Ryman Hospitality Properties: November 29

 …Ryman operates in two segments: both the larger Hospitality segment (90% of cash flow) and the smaller Entertainment segment (Grand Ole Opry and Ole Red entertainment venues) have been hurt by virus concerns and restrictions over the last two years. However, management underscored its view that the economy is returning to normal by recently purchasing Block 21, a mixed-use entertainment, lodging, office and retail complex located in downtown Austin, TX. The purchase price of Block 21 was $260 million, including the assumption of $138 million existing mortgage debt and $11 million cash. The deal is funded by cash on hand plus the revolving credit and represents an expensive 15x multiple of 2019 adjusted EBITDA (about 12x expected 2023 normalized EBITDA post-COVID). The acquisition provides the Entertainment segment with increased diversification and scale with an opportunity to cross market brands and enhance margins through shared services. Third quarter comparisons were not very useful since both the lodging segment and entertainment venues were closed in the prior year period. However, overall revenue exhibited a big comeback at $307 million. The company generated operating income of $26 million versus negative $103 million in the prior year period; adjusted EBITDA showed similar improvement to $86 million versus negative $35 million. The long-term strength of the group business was evidenced by the continuing sequential improvement and organic room night production that has surpassed rebooking activity for several months. Year to date 2021 ITYFTY (in the year for the year) volumes declined from the June peak but remain above 2019 levels despite the impact of COVID-19 and its variants. The Entertainment segment third quarter results also continued to reflect pent-up demand for live entertainment and in-person gatherings. Revenue increased to $49 million and operating income recovered to $12 million after a $9 million loss in last year’s quarter. Adjusted EBITDA experienced a $20 million positive swing to $14 million. We calculate adjusted EBITDA on an LTM basis of $80 million resulting in low interest coverage and double-digit leverage. Despite the likelihood of a stronger second half, we find our earlier projections a bit optimistic and are adjusting them downward. Our new adjusted EBITDA estimate results in very high leverage at year end in excess of 15x. Nevertheless, Ryman’s liquidity remains adequate but could become strained without an extension of the Gaylord debt due in 2023. While Ryman’s recovery may be delayed by new COVID variants, we expect Ryman’s financial results to continue to improve over the intermediate return. We last rated the bonds due in 2027 underperform and prices are lower at 4.8% y.t.w. We maintain underperform but downside limited.

Centene Corporation: November 24

In July, Centene issued $1.8 billion of 2.45% senior notes due 2028, with proceeds slated to cover the majority of the funding for the Magellan transaction. In August, it came back to the bond market, issuing another $1.8 billion, including $1.3 billion in new 2.625% senior notes due 2031, plus a $500 million add-on to the 2.45% senior notes. The second offering had a neutral impact on leverage, because proceeds (along with cash on hand and borrowings on a term loan facility) were used to redeem $2.6 billion of 5.375% notes due 2026. The company recorded a pretax loss on extinguishment of $79 million in the third quarter but will incur lower interest expense going forward. In conjunction with the financing transaction, the company negotiated more favorable terms on its credit agreement and term loan credit facility, including an increase in the amount to $2.2 billion, up from $1.45 billion, and an increase in the maximum total net leverage ratio allowed under the debt/EBITDA covenant to 4.0x, up from 3.5x. Debt/EBITDA levels were temporarily elevated as of September 30, reflecting the addition of the Magellan funding. Centene says it is targeting an investment grade rating, but it also remains focused on M&A and share buybacks. (It is already weak triple ‘B’ at S&P, but only strong double ‘B’ at Moody’s.) There is currently a $1.0 billion buyback program. Given its pending acquisition, Centene was not active in buying back stock in the first nine months of this year, but last year it used proceeds from divestitures to fund $500 million in buybacks. In conjunction with its initial response to Politan earlier this month, Centene said it had signed an agreement to sell a majority stake in U.S. Medical Management, a provider of in-home health services. (Centene paid $200 million for the business in 2014.) It intends to use proceeds from the sale to buy back stock, which it called “a first step towards a material share repurchase program.” Centene’s Medicaid business, which accounts for about two-thirds of total revenues, is both a credit strength and a potential weakness. The business is subject to regulatory risk and has relatively low margins. Year-to-date results include a $1.25 billion reserve, covering settlements with various states in cases involving allegations of breaches of contract relating to PBM services provided under Medicaid contracts. If Centene fails to make progress in achieving its margin improvement goals (and if activist investors remain involved), it may be pressured to favor a more aggressive buyback policy over ratings upgrade goals. The 2.625% notes due 8/01/31 are seen at T+141. Opinion: sell.

