Connect with us

Stocks

Leveraged loan investors worry good times will soon haunt them

Published

on


From Lisa Lee and Bloomberg:

One of the safest ways to invest in junk-rated companies is starting to look pretty risky.

Money managers have grown increasingly concerned about loans to high-yield corporations over the last month as early signs of slowing global growth have emerged. Investors are starting to realize that a key safeguard that protects them, namely the collateral they can seize if a company goes under, gives them less cover than they thought.

In December these worries helped push down prices in the $1.3 trillion leveraged loan market, hitting the debt that financed some of the biggest buyouts of 2018. In the go-go credit markets of the last two years, companies won unprecedented power to sell businesses, move operations to different units, and use other tactics to move assets out of the reach of lenders before defaulting.

“Collateral is a big long-term risk,” said Chris Mawn, head of the corporate loan business at investment manager CarVal Investors. “You think you’re secured by a Cadillac, but three years from now, it turns out you’ve got a Chevy.”

The loose contract provisions that money managers have agreed to over the last two years mean that when borrowers actually do start going under en masse, creditors are likely to end up with fewer assets to liquidate, and ultimately bigger losses. Private equity-backed firms have generally been the most aggressive borrowers when it comes to pushing for the right to move around collateral.

When Blackstone Group bought out a majority stake of Thomson Reuters Corp.’s financial terminal business last year, its $6.5 billion loan offered it wide latitude to sell assets and pull cash from the company. Soon after that Bloomberg reported that the business, dubbed Refinitiv, was looking at offloading its currency trading unit, among others. These concerns along with broader market volatility helped push the bid on these loans as low as 93.375 cents on the dollar in December, from their initial sale price of 99.75 cents.

Loans sold to help finance another leveraged buyout in September for Envision Healthcare have similarly fallen, to 93.75 cents from their original 99.5 cents. Investors have grown more worried that private equity owner KKR can easily sell off a more profitable portion of the company’s business and leave lenders with the less attractive part, according to people with knowledge of the matter.

Sometimes loan investors don’t realize the extent of the rights they’ve given to a corporation and its private equity owners until assets are taken away. The contractual provisions that allow greater flexibility, known as covenants, may be spread through a lengthy lending agreement. Only careful consideration of how different lending terms interact with each other reveals what a company can do.

“There are covenants that put together can make a loan like an equity,” said Jerry Cudzil, head of credit trading at money manager TCW Group Inc., which oversaw $198 billion of assets as of Sept. 30. Equity usually has the last claim on assets when a company is liquidated, making it the riskiest kind of investment in a company.

More Risk

Weaker collateral protection is just one factor that makes loans to junk-rated companies much riskier in this cycle than they’ve been in previous downturns, and one factor spurring investors to pull money from leveraged loan funds. Companies have more debt relative to their assets than they had in the past, which means that if a failed corporation liquidates, the proceeds have to cover more liabilities.

On top of that, a higher percentage of loan collateral is intangible assets — about two thirds, up from about 60 percent in 2009, according to UBS Group AG. Those kinds of assets, like brand names, are harder to value and liquidate than tangible assets. And more borrowers have just loans and no other form of debt this time around, meaning if the company fails, there are fewer other creditors to absorb losses.

Add it all up, and Moody’s Investors Service reckons that investors will recover just 61 cents on the dollar when first-lien term loans go bad whenever the market turns, well below the historical average of 77 cents.

A key to loosening investors’ hold over collateral has been tweaking the tests that determine if a company is earning enough relative to its debt obligations, known as leverage. As long as corporations are generating enough income, managers often have the freedom to move assets around and pull money from the company, among other things. Companies have been easing the requirements for these tests, making it easier for them to clear the hurdles and keep their flexibility.

“These leverage tests are like a master key that unlocks all these flexibilities,” said Derek Gluckman, analyst at Moody’s, “and the master key is working better and easier.”

J. Crew

One of the first signs of the potential trouble ahead for loan investors came from J. Crew Group. In 2016, the preppy clothing retailer told lenders it was moving intellectual property including its brand name into a new unit that was out of the reach of creditors as part of a restructuring, a process it completed in July 2018. Litigation ensued, as angry lenders said that collateral was being taken away from them. But the company has showed signs of recovering, and its term loan now trades at 92 cents on the dollar, up from around 55 cents in November 2017.

J. Crew’s efforts seem to have inspired other private-equity owned retailers as well. PetSmart Inc. and Neiman Marcus Group Inc., for example, have shuffled online businesses into different units where lenders can’t reach them.

“If new terms get through, all the private equity firms and their counsels start to claim that the new term is becoming standard in the market and they point to the precedent,” said Justin Smith, an analyst who looks at high-yield lending agreements at Xtract Research. “There are too many lenders who don’t care enough about covenant packages or don’t pay attention.”

Reprinted with permission.


