MTN Group Ltd.: March 11

…MTN’s new ZAR 15 billion divestment program (including the already agreed to sale of its minority stake in
Botswana’s Mascom for $300 million) will enable the company to improve its credit measures going forward.
Besides, starting from 2020, we believe that the company’s free cash flow will get closer to breakeven as
MTN’s EBITDA will increase while capital expenditure will decrease. In light of the management team’s
efforts to simplify the group and reducing the credit risk, we expect a gradual improvement in MTN’s credit
profile. Late last year, MTN agreed to pay $53 million to settle an allegation about the illegal repatriation of
funds, removing another layer of risk on the company. MTNSJ 4.755% 2024 bonds trade at 95.5, a z-spread
of 317bps and offer a yield-to-worst of 5.7%. We change our recommendation to “outperform”.

MGM Resorts: March 11

…MGM also announced a cost reduction program called MGM 2020 that should provide an additional $200
million EBITDA by 2020 and another $100 million by end of 2021. We are initiating an adjusted EBITDA
projection for the full year 2019 of $3.1 billion, an approximate 10% increase based on the continued ramp
up of Cotai and recent acquisitions. Using our projected EBITDA, we estimate free cash flow will be near
$850 million after subtracting interest expense, capex and the share dividend.
While growth in MGM’s free cash flow should be significant over the next few years, there is event risk
combined with equity-friendly financial policies. The senior notes due 2026 now trade at a y.t.w. of 5.4%.
Maintain outperform with limited upside.

Berkshire Hathaway: March 11

…As of 12/31/18, the parent had outstanding debt of $16.9 billion, down $1.9 billion relative to the year end
2017 level. Total debt for the parent, the insurance business, and Berkshire Hathaway Finance Corp. (debt
is parent-guaranteed) was about $35 billion at 12/31/18, down year-over-year from $40 billion. BHFC’s
debt is used to fund manufactured housing loans (Clayton) and leased equipment (UTLX). The railroad,
utilities and energy businesses have large needs for capital investments (projected by BRK as $10.5 billion
for 2019), and had $62.5 billion in debt outstanding at year-end. The debt of these operating businesses is
not parent-guaranteed, though assets of the subsidiaries may be pledged to support or secure these
obligations. In January, BHFC issued $1.25 billion of 30-year debt at a spread of T+140. Last week, it
reopened the issue (the 4.25% notes due 1/15/49), adding an additional $750 million at a tighter spread of
T+115. The notes ended the week a bit wider, at T+119. Our credit score remains stable given Berkshire’s
liquidity, and its long-track record of sound management. But the company’s outsized investments raise the
risk for continued earnings volatility, even as succession risk remains an issue, given the advancing age of
Messrs. Buffett and Munger. Opinion: underperform.

J.C. Penney: March 08

…Given the department store retailer’s ongoing strategic transition coupled with recent management changes, JCP provided limited fiscal 2019 guidance which did include expectations for some gross margin improvement as the year progresses, positive free cash flow as further inventory reductions should be a source of funds, and a 60-basis point difference between total and comparable store sales. Based on revised projections, we look for leverage to decrease to 6.7x (7.0x rent adjusted) in fiscal 2019 and to 5.9x (6.4x rent adjusted) in fiscal 2020 assuming the economy avoids slipping into a recession. The 5.875% senior notes due 2023 yield 9.9%. Until we see more evidence of an operating turnaround, we remain underperform.

CenturyLink: March 08

…Spreads have widened significantly over the last several months and are now intriguing. Yet our near term outlook calls for lower revenue, while margin expansion appears limited after this year. Leverage should improve, but remains high. Another dividend cut would aid bondholders, but could seriously upset yield hungry equity investors, so a cut is not likely soon. We are keeping our sell recommendation, with the 2024 issue trading at a spread of +391.

America Movil SAB de CV: March 08

…The stock price is about 26% lower than its high point reached a year ago, significantly worse than the
Mexican stock markets (-16%). Bonds issued by several domestic issuers are under pressure due to some
risk aversion linked to the country’s uncertain economic direction, but America Movil remains solid. The
AMXLMM 3.125% 2022 bonds currently yield 3.35% (z-spread: 81bps), while the longer dated AMXLMM
6.375% 2035s offer 4.4% (z-spread: 168bps). Change to OUTPERFORM.

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