Tuesday 08 May 2018 by FIIG Research Company updates

Company updates – Avon, Dean Foods, Eric Insurance, IMF Bentham, Frontier, Macquarie, Noble, Pepper, Sprint, Virgin

This week, Moody’s downgrades Dean Foods, changes Virgin outlook, and upgrades Pepper RMBS tranches. IMF plans class action against AMP, Macquarie plans to issue a new hybrid, and Sprint Corp announces consent solicitation to buy back notes. Eric Insurance 3Q18 financial results. US issuers Avon, Frontier and Noble 1Q18 earnings

Avon 1Q18 earnings presentation

On 3 May 2018, Avon released its 1Q18 earnings presentation. Avon states that results were driven by underperformance in its top markets and while it recognises it will take time to return to revenue growth, the company expects results to improve through 2018.

Key financials:

  • Total revenue was up at USD1.39bn, compared to USD1.33bn reported in the prior corresponding period (pcp)
  • Cost of sales at USD579.7m, up from USD517.7m in pcp
  • Operating profit was up at USD44.9m, compared to USD29.8m in pcp
  • Income before income taxes was up at USD10.4m, compared to a loss of USD6.7m in pcp
  • Net loss decreased to USD21.1m from USD36.5m in pcp
  • Operating margin at 3.2%, up from 2.2% in pcp

Source: Company presentation

The Avon USD 7.875% August 2022 bond rated BB- is available at yield to worst of 7.08%pa.

Moody’s downgrades Dean Foods

On 7 May 2018, Moody’s Investors Service (Moody’s) downgraded Dean Foods Company’s (Dean Foods) corporate family rating to B2 from B1, and its probability of default rating to B2-PD from B1-PD. Moody’s also downgraded the company’s speculative grade liquidity rating to SGL-3 from SGL-2. The rating outlook is stable.

The downgrade follows Moody’s expectation of lower earnings and cashflow, and weaker liquidity in the years ahead for the company. Earnings will be lower with industry volumes declining as consumers move away from fluid milk to alternative products. The company has been losing volume at a greater rate than the industry having lost its private label milk business to competitors. Moody's estimates that Dean Foods’ free cash flow (after dividend payments) will be roughly breakeven over the next 12 months due to the decline in earnings and the cost to implement its productivity plan.

The Dean Foods USD 6.50% March 2023 bond is available at yield to worst of 6.83%pa. This bond was downgraded by Moody’s to B3, one notch lower than the corporate family rating, which is equivalent to a B- rating from S&P.

Eric Insurance 3Q18 financial results

We have provided a research update for Eric Insurance 3Q18 financial results to 31 March 2018. The full update is available on the FIIG website.

Some key points:

  • Eric Insurance reported a net loss of AUD1.3m, which was an improvement from the net loss of AUD5.4m reported in the prior corresponding period (pcp). However this lags our forecast for FY18, mainly due to higher than expected operating expenses (higher IT project related costs)
  • The gross written premium (GWP) of AUD100.7m is lower than AUD109.1m reported in pcp, mainly due a decrease in policy volumes resulting from a reduction in commission and tighter lending practices by financiers
  • The company notes that there is increased competition in the warranty insurance segment as some non regulated players are offering higher commissions to dealers

The Eric Insurance AUD 10% August 2021 callable bond is available at yield to worst of 14.00%pa. Read the Eric Insurance research compendium report*

IMF Bentham plans class action against AMP

On 30 April 2018, Reuters reported that IMF Bentham plans to fund a class action against AMP Ltd, Australia’s largest listed wealth manager. IMF states the investment involves a proposed class action by certain current and former AMP shareholders regarding alleged misconduct arising from the banking royal commission.

The IMF Bentham AUD 7.40% June 2020 bond is available at yield to worst of 3.88%pa (at a 30 June 2019 redemption date). Please contact your relationship manager for information on AMP bonds available to trade.

Frontier 1Q18 earnings presentation

On 1 May 2018, Frontier released its 1Q18 earnings presentation.

Key points:

  • Total revenue decreased to USD2.19bn from USD2.21bn quarter over quarter (qoq)
  • Reported net income of USD20m, compared to a loss of USD1.03bn qoq
  • Adjusted EBITDA at USD908m, down from USD919m qoq
  • Operating free cash flow at USD632m, down from USD662m qoq
  • USD1.6bn second lien secured notes issued
  • Total customer revenue increased to USD2.1bn, compared to USD2.03bn qoq, marking the first sequential increase in consumer revenue since 2014
  • Guidance for FY18 remains unchanged, see below


 Source: Company reports

The following Frontier USD bonds are available to trade:

  • Frontier 8.5% April 2020 bond; rated B- at YTW – 6.94%pa
  • Frontier 9.25% July 2021 bond; rated B- at YTW – 10.21%pa
  • Frontier 6.25% September 2021 bond; rated B- at YTW – 10.32%pa
  • Frontier 11.00% June 2025c bond; rated B- at YTW – 14.92%pa
  • Frontier 8.5% April 2026 bond; rated B+ at YTW – 8.43%pa

Macquarie to issue AUD600m plus hybrid securities

On 7 May 2018, The Australian Financial Review reported that Macquarie Group (Macquarie) will launch a new, AUD600m-plus hybrid securities raising as early as next Monday. It was revealed on 6 May that Macquarie has ‘lined up a big syndicate of institutional and retail brokers to sell its proposed new “Macquarie Capital Notes 3” issue to investors’.

