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Rolls-Royce Update

06 July 2020 by jbchevrel

We have had quiet sessions today and Friday in € CDS, except on Rolls-Royce on which news hit us in Friday afternoon. Rolls-Royce Plc (ROLLS) is a UK-based engineering company focused on power and propulsion systems. ROLLS segments include Civil Aerospace, Defence Aerospace and Power Systems. Reportedly, ROLLS is exploring options to raise funds to fortify its balance sheet, apparently in the early stages of examining possibilities including issuing 1/ common equity 2/ divesting assets. The option 1/ being on the table, stocks dipped double-digit while CDS squeezed -36bp tighter, offered below the 400bp handle on Friday. We closed 385 on Friday and 389 today. The post-COVID range for ROLLS 5y CDS has been [93,660]. Option 1/ would translate into an equity offering of about 1.5 billion pounds to 2 billion pounds. As far as the option 2/ is concerned, it seems that ROLLS ITP Aero unit is the one potential disposal being studied. That business had generated an underlying operating profit of GBP 111 million in 2019 and GBP 67 million in 2018, ie displaying decent underlying operating margin of 11.9% and revenue growth +20%, both for the year 2019, which was a strong year for this unit, driven by increases in both aftermarket and OE sales for civil aerospace, both on Trent and non-Rolls-Royce engine programmes, and scale effect. However, ITP Aero’s 2019 performance also benefited from a change made to simplify its trading relationship and contractual terms with Civil Aerospace. This change was net 0 at ROLLS Group level.

Number One Automaker

03 July 2020 by jbchevrel

Tesla (TSLA) said earlier this week it had delivered 91k vehicles in Q2, well ahead of ahead of analysts’ expectations for 74k according to a Refinitiv survey. This was despite closing its Fremont, California, plant from late March to early May. That was still down c-5% from Q219. TSLA CDS closed 226bp as of Thursday evening. TSLA 5y CDS annual premium has been divided by more than 3 over the past 13 months, but it remains 1.7x more expensive than what it cost in mid-February, right before the COVID crisis started to rattle markets. TSLA latest leg higher this week made it the biggest carmaker in the world by market cap, in particular ahead of Toyota. TSLA market cap closed $224b as of yesterday, which is c$20b more than Toyota. TSLA market value has been multiplied by around 5.5x over the past year. In terms of volumes, TSLA has delivered 3% as many cars as Toyota in 2019. TSLA benefitted from the fact that their new car plant in Shanghai (open since Jan) was less affected.

Certainty... ?????? update

02 July 2020 by jbchevrel

Foreign medias don’t praise Mr Putin, but foreign investors do, as he guarantees some degree on certainty over business and investment conditions in Russia. Today, Russia 5y CDS has unwound the recent under-performance it had displayed vs peers, as President Putin won an endorsement of his bid to extend his rule potentially to 2036 (for reference Putin was first elected 2000). This positive result for the Putin camp came even as some polls show his approval ratings near historic lows (59% earlier this week). 78% voted for his proposal, turnout 65%. Some polls point to growing public discontent about deteriorating living standards, and significant inequalities but that has failed to translate into political developments yet. The strategy of the government to spend little on COVID crisis compared to other countries is a positive for CDS, as discussed previously in this blog. Today Reuters reported that Russian PM said the government would consider increasing budget spending by P1.8T ($26B) to fight coronavirus and support economy. Some economists had pointed out that local regulations around public spending have hindered Russia’s ability to ramp up fiscal stimulus. Other than that, the brighter picture on energy/base commodities that Russia exports is also positive in the short term. Russia CDS closes 97 (-6). That is a 86% retracement in the premium, from the COVID wide (reference being 2/21 close). Indeed, Russia 5y CDS had closed at a peak of 300 on 3/18. The fact that post-GFC tights in Dec 19 was 50 area, it is probably fair to say that further strength from here is on cards.

Lockdown Winner

01 July 2020 by jbchevrel

FedEx Corporation (FDX) provides a portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively, under the FedEx brand. Segments include Express, TNT Express, Ground, Freight and Services. Express offers a range of the shipping services for delivery of packages and freight. TNT Express collects, transports and delivers documents, parcels and freight on a day-definite or time-definite basis. Ground provides business and residential money-back guaranteed ground package delivery services. Freight offers less-than-truckload (LTL) freight services. Services segment provides its other companies with sales, marketing, IT and back-office. FDX CDS is not very liquid, thus why historically it has not been a member in any CDX series. Today FDX earnings beat, driven by its ability to contain costs and improve efficiencies despite the massive surge in shipping. The Ground unit revenue was up +20%, Home deliveries accounted for 72% of this, from 56% a year earlier. So today the FDX 5y CDS is tighter -20bp on our end, closing at 85bp on our European close. The stock was up +15% and cash was richer. Before Covid began, FDX had already moved to 7-day service, expanded capacity for larger packages, introduced a new routing software and began pushing more Express packages into the lower-cost Ground network. Those changes helped them benefit from the upsurge in residential packages being sent over the past months, in the context of lockdown in many parts of the world, incl US. Leverage increased +0.8x to 4.5x, as 1/ EBITDA in the quarter was down ~-30% YoY and 2/ FDX issued $3b debt to shore up liquidity. FDX demonstrated is in position to take advantage of heavy e-commerce demand, something that analysts and market participants expect to last. Other than that, the broader US IG CDS market is tighter today. CDX IG is -2. Mainly due to the Pfizer vaccine news.