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   March 6, 2015 @ 3:56 AM EST
TODAY'S REPORTS
Investment Grade
AbbVie  (with Analyst's Data Sheet) After wasting considerable time and money trying to acquire Shire, AbbVie is on the acquisition hunt again. Its $21 billion purchase of Pharmacyclics seems pricey by...
Buy American by Carol Levenson, CFA
Charles Schwab  (with Analyst's Data Sheet) Charles Schwab is not a frequent debt issuer, but the company tapped the markets earlier this week, pricing $1.0 billion in three ($625 million) and...
Liquidity Boost by Kathleen Shanley, CFA
High Yield
Pilgrim's Pride  (with Analyst's Data Sheet) Pilgrim's Pride popped into the hungry high yield market this week with a quickly shopped $500 million issue of new 10-year senior notes priced with a...
Chicken Snack by Vicki Bryan
THURSDAY'S COMMENTS (3/5/2015)
4:24pm Pilgrim's Pride As we projected back in January Pilgrim's Pride decided to tap the high yield market to...
New Financing by Vicki Bryan
As we projected back in January Pilgrim's Pride decided to tap the high yield market to refinance some of the bank debt it recently added to fund the $1.5 billion special equity dividend paid out in mid-February. Pilgrim's sold a quickly shopped $500 million issue of new 10-year senior notes, with $350 million tagged to pay off debt and $150 million left for "general corporate purposes" which we expect will be applied toward its pending $400 million acquisition of Tyson Foods' Mexico operations expected to close in the second quarter. For now this implied a modestly higher net increase in debt to $1.65 billion just to bolster seemingly already ample cash, so investors drove a better than expected deal to get the notes priced on top of price-talk at 5.75%. This advantage was quickly exploited as soon as the deal broke and the notes shot to 102 on heavy volume. While we never have been a fan of companies borrowing instead of using free cash flow to fund equity dividends, especially one this large, Pilgrim's pro forma leverage still is indicated barely over 1x strong 2014 EBITDA which jumped 67% to $1.352 billion. We also estimate Pilgrim's will generate more than $1.1 billion in free cash flow for 2015, more than sufficient to buy the Tyson business have still have nearly $700 million available to pay off debt--unless it chooses to pursue a potentially sizable, albeit likely well-bought strategic acquisition. Even then we would estimate pro forma leverage to remain in line with if not lower versus investment grade Tyson Foods at 2-3x. We rate "buy" on the new notes, still attractive near 5.5% ytw, and will have more discussion in an upcoming report.
1:26pm Newfield Exploration and Production Newfield Exploration (NFX) is looking to issue $500 million of...
New Financing by Evan Mann, CFA
Newfield Exploration (NFX) is looking to issue $500 million of senior notes due 2026. The company plans to use these proceeds along with cash on hand and revolver borrowings to redeem its $700 million of 6.875% senior subordinated notes due 2020 (callable Feb 1 at 103.438). This redemption will eliminate the remaining senior subordinated debt from NFX's capital structure, leaving the senior unsecured notes and the revolver. This pending debt issuance follows the late February secondary common stock offering that raised $815 million of net proceeds which were used to repay borrowings under the company's revolver and money market lines and boost cash on hand. We will update our projections and review our rating shortly.
1:05pm Canadian Natural Resources Limited Canadian Natural Resources reported very good fourth quarter...
Earnings by Philip C. Adams, CFA
Canadian Natural Resources reported very good fourth quarter results, capping off a strong 2014 in which production averaged a record 790,400 BOE/d, up 18% from 2013. For the quarter, CFO of C$2.37 billion funded capex (net of dispositions) of C$2.22 billion, with dividends of C$246 million resulting in a cash flow deficit of just C$98 million. For the year, CFO was approximately C$9.6 billion, versus capex of C$11.7 billion and dividends of C$955 million, for a cash flow deficit of about C$3.1 billion. (Capex includes net acquisitions of C$2.9 billion, principally the C$3.125 billion acquisition of Devon's conventional assets in western Canada, last April) also repurchased C$453 million of shares (C$49 million in Q4; the program is currently suspended). CNQ ended the year with total debt of C$14.0 billion, which was 33% of capitalization, and 1.3x LTM EBITDA. Cash was just C$25 million, but CNQ had C$2.6 billion of available liquidity, and borrowed an additional C$1.5 billion on a three-year term loan from a bank group after year-end, for total pro forma liquidity of C$4.1 billion. CNQ further tweaked 2015 capex guidance by deferring a portion of turnaround investment at the Horizon oil sands project. New capex guidance is C$6.04 billion, of which C$2.2 billion pertains to expansion of the Horizon oil sands project (for production growth beyond 2015). CFO guidance is C$6.3 billion. CNQ increased its dividend slightly, increasing the annual cash usage to C$1.0 billion. So guidance calls for a cash deficit of approximately C$740 million, with an estimated YE2015 TD/TC ratio of 35% and TD/EBITDA increasing to 2.3x. This guidance excludes potential monetization of certain royalty assets generating approximately C$186 million annually. CNQ's YE2014 proved liquids reserves were up 2% to 4.51 billion barrels, with natural gas proved reserves up 39% to 6.0 Tcf. CNQ's production expenses for crude oil and NGLs exited 2014 at C$18.69 per barrel, with natural gas production expense of C$1.30 per Mcf. Oil sands production expense averaged C$34.34 in Q4 (C$37.18 for all of 2014) and are expected to decline further in 2015, versus a Q4 sales price for Synthetic Crude Oil of C$79.23, and a Bitumen price (net of royalties and transportation) of $50.78.
