Our Experts Comment on The Grapples

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One Strike Too Far

20 February 2019 by lberuti

There is an overhang of protection in the market after the last few weeks and no one seems too keen to pick it up. Some of it was housed in options that expired today, and some short covering took place on the back of it. But generally speaking, it was a relatively quiet option expiry. The market has rallied so hard over the last 10 sessions – not to mention the rally since the beginning of the year that took investment grade credit indices 28bps tighter to 61bps in the US and 27bps tighter in Europe to 66bps! -, that all the strikes with a large open interest (around 70 and 75bps on iTraxx Main and 325bps on iTraxx Crossover) were broken long ago and were too far to have any meaningful impact on today’s trading pattern. iTraxx Main (ITXEB) reached current series’ tights, and nothing can stop the move at the moment. The spread between ITXEB and iTraxx Financial Senior, which is a good “bullishness” indicator of the market was down another bp today – it closed at 14bps -, despite the widening of BTPs against bund. Many investors who were holding short risk positions have been forced to throw the towel, and with the roll within sight, it will take a very brave man to call the end of the rally.

No WIN For Windstream

19 February 2019 by lberuti

When US High Yield investors left for a long week-end on Friday, they were certainly not expecting the brutal punishment that was inflicted on WIN ( Winstream ) during today’s session. The very survival of the company is under threat after the surprise ruling late last week by a Manhattan federal court that it defaulted on its debt by spinning off Uniti Group Inc in 2015. It contends that some of WIN’s bondholders were unfairly stripped of assets that backed up their investment. The judgement was made on the back of an action undertaken by Aurelius Capital Management, but the $310mln awarded to the fund could only be the beginning. Other creditors could claim cross defaults on other parts of WIN’s debt which totals roughly $5.8Bln. The ruling means that creditors could ask their trustees to file notices to accelerate their debt and seek immediate repayment. WIN’s bonds were trashed, and the company’s 5-year risk premium reached 70% upfront. That means you have to pay 70cts upfront to insure $1 of WIN’s debt against a default within 5 years, and an additional 5cts per year. The market now assesses that WIN has only 1 in five chances to make it through the next 12 months.

The Power Of France

15 February 2019 by jbchevrel

First of all, this isn’t about rugby. EDF released an encouraging set of 2018 results, with EBITDA +11% to €15B. Although low beta, the CDS was tightened 30bp YTD. From 80bp to 50bp. This €15B EBITDA was top of their target range. The main driver was France’s power supply. This division’s EBITDA soared c20%, to >€6B. And in the same time, net debt was stable-ish at €33B (€2B disposals vs €3B investments). Thus, leverage has improved to 2.2x from 2.4x, the year before. The trading range of this low-beta 50bp-paying CDS over the past 3 years has been [40bp,140bp]. And there are reasons to think it will stay in the lower part of that range, this year. Indeed, 2019 guidance for EBITDA is €15.3-16B. And it looks conservative, as it accounts for the fact that current French tariff freezes might impact EBITDA adversely. The dividend payout ratio was maintained <50%. The French government (>80% stake) is committed to keep its scrip option until 2020. To preserve credit rating is also something management is committed on. So it looks like EDF will remain a boring if not tragic equity story (the stock has lost >80% of its value since its pre-GFC peak), but on the credit side, things look good for this A-/A-/A3 utility.

Watch Your Back

14 February 2019 by jbchevrel

UniVision (UVN) spread was wider today (5y CDS +65 cash -1/-1.5pt), as Q4 results missed, and confirmed the downtrend in revenue. The 5y CDS now pays 550bp and looks like it is at an intermediate juncture between distressed and low-beta HY names. Audience trends are worsening (especially among target Spanish-speaking people). UVN has already lost its leading position to Comcast Corp (CMCS, IG, owns NBCUniversal, which itself owns Telemundo). Another patent-related story might also weigh on UVN sentiment. Indeed, UVN may have infringed DISH patents by using its technology that adapts the quality of streaming content based on available bandwidth, without paying a license. On the positive side of things. UVN has repaid $550m debt in 2018 incl $210m in 4Q, and according to management, the plan is to continue reduce debt, using FCF, in 2019. Another way to reduce debt could be asset sales. In particular, UVN announced plans to sell English-language digital assets. Last year, those assets contributed $2m to EBITDA. This is small compared to the potential sales proceeds (up to $100m). Management explicitly committed to use sales for debt payment. Sales are still pending, though. For now, Entreprise Value (8.5x) more than covers Net Debt (7.3x), which argues for a reversal towards 400s on the 5y CDS. But in the medium term, subscription losses and M&A uncertainty could prove challenging for credit.