×
Subscribe to Crux



Source link

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Stocks

Charts reveal buying opportunities in some Chinese stocks

Published

on

By


The stocks of a few top-notch Chinese companies may have already bottomed as a result of the U.S.-China trade dispute and could soon be buying opportunities for investors, a top chartist tells CNBC’s Jim Cramer.

Cramer, who has been steering investors away from Chinese stocks for the better part of the dispute, said he wouldn’t blame anyone for thinking Chinese investments were too risky, especially after China announced that its economy grew at the slowest pace in nearly three decades last year.

But when he checked in with technician Dan Fitzpatrick, the founder and president of StockMarketMentor.com and Cramer’s colleague at RealMoney.com, he started to see things a little differently.

“Fitzpatrick has a really interesting thesis: He thinks the current weakness is already priced into many of the largest, highest-profile Chinese stocks,” Cramer said on Tuesday. “Looking at the charts, he believes they’ve already bottomed [and] they’re not going to take that bottom out, which means dips, like the one we had today, … should be treated as buying opportunities.”

Cramer, host of “Mad Money,” explained this phenomenon: because the stock market is “a forecasting machine,” it tries to predict what could happen six to nine months from now. So, when China released its latest economic data, it should’ve already been baked into most stock prices.

“The market will almost always peak before the economy peaks,” Cramer said. “It will almost always bottom before the economy bottoms, and that’s what Fitzpatrick’s predicting with some of the better Chinese stocks.”

First, Fitzpatrick analyzed the daily stock chart of JD.com, a Chinese e-commerce company. His take? The stock just made a “totally buyable double bottom” pattern at $20 a share, and, so far, has held above that level, Cramer said.

Fitzpatrick also noted that JD.com’s stock managed to hold above its 50-day moving average after trading above it earlier in January, which signaled to him that JD.com could be ready to rally higher.

But the most important signal is coming from the stock’s moving average convergence-divergence indicator, or MACD, which detects changes in a stock’s path before they happen. That indicator has been soaring since September, which, coupled with the stock’s relative inaction, is usually a signal that a stock has “a lot more upside,” Cramer said.

“Still, Fitzpatrick says that the stock is kind of caught in the middle of no man’s land” between its $21 floor and its $24 ceiling, where it peaked earlier this month, Cramer said. “If the stock pulls back any lower, it could stay stuck down there for a while.”

However, if the stock can break through the $24 level, and Fitzpatrick believes it can, then it could climb as high as $29, the “Mad Money” host continued. Fitzpatrick would buy in as soon as it passes the key $24 threshold.

Also on the table for Fitzpatrick was the stock of YY, a Chinese entertainment streaming platform-meets-social network. Like JD.com, its stock formed a double bottom pattern and climbed above its 50-day moving average in recent months.

“Right now, YY’s trading at $68 and change. Fitzpatrick likes it as long as it holds above the 50-day moving average” of $65, Cramer said. “Now, the stock has a ceiling at about $70, but if it can break out above that, Fitzpatrick thinks it’s smooth sailing to $85.”

All in all, while Cramer has been wary of Chinese plays, it’s always worth examining “the other side of the trade,” he told investors.

“After today’s brutal, in-part-China-driven sell-off around the world, it’s worth considering whether some of these Chinese stocks may be in better shape than you’d expect,” the “Mad Money” host said. “The charts, as interpreted by Dan Fitzpatrick, suggest that the best-of-breed China internet [stocks] like YY and JD.com may have already bottomed, although Fitz says you should wait for more of a breakout before you start buying either stock.”

“I don’t know if he’s right, and I don’t recommend buying any Chinese stocks because of the trade turmoil,” Cramer continued. “But when just about everyone’s negative on a particular group, it’s always worth giving the other side of the trade some serious consideration.”



Source link

Continue Reading

Stocks

Charts suggest lower volatility, higher stock prices ahead

Published

on

By


The market’s fear gauge is signaling that stocks will see less volatility and higher prices in the next few months, CNBC’s Jim Cramer said Tuesday after consulting with a top volatility chartist.

The fear gauge, also known as the CBOE Volatility Index or the VIX, tracks S&P 500 option prices to measure near-term expectations of volatility, or the chances that the stock market will endure dramatic swings in the near future. When the VIX rises, it tends to mean investors are growing concerned about the market and making bets to protect themselves.

But the VIX has been trading lower since it peaked in December amid a marketwide sell-off, suggesting that fears about the market are subsiding. To make sense of the action after the late-2018 fallout, Cramer asked technician Mark Sebastian, founder of OptionPit.com and resident “Mad Money” VIX expert, for his input.

Sebastian, who also works with Cramer at RealMoney.com, said that while the nature of the VIX has changed, it’s still helpful in predicting what’s next for the market. And, right now, it’s quite positive, he told the “Mad Money” host.

“Sebastian thinks it signals that this earnings season may be a bit of snoozer, with a bullish bias, as the market gradually pushes higher over the next few months,” Cramer said. “The Volatility Index may not be working exactly like it used to, [but that] doesn’t mean it’s useless, and based on the current action here, he thinks the stock market has more room to run.”

