The Wall Street Journal - 19.08.2019

(Ron) #1

THE WALL STREET JOURNAL. Monday, August 19, 2019 |B9


THE TICKER |Market events coming this week


Leading indicators
June, previous down 0.3%
July, expected up 0.2%

Earnings expected*
Estimate/YearAgo($)
Hormel Foods 0.37 /0.39
HP Inc. 0.55 /0.52
Intuit (0.15) /(0.01)
Ross Stores 1.12 /1.04
salesforce.com 0.47 /0.71
VMware 1.55 /1.54

Friday


New-home sales
June, previous 646,000
July, expected 650,000

Earnings expected*
Estimate/YearAgo($)
Foot Locker 0.67 /0.75

Monday
Earnings expected*
Estimate/YearAgo($)
Estee Lauder 0.53 /0.61
Sina 0.54 /0.89

Tuesday


Earnings expected*
Estimate/YearAgo($)
Home Depot 3.09 /3.05
Jack Henry 0.77 /1.10
Kohl’s 1.53 /1.76
Medtronic 1.18 /1.17
Nordson 1.81 /1.60
TJX Cos. 0.62 /0.59

Wednesday


Mort. bankers indexes
Purch., previous up 2%
Refinan., prev. up 37%

EIA status report
Previouschangein stocks in
millionsof barrels
Crude oil up 1.6

Gasoline down 1.4
Distillates down 1.9

Existing-home sales
June, previous 5.27 mil.
July, expected 5.39 mil.

Earnings expected*
Estimate/YearAgo($)
Analog Devices 1.22 /1.53
Keysight Technologies
1.02 /0.89
Lowe’s Cos. 2.00 /2.07
Splunk 0.12 /0.08
Synopsys 1.10 /0.95
Target 1.62 /1.47

Thursday


Initial jobless claims
Previous 220,000
Expected 220,000

EIA report: natural gas
Previouschangein stocks in
billionsof cubic feet
up 49

* FACTSET ESTIMATES EARNINGS-PER-SHARE ESTIMATES DON’T INCLUDE EXTRAORDINARY ITEMS (LOSSES IN
PARENTHESES)  ADJUSTED FOR STOCK SPLITNOTE: FORECASTS ARE FROM DOW JONES WEEKLY SURVEY OF
A KentuckyLowe’s store. Thehome-improvement retailer and competitor Home Depot are scheduledto report results this week. ECONOMISTS

LUKE SHARRETT/BLOOMBERG NEWS


Best in Class
Totalreturnsfortriple-B(Baa)U.S.corporate
bondshaveexceededthoseforbonds
withdifferentratingsthisyear.

Aa

A

Baa

Ba

B

Caa

105%

127

14.2

109

96

40

Sources: Bloomberg Barclays (total returns); S&P Global Fixed Income Research (corporate debt)

Theamountoftriple-Bcorporatedebthas
sharplyincreasedinrecentyears.

$2.0

0

0.5

1.0

1.5

trillion

2005 ’10 ’15

bond trading will be conducted
on electronic exchanges in the
future,” Baillie Gifford fund
manager Gary Robinson said in
an email. The firm, which spe-
cializes in technology invest-
ments, is the biggest share-
holder of MarketAxess, with a
12% stake, according to S&P
Global Market Intelligence.
Electronic trading trans-

formed equity markets in the
1990s. Bond markets evolved
far more slowly because debt
trades over the counter rather
than on exchanges, making it
hard for buyers and sellers to
find each other and agree on
price.
Investment banks controlled
bond trading, and its lucrative
fees, until the financial crisis.

MARKETS


MarketAxess’s growth re-
flects a shift in fixed-income
markets. Financial-technology
companies that control data
and digital networks are dis-
placing investment banks and
brokerages that used capital
and personal relationships to
dominate trading.
Tradeweb went public in
April at a valuation of about
$10 billion. Its stock has since
rallied 25%. MarketAxess’s val-
uation doubled this year to
about $14 billion.
“The way that equity inves-
tors have responded to Market-
Axess and Tradeweb shows
there’s a huge expectation for
growth, which is well founded,”
said Kevin McPartland, an ana-
lyst for Greenwich Associates.
Others doubt the hype.
Goldman Sachs Group analyst
Alexander Blostein said he
thinks MarketAxess is over-
valued. The stock trades at
around 70 times forward earn-
ings, near Amazon.com Inc.’s
valuation, according to FactSet.
Given the evolution of mar-
kets, though, MarketAxess
backers say more growth will
come. “We believe that a sub-
stantially larger proportion of

