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RR Downgraded Again, Targeted for Investment

25 September 2020 by jbchevrel

Rolls-Royce Plc (RR) is a UK-based engineering company focused on power and propulsion systems. RR segments include Civil Aerospace, Defence Aerospace and Power Systems. RR has been struggling this year due to the collapse in the number of hours flown by its wide-body engines. This is the source of more than 50% of their Civil Aerospace segment revenue. This metric fell -75% in Q2 and -50% in H1. RR burnt roughly -£3b in H1 and will have burnt roughly -£4b in full year 2020. Today, RR tightened (-40bp from +18 to -22 close) on optimism about potential investments from 2 sovereign wealth funds. Singapore’s GIC is considering an investment in RR and Kuwait Investment Office would also contribute about £250M, Sky News reported today. RR said in an update earlier this month that it aims to raise £2.5B in total. RR said it continues to review all funding options. RR has a market value of roughly £3B. RR had been downgraded to 'BB-/B' from 'BB/B' by S&P earlier this month. The agency also placed RR on CreditWatch with negative implications. To explain that move, S&P had explained that RR free cash flow generation and therefore deleveraging prospects for the next 12 months have fallen materially below their previous assumptions. In a similar move today, Moody’s downgraded RR to Ba3 from Ba2, and the outlook remains negative.

Huge Unfunded Pension Deficit

24 September 2020 by jbchevrel

Unisys Corporation (UIS) is an information technology company that operates through 2 segments: Services and Technology. The Services segment offers solutions including cloud and infrastructure services, application services and business process outsourcing services. The Technology segment designs and develops software and offers hardware and other related products to clients. It provides a range of data-center, infrastructure management and cloud computing offerings to help clients virtualize and automate their data-center environments. UIS CDS is a member of the CDX HY index since series s12. This week it was reported that UIS CFO is weighing a bond sale in the coming months to reduce the company’s substantial pension deficit. Their unfunded pension obligations is huge. It stood at $1.75 billion while its market capitalization is $655 million. So the unfunded pension deficit is 267% of market cap. That’s the highest ratio among the 100 largest defined-benefit pension plans owned by U.S. companies, according to actuarial consulting firm Milliman Inc. UIS last issued debt in 2017, back then it raised about $440 million, saying the money would be used for general corporate purposes. Its total debt stood at $733 million at the end of 2019, up from $653 million in 2018. UIS 5y CDS was close to the tightest levels, below 200bp, as of yesterday’s close. Today while the global CDS widening came to a halt in London afternoon, UIS CDS opened wider +50bp. It had peaked above 400bp in March.

Winter is coming

23 September 2020 by jbchevrel

TUI AG is Europe’s largest tour operator. TUI is in all XOvers since s03, except s25. Yesterday TUI widened +3.5% to 13% on the 5y. Today it closed 13.5%. For context, Before TUI got saved by the state in April, CDS reached 46%. It then tightened to just 6%, a week ago. The reason it widened this week is that the outlook for winter is pretty grim. TUI made further cuts to their winter holiday schedule. They warned of a hit from more refund requests. In August, TUI had said it expected to break even during the late summer months as travel resumed. That may have been the only window this year, though. Time will tell. Meanwhile, yesterday, TUI downgraded its view, arguing that “volatile changes” to travel advice from European countries created more demand for refunds and even discouraged people from booking for winter, at all. As a consequence, TUI expects to be cash flow negative in late August and September (~€400m monthly cash burn rate). Liquidity-wise, TUI said it had available funding of €2bn, compared with €2.4bn it announced in August after it agreed 2 state-backed loans from the German government. Back in May, TUI launched a €300m cost-saving programme (8,000 jobs cut), but the real force keeping them up is that Germany is standing behind. Credit friendly options such as asset disposals or a rights issue (mkt cap €1.7bn) are also on the table.

UK and Italy Outperforming

22 September 2020 by jbchevrel

The 1st cluster which outperformed in € financial CDS today was Italian banks (Medio -6 UniCredit -5). Italian sovereign risk premium, although already very low, got even lower today. Indeed, 10y BTP rallied -5bp today, thus tightening -7.5bp vs 10y Bund. Italian Risk rallied after the nation’s latest election results soothed investors’ worries about its historically volatile politics and their impact on the eurozone. 10y Italian yield came close to 0.8% today (in March, it was above 2%). Italian people voted (on Sept 20-21) in regional elections and a constitutional referendum that sought to reduce the number of MPs. The combined results strengthened the current governing coalition (Democratic Party + 5 Star Movement). For the market, that reduced the likelihood of early elections (knowing that such early elections could favor right-wing, EU-skeptic parties). UK banks also outperformed today. This was more a retracement from previous under performance. This move was helped by BoE governor Bailey reassuring this market, clarifying that although the BoE may study the option of negative rates, it nothing sure and nothing imminent. Front end rates sold off 3/4bp on the back of that and the Great British Pound temporarily rebounded (€1.09 $1.27). As far as other names are concerned, consolidation discussions are going on, in the European banking sector. DB CFO said DB is interested in cross-border mergers, UBS CEO said the pandemic has made it clear that deals need to happen, echoing CS similar comments.