Kinder Morgan: January 18

… Management plans to provide an update on its strategic review of the KML subsidiary after the first quarter. At this point the company is considering all options. A sale of this asset could provide additional funds for debt reduction. Furthermore, rumors are circulating that Kinder Morgan may consider selling its CO2 unit, a volatile business that could command as much as $5 billion in a sale. Consistent increases in EBITDA, and significant improvement in distributable cash flow should allow Kinder Morgan to accommodate the increase in dividends and capital projects without the need to access equity funding. Debt increases are likely to be modest. Accordingly, we expect a slight drop in leverage this year. We reiterate our buy recommendation, with the 2028 issue trading at a spread of +173.

Delphi Technologies: January 18

… While encouraged by DLPH’s longer-term growth, free cash flow, and credit prospects (in 2020 and beyond as Power Electronics and GDi ramp up to scale and produce higher margins), the near to medium term outlook is fraught with uncertainty as the company transitions to GDi and electrification in Europe, to a more balanced global OEM customer mix in China, and increased capital spending weighs on free cash flow. The 5% senior notes due 2025 yields 7.5%.We initiate coverage with a recommendation of underperform with limited downside.

Embraer SA: January 18

… We changed our recommendation on Embraer last November to “underperform”. The EMBRBZ 5.05% 06/2025 bonds have improved from a z-spread of 124bps (yield: 4.5%) to 170bps (yield: 4.4%) currently, relative to Boeing 7.25% 06/2025 yielding 3.4% (z-spread: 75bps). The performance will be capped by the expectation of the transaction closing by year-end. At a spread differential of 95bps between Embraer’s and Boeing’s bonds, there is some value. Change to OUTPERFORM.

JP Morgan Chase: January 17

… As part of its 2018 capital plan, JPM received a green light from the Federal Reserve to repurchase $20.7 billion of common stock during the 12-month period ending 6/30/19. The bank also recently increased its quarterly common stock dividend to $0.80 per share, from $0.56. Reflecting this hike, the dividend payout ratio rose from 24% in the second quarter to 40% in the fourth quarter. Total distributions to shareholders were $8.3 billion in the fourth quarter, including $5.7 billion of net share buybacks. This brought the total payout to shareholders for the past year to 92% (net of stock issued to employees). The CET1 ratio remains at a strong level (12%), flat with the third quarter, and down only 20 basis points from the end of last year. Risk-weighted assets declined slightly on a sequential basis, with loan growth offset by lower derivatives/trading RWA. Our credit score is stable. The JPM 4.452% notes due 2029 are seen at T+149. Opinion: buy.

Tenet Healthcare: January 17

… Tenet cut its EBITDA guidance for full year 2018 by just $50 million to a $2.55 billion midpoint; however, free cash flow (cash from operations less capex) was cut to $600-800 million from $725-925 million. Our EBITDA projection is in line with management’s and leads to 5.9x leverage at year end. Our forecast for free cash flow (adjusted EBITDA less capex and interest expense) is near $800 million. Tenet’s liquidity is good with modest debt maturities near term ($500 million of unsecured debt due in March). However, leverage through the secured debt is substantial at 3.4x. Although a near term sale of Conifer could result in price appreciation on the bonds, they have already run up since the year end downdraft with the 2023 unsecured issue increasing about 5 points to a y.t.w. of 7.5%. We recommend buy on weakness at a y.t.w. near 8%.

KOC Holding AS: January 17

… The lira remains weak, but it stabilized since early November 2018. Besides, Turkey’s current account has been in surplus over the last four months and the political situation seems more stable. Yet, the country is still dealing with elevated inflation levels (20% in December 2018 vs. 12% in 2017) and the country’s GDP is expected to remain unchanged in 2019. In this context, we expect a gradual tightening of the spread of bonds from relatively safe issuers, like KOC. The company is committed to maintaining a solid FX position and adequate credit measures at the holding level. The move to support stronger capital ratios at Yapi Kredi also shows its commitment to ensure the sustainability of its underlying assets.
We keep our “outperform” stance on KCHOL bonds.

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