It is expected that Macquarie will structure the deal as a hybrid security at an indicative margin of about 3.9 per cent over the bank bill swap rate. It is understood that Macquarie will sell the new notes via its own distribution network, and has tapped Citi, JPMorgan, Evans & Partners, Shaw and Partners to help manage the offer.

The Macquarie Capital GBP 6.177% April 2020 callable bond rated BB+ is available at yield to worst of 2.10%pa.

Noble Corp 1Q18 results

On 5 May 2018, Noble Corp reported its 1Q18 results.

Key points:

  • Revenue was down 19% (excluding non-recurring revenue in 4Q17) following lower rig utilisation. This was in part due to rigs coming off contracts and being relocated prior to the start of new contracts
  • Adjusted EBITDA was USD72m, compared to street estimates of USD58m, and EBITDA margins were 31% from 34% quarter over quarter (qoq)
  • Fleet utilisation was 46%, down from 58% qoq
  • Net leverage over the last 12 months increased to 8.7x in 1Q18 from 6.8x, while net leverage increased to 11.8x from 7.5x in 4Q17
  • During the quarter, the company was operating free cash flows positive by USD21m. Overall cash position decreased by USD201m as the company repaid debt maturing in 2018 and 2019
  • Net debt decreased by USD3m over the quarter
  • Average day rates for drillships was down 21% against the prior quarter, in part due to some assets earning low day rates while idle. This will continue for most of them in 2018, with a pick up in day rates expected at the end of the year

The following Noble bonds are available to trade:

  • Noble USD 7.75% January 2024 bond; rated single B at YTW of 8.86%pa
  • Noble USD 7.875% February 2026 bond; rated B+ at YTW of 7.06%pa

Moody’s upgrades 21 tranches of Pepper RMBS

On 8 May 2018, Moody’s Investors Service (Moody’s) upgraded 21 classes of Residential Mortgage Backed Securities (RMBS) issued by Pepper Money (Pepper) – the Pepper Residential Securities Trusts No. 14 to No. 19.

The upgrade has been prompted by the combined effect of:

  1. The correction to model input errors related to the yield enhancement reserve of the affected transactions An increase in the credit enhancement available to the affected notes.
  2. At the time the ratings were assigned, Moody's had incorrectly modelled the release of the yield enhancement reserve.

Ratings movements for Pepper RMBS in client holdings are summarised below:

Notes Previous Current
Pepper 14 Class F Ba3 Ba1
Pepper 18 Class B Aa1 Aaa

Please contact your relationship manager if you have any questions relating to these holdings.

Sprint and Sprint Communications announce consent solicitation

On 8 May 2018, Sprint Corp (Sprint) announced that it has commenced a consent solicitation with respect to certain proposed amendments to the indenture (the Sprint Indenture) dated 11 September 2013.

The Sprint Indenture governs the following bonds that are available to trade:

  • The 7.875% September 2023 bond; rated single B at a YTW of 5.96%pa
  • The 7.625% February 2025 bond; rated single B at a YTW of 6.42%pa

Under the Sprint Indenture, the occurrence of both a Change of Control and a Ratings Decline constitutes a "Change of Control Triggering Event" requiring Sprint to make an offer to each Sprint notes holder to repurchase each holder’s Sprint notes for 101% of the principal amount plus accrued and unpaid interest.

Sprint is offering to pay each holder who validly delivers and does not validly revoke its consent to the Sprint Proposed Amendments on or prior to expiration time, in each case on a pro rata basis with all other consenting holders, cash payments to Computershare Trust Company, N.A. (the payment agent) of the aggregate consent payments.

For the full announcement, consent payments table for the notes and expiration date, please click here for the full announcement on the Sprint website.  

For background, T-Mobile and Sprint entered into a definitive agreement to merge in a USD26.5bn all stock deal. Based on closing share prices on 27 April 2018, this represents a total implied enterprise value of approximately USD59bn for Sprint and approximately USD146bn for the combined company. Click this link for the full update.

Moody’s changes Virgin’s outlook to stable

On 30 April 2018, Moody’s Investors Service (Moody’s) changed Virgin Australia Holdings Limited’s (Virgin) outlook to stable from negative. Moody’s affirmed all ratings including:

  • Virgin’s B2 corporate family rating and B3 senior unsecured rating
  • The company’s Enhanced Equipment Notes (EEN)
  • Virgin Australia 2013-1A Trust’s Baa1 rating
  • Virgin Australia 2013-1B Trust’s Ba2 rating
  • Virgin Australia 2013-1C Trust’s B1 rating

The affirmation reflects the sizable equity cushions of about 60%, 55% and 50% on the Class A, Class B and Class C notes, respectively, and projected increases in the equity cushions in upcoming years. The outlook on the EEN ratings is changed to stable from negative.

The outlook on Virgin's rating had been negative since June 2016. Virgin’s free cash flow had not improved to a level where Moody’s believed it could maintain its B2 rating without further improvements in operating cash flow, reductions in capital expenditure, or reliance on shareholder support. Moody’s expects debt to EBITDA for fiscal 2018 and 2019 to be between 4.9x and 5.2x. While Virgin's EBITDA has been improving and is expected to continue improving, operating cash flow remains insufficient to fund capital expenditure, including for aircraft, and therefore the company remains free cash flow negative.

The following Virgin bonds are available to trade:

Please note that yield to worst is accurate as at 8 May 2018, subject to change. S&P ratings are shown.

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