Truist Financial Corporation: August 03

…The $315 billion loan portfolio (held for investment) is well-diversified and split 60%/40% between commercial and consumer loans. As of June 30, there was $30.1 billion (9.6% of loans) outstanding to the most Covid-exposed sectors, including hotels, resorts and cruise lines (2.4%); senior care (1.9%); oil & gas (1.9%); and acute care facilities (1.5%). This was up $1.7 billion (6%) sequentially, but excluding PPP loans, the increase was only $0.2 billion (1%). The leveraged lending portfolio totaled $9.5 billion (3.0%), down 10% quarter over quarter. Clients had asked for “accommodations” on $21.2 billion of commercial loans and $13.8 billion in consumer loans as of June 30. So far, net chargeoffs remain modest (0.39% in 2Q), although this could change especially for Covid sensitive commercial borrowers. The allowance/loans ratio is 1.81%; the Truist balance sheet also is cushioned by unamortized purchase accounting marks. Liquidity remains strong, with parent company cash ($14.5 billion) equal to 21 months of outflows, including dividends (assuming no inflows.) As of 6/30/20, the CET1 ratio was 9.7%, up 40 basis points sequentially. The tier 1 ratio was 11.5%, an increase of 100 basis points, reflecting the issuance of $2.6 billion in preferred stock. There was $7.1 billion in preferred stock outstanding as of 6/30/20. Truist priced an additional $925 million in preferred stock in the last week of July. On its second quarter earnings call, the company said that it will have the ability to call some of its preferred shares over the next few years, but that it intends to keep its capital position strong, given the current “stressed” environment. Based on the 2020 CCAR stress tests, Truist is required to maintain a 2.7% stress capital buffer (subject to a final determination by the end of this month). Given the merger, Truist had already suspended share buybacks even prior to the Covid outbreak, but it intends to maintain its common stock dividend. The common dividend payout ratio was 67% in the second quarter. Last week, Truist priced $750 million of 1.125% senior MTNs due 8/3/27 at a spread of T+75. We maintain a stable credit score and a buy opinion.

Liquid Telecommunications Holdings Ltd: August 03

…The company posted a positive free cash flow of $14 million (1Q19/20: -$10 million) thanks to a reduction in working capital (as promised when the company reported its 4Q results) and a reduction in capital expenditure. Capital expenditure fell -41% largely due to a continued control of investing activities following the slowdown of some projects as a result of the COVID-19 pandemic. Net leverage was 3.34x in 1Q20/21, vs 3.19x in 4Q19/20. The company has a maintenance net leverage covenant limit of 4.25x, so the headroom remains adequate here. Yet, it also has an incurrence gross leverage covenant limit of 3.75x and this ratio was at 3.79x in 1Q20/21 vs. 3.55x in 4Q19/20. We do not see this incurrence covenant breach as problematic for now as the company does not plan to become more aggressive on capital spending in the short-term. We have actually revised downwards our capital expenditure forecast to $90 million for this year as we believe that the company will intensify its efforts to preserve cash this year. We now expect a net leverage of 3.1x at the end of current fiscal year (slightly above our previous forecast of 2.8x). Our most recent view on LIQTEL 8.5% Jul-2022 bonds was “outperform” at a price of 99.3 and a z-spread of 865bps (on June 26, 2020). These bonds now trade at 102, a z-spread of 600bps and offer a yield-to-worst of 6.2% (assuming a call at par in July 2021) while the yield-to-maturity stands at 7.3%. Despite some foreign exchange headwinds, the company is on track to deliver a healthy growth in revenue this year with limited capital spending. We still expect a moderate improvement in credit measures by the end of this fiscal year. The 2022 bonds have a limited capital appreciation potential at current levels, but they offer a decent carry. We keep our “outperform” rating.

Celanese Corporation (CE): August 03

…CE ended the second quarter with solid liquidity of $1.6 billion. For the six months, free cash flow was down $162 million to a still healthy $418 million as lower earnings and higher capital spending were partly offset by reduced working capital usage. This FCF was used to fund $148 million of dividends and $167 million of share repurchases. Total debt was up a modest $129 million year to date to $4.0 billion. The company is actively building its M&A pipeline as the pending joint venture sale frees up more capital to pursue external growth opportunities while second half share repurchases are likely to be limited to the $500 million associated with completion of the Polyplastics transaction. The company is seeing the start of demand recovery as the early third quarter order book improved compared to the second quarter. In the third quarter, CE expects to recover about a third of the sequential decline in consolidated adjusted EBIT experienced in the second quarter, especially from gains in Engineered Materials as the automotive market ramps back up and margin improves from higher volume. Based on our updated model, we expect 2020 leverage to rise to 2.8x before receding to 2.3x in 2021. Since our last report (GC 3/31/20), the yield for the 4.625% senior notes due 2022 tightened considerably to 1.1% (from 7.5%). At this level we change our recommendation back to underperform with limited downside from outperform.

