CORPORATE BONDS RJ FIXED INCOME. March 21, Raymond James & Associates, Inc., member New York Stock Exchange/SIPC

Transcription

1 CORPORATE BONDS March 21, 2018 RJ FIXED INCOME 2013 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC

2 Performance vs. Other Asset Classes and How to Invest Eli Lapp Raymond James

3 Table of contents SECTION 1 SECTION 2 SECTION 3 SECTION 4 SECTION 5 Corporate returns perspective and prospective Supply: Investment-Grade and High-Yield Credit Quality Conundrum New tax ruling and interest rate impact Credit examples navigational tools

4 Source: Raymond James Bond Market Size

5 Corporates vs. Other Asset Classes Source: Citi Index

6 Source: CreditSights and Raymond James USD Fixed Income Returns

7 Y/Y Spread Action: Mind the Gap Source: Raymond James

8 The Steady March (or not) YTD 18 vs 17 $280bn vs $332bn Source: Dealogic, Raymond James

9 HY Ties to the Cycle Source: MS and indices

10 Source: MS and Indices Who Owns and Who s Buying

11 GDP vs Leverage: curious diversion Source: Bloomberg

12 Source: Bloomberg Target the Sweet Spot

13 Source: Moody s and Raymond James Is this ratings apathy, or..?

14 Declining 17 EBITDA Margins..RJ 2018 Outlook Source: Bloomberg

15 Source: Bloomberg Triple-B Leverage Trends

16 Ratings Direction..Forward or Backward Looking Source: Bloomberg

17 Spread per unit of leverage Source: Bloomberg, MS

18 Source: Raymond James Tax Change and Interest Deductibility Investment Grade Crossover High Yield status-q pre-2022 post-2022 status-q pre-2022 post-2022 status-q pre-2022 pre-2022 Revenues Op Expenses Deprec EBIT EBITDA Interest Amt. deductable (fully, 30% of EBITDA, 30% of EBIT) Taxes (from 30% to 21%) Net Income Free cash Debt Ratios EBITDA/Interest 11.8x 11.8x 11.8x 4.2x 4.5x 4.5x 1.6x 1.6x 1.6x Total debt/ebitda 2.0x 2.0x 2.0x 4.0x 4.0x 4.0x 8.0x 8.0x 8.0x Net margin 25.0% 28.2% 28.2% 19.6% 22.9% 22.9% 5.6% 2.8% 2.1% Free cash/total debt 35.0% 38.2% 38.2% 14.8% 16.5% 16.5% 3.9% 3.2% 3.0%

19 RJ Credit Paradigm (peer comparison) Management (underappreciated) Business Description (strengths/weaknesses) Credit Ratios (margins, coverage, leverages and market-based (i.e. RJ ratio and Z-Score) Competitive landscape (secular and cyclical) M&A (positive and negative event risk) Regulatory Technicals (debt and equity)

20 Ratio Matrix Median Fundamentals Leverage & Coverage AAA/AA A BBB BB B Total Debt / EBITDA Net Debt / EBITDA Total Debt to Total Capital Total Debt to Total Equity T12M EBITDA / Interest Profitability AAA/AA A BBB BB B Sales 5Yr Avg. Growth T12M Gross Margin T12M Operating Margin T12M EBITDA Margin Return on Equity Liquidity & Cash Flow AAA/AA A BBB BB B T12M FCF Margin Free Cash Flow to Total Debt Current Ratio Cash Ratio Cash Conversion Cycle Source: Raymond James, Bloomberg Efficiency & Other AAA/AA A BBB BB B Working Capital to Sales Asset Turnover Capital Expenditure to Sales Altman's Z-Score Health Grade

21 GE Relative Value December 6, 2017 Summary Recommendation/Analysis: We believe GE spreads appropriately reflect the murky outlook at several key GE divisions and long-term potential for ratings pressure if leverage does not decline and operational improvements do not ensue. Industrial peers, such as Honeywell International (HON, A2/A, S/S), Tyco Electronics (TEL, Baa1/A-, S/S) and Parker- Hannifin (PH, Baa1/A, S/N) offer a fair mosaic for establishing fair value. Given the numerous uncertainties facing GE, we maintain that the 10s/30s curve should be steeper at GE versus peers, which we believe it to be. GE s massive backlog partially offsets the outlined risks, as does the Company s new management team that seems more focused, albeit with less detail for a turnaround than we were looking for. We believe current spreads represent fair risk/reward while the outlined hurdles and uncertainties persist. We do not anticipate major operational improvement from GE in the near or medium term. In fact, we anticipate ongoing hiccups (restructurings, cash charges, etc.) as GE reconfigures its numerous businesses. Source: Raymond James

