Completed 08 Jun 2017 11:12 PM EDT Disseminated 09 Jun 2017 01:04 AM EDT
North America Credit Research 09 June 2017
High Grade Credit Fundamentals: 1Q17 A Sector-by-Sector Review of Trends in Credit Ratios
US High Grade Strategy and CDS Research Eric Beinstein
AC
(1-212) 834-4211
[email protected]
Dominique Toublan (1-212) 834-2370
[email protected]
Paul Glezer (1-212) 270-8185
[email protected]
Alejandra Andrade (1-212) 834-3220
[email protected] J.P. Morgan Securities LLC
See page 70 for analyst certification and important disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com
Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 09 June 2017
Table of Contents Summary discussion of credit metrics...................................3 Detailed discussion of credit metrics ........................... ..................................... .......... 5 Automotive..............................................................................28 Cable/Satellite.........................................................................30 Capital Goods ........................... .................................................... ..............................................32 .....................32 Chemicals ........................ ................................................. .................................................. ..............................34 .....34 Consumer Products ......................... .................................................. ......................................36 .............36 Diversified Media .......................... ................................................... ..........................................38 .................38 Energy .......................... ................................................... .................................................. ..................................40 .........40 Food, Beverages and Tobacco..............................................43 Tobacco..............................................43 Food/Drug Retail.................. Retail........................................... .................................................. ..........................45 .45 Healthcare ........................ ................................................. .................................................. ..............................47 .....47 Metals and Mining ........................ ................................................. ..........................................49 .................49 Non-Food Retail........................................ Retail................................................................ ..............................51 ......51 Pharmaceuticals.....................................................................53 Railroad/Shipping...................................................................55 Technology ........................... ................................................... ................................................. ..........................57 .57 Telecoms—Domestic ....................... ................................................ ......................................59 .............59 Telecoms—Yankee.................................................................61 Utilities ......................... .................................................. .................................................. ..................................63 .........63 Methodology ......................... ................................................. ................................................. ..........................65 .65 Cross-Sector Comparisons of Credit Metrics......................68 Source for all tables and charts: Capital IQ and J.P. Morgan.
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North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Summary Summa ry discu discussion ssion of of credit credit metrics metrics Summary: 1Q17 credit fundamentals improved thanks to stronger EBITDA growth, but leverage remains high and interestt coverage continu interes continues es to weaken weaken A summary of 1Q17 fundamentals data shows a significant improvement versus prior quarters. This has been driven driven by positive Revenue and EBITDA EBITDA growth after after eight quarters of contraction (based on LTM data). Debt growth is still strong, however, as companies continue share buyback programs and to fund M&A transactions. For 1Q17 the results are flattered by easier comparables given 1Q16 weakness. Also a weaker dollar and the the strong rebound in commodity prices prices from one year prior all benefited revenue and EBITDA trends. Exhibit 1: Credit Metrics Summary OVERALL
EX COMMODITIES
Y/Y
Q/Q
Y/Y
Q/Q Change
Change
3yr Range
Change
Change
3yr Range
Revenue
2 .3 %
1. 3%
-11.1% - 1.6%
0. 9%
2. 2 %
-1.5% - 3.6%
EBITDA
3 .3 %
3. 2%
-10.2% - 3. 3.2%
1. 1 %
1. 9 %
-0.4% - 3. 3.2%
EBITDA followed the same trend as revenue
2 .6 %
8. 5%
6.7% - 14 14.3%
2. 7 %
10.2%
6.9% - 15.6%
Debt y/y growth decelerated to 9%
Debt growth
Comment Revenue growth turned positive after after 2 years of contraction
Source: J.P. Morgan.
Exhibit 2: Credit Ratios Summary OVERALL
EX COMMODITIES
Y/Y Change
3yr Range
Level
Change
3yr Range
27.9%
0. 4 %
27.1% - 28.2%
29.4%
0.1%
28.4% - 29.4%
3.02x
0.1x
2.29x - 3.13x
2.85x
0 .1 x
2.37x - 2.90x
10.11x
-1.1x
9.83x - 13.87x
10.43x
-0.8x
10.43x - 12.30x
Margin Leverage Interest
Y/Y
1Q17 Level Profit
Coverage
1Q17
Comment Profit margins are toward the higher end of the 3year range. Leverage is up y/y with and ex commodities but is down q/q with and ex commodities Interest coverage weakened y/y and is at the lower end of the post-crisis range.
Source: J.P. Morgan.
(+0.9% q/q and +2.2% y/y excluding Revenue grew 2.3% q/q and 1.3% y/y (+0.9% commodities). This was the strongest q/q q/q performance in 22 quarters and the the strongest y/y revenue growth in 11 quarters. EBITDA increased 3.3% q/q and 3.2% y/y (+1.1% q/q and +1.9% Y/Y excluding commodities), the first y/y growth in 19 quarters. Profit margins improved 0.4%, and at 27.9% are at the higher end of the 23.9%-28.2% range post crisis. Gross leverage and interest coverage both weakened Y/Y. However, However, they improved improved Q/Q. The Y/Y weakness was driven primarily by deterioration deterioration in the Technology sector while the Commodity related sectors posted improvements. Gross leverage was up 0.1x y/y but down 0.1x q/q. Interest coverage coverage is at 10.1x, down 1.1x 1.1x y/y, but up 0.1x q/q. Ex the commodity related sectors interest coverage is at 10.4x, the lowest reading since 2010 but above pre crisis numbers.
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North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 3: EBITDA improved after 19 quarters of negative growth LTM EBITDA Y/Y Growth LTM EBITDA Y/Y (ex Energy, M/M) Y/Y Growth
25% 20%
3.2x
Gross Leverage Gross Leverage ex Metals/Mining, Energy
2.8x
15% 10%
2.4x
5% 0%
2.0x
-5% -10%
1.6x
-15% 1Q10
1Q11
Source: J.P. Morgan
4
Exhibit 4: Gross leverage fell q/q in part driven by commodity related sectors
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1 Q00
1Q02
1Q04
1Q06
1Q08
1Q10
1Q12
1Q14
1Q16
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Detailed discussion of credit metrics The pace of deterioration slowed, and some metrics have improved after strong results in 1Q17 To begin the analysis, note that comparables for our market were easier and the effects of lower oil prices and a stronger dollar faded. The average price of oil was 2% higher in the four quarters ending 1Q17 compared to the four quarters ending in 1Q16. Also the trade weighted US Dollar was only 2% stronger. Weak results in 1Q16 alongside an improvement in the two factors mentioned above helped 1Q17 metrics significantly in relative terms. Exhibit 1: The average price of oil was up from $45.1 in the 12 month period ending in 1Q16 to $47.9 in the 12 month period ending in 1Q17 $ WTI Price
60
Average: $47.9
Average: $45.1
106 104
Average: 102.1
Average: 103.8
102 100 98
40
96
30 20 Apr-15
USD TWI
108
70
50
Exhibit 2: The USD was 2% stronger in LTM 1Q17 vs LTM 1Q16 as the USD appreciation faded in 1Q17
94 Oct-15
Apr-16
Oct-16
92 Apr-15
Oct-15
Apr-16
Oct-16
Source: J.P. Morgan
LTM Revenue as of 1Q17 increased 1.3% y/y which is the largest increase in the past 11 quarters. Since the biggest drawdown of -11% in 4Q15, the trend has been improving, although revenue growth was still negative up until this quarter. Q/Q revenue increased 2.3% as 1Q17 posted strong results for many of our sectors.
Excluding the commodity related sectors, revenue increased 2.2% y/y, the strongest result since 1Q15. The commodity related sectors continue to be a drag on overall numbers but to a lesser extent than before. Energy had a revenue decline of 1.5% y/y (-$22bn) which is an improvement from the deterioration seen in previous quarters. Metals and Mining had a 5.2% decline, -$14bn y/y. The biggest improvement in absolute terms was in Healthcare, with revenue up $40bn, 5.7% y/y. The sector had strong operating performance supported by advantageous commercial insurance trends for UnitedHealth, Anthem and Cigna. Food/Drug Retail followed with Revenue up 5.7%, $25bn y/y. CVS led the increase with revenue up $19bn y/y. This company has been able to monetize the synergies of its acquisitions and has benefitted from strong consumer sentiment and trends. In percentage terms, Yankee Telecoms, Cable and Transportation all had significant increases of 8.3%, 8.0% and 6.0%. Deutsche Telekom and Telefonica posted good results although partly the effect of a strong dollar also faded. In Cable/Satellite, both Comcast and Charter posted strong growth of 9% and 6% due largely to robust HSD and commercial revenue growth.
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North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
On the other hand, Technology’s top line continues to be pressured with revenues down $22bn, -3.6% y/y. Dell, Apple and IBM all had challenging quarters. For Dell and IBM it is due to the headwinds the companies face in their legacy hardware businesses. For Apple, it is attributable to the maturation of the smartphone market and a transition to more diversified / services-oriented revenue streams. Food and Beverage shows a decline of 3.3% (-$11bn). Part of this decline is driven by our adjustment for Anheuser Busch figures post M&A. For companies which have recently undergone an M&A transaction, we adjust the data series looking backward by adding the data of the target and acquirer. Given the divestitures done on both sides of this acquisition, it seems metrics worsened by more than they did. The combined entity did not inherit the complete EBITDA of each part as some revenue generating assets were divested. This effect should fade off a year after all of the asset sales are complete. Exhibit 3: Cable/TV Revenue growth has outperformed since 2012 150
125
Cable/TV Healthcare/HMOs Food/Drug Retail Transportation Non-Food Retail
125
Exhibit 4: Commodity sectors lead the largest Revenue y/y declines but trends are improving
100 75
100
Energy Metals/Mining Chemicals Telecoms - Yankees
50 25
75 1Q12
1Q13
1Q14
1Q15
1Q16
1Q12
1Q17
1Q13
1Q14
1Q15
1Q16
1Q17
Source: J.P. Morgan
Exhibit 5: Revenue growth was 1.3% q/q as rends improved in 1Q17
Exhibit 6: Revenue growth has turned positive y/y 1Q17 change
15%
($mn)
%
Metals/Mining
-14,252
-5.2%
257,379
Technology
-22,127
-3.6%
595,156
Food/Beverages
-10,742
-3.3%
316,359
Telecoms - Domestic
-8,875
-2.9%
296,393
Energy
-21,686
-1.5%
1,384,242
Diversified Media
1,106
0.8%
144,983
Capital Goods
4,551
0.8%
568,753
Consumer Products
2,373
1.2%
199,156
Chemicals
2,075
1.3%
158,809
Non-Food Retail
14,535
1.7%
865,729
Pharmaceuticals/Medical Products
14,041
3.0%
476,758
Utilities
13,794
4.5%
320,825
Automotive
16,929
4.5%
389,458
Food/Drug Retail
24,555
5.7%
456,613
Healthcare/HMOs
40,361
5.7%
749,082
Transportation
9,752
6.0%
172,535
Cable/TV
9,059
8.0%
122,521
Telecoms - Yankees
21,271
8.3%
278,407
Industrials Total (ex Metals/Mining, Energy)
132,658
2.2%
6,111,537
Industrials Total
96,719
1.3%
7,753,157
LTM Revenue Y/Y Growth LTM Revenue (ex Energy, M/M) Y/Y Growth
10%
5%
0%
-5%
-10% 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
LTM level ($mn)
Second and third column show the change in 1Q17 vs 1Q17. The fourth column shows the 1Q17 level. Source: J.P. Morgan 6
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
LTM EBITDA increased 3.2% y/y and 3.3% q/q. This is the best result in the past 19 quarters. This improvement in EBITDA trends translated into better credit metrics overall after significant deterioration in the last couple of years. Excluding the commodity related sectors, EBITDA grew 1.9% y/y and 1.1% q/q. The commodity related sectors were a big driver of EBITDA improvement this quarter. The trend in Energy turned, with EBITDA up 3.2%, $7bn, after falling consistently over the past 18 quarters. Metals and Mining was the biggest contributor to EBITDA growth this quarter, up 48% ($15bn) y/y. The sector has benefitted from an improvement in commodity prices as well as cost cutting efforts.
Pharmaceuticals/medical products continued to take the lead on EBITDA, with numbers up $9bn, +5.7%. 10 out of the 14 Pharma companies in our report posted increases in EBITDA. Large cap and Biotech names have experienced solid growth in an LTM basis, although q/q results are flat. Healthcare also had improving trends with EBITDA up $5bn, 12% y/y. EBITDA trends have followed revenue trends in most cases. Technology had the largest decline in EBITDA, down $11bn, -5.8% y/y. This sector continues to have a challenging environment as product cycles mature. Domestic Telecoms, Transportation, Diversified Media and Chemicals also experienced a decline in EBITDA y/y. Domestic Telecoms had a decline of 4.4% ($4bn) driven by Verizon as it faces top-line pressure from enhanced wireless competition. Diversified Media had weakness in domestic advertising and higher content costs which decreased EBITDA 2% y/y. Finally Chemicals struggled with less favorable fertilizer prices and posted a decrease of 1.8%. Exhibit 7: Cable/TV has had a corresponding trend in EBITDA relative to Revenue, Autos has recovered significantly Cable/TV Healthcare/HMOs Automotive Food/Drug Retail Utilities
175 150
Exhibit 8: Commodity related companies had the largest declines in EBITDA y/y but improved in the previous quarters 120 100 80
125
Energy Metals/Mining Telecoms - Yankees Food/Beverages Capital Goods
60 100
40
75
20 1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Source: J.P. Morgan
7
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 9: EBITDA growth as in part driven by the recovery in Energy and Metals/Mining
Exhibit 10: EBITDA had a significant increase of 3.2% y/y 1Q17 change ($mn)
%
Technology
-10,891
-5.8%
176,243
Transportation
-1,754
-4.4%
38,320
Telecoms - Domestic
LTM EBITDA Y/Y Growth
25%
LTM EBITDA Y/Y (ex Energy, M/M) Y/Y Growth 20%
15%
10%
5%
0%
-5%
-10%
-15% 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
LTM level ($mn)
-4,375
-4.4%
95,708
Diversified Media
-812
-2.0%
39,562
Chemicals
-617
-1.8%
32,827
Food/Beverages
-942
-1.0%
92,368
Non-Food Retail
936
1.3%
71,229
Automotive
1,208
2.9%
43,012
Energy
6,559
3.2%
211,198
Food/Drug Retail
1,431
3.6%
40,865
Consumer Products
2,158
5.4%
42,080
Capital Goods
4,390
5.5%
84,298
Pharmaceuticals/Medical Products
9,071
5.7%
166,846
Utilities
8,343
7.8%
115,421
Cable/TV
3,175
8.2%
41,738
Telecoms - Yankees
6,359
8.4%
82,438
Healthcare/HMOs
5,318
11.9%
50,043
Metals/Mining
15,438
47.5%
47,918
Industrials Total (ex Metals/Mining, Energy)
22,999
1.9%
1,212,998
Industrials Total
44,996
3.2%
1,472,114
Second and third column show the change in 1Q17 vs 1Q16. The fourth column shows the 1Q17 level. Source: J.P. Morgan
Profit margins improved slightly but are unchanged ex commodities Profit Margins remain range-bound in the 27.1% to 28.2% range since 1Q11. Margins are currently at 27.9%, an improvement of 0.4% y/y. Excluding the commodities sectors, Profit Margins are at 29.4%, up 0.1% y/y which is almost unchanged. Commodities are no longer a drag and margins have improved with the rebound in EBITDA Energy profit margins of 21% are down 1.1% y/y but up 1.9% q/q. The sector is finally seeing an improvement in EBITDA which has helped overall credit metrics for the sector. Metals and mining had the largest improvement in our sample, up 11.7% y/y to 37%. The sector has high margins compared to the index (28%) and the current level is the highest since early 2012. Much of this recovery has been driven by BHP Billiton with margins up 34%. The company has benefitted from a rebound in commodity prices in particular iron ore, as well as productivity gains. All the names in this sector had stable or improving margins however, with the exception of Goldcorp. Aside from the improvement in Metals and Mining, Consumer Products and Utilities also had increases in profit margins of 1.6% and 1.5% respectively. Newell led the increase in Consumer Products, up 3.2% as it monetizes synergies of the merger. The rest of the sector also saw improvements in profit margins except for Clorox, down 1.1% on the year. Consumer Products has been cutting costs helping margins improve for most issuers. The improvement in Utilities has been more idiosyncratic in some cases cost cutting post M&A helping EBITDA trends.
8
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Technology had the largest decline in margins, down 240bp y/y to 31%. Technology has seen deteriorating trends as headwinds in legacy hardware business and the product cycle have been hitting bottom line. Apple, IBM and Intel had declines of 2.9%, 2.7% and 1.8% which drove the decline in the overall sector. Despite the worsening metrics, Technology continues to have credit ratios above the index. Transportation and Chemicals also had declines of 1.6% and 1.5%, respectively, as both sectors have struggled with EBITDA. Exhibit 11: Profit Margins remain range bound but have improved
Exhibit 12: Profit margins are up modestly as positive EBITDA trends help several sectors Sector
30% EBITDA/Revenue, LTM
28%
26%
24%
22%
20% 1Q00
1Q02
1Q04
1Q06
1Q08
1Q10
1Q12
1Q14
1Q16
1Q17 Level
Y/Y Change
Sector Weight
Technology
31%
-2.4%
11%
Transportation
34%
-1.6%
2%
Chemicals
21%
-1.5%
2%
Div ersified Media
27%
-1.3%
3%
Energy
21%
-1.1%
16%
Telecoms - Domestic
32%
-0.4%
6%
Non-Food Retail
9%
-0.4%
4%
Telecoms - Yankees
30%
0.0%
2%
Food/Beverages
32%
0.1%
9%
Capital Goods
14%
0.2%
6%
Healthcare/HMOs
9%
0.2%
3%
Cable/TV
35%
0.3%
3%
Pharmaceuticals/Medical Products
35%
0.4%
10% 3%
Food/Drug Retail
17%
0.5%
Automotive
12%
0.8%
3%
Utilities
37%
1.5%
12%
Consumer Products
21%
1.6%
2%
Metals/Mining
37%
11.7%
2%
Industrials Total
28%
0.4%
100%
Source: J.P. Morgan
Exhibit 13: Sectors with the largest post crisis increases in margins share either cost cutting or shareholder activism stories 8%
5%
Utilities Transportation Automotive Consumer Products Food/Beverages
6%
Exhibit 14: Sectors with the largest post crisis decreases in margins are commodity related sectors which have bounced back recently
0%
4%
-5%
2%
-10%
0%
-15%
-2%
Energy Technology Metals/Mining Non-Food Retail Telecoms - Yankees
-20% 1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Source: J.P. Morgan.
9
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 15: Largest Profit Margin increases and decreases Largest Margin Increase
Largest Margin Decline 3yr Margin Change
1Q17 Weight ($mn)
Contrib ution
#
Issuer
1Q17 Margin
3yr Margin Change
1Q17 Weight ($mn)
Contrib ution
#
Issuer
1Q17 Margin
1
Allergan
44%
16%
22,180
0.2%
1
Microsoft Corp
33%
-5%
65,756
-0.2%
2
ETP
21%
13%
18,760
0.1%
2
ConocoPhillips
24%
-13%
22,707
-0.2%
3
EPD
20%
10%
20,465
0.1%
3
Anadarko
37%
-24%
10,025
-0.1%
4
PG&E Corp
33%
9%
16,694
0.1%
4
Occidental Petro
31%
-26%
9,204
-0.1%
5
AbbVie Inc
42%
4%
31,284
0.1%
5
Pfizer Inc
38%
-7%
28,050
-0.1%
6
BRKHEC
39%
5%
24,041
0.1%
6
Verizon
33%
-3%
59,483
-0.1%
7
General Motors
11%
3%
34,118
0.1%
7
Hess Corp
27%
-28%
5,935
-0.1%
8
Southern Co
38%
5%
22,863
0.1%
8
Noble Energy Inc
36%
-25%
5,760
-0.1%
9
Teva
33%
5%
18,534
0.0%
9
ABIBB
35%
-2%
76,513
-0.1%
10
Cisco Systems Inc
31%
3%
27,790
0.0%
10
IBM
21%
-6%
21,950
-0.1%
All Other Change
-0.2%
All Other Change
1.7%
Total Change
0.6%
Total Change
0.6%
Note: Based on Y/Y LTM data. Source: J.P. Morgan, Capital IQ .
