Cardinal Health: February 11
…As we anticipated, the rating agencies have taken modest negative actions in response to the global framework announced in October to settle all the public opioid litigation. Negotiations continue to finalize the terms (the next trial is set for November), and Cardinal is alone among the three distributors to take a charge for the full cash portion ($5.6 billion). The lead attorneys general (AG) estimate another $930 million in value for distribution and monitoring services, but Cardinal feels this is not yet estimable and has not accrued for it. We believe Cardinal has been the most prudent of the distributors in accruing its entire cash liability immediately. Its commitment is manageable (cash payments spread out over eighteen years and distribution and monitoring services over ten years). Adding the net present value of the cash component to Cardinal’s debt only increases projected leverage by about half a “turn” to 3x. The absence of any news on the AG negotiations since October is frustrating. We reiterate our “outperform” (2027 notes at T+104).
Red Rock Resort: February 11
…Lackluster results didn’t hurt Red Rock’s recent refinancing efforts. It just closed on a new high yield issue of $750 million (upsized) of 4.5% senior notes due in 2028 with proceeds to be used for repayment of senior secured bank debt and general corporate purposes. The company also amended its credit facilities at attractive interest rates—the revolver and Term loan A mature in 2025 and Term loan B matures in 2027. Underlying asset value in Las Vegas likely will support bond prices, and the 2025 unsecured notes are short maturity. But at a y.t.w. of just 3.8%, upside is limited.We are lowering our rating to underperform.
Arcelor Mittal: February 11
…Based on our updated projections, we look for 2020 leverage to decrease slightly to 2.5x on mostly flat adjusted EBITDA, but healthy free cash flow. The 4.55% senior notes due 2026 yield 3.0%. We are encouraged that debt reduction remains the company’s top priority. Reaffirm outperform with limited upside.
Brazilian Meat Producers: Sales To China: February 11
…The coronavirus has put China, home to 1.4 billion people, on standby. Apart from Hubei Province, where the outbreak first started and which is counting the most fatalities, other parts of the country are under siege. Pictures of empty trains at rush hour in Beijing are giving a glimpse into the reality on the ground. Human contact is to be avoided to reduce the spread of the virus. For Brazilian meat producers exporting to Chinese markets, sales are at risk, as consumption drops. The imports of meat into China have grown tremendously over the last five years, making it a top market for most of them. The credit profile of the four companies we cover has seen a very strong improvement, as sales of meat to Asian markets have been very strong, due to structural factors (consumer taste and population growth), the outbreak of the Swine Fever that has impacted the pork herd, thus boosting demand for imports. Although the current disruption may be more impactful, the recent improvement in performance has resulted in a reduced leverage, good cash levels and a lower refinancing risk, which will limit the deterioration of the credit ratios.
Sprint Corporation: February 11
…The prices on Sprint’s bonds surged yesterday. However, they are still not trading in line with T-Mobile bonds. The spread may stem from the fact that the California Public Utility Commission still needs to approve the deal. We’re not claiming it is obstructionist, but let’s just say it wants to be heard. In addition, since the merger agreement has expired, Sprint and T-Mobile could attempt to renegotiate some terms. The New York attorney general is considering an appeal. We think the transaction will eventually be blessed by the commission, and both management teams have tremendous incentive to finalize the agreement as soon as possible. Therefore, although prices have soared already, we think there may be some upside left until the deal officially closes. Management indicated that it hopes to close the merger by April 1st. We repeat our buy recommendation, with the 2024 issue trading at a price of 114.15, a yield of 3.57%, and a spread of +219.
Discover Financial Services: February 10
…The CET1 ratio was 11.2% at 12/31/19, up slightly from 11.1% at the end of 2018. Consumer deposits now make up 55% of the funding base, up from 47% a year ago. The company returned $521 million to shareholders in the fourth quarter, including dividends and $401 million in share buybacks. The payout ratio was 77% over the last twelve months. The company has a target CET1 ratio of 10.5%, which would imply potentially higher payouts over the coming year, but this will depend on how regulators factor the implementation of CECL into their review of capital plans. The change in accounting for loan losses does not impact cash flows, and Discover will be able to phase in the impact on capital ratios over time (25% per year through 2023.) But since the new standard will also affect provisioning going forward, we expect that Discover will continue to manage its capital levels prudently. Last week, Discover Bank sold $500 million of 2.7% senior unsecured notes due 2/06/30 at a spread of T+120. We maintain a buy opinion.