IFR International - 21.07.2018

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BONDS CORPORATES

One of the best examples of that is
CONTINENTAL RESOURCES, which was upgraded to
investment-grade and then downgraded again to
junk between 2012 and 2016.
Its longest-dated tranche was the most
volatile, trading down by more than 60 points
to below 50 cents on the dollar, while its short-
dated 2023 bonds found a floor in the mid-60s.
“Timeframe and whether an investor aims
to buy and hold versus generating total return
should weigh heavily on BBB investment
decisions,” said Wells Fargo.

PULLING LEVERS
The recent pick-up in Triple B rated corporate
debt has been mostly driven by M&A, a cause of
concern for Wells Fargo analysts.
That is a shift from prior years when the
growth in Triple Bs was driven more by ratings
migration following commodity downgrades in
2015-2016, and, to a lesser extent, more lower-
rated bank subordinated debt issuance to meet
regulatory needs.
Still, on the positive side, there has also been a
rise in rising stars.
S&P said potential global bond upgrades
increased to 353 as of June 25 2018, from 349
as of May 25, reaching a level last surpassed in
2007.

“By sector, financial institutions lead potential

upgrades with 51, followed by utilities with 37,”

S&P analyst Diane Vazza said.

In addition, some of the largest Triple B

companies generate plenty of cash, which gives

them options to manage their debt.

Among the most prolific cash generators are

AT&T, CVS HEALTH, KINDER MORGAN, ENERGY TRANSFER

PARTNERS, BRITISH AMERICAN TOBACCO, CHARTER

COMMUNICATIONS and KRAFT HEINZ, Wells Fargo said.

AT&T, the largest Triple B issuer, could in

theory pay down its entire US$163bn of total

debt in six years if it were to redirect all its free

cashflow towards debt service.

“While this may seem radical in light of AT&T’s

longstanding hefty dividend, we see a concrete

example of this type of scenario in Kinder

Morgan,” said Wells Fargo.

In late 2015, when the commodity crisis was

peaking and Kinder Morgan agreed to buy highly

leveraged Natural Gas Pipeline Company of

America, Moody’s assigned a negative outlook to

its Baa3 rating.

Investors immediately worried about a possible

downgrade to high-yield, and the company’s

bonds widened by 100bp in just six days. To

appease bondholders and rating agencies,

Kinder Morgan slashed its dividend, showing its

commitment to a high-grade rating.

Late on Wednesday, the company reinforced

that message.

Its bonds rallied by between 7bp and 21bp

after Kinder Morgan said it would use proceeds

from a recent asset sale to pay down debt last

week.

Some analysts had expected the company,

which is rated Baa3/BBB-/BBB-, to use roughly

US$2bn of proceeds from the sale of its Trans

Mountain line to the Canadian government to

return money to shareholders.

But the move to reduce debt instead “could

put them well on their way to upgrade land”,

analysts at CreditSights said.

The independent research firm reduced its

year-end leverage forecast to 4.6x earnings

from 4.9x previously.

“It’s hard to predict which issuer will be the

next Kinder Morgan versus which will be the

next Teva,” said Wells Fargo analysts. But they

recommend buying Triple B credits where the

catalysts have already happened - such as

M&A.

“On the other hand, we encourage investors

to pare positions in BBBs with exposure to

macroeconomic headwinds, such as autos,

which have already become the beta sector for

trade-war related headlines.”

Natalie Harrison

ALL SWISS FRANC BONDS EXCLUDING

SECURITISATIONS

BOOKRUNNERS: 1/1/2018 TO DATE

Managing No of Total Share

bank or group issues SFr(m) (%)

1 UBS 74 8,545.89 27.4

2 Credit Suisse 77 8,471.83 27.1

3 Verband Schweizerischer 10 3,838.82 12.3

4 ZKB 34 3,493.89 11.2

5 Raiffeisen Schweiz 22 1,932.24 6.2

6 BNP Paribas 14 1,387.35 4.4

7 Deutsche Bank 9 867.55 2.8

8 Commerzbank 8 699.25 2.2

9 HSBC 5 435.63 1.4

10 Bank Vontobel  1 225.00 0.7

Total 145 31,214.88

Including preferreds. Excluding equity-related debt.

Source: Thomson Reuters SDC code: K06b

ALL INTERNATIONAL STERLING BONDS

EXCLUDING SECURITISATIONS

BOOKRUNNERS: 1/1/2018 TO DATE

Managing No of Total Share

bank or group issues £(m) (%)

1 HSBC 65 10,369.46 13.9

2 NatWest Markets 59 8,855.15 11.9

3 Barclays 51 7,032.04 9.4

4 RBC 41 5,894.29 7.9

5 Lloyds Bank 35 5,126.27 6.9

6 BAML 22 3,681.53 4.9

7 Santander Global  17 3,309.28 4.4

8 JP Morgan 15 3,249.95 4.4

9 Deutsche Bank 14 3,080.36 4.1

10 Goldman Sachs 10 3,048.66 4.1

Total 185 74,629.37

Including preferreds. Excluding equity-related debt.

Source: Thomson Reuters SDC code: K05a