Our Experts Comment on The Grapples

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Montagne Russe

10 December 2019 by lberuti

Investors who own debt of ATLIM ( Atlantia SpA ) have been taken on a wild ride over the last 18 months. Their roller coaster began with the collapse of the Morandi motorway bridge in Genoa in August 2018. It eventually led to talks of stripping the main Italian toll-road operator of its lucrative contracts. ATLIM’s position looked even weaker when another bridge, this time in the norther Italian coastal region of Liguria, fell in November, even though for reasons – a mudslide caused by heavy rain - the company argued were beyond its control. But there was another twist today with Cassa Depositi e Prestiti (CDP) possibly entering the fray. CDP is an Italian public institution “using the country’s savings to promote growth and jobs, supporting innovation and the competitiveness of businesses, as well as infrastructure”. The potential arrival of such a “partner” is not necessarily what investors like most, but as it represents a credible alternative to the revocation of the toll-road contract, the news was greeted with a 3% raise of the ATLIM’s stock and a 35bps tightening of its 5-year risk premium to 240bps, which remains close to the high end of its range though.

Waiting For Boris (To Deliver)

09 December 2019 by lberuti

Over the last few weeks, risky assets (FX, equities, credit,…) have all been pointing in the same direction : the Conservative Party will win comfortably the forthcoming general elections – given the recent polls conducted as recently as this week-end which gave the Tories a 10pts lead over Labour with 44% of the votes, in front of distant Lib Dems at 11%, it is difficult to argue about that – and Boris Johnson will be able to navigate smoothly the exit of the UK from the EU. If a Brexit deal looks more than probable by the end of January, the negotiations that will follow and will govern the future relationships between the parties look anything but plain sailing. There are many outcomes which would not be materially different from a hard Brexit, given the very limited amount of time that will be left before the end of the transition period in December 2020. If it is true that the rally among credit risk premia has been broad-based since the beginning of October – iTraxx Main and iTraxx Crossover went respectively from a wide of 59bps and 258bps to 47.5bps and 221bps at the close tonight -, UK names have outperformed their peers in every sector, notably among financials as per the above grapple. There is not much room for disappointment of any kind at current levels, and it is not a big stretch of the imagination to think of a bumpier road ahead.

Surprise Surprise

05 December 2019 by lberuti

Some present GLENLN ( Glencore Plc ) as a company that “trades in the stuff of which stuff is made”. It is a commodity trader and a diversified conglomerate which has interests in companies involved in mining, smelting, refining and agriculture. It has more than 90 offices in more than 50 countries. They are doing business in many of the world most impoverished and corrupt countries, and they have long relied on agents – intermediaries who work on commission – to help them secure deals. GLENLN has been asked many questions in the past, and it has already said that the US Commodity Futures Trading Commission and the Justice Department were investigating it over its business in the Democratic Republic of Congo, Venezuela and Nigeria. Today, its legal woes were compounded when it was announced that GLENLN is the subject of an investigation by the Serious Fraud Office in the UK on suspicion of bribery. That renewed attack from a different angle did not go down well with market participants. While GLENLN’s stock was marked down 7%, its 5-year CDS closed 14bps wider at 156bps in a credit market that generally traded sideways.

Chesapeake Update

04 December 2019 by jbchevrel

Chesapeake Energy Corp. (CHK) is exploring & producing oil and natural gas onshore in the US. They got E&P assets in Appalachia, the Mid-Continent, the Barnett, Bossier, and Haynesville shale plays, and the Rockies. The name is a constituent of CDX HY since series s12. Today the 5y CDS tightened aggressively at the open, by close to 10 points, going from ~51% to ~41%. This is after CHK announced a debt exchange offer. Indeed, it has engaged banks to assist with the arrangement of a secured 1L 4.5y loan for of up to $1.5B. CHK intends to use the net proceeds of the loan to finance a tender offer for unsecured notes issued by Brazos Valley Longhorn, L.L.C. and Brazos Valley Longhorn Finance Corp (both wholly-owned subsidiaries of CHK). The proceeds are also meant to fund the Brazos Valley Longhorn L.L.C.’s existing secured RCF. This partially boost CHK’s financial flexibility, as it will allow CHK’s subsidiaries to support its debt. The loan will be secured by the same collateral securing CHK's existing RCF and unconditionally guaranteed on a joint basis by CHK's subsidiaries which are guarantors under the RCF (incl. Brazos Valley). CHK's ability to establish the new term loan facility and borrow thereunder will be subject to the receipt of commitments from lenders to provide the term loan facility, the negotiation and execution of definitive loan documents, the success of the consent solicitation and other customary conditions. Though a successful exchange will give CHK’s creditors more direct support from Brazos Valley, that will be offset by an additional $1.5B secured debt ahead of them in the capital structure. It's been quite a U-turn for CHK. About a month ago, the CDS under-performed the US HY space today, by widening +6%, after CHK warned there is substantial doubt about its solvency, stating that depressed natural gas & oil prices may affects their ability to comply with leverage ratios in debt covenants, over the next 12 months. CHK had maintained a revenue stable from a year ago (~$1.2B) but had posted a bigger-than-expected loss in Q3, net -$61m. they had lost net -$145m in Q3-18. Against this backdrop, CHK’s spending outlook for 2020 had been cut by almost 1/3 to handle debt and generate FCF. CHK’s debt totalled $9.7B as of Sept. 30, up from $8.2B at the end of 2018. As per their communique last month, CHK continues to look at asset sales, deleveraging acquisitions and capital funding options.