United States Steel: November 24

X ended the third quarter with $4.5 billion of liquidity and no significant debt maturities until 2029. For the nine months, free cash flow (cash flow from operations less capital spending) swung $2.9 billion to $2.1 billion on higher earnings before a $790 million stock issuance earlier in the year and $27 million of net acquisitions/dispositions. Year to date, total debt was reduced by $554 million to $4.3 billion. During the third quarter, the company redeemed $718 million of its 6.875% senior notes due 2025, $370 million of its 6.25% senior notes due 2026, and $180 million of Big River’s 6.625% senior secured notes due 2029. The company expects fourth quarter adjusted EBITDA to be near the third quarter level as the flow through of higher average pricing offsets lower production from planned outages and anticipates another strong free cash flow performance, ending 2021 with $5 billion of liquidity and total debt of $3.9 billion, implying an incremental $400 million of debt reduction in the fourth quarter. X considers total debt of below $4 billion a sustainable level, leaving room to raise capital spending to support growth projects and return funds to shareholders. Based on our updated projections we look for X’s leverage to decrease to 0.7x (0.2x net) at year end. Looking to 2022, X believes its Flat-rolled average selling price will be higher than in 2021, helped in part by a pick-up in shipments to automotive customers as semiconductor chip shortage issues recede (fourth and first quarter automotive build schedules are increasing). Capital spending in 2021 will be higher at an expected $2.3 billion reflecting investment in the new mini mill and finishing lines at Big River to enhance margins through expanding higher-value capabilities, still leaving room to return more funds to shareholders as its pension and OPEB plans are fully funded, and year-end total debt is expected to be at its targeted “sustainable” level. The 6.875% senior notes due 2029 yield 4.7%. Maintain outperform with limited upside.

Turkiye Sise ve Cam Fabrikalari A.S.: November 24

…Cash and equivalents at the end of September reached TRY 15.7 billion, including TRY 3.4 billion of marketable securities. 87% of this cash balance was held in hard currencies and Sisecam held a comfortable net long foreign exchange position of $1 billion in 3Q21. Net leverage decreased quarter-on-quarter from 1.0x to 0.8x. When deducting the market value of the TRY 3.4 billion portfolio of marketable securities from net debt, net leverage was at a very comfortable level of 0.35x (down from 0.65x in 2Q21). The company previously aimed at maintaining this adjusted net leverage ratio below 1.25x through the cycle but the company announced earlier this week, a new investment program that should lead to an increase in net leverage towards a peak of 2x in 2024. Sisecam wants to become one of the world’s largest soda ash producers. To achieve that, the company announced two separate transactions for a total consideration of $450 million. The first one is the acquisition of a 60% stake in Ciner Resources (total capacity of 2.5mt of natural soda) from Ciner Group for $300 million. It also announced the acquisition of a 60% stake in the Atlantic natural soda project and the increase of its stake from 50% to 60% in the Pacific natural soda project for $150 million. In total, Sisecam and Ciner Group plan to jointly invest $4 billion in the US soda ash market via their joint venture (60% owned by Sisecam). Judging from Sisecam’s projections, soda ash could become the dominant EBITDA contributor for the company before glass products. Once all the sites to be fully operational in 2027-2028, Sisecam expects to generate ~$1 to 1.2 billion of EBITDA in the U.S. (vs almost nil currently). The correction seen on SISETI 2026 bonds this week was actually rather limited. Its bond price decreased from 109 last week to 107 now. In other words, we do not see this price move as a reason to aggressively buy these bonds now. They now trade at a price of 107, a z-spread of 396bps and offer a yield-to-worst of 5%. SISETI bonds are valued by the market at a premium to state-issued debt (TURKEY 4.75% 2026s trade with a z-spread of 494bps). In light of the company’s more aggressive strategy (new investment program) and the uncertain and instable political and macro environment in Turkey, we become more cautious on SISETI bonds. We change our rating from “outperform” to “underperform”.