Exhibit 16: Profit margin – current level, change over the last three years and range over the last three years Profit Margins Sector Consumer Products
3yr Max
1Q17
18%
21%
21%
Food/Drug Retail
17%
17%
17%
Metals/Mining
25%
37%
37%
Utilities
32%
37%
37%
Automotive
8%
12%
12%
Telecoms - Yankees
27%
30%
30%
Pharmaceuticals/Medical Products
32%
36%
35%
Food/Bev erages
30%
32%
32%
Healthcare/HMOs
8%
9%
9%
Transportation
29%
36%
34%
Telecoms - Domestic
30%
33%
32%
All
27%
28%
28%
Cable/TV
34%
35%
35%
Chemicals
19%
23%
21%
Capital Goods
14%
15%
14%
Energy
19%
26%
21%
Technology
31%
35%
31%
Div ersified Media
27%
28%
27%
Non-Food Retail
9%
10%
9%
Note: Based on Y/Y LTM data. Source: J.P. Morgan, Capital IQ
10
Percentage in 3y Range
3yr Min
1Q 14
1 Q1 6
1Q17
3y r Rang e
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Corporate cash balances increase as companies improve working capital and issue debt Cash increased $65bn (+5.9%) y/y, and $25bn (+2.2%) q/q. The biggest driver for the increase was Technology, with cash up $38bn, 12% y/y. Microsoft had a $21bn increase in cash as it issued debt in January for general corporate purposes. The company has normalized onshore cash levels following the LinkedIn acquisition.
Healthcare had a $19bn increase in cash y/y driven by early timing of CMS premium payments. Capital Goods had an increase in cash of $17bn, 29% y/y mainly driven by CAT (+$3bn) and Honeywell (+$3bn). CAT grew revenue for the first time in the past 9 quarters while Honeywell had an improvement in working capital after a weak 1Q16. Most of our sectors, 12 out of the 18, had increases in cash driven by different purposes. In some instances, however, the increase in cash was driven by debt issuance for several purposes. Cash stabilized in the commodity related sectors with Energy cash up $3bn, 3%, and Metals and Mining cash balances up $2bn, 7.2%. Both sectors have seen a turn from deteriorating metrics as commodity prices stabilize and comps become easier. Cash decreased the most for Food and Beverage -$46bn (-39%) as ABIBB completed the Sab Miller acquisition using the cash on its balance sheet from the 1Q16 debt issuance. Cash also decreased for Consumer Products, Transportation and Non-Food Retail, -$6bn, -$3.6bn and -$3bn respectively. In the case of Consumer Products the decrease was driven by the cash deployed by Newell to complete the Jarden acquisition (-$7bn). Transportation had declines in UPS (-$2.5bn), UNP (-$1.5bn) and CP (-$286mn). Non-Food retail had declines in 3 companies. Exhibit 17: Cash balances increased y/y driven by Technology $bn
Exhibit 18: Cash levels increased $65bn, part of the improvement from 1Q16 was offset by deploying cash to complete transactions 1Q17 change
Cash
1,200
1,000
800
600
400
LTM level
($mn)
%
($mn)
Food/Beverages
-46,256
-39.3%
71,578
Transportation
-3,579
-25.6%
10,389
Consumer Products
-6,009
-20.8%
22,842
Cable/TV
-1,261
-15.4%
6,942
Non-Food Retail
-3,300
-13.1%
21,919
Diversified Media
-594
-5.7%
9,816
Energy
3,412
3.2%
109,672
Pharmaceuticals/Medical Products
6,066
3.7%
169,095
Chemicals
1,085
6.9%
16,758
Metals/Mining
2,165
7.2%
32,208
Technology
38,492
12.0%
360,045
Automotive
6,215
13.5%
52,146
Telecoms - Domestic
3,473
21.6%
19,514
Capital Goods
17,367
29.2%
76,770
Telecoms - Yankees
14,061
29.7%
61,446
Healthcare/HMOs
19,017
30.9%
80,479
Utilities
5,812
52.6%
16,858
Food/Drug Retail
8,764
83.6%
Industrials Total
64,931
5.9%
19,253
1,157,731
Second and third column show the change in 1Q17 vs 1Q16. The fourth column shows the 1Q17 level.
200 1Q00 1Q02
1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16
Source: J.P. Morgan.
11
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Debt stabilized q/q but was up 8.5% y/y Total debt grew at a slower pace than in the past two quarters, up 8.5% y/y (+$313bn). Debt growth reached a peak of 14.3% growth in 3Q16 but growth has since then decelerated to 11.1% in 4Q16 and 8.5% currently. M&A, buybacks and dividends continue to drive the increase although at a lower rate. M&A issuance in particular was only $19bn in 1Q17 compared to $67bn in 1Q16. We did expect M&A related issuance to decline in 2017 but we are still pending several of the large transactions we anticipated coming into this year. Excluding the commodity related sectors, debt increased 10.2%, a significant increase, but a slower pace than in previous quarters.
On a q/q basis debt increased by 2.6% ($102bn). Debt has been increasing quarterly every quarter since 1Q10 except for 4Q16. Quarterly growth of 2.6% in 1Q17 is lower than the 4% average seen from 1Q16-3Q16 but higher than the -1.3% decline in 4Q16. Technology continues to be largest driver for debt growth, up $102bn, 36% y/y. Microsoft and Dell drove this increase up $37bn and $31bn respectively. Both companies completed acquisitions in 2016 and Microsoft also continued to issue debt in 2017 for general corporate purposes. Apple increased debt by $19bn as it continues to fund buyback programs through debt. Utilities also had a significant increase of $63bn, 12.9% as the sector continues to lever up partly due to consolidation. Energy increased debt this quarter $38bn, 6%, as the sector funds operations through debt given limited cash flow and companies fund M&A with debt. In particular, Enbridge increased debt $19bn as it acquired SE. Metals and Mining decreased debt y/y by $18bn, 15% as the sector seeks to delever to retain IG ratings. Consumer Products and Diversified Media had stable/ modestly declining debt down $1bn, -2% and $357mn, -0.4% respectively. Exhibit 19: The top 5 largest increases in debt are all tied to M&A related issuance Technology Food/Drug Retail Telecoms - Domestic Pharmaceuticals/Medical Products Transportation
425 375 325
Exhibit 20: Looking at the small increases, only Yankee Telecoms has reduced debt since 2011 175
Telecoms - Yankees Metals/Mining Non-Food Retail Consumer Products Automotive
150 125
275 225
100
175
75
125 75
50 1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Source: J.P. Morgan
Net debt increased 9.6% y/y, as debt growth outpaced cash growth. This is the slowest pace since 1Q14. Q/Q net debt increased 3%, following the same trend as debt growth. Technology also drove the increase in net debt as it increased $64bn y/y. Utilities and Energy followed with increases in net debt of $57bn and $35bn.
12
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 21: Debt grew 8.5% yy he lowest rate since 4Q14 4.0
$tn
Exhibit 22: Most sectors increased debt over the year, although the pace stabilized
Debt
1Q17 change
3.5
3.0
2.5
2.0
1.5
1.0
LTM level
($mn)
%
Metals/Mining
-18,042
-14.7%
104,480
Non-Food Retail
-3,636
-3.2%
110,099
Consumer Products
Net Debt
($mn)
-1,427
-1.7%
81,818
Diversified Media
-357
-0.4%
86,732
Healthcare/HMOs
1,122
1.1%
104,470
Telecoms - Domestic
9,935
3.9%
266,347
Telecoms - Yankees
9,722
4.1%
246,511
Food/Beverages
15,259
4.5%
352,302
Energy
37,962
5.6%
710,865
Chemicals
4,364
6.1%
75,608
Automotive
2,786
6.5%
45,959
Cable/TV
9,236
8.0%
124,629
Capital Goods
15,997
10.0%
175,372
Transportation
8,548
11.9%
80,145
Utilities
62,575
12.9%
546,374
Pharmaceuticals/Medical Products
45,418
12.9%
396,392
Food/Drug Retail
11,655
14.6%
91,605
Technology
102,207
35.7%
388,290
Industrials Total
313,324
8.5%
3,987,996
Second and third column show the change in 1Q17 vs 1Q16. The fourth column shows the 1Q17 level.
0.5 1Q00
1Q02
1Q04
1Q06
1Q08
1Q10
1Q12
1Q14
1Q16
Source: J.P. Morgan
Leverage stabilized q/q but increased y/y Gross Leverage increased 0.13x y/y to 3.02x but fell 0.1x q/q. The lower rate of debt growth of 8.5% and the strong EBITDA results up, 3.2% y/y, have helped stabilize leverage metrics. Excluding the commodity sectors, leverage ticked up 0.11x y/y and fell 0.04x q/q.
Technology was the biggest driver of the leverage increase with leverage for the sector up 0.6x y/y. Q/Q the sector had a decrease of 0.1x to 2.5x. Although the sector has outstanding buyback programs that it funds through debt, several M&A transactions have been completed last year and new ones have not been funded in 2017 so far. Except for Microsoft which had a significant deal for GCP, the rest of the names had stable leverage q/q whereas Dell started the deleveraging process decreasing leverage 3x q/q. Pharma also increased leverage up 0.4x y/y but only 0.1x q/q while Utilities had a 0.3x increase y/y and a 0.1x increase over the quarter. Several sectors saw improvements in leverage driven by strong EBITDA trends, deleveraging post M&A and stabilization of debt growth. Metals and Mining led the decline with leverage down 2.3x y/y, -0.1x q/q. This sector has made a significant effort to cut back debt to improve credit metrics and efficiency. Healthcare had a decline of 0.2x y/y, -0.1x q/q as EBITDA grows for the sector after significant consolidation in the space. Energy leverage declined by 0.1x y/y and more importantly by 0.7x q/q as higher oil prices and easier comps benefit the sector’s bottom line and relative comparisons.
13
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
We continue to track deals from 2015 and 2016 to see the deleveraging path of companies post M&A. Companies that completed deals in 2015 have had at least a year to delever post the transactions. Allergan has decreased leverage 2.6x since completing a deal in 1Q15. Reynolds and Newell have also delivered quickly with leverage down 1.6x and 1.4x since the close. On average, companies have decreased leverage 0.5x 5 quarters after completing transactions Exhibit 23: Companies are deleveraging post M&A 1.2x 1.0x 0.8x 0.6x 0.4x 0.2x 0.0x -0.2x -0.4x -0.6x -0.8x
1.01x
-0.18x -0.38x From Previous Q to Deal
+1Q
+2Q
-0.49x
+3Q
-0.49x
+4Q
-0.52x +5Q
Source: J.P. Morgan. Based on a sample of 11 large M&A transactions which closed in 2015 or 2016.
Over the past 5 years, looking at the largest 5 increases and decreases in leverage, the largest increases share the same theme: M&A related issuance, funding the business with debt in the case of Energy, and pursuing shareholder friendly policies. Energy has seen the largest increase as it funds the business through debt given the lack of cash flow generation. EBITDA trends have finally stabilized however as oil prices recover. Technology and Pharma have pursued large M&A deals as well as share buybacks. The only sector which has kept leverage nearly unchanged is Autos. Exhibit 24: Gross Leverage continues to rise y/y but declined from 4Q16
Exhibit 25: 9 out of 18 sectors had leverage decline or stabilize y/y
3.2x
Gross Leverage Gross Leverage ex Metals/Mining, Energy
2.8x
2.4x
2.0x
1.6x 1Q00
1Q02
1Q04
1Q06
1Q08
1Q10
1Q12
1Q14
1Q16
Sector
1Q17 Level
Y/Y Change
Sector Weight
Metals/Mining
2.04x
-2.31x
2%
Healthcare/HMOs
2.16x
-0.24x
3%
Telecoms - Yankees
3.00x
-0.15x
2%
Div ersified Media
2.71x
-0.12x
3%
Consumer Products
1.85x
-0.10x
2%
Energy
3.85x
-0.09x
16%
Cable/TV
3.20x
-0.06x
3%
Non-Food Retail
1.98x
-0.05x
4%
Capital Goods
2.07x
0.01x
6%
Food/Drug Retail
3.38x
0.15x
3%
Food/Bev erages
3.33x
0.15x
9%
Telecoms - Domestic
2.79x
0.20x
6%
Chemicals
2.48x
0.21x
2%
Transportation
2.22x
0.23x
2%
Utilities
4.81x
0.28x
12%
Automotive
1.26x
0.31x
3%
Pharmaceuticals/Medical Products
2.77x
0.36x
10%
Technology
2.45x
0.59x
11%
Industrials Total
3.02x
0.13x
100%
The first column shows the 1Q17 level. The second column shows the 1Q17 vs. 1Q16 change. The last column gives the sector weight in the index. Source: J.P. Morgan
14
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 26: Largest Gross Leverage increases and decreases: 10 companies account for 1/2 of the rise in leverage over the past 3 years Largest Leverage Increase
Largest Leverage Decline 1Q17 Levera ge
3yr Leverage Change
1Q17 Weight ($mn)
Contrib ution
#
Issuer
1Q17 Levera ge
3yr Leverage Change
1Q17 Weight ($mn)
Contrib ution
#
Issuer
1
Microsoft Corp
2.9x
2.2x
65,756
0.08x
1
Amgen Inc
2.8x
-1.4x
20,630
-0.02x
2
Oracle Corp
3.3x
1.8x
47,594
0.05x
2
Thermo Fisher
3.7x
-2.2x
9,572
-0.01x
3
ConocoPhillips
4.3x
3.3x
22,707
0.04x
3
PG&E Corp
3.1x
-0.8x
16,694
-0.01x
4
Shell
2.7x
1.6x
38,991
0.03x
4
Newmont Mining
1.7x
-2.2x
4,395
-0.01x
5
Actavis plc
4.9x
2.5x
22,180
0.03x
5
Glencore
4.1x
-1.9x
4,709
0.00x
6
AT&T Inc
2.7x
0.6x
78,196
0.03x
6
McKesson Corp
1.9x
-1.4x
5,505
0.00x
7
Teva
4.7x
2.6x
18,534
0.03x
7
Target Corp
1.9x
-0.6x
9,842
0.00x
8
Chevron Corp
2.6x
2.0x
21,222
0.02x
8
Barrick Gold Corp
1.8x
-0.9x
6,681
0.00x
9
AbbVie Inc
3.3x
1.4x
31,284
0.02x
9
NextEra Energy
4.3x
-0.5x
10,851
0.00x
10
BP PLC
3.0x
1.3x
29,292
0.02x
10
Wal-Mart Stores
1.9x
-0.2x
32,106
0.00x
All Other Change
0.39x
All Other Change
0.80x
Total Change
0.74x
Total Change
0.74x
Note: Based on 3yr LTM data. Source: J.P. Morgan, Capital IQ
Exhibit 27: Energy is finally recovering after significant leverage increase since 2012 5.0x
Energy Technology Pharmaceuticals/Medical Products Telecoms - Domestic Chemicals
4.5x 4.0x 3.5x
Exhibit 28: Over the past 5 years, some companies have increased debt prudently. Metals and Mining is in deleveraging mode Automotive Consumer Products Metals/Mining
4.5x
Non-Food Retail Cable/TV
3.5x
3.0x 2.5x
2.5x
2.0x 1.5x
1.5x
1.0x 0.5x
0.5x 1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Source: J.P. Morgan
15
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 29: Gross leverage – current level, change over the last three years and range over the last three years Gross Leverage Sector
Percentage in 3y Range
3yr Min
3yr Max
1Q17
2.04
4.64
2.04
Metals/Mining Telecoms - Yankees
2.92
3.28
3.00
Healthcare/HMOs
1.90
2.59
2.16
Consumer Products
1.79
1.96
1.85
Div ersified Media
2.50
2.89
2.71
Non-Food Retail
1.92
2.04
1.98
Energy
1.92
4.59
3.85
Chemicals
2.00
2.63
2.48
All
2.28
3.13
3.02
Cable/TV
2.41
3.29
3.20
Capital Goods
1.42
2.12
2.07
Technology
1.13
2.51
2.45
1Q 14
Telecoms - Domestic
2.26
2.79
2.79
Automotive
0.88
1.26
1.26
Transportation
1.68
2.22
2.22
Utilities
4.18
4.81
4.81
Food/Drug Retail
2.59
3.38
3.38
Food/Bev erages
2.69
3.33
3.33
Pharmaceuticals/Medical Products
1.87
2.77
2.77
1 Q1 6
1Q17
3y r Rang e
Note: Based on Y/Y LTM data. Source: J.P. Morgan, Capital IQ
Net Leverage moved less than Gross Leverage. Net Leverage was unchanged y/y at 2.4x. On a q/q basis however, net leverage declined 0.1x. Given a big improvement in commodity related sectors, ex commodities, net leverage increased 0.03x y/y and 0.04x q/q. The themes were similar to leverage with Metals and Mining as well as Energy posting decreases of 1.8x and 0.3x respectively. Healthcare also had improving trends of -0.4x y/y. Tech and Pharma had the largest increases with net leverage up 0.4x and 0.5x y/y. Exhibit 31: Net Leverage is unchanged y/y
Exhibit 30: Net Leverage ell from last quarter 2.6x
Sector
1Q17 Level
Y/Y Change
Sector Weight
Metals/Mining
1.37x
-1.78x
2%
2.4x
Healthcare/HMOs
0.63x
-0.42x
3%
2.3x
Telecoms - Yankees
2.25x
-0.27x
2%
Energy
2.94x
-0.25x
16%
Div ersified Media
2.45x
-0.15x
3%
2.5x
Net Leverage
Net Leverage ex Energy and M/M
2.2x 2.1x
Food/Bev erages
2.46x
-0.10x
9%
2.0x
Consumer Products
1.50x
-0.09x
2%
1.9x
Automotive
-0.35x
-0.06x
3%
1.8x
Capital Goods
1.22x
-0.05x
6%
1.7x
Cable/TV
3.03x
-0.02x
3%
Food/Drug Retail
3.03x
0.00x
3%
Non-Food Retail
1.76x
0.05x
4% 6%
1.6x 1.5x
Telecoms - Domestic
2.58x
0.16x
1.4x
Transportation
1.90x
0.21x
2%
1.3x
Utilities
4.65x
0.23x
12%
1.2x
Chemicals
2.01x
0.31x
2%
Technology
-0.16x
0.44x
11%
Pharmaceuticals/Medical Products
2.03x
0.54x
10%
Industrials Total
2.44x
0.01x
100%
1.1x 1Q00
1Q02
1Q04
1Q06
1Q08
1Q10
1Q12
1Q14
1Q16
Second column shows the 1Q17 level. The 3rd column shows the 1Q17 vs. 1Q16 change. The last column gives the sector weight in the index. Source: J.P. Morgan
16
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 32: Largest Net Leverage increases and decreases Largest Leverage Increase
Largest Leverage Decline 3Q16 Levera ge
3yr Leverage Change
3Q16 Weight ($mn)
Contrib ution
#
Issuer
3Q16 Levera ge
3yr Leverage Change
3Q16 Weight ($mn)
Contrib ution
#
Issuer
1
ConocoPhillips
3.8x
3.1x
22,707
0.04x
1
Thermo Fisher
3.5x
-1.8x
9,572
-0.01x
2
AbbVie Inc
2.8x
2.1x
31,284
0.04x
2
PG&E Corp
3.0x
-0.8x
16,694
-0.01x
3
Shell
2.2x
1.4x
38,991
0.03x
3
Newmont Mining
0.6x
-2.4x
4,395
-0.01x
4
Medtronic Inc
2.4x
2.2x
23,355
0.03x
4
Target Corp
1.6x
-0.9x
9,842
-0.01x
5
Teva
4.5x
2.6x
18,534
0.03x
5
Aetna Inc
0.5x
-0.6x
11,372
0.00x
6
Halliburton Co
4.7x
3.8x
12,595
0.03x
6
Barrick Gold Corp
1.3x
-0.9x
6,681
0.00x
7
Actavis plc
3.5x
2.0x
22,180
0.03x
7
Wal-Mart Stores
1.7x
-0.2x
32,106
0.00x
8
Chevron Corp
2.2x
2.0x
21,222
0.03x
8
NextEra Energy
4.3x
-0.5x
10,851
0.00x
9
Pfizer Inc
1.5x
1.3x
28,050
0.02x
9
Procter & Gamble
0.9x
-0.5x
9,456
0.00x
10
AT&T Inc
2.4x
0.5x
78,196
0.02x
10
Devon Energy
2.6x
-0.7x
6,587
0.00x
All Other Change
0.38x
All Other Change
0.72x
Total Change
0.67x
Total Change
0.67x
Note: Based on 3yr LTM data. Source: J.P. Morgan, Capital IQ
Exhibit 33: Net leverage – current level, change over the last three years and range over the last three years Net Leverage Sector
Percentage in 3y Range
3yr Min
3yr Max
1Q17
Healthcare/HMOs
0.63
1.20
0.63
Metals/Mining
1.37
3.34
1.37
Telecoms - Yankees
2.20
2.70
2.25
Non-Food Retail
1.69
1.84
1.76
Food/Bev erages
2.16
2.66
2.46
Div ersified Media
2.21
2.62
2.45
Energy
1.49
3.86
2.94
Consumer Products
1.32
1.60
1.50
Cable/TV
2.30
3.19
3.03
Telecoms - Domestic
2.12
2.67
2.58
All
1.76
2.56
2.44
Automotive
-0.72
-0.29
-0.35
Capital Goods
0.75
1.27
1.22
Transportation
1.36
1.94
1.90
Food/Drug Retail
2.18
3.07
3.03
Technology
-1.04
-0.13
-0.16
Utilities
4.04
4.65
4.65
Pharmaceuticals/Medical Products
0. 72
2. 03
2. 03
Chemicals
1.47
2.01
2.01
1Q14
1Q16
1Q17
3yr Range
Note: Based on Y/Y LTM data. Source: J.P. Morgan, Capital IQ
Though the trend has been an increase in leverage overall, lower rated companies (ex commodities and utilities) have had a slight increase y/y of 0.1x while A rated companies were flat. We can see the migration from low leverage to higher leverage in the bar chart below. The majority of companies in 2012 were 1-2x levered (37%) whereas now this has shifted to 2-3x (35%). The risk on the tails has significantly increased driven by Energy, Utilities and companies completing acquisitions. The recent rebound has helped the tails from the previous quarters as oil prices stabilize, EBITDA improves and several companies delever post M&A.