Tempur Sealy International: July 31

…Despite the unexpected and rapid increase in demand for bedding that has challenged industry and supply chain manufacturing, the company projects that sales in the third quarter will increase 25% year over year. We had significantly reduced our projections at the time of the first quarter report but subsequent events suggest the company will outperform in the second half. We are therefore increasing our 2020 adjusted EBITDA estimate to near $550 million and our free cash flow estimate (less capex, cash interest and taxes) is over $250 million. Total leverage at year end will remain relatively stable at just over 3x. Tempur likely will continue to benefit from consumer spending trends and the reopening of retail outlets. The housing market also has bounced back and bedding marketers often benefit from household moves as consumers replace old mattresses. We had been concerned about competition from online retailers, but Tempur’s suite of products has shown resilience in the health crisis. We last rated the 2026 bonds underperform based on the order fall off in April that was expected to continue, missing a buying opportunity. Prices have moved up considerably with the 2026 bonds now yielding just 2.8%. Underperform with limited downside.

General Electric: July 31

…The sales declines and losses were milder in Renewable Energy and Power, while Healthcare revenues were down only 4%, as COVID-19 related products saw good demand while pharmaceutical diagnostics sales (down 28%) were dampened by deferred medical procedures. Healthcare turned a profit, but its margins contracted by 530 basis points to 14.1%, owing to a less profitable sales mix. Power’s sales decline was only 9%, but orders were down 41%, and the segment had a modest loss despite cost reduction efforts. In Renewable Energy, sales increased slightly but losses were higher. The absence of the profitable biopharma business was felt. About the only guidance management is prepared to give is that the industrial business will be free cash flow positive in 2021. It’s certainly not prepared to predict a rebound in commercial aviation. In the first half, however, industrial free cash flow after dividends was negative $4.5 billion. This explains why the company completed $21 billion in asset sales in the first half but only reduced net debt by $14 billion. Moreover, there was little GAAP debt reduction in the second quarter, mostly refinancing with longer maturities. We appreciate the repetition by management of its goal to return to single ‘A’ ratings and to get net debt/EBITDA below 2.5x “over a longer period of time,” but wishing won’t make it so. In fact, we foresee backsliding, not progress towards this goal as losses mount. We did not join in the general rejoicing over industrial free cash flow coming in a bit better than the most recent guidance in the quarter (at negative $2.1 billion). The guidance was revealed at an investor conference a month before the quarter ended and was off by $1.4-$2.4 billion, which illustrates how poor cash flow visibility remains. Management at last announced a “program” to monetize its remaining stake in Baker Hughes over about three years, and intends to use the proceeds to reduce debt. Every little bit helps, but the duration is prolonged and the market risk is high. Our projections still show leverage of about 4x this year, which incorporates a slightly better second half. However one chooses to define it (and there are many definitions of GE’s debt), it’s too high given GE’s business risk. We appreciate the emphasis on deleveraging, but remain cautious about the lack of visibility and erratic cash flow. We reiterate our “underperform” (2030 notes at T+28

EQT Corporation: July 31

…Although debt continues to decline as promised by management, EBITDA has also been declining with the weaker demand for natural gas stemming from the COVID-19 impact. Production volume fell 7% in the second quarter, while the average realized price was down 9%. EQT curtailed production in May, although as of today all curtained production has returned. Management provided guidance for adjusted EBITDA of $1.5 to $1.6 billion for the full year. The forecast implies adjusted EBITDA modestly better than the pace of the second quarter, which seems reasonable. The key is that the company includes net cash settlements received on derivatives not designated as hedges. These receipts totaled more than $300 million in the second quarter, and roughly $560 million for the first half. If we ignore these receipts, EBITDA would have been negative in the second quarter. EQT has hedged roughly 90% of its 2020 production and 40% of its expected 2021 production. It is preserving its optionality on hedging its 2021 production, which is likely to be flat. EQT continues to attack costs, as well costs have dropped 30% over the last year, including a 10% decrease in the second quarter. Well costs have benefitted from proactive scheduling and operational efficiencies. Horizontal drilling speed has increased by 63%, while horizontal days per thousand feet drilled has dropped by 36%. Meanwhile, G&A costs are down by 25%. Assuming EQT hits the midpoint of its EBITDA guidance, and is able to cut debt by another $300 million as planned, leverage at year-end would be 2.8x. Recall that management intends to cut this metric to 2x or less. Management noted that the Appalachian region is ripe for consolidation. EQT would consider potential mergers, but any deal would need to be de-leveraging. We suspect this could constrain any M&A activity, but management seems more optimistic. EQT bonds have performed extremely well over the past several months. Clearly, much of the upside has been captured. But we still see opportunity for spread tightening. Admittedly, these are riskier than most bonds in our universe given the nature of the business, the uncertain outlook for gas prices, and the company’s relatively small size. We maintain our buy recommendation, with the 2030 notes trading at a price of $112.5 and a yield of 6.9%.

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