Most attempts at electronic
platforms failed.
MarketAxess started out
connecting dealers with corpo-
rate-bond investors electroni-
cally, rather than immediately
trying to link bond investors to
each other. Signing banks up to
the limited network took years
longer than expected because
traders feared it would erode
their control over information
and pricing.
“We had three or four near-
death experiences early on
where revenue growth was not
what we wanted,” Mr. McVey
said.
The firm was profitable by
2004 when it went public and
most of its bank shareholders
sold out. “It was always our
objective to be independent
and not owned by the dealers,”
Mr. McVey said.
Still, traders at investment
firms were slow to use Market-
Axess because Wall Street
banks held massive bond in-
ventories. That made it easy
for funds to buy and sell over
the phone or via email.
When the financial crisis
struck in 2008, bond trading
froze across Wall Street; Mar-

ketAxess stock fell 75%. Para-
doxically, the crisis triggered
the behavioral shift the com-
pany anticipated.
New bank regulations made
it costly for dealers to carry
big bond inventories, forcing
large investors to look for ways
to trade with each other. Black-
Rock Inc. tried to solve the
problem in 2012 by creating a
platform with other large asset
managers. The firm soon real-
ized it needed a broader net-
work and formed a partnership
the following year with Mar-
ketAxess. This eventually be-
came Open Trading.
The platform now connects
clients ranging from Midwest-
ern insurers to Swiss private
banks to South African hedge
funds, often bypassing banks.
“Before, we primarily traded
with brokers,” said Sandro
Meier, a head trader at Zürcher
Kantonalbank, a regional Swiss
bank. He said MarketAxess
trades now account for about
25% of his business, up from
nothing in 2014.
“Open Trading was like this
gate to global liquidity to trade
in the bonds we’re involved in,”
Mr. Meier said.

MarketAxess Holdings Inc.
chief Rick McVey runs the hot-
test online marketplace you
have never heard of.
The firm is a trading plat-
form for bonds. MarketAxess
was added to the S&P 500 this
summer after its share price
doubled in a matter of months,
making it one of the index’s
top-performing stocks this
year.
MarketAxess has risen by
challenging Wall Street banks
that have long dominated trad-
ing in corporate bonds. It did
so by coaxing investors to
adopt electronic trading rather
than buy securities over the
phone.
Now, the company is making
a run at the biggest trading
pool there is, the $16 trillion
market for U.S. government
debt.
The company is buying Li-
quidityEdge, a platform that
controls about 5% of electronic
trading of Treasurys. The pur-
chase will put MarketAxess
head to head with competitors
including Bloomberg LP and
Tradeweb Markets Inc.

BYMATTWIRZ

A Hot S&P 500 Stock Is All About Bonds


99%

96

86

67

63

Trading Up
MarketAxessjustjoinedtheS&P 500 andisoneoftheindex's
topperformers,asaboutathirdofU.S.corporatebondsnow
tradeelectronically.

Five highest-returning S&P
500 stocks*

Sources: FactSet (returns); Greenwich Associates (trading)

*Compound returns 12 months through Aug. 16

Ball

MarketAxess

Starbucks

SBACommunications

ChipotleMexicanGrill

Share of investment-grade
bonds traded electronically†

†Of notional trading volume

30

0

10

20

%

2014 ’16 ’18

Big Firms


Step Up


Debt Cuts


AT&T has cut its net debt by roughly $9 billion since the start of the year.

MIKE BLAKE/REUTERS

1

2

3

4 times

Realestateandrentalandleasing
$ 219 B net debt
4. 4 timesEbitda
Utilities
$1.0Tnet debt
3. 8 timesEbitda

Healthcareandsocialassistance
Accommodationandfoodservices

Transportationandwarehousing

Wholesaletrade

Mining,quarrying/
oilandgasextraction Total
nonfinancial
business
1. 7 timesEbitda
Retailtrade
Information
Manufacturing
$1.2Tnet debt
1. 2 timesEbitda

Ratio of net debt
to Ebitda* by sector

Netdebt $500B
$250B

*Earnings before interest, taxes, depreciation and amortization
Source: WSJ analysis of 10-K filings via Compustat