17
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 34: BBB and A rated companies decreased leverage Q/Q
Exhibit 35: Net leverage has icked up in BBB rated companies
Gross Leverage ex Energy, M/M, Utilities - BBB
3.0x
Net Leverage ex Energy, M/M, Utilities - A Net Leverage ex Energy, M/M, Utilities - BBB
2.5x
Gross Leverage ex Energy, M/M, Utilities - A 2.0x
2.5x
1.5x
2.0x 1.0x
1.5x
0.5x 0.0x
1.0x 1Q00
1Q02
1Q04
1Q06
1Q08
1Q10
1Q00 1Q02 1Q04
1Q12 1Q14 1Q16
1Q06 1Q08 1Q10 1Q12 1Q14 1Q16
Source: J.P. Morgan
Exhibit 36: The majority of companies are now 2-3x levered 37%
40%
35%
35%
Exhibit 37: The same trend is true in net leverage 30
Gross Leverage - % of Debt 4Q12
1Q17
Net Leverage - % of Debt
27%
25%
4Q12
22% 23%
23%
1Q17
30% 25% 20%
20%
20%
22% 15% 15%
16%
15%
15% 10% 7%
7% 4%
2%
4%
5%
3%
12%
12%
14%
10% 5%
17%
4%
8%
7%
10%
3%
10% 7%
6% 3%
3%
4-5x
5-6x
3%
0%
0% 0-1x
1-2x
2-3x
3-4x
4-5x
5-6x
-2 - -1x -1 - 0x
6x+
0-1x
1-2x
2-3x
3-4x
6x+
Source: J.P. Morgan
Interest coverage has fallen to the lower end of the post crisis range Interest expense increased 11.2% y/y (+$15bn), a slower pace from the 12.5% average increase of the previous 2 quarters but still significant. The increase has been driven by larger debt balances. Interest expense lags debt growth, however, so we should continue to see increases in interest expense going forward. YTD, maturing bonds have had higher yields than new issues by 11bp. This is a decline from the average 54bp seen in 2016. We expect this difference to compress as yields on new issues rise. Exhibit 38: We expect the difference between maturing and new issue coupons to decrease 3.00 2.50 2.00 1.50 1.00 0.50 0.00 -0.50 -1.00 -1.50 -2.00
Avg Maturing - Avg Issued Coupon
%
1.61 1.47
2.23 2.39
1.66
1.66 1.48
0.78
0.54
0.15
0.13
0.25
0.11
-0.24
-0.29 -1.36 2001
Source: J.P. Morgan
18
1.85
2003
2005
2007
2009
2011
2013
2015
2017
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
On a sector level, Technology had the largest interest expense increase: up $3.3bn, 54% y/y. The sector has added debt in the past 12 months to complete acquisitions, fund projects and share repurchase programs. Energy also had a large increase in interest expense of $3.1bn y/y. The increase is a combination of higher costs and higher debt. Investors demand larger coupons from sectors with significant headwinds and this has been the case for Energy. Furthermore, the sector has had to increase debt in order to fund operations given negative cash flows and complete acquisitions. The third largest sector was Food and Beverage with interest expense up $2bn (+19%) post the ABIBB acquisition of SAB Miller. Given the amount of debt that was raised the increase in interest expense comes as no surprise. Yankee Telecoms had the largest decrease of $647mn, 6%. This was driven by Telefonica (-$1bn) as the company refinances debt at cheaper levels. Most companies had increases however, and in 17 of our 18 sectors. Exhibit 39: Interest expense is rising and we expect this to continue as rates rise 150
Exhibit 40: Interest expense was up 11.2%, a slower pace than in the previous quarter but still significant growth 1Q17 change
$bn Interest Exp
Telecoms - Yankees
140 130
100
0.9%
9,853
4.2%
3,029
282
5.7%
5,226
1,391
6.8%
21,821
Diversified Media
256
7.3%
3,767
Pharmaceuticals/Medical Products
841
7.6%
11,971
Cable/TV
500
9.5%
5,752
Metals/Mining
505
11.2%
5,013
Transportation
329
11.4%
3,203
Consumer Products
264
12.9%
2,306
729
13.1%
6,312
3,134
14.7%
24,499
424
15.3%
3,195
Healthcare/HMOs
676
18.5%
4,332
Food/Beverages
2,011
18.5%
12,891
Automotive
357
21.9%
1,986
Technology
3,267
53.6%
9,364
14,530
11.2%
144,228
Food/Drug Retail
70
Industrials Total
60 1Q00
1Q02
1Q04
1Q06
1Q08
1Q10
1Q12
1Q14
1Q16
9,707
89
Energy
80
-6.3%
122
Capital Goods
90
($mn)
-647
Chemicals Utilities
110
%
Telecoms - Domestic Non-Food Retail
120
LTM level
($mn)
Second and third column show the change in 3Q16 vs 3Q15. The fourth column shows the 3Q16 level.
Source: J.P. Morgan
19
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 41: Interest coverage has stabilized in part due to the improvement in commodity related sectors 15x
Exhibit 42: Interest coverage has deteriorated y/y but stabilized q/q Sector Technology
14x
10x
9x
30.65x
-3.24x
3%
-2.88x
2%
Interest Coverage Interest Coverage ex Energy, M/M
7x 1Q00
1Q02
1Q04
1Q06
1Q08
1Q10
1Q12
1Q14
1Q16
7.93x
-2.35x
16%
13.92x
-2.00x
10%
9.76x
-0.65x
6%
Capital Goods
12.77x
-0.54x
6%
Healthcare/HMOs
12.21x
-0.44x
3%
Chemicals
11.27x
-0.36x
2%
Food/Drug Retail
8.35x
-0.36x
3%
Non-Food Retail
11.37x
-0.32x
4%
Div ersified Media
7.35x
-0.30x
3%
Cable/TV
7.32x
-0.08x
3%
Utilities
5.26x
0.02x
12%
Telecoms - Yankees
8.61x
0.69x
2%
Food/Bev erages
8x
11%
12.55x
Telecoms - Domestic
11x
Sector Weight
-7.00x
Transportation Pharm aceutic als/Medical Products
12x
Y/Y Change
17.55x
Automotive Energy
13x
1Q17 Level
9.04x
1.07x
9%
Consumer Products
22.71x
2.22x
2%
Metals/Mining
11.22x
2.69x
2%
Industrials Total
10.11x
-1.07x
100%
Second column shows the 1Q17 level. The 3rd column shows the 1Q17 vs.1Q16 change. The last column gives the sector weight in the index.
Source: J.P. Morgan
Interest coverage is at 10.1x, down 1.1x y/y but a 0.05x improvement from the recent low reached last quarter. This marks the first q/q increase in over 2 years. Ex the commodity related sectors interest coverage is at 10.4x, the lowest reading since 2010. Although EBITDA improved materially, debt continues to grow and the effect of the increase in interest expense is somewhat delayed.
On a sector level, unsurprisingly, Technology led the decline, down 7x to17.6x as EBITDA trends were weak while the amount of debt issued by the sector continues to increase on the back of shareholder friendly policies. However, a 17.6x interest coverage for the sector continues to be strong compared to other sectors. Despite some deterioration in credit metrics, several companies in this sector still have better than average metrics and are excluded from our overall calculations (we exclude the top and bottom 10% from our average credit ratios). Apple for example had a decline of 40x y/y, yet EBITDA/Interest expense stands as 36x, which is still well above other companies in our sample. Autos also had a large decline in interest coverage of 3.2x y/y, but still has interest coverage of 30.7x. Energy interest coverage had a y/y decline of 2.3x to 7.9x, but q/q coverage improved by 1.9x as EBITDA improved. Overall, most sectors had decreases in coverage, 13out of 18 in our sample. Of the five stable or improving sectors, Metals and Mining led the group with coverage up 2.7x to 11.2x. Consumer Products followed with a large increase of 2.2x y/y to 22.7x. Interest coverage improved for BBB rated companies by 0.4x y/y to 7.8x but decreased for A rated companies by 0.2x y/y to 11.4x. Adjusting for commodity related sectors and Utilities, coverage increased by 1.1x to 8.6x for BBB rated companies while it declined by 0.8x to 14.7x for A rated companies.
20
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
The shift in the interest coverage distribution across issuers continues to show a migration to lower coverage from higher rated companies on a y/y basis, the q/q trend does show an improvement however. Currently, 44% of companies have coverage ratios of 5-10x while this was 29% in 2012. The companies that have migrated to the lower tail have been companies in the Energy and Utilities sectors as well as companies completing M&A, so similar to what we observed for leverage above. M&A worsens metrics significantly in the short term but improvements can be seen with time if the deal is truly beneficial, allowing companies to monetize synergies and deleverage. Exhibit 43: Currently 44% of debt has coverage of 5-10x in our sample Interest Coverage - % of Debt
50%
4Q12
Interest Coverage - All Interest Coverage - A Interest Coverage - BBB
21x
1Q17
19x
38%
40%
17x 15x
30% 20%
Exhibit 44: Interest coverage improved for lower rated companies q/q
24%
19% 20% 14% 10%
10%
10%
22% 12%13%
13x 11x
11%
9x
7%
7x 0% 0-5x
5-7.5x
7.5-10x
10-12.5x
12.5-15x
15x +
5x 1Q00
1Q02
1Q04
1Q06
1Q08
1Q10
1Q12
1Q14
1Q16
Source: J.P. Morgan
Exhibit 45: Largest Interest Coverage increases and declines Largest Coverage Increase
Largest Coverage Decline 4Q16 Covera ge
3yr Coverage Change
4Q16 Weight ($mn)
Contrib ution
#
Issuer
3Q16 Covera ge
3yr Coverage Change
3Q16 Weight ($mn)
Contrib ution
#
Issuer
1
Dow Chemical
10.3x
3.3x
14,976
0.03x
1
Microsoft Corp
15.1x
-247.8x
65,756
-8.70x
2
Amgen Inc
9.4x
1.9x
20,630
0.02x
2
OXY
11.4x
-78.3x
9,204
-0.38x
3
Merck & Co Inc
21.6x
2.1x
18,566
0.02x
3
Husky Energy Inc
10.2x
-224.0x
2,986
-0.36x
4
McKesson Corp
14.3x
6.0x
5,505
0.02x
4
ConocoPhillips
5.0x
-28.4x
22,707
-0.34x
5
NextEra Energy
8.3x
3.0x
10,851
0.02x
5
BP PLC
19.0x
-17.4x
29,292
-0.27x
6
Charter
5.3x
0.8x
37,800
0.02x
6
AbbVie Inc
10.1x
-15.0x
31,284
-0.25x
7
Home Depot
13.2x
1.3x
22,533
0.02x
7
Apache Corp
6.6x
-56.0x
8,314
-0.25x
8
PG&E Corp
7.0x
1.7x
16,694
0.01x
8
Oracle Corp
9.9x
-8.8x
47,594
-0.22x
9
DTE
7.2x
1.9x
14,348
0.01x
9
FedEx Corp
16.5x
-25.8x
11,166
-0.15x
10
Honeywell
23.9x
3.5x
7,526
0.01x
10
Teva
10.2x
-14.1x
18,534
-0.14x
All Other Change
-4.26x
All Other Change
6.99x
Total Change
-4.08x
Total Change
-4.08x
Note: Based on Y/Y LTM data. Source: J.P. Morgan, Capital IQ
21
Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 09 June 2017
Exhibit 46: Interest coverage – current level, change over the last three years and range over the last three years Interest Coverage Sector
Percentage in 3y Range
3yr Min
3yr Max
1Q17
Consumer Products
15.75
22.71
22.71
Telecoms - Yankees
6.85
8.61
8.61
Food/Bev erages
7.14
9.24
9.04
Utilities
4.94
5.43
5.26
Cable/TV
6.70
7.75
7.32
Automotive
25.91
34.96
30.65
Non-Food Retail
11.19
11.72
11.37
Telecoms - Domestic
9.30
11.23
9.76
Metals/Mining
7.76
27.50
11.22
Healthcare/HMOs
11.98
13.42
12.21
Div ersified Media
7.24
8.01
7.35
Energy
6.02
26.13
7.93
Transportation
12.26
16.43
12.55
All
10.06
14.18
10.11
Capital Goods
12.74
16.04
12.77
Chemicals
11.27
16.30
11.27
Food/Drug Retail
8.35
10.00
8.35
Pharmaceuticals/Medical Products
13.92
18.11
13.92
Technology
17.55
104.95
17.55
1Q 14
1 Q1 6
1Q17
3y r Range
Note: Based on Y/Y LTM data. Source: J.P. Morgan, Capital IQ
Capex declined 9% y/y but was marginally up 2% excluding the commodity sectors Capex declined 9% y/y for a second consecutive quarter but was marginally up 2% y/y excluding the Energy and Metals/Mining sectors. Commodity sectors continue to cut Capex, with Metals and Mining cutting capex by 32% while Energy decreased 27%. This y/y comparison compares the LTM periods before and during the commodities selloff so the changes will be extremely punitive. However on a q/q basis Capex excluding the Energy and Metals/Mining sectors was marginally down 1%. Outside of these two sectors Diversified Media has cut Capex by 11% driven by a 16% decline in capex in DIS (-$776mn). Other sectors to decrease Capex include Transportation (-6%, -$1.2bn), Non Food Retail (-4%,-$772mn) and Chemicals (6%,-$718mn). However on the other side of the spectrum Technology, Pharma, Automotive and Domestic Telecom companies have increased Capex substantially by 15%, 10%, 6% and 5% y/y respectively. The increase in Tech has been driven in large part by Dell which has increased Capex by 56% (+$3.7bn) and MSFT (+14%, +$1.0bn).The increase in the Pharma sector was driven mainly by the $1.9bn increase in Capex (+52%) at Roche Holdings, although there were increases in Capex across most companies we cover in the pharma sector
22
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 47: Capex decreased 8.9% y/y, but was up 2.1% ex commodities sectors 700
$bn
Exhibit 48: Sectors were on both ends of the spectrum in terms of capex changes 1Q17 change
$bn Capital Exp (lhs)
375
600
($m n)
%
($m n )
Metals/Mining
-6,965
-31.5%
15,135
Energy
-57,942
-27.3%
154,309
-787
-11.3%
6,158
Diversifi ed Media
-1,193
-6.0%
18,603
Chemicals
-718
-5.9%
11,435
Food/Beverages
-802
-4.6%
16,538
Non-Food Retail
-772
-4.1%
18,116
Healthcare/HMOs
-111
-2.2%
4,896
Transportation
325 500
275 400
225
300
200
175 1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16
LTM level
Cable/TV
-98
-0.6%
15,779
Capital Goods
-7
0.0%
14,902
Food/Drug Retail
18
0.2%
10,356
Utilities
770
0.7%
105,195
Telecoms - Yankees
363
1.0%
36,900
Consumer Products
247
3.1%
8,267
Telecoms - Domestic
2,050
5.1%
42,176
Pharmaceuticals/Medical Products
2,070
10.3%
22,153
Technology
5,128
15.3%
38,690
Industrials Total (ex Metals/Mining, Energy)
8,444
2.1%
409,769
-56,462
-8.9%
579,213
Industrials Total
Second and third column show the change in 1Q17 vs 1Q16. The fourth column shows the 1Q17 level.
Source: J.P. Morgan
Exhibit 49: Automotive Automotivess had the largest increase increase in Capex since 2012 2012 Exhibit 50: 50: Energy and Metals and and Mining have cut capex due to pressure from commodity prices Automotive Automotive Cable/TV Technology Utilities Pharmaceuticals/Medical Products
300 250 200
150 125 100
150
75
100
50
50
25
0
Metals/Mining Energy Non-Food Retail Capital Goods Consumer Products
0 1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Source: J.P. Morgan
Looking at the top 5 largest increases in Capex since 2012, Automotive, Cable/TV and Tech round out the top 3 largest increases. In Cable/TV, Comcast has invested in Capex heavily over the recent past with the growth in fiber optic cable. The 5 sectors with the lowest Capex growth have been stable or have had large declines due to pressures from commodity prices. prices.
23
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Cash paid to shareholders continues to decline as companies curtail share buybacks Cash to Shareholders is down 6.0% (-$36bn) y/y driven mostly by declines in commodities sectors. Commodity sectors have been driving the decrease as Energy was down 28% (-$19bn) and Metals/mining Metals/mining was down 51% (-$6bn). Excluding Excluding the commodities sectors, cash cash to shareholders was down 2.2% 2.2% (-$12bn). On a q/q basis cash to shareholders is about flat, down by just 0.1% (-0.8% ex commodities), as the reductions in payouts mostly happened in 2016 in response to the commodity selloff.
Declines in cash to shareholders have been almost exclusively driven by a reduction in share buybacks, not by b y a change in dividends. This corresponds to the usual trend, with dividend payment more stable than share buybacks. Total share buybacks are down 17.0% driven mostly by the commodities sectors. The Energy sector has turned into net issuers of equity. Excluding the commodities sectors, share buybacks were down 10.4%. On the other hand, dividends have increased 1.4%y/y (+6.2%y/y ex commodities). Some of the large Energy companies have not only eliminated share repurchases but also cut down on dividends. Dividends decreased by 12.7%y/y ($9.6bn) for Energy and $61.0%y/y (-$8.6bn) for Metals/Mining. Excluding the commodities sectors, share buybacks were down 2.2% y/y, driven mostly by Capital Goods (-47%, -$18bn) and Technology (-23%, -$17bn). In Tech, Oracle, Dell, Apple, and Microsoft led with the largest declines in share buybacks. Cash to shareholders increased for only four sectors: Pharma/Medical Pharma/Medical Products (41.3%, +$33bn), Food/Beverages (39.5%, +$14bn), and Yankee Telecoms (90.9%, +$6bn) and Domestic Telecoms (11.0%, $2bn). In Pharma, about half the increase was driven by Allergan as the company bought back about $12bn of stock in 4Q16. In Food/Beverages, the large ($10bn) 3Q15 equity issuance from Kraft Heinz has fallen out of the last twelve months calculation. A-rated Non-Financial issuers have dramatically reduced Cash to Shareholders, down 13.1% y/y and 2.4% q/q. This ratings tranche is mainly made up of Utilities, Food/Beverages, Energy and Pharma/Medical Products issuers. On the other hand, BBB-rated BBB-rated Non-Financial Cash to Shareholders has increased 2.4% y/y and 3.1% q/q. Lastly, Cash to shareholder at highly rated companies was down 1.5% y/y but was about flat over the quarter. Exhibit 51: Lower share repurchases are driving lower cash to shareholders, as dividend payouts increased over a year 700
$bn
600
Exhibit 52: The decline in cash to shareholders has been driven by Single-A rated companies
Share Buybacks
320
Dividends
270
500
220
400
170
300
120
200
70
100
20
0
-30
1Q10
1Q11
Source: J.P. Morgan
24
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
$bn
1Q11
Cash to Share - A - All Industries Cash to Share - BBB - All Industries Cash to Share - AAA/AA, Ex Energy
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 53: Cash to shareholders has been declining, driven mostly by the commodities sectors 700 $bn
Exhibit 54: Ex-Commodities, Capital goods and Tech drove the decline in cash to shareholders 1Q17 change
Cash to Shareholders
600
500
400
300
200
100 1Q00 1Q00 1Q0 1Q02 1Q04 1Q04 1Q06 1Q06 1Q08 Q08 1Q10 1Q10 1Q12 1Q12 1Q14 1Q14 1Q16 1Q16
LTM level
($m n )
%
($m n )
Metals/Mining
-5,645
-50.5%
5 , 540
Cable/TV
-4,515
-49.2%
4 , 671
Utilities
-7,669
-42.0%
10,588
Chemicals
-8,078
-41.3%
11,503
Automotive
-5,403
-32.9%
11,030
Energy
-18,775
-28.3%
47,667
Capital Goods
-16,584
-27.6%
43,394
Diversified Media
-4,990
-20.1%
19,880
Transportation
-2,371
-13.3%
15,455
Technology
-14,436
-12.8%
98,158
Food/Drug Retail
-1,330
-5.0%
25,259
Consumer Products
-774
-3 -3.7%
20,295
Healthcare/HMOs
-410
-2.6%
15,149
Non-Food Retail
-638
-1.8%
35,344
Telecoms - Domestic
2, 223
11.0%
22,511
Food/Beverages
14,105
39.5%
49,841
Pharmaceuticals/Medical Products
33,124
41.3%
113,347
Telecoms - Yankees
6, 131
90.9%
12,873
-36,036
-6.0%
562,504
Industrials Total
Second column shows the 1Q17 level. The 3rd column shows the 1Q16 vs 1Q17 change. The last column gives the LTM level. Source: J.P. Morgan
Exhibit 55: Cash to shareholders has declined in some of the sectors with the largest increase in the past 5 years Automotive ve Technology Food/Drug Retail Non-Food Retail Pharmaceuticals/Medical Products
700 600
Exhibit 56: Sectors with limited cash flow generation have decreased cash to shareholders in the past 5 years Telecoms - Yankees Metals/Mining Energy Cable/TV Utilities
200 150
500 400
100
300 200
50
100 0
0 1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Source: J.P. Morgan
Looking at the top 5 largest increases and decreases in cash to shareholders, Autos has returned the most cash cash though recently the trend has turned. turned. Technology has also had a large increase as companies complete share buyback programs to enhance shareholder returns. The largest decline was was in Yankee Telecoms Telecoms as Vodafone and Telefonica curtailed curtailed cash to shareholders. Metals and Mining Mining and Energy have been sectors with limited cash flow generation which have cut cash to shareholders as a response to the challenging environment in the past few years.