Lear: November 22

…Third quarter sales declined 13% to $4.3 billion. By segment, sales were down 14% for Seating to $3.2 billion and 9% for E-Systems to $1.1 billion, both driven by lower production partly offset by a strong new business backlog. Segment adjusted margin contracted 330 basis points for Seating and 560 basis points for E-Systems mostly from lower volume and higher commodity costs with core operating income dropping 50% to $144 million and 75% to $23 million, respectively. Reflecting the decreases in sales and margin, third quarter adjusted EBITDA fell 49% to $239 million. LTM adjusted EBITDA of $1.6 billion (up $410 million for the nine months) covered interest 17.6x and leverage was 1.5x, improvement from 11.6x and 2.0x, respectively, in 2020. LEA ended the third quarter with $2.85 billion of liquidity. For the nine months, free cash flow (cash flow from operations less capital spending) swung $121 million to $98 million as higher earnings more than offset increased capital spending and working capital usage. After $61 million of dividends and $99 million of share repurchases, this free cash flow turned into a shortfall of $62 million. In late October, the company increased the size of its revolver by $250 million to $2.0 billion and extended the maturity two years to 2026. In early November, LEA issued $350 million of 2.6% senior notes due 2032 and $350 million of 3.55% senior notes due 2052 with net proceeds used to repay a $206 million term loan maturing in 2022 and to tender for up to $200 million of its 3.8% senior notes due 2027. Reflecting ongoing supply disruptions, reductions in production schedules, and moderately higher commodity costs, LEA lowered its 2021 guidance, expecting global vehicle production to be in line with 2020 (down from 6% growth initially). Sales are expected to be $18.8-19.2 billion (down by $900 million to $1.3 billion) and operating income should be $750-850 million (down by $170-260 million). Free cash flow was lowered to $175 million from $350-500 million on lower earnings and higher working capital usage. Despite these reductions, these projections represent a sales performance of eight percentage points above the market. Based on updated projections, we look for 2021 leverage to improve 1.7x, but up from 1.5x for the LTM. Medium term positive drivers are strong customer demand and low dealer inventories, boding well for a performance recovery once near-term supply constraint issues are navigated. The 5.25% senior notes due 2049 yield 3.8%. Reaffirm underperform with limited downside.

Celulosa Arauco y Constitucion SA: November 22

…Arauco reported a free cash flow of $178 million in 3Q. In light of this strong quarterly performance and the aforementioned sale of forestry assets, the company paid $200 million of dividends in October and $271 million in November. Besides, during October, the company redeemed in full its 4.75% USD-denominated notes due 2022 from cash. The company’s net leverage decreased from 3x in 2Q to 2.1x in 3Q21. This is a strong improvement compared to the net leverage of approximately 6x seen in mid-2020. With regards to the MAPA project, Arauco now expects to start operating the plant during March 2022 (vs previous plan for a startup in 4Q21) due to delays in construction, primarily on Covid-related issues. With approximately $200 million of planned remaining capex on this project scheduled in 2022, the pressure on free cash flow will ease. The company is contemplating the construction of a new MDF production line in Mexico, with a total investment cost of $200 million throughout 2024. Chile’s government bonds have been trading in a range of 100-130bps over last six months. Chileans headed to the polls Sunday to elect their new president. The election is likely headed for a runoff between conservative Jose Antonio Kast and leftist Gabriel Boric, the two front-runners in opinion surveys. Mr. Kast wants to double down on the free-market system by slashing taxes and public spending, while Mr. Boric envisions a bigger state and higher corporate levies such as mining royalties. Still, these presidential elections do not seem to be a major concern for Chilean corporates, and discussions regarding mining royalties or new tax rates are expected to have digestible outcomes.  Arauco continued to substantially de-risk its balance sheet with another substantial quarterly decrease in leverage ratios while the construction of its MAPA pulp project is coming to an end. Going forward, we expect the company’s net leverage to remain close to 2x by the end of FY22. CELARA 4.2% 2030 notes trade at 107, a z-spread of 193bps (up c. 20bps since we last wrote on the company in September 2021) and offer a yield-to-worst of 3.2%. This is in line with CMPC’s 3.85% 2030 notes. When compared to underlying sovereigns, their spread is 70bps wider than CHILE Jan-2031 bonds. We keep our “outperform” rating.

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