Blog

Our Experts Comment on The Grapples

See All Entries
rss

‘Crazy Bernie’

18 April 2019 by jbchevrel

The healthcare sector has weighed on the US CDS market this week, especially since Tuesday. Noteworthy that this impacted both IG and HY segments of the market. Not just health insurance companies (UNH) but also hospitals. For instance, in the CDX IG index, CVS is +6 WTD (since Apr 12 close), UNH +7, CAH +9, and in the CDX HY index, THC +50 HCA +10. In the same time, the broader CDX IG was wider by less than a basis point… Today the move extended to medical devices, biotech and pharmaceutical, with PFE +4 (vs CDX unchanged). This relative move in CDS echoes stocks’. Indeed, the sub-index S&P 500 Health Care Equipment Index has lost -5.2% WTD, while in the same time lapse, the S&P 500 is almost exactly flat. The main reason is the concerns over Democrats’ ‘Medicare for all’ project, which would expand the US government-administered coverage to most of the population (from the current c60 million people) and potentially squeeze the businesses of not just US health insurers, but also hospitals and the rest of the ecosystem. That offset better than expected earnings from UNH on Tuesday. Indeed, they boosted FY adj EPS guidance mid-point (from $14.50 to $14.75) and they delivered better-than-expected Q1 adj EPS $3.73 vs $3.60 consensus. ‘Medicare for all’ is far from becoming law, but it is undoubtedly supported by some runners for Presidency, obviously on the Democrat side, including the man that President Trump calls ‘Crazy Bernie’.

Pacific Spread

17 April 2019 by jbchevrel

Today Latin American risk underperformed in the EM sovereign CDS universe, despite +/- stable energy and metal prices, while Asia performed strongly. Argentina 5y CDS lagged the complex (wider +28 vs CDX EM tighter -1.3). Yesterday March inflation rose +4.7% MoM (core CPI @ fresh record highs at 55.5%). The BCRA announced afterwards that the banks of the $ARS non-intervention zone would be kept unchanged until EOY. That helped stabilize ARS (+0.6% in the short term). The government has also just announced it will freeze prices on 60 food products until at least the end of NOV. One month after the election. Which I think is the tail risk for Argentina. If it would be fairBrazil CDS also underperformed (wider +3) on pension reform uncertainty. The Constitution and Justice Committee session has now started. A vote on the pension reform proposal is still possible today. The only possible positive outcome seems to be if the proposal passes this stage without any changes. Reports suggest that centrist parties are demanding pension text changes. Even if the proposal goes through today, it is worrying that the pension reform is stumbling at such an early stage of Lower House approval. A long way to go. Mexico CDS was stable (just -1). AMLO cancelled the education reforms from previous administrations via a memorandum. No economic impact, but AMLO exerting his authority via memorandums does not bode too well. Reversely, Asian names were rather strong. Chinese data were all beating expectations. GDP q1 6.4% y/y vs exp 6.3% and 6.3% prev. IP 6.5% y/y vs exp 5.6% and 5.3% prev. Retail Sales 8.7% y/y vs exp 8.4%. Fixed Assets 6.3% y/y as exp and 6.1% prev. China CDS was thus tighter -2. New post-GFC tight for China @ 39 ¼ and Indonesia even stronger (-3 ½) as the incumbent Jokowi won a 2nd five-year term, based on unofficial private co counts (reliable in past). Indon CDS @ 90 still 10bp above Jan-18 dip.

Ups and Downs

16 April 2019 by jbchevrel

Today Turkey CDS outperformed EM sovereign space, tightening by 22bp vs 2.5bp for CDX EM and 3.3bp for its fair value. The headline *TURKEY IN TALKS WITH RAYTHEON TO BUY PATRIOT SYSTEM, KALIN SAYS helped TRY and thus CDS get firmer. For reference, Turkey had rejected a U.S. proposal to deliver one Patriot missile defense system on March 1st. That was conditional on Turkey abandoning the S-400 deal with Russia, and was the #1 driver of Turkey CDS lately, and the recount of Istanbul vote seems clearly behind, for now. Looking ahead. The CBT will hold its next meeting on next Thursday (April 25). It is (very) likely to leave rate @ 24%. Historically. The CBT prefers to keep real rate as close to 0% as possible (interest rates are neither halal nor inflation-reducing, as President Erdogan often noted), except when TRY sharply depreciates and/or when financial stability is threatened. Meaning we would need to see TRY keep stable and inflation moderate before CBT starts cutting. Inflation has slowed (c20% from c25% in Q4-18) esp. goods (c20% from c30% in Q4-18) but inflation expectations remain high (12m 15% 24m 12%) far higher than the permanent regime averages of c5% in 2013-17. CBT expects c15% by EOY and 2 upside risks remain: 1/ TRY weaker on geopolitical/macro 2/ commodity prices going higher. Also, lately CBT responded to TRY weakness by closing 1-week (1W) repo facility (25 March - 5 April) providing TRY funding @ O/N 25.5% instead of 1W 24%. How to temporarily hike by 150bp at no political cost. That technique is likely to come back on the table before any actual hike (Political bar higher. CBT not as independent as the Fed. Bad example). Interestingly one bank got TRY3B ($520M) from the CBT via the late liquidity window yesterday. Meaning it cost them 27% vs policy 24%. To be continued…

‘Digital Revolution’

15 April 2019 by jbchevrel

Today the Main rebounded +1.75bp, after dipping c15bp in three weeks. Constituents, as an aggregate, were little changed (+0.3bp), but it is worth noting that Publicis (PUBFP) underperformed, in that respect, with its 5y CDS wider by 7bp. This is after PUBFP confirmed over the weekend that it will acquire Epsilon from Alliance Data for $4.4B (c10x EV/EBITDA) in cash, the deal is expected to close in Q3. Not an outright surprise, as PUBFP had said it was considering it (Reuters Apr 2). Epsilon is a major US player in data and targeted marketing solutions, so it confirms PUBFP willingness to take the digital turn. As both Laurent (Feb 12) and myself (Jul 19) have previously mentioned in this blog, the advertising sector is challenged (data-protection regulations, competition from tech and consulting firms), and there is a need for renewal. In this respect, the faster-growing digital segment can prove a decisive part of PUBFP strategy. That step helped PUBFP stock price (up almost +5% this morning) while it was -10% (same CDS move) on Jul 19. The deal will effectively cost $4B, after considering the tax step-up. Clearly lower than the $5B initially reported, on Apr 2. While PUBFP confirmed its 2019 outlook, this acquisition comes at a time when the company struggles to grow organically. Indeed, Q1 revenue slowed -1.6%, following Q4 -0.3%. The deal will be financed by cash and a 1y bridge loan (which has the potential to be renewed 2 x 6 months). PUBFP might end up finishing the bridge loan with senior bond debt issuance. Senior bonds could underperform in that case, it is worth noting that the latter ‘already’ trade c20bp tight to the CDS (looking at the 1 5/8 Dec24s). The operations takes PUBFP leverage immediately up to 1.8x from 0.8x, as of end-18 (€4.9B debt, €3.2B cash & equiv and €2.2B adj. EBITDA). PUBFP management is still committed to keep its BBB+s/Baa2s rating and expects full deleveraging after 4 years. To balance the impact for credit investors, PUBFP will suspend its share buyback plan, although it still is committed to its 45% dividend payout ratio, for the time being.