25
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
The Earnings Payout Ratio (Cash to shareholders / EBITDA) fell 4.1% y/y to 33.7% after peaking in 3Q15 at 38.7%. The largest increases and decreases in Earnings Payout mirror the trends in Cash to Shareholders meaning that EBITDA changes y/y were not a big explanatory factor. Excluding commodities the earnings payout came down 3.7% to 36.9%. Capital Goods leads the declines ex commodities sectors as its Earnings Payout Ratio fell 23% to 46%. This is followed by Chemicals (-22% to 31%) and Cable/TV (-14% to 6%). Pharma/Medical Products, Healthcare, Yankee Telecoms and Domestic Telecoms were the only sectors that increased the Earnings Payout Ratio Exhibit 57: The payout ratio (cash to shareholders/EBITDA) has been declining for the past 3 quarters 40%
Earnings Payout Ratio
Exhibit 58: Changes in the Earnings Payout Ratio have been more influenced by Cash to Shareholders than EBITDA Sector Metals/Mining
35%
30%
25%
20%
15%
10% 1Q00
1Q02
1Q04
1Q06
1Q08
1Q10
1Q12
1Q14
1Q16
1Q17 Level
Y/Y Change
Sector Weight
11%
-37%
2%
Capital Goods
46%
-23%
6%
Chemicals
31%
-22%
2%
Cable/TV
6%
-14%
3%
Div ersified Media
45%
-14%
3%
Automotive
26%
-13%
3%
Technology
52%
-9%
11%
Transportation
34%
-8%
2%
Energy
22%
-6%
16%
Utilities
12%
-5%
12%
Consumer Products
46%
-2%
2%
Food/Drug Retail
50%
-2%
3%
Non-Food Retail
47%
-2%
4%
Food/Bev erages
50%
-1%
9%
Telecoms - Domestic
23%
3%
6%
Telecoms - Yankees
15%
7%
2%
Healthcare/HMOs
26%
7%
3%
Pharmaceuticals/Medical Products
61%
10%
10%
Industrials Total
34%
-4%
100%
Second column shows the Y/Y change from 1Q16 to 1Q17. The 3rd column shows the 1Q17 sector weight. Source: J.P. Morgan
26
Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 09 June 2017
Exhibit 59: Earnings Payout Ratio – current level, change over the last three years and range over the last three years Earnings Payout Ratio Sector
Percentage in 3y Range
3yr Min
3yr Max
1Q17
39%
61%
61%
Telecoms - Yankees
9%
17%
15%
Food/Drug Retail
30%
59%
50%
Food/Bev erages
42%
58%
50%
Healthcare/HMOs
13%
43%
26%
Pharmaceuticals/Medical Products
Non-Food Retail
34%
64%
47%
Energy
18%
29%
22%
Telecoms - Domestic
20%
30%
23%
Consumer Products
42%
55%
46%
Cable/TV
0%
25%
6%
Utilities
12%
18%
12%
Transportation
34%
45%
34%
All Automotive
34% 26%
39% 46%
34% 26%
Capital Goods
46%
72%
46%
Chemicals
31%
65%
31%
Div ersified Media
45%
80%
45%
Metals/Mining
11%
64%
11%
Technology
52%
62%
52%
1Q 14
1 Q1 6
1Q17
3y r Rang e
Note: Based on Y/Y LTM data. Source: J.P. Morgan, Capital IQ
27
Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 09 June 2017
Automotive Jonathan Rau, CFA AC – (212) 834-5237;
[email protected]
We expect the confluence of increased incentive spending, declining used vehicle prices, forecasted growth in off-lease volumes, higher interest rates, and slightly elevated inventory levels to pressure the rate of light vehicle sales in the US in 2017. Negative investor and press sentiment is likely to persist, and some production cuts, particularly in the passenger car segment, are possible later this year. While we believe that new car sales likely peaked in 2016 (at a record 17.6mm SAAR), we do not expect the YTD decline in sales volumes to materially accelerate given a still supportive economic backdrop. Gasoline prices remain low (positive from a vehicle mix perspective), employment trends continue to improve, and consumer confidence is historically strong. Increasing reliance on financing to purchase vehicles, longer loan terms, historically low interest rates, and growing reliance on leasing have all supported US consumer preferences for more expensive vehicles, resulting in average transaction prices growing at a faster rate than average monthly payments. Balance sheets remain conservative, and importantly so given the cyclical, competitive, and capital intensive nature of the industry. OEMs and suppliers alike boast low leverage, ample liquidity, and pension burdens significantly below pre-crisis peak levels. In recent years, credit metrics have improved on the OEM side, but have deteriorated among the suppliers, as these companies utilize ample balance sheet capacity (in addition to free cash flow) to fund M&A activity and increased shareholder returns. Longer term, an evolving industry landscape, including the development of autonomous vehicles, proliferation of mobility platforms, and adoption of alternative energy propulsion techniques, presents additional uncertainty. # 1 2 3 4 5
Issuer Ford Motor Co General Motors Co Harley-Davidson Inc Delphi Automotive PLC Magna International Inc Sector Summary
Debt in JULI ($mn) 38,968 34,118 4,130 1,650 1,467 82,403
Share 47% 41% 5 2 2 100%
Revenue ($bn) 143 160 6 17 37 389
EBITDA ($bn) 13 18 1 3 4 43
Debt ($bn) 17 11 7 4 3 46
Leverage 1.3x 0.6x 5.9x 1.3x 0.8x 1.3x
Int Cov Profit Margin 13.4x 9% 30.3x 11 39.2x 21 20.4x 18 41.6x 11 30.6x 12%
Earnings Payout Ratio 21% 25% 53% 26% 27% 26%
Change # 1 2 3 4 5
28
Issuer Ford Motor Co General Motors Co Harley-Davidson Inc Delphi Automotive PLC Magna International Inc Sector Summary
Revenue EBITDA Debt Leverage (y/y chg) (y/y chg) (y/y chg) (y/y chg) -1% -12% 25% 0.4x 9 13% 3% -0.1x -5% -12% -2 0.6x 10% 20% -8 -0.4x 11% 19% -4 -0.2x 5% 3% 6% 0.3x
Int Cov Profit Margin Earnings Payout (y/y chg) (y/y chg) Ratio (y/y chg) -5.1x -1% -4% -4.1x 0% -12% -30.5x -2% -76% 1.8x 2% -36% -5.7x 1% -6% -3.2x 1% -13%
LTM Revenue and EBITDA are up 5% and 3% y/y for the sector. However, Revenue and EBITDA fell for Ford Motor by 1% and 12% y/y respectively. Ford is the largest automotive issuer in terms of debt. Debt was up 6% y/y with the 25% increase in debt at Ford Motor Co being a major driver (at the automotive level, as this analysis excludes the FinCo debt). Gross Leverage increased 0.3x to 1.3x which is about the highest level since 4Q13. Interest Coverage is down 3.2x y/y to 30.6x. The sector tends to run a high level of Interest Coverage owing to its cyclical nature. Post crisis, the average level of Interest Coverage is 25x and has ranged between 6.3x and 35.6x. Harley Davidson saw a notable decline as interest expense increased related to debt issuance and EBITDA decreased. Profit Margins rose by 1% y/y to 12% for the sector. Currently, Profit Margins are near the higher end of the range for the past 5 years. The five year range is 8%-12% while the average is 10%. Cash to Shareholders is down 32.4%. Share buybacks are down 50.8% while dividends were down 12.3% (lower y/y supplemental dividend at Ford). The Earnings Payout Ratio is down 13% and has fallen among all of the 5 largest companies.
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 1: Sector Constituents
1. 2.
Exhibit 2: Revenue Debt outst ($mn) 38,968 34,118 4,130 1,650 1,467 1,083 82,403
Sector Ford Motor Co General Motors Co Harley-Davidson Inc Delphi Automotive PLC Magna International Inc Cummins Inc Total
10%
Share 47% 41% 5% 2% 2% 1% 100%
Quaterly % change in Revenue
8%
Rolling 4 quarter change in Revenue
6% 4% 2% 0% -2% -4% 1Q12
Exhibit 3: EBITDA 20% 15% 10% 5% 0% -5% -10% 1Q13
1Q14
1Q14
1Q15
1Q16
50 48 46 44 42 40 38 36 34 32 30
1Q17
Exhibit 5: Cash to Shareholders
1Q16
1Q17
1Q15
1Q16
1Q17
Debt ($bn)
1Q12
1Q13
1Q14
Exhibit 6: Gross and Net Leverage 2
20 18 16 14 12 10 8 6 4 2 0
1Q15
Exhibit 4: Debt Quaterly % change in EBITDA Rolling 4 quarter change in EBITDA
1Q12
1Q13
Cash to Shareholder ($bn)
Gross Leverage
1.5
Net leverage
1 0.5 0 -0.5 -1 1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Exhibit 7: Interest Coverage Ratio
-1.5 1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q16
1Q17
Exhibit 8: Profit Margins 12%
Profit Margin
35x 11%
33x
10%
31x 29x
9%
27x
8%
25x
7%
Interest coverage
23x
6% 1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q12
1Q13
1Q14
1Q15
29
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Cable/Satellite Brian Turner AC – (212) 834-4035;
[email protected]
We maintain our Overweight recommendation on the HG Cable/Satellite sector. Overall operational themes are generally unchanged; the video and telephony businesses remain under pressure, while residential high-speed data and commercial services are growing market share(s) and have good pricing power. We continue to view the broadband pipe as an increasingly valuable asset and a hedge against over-the-top (OTT) risks. Importantly, while top lines could suffer as video consumption transitions to OTT, we believe cash flow is unlikely to be negatively impacted. The latter is due to high incremental margins on high-speed data and the much lower margins and higher capital intensity on the video business (programming costs/set-top box capex). Largest issuers in the sector Levels #
Issuer
Debt in JULI ($mn)
Share
Revenue ($bn)
EBITDA ($bn)
Debt ($bn)
Leverage
Int Cov
Profit Margin
Earnings Payout Ratio
1
Comcast
44,110
54%
82
27
62
2.3x
9.0x
33%
27%
37,800
46%
40
15
63
4.3x
5.3x
36%
-18%
81,910
100%
120
41
123
3.2x
7.0x
34%
4%
Revenue (y/y chg)
EBITDA (y/y chg)
Debt (y/y chg)
Leverage (y/y chg)
Int Cov (y/y chg)
Profit Margin (y/y chg)
Earnings Payout Ratio (y/y chg)
1 Comcast
9%
7%
11%
0.1x
-0.2x
-1%
-6%
2 Charter
6%
11%
5%
-0.2x
0.0x
1%
-24%
8%
8%
8%
-0.1x
-0.1x
0%
-14%
2 Charter Sector Summary Change
#
Issuer
Sector Summary
The sector revenue and EBITDA both picked up by 8% over the last year, with profit margins unchanged y/y.
Leverage decreased 0.1x over the year as the increase in debt was nearly offset by rising EBITDA.
30
Interest coverage fell marginally as companies issue more debt, and the cost of debt rose. For Charter, coverage was unchanged while the move was only -0.2x y/y at Comcast. The earnings payout ratio has been falling over time and is down 14% Y/Y. Charter in particular has issued equity in the last couple of quarters to finance its acquisition of Time Warner Cable and Bright House Networks. Capex was almost unchanged (-0.6%), compared to the increases of 7.8% and 11% seen the previous quarters
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 1: Sector Constituents
1. 2.
Exhibit 2: Revenue Debt outst ($mn) 44,110 37,800 81,910
Sector Comcast Corp Charter Communications Total
Share 54% 46% 1
30%
Quaterly % change in Revenue
25%
Rolling 4 quarter change in Revenue
20% 15% 10% 5% 0% 1Q10
Exhibit 3: EBITDA
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q14
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
Exhibit 4: Debt
18%
Quaterly % change in EBITDA
130
16%
Rolling 4 quarter change in EBITDA
120
14%
Debt ($bn)
110
12% 10%
100
8%
90
6%
80
4%
70
2% 0%
60 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Exhibit 5: Cash to Shareholders 20 18 16 14 12 10 8 6 4 2 0
1Q10
1Q11
1Q12
1Q13
Exhibit 6: Gross and Net Leverage 3.4
Cash to Shareholder ($bn)
Gross Leverage
Net leverage
3.2 3 2.8 2.6 2.4 2.2 2 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Exhibit 7: Interest Coverage Ratio 8x
1Q10
1Q11
1Q12
1Q13
1Q14
Exhibit 8: Profit Margins 38%
Interest coverage
8x
37%
7x
36%
7x
35%
6x
34%
6x
33%
5x
Profit Margin
32% 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q10
1Q11
1Q12
1Q13
1Q14
31
Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 09 June 2017
Capital Goods Ginger Chambless AC – (212) 834-5481;
[email protected]
We recommend investors Underweight the Capital Goods sectors: HG Manufacturing and Aerospace & Defense. Our UW on Manufacturing is based on rich relative valuation, mixed end market fundamentals, stepped up M&A activity and more aggressive financial policies. The sector is high quality and heavily weighted toward single A issuers. Our Underweight on Aerospace & Defense is driven by rich valuation, as sector fundamentals are solid and improving overall. The sector is also weighted towards single A issuers. We have seen some M&A in the sector, with also a leaning towards more shareholder friendly policies. Largest issuers in the sector Levels # 1 2 3 4 5
I ssuer United Technologies Corp Caterpillar Inc Deere & Co Siemens AG Lockheed Martin Corp Sector Summary
Debt in JULI ($mn) 18,379 18,337 17,789 16,414 15,136 141,647
Share 13% 13% 13% 12% 11% 100%
Revenue ($bn) 58 36 23 90 48 569
EBITDA ($bn) 10 5 2 12 6 84
Debt ($bn) 25 10 5 41 14 175
Leverage 2.4x 1.9x 2.0x 3.5x 2.4x 2.1x
Int Cov Profit Margin 8.7x 18% 9.4x 14% 9.6x 10% 9.2x 13% 9.3x 13% 12.8x 14%
Earnings Payout Ratio 52% 36% 31% 30% 67% 46%
Change # 1 2 3 4 5
32
I ssuer United Technologies Corp Caterpillar Inc Deere & Co Siemens AG Lockheed Martin Corp Sector Summary
Revenue EBITDA Debt Leverage (y/y chg) (y/y chg) (y/y chg) (y/y chg) 3% 0% 7% 0.2x -12% 3% 3% 0.0x -5 5% 0% -0.1x 10 28 33% 0.1x 0% -6% -7% 0.0x 0.8% 5.5% 10% 0.0x
Int Cov Profit Margin Earnings Payout (y/y chg) (y/y chg) Ratio (y/y chg) -1.9x 0% -28 0.4x 2% -34 0.8x 1% -76 0.1x 2% -24 -3.2x -1% -8% -0.5x 0% -23%
LTM Revenue and EBITDA are up 0.8% and 5.5% y/y for the sector respectively. Revenues increased for 10 out 15 companies in our analysis while EBITDA was up for 13 out of 15 companies in our analysis. Profit Margins rose by 0.2% over the year to 14.3%. Profit Margins for the sector have remained in a narrow range of 13.6%-14.8% over the past 5 years. Leverage across the sector was unchanged this year as the increase in debt (10%) was balanced by a rise in EBITDA (5.5% y/y). Leverage increased the most at United Technologies, reflecting a slight EBITDA decline and modestly higher debt levels. Interest coverage fell as companies take on more debt, and the cost of debt rises. Coverage fell the most for 3M Co by 7.9x, while it slipped 3.2x and 1.9x for Lockheed Martin Corp and United Technologies respectively. The earnings payout ratio has been falling in the sector and is down 23% Y/Y. It was down by 76% Y/Y in Deere & Co as the company halted share buybacks. All of the five largest companies had a decline in their payout ratios as buybacks fell by $18bn for the sector.
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 1: Sector Constituents
Exhibit 2: Revenue 12%
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
Sector United Technologies Corp Caterpillar Inc Deere & Co Siemens AG Lockheed Martin Corp Boeing Co Honeywell International Inc Northrop Grumman Corp 3M Co BAE Systems PLC Other Total
Debt outst ($mn) 18,379 18,337 17,789 16,414 15,136 8,417 7,526 6,590 6,074 5,499 21,486 141,647
Share 13 13 13 12 11 6 5 5 4 4 15 100%
Exhibit 3: EBITDA
Quaterly % change in Revenue
10%
Rolling 4 quarter change in Revenue
8% 6% 4% 2% 0% -2% -4% -6% 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q14
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
Exhibit 4: Debt
17%
Quaterly % change in EBITDA
180
Rolling 4 quarter change in EBITDA
170
Debt ($bn)
160
12%
150 7%
140 130
2%
120 -3%
110 100
-8% 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
Exhibit 5: Cash to Shareholders 70
1Q10
1Q17
1Q11
1Q12
1Q13
Exhibit 6: Gross and Net Leverage 2.5
Cash to Shareholder ($bn)
60
Gross Leverage
Net leverage
2
50
1.5
40 1
30
0.5
20 10
0 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Exhibit 7: Interest Coverage Ratio
1Q10
1Q11
1Q12
1Q13
1Q14
Exhibit 8: Profit Margin
18x
16%
Profit Margin
Interest coverage 17x
15%
16x
14%
15x
13%
14x
12%
13x
11%
12x
10% 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q10
1Q11
1Q12
1Q13
1Q14
33
Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 09 June 2017
Chemicals Michael Pace AC – (212) 270-6530;
[email protected]
We maintain our Neutral recommendation on the Chemicals sector. We believe the continued fundamental deterioration (particularly in fertilizers), rating agency downgrades, and M&A financing have largely been priced into spreads. Given the pending transactions within the sector, we expect a fairly sizable amount of new issue over the course of the rest of the year. The looming consolidation, in our view, will likely bring a wave of improved profitability and focus on integration/synergy realization vs shareholder enhancement and incremental acquisitions. We also think the removal of supply overhang will allow investors to focus more on bottoms up analysis and relative value opportunity vs. technicals and deal scrutiny. Largest issuers in the sector Levels # 1 2 3 4 5
I ssuer Dow Chemical Co/The EI Du Pont de Nemours & Co LyondellBasell Industries NV Praxair Inc Monsanto Co Sector Summary
Debt in JULI ($mn) 14,976 7,920 7,568 6,354 5,295 51,067
Share 29% 16% 15% 12% 10% 100%
Revenue ($mn) 51 25 31 11 14 159
EBITDA ($mn) 9 5 6 3 4 33
Debt ($mn) 21 10 9 9 9 76
Leverage 2.3x 2.0x 1.5x 2.7x 2.2x 2.5x
Int Cov Profit Margin 10.3x 18% 14.4x 21% 13.3x 19% 21.1x 33% 9.6x 29% 11.3x 21%
Earnings Payout Ratio 30% 37% 59% 27% 20% 31%
Change # 1 2 3 4 5
34
I ssuer Dow Chemical Co/The EI Du Pont de Nemours & Co LyondellBasell Industries NV Praxair Inc Monsanto Co Sector Summary
Revenue EBITDA Debt Leverage (y/y chg) (y/y chg) (y/y chg) (y/y chg) 8% 4% 24% 0.4x 1% 28 6% -0.4x -1 -14% -2% 0.2x 2% 0% 0% 0.0x 6% 6% 2% -0.1x 1% -2% 6% 0.2x
Int Cov Profit Margin Earnings Payout (y/y chg) (y/y chg) Ratio (y/y chg) 0.7x -1% 2% 2.8x 4% -46 -8.0x -3% -24 0.1x -1% -9% 0.9x 0% -85 -0.4x -2% -22%
LTM Revenue growth y/y was 1% while LTM EBITDA growth y/y was -2%. Revenue growth has been negative for the past 9 quarters and EBITDA growth has been negative for the past 5 quarters. Debt growth of 6% was mostly driven by a 24% increase in debt at Dow. Dow bought Corning in 2016 and so took Corning’s ~$4.5bn of debt. Gross Leverage is up 0.2x y/y at 2.47x. This was driven by a 6% increase in debt and a 2% decline in the EBITDA y/y. Profit Margins at 22% are on the high side of the range since 2012 of 18.5% to 22.6%. Cash to Shareholders has fallen by 41% y/y as shareholder activism in the sector has subsided. Share buybacks in the sector are down 70% y/y. This has also resulted in the Earnings Payout Ratio falling 22% y/y to 35% which is the lowest value since 2013.
