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Pivot

14 June 2019 by jbchevrel

A resolution in US/Mexico trade tensions offered some respite to CDS across regions in the first half of the week. Both US and European IG indices rallied around 4bp, CrossOver 15bp and CDX HY 20bp. That proved temporary, however, as a core rates rally picked up steam, pushing G3 yields to fresh lows. The sacrosanct Bund yield came to -27bp this AM, lowest level ever. We retraced this afternoon, to some extent, after US retail sales data showed that the US consumer is still strong (higher than expected results for the core and control group readings, along with higher revisions in April). As less than 20% is priced in for next week’s FOMC meeting (June 19), market participants will try, on the occasion of next week’s meeting, to figure out about the subsequent meetings, starting with July 31 (86% priced in). There are about three 25bp cuts priced in the $ OIS curve by March 2020. That is to compare with c10bp priced in the short end of the €/JPY OIS curves. This week, a major European bank called for an ECB rate cut at the September 12 meeting, which is scheduled to be the penultimate meeting for President Draghi (last one being October 24). Next week could prove pivotal in this respect, with CPIs being release in the Eurozone, the UK, Canada and Central Banks meetings being scheduled in the US, the UK, and Japan.

Black and Yellow

13 June 2019 by jbchevrel

The Hertz Corporation (HTZ) outperformed US HY CDS space today, with 5y point tighter by c120bp, now c525bp on our European (well, British) close. That is after HTZ disclosed (unexpected) that on June 26, it will distribute to shareholders subscription rights to buy up to 57.92m new shares or c$750m, in a rights offering. Plans to use the proceeds of this rights offering to deleverage its balance sheet (basically repay the senior notes, both 20s and 21s) boosted the CDS. It looks good, because it should lower future interest expense and cut leverage while limiting dilution among existing shareholders, in particular Icahn (29% ownership) intends to participate to the offering. On top of the rights offering, HTZ cited a very strong Q2 and guides c$2.5B revenues $165-185M EBITDA (consensus was $131M). So leverage should arrive close to 6x, assuming $750m debt paydown and EBITDA of $175M (mid-point of guidance). Still not quite the 4x management’s target. HTZ debt average maturity is close to 3years, with 2021 and 2022 the biggest years, altogether more than 2/3 of total debt ($5.4B). From an M&A standpoint, earlier this week, Macquarie Research interestingly noted that a potential deal between HTZ and Avis (CAR) looks possible due to lower antitrust (DOJ) risk, after companies like Uber/Lyft have gained market share. That phenomenon leaves HTZ CAR market shares to high single-digit from low 20s.

Miguel Ángel

12 June 2019 by jbchevrel

Emerging market risk looked rather firm, as a whole, with the benchmark CDX EM s31 tightening 3bp on the day (London close), not far below 96 cents on the dollar, with Argentina (6% of the on-the-run index) the main mover. Argy rally effectively happened last night after our close, triggered by Macri picking Senator Pichetto (PJ) as his Vice-President. The latter was the leader of the opposition Peronist caucus in the Senate and a member of the Alternativa Federal group of Peronists who have, in the past, dissented against Mrs Kirchner. In his own camp, members of Cambiemos expressed support. Markets took that positively as it could broaden Macri’s spectrum, and although Pichetto does not sound like a super popular politician (i.e. he is not expected to directly add many many votes), that latest tactical move might drag other Peronists to the Macri’s camp in the future (Mr Urtubey will be key to watch, in particular). Across other asset classes, the Merval index gained more than 6% and ARS/$ came up more than 2.5%. The prospects of dovish Fed have also been supportive of Argentina lately. No later than this PM, the dollar also came weaker on the back of lighter than expected inflation data.

Neiman Moment

11 June 2019 by jbchevrel

Neiman Marcus Group LLC (NMG) is a department store chain offering mostly prime fashion stuff. It is also one of the widest names in the CDX HY index, paying around 55%. Today its results came not far from expectations. Net sales came up +9.2%y and beat estimate, with gross margin stable 35%. Adjusted EBITDA down -12% y. The area of growth was MyTheresa (revenue +23.6%y). It will be included in consolidated balance sheet and p&l statement going forward. That is the innovative/online arm, which can impact customers globally, and aimed specifically at younger customers, but also mostly positioned on women luxury fashion. The company reported a net loss of -$88M vs +$326M same period previous year. That EBITDA is to put in regard with (i) secured debt $3.4B (ii) total debt $5B and cash thin less than $40M. So net net, leverage is 7.5x on secured 11x on total basis. The credit markets seemed not too surprised by the release, with CDS (5y) still paying around 55% (mid) on our London close. Cash-wise, term loans 1L 7 1/8 28s ~ 80 2L 8 24s ~ 90 3L 8 24s ~45 and unsecured 8 21s ~ 60.