Tuesday 22 May 2018 by FIIG Research Company updates

Company updates – Alumina, Calpine, Eric Insurance, JC Penney, MNK, Sprint, Virgin

Alumina upgraded by S&P, new debt sees Calpine bond price fall, Sprint increases its consent payment offer, Mallinckrodt drug invalidated by US court, and first quarter results from Calpine and JC Penney. Virgin Australia launches new AUD denominated senior unsecured debt

Alumina ratings raised by S&P

On 16 May 2018, S&P Global Ratings (S&P) raised the long term issuer credit rating and associated issue rating on Alumina Ltd (Alumina), and its senior unsecured debt to 'BBB-' from 'BB+'. The outlook on the long term rating is stable.

S&P raised the ratings to reflect the improved earnings and cash flows of Alumina's joint venture, Alcoa World Alumina and Chemicals (AWAC), as well as the stronger credit quality of AWAC's operating company, Alcoa Corp. In addition, the rating agency expects both Alumina and AWAC to maintain a low level of debt, which is key to its resilience amid volatile commodity prices. The outlook is stable, reflecting S&P’s expectation that AWAC's strong dividend distribution is sustainable and Alumina will maintain a low leverage level.

The Alumina AUD 5.5% November 2019 bond is rated BBB- is available at yield to worst of 4.25%pa, for wholesale investors only.

Calpine bonds fall 1pt after 10Q shows new debt

On 16 May 2018, Calpine Corporation’s (Calpine) unsecured bonds fell one point after the now private company filed interim results showing that it entered into a new USD300m credit facility maturing in August, and that Calpine had drawn from the facility.

On 18 May 2018, Calpine announced its 1Q18 results reflecting the improving price environment in the Northeast, ERCOT and Californian market.

Key points:

  • EBITDA came in at USD238m, against USD192m in 1Q17
  • During the quarter, Calpine incurred USD31m of costs related to the company privatisation (non-recurring)
  • Operating performance was overall stable against the per comparative period (pcp), with no major outages
  • Net loss for the quarter came in at USD594m, in part driven by a large negative mark-to-market (MtM) on electricity hedging (USD411m) and USD108m tax expense as a result of privatisation
  • Debt went up by about USD275m to USD11.7bn, due to the drawdown of the company’s revolver. Given the spike in prices in Texas, it is highly likely that the cash was used to post as collateral for electricity hedges (negative MtM movement of USD547m in that state), hence the company should gradually recoup it as hedge contracts roll off
  • Consensus for the rest of FY18 sees EBITDA averaging about USD500m per quarter, resulting in EBITDA for the year at about USD1.9m

The following Calpine bonds, both rated single B are available to wholesale investors:

  • Calpine USD 5.375% January 2023 bond; YTW – 6.06%pa
  • Calpine USD 5.75% January 2025 bond; YTW – 7.32%pa

Eric Insurance update

The Eric Insurance (Eric) bond price has declined in the last few days but we have had no new information from the company since its third quarter results issued a few weeks ago. 

We have provided an analyst update on Eric's bond price available here to wholesale investors. The research report for Eric’s 3Q18 results is available here.

JC Penney first quarter results

On 17 May 2018, JC Penney Company (JCP) released its 1Q18 earnings presentation.

Key points:

  • Adjusted EBITDA was at USD151m, down USD87m from the pcp in 1Q17
  • First quarter comparable store sales came in at positive 0.2%, although total net sales and total revenues decreased 4.3% and 4.1%, respectively from the pcp
  • USD371m asset based lending draw used to support seasonal working capital outflow as the company had USD190m cash need associated with a February bond maturity
  • The company issued USD400m in senior secured second priority notes due 2025
  • JCP currently has USD50m debt maturing in October 2019 and USD110m maturing in June 2020, with no significant unsecured debt maturities until 2036
  • Enhanced partnerships with Nike, Adidas, Champion and Puma
  • The company reiterated guidance for a flat to plus 2% comparative performance. It still expects to reach its USD200-300m free cash flow target for the year

The following JCP bonds are available to wholesale investors:

  • JCP USD 5.875% July 2023 bond; rated BB- at YTW – 4.64%pa
  • JCP USD 8.625% March 2025 bond; rated single B at YTW – 10.07%pa

Mallinckrodt sees minor setback in court of appeals

On 17 May 2018, it was reported the US Court of Appeals for the Federal Circuit upheld the Patent Trial and Appeal Board’s (PTAB) decision to invalidate the majority of a patent for Mallinckrodt’s (MNK) respiratory drug Inomax. The unfavourable decision affirmed a previous determination by the PTAB that key claims in a patent covering a method of distributing Inomax’s active ingredient, nitric oxide, were invalid as obvious. Inomax represents over 20 per cent of MNK’s revenue.

Furthermore, in September 2017, the US District Court invalidated five of Inomax’s HF patents and claimed that industrial gases company Praxair did not infringe another six patents associated with Inomax’s delivery system. MNK has appealed the District Court decision. Per MNK's 1Q earnings call, the company expects a decision on this appeal in early 2019.  It is uncertain whether the US Court of Appeals decision will factor into the appeals process at the District Court level.

The following MNK bonds all rated B+ are available to wholesale investors only:

  • MNK USD 4.875% April 2020 bond at YTW – 5.95%pa
  • MNK USD 5.75% August 2022 bond at YTW – 8.98%pa
  • MNK USD 5.625% October 2023 bond at YTW – 9.43%pa

Sprint and T-Mobile prepare capital structures ahead of merger

On 16 May 2018, Sprint and T-Mobile announced a set of Consent Solicitations, as each prepare their capital structures for the proposed merger. Sprint is seeking consents specifically on its Capital Corp bonds, while T-Mobile is looking to increase its secured leverage test on notes issued prior to 2017.

On 18 May 2018, Sprint increased its consent payment offer related to the Consent Solicitation launched earlier in the week. The decision to increase the payment appears to be in reaction to resistance from bondholders. In addition, the expiration of the Solicitation has been accelerated to 17 May at 5:00 pm (NYC time).

The following Sprint bonds rated single B are available to wholesale investors only:

  • Sprint USD 7.875% September 2023 bond; YTW – 6.16%pa
  • Sprint USD 7.625% February 2025 bond; YTW – 6.60%pa

Virgin launches new AUD denominated senior unsecured notes

On 18 May 2018, Virgin Australia launched a new, AUD150m five year non call three year, senior unsecured domestic deal. The transaction has an 8.25 per cent fixed rate coupon with the notes maturing on 30 May 2023. The notes are expected to be rated B-/B3 (S&P/Moody’s).

The following Virgin USD bonds also rated B- are available to wholesale investors only:

  • Virgin 8.5% November 2019 bond; YTW – 6.02%pa
  • Virgin 7.875% October 2021 bond; YTW – 7.03%pa

Please note yield to worst is accurate as of 22 May 2018, subject to change. S&P ratings are shown.