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 1: Sector Constituents
Exhibit 2: Revenue Debt outst ($mn) 14,976 7,920 7,568 6,354 5,295 4,607 3,760 587 51,067
Sector Dow Chemical Co/The EI Du Pont de Nemours & Co LyondellBasell Industries NV Praxair Inc Monsanto Co Agrium Inc Eastman Chemical Co Potash Corp of Saskatchewan Total
1. 2. 3. 4. 5. 6. 7. 8.
Share 29% 16% 15% 12% 10% 9% 7% 1% 100%
20%
Quaterly % change in Revenue
15%
Rolling 4 quarter change in Revenue
10% 5% 0% -5% -10% -15% -20% 1Q10
Exhibit 3: EBITDA
36%
Quaterly % change in EBITDA
80
Rolling 4 quarter change in EBITDA
75
26%
70
16%
65
6%
60
-4%
55
-14%
50 1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q13
1Q14
1Q15
1Q16
1Q17
Debt ($bn)
1Q10
1Q17
Exhibit 5: Cash to Shareholders 30
1Q12
Exhibit 4: Debt
46%
1Q10
1Q11
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
Exhibit 6: Gross and Net Leverage 3.5
Cash to Shareholder ($bn)
25
Gross Leverage
Net leverage
3
20
2.5
15 2
10
1.5
5 0
1 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Exhibit 7: Interest Coverage Ratio
1Q10
1Q11
1Q12
1Q13
1Q14
Exhibit 8: Profit Margins 24% Interest coverage
18x
Profit Margin
23% 22%
16x
21% 14x
20% 19%
12x
18%
10x
17%
8x
16% 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q10
1Q11
1Q12
1Q13
1Q14
35
Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 09 June 2017
Consumer Products Ginger Chambless AC – (212) 834-5481;
[email protected]
We recommend investors Underweight HG Consumer Products. While underlying credit fundamentals are strong, the sector trades rich and M&A event risk is elevated. Currency has been a top-line headwind given the globally diversified sales for many of the HG CPG companies. Profit margins have been expanding due to cost cutting, productivity gains and lower input costs. Despite the strong credit fundamentals, we believe the combination of tight spreads and M&A event risk will cause the sector to underperform the overall market in 2017. Largest issuers in the sector Levels # 1 2 3 4 5
I ssuer Newell Rubbermaid Inc Procter & Gamble Co/The Unilever NV Kimberly-Clark Corp Colgate-Palmolive Co Sector Summary
Debt in JULI ($mn) 10,422 9,456 6,125 4,877 4,038 38,225
Share 27% 25% 16% 13% 11% 100%
Revenue ($bn) 15 65 59 18 15 199
EBITDA ($bn) 2 18 10 4 4 42
Debt ($bn) 11 30 18 8 6 82
Leverage 4.6x 1.7x 1.9x 1.9x 1.5x 1.9x
Int Cov Profit Margin 4.9x 16% 35.8x 27% 15.5x 17% 12.7x 23% 47.1x 29% 22.7x 21%
Earnings Payout Ratio 16% 56% 44% 50% 52% 46%
Change # 1 2 3 4 5
36
I ssuer Newell Rubbermaid Inc Procter & Gamble Co/The Unilever NV Kimberly-Clark Corp Colgate-Palmolive Co Sector Summary
Revenue EBITDA Debt Leverage (y/y chg) (y/y chg) (y/y chg) (y/y chg) 3% 29 -2% -1.4x -1 2% -7% -0.2x 5% 10 7% 0.0x -1 5% -2% -0.1x -3 2% -2% -0.1x 1.2% 5.4% -2% -0.1x
Int Cov Profit Margin Earnings Payout (y/y chg) (y/y chg) Ratio (y/y chg) -2.0x 3% 71% 5.6x 1% -15 0.4x 1% 0% -0.5x 1% -2% -47.2x 2% -4% 2.2x 2% -2%
LTM Revenue growth y/y was 1.2% and LTM EBITDA growth y/y was +5%. EBITDA grew at all of the five largest companies for the sector in our analysis. Profit Margins for the sector were up 2% to 21% as cost cutting initiatives continue to take hold. Profit Margins are at their highest level of the post crisis range of 17.3%-20.7%. Gross leverage for the sector is at 1.9x, down 0.1x from its post crisis peak of 1.96x in 1Q16. Debt growth was down 2% over the year. Debt level declined for 4 out of the five largest companies for the sector. Interest Coverage at 22.7x is the highest it has been post crisis. The metric is up 2.2x y/y and has ranged between 11.4x22.7x in the post crisis period. This is in contrast to interest coverage for the HG Non-Financial market which is 10.7x. Cash to Shareholders is down 4% y/y reversing the trend of y/y growth over the past 3 quarters. This was driven by a sharp decline in share buybacks. Share buybacks were down 20% y/y while dividends continue to grow in the low single digit range. Dividends for the sector have grown between 2-6% y/y for each of the quarters during the last four years. The Earnings Payout ratio is down modestly as EBITDA for the sector grew while the Cash to Shareholders declined over the year.
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 1: Sector Constituents
1. 2. 3 4 5 6 7
Exhibit 2: Revenue Debt outst ($mn) 10,422 9,456 6,125 4,877 4,038 1,850 1,457 38,225
Sector Newell Rubbermaid Inc Procter & Gamble Co/The Unilever NV Kimberly-Clark Corp Colgate-Palmolive Co Whirlpool Corp Clorox Co Total
Share 27% 25% 16% 13% 11% 5% 4% 100%
8%
Quaterly % change in Revenue
6%
Rolling 4 quarter change in Revenue
4% 2% 0% -2% -4% -6% 1Q10
Exhibit 3: EBITDA
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q14
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
Exhibit 4: Debt
10% 8%
Quaterly % change in EBITDA
90
Rolling 4 quarter change in EBITDA
85
6%
Debt ($bn)
80
4% 2%
75
0%
70
-2%
65
-4%
60
-6% 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
Exhibit 5: Cash to Shareholders 30 28 26 24 22 20 18 16 14 12 10
1Q11
1Q12
1Q13
1Q11
1Q12
1Q13
Exhibit 6: Gross and Net Leverage 2 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1
Cash to Shareholder ($bn)
1Q10
1Q10
1Q17
1Q14
1Q15
1Q16
1Q17
Exhibit 7: Interest Coverage Ratio
Gross Leverage
1Q10
1Q11
1Q12
1Q13
Net leverage
1Q14
Exhibit 8: Profit Margins 22%
23x
Profit Margin
Interest coverage
22x
21%
21x 20%
20x
19%
19x 18x
18%
17x 17%
16x 15x
16% 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q10
1Q11
1Q12
1Q13
1Q14
37
Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 09 June 2017
Diversified Media Brian Turner AC – (212) 834-4035;
[email protected]
We maintain our Underweight recommendation on Diversified Media as the sector continues to face heightened scrutiny given the pressure on advertising revenue coupled with linear subscriber erosion. We prefer media credits with higher quality content (sports/live events and hit shows) and lower advertising exposure given the secular changes/challenges in the industry. Overall, we note strong free cash flow profiles and (relatively) solid balance sheet positions, although the latter has been weakening from stock buybacks and modestly sized M&A. Pending sector M&A could entice others to pair-up, but we note largely controlled companies, which makes M&A difficult. We expect modest new supply going forward with companies such as Viacom ($1.3bn), Discovery ($650mm), and Disney ($4bn across two issuances) having issued new debt YTD. Largest issuers in the sector Levels # 1 2 3 4 5
I ssuer Time Warner Inc Walt Disney Co/The Viacom Inc CBS Corp Discovery Communications Inc Sector Summary
Debt in JULI ($mn) 22,466 13,208 11,756 8,850 6,472 73,217
Share 31% 18% 16% 12% 9% 100%
Revenue ($bn) 30 56 13 14 7 145
EBITDA ($bn) 9 17 3 3 2 40
Debt ($bn) 23 22 13 9 8 87
Leverage 2.7x 1.3x 4.4x 2.8x 3.3x 2.7x
Int Cov Profit Margin 6.3x 29% 38.6x 31% 4.7x 22% 7.6x 24% 6.8x 37% 7.4x 27%
Earnings Payout Ratio 32% 51% 12% 103% 49% 45%
Change # 1 2 3 4 5
38
I ssuer Time Warner Inc Walt Disney Co/The Viacom Inc CBS Corp Discovery Communications Inc Sector Summary
Revenue EBITDA Debt Leverage (y/y chg) (y/y chg) (y/y chg) (y/y chg) 5% 7 -2% -0.2x 1% -1% 3% 0.0x -1% -24% 1% 1.1x -5% -6% 10% 0.4x 2% 2 1% -0.1x 1% -2% 0% -0.1x
Int Cov Profit Margin Earnings Payout (y/y chg) (y/y chg) Ratio (y/y chg) 0.1x 0% -26% -23.6x -1% -13% -1.2x -7% -41% -1.1x 0% 26% -0.3x 0% 8% -0.3x -1% -14%
The sector revenue increased by 1% and EBITDA decreased by 2% over the year. The pace of growth in revenue has slowed down over the past few quarters. Viacom saw a sharp decline of 24% in EBITDA over the year due to advertising headwinds and poor performance from its film unit. Margins declined by 1% to 27% y/y but continued to remain towards the higher end of the 5 year range of 24.3%-28.1%. Leverage declined by a marginal 0.1x y/y to 2.7x over the year as debt remained unchanged but EBITDA declined by 2%. Interest coverage for the sector fell 0.3x y/y to 7.4x. Time Warner Inc was the only company in the sector for which interest coverage ratio did not decline. The earnings payout ratio declined by 14% Y/Y to 45% driven by declines for the 3 largest issuers in the sector.
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 1: Sector Constituents
Exhibit 2: Revenue Debt outst ($mn) 22,466 13,208 11,756 8,850 6,472 5,326 5,138 0 73,217
Sector Time Warner Inc Walt Disney Co/The Viacom Inc CBS Corp Discovery Communications Inc Thomson Reuters Corp Omnicom Group Inc Twenty-First Century Fox Inc Total
1. 2. 3. 4. 5. 6. 7. 8.
10% Share 31% 18% 16% 12% 9% 7% 7% 0% 100%
Quaterly % change in Revenue Rolling 4 quarter change in Revenue
8% 6% 4% 2% 0% -2% 1Q10
Exhibit 3: EBITDA
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q14
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
Exhibit 4: Debt
16%
Quaterly % change in EBITDA
90
Rolling 4 quarter change in EBITDA
85
Debt ($bn)
80
11%
75 70
6%
65 60
1%
55 50
-4% 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
Exhibit 5: Cash to Shareholders 30
1Q10
1Q17
1Q11
1Q12
1Q13
Exhibit 6: Gross and Net Leverage 2.9
Cash to Shareholder ($bn)
25
2.7
20
2.5
15
2.3
Gross Leverage
Net leverage
2.1
10
1.9
5
1.7
0
1.5 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Exhibit 7: Interest Coverage Ratio
1Q10
1Q11
1Q12
1Q13
1Q14
Exhibit 8: Profit Margins
10x
30% Interest coverage
10x
Profit Margin
29%
9x
28%
9x
27%
8x
26%
8x
25%
7x
24%
7x
23%
6x
22% 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q10
1Q11
1Q12
1Q13
1Q14
39
Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 09 June 2017
Energy Matthew A. Anavy, CFA AC – (212) 834-3568;
[email protected]
We maintain our Overweight rating on the Pipeline, Midstream, MLP sub-sector as we continue to see value in the space and expect rising hydrocarbon volumes through the year to lend further support to sub-sector fundamentals. We would expect further spread compression in a range-bound commodity price environment on the back of improving fundamentals, and believe the new administration will continue to support midstream infrastructure development. Midstream companies remain focused on balance sheet strength and healthy distribution coverage to support IG ratings, and have taken various actions ranging from lowering capex requirements through JVs and project deferrals, issuing equity and hybrids, and corporate simplification. We remain Neutral on the Integrated, E&P, Refining, and Services sub-sectors. E&Ps have benefited from a recent modest recovery in commodity prices and plan to increase activity in 2017 to support production and cash flow growth. E&Ps are planning for service cost inflation of up to ~15%, though we do not expect this to translate into significant outperformance of the servicers space. We have seen several of the large services providers calling a bottom of activity levels during 1Q17: SBL, HAL, and BHI all expect North America to lead the recovery while International markets may follow late in 2017. However, customers plan to primarily allocate capital to short-cycle shale investments. Integrateds have also benefited from improved Upstream earnings though shareholder return remains a significant call on cash, partially offset by large asset sales programs underway at several of the companies. Refiners plan to continue growing their MLPs to support significant shareholder return, and notably MPC is accelerating drop-downs to MPLX and reviewing its ownership of Speedway following activist pressure. Largest issuers in the sector Levels # 1 2 3 4 5
I ssuer Royal Dutch Shell PLC BP PLC Kinder Morgan Inc/DE ConocoPhillips Chevron Corp Sector Summary
Debt in JULI ($mn) 38,991 29,292 25,214 22,707 21,222 390,208
Share 10% 8 6 6 5 100%
Revenue ($bn) 257 200 13 26 119 1,384
EBITDA ($bn) 40 21 7 8 23 211
Debt ($bn) 92 62 38 24 45 711
Leverage 2.3x 3.0x 5.6x 2.9x 2.0x 3.9x
Int Cov Profit Margin 8.5x 13 19.0x 10 3.3x 46 5.0x 24 28.3x 15 7.9x 21%
Earnings Payout Ratio 31 24 15 24 44 22%
Change # 1 2 3 4 5
40
I ssuer Royal Dutch Shell PLC BP PLC Kinder Morgan Inc/DE ConocoPhillips Chevron Corp Sector Summary
Revenue EBITDA Debt Leverage (y/y chg) (y/y chg) (y/y chg) (y/y chg) 4 19% 13% -0.1x -3% -6% 9% 0.6x -5% -7% -9 -0.1x -3% 17% -17% -1.2x -2% -7% 7% 0.3x -2% 3% 6% -0.1x
Int Cov Profit Margin Earnings Payout (y/y chg) (y/y chg) Ratio (y/y chg) -2.2x 5% -12% -4.6x 0% -5 -0.1x -2% -5 -0.1x 6% -37% -17.4x 1% -3 -2.3x -1% -6%
LTM Revenue decreased by 2% while EBITDA increased by 3% y/y. However, both revenue (+9% q/q) and EBITDA (+18% q/q) were up over the quarter driven by a recovery in commodity prices. Debt increased by 6%, which is less than the HG Non-Financial universe debt growth of 10.%. Companies across the sector have focused on balance sheet strength and several have reduced gross debt with asset sale proceeds, equity issuances and retained excess cash flow. Gross Leverage has decreased materially over the quarter, down 0.7x to 3.9x. Gross leverage continues to remain towards the higher end of post crisis range of 1.6x to 4.6x but has significantly declined from its peak reached in 3Q16 driven by a improvement in EBITDA levels. Interest coverage for the sector has improved over the quarter but is still worse than in 1Q16. Interest coverage declined by 2.3x over the year to 7.9x but has improved by 0.8x from its post crisis low of 7.1x reached last quarter. This is the first quarter in the past 3 years when the sector saw an improvement in interest coverage on a quarter on quarter basis.
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Profit Margins for the sector declined by 1% y/y to 21% but were up 0.4% from last quarter. Companies have also limited capex by reducing activity levels, deferring projects, and forming JVs, and LTM capex accordingly declined by 27.3% y/y.
Cash to Shareholders declined by 28% YoY as many companies lowered dividends, suspended share repurchase programs, or both. Additionally, several have issued equity over the last year to help reduce debt and fund capex and acquisitions. The Earnings Payout Ratio ticked down by 6%.
Exhibit 1: Sector Constituents
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
Exhibit 2: Revenue Debt outst ($mn) 38,991 29,292 25,214 22,707 21,222 20,465 19,109 18,760 14,377 14,186 165,9885 390,208
Sector Royal Dutch Shell PLC BP PLC Kinder Morgan Inc/DE ConocoPhillips Chevron Corp Enterprise Products Partners LP Exxon Mobil Corp Energy Transfer Partners LP StatoilHydro ASA TransCanada Corp Other Total
Share 10% 8% 6% 6% 5% 5% 5% 5% 4% 4% 53% 100%
Exhibit 3: EBITDA
34%
Quaterly % change in Revenue
24%
Rolling 4 quarter change in Revenue
14% 4% -6% -16% -26% -36% 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Exhibit 4: Debt Quaterly % change in EBITDA
28%
Debt ($bn)
690
Rolling 4 quarter change in EBITDA
18%
640
8%
590
-2%
540
-12%
490
-22%
440
-32%
390 340
-42% 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
Exhibit 5: Cash to Shareholders 110
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q16
1Q17
Exhibit 6: Gross and Net Leverage 5
Cash to Shareholder ($bn)
100
1Q10
1Q17
Gross Leverage
4.5
Net leverage
4
90
3.5
80
3
70
2.5
60
2
50
1.5
40
1 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
41
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 7: Interest Coverage Ratio
Exhibit 8: Profit Margins 30%
31x
Profit Margin
Interest coverage 28%
26x 26% 21x
24%
16x
22%
11x
20%
6x
18% 1Q10
42
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 09 June 2017
Food, Beverages and Tobacco Ginger Chambless AC – (212) 834-5481;
[email protected]
We recommend investors Underweight the HG Food/Beverage and Tobacco sectors. While underlying credit fundamentals are strong, the sectors trade rich and M&A event risk is high. Revenue trends have been muted as contributions from pricing and mix have been offset by slight volume declines. Profit margins have been expanding due to cost cutting, productivity gains and lower input costs. Currency has been a headwind to reported results, but is not a material credit concern. Significant M&A in the beer sector during 2016 should result in a focus on deleveraging over the next couple of years for ABInbev and Molson Coors. Pending M&A in the tobacco sector could result in some issuance as well as the potential for future deleveraging. We believe the combination of tight spreads and event risk will cause the sectors to underperform the overall market in 2017. Largest issuers in the sector Levels # 1 2 3 4 5
I ssuer Anheuser-Busch InBev NV PepsiCo Inc The Kraft Heinz Company Philip Morris International Inc Coca-Cola Co/The Sector Summary
Debt in JULI ($bn) 76,513 27,084 24,035 20,731 15,985 213,087
Share 36% 13% 11% 10% 8% 100%
Revenue ($bn) 49 63 26 27 41 316
EBITDA ($bn) 17 12 8 12 11 92
Debt ($bn) 123 39 33 31 48 352
Leverage 7.0x 3.1x 4.3x 2.7x 4.2x 3.3x
Int Cov Profit Margin 3.4x 36% 9.2x 20% 6.4x 29% 10.9x 43% 14.3x 28% 9.0x 32%
Earnings Payout Ratio 42% 53% 50% 56% 69% 50%
Change # 1 2 3 4 5
I ssuer Anheuser-Busch InBev NV PepsiCo Inc The Kraft Heinz Company Philip Morris International Inc Coca-Cola Co/The Sector Summary
Revenue EBITDA Debt Leverage (y/y chg) (y/y chg) (y/y chg) (y/y chg) -15% -17% 2% 1.3x 0% 3 10% 0.2x 17% 5 30% 0.8x 2% 4 5% 0.0x -7% -7% 1% 0.3x -3% -1% 5% 0.2x
Int Cov Profit Margin Earnings Payout (y/y chg) (y/y chg) Ratio (y/y chg) -3.6x -1% -6% -2.8x 1% -14% 1.1x -3% 151% 0.8x 1% -1% -7.7x 0% 5% 1.1x 0% -1%
The sector had a decline in Revenue of 3% y/y and a decline of EBITDA of 1% y/y. Anheuser Busch struggled with sales in Brazil and was also hurt by our M&A adjustment. We add up levels for the 2 companies combined pre meger, but post-merger the companies divested assets resulting in a lower combined revenue and EBITDA. We expect this to fade a year after all of the asset sales are complete. Profit Margins for the sector were unchanged at 32% However, Profit Margins for the sector remain towards the higher end of their post crisis range of 28-32%. Leverage for the sector increased by 0.2x to 3.3x. Gross leverage for the sector is at the highest level for the ratio since the first quarter of 2000 at least as companies issue debt for M&A. Interest coverage for the sector rose by 1.1x over the year to 9.0x as Kraft Heinz had significant EBITDA increase continuing to monetize synergies post the merger. Interest expense for the sector increased by 19% y/y with the most significant increase at ABIBB. The earnings payout ratio declined 1% Y/Y as 3 companies in our sample decreased their payout ratio. Cash to shareholders increased 40% over the year driven by an increase in share buybacks of $13bn.