To reach this conclusion, Sebastian reviewed how the VIX acted over the course of 2018. Plotting it against the S&P 500, he noted that during the market’s breakdown in February and March, the VIX acted normally: surging when the S&P plunged, and making a lower high when the S&P dropped again, which signaled that the market had bottomed.

But in November, the VIX barely budged when the S&P got crushed, Sebastian said. Normally, that means that stocks are bottoming, but in December, the S&P collapsed again. The VIX only lifted in late December, after the S&P had fallen several hundred points, and didn’t even reach its January peak despite the fact that the entire market was selling off.

“Sebastian says the fourth-quarter decline was different from anything else we’ve seen in the last decade. Since 2008, when the stock market experienced a major sell-off, that’s always been accompanied by a huge spike in the VIX,” Cramer explained. “If you were only looking at the fear gauge, it seemed to be saying that the garden-variety sell-off at the beginning of last year was worse than the total meltdown at the end of last year.”

And, according to Sebastian’s analysis, the trading instruments that Cramer railed against in February — the ones that profit when the VIX does down — were behind the unusual action.

Specifically, securities like the VelocityShares Daily Inverse VIX Short-Term exchange-traded note, or the XIV, which imploded while the VIX stayed calm, “[represent] a sea change in how volatility is going to work going forward,” Cramer said.

“The crazy price action from a year ago left a bad taste in traders’ mouths,” he explained, adding that fewer money managers are likely to hedge their positions using VIX options after seeing 2018’s swings.

“In this new environment, hedge funds will no longer be racing to cover their short positions, which means that the VIX is probably going to signal that there’s less volatility going forward,” Cramer continued.

But that doesn’t mean that the VIX has become a less useful measure, Sebastian argued. The VIX’s tepid action in late December and early January was likely a precursor to the higher prices stocks are currently enjoying, he suggested.

So, as more money managers steer clear of risky VIX trading products and more still unwind their hedges, the fear gauge’s recent breather is signaling a peaceful few months ahead for stocks, Sebastian said.

Cramer’s take? “Even though I’m a little flummoxed that the VIX really didn’t work, I agree with Sebastian. I think we go higher.”

Questions for Cramer?
Call Cramer: 1-800-743-CNBC

Want to take a deep dive into Cramer’s world? Hit him up!
Mad Money TwitterJim Cramer TwitterFacebookInstagram

Questions, comments, suggestions for the “Mad Money” website? madcap@cnbc.com



Source link

Continue Reading

Stocks

Medtronic CEO pushes back on criticisms it has a ‘spotty record’

Published

on

By


Medtronic CEO Omar Ishrak pushed back Tuesday on a Barclays research note that said the U.S. medical device maker took a “step back” following disappointing comments on the company’s outlook from Ishrak at the 2019 J.P. Morgan Healthcare Conference.

The medical device maker has “the strongest pipeline that we’ve ever had in this company,” Ishrak told CNBC’s Jim Cramer from the 37th Annual J.P. Morgan Healthcare Conference in San Francisco, California. “We innovate, we create new markets and we disrupt our own market,” he added. “We think these are game changers for health care.”

Shares of Medtronic sold off Monday, closing down 6.5 percent to $82.45 each after Ishrak said during an investor presentation that the company could expect sales to be at the mid-point of its full-year range of 5 percent to 5.5 percent. The company is experiencing softness in its top-selling cardiac and vascular unit, which makes defibrillators, pace-makers, heart valves, and stents.

Barclays analyst Kristen Stewart late Monday cut her price target on the stock to $104 from $113 and reiterated her overweight rating. In a note to clients, Stewart said she wasn’t surprised by the sharp stock reaction and characterized Ishrak’s comments as “cautious.”

“If it isn’t one thing, it seems to be another when it comes to Medtronic,” Stewart said. “Medtronic has had a somewhat spotty record when it comes to providing guidance and has been affected by a series of one-off events over the past year and a half.”

Ishrak said the note did not accurately reflect his comments.

Medtronic’s stock is down about 4 percent over the past 12 months and down 9 percent year to date.

Wall Street analysts have had some concerns regarding questions of the safety of paclitaxel, the drug used in commercially available drug-coated devices, which Medtronic make. Medtronic has said they are working with the U.S. Food and Drug Administration on that.

Additionally, Medtronic, along with the rest of the medical device industry, could face new regulations from the FDA, which seeks to change how the device manufacturers bring their products to the market.

Advanced Medical Technology Association, or AdvaMed, the industry’s lobbying group, has pushed back against the agency.

Despite weakness in the cardiac and vascular unit, Ishrak told CNBC the company is focusing on introducing technologies such as Micra, a new kind of pacemaker that is implanted directly into a patient’s heart and is less invasive than current methods.

Ishrak also touted the company’s $1.64 billion acquisition of Israel-based Mazor Robotics, a maker of guidance systems for spine and brain surgeries.



Source link

Continue Reading

Trending

Copyright © 2017 Zox News Theme. Theme by MVP Themes, powered by WordPress.