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Liquidity challenges for some IG issuers

| March 13, 2020

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Recent moves by Boeing, Blackstone and Carlyle to draw on liquidity facilities highlights the pressure some companies face as coronavirus changes corporate and consumer behavior and affects revenues and costs. Other investment grade companies are likely to follow, especially in light of a sharp contraction in new bond issuance. Across the investment grade market, a number of issuers stand out as needing liquidity to meet maturities and interest expense.

Earlier this week, Boeing (BA: *-/A-*-/A-) announced it would draw all of its $13.8 billion term loan. The company is not required to take ownership of the funds unless it needs them, which gives management added flexibility about when and whether to deploy the capital. Shortly afterwards, private equity operators Blackstone Group (BX: A+/A+) and Carlyle Group (CG: BBB+/BBB+) both encouraged their portfolio companies to do likewise in order to avoid liquidity pressures over the near-term.

Other investment grade companies should follow given the spottiness of the new issue market after a nearly unprecedented run in the months preceding the recent freeze in issuance.  Since the selling began late last month, only $42 billion in debt has priced in the investment grade new issue market, which compares with more than $100 billion over that same roughly period in 2019, as well as more than $250 billion that had launched through February 19.

Only several issuers have been able to opportunistically take advantage of low rates and time the market over the past two weeks on the few days it has been functional; but only in limited quantities, and with access mostly limited to the highest quality issuers – those less likely to have immediate needs for liquidity.

In each major sector of the investment grade market, some issuers are most in need of near-term funding for maturities and interest expenses with the least liquidity currently on the balance sheet. These issuers show low liquidity coverage ratios. These issuers are more likely to tap their existing credit lines or revolving credit facilities; thereby draining their emergency back-stops for liquidity and overall credit quality.

The approach took all issuers in the Bloomberg Barclays Investment Grade Index  with liquid 5-year bonds, which fall outside of the liquidity test and therefore are more likely to be affected by a drawdown in credit facilities. For “current liquidity” we used cash and equivalents plus short-term investments and added projected cash-flows for the coming year – using the average estimated EBITDA according to Bloomberg or trailing LTM EBITDA or EBIT when unavailable. The analysis looked at the scheduled maturities plus interest expenses for the next three years (using current interest expense 1x, 2sx and 3x, respectively). Those factors led to an aggregate coverage statistic for each coming year. Some issuers fell into the low (or below) single digit area and could have a tougher time among its peer group given the current dysfunction in the new issue market. This by no means is an exact science, but at a minimum provides investors with a guideline for liquidity sources and needs across a large cross section of the IG corporate bond market.

Some of the more notable names are listed below, with the biggest sector concentrations apparent in Consumer, REITs, and Energy segments (see below for description of methodology).

  • In basic industry: DD, SCCO, WY

Exhibit 1: Liquidity coverage for issuers in basic industry

Source: Bloomberg LP; Company Filings

  • In capital goods: CAT/DE, GD, PCP, RSG; however, given high credit quality seem have more flexibility than much of the segment

Exhibit 2: Liquidity coverage for issuers in capital goods

Source: Bloomberg LP; Company Filings

  • In communications: DISCA, T, VIAC and the cell tower REITSs CCI and AMT

Exhibit 3: Liquidity coverage for issuers in communications

Source: Bloomberg LP; Company Filings

  • In consumer cyclical: Ford, HOG, HAR, MAR, ORLY

Exhibit 4: Liquidity coverage for issuers in consumer cyclicals

Source: Bloomberg LP; Company Filings

  • In consumer non-cyclicals: BATSLN, BDX, CAG, CPBCVS, DGELN, GIS, STZ, SJM and ZBH

Exhibit 5: Liquidity coverage for issuers in consumer non-cyclicals

Source: Bloomberg LP; Company Filings

  • In electric utilities: ONCRTX, PPL, PSD, DTE, and DUK

Exhibit 6: Liquidity coverage for issuers in electric utilities

Source: Bloomberg LP; Company Filings

  • In energy: KMI, ETP, SPLLLC, WMB, and MPLX

Exhibit 7: Liquidity coverage for issuers in energy

Source: Bloomberg LP; Company Filings

  • In insurance: AET, MET, AIG, KMPR; but the first two should not have difficulty accessing debt markets as needed

Exhibit 8: Liquidity coverage for issuers in insurance

Source: Bloomberg LP; Company Filings

  • In REITs: DLR, OPI, BRX, KIM, HST, ESS, CXP, SVC, VER, VTR

Exhibit 9: Liquidity coverage for issuers in REITs

Source: Bloomberg LP; Company Filings

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