22 GE: Turning the Tanker December Fiscal E % chg y/y 2018E % chg y/y Revenues 117, , , % 107, % % chg y/y 0.2% 5.4% 1.0% -13.7% Operating expenses 87,599 94,070 96,000 82,955 Other 17,382 15,750 17,000 14,598 EBIT 10,970 12,564 11,561 10,115 Depreciation and amort. 2,473 2,597 2,800 3,025 Power 4,502 4,979 5, % 4, % Renewables % % Oil & Gas 2,427 1,392 1, % 1, % Aviation 5,507 6,115 6, % 7, % Healthcare 2,882 3,160 3, % 4, % Transportation 1,130 1,273 1, % % Energy Connections & Lighting nmf 100 nmf GECC 1,672 1,892 1, % 1, % Corporate (5,108) (4,226) (6,200) (7,500) Segment Profit 13,443 15,161 14, % 13, % Interest 1,706 2,026 2,100 2,080 Taxes 6,485 (464) 1,695 2,335 Cash & Equivalents 10,372 10,525 8,500 1,000 Short term debt 2,150 8,786 7,286 7,300 Long term debt 16,305 11,726 22,250 23,800 Total debt 18,455 20,512 29,536 31,100 Operating leases 3,774 4,584 4,500 4,200 Net debt 8,083 9,987 21,036 30,100 Cash flow from operations 19,891 (244) 7,000 6,000 CapEx 7,309 7,199 7,500 3,500 Dividends 9,295 8,806 8,700 4,162 Share buybacks 1,099 21,429 5, FCF pre buybacks 3,287 (16,249) (9,200) (1,662) FCF after buybacks 2,188 (37,678) (14,200) (2,162) Market cap 292, , , ,022 Enterprise value 300, , , ,122 Source: Raymond James Ratios EBIT Margin 9.3% 10.2% 9.3% 9.4% EBITDA Margin 11.5% 12.3% 11.5% 12.2% EBIT/Interest 6.43x 6.20x 5.51x 4.86x EBITDA/Interest 7.88x 7.48x 6.84x 6.32x Net levg 0.60x 0.66x 1.46x 2.29x Gross levg 1.37x 1.35x 2.06x 2.37x FCF/Total debt 17.8% neg neg neg FCF (after buybacks)/total debt 11.9% neg neg neg EV/EBITDA 22.33x 18.88x 12.54x 14.39x RJ ratio (EV Multiple/levg) 16.27x 13.96x 6.10x 6.08x

23 GE-Relative Value Peers Issuer Fiscal GE Honeywell Parker-Hannafin December 31, December 31, June 30, Tyco Electronics Sept. 30, E Revenues 123, ,468 39,302 40,534 12,029 13,970 13,113 13,921 % chg y/y 5.4% -2.6% 1.9% 3.1% 5.9% 16.1% 7.1% 6.2% EBIT 12,564 3,308 7,473 8,347 1,526 1,930 2,201 2,350 Depreciation and amort. 2,597 5,139 1,030 1, EBITDA 15,161 8,447 8,503 9,462 1,881 2,341 2,836 3,023 Interest 2,026 2, Taxes (benefit) (464) 3,044 1,601 5, Cash & Equivalents 10,525 8,500 9,874 10, ,109 1,218 1,250 Short term debt 8,786 7,286 3,593 3,958 1, Long term debt 11,726 22,250 12,182 12, ,350 3,634 4,000 Total debt 20,512 29,536 15,775 16,531 1,870 1,900 4,344 4,317 Net debt 9,987 21,036 5,901 5, ,126 3,067 Cash flow from operations 10,525 8,500 5,498 5,966 1,303 1,498 2,321 2,460 CapEx 7,199 7,500 1,095 1, Dividends 8,806 8,700 1,915 2, Share buybacks 21,429 5,000 2,079 2, FCF pre buybacks (5,480) (7,700) 2,488 2, ,073 1,142 FCF after buybacks (26,909) (12,700) 409 (73) Market cap 276, ,172 88, ,773 21,287 23,833 29,213 36,371 Enterprise value 286, ,208 94, ,487 22,233 24,625 32,339 39,438 Source: Raymond James Ratios EBIT Margin 10.2% 2.7% 19.0% 20.6% 12.7% 13.8% 16.8% 16.9% EBITDA Margin 12.3% 7.0% 21.6% 23.3% 15.6% 16.8% 21.6% 21.7% EBIT/Interest 6.20x 1.21x 22.11x 26.41x 9.42x 10.72x 20.01x 21.36x EBITDA/Interest 7.48x 3.08x 25.16x 29.94x 11.61x 13.01x 25.78x 27.48x Net levg 0.66x 2.49x 0.69x 0.60x 0.50x 0.34x 1.10x 1.01x Gross levg 1.35x 3.50x 1.86x 1.75x 0.99x 0.81x 1.53x 1.43x FCF/Total debt neg neg 15.8% 17.0% 37.8% 45.5% 24.7% 26.5% FCF (after buybacks)/total deb neg neg 2.6% -0.4% 19.7% 25.5% 10.6% 11.7% EV/EBITDA 18.88x 17.31x 11.06x 12.52x 11.82x 10.52x 11.40x 13.05x RJ ratio (EV Multiple/levg) 13.96x 4.95x 5.96x 7.17x 11.89x 12.96x 7.44x 9.14x