43
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 1: Sector Constituents
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
Exhibit 2: Revenue Debt outst ($mn) 76,513 27,084 24,035 20,731 15,985 14,293 12,719 5,933 5,119 5,021 5,654 213,087
Sector Anheuser-Busch InBev NV PepsiCo Inc The Kraft Heinz Company Philip Morris International Inc Coca-Cola Co/The Altria Group Inc Reynolds American Inc Diageo PLC General Mills Inc Kellogg Co Other Total
Share 36% 13% 11% 10% 8% 7% 6% 3% 2% 2% 3% 100%
15%
Quaterly % change in Revenue Rolling 4 quarter change in Revenue
10% 5% 0% -5% -10% 1Q10
Exhibit 3: EBITDA
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Exhibit 4: Debt
15%
Quaterly % change in EBITDA
350
Rolling 4 quarter change in EBITDA
330
Debt ($bn)
310
10%
290
5%
270
0%
250 230
-5%
210
-10%
190
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Exhibit 5: Cash to Shareholders 60
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Exhibit 6: Gross and Net Leverage 3.5
Cash to Shareholder ($bn)
50
Gross Leverage
Net leverage
3
40
2.5
30 2
20
1.5
10
1
0 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
Exhibit 7: Interest Coverage Ratio 12x
1Q10
1Q17
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Exhibit 8: Profit Margins 33%
Interest coverage
11x
Profit Margin
32%
10x
31%
9x
30%
8x
29%
7x 6x
28% 1Q10
44
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 09 June 2017
Food/Drug Retail Ginger Chambless AC – (212) 834-5481;
[email protected]
We recommend investors Neutral weight Food/Drug Retail. The credit profile of the sector has deteriorated over the past couple of years due to higher leverage for M&A (CVS, Walgreens, Kroger) and more aggressive financial policies (McDonalds). Due to some associated negative rating actions, the sector is now solidly BBB. Food/Drug Retail trades roughly in line with the overall index. Largest issuers in the sector Levels # 1 2 3 4 5
I ssuer CVS Caremark Corp McDonald's Corp Walgreen Co Kroger Co/The Starbucks Corporation Sector Summary
Debt in JULI ($mn) 25,857 15,003 14,449 10,585 3,294 69,187
Share 37% 22% 21% 15% 5% 100%
Revenue ($bn) 179 24 116 115 22 457
EBITDA ($bn) 13 9 8 6 5 41
Debt ($bn) 27 27 19 14 4 92
Leverage 3.1x 3.7x 4.1x 3.0x 2.1x 3.4x
Int Cov Profit Margin 8.6x 8% 7.8x 47% 6.7x 10% 8.9x 6% 14.2x 28% 8.3x 17%
Earnings Payout Ratio 50% 94% 18% 32% 45% 50%
Change # 1 2 3 4 5
I ssuer CVS Caremark Corp McDonald's Corp Walgreen Co Kroger Co/The Starbucks Corporation Sector Summary
Revenue EBITDA Debt Leverage (y/y chg) (y/y chg) (y/y chg) (y/y chg) 12% 6 0% -0.2x -4% 5 17% 0.2x 0% -3% 35% 0.6x 5% 2 16% 0.3x 9% 10% 32% 0.0x 6% 4% 15% 0.2x
Int Cov Profit Margin Earnings Payout (y/y chg) (y/y chg) Ratio (y/y chg) 0.0x -1% 6% -0.7x 3% -22% -0.7x 0% -8% -0.4x 0% 17% 0.3x 0% -17% -0.4x 0% -2%
Revenue for the sector increased 6% Y/Y while EBITDA has picked up slightly less at 4% Y/Y. McDonald’s was the only company in the sector to record a decline in revenues, due to continued refranchising of its restaurants as well as currency headwinds. Margins for the sector increased by 0.5% to 17%. Margins have remained stable between 16.117.5% since the crisis. Leverage rose by 0.2x to 3.4x as the increase in debt outpaced the rising EBITDA. Debt for the sector grew at 15% y/y with debt growing for all companies in the sector apart from CVS. Debt levels were flat over the year for CVS. Interest coverage fell as companies took on more debt, and the cost of debt rose. Interest coverage ratio rose for Starbucks and was flat for CVS but declined for every other company in the sector. The earnings payout ratio decreased by 2% Y/Y and 4% Q/Q to 50%. Earnings payout ratio decreased the most for McDonald’s while it increased the most for Kroger.
45
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 1: Sector Constituents
Exhibit 2: Revenue Debt outst ($mn) 25,857 15,003 14,449 10,585 3,294 69,187
Sector CVS Caremark Corp McDonald's Corp Walgreen Co Kroger Co/The Starbucks Corporation Total
1. 2. 3. 4. 5.
12% Share 37% 22% 21% 15% 5% 100%
Quaterly % change in Revenue
10%
Rolling 4 quarter change in Revenue
8% 6% 4% 2% 0% -2% -4% -6% 1Q10
Exhibit 3: EBITDA
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q14
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
Exhibit 4: Debt
12%
Quaterly % change in EBITDA
10%
Rolling 4 quarter change in EBITDA
100
Debt ($bn)
90
8%
80
6%
70
4%
60
2%
50
0% -2%
40
-4%
30 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
30
1Q10
1Q17
Exhibit 5: Cash to Shareholders
1Q11
1Q12
1Q13
Exhibit 6: Gross and Net Leverage 3.4
Cash to Shareholder ($bn)
25
3.2
20
3
15
2.8
Gross Leverage
Net leverage
2.6
10
2.4
5
2.2
0
2 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Exhibit 7: Interest Coverage Ratio
11x 10x 10x 9x 9x 8x 1Q11
1Q12
1Q13
1Q11
1Q12
18% 18% 18% 17% 17% 17% 17% 17% 16% 16% 16%
Interest coverage
1Q10
1Q10
1Q13
1Q14
Exhibit 8: Profit Margins
11x
46
1Q11
1Q14
1Q15
1Q16
1Q17
Profit Margin
1Q10
1Q11
1Q12
1Q13
1Q14
Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 30 November 2016
Healthcare Brett G. Gibson AC – (212) 270-7484;
[email protected]
We recommend a Neutral for Healthcare Services. Pending M&A in Managed Care has taken a break (for now) with ANTM deciding not to appeal a court decision against the proposed CI acquisition. However, the sector remains uncertain with a legal battle pending over the ANTM/CI deal break fee and continued Healthcare reform headlines on Capitol Hill. Both ANTM and CI have also publicly expressed interest in pursuing strategic alternatives as well, and it appears that shareholder returns across the sector are likely to increase y/y in the wake of these recent deal breaks. That said, we take solace in steady Commercial segment trends and believe these names will be able to weather any market changes resulting from regulatory actions as they are likely to be involved in finding new solutions. Separately, we continue to be comfortable with Distributor exposures as we see companies maintaining strong credit profiles despite some concerns around generic market trends and some degree of additional competition in core businesses. Also contributing to the view, we anticipate limited issuance and M&A in 2017 for the subsector. Largest issuers in the sector Levels # 1 2 3 4 5
I ssuer UnitedHealth Group Inc WellPoint Inc Express Scripts Holding Co Aetna Inc McKesson Corp Sector Summary
Debt in JULI ($mn) 26,801 11,882 11,754 11,372 5,505 83,880
Share 32% 14% 14% 14% 7% 100%
Revenue ($bn) 189 87 100 63 199 749
EBITDA ($bn) 16 6 7 6 4 50
Debt ($bn) 34 17 16 9 9 104
Leverage 2.1x 2.9x 2.1x 1.6x 1.9x 2.2x
Int Cov Profit Margin 14.5x 8% 8.0x 7% 10.4x 7% 8.5x 9% 14.3x 2% 12.2x 9%
Earnings Payout Ratio 21% 9% 33% 64% 56% 26%
Change # 1 2 3 4 5
I ssuer UnitedHealth Group Inc WellPoint Inc Express Scripts Holding Co Aetna Inc McKesson Corp Sector Summary
Revenue EBITDA Debt Leverage (y/y chg) (y/y chg) (y/y chg) (y/y chg) 14% 24% 1% -0.5x 8% 7 -1% -0.2x -1% 7 -6% -0.3x 3% 6 21% 0.2x 4% -5% 5% 0.2x 6% 12% 1% -0.2x
Int Cov Profit Margin Earnings Payout (y/y chg) (y/y chg) Ratio (y/y chg) 0.3x 1% 3% -0.2x 0% -13% -2.6x 1% -92% -5.5x 0% 53% 1.2x 0% 18% -0.4x 0% 7%
The sector has had steady revenue increase in the 1-2% range for the past 4 quarters, with a 6% Y/Y growth in revenues, driven by United Health Group (+14%, Y/Y). EBITDA has grown +12% Y/Y, but increased by only 1% Q/Q. UnitedHealth had significant EBITDA growth due to the impressive performance our of its Optum services unit. Debt increased marginally by 1% Y/Y, but decreased by 9% over the quarter (we note that the majority of this decline is due to a Special Mandatory Redemption of Aetna bonds). Humana was the only company with a significant rise in debt (26% Q/Q) as the company releveraged its balance sheet in the wake of the failed combination with AET. Leverage decreased slightly, (0.2x Y/Y) as EBITDA continued to pick up while the increase in debt was marginal. Interest coverage fell marginally, -0.4x Y/Y. This was mainly driven by Aetna (-5.5x, Y/Y) and Express Scripts (-2.6x, Y/Y). McKesson’s interest coverage increased by 0.2x in that time period. The overall earnings payout ratio increased by 7% Y/Y. Anthem and Express Scripts saw decreases of 13% (Y/Y) and 92% (Y/Y) respectively while Aetna and McKesson Corp increased their payout ratios by 53% (Y/Y) and 18% (Y/Y) respectively.
47
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 1: Sector Constituents
1. 2. 3. 4. 5. 6. 7. 8. 9.
Exhibit 2: Revenue
Sector UnitedHealth Group Inc WellPoint Inc Express Scripts Holding Co Aetna Inc McKesson Corp Laboratory Corp of America Holdings CIGNA Corp Humana Inc Quest Diagnostics Inc/DE Total
Debt outst ($mn) 26,801 11,882 11,754 11,372 5,505 4,782 4,624 3,703 3,457 83,880
Share 32% 14% 14% 14% 7% 6% 6% 4% 4% 100%
14%
Quaterly % change in Revenue
12%
Rolling 4 quarter change in Revenue
10% 8% 6% 4% 2% 0% -2% 1Q10
Exhibit 3: EBITDA
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q14
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
Exhibit 4: Debt
18%
Quaterly % change in EBITDA
120
Rolling 4 quarter change in EBITDA
110
Debt ($bn)
100
13%
90 80
8%
70 60
3%
50 40
-2% 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
Exhibit 5: Cash to Shareholders 20 18 16 14 12 10 8 6 4 2 0
1Q11
1Q12
1Q13
Exhibit 6: Gross and Net Leverage 3
Cash to Shareholder ($bn)
Gross Leverage
2.5
Net leverage
2 1.5 1 0.5 0 -0.5 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Exhibit 7: Interest Coverage Ratio
1Q10
1Q11
1Q12
1Q13
1Q14
Exhibit 8: Profit Margins
16x 16x 15x 15x 14x 14x 13x 13x 12x 12x 11x
10%
Profit Margin
Interest coverage 10% 9% 9% 8% 1Q10
48
1Q10
1Q17
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q10
1Q11
1Q12
1Q13
1Q14
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Metals and Mining Brian Turner AC – (212) 834-4035;
[email protected]
We maintain our Overweight recommendation given a more supportive commodity price environment and recent proactive balance sheet deleveraging. Management teams have also focused on cost reductions which should help insulate relative profitability should we see incremental stress in underlying metal prices. Spreads have tightened YTD (from a ~97bps to ~77bps discount to the JULI), but have recently been under a bit of pressure given declining prices for iron ore and, to a lesser extent, nickel and zinc. While levels are certainly less compelling today vs. a year ago, we think fundamentals continue to be supportive and support the higher level sector recommendation. The commodity strategists recently lowered their base metal price estimates for 2017 by 2-9% (ex. aluminum) depending on the specific metal due to expected looser 2H market conditions. Precious metal prices are expected to increase into year-end, and 2017 price estimates were raised by 1-2%, while iron ore forecasts were reduced by 9% to $67/t given the mark-to-market. Our economists recently increased their forecast for 2017 China real GDP growth to 6.7%. Largest issuers in the sector Levels # 1 2 3 4 5
I ssuer Rio Tinto PLC BHP Billiton Ltd Barrick Gold Corp Glencore Funding LLC Newmont Mining Corp Sector Summary
Debt in JULI ($mn) 10,873 10,201 6,681 4,709 4,395 42,078
Share 26% 24% 16% 11% 10% 100%
Revenue ($bn) 34 34 9 153 7 257
EBITDA ($bn) 14 16 4 8 3 48
Debt ($bn) 18 34 8 33 5 104
Leverage 1.3x 2.2x 1.8x 4.1x 1.7x 2.0x
Int Cov Profit Margin 15.4x 40% 12.0x 46% 7.2x 49% 4.8x 5% 9.9x 37% 11.2x 37%
Earnings Payout Ratio 20% 13% 2% 1% 3% 11%
Change # 1 2 3 4 5
I ssuer Rio Tinto PLC BHP Billiton Ltd Barrick Gold Corp Glencore Funding LLC Newmont Mining Corp Sector Summary
Revenue EBITDA Debt Leverage (y/y chg) (y/y chg) (y/y chg) (y/y chg) 1% 17% -24% -0.7x 2% 293% -11% -7.4x -1% 18% -15% -0.7x -9% 8 -14% -1.1x -7% 12% -19% -0.7x -5% 48% -15% -2.3x
Int Cov Profit Margin Earnings Payout (y/y chg) (y/y chg) Ratio (y/y chg) 1.8x 6% -27% 6.2x 34% -123% 2.2x 8% -1% 0.3x 1% 11% 2.4x 6% 1% 2.7x 12% -37%
The revenue decreased 5% Y/Y across the sector. Metals and Mining has been steadily declining since 3Q14. EBITDA rose 48% Y/Y due to a 293% increase in BHP Billiton Ltd. EBITDA has been negative in the sector since 3Q14, turning positive in 3Q16 owing to an 82% Q/Q increase in BHP Billiton. Ex BHP Billiton however, the majority of our sample has also seen a positive EBITDA change this quarter (5 out of the remaining 6 companies). Margins increased 12% Y/Y, again due to a 34% Y/Y increase in BHP Billiton. BHP has benefitted from a rebound in commodity prices, in particular iron ore as well as an increase in productivity. Leverage decreased by 2.3x due to a decrease in debt (-15% Y/Y) and increase in EBITDA. Leverage reduced significantly for BHP Billiton, -7.4x Y/Y. Interest coverage rose by 2.7x y/y owing to EBITDA increase in BHP Billiton. The earnings payout ratio fell 37% Y/Y due to a sharp decline in the payout ratio in BHP Billiton (-123% Y/Y). Payout ratio decreased Y/Y for the top three companies in the sector but increased for Glencore and Newmont.
49
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 1: Sector Constituents
Exhibit 2: Revenue Debt outst ($mn) 10,873 10,201 6,681 4,709 4,395 3,132 2,086 42,078
Sector Rio Tinto PLC BHP Billiton Ltd Barrick Gold Corp Glencore Funding LLC Newmont Mining Corp Nucor Corp Goldcorp Inc. Total
1. 2. 3. 4. 5. 6. 7.
Share 26% 24% 16% 11% 10% 7% 5% 100%
34%
Quaterly % change in Revenue
24%
Rolling 4 quarter change in Revenue
14% 4% -6% -16% -26% 1Q10
Exhibit 3: EBITDA
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Exhibit 4: Debt
70% 50%
Quaterly % change in EBITDA
160
Rolling 4 quarter change in EBITDA
150
Debt ($bn)
140 130
30%
-10%
120 110 100
-30%
90 80
-50%
70
10%
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
Exhibit 5: Cash to Shareholders 20
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
Exhibit 6: Gross and Net Leverage 5
Cash to Shareholder ($bn)
15
1Q10
1Q17
Gross Leverage
4.5
10
4
5
3.5
0
3
-5
2.5
-10
2
-15
1.5
-20
Net leverage
1 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Exhibit 7: Interest Coverage Ratio
1Q10
1Q11
1Q12
1Q13
1Q14
Exhibit 8: Profit Margins
87x
49%
Interest coverage
77x
Profit Margin
44%
67x 57x
39%
47x 34%
37x 27x
29%
17x 7x
24% 1Q10
50
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q10
1Q11
1Q12
1Q13
1Q14
Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 09 June 2017
Non-Food Retail Ginger Chambless AC – (212) 834-5481;
[email protected]
We recommend investors Underweight the HG Non-Food Retail sector . This is based on rich relative value, as credit profiles have been stable on generally steady retail sales and earnings. The composition of the sector is weighted towards high quality issuers (WMT/TGT/HD/LOW > 75% of the index) with the more cyclical department stores comprising a much smaller percentage. Largest issuers in the sector Levels # 1 2 3 4 5
I ssuer Wal-Mart Stores Inc Home Depot Inc Lowe's Cos Inc Target Corp Macy's Inc Sector Summary
Debt in JULI ($mn) 32,106 22,533 13,640 9,842 5,171 85,503
Share 38% 26% 16% 12% 6% 100%
Revenue ($bn) 488 96 67 69 25 866
EBITDA ($bn) 33 16 7 7 3 71
Debt ($mn) 46 23 16 13 7 110
Leverage 1.9x 1.8x 2.5x 1.9x 2.9x 2.0x
Int Cov Profi t Margi n 11.3x 7% 13.2x 17% 9.9x 12% 9.4x 11% 7.1x 12% 11.4x 9%
Earnings Payout Ratio 39% 63% 59% 59% 20% 47%
Change # 1 2 3 4 5
I ssuer Wal-Mart Stores Inc Home Depot Inc Lowe's Cos Inc Target Corp Macy's Inc Sector Summary
Revenue EBITDA Debt Leverage (y/y chg) (y/y chg) (y/y chg) (y/y chg) 1% -1% -8% -0.1x 6% 11% 9% -0.1x 11% 0 4% 0.1x -5% -3% -10% -0.1x -5% -14% -12% 0.1x 2% 1% -3% -0.1x
Int Cov Profit Margin Earnings Payout (y/y chg) (y/y chg) Ratio (y/y chg) -0.4x 0% 3% 1.1x 1% -4% -1.2x -1% -3% -2.1x 0% -4% -0.8x -1% -40% -0.3x 0% -2%
LTM Revenue and EBITDA grew 2% and 1% y/y. Despite poor 1Q17 results from some of the sector constituents, the overall level of LTM Revenue and EBITDA is the highest it has been since 2000. Debt is down marginally 3% y/y and Gross Leverage fell by 0.1x to 2.0x over the same time horizon. Gross leverage has been extremely stable post crisis averaging 2.0x with a range of 1.91x to 2.08x. Gross leverage remained relatively stable for all companies in our analysis Interest coverage for the sector fell by 0.3x y/y to 11.4x. Post crisis, the ratio has averaged 11.5x within a narrow range of 10.85x and 11.92x. Profit margin for the sector was marginally lower over the year, down 0.1% at 9.3%. Profit Margins for the sector have been quite stable post crisis with a range of 9.3% to 10.8%. The sector has one of the lowest Profit Margins compared to other sectors in our overall universe. LTM Cash to Shareholders was down 2% y/y. Dividends were up 5% though Share Buybacks were down 5%. The Earnings Payout Ratio is down 2% y/y with the ratio decline at 5 out of 6 companies in our analysis. Earnings payout ratio declined most significantly at Macy’s as the company pulled back on share repurchase activity in the midst of weak operating results.
51
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 1: Sector Constituents
1. 2. 3. 4. 5. 6.