11:36am AbbVie Late last night, perhaps aware of press leaks, AbbVie announced it was buying Pharmacyclics for $21...
Acquisition by Carol Levenson, CFA
Late last night, perhaps aware of press leaks, AbbVie announced it was buying Pharmacyclics for $21 billion. The prize is the company's blockbuster blood cancer drug, Imbruvica, which had sales in its first full year on the market of $730 million. Obviously eager to spend some money after its Shire deal fell apart (as we warned), AbbVie participated in a "very competitive" auction of Pharmacyclics, and ended up paying a 39% premium to the unaffected share price. The fixed price agreement allows shareholders to choose cash or equity subject to proration, but AbbVie estimates the cash portion will be 58% of the purchase price. Hidden in the fine print (i.e., not in the press release) is AbbVie's intention to repurchase at least half of the stock it issues for the deal. You can guess that the credit quality implications are fairly severe, as the company did not mention debt, leverage, or a ratings target in its presentation, and nobody asked. We estimate the acquisition plus the accelerated share repurchase will add some $16 billion in debt, tripling the company's pro forma leverage to more than 3x (most of its cash is held abroad and not readily accessible), and any material debt reduction from free cash flow is unlikely. No synergies, no tax advantage. Management's low bar of remaining "investment grade" is going to be tested, if not with this acquisition then with the next one. We reiterate our "deteriorating" credit score and our "underperform" on the bonds (2022 notes at T+94). We will have more in an upcoming full report.
THURSDAY'S REPORTS (3/5/2015)
Investment Grade
Orange SA  (with Analyst's Data Sheet) After suggesting that a combination with Telecom Italia could be a great opportunity for European consolidation, Orange CEO Stephane Richard subsequently...
Inevitable Consolidation? by Dave Novosel, CFA
Best Buy  (with Analyst's Data Sheet) Under pressure from shareholders to distribute some of its cash, Best Buy announced a new "capital return to shareholders" plan as well as improved fiscal fourth...
Not Too Much But Too Soon by Carol Levenson, CFA
High Yield
J.C. Penney  (with Analyst's Data Sheet) J.C. Penney's (JCP) fiscal 2014 fourth quarter adjusted EBITDA was a little short of consensus expectations as stronger same store sales were offset by less...
Muted Outlook by Evan Mann, CFA
Chesapeake 3/4 
Ensco 2/26 
Martin Marietta Materials 2/10 
Wendy's 2/5 
ConocoPhillips 2/5 
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Every report is one page, and concludes with an actionable investment recommendation.
Mar 4, 2015 | Financial Post
VB on Valeant Pharmaceuticals International Inc faces high execution risk Q - "With Salix and Dendreon in the hopper, Valeant could be facing its highest and most difficult execution risks ever."
Mar 2, 2015 | Bloomberg
CL on Actavis Cuts Cost on $21 Billion Bond Deal With Buyers Swarming Q - "Actavis is a relatively high-yielding name in a relatively stable industry that probably will be highly liquid."
Mar 2, 2015 | DBR High Yield Weekly
KN on New Pet Owner Q - PetSmart report featured
Mar 2, 2015 | The Street
VB on American Air Shares Decline Despite Credit Rating Upgrade Q - "Cash and liquidity is restored to a more comfortable range with little noticeable impact to our projected yearend leverage of 2x - a nice improvement versus 3.8x at the end of 2014."
Feb 26, 2015 | Reuters
EM on With cash tight, Sears REIT deal takes on new importance Q - "A billion dollars probably isn't going to be enough for the year. My assumption is they are going to keep burning the furniture to keep the store open."
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