General Dynamics: March 23

…Gulfstream equipment sales are not going to zero, and aftermarket parts and service sales for the installed base will continue even if equipment sales decline. GD is a vital defense contractor, and 66% of its sales are to the U.S. government, primarily to the Department of Defense. It is relatively well diversified in revenue sources, and last year its backlog hit a record of $87 billion (two-thirds funded). It has veered from its traditional conservative financial policies, however, which is what has brought it to this tricky position. The company ended the year with $900 million of cash and $5 billion of revolver availability, but short-term debt of $2.9 billion, most of it due in May. In order to reassure the credit markets, it needs to extend its maturities and get a bond deal done soon. After all, Northrop was able to do so last week, and it is a much lower rated credit. We believe GD will also be able to get a deal done, assuming capital markets don’t completely seize up: The sooner this is done, the better. We have stress tested earnings and cash flow by taking a 25% haircut to consensus earnings. Under this scenario free cash flow should be about breakeven, and debt/EBITDA (excluding leases and pension liabilities) would rise to 2.6x on lower EBITDA, still pretty strong. Ten-year paper is trading at T+316, and we would expect a new issue to offer a premium to this. We reiterate our “outperform.”

General Mills: March 23

…The main reason for bondholders to be encouraged is that the company has generated roughly $1 billion of free cash flow through the first three quarters. Just over $800 million has been used to reduce debt. Debt was slashed by more than $1.2 billion in fiscal 2019. As the result, leverage is down to 3.8x, which is much improved from leverage of nearly 5x after the Blue Buffalo deal was completed. We expect leverage to continue falling as debt is knocked down further. General Mills is not thriving by any means, as the flat organic growth demonstrates. However, the coronavirus may increase demand for its products, allowing for much better growth ahead. Furthermore, if the economy slips into a recession, the company is very well positioned versus other firms. Management noted that Pet Foods performed well during the last downturn in 2008/2009. Margins are modestly better. So over the near term, we like the prospects for General Mills. Meanwhile, the excellent free cash flow is being directed to debt reduction, leading to lower leverage. We think that General Mills would perform nicely in a recessionary environment. It is too soon to predict the extent of any downturn, but the longer it goes, the better it is for the company. We are moving to a buy recommendation, particularly because of the current economic environment. The 2028 notes are trading at a spread of +281.

Avis Budget Group: March 23

…CAR’s 2020 guidance called for revenue of $9.4-9.6 billion, up 3.5% at the midpoint, driven by increased Americas volume of 2-5% and pricing flat to up 2%. International rental days were expected to be flat to up 3% with RPD flat to up 2%. Per unit fleet costs was expected to rise 0-3% for the Americas and 1-4% for International with 2020 adjusted EBITDA expected to be $750-850 million, up 1.5% at the midpoint, with adjusted free cash flow of $275-325 million. Reflecting current market conditions, results are likely to be significantly below these levels. Based on our best guesstimate, leverage could spike this year to over 8x (over 6x net), exceeding the CAR’s 3-4x net corporate leverage target, hopefully returning to this range in 2021. The yield on the 5.75% senior notes due 2027 spiked to 11.3%. Until there is greater clarity, we temper our recommendation to underperform.

AngloGold Ashanti Ltd: March 23

…We do not think that AngloGold Ashanti will have any difficulty to redeem its $700 million bond maturing next month. In light of its strong credit measures, we do not believe that it will have any issue to raise the needed fund from its revolving credit facility. Then, AngloGold Ashanti will benefit from low oil prices, a strong USD, still elevated gold prices this year. In 2021, the company will most probably cut its capital expenditure and benefit from the ramp-up of its Obuasi mine in Ghana. Overall, AngloGold Ashanti is set to maintain a solid credit profile in the medium-term, with net leverage ratios close to 1x this year. We, therefore, view the correction in its 2022 and 2040 bonds (down -9% and -13% year-to-date, respectively) as a good opportunity to add more exposure to this credit. The 2022 bonds trade at 96 (vs. 106 last month), a z-spread of 647bps (yield of 7%). We change our rating to “outperform”.

Macy’s Inc: March 20

…Underlying View:  [Deteriorating: -1]  Macy’s sales were in the doldrums along with most of its mall-based department store peers despite being at the forefront of omnichannel selling. Macy’s is a good operator in a tough business, but activist investors have eyed its real estate portfolio greedily. The company’s decision not to put its real estate into a REIT shows a prudent commitment to maintaining high credit quality, and it has been selling off some of its real estate. Meanwhile, however, sales visibility remains poor. The advent of a new CEO, although he is a Macy’s veteran, and a new CFO raised some concerns as to the continuation of the company’s conservative financial policies, but thus far deleveraging has remained a top priority for the use of cash. We expect Macy’s to be a survivor amid a steadily weakening retailing sector.


Millicom International Cellular S.A: March 20

The refinancing risk is low. The large majority of the company’s debt is at fixed or swapped interest rates, but it is mostly exposed to hard currencies. Apart from a $2.1 billion of bond debt at the holding level, the rest of the borrowing has been done in each of the operating companies, mostly in Latin America. As of December 2019, there were no principal repayments due under its international bonds until 2024 (the $800 million Comcel 6.875% bonds), leaving ample time for a refinancing until 2023. Some local bonds, bank financing and development financial loans will need to be repaid, but they represent only 3$% of total debt in 2020. Given the cash sitting on the balance sheet, there are sufficient funds to honor these short-term liabilities. The weakness has resulted in a sharp fall in Millicom’s bonds. TIGO 6% 03/2025s yield 8.7% (z-spread: 796bps), TIGO 6.625% 10/2026s 8.3% (z-spread: 750bps) and TIGO 5.125% 01/2028s 7.5% (z-spread: 663bps). These levels are extreme and represent a buying opportunity for a credit that is not exposed to the sectors and the geographies affected by the pandemic. Change to BUY.

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