broadband communication services and is a leading provider to customers in television (broadcast and pay-TV), enterprise and government. Recently the company has focused on becoming more vertically integrated in Video by increasing its presence there, while still differentiating its offerings with the acquisition of O3b Networks Ltd, in particular. Another area of focus for them is satellite-based mobile connectivity, especially for air travel. SESGFP has been an iTraxx Main constituent in series 19-21 and 29-32. Today SESGFP 5y CDS widened 9bp, underperforming any other single-name CDS (-2/+5) in the Main. In cash, the SES 1.625% 03/2026 bonds were ~stable despite the steep move richer in core € rates (3/5bp in the belly). This is after an analyst at the US bank I won’t name wrote the US may be leaning more toward a public auction of C-band airwaves. This could lead to lower proceeds for satellite companies. Including SESGFP. The FCC may be shifting away from the proposal offered by the CBA (C-Band Alliance). For context, SESGFP had said on the occasion of their Q3 results release that the CBA remained proactively engaged with all stakeholders for its proposal to repurpose C-Band spectrum for 5G services in the US, with an aim to deliver fair value for all involved. S&P had also commented on the potential for ratings upside for SESGFP depending on the amount of proceeds potentially raised via C-Band restructuring. This had contributed to SESGFP CDS. For context, in October, the CBA announced it joined several national, regional, and rural wireless operators in an FCC filing detailing a set of principles to guide a process for auctioning off terrestrial rights to C-band spectrum. Consistent with the goal of clearing spectrum and completing the auction efficiently, the CBA then proposed to clear a first tranche of 120 MHz of spectrum, including the 20-MHz guard band, in 46 top metropolitan zones within 18 months of an FCC order. The 2nd tranche of the remaining spectrum would be made available within 3y of the C-Band auction, providing cleared spectrum throughout the entire continental US. Announced last oct 25, SESGFP Q3 results showed slower declines in sales & EBITDA at Video arm and stable growth at Networks arm. Back then, SESGFP had reiterated its FY targets, incl. leverage 3x-3.5x, on which the risk now seems skewed to the upside.

The End

12 November 2019 by jbchevrel

Dean Foods Co (DF), the largest dairy company in the US, has today announced that it has initiated voluntary Chapter 11 reorganization proceedings in the Southern District of Texas. DF intends to use this process to protect and support its ongoing business operations and address debt and unfunded pension obligations while it works toward an orderly and efficient sale of the assets. On that matter, DF announced that it is engaged in advanced discussions with Dairy Farmers of America, Inc. (DFA) regarding a potential sale of substantially all assets of DF. The CDS widened about 10 points to stabilize in the area of 80 points upfront. DF listed $10b assets and liabilities in court papers filed in Houston, and said it has commitments for $850m in bankruptcy financing from existing lenders. The Central States Southeast & Southwest Areas Pension Plan is listed as the company’s largest unsecured creditor, with a $722.4m claim alongside DF’s $700m unsecured notes that mature in 2023. DF’s bankruptcy was the “clearest option” for addressing the pension and debt load, according to Wells Fargo analyst. DF can keep operating while it works on a plan to pay creditors and turn things around. Back in August, at last results release, DF was reporting the 4th consecutive quarterly net loss, dampening previous promise of positive FCF, due to losses and unfavorable working capital changes (inventory builds). Top line was $1.84b EBITDA was $5.4m. Back in August, although huge co. leverage prompted 5y def. proba. being priced at >90% the horizon is less than half, the 1s5s paying c25% for c50% on 5s. DF blamed retailers for basically discounting milk too much, making DF’s core margin thinner and thinner, squeezed between lower retail prices and inflationary pressures in the dairy commodity market. The fact that Walmart Inc. (WMT) built its own milk plant didn’t help. The fact that dairy beverages are less in vogue among consumers nowadays didn’t help either, with increased competition from alternative milks (ex: vegetal-based like almond, oat, soy, coconut). The consumption of cow’s milk in the US alone has fallen -40% since 1970. Sales of alternative (non dairy) milks soared +30% since 2011.