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Eye Network

21 February 2020 by jbchevrel

ViacomCBS Inc. (noted ‘CBS’) is a leading mass media conglomerate with TV, radio, online content, and publishing operations. CBS reported their results yesterday, missing the consensus on revenue and OIBDA. This is particularly interesting as this was the first reported quarter of combined results since the reunion of Viacom and CBS. The ViacomCBS CDS widened from ~60 to ~70 yesterday, on the back of that miss. Today the 5y CDS closed at 69, now around flat to AT&T 5y swap. Q4 revenue was reported at $6.9b (vs a consensus of $7.3b and the range of analysts listed by BBG was [$7.0b , $7.5b]), adjusted OIBDA came at $1,164m. Operating income and net earnings came in the red, at -$13m and -$273m respectively. Their margin was reported at 16.9% i.e. it fell -700bp from a year before. CBS stock is down almost -40% since the merger was announced on Aug 14, 2019 (incl. 16% yesterday alone) as market participants are concerned about scale, reinvestment needs, contract renegotiation (NFL) and FCF. Leverage-wise, CBS reported Gross Debt at $18.7b and Net Debt at $18.1b, taking leverage at 3.4x. That is basically a + 0.4x increase in leverage since the ViacomCBS transaction was announced. CBS is currently Baa2= / BBB= / BBB=, so according to those outlooks, no real expectation of rating change is baked in. without surprise, CBS reiterated their commitment to IG credit rating and set a target leverage ratio of 2.75x, while agencies have set 3.0x as the guide line for CBS to preserve their BBB rating. Going forward, debt reduction will be targeted with non-core disposal proceeds. The sale of the ‘Black Rock’ headquarter building in Manhattan had been confirmed by the CEO at the UBS TMT conference in December -- and is ongoing. CBS stated that the proceeds of the disposal will be used both (1) to de-lever the balance sheet, and (2) for stock repurchases. The only CBS employees at ‘Black Rock’ work in its corporate and administrative divisions. Also, in the ‘potential good news’ section, the company increased its estimate of annual run-rate cost savings to $750m from $500m. But in the context of a miss, this sounded more like CEO Bakish tried to shift investors’ attention to the benefits of the merger rather than on the disappointing numbers.

On Hold

20 February 2020 by jbchevrel

We got the minutes from (A) the ECB today and (B) the Fed’s yesterday. (A) The ECB minutes acknowledged the “phase-one” deal. GC members welcomed a slight pick-up in PMIs, especially manufacturing, although coming from very low levels. As often, the GC agreed to wait and see more data. Although that is usually not followed by any action, the GC was reportedly concerned by financial stability risks due to the current monetary stance. They noted that “potential side effects might become more pronounced in an environment with low rates and a flat yield curve persisting for a long time” and also on the equity markets, where “the continued rise in valuations was difficult to square with a weaker earnings outlook”. A remark was also made that higher house prices could create financial risks and local macro prudential tools might be insufficient to tackle them. (B) The FOMC minutes did not show either any particular lean with respect to policy direction or timing for future changes. FOMC agree that maintaining the current stance allows "for a fuller assessment of the ongoing effects on economic activity of last year's shift to a more accommodative policy stance and would also allow policymakers to accumulate further information bearing on the economic outlook." Basically, ‘wait and see’, as well. The minutes noted the pickup in residential investment, a trend that started in summer 2019. The FOMC discussed how maintaining the current stance for a time could support the US economy "in the face of global developments that have been weighing on spending decisions." The ongoing review of tools and communication practices was discussed. The FOMC members hope to complete this around summer. In January, the discussion focused on interactions with financial stability and the potential use of inflation ranges around the 2% target. On the former, the minutes show that several policymakers do not wish to "rule out the possibility of adjusting the stance of monetary policy to mitigate financial stability risks." There is 1.5x cut priced in for the Fed this year, and close to nothing for the ECB. Kashkari, dove voter, recently said he would expect 3-6m on hold and then another -25bp cut. While he is on the dovish end of the spectrum, the OIS market’s view is close to his’.