Busch InBev SA has both cut its
dividend and announced a deal
to sell its Australian unit to free
up cash that can be used to re-
duce its more than $100 billion
debt load. CVS Health Corp.
paid down $3.6 billion in the
second quarter after completing
its acquisition of Aetna.
Overall, triple-B bonds have
delivered 14.2% in total returns
this year, outpacing both higher-
rated, single-A bonds, which
have returned 12.7%, and lower-
rated double-B bonds, which
have returned 10.9%, according
to Bloomberg Barclays data.
There has been a strong wind
at the back of triple-Bs. Both
safer than speculative-grade
debt and higher yielding than
other investment-grade bonds,
triple-Bs have been a sweet spot
for investors facing slowing eco-
nomic growth and a sharp de-
cline in U.S. Treasury yields.
The steps taken by some
high-profile triple-B companies
have added to the rally because
they have “allowed investors to
feel more comfortable” owning
their bonds, said Rajeev
Sharma, director of fixed in-
come at Foresters Investment
Management Co.
Over the past decade, triple-
Bs have grown from roughly
40% of the investment-grade
market to about half of it as
companies bulk up on debt in
an era of low interest rates.
Some investors have said the
increase in triple-B bonds is
worrisome because it means an
unusually large number could
be downgraded to speculative
grade in an economic down-
turn. That, in turn, could lead
to further economic disruption
as businesses face a jump in
their borrowing costs.
With little pressure on them
to move faster, some companies
such as AB InBev have for years
been slow to reduce debt-to-
earnings ratios after making
large debt-funded acquisitions.

Continued from page B1

Often, they have tried to meet
leverage targets more by in-
creasing earnings than reducing
debt.
That, according to investors,
is why recent developments
have been so welcome as some
companies take a more aggres-
sive approach to deleveraging.
At least in some cases, com-
panies have been pushed in
that direction. AB InBev’s divi-
dend cut last October came af-
ter Moody’s Investors Service
placed its credit ratings on re-
view for a downgrade.
Even so, Moody’s lowered
the company’s ratings one level
to Baa1, a move some investors
interpreted as a sign that the
ratings firm was becoming less
tolerant of companies that drag
their feet on deleveraging.
Investors, too, have applied
pressure. Before AT&T an-
nounced a new deleveraging

plan at an analyst meeting last
fall, a consensus had emerged
that it needed to reduce debt to
insure its investment-grade sta-
tus and the long-term viability
of its dividend.
Though prioritizing debt re-
duction can sometimes come at
the expense of shareholders,
AT&T shares rose 2.2% in the
first trading session after the
meeting, easily outpacing the
gains of the broader market.
In total, AT&T has reduced
net debt by $18 billion since it
closed its acquisition of Time
Warner Inc. in June of last year.
An additional $12 billion of net
debt reduction is expected by
the end of the year, and Chief
Executive Randall Stephenson
has said the company will con-
sider share buybacks if AT&T
can reduce its net debt below
its target of 2.5 times adjusted
earnings before interest, taxes,

depreciation and amortization.
There are definitely cases in
which companies are “finding
leverage religion,” typically if
they have unusually large debt
loads or if their credit ratings
have been lowered, said Josh
Lohmeier, head of North Amer-
ican investment-grade credit at
Aviva Investors.
Still, some investors and an-
alysts say it is too soon to ap-
plaud triple-B companies for
reducing debt. There has been
little evidence of broad delever-
aging.
If anything, aggregate lever-
age ratios have ticked higher
this year.
That is a sign that not all
companies are being pushed to
reduce debt and that even
those that are feeling pressure
still have work to do.
—Drew FitzGerald
contributed to this article.

Investors’ concern over cor-
porate leverage isn’t limited to
triple-B-rated companies. Since
the financial crisis, there has
been a significant increase in
debt and an uptick in leverage.
In the U.S., corporate bor-
rowing has soared above $6
trillion to a new high. At the
end of 2018, nonfinancial public
companies had net debt equiva-
lent to 1.7 times a measure of
earnings, according to an analy-
sis by The Wall Street Journal.
That compares with 1.2 in 2010.
But investors and analysts
are watching this data more
with concern than alarm. While
the debt numbers are large, the
rise in leverage, comparing
debt levels with income, has
been moderate and underscores
the accompanying gain in cor-
porate earnings power as the
economy improves.
“Naturally, leverage goes up

whendebt is cheap,” said Jeff
Khasin, a fixed-income credit
strategist at CreditSights.
“We’d like to see the numbers
come down, but we’re more
concerned” about some individ-
ual companies.
The Journal analyzed the re-
ports of more than 9,000 public
companies filed annually with
the Securities and Exchange
Commission. For 2009 through
2018, the ratio of net debt, or
debt minus cash, was analyzed
relative to earnings before in-
terest, taxes, depreciation and
amortization by industry.
Companies that provide pro-
fessional, scientific and techni-
cal services posted the largest
jump, with net debt rising to
1.5 times Ebitda from 0.02 in


  1. The manufacturing in-
    dustry rose to 1.16 from 0.56,
    while agriculture, fishing, for-
    estry and hunting companies
    cut their ratio to just under 0.15
    from almost 0.79 in 2009.


BYJULIADONHEISER

Corporate Leverage


Rises Moderately

Free download pdf