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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.

No-Surprise Write-Down, BP/RDSA stable at +20

30 June 2020 by jbchevrel

The Anglo-Dutch oil major group Royal Dutch Shell (RDSA) will slash up to $22b from the value of its assets as they warned COVID will give a lasting blow to demand for energy globally. As BP did ($17.5b). RDSA cut its oil and gas price outlook today. As BP did. RDSA said that as a result of the lower prices, it would record post-tax charges in the range of $15b - $22b in Q2. The post tax impairments will increase its gearing by +3%. Operationally speaking, all divisions ex Chemicals achieved production at the upper end of what had been guided in May. Earlier this month, BP had announced it would reduce the value of its oil and gas assets by $17.5B. That also reflected BP management’s view that essentially oil and gas prices will remain lower for longer. Here RDSA revised down its own price outlooks for impairment testing to $35/bbl in 2020, $40/bbl in 2021, $50/bbl in 2022 and $60/bbl in 2023 for the long term. RDSA 5y CDS (68) feels even more bullet proof than BP (88), especially after the historic RDSA dividend cut. They cut it for the 1st time since WW2. Payout cut by a tad more than 2/3 (to 16c per share from 47c). That saves them c$10b annually. Back then, that was clearly presented as being part of a lasting “reset” of RDSA dividend policy, as opposed to a short-term quick-to-reverse measure. Before that, RDSA was the biggest dividend payer in FTSE in 2019, so a big change in strategy to protect RDSA balance sheet. Pre-COVID, RDSA 5y CDS was 27 (2/21) peak close 191 (3/18) now 68 after rallying to 47. RDSA will release Q2 #s on July 30. In Q1, RDSA net income adjusted for cost of supply (their preferred profit measure) dropped to $2.9b. This compared with $5.3b in Q119. Analysts had $2.3b. Back then already, RDSA said the situation would be “more severe” in Q2, with oil prices at the start of the year likely to be a “high point” for 2020. The message had been clearly telegraphed back then, explaining partly why today is no surprise. For reference, Brent was around $24 when dividend was cut, now $41, year high $68. RDSA CEO said “We do not expect a recovery in oil prices or demand for our products in the medium term.” Energy consumption worldwide could drop -6% in 2020, according to the IEA, equivalent to India’s total annual demand. The outlook for crude is quite uncertain, the US held a record-high level of commercial crude oil inventories as of the week to June 19, EIA data showed Monday. EIA reported a +1.4mb increase in crude oil inventories for the week to June 19 to 540.7mb, above the 5y average for this time of the year, while demand rebound is fading as in some states, part of the re-opening measures are being rolled back. On BP side, the sale of petrochemicals business to INEOS has been agreed for $5b, with $400m to be initially received as a deposit, $3.6b on completion which is scheduled for the end of 2020 and the final $1b to be paid in instalments by the end of June 2021. BP will have completed its total $15b disposal program 1y head of schedule. Another step forward in bringing debt down, although the future of BP dividend isn’t surely going to be the same as RDSA. BP will release Q2 #s on August 4. The 1:1 RV BP/RDSA is +20 vs a range [+10,+75] COVID to date.