World Cup Picks ‘n’ Pans

Excitement is brewing as the World Cup begins today in Russia. Here are the Kames Fixed Income team’s top 5 picks for the tournament.

World cup ranking (1)
The ultimate tournament team – serial winners and current holders of the cup, they have a knack for peaking at exactly the right time. A blend of youth and experience should see them progress but with the fitness of “sweeper-keeper” Manuel Neuer key. Germany’s credit quality is rock solid but the end of ECB QE will mean some caution is required…
World cup ranking (2)
The nation has won the most World Cup tournaments, but suffered a humiliating 7-1 defeat by Germany in the last tournament’s semi-finals. The South American side will be out for revenge. Despite positive momentum for the World Cup, the outlook for bonds is not as constructive as the country tackles strikes, a weak currency and upcoming elections.
World cup ranking (3)
The side is teeming with youthful talent but lacking that much needed experience. Despite this, a successful coach and strong team morale on the back of second place at the Euros in 2016 should see the team do well. Meanwhile, since the election of Emmanuel Macron in 2017, French debt has been very popular and has performed well.
World cup ranking (4)
Probably Lionel Messi’s last shot at the competition he has never won, but Argentina’s preparation has been chaotic, including a 6-1 loss to Spain in a warm-up friendly. Meanwhile, at home the country is also in chaos and has had to call on the IMF for support. This could work out in bonds’ favour, at least until domestic politics intervenes.
World cup ranking (5)
A fresh team of quality players (and extremely new coach) have emerged after a disastrous Euros in 2016, however we think the team are a few years early for a World Cup win. For bonds, the market is long Spanish risk and political risk is increasing again. Better quality is available elsewhere in Europe.

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Netflix has no time to chill

On this week exactly a year ago, our co-Head of Fixed Income Adrian Hull wrote about Netflix’s debut issuance (Netflix launches Billions) into the euro bond market, when it printed €1bn of 10-year maturity bonds. One year on and Netflix has just priced its first issuance of 2018, this time in US dollars. Having initially targeted raising $1.5bn through senior bond issuance, the company ended up printing almost $2bn. Pricing at 5.875% for a 10.5 year maturity, this bullet bond proved to be another successful bond issue for Netflix. So what has changed for the business in the last year?

Netflix continues to surpass expectations for subscriber and EBITDA (earnings before interest, taxes, depreciation and amortization) growth. Both US and overseas segments saw net additions to subscribers well above company expectations. On top of this, Netflix successfully passed through its planned subscription price increase without significant churn in either its US or overseas base. Last year, US profits meaningfully supported overseas expansion; one year on, international improvements are offsetting margin declines in the US market.

The proceeds for the new bond have been earmarked for ‘general corporate purposes’, which is likely to mean a significant portion will be used to fund Netflix’s anticipated $3-4bn cash flow burn in 2018. We think Netflix will have to keep tapping the debt market in the near term as it burns through its cash pile in its quest to create new content.

On that basis we’re not taking a “Daredevil” approach to this bond issue, and will instead continue to focus our efforts on finding companies with secure and stable cash flows, and of course sustainable returns for our clients.

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Valuations Sour the Green Apple

This week saw the issuance of Apple’s second green bond, a $1billion 10-year transaction to help fund its goal of running 100% of the company’s operations on renewable energy. The issue builds on $1.5billion of green bonds sold by Apple a year ago, the biggest ever green bond issued by a US corporation. Whilst Apple has plenty of cash on its balance sheet the company’s issuance has helped fuel a surge in dollar green bond issuance last year, with 2016’s supply doubling 2015’s total issuance. This year so far, around $120billion worth of green bonds have been issued by corporations.

Apple has an agenda, epitomised by CEO Tim Cook attempting to persuade Donald Trump not to leave the Paris Climate Accord. Apple is committed to making the future iPhone solely from recycled materials but currently only a small percentage of the current iPhone is made from them. Apple has identified a number of materials used in their products which can be recycled and used in new products, for example aluminium that is used in the current iPhone 6 can be melted down and used in Mac computer cases.

December 2016 also saw Apple investing in four subsidiaries of China’s largest wind turbine manufacturer, Goldwind, taking 30% stakes. They are targeting directing power from the wind turbines to Apple manufacturers based in China. The company is currently using renewable energy in 96% of their stores and factories with the goal of increasing this to 100%. Apple scores very well in the E component of our ESG scoring but controversies still lie around their supply chain management, use of child labour and hazardous chemicals usage.

For investors the new green bond was fully priced at +82bps spread over the US Treasuries curve. Initial price talk at +95-100bps would have offered investors some value at launch but final pricing left little to excite. In the basket of Apple bonds this wasn’t necessarily the one to pick and, whilst the ‘green’ label is to be applauded, for a company the size of Apple corporate responsibility is more material than the odd billion of green bonds.