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Equatorial Guinea Is Not Enough

25 May 2017 by lberuti

Part of continental Europe was closed today and it had a bearing on the market activity, and volumes were on the low side. People spent the whole day keeping an eye on headlines regarding the meeting of OPEC and their allies in Vienna. Hardly anything filtered until the middle of the afternoon when the producer group together with Russia and other non-members announced they had agreed to prolong their previous agreement to limit output for another 9 months. While 6 months ago, the cartel surprised investors and delivered cuts that exceeded expectations, the market did not seem entirely convinced today. People were apparently left a bit disappointed and news that Equatorial Guinea was officially becoming the 14th member of OPEC – it will be one of the smallest producers, pumping 270,000 barrels a day – was not the extra something people had been hoping for. Without a steer on what will happen beyond March, there is concern that OPEC could return to the free-for-all production that caused the free fall of oil between mid-2014 and early 2016. While oil had been stable for most of the day, it lost roughly 4% during the last couple of hours of trading. That was a drag on all commodity names, which today formed the worst performing group in the US high yield universe.

Who Shall Come Next?

24 May 2017 by lberuti

FIAT ( Fiat Chrysler Automobiles ) were slapped with a Department of Justice civil lawsuit last night. After VW ( Volkswagen AG ), the Italian carmaker is on the US administration hit list. It is a consequence of the claim made in January by the Environmental Protection Agency (EPA) that the company had equipped Ram pickup trucks and Jeep Grand Cherokee sold from 2014 through 2016 with defeat devices aimed at cheating emission tests. If US officials view the FIAT matter as less serious than VW’s, the maximum EPA fine – which exclude recall costs and any customer compensation- could be $4.6Bln. Filing the suit is seen as an effort to accelerate settlement negotiations, which are now the only way for FCA to avoid a suit the outcome of which is uncertain. Using VW’s fine as a yardstick, they could end up taking a $1.6Bln hit. Their case is allegedly less serious, but considering that FCA’s net debt at the end of 2016 stood at $4.6Bln, this could be significant. Investors reacted late yesterday and marked FCA’s 5-year risk premium 13bps wider to 318bps. They pushed it another 10bps wider this morning, but there was no follow through, and it eventually closed unchanged on the day. The recent wides are proving tough to break in the current positive environment.

Scrutinizing Leverage

23 May 2017 by lberuti

The dramatic events that took place yesterday night in Manchester had no bearing on the market this morning. Credit indices opened unchanged across the board and trended tighter – albeit very modestly – throughout the session. Interest rates, currencies and commodities were stable and cues were taken from companies’ results, which were mostly on the bright side, particularly as far as iTraxx Crossover constituents were concerned. Investors welcome the deleveraging efforts of CAREUK (Care UK Health and Social Care Plc), which serves patient in the UK and announced a net leverage decrease to 6.14x from 6.86x at the end of the previous quarter, and of GFKLDE (Garkunkel) – the debt collector -, which lowered its net leverage by 0.2 turns compared with last quarter at 4.7x. CAREUK was rewarded with a 55bps tightening of its 5-year risk premium to 406bps, while GFKLDE saw its 5-year risk premium tighten by 25bps at 506bps.

When McDo Meets Specialty Chemicals

22 May 2017 by lberuti

The company that produced the iconic foam clamshells that housed McDonald’s Big Macs and kept them warm could soon be based in Switzerland. After the mergers of Dow and DuPont, of Syngenta and ChemChina, and of Monsanto and Bayer, CLAR ( Clariant AG ) announced today a merger of equals with the Huntsman Corporation (it is not part of the 1000 most liquid entities in CDS and does not appear in Datagrapple). The all-stock operation will create a chemical giant worth round $14Bln, with corporate headquarters in Pratteln, Switzerland and operational headquarters in the US. In the recent past, both companies have struggled to bolster their revenues and they said the deal would result in cost savings of about $400mln a year, which the pair valued at $3.5Bln upfront. Investors took a more cautious approach and after an initial 10% jump, both stocks closed the day more or less flat. CLAR, which enters the tie-up with a stronger balance sheet (it has $1.5Bln debt vs Huntsman $3.8Bln), is willing to put at risk its investment grade rating (currently standing at BBB-) to gain access to the US market and of course to share a big cost cutting opportunity. Investors acknowledged the risk of merging with a far more leveraged entity, but only sent CLAR’s 5-year risk premium 6bps wider to 84bps. As part of the merger, the companies plan to IPO Venator, Huntsman’s Pigments and Additive business. Together with the expected synergies, it will certainly improve the credit metrics on the resulting entity.