Bombardier update

19 February 2020 by jbchevrel

Bombardier (BOMB) gapped back tighter over the past sessions. The CDS has come to around 300bp on the 5y point, before reverting to the current 330bp at the close. The Canada-based industrial manufacturer indeed announced the sale of Bombardier Transportation division (mainly manufacturing trains) to the French manufacturer Alstom (ALOFP, whose 5y CDS is paying just 34bp as of today’s close) for C$8.2B. Net proceeds following 1/ adjustments for liabilities 2/ Quebec Caisse stake 3/ cash will be around $4.5B , and that includes $0.6B of ALOFP shares (worth noting that these will be monetizable after 3-month lockup period). The deal’s closing is expected to be in H1-2021 (with in the unlikely event of a breaking, a fee of €75M). The CDS of BOMB gapped tighter, as the sale price was seen as favourable by market participants. BOMB management indicated that the sale price was negotiated based on the 3-year average of the EBIT (calculated on 2016-2018). Then the management applied price = 12x EBIT. This equates to about 10x EV/ EBITDA valuation, which looks low in the range of peers. As far as BOMB credit is concerned, the impact reflects that the proceeds of the sale will be used to accelerate the de-leveraging. BOMB management indicated that the net proceeds will be applied directly to paying down debt. BOMB management estimates that the ALOFP/ Bombardier Transportation deal, added to the previously announced transactions, will result in a pro-forma Net Debt of C$2.5B (vs reported Net Debt of C$6.7B as of Q419). Assuming an EBITDA of around $1.0B for Bombardier Aviation, the resulting net leverage should thus come in the area of 2.5x Net Debt / EBITDA. Going forward, the regulatory process will be interesting to watch, especially as there is a history on this one. Indeed, a deal had failed between Siemens (SIEGR) and ALOFP earlier. With regard to regulatory approval, BOMB management sounded confident that the overlap between the businesses will not result in a regulatory block of the transaction.

South Africa update

18 February 2020 by jbchevrel

Republic of South Africa (SOAF) 5y CDS was little changed today, in the area of 170bp, despite the continued underperformance of ZAR in FX space. $ZAR came up +0.5% yesterday after Moody’s lowered SOAF’s 2020 GDP forecast to 0.7% from 1.0%. It came up another +0.6% today before paring that to +0.25%, possibly more due to general $ demand. Moody’s is especially at focus because they are the only agency of the big three with still SOAF at an IG rating. While this CDS has largely followed the macro dynamic on the back of the coronavirus, since the end of January, it is possible that we see it de-couple from the broader EM complex in the next few weeks. Last week’s state of the nation address (SONA) given by President Cyril Ramaphosa failed to give details about a turnaround of ESKOM. It leaves us with the budget as next focus, as this will probably help Moody’s decision on whether to keep SOAF IG. For reference, the outlook had been set at negative back in Nov19, suggesting the probability of an incoming downgrade was high. The growth picture is still sluggish. A technical recession seems on the cards, although not too deep. Indeed, activity data show that SOAF economy contracted sharply in dec19 pulled by power shortages and renewed load-shedding. This is the most common reason for investor to be under-weight SOAF at the moment. The job market showed no sign of improvement despite seasonally higher than usual hires for the Christmas period. And seasonally adjusted retail sales fell -3.1% YoY in dec19, pointing to fragile consumption. Consumer confidence is low, investor confidence is low. Hard data was also weak in dec19. Manufacturing production fell -2.8% MoM. Mining production fell -2.4% MoM. Electricity production fell -1.6% MoM. As a consequence, Q419 GDP growth will likely come on the weak side of the range. The consensus has now shifted for Q419 QoQ% to print negative. That would mean SOAF technically slipping back into recession territory, after the -0.6% QoQ GDP in Q3. The last time we had a technical recession in SOAF was in Q118-Q218 period.