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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.

150 Years

03 December 2019 by jbchevrel

Campbell Soup Company (CPB) manufactures and markets soups, sauces, biscuits, among others. Beyond being the #1 soup maker in the world, it has become an American icon after its use in Warhol’s art. This Tuesday, CPB celebrates its 150th anniversary. The name is a member of the CDX IG, if not for 150 years, since series s04. The 5y CDS pays 66bp, as of today’s London close. That CDS has tightened almost 100bp over the past 12 months and in 2019, its share price has appreciated by more than 40%. It had peaked at about 160bp last autumn. Now, for a 60-spread, CPB is quite levered, its current leverage being reported 3.5x. Credit investors, along with rating agencies, have been confident that through asset sales, CPB’s leverage targets would be eventually met. While CPB leverage had been printing in mid-3s, its target is 3x. and this is for fiscal year 2021. It is worth noting that the transaction multiples of its asset sales have been quite healthy, reflecting their solid brand value in particular. Indeed, CPB sold its International assets for 12.4x EV/EBITDA. CPB’s ratings have been affirmed with the announced asset sales, in particular. CPB is rated Baa2/BBB/BBB- (S&P). CPB will release its quarterly results before tomorrow’s US market open. Net sales from continuing operations are expected close to $2.2b. this is to be compared with $2.7b the same quarter last year. The consensus expects a gross margin in low 30%s. This is meant to be helped by a slightly more supportive COGS environment than in previous quarter. Thanks to yoy% deflationary effects from some commodities including poultry, beef, flour, wheat & eggs. More inflationary ingredients include vegs, corn, cheese & soybeans. Thanks Giving timing may not be great for this quarterly release. Indeed, Wells Fargo (mentioned by Seeking Alpha) wrote that net sales may trail consensus given the impact of a later Thanksgiving on soup shipments. Wells Fargo also expect a downward effect on profit from October's UK snacks divestiture and Partner Brands distribution declines in the snacks segment.