CODELCO: December 05

…The credit profile has remained stable so far, despite the ongoing operational challenges. The pressure on margins is causing a significant fall in EBITDA this year. Free cash flows have been steady, as dividends paid have fallen. The total debt is stable, but the recent increase in the net leverage ratio, albeit small, is likely to continue into the fourth quarter and the start of 2023. The refinancing of the upcoming maturities in August next year will be manageable, given the solid long-term outlook for the copper markets and the solid standing of Codelco. The credit markets remain under pressure from the uncertain path of global interest rates, in the face of persisting inflation. In this context, Codelco’s bonds have benefited from the strong market technical factors. The CDEL 3% 09/29s have rallied, currently yielding 4.9% (z-spread: 142bps), against 5.2% (z-spread: 156bps) in September. The shorter dated CDEL 4.5% 2025s are yielding 4.9% (z-spread: 68bps), compared to SCCO 3.875 2025s, trading at 5.0% (z-spread: 58bps). We continue to be cautious, in the fact of ongoing production challenges. Keep at UNDERPERFORM.

Pactiv Evergreen: December 05

…Total revenue in the third quarter decreased 2% sequentially to $1.6 billion due to lower sales volumes as the market softened. These effects were partially offset by contractual pass through of material costs and pricing, but seasonal softness affected the Foodservice and Food Merchandising segments. Consolidated adjusted EBITDA fell to $187 million versus the outsized $249 million in the second quarter due to higher material and manufacturing costs. Adjusted EBITDA was nevertheless well above the prior year’s quarter in part due to the
acquisition of Fabri-Kal, a leading provider of foodservice packaging products and now part of the Foodservice segment (near 40% of revenue). All segments posted sequential declines in reportable segment EBITDA, but Foodservice comparisons were the most unfavorable due to input cost inflation and a flattening of revenue. The other two segments, Food Merchandising and Beverage Merchandising posted smaller decreases of about 10% each as margins were pressured. Pactiv continues to exit low margin businesses, including the divestiture of its remaining closures businesses. LTM adjusted EBITDA was $823 million that led to leverage and net leverage of 5.1x and 4.5x,
respectively. Our 2022 EBITDA projection is in line with guidance and total leverage should be in the mid 5x range. Management expects free cash flow ($70 million year to date) to exceed $100 million by year end. Our estimates are higher because they exclude the strategic inventory build. We rated the secured notes that have a priority position in the capital structure outperform and they still trade at a y.t.w. around 7%. Maintain outperform.

Air Lease: December 05

…Air Lease ended the third quarter with $6.7 billion in available liquidity, including $1.1 billion of
unrestricted cash and $5.6 billion in availability under its revolving credit facilities. As of
September 30, 87% of debt was fixed-rate, down from 95% at the end of last year, while 99.3%
was unsecured. In the first nine months of 2022, the composite interest rate on the company’s
debt increased only modestly, to 2.85%, versus 2.79% at 12/31/21. Given that leasing demand
is strong even as both Boeing and Airbus are experiencing production delays, Air Lease has
some ability to offset the higher costs with higher lease rates (including escalation clauses). If
the global economy goes into recession, some airline customers may face financial difficulties,
but we expect aircraft demand will remain strong enough for Air Lease to place planes with other
carriers. (As of November, six aircraft were the subject of some form of insolvency proceeding, a
modest number.) Our credit score is stable. The 5.85% medium-term notes due 12/15/27
priced last week at T+220. Opinion: buy.

Vodafone Group Plc: December 05

Vodafone has faced pressure from activist investors who have suggested that the company should explore potential mergers or acquisitions. Mr. Read himself advocated for consolidation in the industry. While there are certainly some advantages in terms of revenue and cost synergies, typically these deals harm the credit profile in the near term. For example, the acquisition of the Liberty Global assets in Germany and other European countries a few years ago raised leverage significantly. Vodafone declined an opportunity to merge with Masmovil in Spain earlier this year. Conversely, some activists have argued for the sale of units, which seems like a more logical strategy for bondholders at this point, since its steep leverage could be reduced. However, Vodafone passed on an opportunity to sell its Italian operations to Iliad. The replacement of CEO Nick Read is not likely to do much for the firm in the near term. Vodafone must contend with slow growth in many markets and overall margin pressure. Leverage is likely to remain high despite some benefit from the proceeds of the sale of a stake in Vantage Towers. We confirm our sell recommendation, with the 2032 issue trading at a spread of +187.

Teck Resources: December 05

TECK lowered 2022 steelmaking coal volume by 1.5 million tonnes to 22.0-22.5 million tonnes to reflect a recent plant feed conveyor failure at Elkview as well as higher transportation unit costs. In addition, the company reduced annual 2023-2025 steelmaking coal guidance by 1.0 million tonnes to 25-26 million tonnes related to ongoing reliability issues. Annual 2023-2025 QB2 copper production is now expected to 170,000-300,000 tonnes, down from 245,000- 300,000 tonnes with 2023 expected to be at the lower end of this range. Inflationary pressures on diesel and other input costs are expected to put upward pressure on unit and capital costs into 2023. While 2023 capital spending will be lower than 2022, with the increase in QB2 capital guidance and inflationary pressures, TECK no longer expects a reduction of $2 billion. The company’s near-term priority is the ramp up of the QB2 project and to advance other copper projects (San Nicolas copper zinc joint venture) as part of its longer-term copper growth strategy (diluting its higher carbon steelmaking coal business). Starting in 2023, spending on growth projects should be down leaving more available cash flow for returning funds to shareholders. The 6.125% senior notes due 2035 yield 5.8%. Maintain outperform with limited upside. 

Kroger: December 05

…Inventories were up 15% at the end of the quarter, an unusually large increase, attributable to cost inflation and better in-stock positions. The impact of inventory increases on cash flow yearto-date is a drag of $2.3 billion. Therefore, despite an 11% increase in EBITDA, cash flow is down by $1.5 billion. Management expects to see working capital improve in the current quarter. Even though it increased its full year outlook for operating income and lowered its capital spending guidance because of supply delays, Kroger did not change its free cash flow forecast of $2.3- $2.5 billion (before dividends), citing working capital movements expected to offset the reduced capital spending plans. As it promised, management paused share buybacks after the Albertsons announcement. Thus, debt net of cash and investments rose only slightly despite lower cash flow and higher dividends. Assuming short-term debt is repaid with free cash flow, we are now projecting lease-adjusted debt/EBITDAR improving to 2.3x from 2.6x this year. The quarter included an unexpected $85 million charge for an opioids settlement with New Mexico. Kroger cautioned investors not to extrapolate given unique circumstances, but it is a liability not previously quantified. Whether or not Kroger buys Albertsons in 2024, we see a stable credit profile over the longer term. We reiterate our “outperform” (2030 notes at T+140).

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