Exhibit 2: Revenue Debt outst ($mn) 32,106 22,533 13,640 9,842 5,171 2,212 85,503
Sector Wal-Mart Stores Inc Home Depot Inc/The Lowe's Cos Inc Target Corp Macy's Inc Costco Wholesale Corp Total
10% Share 38% 26% 16% 12% 6% 3% 100%
Quaterly % change in Revenue Rolling 4 quarter change in Revenue
8% 6% 4% 2% 0% -2% 1Q10
Exhibit 3: EBITDA
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q14
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
Exhibit 4: Debt
10% 8%
Quaterly % change in EBITDA
120
Rolling 4 quarter change in EBITDA
115
Debt ($bn)
110
6%
105
4%
100
2%
95
0%
90
-2%
85
-4%
80 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
40
2.5 2.4 2.3 2.2 2.1 2 1.9 1.8 1.7 1.6 1.5
35 30 25 20 15 10 1Q11
1Q12
1Q13
1Q11
1Q12
1Q13
Exhibit 6: Gross and Net Leverage
Cash to Shareholder ($bn)
1Q10
1Q10
1Q17
Exhibit 5: Cash to Shareholders
1Q14
1Q15
1Q16
1Q17
Exhibit 7: Interest Coverage Ratio
Gross Leverage
1Q10
1Q11
1Q12
1Q13
Net leverage
1Q14
Exhibit 8: Profit Margins
12x 12x 12x 11x 11x 11x 11x 11x 10x 10x 10x
12% Interest coverage
Profit Margin
12% 11% 11% 10% 10% 9% 9% 8%
1Q10
52
1Q11
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q10
1Q11
1Q12
1Q13
1Q14
Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 09 June 2017
Pharmaceuticals Brett Gibson AC – (212) 270-7484;
[email protected]
We divide our view of the overall Pharma/Devices space into three subsectors. We hold a Neutral view for Biotech and Generics as we believe potential repatriation efforts could benefit Biotech companies (though reform now appears less likely in 2017), but we see that offset by branded drug pricing trends, increased levels of scrutiny from Washington, and potential for changes in the system. On the Generics side, we take a cautious view of fundamentals thanks to continued price deflation, little possible benefit from repatriation, and aggressive delevering plans which may be difficult to achieve. Separately, we still rate Large-Cap pharma an UW as tight valuations and concerns over branded pricing leave us with a cautious view of the subsector, though possible tax repatriation could benefit it and issuers should generally maintain strong balance sheets regardless. In Medical Devices we carry a Neutral view as M&A and shareholder returns have become more of a priority across our coverage universe there and possible healthcare reform could weaken utilization trends, though operating performance has been and should continue to be fair from a credit markets standpoint. Largest issuers in the sector Levels # 1 2 3 4 5
I ssuer AbbVie Inc Pfizer Inc Medtronic Inc Actavis plc Amgen Inc Sector Summary
Debt in JULI ($mn) 31,284 28,050 23,355 22,180 20,630 244,035
Share 13% 11% 10% 9% 8% 100%
Revenue ($bn) 26 53 29 15 23 477
EBITDA ($bn) 11 20 9 7 12 167
Debt ($bn) 37 44 32 32 34 396
Leverage 3.3x 2.2x 3.7x 4.9x 2.8x 2.8x
Int Cov Profit Margin 10.1x 42% 16.7x 38% 8.1x 30% 5.2x 44% 9.4x 53% 13.9x 35%
Earnings Payout Ratio 93% 56% 75% 236% 49% 61%
Change # 1 2 3 4 5
I ssuer AbbVie Inc Pfizer Inc Medtronic Inc Actavis plc Amgen Inc Sector Summary
Revenue EBITDA Debt Leverage (y/y chg) (y/y chg) (y/y chg) (y/y chg) 10% 11% 17% 0.2x 3% 2 12% 0.2x 1% 0 3% 0.1x -12% -13% -25% -0.8x 3% 10% -1% -0.3x 3% 6% 13% 0.4x
Int Cov Profit Margin Earnings Payout (y/y chg) (y/y chg) Ratio (y/y chg) -1.6x 0% -16% 0.4x -1% -3% 1.8x 0% 23% -0.3x 0% 236% -0.3x 3% 7% -2.0x 0% 10%
The increase in revenue (+3%, Y/Y) was on a higher side relative to the past few years, led by AbbVie (postStemcentryx) and Amgen on continued strong product performance. EBITDA growth has also shown a similar trend over the last 4 quarters, with a 6% Y/Y increase in the last quarter led by the same names but offset by Allergan following the divestiture of its generics business to Teva. Leverage grew by 0.4x as debt grew by 13% over the year, outpacing EBITDA growth. AbbVie had the largest percentage increase in debt out of the top 5 companies, with funding for Stemcentryx and issuance overseas driving a 17% increase. Increases in debt and interest expense resulted in lower interest coverage for the sector. Interest coverage fell by 2.0x Y/Y to 13.9x, driven mainly by AbbVie on the back of increased debt issuance (-1.6x, Y/Y). The earnings payout ratio increased 10% (Y/Y) in the last quarter, notably up 236% Y/Y for Allergan as the company deployed much of the proceeds from the sale of its generics business to TEVA.
53
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 1: Sector Constituents
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
Exhibit 2: Revenue Debt outst ($mn) 31,284 28,050 23,355 22,180 20,630 18,566 18,534 16,708 16,597 11,673 11,044 244,035
Sector AbbVie Inc Pfizer Inc Medtronic Inc Actavis plc Amgen Inc Merck & Co Inc/NJ Teva Pharmaceutical Industries Ltd Johnson & Johnson Novartis AG AstraZeneca PLC GlaxoSmithKline PLC Total
Share 13% 11% 10% 9% 8% 8% 8% 7% 7% 5% 5% 1
Exhibit 3: EBITDA Rolling 4 quarter change in EBITDA 12% 7% 2% -3% -8% 1Q12
1Q13
1Q14
1Q15
1Q16
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q14
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
Debt ($bn)
1Q10
1Q11
1Q12
1Q13
Exhibit 6: Gross and Net Leverage 3
Cash to Shareholder ($bn)
110
1Q10
1Q17
Exhibit 5: Cash to Shareholders 120
Rolling 4 quarter change in Revenue
400 380 360 340 320 300 280 260 240 220 200
Quaterly % change in EBITDA
1Q11
Quaterly % change in Revenue
Exhibit 4: Debt
17%
1Q10
16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4%
Gross Leverage
Net leverage
2.5
100 2
90 80
1.5
70
1
60 0.5
50 40
0 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Exhibit 7: Interest Coverage Ratio
1Q10
1Q12
1Q13
1Q14
Exhibit 8: Profit Margins
20x
36% Interest coverage
19x
Profit Margin
36% 35%
18x
35%
17x
34%
16x
34%
15x
33%
14x
33%
13x
32% 1Q10
54
1Q11
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q10
1Q11
1Q12
1Q13
1Q14
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Railroad/Shipping Mark Streeter AC – (212) 834-5086;
[email protected]
Our recommendation on the HG Railroad sector is Neutral. Comps have gotten easier, and sentiment seems to have bottomed out: the S5RAIL equity index has rallied 70% from the low reached on 25-Jan-16, far outpacing the broader market’s 28% increase over that time frame (SPX). YTD, the rail index is up almost double the market’s gain (rails up >13% versus the broader market at 7.1%). Fundamentals across various markets remain vulnerable to commodity price volatility and the stronger U.S. dollar. Lower natural gas prices and high stockpiles are a headwind to domestic utility coal shipments, although the export coal story has improved. FX hurts metals volumes among other commodities while lower crude oil prices have driven a reduction in drilling activities – although frac sand is picking up. And the negative mix shift as rails transport more lower-margin intermodal cargo and less higher-margin commodity carloads remains a headwind as well. Pricing trends in a softer truckload and weaker volume environment are another source of concern. Another lingering concern for the sector is a slowing or even reversal of the trend for shippers to choose rail over truck lanes. While we doubt the rails will give back much of share gained from trucks over the last several years during the higher fuel environment (especially given the ongoing shortage of truck drivers and the more onerous regulations negatively impacting truck operator efficiency), the reality is that lower diesel prices make truck lanes more competitive on the margin (something NSC and KSU specifically cited on calls in 2016). We reiterate our Neutral recommendation on the HG Freight sector. UPS and FDX have for the most part adjusted to the shift from higher margin international priority lanes to less expensive, slower shipping options. Both of these companies will benefit from growth in e-commerce long term although the cost pressures to adjust to surging volumes in the short run remains a focus. Both are also focused on (partially) debt financed M&A and are using any excess cash flow to increase the return of capital to shareholders through share buybacks. In trucking, anemic freight growth, driver turnover, and oversupply of tractors remain headwinds but the upcoming ELD compliance deadline should reduce capacity on the margin. Largest issuers in the sector Levels # 1 2 3 4 5
I ssuer FedEx Corp Union Pacific Corp CSX Corp Norfolk Southern Corp United Parcel Service Inc Sector Summary
Debt in JULI ($mn) 11,166 9,565 8,610 8,177 7,996 51,957
Share 21% 18% 17% 16% 15% 100%
Revenue ($bn) 58 20 11 10 62 173
EBITDA ($bn) 8 10 5 4 8 38
Debt ($bn) 15 19 12 12 17 80
Leverage 1.9x 1.9x 2.5x 2.7x 2.3x 2.2x
Int Cov Profit Margin 16.5x 14% 9.2x 47% 5.7x 43% 5.3x 41% 19.6x 12% 12.6x 34%
Earnings Payout Ratio 13% 54% 36% 34% 65% 34%
Change # 1 2 3 4 5
I ssuer FedEx Corp Union Pacific Corp CSX Corp Norfolk Southern Corp United Parcel Service Inc Sector Summary
Revenue EBITDA Debt Leverage (y/y chg) (y/y chg) (y/y chg) (y/y chg) 16% 7 74% 0.7x -4% -4% -1% 0.0x -1% 3 7% 0.1x -3% 2 3% 0.0x 5% -23% 11% 0.7x 6% -4% 12% 0.2x
Int Cov Profit Margin Earnings Payout (y/y chg) (y/y chg) Ratio (y/y chg) -7.8x -1% -21% -1.8x 0% 0% 0.0x 2% 1% -0.1x 2% -3% -9.1x -5% 15% -2.9x -2% -8%
Revenue for the sector increased 6% Y/Y driven mainly by a 16% increase in revenue at FedEx. Fedex revenue increased due to yield growth in all segments. Excluding FedEx, revenue for the sector was up 1% Y/Y. On the other hand, EBITDA was down 4% Y/Y (-7% Y/Y ex FedEx) with EBITDA declining the most for UPS. Leverage increased by 0.2x as debt levels increased by 12% while EBITDA for the sector declined. Debt levels increased the most at FedEx (+74% Y/Y, +$6.3bn). Interest coverage fell as companies issue more debt, and the cost of debt rises while EBITDA levels declined. Interest coverage ratio for the sector was down 2.9x to 12.6x y/y. Interest coverage ratio for the sector is at its weakest level since 2011. Interest expense for the sector increased by 11% y/y. Capex declined by 6% Y/Y. Capex has declined over the past few quarters after increasing by double digits in each quarter of 2015. 55
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 1: Sector Constituents
1. 2. 3. 4. 5. 6. 7.
Exhibit 2: Revenue Debt outst ($mn) 11,166 9,565 8,610 8,177 7,996 3,453 2,990 51,957
Sector FedEx Corp Union Pacific Corp CSX Corp Norfolk Southern Corp United Parcel Service Inc Canadian Pacific Railway Ltd Ryder System Inc Total
Share 21% 18% 17% 16% 15% 7% 6% 100%
Quaterly % change in Revenue
13%
Rolling 4 quarter change in Revenue 8% 3% -2% -7% -12% 1Q10
Exhibit 3: EBITDA Quaterly % change in EBITDA
23%
Rolling 4 quarter change in EBITDA
90 85 80 75 70 65 60 55 50 45 40
18% 13% 8% 3% -2% -7% -12% 1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q14
1Q15
1Q16
1Q17
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
Exhibit 6: Gross and Net Leverage 2.4
Cash to Shareholder ($bn)
Gross Leverage
Net leverage
2.2 2 1.8 1.6 1.4 1.2 1 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Exhibit 7: Interest Coverage Ratio 16x 15x 14x 13x 12x 11x 10x 9x 8x 1Q11
1Q12
1Q13
1Q11
1Q12
38% 37% 36% 35% 34% 33% 32% 31% 30% 29% 28%
Interest coverage
1Q10
1Q10
1Q13
1Q14
Exhibit 8: Profit Margins
17x
56
1Q13
Debt ($bn)
1Q10
1Q17
Exhibit 5: Cash to Shareholders 20 18 16 14 12 10 8 6 4 2 0
1Q12
Exhibit 4: Debt
28%
1Q10
1Q11
1Q14
1Q15
1Q16
1Q17
Profit Margin
1Q10
1Q11
1Q12
1Q13
1Q14
Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 09 June 2017
Technology Brian Turner AC – (212) 834-4035;
[email protected]
We maintain our Underweight recommendation on the Technology sector with spreads at ~25bps through the JULI, and we believe there is little upside for the sector given fundamental deterioration. The jury is out on the way in which secularly challenged companies have attempted to offset operational weakness; the combination of M&A and deleveraging efforts has created heightened execution risks, and management teams may be forced to shift to more equity-centric financial policies should equity pressure persist. The prospect of a repatriation holiday on overseas cash is particularly relevant for Tech companies, but it’s too early to tell the likelihood & timing of such a measure being passed; should a ‘holiday’ occur, we would expect it to have a mixed impact on Tech credit as the greater cash access could result in a boost in share repurchases and US-based M&A, while also limiting the need for incremental debt issuance and affording companies with a deleveraging lever. Largest issuers in the sector Levels # 1 2 3 4 5
I ssuer Microsoft Corp Apple Inc Oracle Corp Cisco Systems Inc Dell Inc Sector Summary
Debt in JULI ($mn) 65,756 62,752 47,594 27,790 22,329 265,396
Share 25% 24% 18% 10% 8% 100%
Revenue ($bn) 87 220 37 49 62 595
EBITDA ($bn) 29 70 17 15 6 176
Debt ($bn) 84 99 54 32 50 388
Leverage 2.9x 1.4x 3.3x 2.2x 8.5x 2.4x
Int Cov Profit Margin 15.1x 33% 36.4x 32% 9.9x 44% 18.3x 31% 3.4x 10% 17.6x 31%
Earnings Payout Ratio 86% 67% 35% 56% -63% 52%
Change # 1 2 3 4 5
I ssuer Microsoft Corp Apple Inc Oracle Corp Cisco Systems Inc Dell Inc Sector Summary
Revenue EBITDA Debt Leverage (y/y chg) (y/y chg) (y/y chg) (y/y chg) 0% -1% 80% 1.3x -3% -11% 24% 0.4x 1% 11% 35% 0.6x -2% 0 14% 0.3x -22% -21% 158 5.9x -4% -6% 36% 0.6x
Int Cov Profit Margin Earnings Payout (y/y chg) (y/y chg) Ratio (y/y chg) -10.4x -1% -6% -39.3x -3% 5% -0.6x 4% -45% -4.9x 1% 3% -5.7x 0% -80% -7.0x -2% -9%
Technology had the largest declines in revenue in absolute terms amongst all the sectors, down $22bn (-3.6%). Dell and Apple led the decline with revenues down 22% and 3% y/y respectively. Technology had a difficult year with EBITDA down $11bn (-6%) as Apple, IBM and Dell all posted weak results in an LTM basis. Revenue and EBITDA declines y/y in Technology were driven by continued headwinds the companies face in their legacy hardware businesses as well as product cycle shifts. Leverage increased by 0.6x y/y to 2.4x, its highest levels since 2000 at least. Y/Y Leverage ratio increased or was about flat for all the companies in the sector. Debt increased considerably y/y by 36%, with increases across the board. Microsoft Inc had a debt increase of 80% (+$37bn) due to the Linkedin acquisition while Dell had an increase in debt of 158% (+$31bn) due to the EMC acquisition. The increase in debt was reflected in the increase in interest expense. Interest expense increased by nearly 54% Y/Y to $9.4bn, its highest levels since 2000 at least. As a result of this, Interest coverage ratio for the sector fell drastically, down 7.0x to 17.6x. The earnings payout ratio fell 9% Y/Y to 52%. Increases in payout ratio at Apple Inc and Cisco were more than offset by a 45% decline in the payout ratio at Oracle Corp and 80% decline at Dell.
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North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 1: Sector Constituents
1. 2. 3. 4. 5. 6. 7.
Exhibit 2: Revenue Debt outst ($mn) 65,756 62,752 47,594 27,790 22,329 21,950 17,225 265,396
Sector Microsoft Corp Apple Inc Oracle Corp Cisco Systems Inc Dell Inc International Business Machines Corp Intel Corp Total
Share 25% 24% 18% 10% 8% 8% 6% 100%
Quaterly % change in Revenue
22%
Rolling 4 quarter change in Revenue
17% 12% 7% 2% -3% -8% 1Q10
Exhibit 3: EBITDA
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q14
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
Exhibit 4: Debt
28%
Quaterly % change in EBITDA
23%
Rolling 4 quarter change in EBITDA
370
Debt ($bn)
320
18% 13%
270
8%
220
3%
170
-2%
120
-7%
70
-12% 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
Exhibit 5: Cash to Shareholders
1Q11
1Q12
1Q13
Exhibit 6: Gross and Net Leverage 3
Cash to Shareholder ($bn)
120
1Q10
1Q17
Gross Leverage
2.5
Net leverage
2
100
1.5 1
80
0.5
60
0
40
-0.5
20
-1 -1.5 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Exhibit 7: Interest Coverage Ratio
1Q10
1Q11
1Q12
1Q13
1Q14
Exhibit 8: Profit Margins 38% Interest coverage
217x
Profit Margin
37% 36%
167x
35% 34%
117x
33% 32%
67x
31% 17x
30% 1Q10
58
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q10
1Q11
1Q12
1Q13
1Q14
Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 09 June 2017
Telecoms—Domestic Brian Turner AC – (212) 834-4035;
[email protected]
We maintain our Overweight recommendation. Spreads of the largest operators remain wide relative to the broader credit universe given fundamental headwinds in the wireless space as well as the speculation of large-scale M&A between wireless & cable/media companies. We believe current trading levels (~50bps wide of the JULI vs. an average of 32bps over the past two years) more than adequately price in the principal concerns/risks as the largest operators (1) appear to be stemming recent sub losses through unlimited offerings, (2) are seeking to gain an advantage in preparing for the roll-out of 5G over the next several years, (3) are actively diversifying their streams of revenue generation, and (4) are likely to be cognizant of credit ratings given the sheer size of their debt burdens. Absent any ‘transformative’ deals, we think U.S. telecom should outperform given levels. Largest issuers in the sector Levels # 1 2 3
I ssuer AT&T Inc Verizon Communications Inc Rogers Communications Inc. Sector Summary
Debt in JULI ($mn) 78,196 59,483 6,953 144,632
Share 54% 41% 5% 100%
Revenue ($bn) 163 124 10 296
EBITDA ($bn) 51 41 4 96
Debt ($bn) 137 117 13 266
Leverage 2.7x 2.9x 3.4x 2.8x
Int Cov Profit Margin 10.3x 32% 9.4x 33% 7.0x 37% 9.8x 32%
Earnings Payout Ratio 24% 23% 19% 23%
Change # 1 2 3
I ssuer AT&T Inc Verizon Communications Inc Rogers Communications Inc. Sector Summary
Revenue EBITDA Debt Leverage (y/y chg) (y/y chg) (y/y chg) (y/y chg) 0% 3 3% 0.0x -6% -13% 6% 0.5x -1% 0 -5% -0.2x -3% -4% 4% 0.2x
Int Cov Profit Margin Earnings Payout (y/y chg) (y/y chg) Ratio (y/y chg) -0.9x 1% 3% -0.4x -3% 4% 0.3x 0% -1% -0.6x 0% 3%
The sector had a 3% decrease in revenue Y/Y. EBITDA also declined 4% Y/Y for the sector, Verizon’s 13% Y/Y decrease was partially offset by AT&T, which saw an increase in EBITDA by 3% Y/Y. Margins were unchanged and the sector has been in the 30-33% range over the last 10 years.
Leverage increased by 0.2x as debt increased by 4% while EBITDA fell by 4% Y/Y.
Interest coverage fell by 0.6x Y/Y. For AT&T it fell by 0.9x while it fell by 0.4x for Verizon.
The earnings payout ratio increased by 3% Y/Y mainly driven by a 3% increase in payout by AT&T and increased by 4% for Verizon while it declined by 1% for Rogers.
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North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 1: Sector Constituents
1. 2.
Exhibit 2: Revenue Debt outst ($mn) 78,196 59,483 6,953 144,632
Sector AT&T Inc Verizon Communications Inc Rogers Communications Inc Total
Share 54% 41% 5% 100%
6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4%
Quaterly % change in Revenue Rolling 4 quarter change in Revenue
1Q10
Exhibit 3: EBITDA
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q14
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
Exhibit 4: Debt
8% 6% 4%
Quaterly % change in EBITDA
270
Rolling 4 quarter change in EBITDA
250
Debt ($bn)
230
2% 0%
210
-2%
190
-4%
170
-6%
150
-8%
130
-10% 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
Exhibit 5: Cash to Shareholders 40
3 2.8 2.6 2.4 2.2 2 1.8 1.6 1.4 1.2 1
35 30 25 20 15 10 1Q11
1Q12
1Q13
1Q11
1Q12
1Q13
Exhibit 6: Gross and Net Leverage
Cash to Shareholder ($bn)
1Q10
1Q10
1Q17
1Q14
1Q15
1Q16
1Q17
Exhibit 7: Interest Coverage Ratio
Gross Leverage
1Q10
1Q11
1Q12
1Q13
Net leverage
1Q14
Exhibit 8: Profit Margins
15x
34% Interest coverage
Profit Margin
34%
14x
33% 13x
33%
12x
32% 32%
11x
31% 10x
31%
9x
30% 1Q10
60
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q10
1Q11
1Q12
1Q13
1Q14
North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Telecoms—Yankee Brian Turner AC – (212) 834-4035;
[email protected]
We maintain our Neutral recommendation on the Yankee Telecom sector. Yankee Telecoms have tightened marginally vs the JULI YTD (from a ~33bps to ~23bps discount). Our Neutral view is supported by a modest improvement in fundamentals, select debt reduction initiatives, and our view on the credit markets more broadly. Largest issuers in the sector Levels # 1 2 3 4 5
I ssuer Deutsche Telekom AG Telefonica SA Orange SA Vodafone Group PLC BT Group PLC Sector Summary
Debt in JULI ($mn) 14,348 10,633 10,070 9,842 4,891 49,784
Share 29% 21% 20% 20% 10% 100%
Revenue ($bn) 85 60 46 57 31 278
EBITDA ($bn) 23 19 13 18 10 82
Debt ($bn) 73 72 36 50 17 247
Leverage 3.2x 3.9x 2.6x 2.8x 1.7x 3.0x
Int Cov Profit Margin 7.2x 27% 8.3x 31% 8.3x 30% 9.5x 31% 12.5x 31% 8.6x 30%
Earnings Payout Ratio 8% 18% 15% 21% 21% 15%
Change # 1 2 3 4 5
I ssuer Deutsche Telekom AG Telefonica SA Orange SA Vodafone Group PLC BT Group PLC Sector Summary
Revenue EBITDA Debt Leverage (y/y chg) (y/y chg) (y/y chg) (y/y chg) 15% 19% 11% -0.2x 20% 9 17% 0.3x 7% 9 0% -0.2x -8% 0 -12% -0.4x 10% -1% -7% -0.1x 8% 8% 4% -0.1x
Int Cov Profit Margin Earnings Payout (y/y chg) (y/y chg) Ratio (y/y chg) 1.0x 1% 1% 3.0x -3% 17% 1.2x 1% 2% -2.2x 3% 10% -0.6x -3% 4% 0.7x 0% 7%
Both LTM revenue and EBITDA for the sector grew at 8% y/y. 4 out of 5 companies in our analysis saw a positive y/y change in revenue and EBITDA levels. Vodafone was the only company in the sector where revenue declined over the year while BT Group was the only company to have a y/y decline in EBITDA levels. Profit margins for the sector remained about flat at 30% as revenue and EBITDA grew at a similar pace. Leverage decreased marginally by 0.1x y/y to 3.0x with only a 4% increase in debt over the year. Leverage for the sector has remained quite stable over the past 5 years ranging between 2.85x and 3.28x. Interest expense fell by 6% y/y with a 31% decrease in Telefonica's interest expense due to lower coupons on refinanced debt and currency effects. Falling interest expense resulted in interest coverage increasing by nearly 0.7x to 8.6x. Interest coverage ratio is at its highest level since 2003. The earnings payout ratio rose 7% y/y with the ratio increasing for all the companies in the sector. Cash to shareholders was up 91% y/y for the sector.
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North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 1: Sector Constituents
1. 2. 3. 4. 5.
Exhibit 2: Revenue Debt outst ($mn) 14,348 10,633 10,070 9,842 4,891 49,784
Sector Deutsche Telekom AG Telefonica SA Orange SA Vodafone Group PLC BT Group PLC Total
Share 29% 21% 20% 20% 10% 100%
Quaterly % change in Revenue
9%
Rolling 4 quarter change in Revenue 4% -1% -6% -11% -16% 1Q10
Exhibit 3: EBITDA
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Exhibit 4: Debt
7%
Quaterly % change in EBITDA
300
Rolling 4 quarter change in EBITDA
290
Debt ($bn)
280 270
2%
260 250 240
-3% -8% -13%
230 220
-18%
210 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
Exhibit 5: Cash to Shareholders 50 45 40 35 30 25 20 15 10 5 0
1Q10
1Q17
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
Exhibit 6: Gross and Net Leverage 3.4
Cash to Shareholder ($bn)
Gross Leverage
Net leverage
3.2 3 2.8 2.6 2.4 2.2 2 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Exhibit 7: Interest Coverage Ratio
1Q10
1Q11
1Q12
1Q13
1Q14
Exhibit 8: Profit Margins 34%
9x Interest coverage
Profit Margin
33%
9x
32% 8x
31% 30%
8x
29%
7x
28% 7x
27% 26%
6x 1Q10 .
62
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q10
1Q11
1Q12
1Q13
1Q14
Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 09 June 2017
Utilities Larry Liou AC – (212) 834-9455;
[email protected] We maintain our Neutral on HoldCo’s, Overweight on OpCo’s and Neutral on GenCo’s. YTD, the Utilities sector has underperformed the broader index. YTD, holding companies have tightened 7bp and operating companies are flat; while generating companies have tightened 24bp.
In terms of earnings contribution for utilities, first quarter results are typically a major contributor to annual earnings. Overall, utilities were largely insulated from the first quarter’s mild weather as the detrimental effects to earnings were offset by previously authorized rate case decisions. Thematically, first quarter earnings focused heavily how the evolving role of state and federal regulators as it specifically pertains to intervention in competitive power markets, fuel diversity and generation mix. Fundamentally, key themes in the sector remained generally unchanged. As a way to offset persistently weak load growth, utilities continue to seek innovative regulatory mechanisms and legislative measures to expand their regulated rate base. Further, M&A of non-traditional utility businesses that increase growth opportunities, such as midstream assets, remains a persistent trend. HG genco’s have been the primary beneficiaries of state generation- specific subsidies. However, we could see a shock for genco’s if the legislative measures are dismissed during pending lawsuits. We continue to view the generation sector negatively given the backdrop of depressed power prices and generation oversupply. Largest issuers in the sector Levels # 1 2 3 4 5
I ssuer Duke Energy Corp Berkshire Hathaway Energy Co Dominion Resources Inc/VA Exelon Corp Southern Company Sector Summary
Debt in JULI ($mn) 35,634 24,041 23,682 22,882 22,863 289,516
Share 12% 8% 8% 8% 8% 100%
Revenue ($bn) 23 18 12 33 22 321
EBITDA ($bn) 10 7 6 9 8 115
Debt ($bn) 53 38 36 37 49 546
Leverage 5.1x 5.6x 5.9x 4.1x 5.9x 4.8x
Int Cov Profit Margin 5.4x 45% 4.0x 39% 5.7x 50% 5.6x 28% 5.4x 38% 5.3x 37%
Earnings Payout Ratio 16% 0% -6% 10% -18% 12%
Change # 1 2 3 4 5
I ssuer Duke Energy Corp Berkshire Hathaway Energy Co Dominion Resources Inc/VA Exelon Corp Southern Company Sector Summary
Revenue EBITDA Debt Leverage (y/y chg) (y/y chg) (y/y chg) (y/y chg) 0% 13% 19% 0.3x -1% 1 -2% -0.1x 9% 15% 24% 0.4x 15% 14% 5% -0.4x 25% 22% 64% 1.5x 4% 8% 13% 0.3x
Int Cov Profit Margin Earnings Payout (y/y chg) (y/y chg) Ratio (y/y chg) 0.1x 5% -25% 0.3x 1% 0% -0.2x 3% -25% -2.6x 0% -1% -1.9x -1% -42% 0.0x 2% -5%
Revenue for the sector increased by 4% Y/Y, mainly driven by Southern Company and Exelon Corp, which saw 25% Y/Y and 15% Y/Y growth in their revenues respectively. We note that SO’s increase was largely due to the closing of the AGL Resources acquisition in July 2016. EBITDA increased by 8% Y/Y with about three fourth of the names, including the 5 largest names in the sector shown above, reporting an increase in EBITDA. Leverage increased by 0.3x as debt levels increased at a much faster pace than EBITDA. Debt levels increased the most at Southern Co (+64% Y/Y). Again, SO had the increase debt from the AGL Resources acquisition as well as increased financing activity at SO Power. The earnings payout ratio decreased by 5% Y/Y to 12%. The payout ratio decreased the most for Southern Company (42% Y/Y) followed by Duke Energy (-25% Y/Y) and Dominion Resources (-25% Y/Y). Total Cash for the sector increased by 53% Y/Y and 18% Q/Q after declining by 27% last quarter.
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North America Credit Research 09 June 2017
Eric Beinstein (1-212) 834-4211
[email protected]
Exhibit 1: Sector Constituents
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
Exhibit 2: Revenue
Sector Duke Energy Corp Berkshire Hathaway Energy Co Dominion Resources Inc/VA Exelon Corp Southern Company PG&E Corp NextEra Energy Inc Xcel Energy Inc Edison International Consolidated Edison Co of New York Inc Duke Energy Corp Total
Debt outst ($mn) 35,634 24,041 23,682 22,882 22,863 16,694 10,851 10,694 10,138 10,001 35,634 289,516
Share 12% 8% 8% 8% 8% 6% 4% 4% 4% 3% 12% 100%
Exhibit 3: EBITDA
8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -12%
Quaterly % change in Revenue Rolling 4 quarter change in Revenue
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Exhibit 4: Debt
12%
Quaterly % change in EBITDA
10%
Rolling 4 quarter change in EBITDA
Debt ($bn)
520
8%
470
6% 420
4% 2%
370
0% 320
-2% 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
Exhibit 5: Cash to Shareholders 20 18 16 14 12 10 8 6 4 2 0
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
1Q15
1Q16
1Q17
Exhibit 6: Gross and Net Leverage 4.9
Cash to Shareholder ($bn)
Gross Leverage
Net leverage
4.7 4.5 4.3 4.1 3.9 3.7 3.5 1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
Exhibit 7: Interest Coverage Ratio
1Q10
1Q11
1Q12
1Q13
1Q14
Exhibit 8: Profit Margins
6x 6x 6x 5x 5x 5x 5x 5x 4x 4x 4x
38% Interest coverage
Profit Margin
37% 36% 35% 34% 33% 32% 31% 30%
1Q10
64
1Q10
1Q17
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q10
1Q11
1Q12
1Q13
1Q14
Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 09 June 2017
Methodology The goal of this publication is to analyze credit quality and credit metrics over time. To accomplish this we compare fundamental credit metrics of the current High Grade corporate bond issuers with the spread history of those bonds using the following methodology:
The credit metrics for each company are weighted for their current weight in the JULI index, held constant over time. The current weights are used throughout the full nine-year history. In this way each chart shows the trend for a specific ratio that is comparable over time. For example, if a debt/equity ratio for a sector is currently 10 and five years ago it was 15, one can conclude with this methodology that this metric has improved for the companies one is investing in today. The data are not distorted by the changes in the index composition over time (e.g., a company with a high debt/equity ratio being downgraded out of the index in the interim period). Due to this methodology, the data for Ford, for example, which fell out of the index in 2005, is not included in the analysis, even for data shown from 2004 and prior. Spread histories for each sector and in total are also based on the current index composition held constant back through 2000. In this way, if a chart shows that the spread of a sector is 100bps today and it was 150bps five years ago, one can conclude that the spread-tightening was due to lower spreads for the current credits in the index. It is not distorted because a higher-spread company fell out of the index over the intervening five years or because a better-creditquality company issued more debt. Spread histories shown in this report differ from the JULI index. The JULI index average spread is based on a regularly changing portfolio of credits. When new bonds are issued that meet the JULI index eligibility criteria they contribute to the index average spread. Similarly, when a credit is downgraded it falls out of the index. When analyzing the index trends in total, composition changes are usually minor, but at the sector level they can be more significant. As our goal is to compare the fundamentals of the credits in the index today with the spread history of those credits, we believe using only the spreads on bonds in the index today is best. The JULI spread history and our Constant Composition spread history are shown together in the exhibit below. We observe that index averages and trends are similar, but there are some small differences. The JULI spread history shows a sell-off in March 2005 due to the auto company downgrades and then a rally in June 2005 when the companies were removed from the index. The Constant Composition index shows a smaller ‘bump’ in the data in 2005 as Ford is not part of the current index composition and is therefore not included in this index spread history chart. Still, the sell-off in 2Q05 affected the market broadly as the Constant Composition index excluding Ford also widened over the period.
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Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 09 June 2017
Exhibit 1: The Constant Composition index shows the spread history of only the current bonds in the index. The JULI averages all bonds historically in the index JULI Constant Composition
550
JULI
450 350 250 150 50 02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
Source: J.P. Morgan.
The data sources for the analysis include J.P. Morgan analysts, SNL Financial, and Capital IQ. J.P. Morgan analysts have vetted the data and helped clean up or explain divergences for mergers or other events. These are highlighted in the commentary in each sector, which is included thanks to their participation. Summary sections include analysis and exhibits organized around Industrials and Financials. For industrials, six credit metrics are shown for each of the Industrial and Utility sectors discussed. Some of these metrics are not commonly a focus for each sector but are included so that the summary metrics can be analyzed. The sector-based analysis provides a brief summary of the complex trends occurring in each sector, and we refer clients to the extensive research from our industry sector credit analysts for more detail and insight. The appropriate analyst’s name is included on the sector pages.
A few industrial sectors are not included in this document, though they are represented in the JULI index: Yankee Banks, Financial Companies, Airlines, Paper/Packaging and Building Materials.. In total these sectors represent 17% of the index. The exclusion of the credit metrics for these sectors from the summary therefore has little bearing on the broader credit trends. Exhibit 2: Industrial and Utility Credit Ratios Analyzed Ratios Gross Debt / EBITDA Net Debt / EBITDA EBITDA / Interest Expense EBITDA / Revenue Cash to Shareholders / EBITDA Source: J.P. Morgan.
66
Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 09 June 2017
The JULI index is the J.P. Morgan US Liquid Index, an index of High Grade US corporate bonds that meet the following criteria:
Issue size: At least $300 million.
Maturity: Greater than 13 months and less than 31 years.
Type: Bullet bonds only. No embedded options aside from make-whole calls. No convertibles, refundables, extendables and perpetuals.
Coupon: Fixed coupon only.
Currency: USD denominated only.
Issuer: Corporate only.
Rating: with ratings available from all three rating agencies (Moody’s, S&P and Fitch) must be rated BBB- or higher by two of the three agencies. Bonds rated by two rating agencies must be rated BBB- or higher by both. Bonds rated by a single rating agency must be rated BBB- or above. Amount outstanding: At least $300 million.
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Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 09 June 2017
Cross-Sector Comparisons of Credit Metrics Exhibit 1: 4Q16 Credit Fundamentals Sector Automotive Cable/TV Chemicals Consumer Products Diversified Media Energy Food Drug Retail Food/Beverages Healthcare/HMOs Manufacturing and Aerospace & Defense Metals/Mining Non-Food Retail Pharmaceuticals Railroad/Shipping Technology Telecoms - Domestic Telecoms - Yankees Utilities
Net Debt / EBITDA -0.4x 3.0x 2.0x 1.5x 2.5x 2.9x 3.0x 2.5x 0.6x 1.2x 1.4x 1.8x 2.0x 1.9x -0.2x 2.6x 2.2x 4.6x
Debt / EBITDA 1.3x 3.2x 2.5x 1.9x 2.7x 3.9x 3.4x 3.3x 2.2x 2.1x 2.0x 2.0x 2.8x 2.2x 2.4x 2.8x 3.0x 4.8x
EBITDA / Interest Expense 30.6x 7.3x 11.3x 22.7x 7.4x 7.9x 8.3x 9.0x 12.2x 12.8x 11.2x 11.4x 13.9x 12.6x 17.6x 9.8x 8.6x 5.3x
EBITDA / Revenue 11.6% 34.5% 20.9% 20.7% 27.1% 20.8% 17.5% 31.8% 8.6% 14.3% 36.5% 9.3% 35.3% 34.2% 31.4% 32.4% 29.6% 37.4%
Cash o Shareholders / EBITDA 25.7% 6.2% 30.7% 46.1% 45.4% 22.4% 50.1% 49.9% 25.9% 46.1% 10.7% 46.7% 60.9% 34.0% 51.7% 23.5% 15.3% 12.2%
EBITDA / Interest Expense 1.2x 0.4x -0.5x 1.7x 0.1x 1.9x 0.0x 0.3x -0.3x -0.3x 0.2x -0.3x -0.2x 0.3x -0.5x -0.1x 0.2x -0.1x
EBITDA / Revenue 0.3% 0.1% -0.3% 0.6% -0.2% 1.9% 0.2% 0.1% 0.0% -0.2% 0.3% -0.1% -0.3% -0.1% 0.1% 0.0% 0.3% 0.7%
Cash to Shareholders / EBITDA -5.5% 2.0% -2.1% -0.1% -5.4% 2.1% -3.7% 0.5% 6.2% -0.9% -0.4% -3.6% 1.0% -4.1% -3.4% 0.6% 4.3% 0.3%
Source: Capital IQ and J.P. Morgan.
Exhibit 2: Difference from Previous Quarter, 4Q16 Sector Automotive Cable/TV Chemicals Consumer Products Diversified Media Energy Food Drug Retail Food/Beverages Healthcare/HMOs Manufacturing and Aerospace & Defense Metals/Mining Non-Food Retail Pharmaceuticals Railroad/Shipping Technology Telecoms - Domestic Telecoms - Yankees Utilities Source: Capital IQ and J.P. Morgan.
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Net Debt / EBITDA 0.1x 0.0x 0.0x 0.0x 0.2x -0.8x 0.0x 0.1x -0.2x 0.1x 0.0x 0.0x 0.4x 0.0x 0.0x 0.1x -0.1x 0.0x
Debt / EBITDA 0.1x 0.0x 0.0x 0.0x -0.1x -0.7x 0.1x 0.3x -0.1x 0.0x -0.1x 0.0x 0.1x 0.0x -0.1x 0.2x 0.1x 0.1x
Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 09 June 2017
Exhibit 3: Difference from Year Ago, 1Q16 Sector
Net Debt / EBITDA
Debt / EBITDA
EBITDA / Interest
EBITDA /
Cash to Shareholders /
Expense
Revenue
EBITDA
Automotive
-0.1x
0.3x
-3.2x
0.8%
-13.4%
Cable/TV
0.0x
-0.1x
-0.1x
0.3%
-14.4%
Chemicals
0.3x
0.2x
-0.4x
-1.5%
-21.8%
Consumer Products
-0.1x
-0.1x
2.2x
1.6%
-2.5%
Diversified Media
-0.1x
-0.1x
-0.3x
-1.3%
-13.9%
Energy
-0.2x
-0.1x
-2.3x
-1.1%
-6.4%
Food Drug Retail
0.0x
0.2x
-0.4x
0.5%
-2.4%
Food/Beverages
-0.1x
0.2x
1.1x
0.1%
-0.6%
Healthcare/HMOs
-0.4x
-0.2x
-0.4x
0.2%
6.5%
Manufacturing and Aerospace & Defense
0.0x
0.0x
-0.5x
0.2%
-23.5%
Metals/Mining
-1.8x
-2.3x
2.7x
11.7%
-37.4%
Non-Food Retail
0.0x
-0.1x
-0.3x
-0.4%
-1.6%
Pharmaceuticals
0.5x
0.4x
-2.0x
0.4%
9.8%
Railroad/Shipping
0.2x
0.2x
-2.9x
-1.6%
-7.7%
Technology
0.4x
0.6x
-7.0x
-2.4%
-9.0%
Telecoms - Domestic
0.2x
0.2x
-0.6x
-0.4%
3.1%
Telecoms - Yankees
-0.3x
-0.1x
0.7x
0.0%
6.5%
Utilities
0.2x
0.3x
0.0x
1.5%
-5.0%
EBITDA / Interest
EBITDA /
Cash to Shareholders /
Expense
Revenue
EBITDA
Source: Capital IQ and J.P. Morgan.
Exhibit 4: Difference from Last Recession, 3Q09 Sector
Net Debt / EBITDA
Debt / EBITDA
Automotive
-3.2x
5.1x
29.9x
12.4%
14.7%
Cable/TV
-0.3x
-0.3x
2.7x
-3.2%
-54.8%
Chemicals
-1.7x
-1.9x
4.4x
5.7%
15.0%
Consumer Products
0.0x
-0.1x
10.4x
2.5%
14.6%
Diversified Media
0.6x
0.1x
0.4x
5.3%
31.9%
Energy
1.1x
1.8x
-10.5x
-0.3%
7.9%
Food Drug Retail
0.6x
0.7x
-0.6x
1.2%
30.3%
Food/Beverages
0.7x
1.3x
-0.2x
4.5%
17.1%
Healthcare/HMOs
0.7x
0.5x
0.5x
0.5%
8.0%
Manufacturing and Aerospace & Defense
0.4x
0.4x
-1.0x
2.4%
13.8%
Metals/Mining
0.2x
-0.2x
-27.1x
4.9%
41.4%
Non-Food Retail
0.0x
-0.1x
0.9x
0.0%
33.9%
Pharmaceuticals
1.6x
1.3x
-2.8x
7.4%
29.1%
Railroad/Shipping
0.1x
0.1x
4.1x
6.4%
21.2%
Technology
1.2x
1.8x
-116.6x
-0.4%
21.0%
Telecoms - Domestic
1.0x
1.0x
-2.1x
-0.7%
1.0%
Telecoms - Yankees
-0.1x
0.3x
2.3x
-3.5%
-7.4%
Utilities
0.7x
0.7x
0.7x
7.8%
1.0%
Source: Capital IQ and J.P. Morgan.
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Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 09 June 2017
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Neutral 59% 62%
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Note: The Credit Research Rating Distributio n is at the issuer level. Please note that issuers with an NR or an NC designation are not inclu ded in the table above. *Percentage of investment banking clients in each rating category.
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Eric Beinstein (1-212) 834-4211
[email protected]
North America Credit Research 09 June 2017
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