24 GE Free cash peer comparison Source: Company filings, RJ

25 VIA/DISCA-Relative value considerations Sr. Unsecured Rating Outlook Viacom Baa3/BBB- Stable/WN Discovery Comm. Baa3/BBB- Stable/Negative Fiscal September 30, Fiscal September 30, E E w/ Scripps Revenues 12,488 13,263 12,810 6,497 6,873 10,060 % chg y/y -5.9% 6.2% -3.4% 1.6% 5.8% 46.4% Cost of Goods Sold 6,684 7,436 7,180 2,363 2,617 3,810 Other op. expenses 3,072 3,084 2,980 2,094 1,790 2,585 EBIT 2,732 2,743 2,650 2,040 2,466 3,665 Depreciation & amort EBITDA 2,953 2,966 2,875 2,362 2,796 4,150 Interest Taxes (benefit) Cash 379 1,389 1, , STD LTD 11,896 11,100 10,310 7,841 14,755 17,450 Total debt 11,913 11,119 11,112 7,923 14,823 17,550 CFFO 1,850 1,671 1,550 1,380 1,629 2,411 CapEx % of revenues 1.4% 1.5% 1.4% 1.3% 2.0% 1.7% Dividends Share buybacks , Free cash pre - buyback 1,100 1,157 1,050 1,294 1,494 2,236 Free cash post buyback 1,000 1,157 1,050 (80) 891 2,236 Market cap 15,126 11,202 13,527 14,884 12,241 15,971 Enterprise value 26,660 20,932 23,539 22,507 19,755 32,721 Source: Raymond James Ratios EBIT Margin 21.9% 20.7% 20.7% 31.4% 35.9% 36.4% EBITDA Margin 23.6% 22.4% 22.4% 36.4% 40.7% 41.3% EBIT/Interest 4.44x 4.44x 4.33x 6.07x 5.34x 6.03x EBITDA/Interest 4.79x 4.80x 4.70x 7.03x 6.05x 6.83x Net levg. 3.91x 3.28x 3.48x 3.23x 2.69x 4.04x Gross levg 4.03x 3.75x 3.87x 3.35x 5.30x 4.23x Total debt/mkt Cap. 78.8% 99.3% 82.1% 53.2% 121.1% 109.9% FCF/Total debt 9.2% 10.4% 9.4% 16.3% 10.1% 12.7% (FCF less buybacks)/td 8.4% 10.4% 9.4% -1.0% 6.0% 12.7% EV/EBITDA 9.03x 7.06x 8.19x 9.53x 7.07x 7.88x (EV Multiple/Gross levg) 2.24x 1.88x 2.12x 2.84x 1.33x 1.86x

26 Source: Bloomberg DISCA/VIA - Long bond comparison

27 The Coal Conundrum-Value or Trap

28 Source: Raymond James

29 (December Fiscal) 2016 Q1'17 Q2'17 Q3'17 Q4' E Coal shipments (mm tons) Average realized prices $ $ $ $ $ $ $ Average Production Cost $ 9.00 $ 9.78 $ 9.72 $ 9.57 $ $ 9.78 $ 9.70 Owned & Operated Mines Logistics & Related Other 18.3 (6.1) (15.5) (16.8) (12.3) (50.7) Revenues % chg y/y -28.8% 8.0% 17.8% 14.6% 3.0% 10.9% 4.2% Cost of Goods Sold Other op. expenses (13.5) EBIT 68.5 (6.6) Depreciation and amort EBITDA Interest Taxes (benefit) - (0.3) (0.1) (0.1) (28.9) (29.4) - Cash & Marketable Securities Total debt CFFO (7.2) 44.5 (5.0) CapEx Share buybacks Free cash pre - buyback (11.0) 39.0 (8.9) Free cash post buyback (11.0) 39.0 (8.9) Market cap Enterprise value Ratios EBIT Margin 8.6% -3.4% 1.1% 4.4% 19.8% 0.7% 0.9% EBITDA Margin 12.0% 6.1% 9.5% 12.0% 19.2% 11.8% 10.7% EBIT/Interest 1.45x -0.51x 0.25x 1.15x 4.70x 0.14x 0.21x EBITDA/Interest 2.02x 0.93x 2.19x 3.10x 4.57x 2.53x 2.41x Gross levg 5.04x 3.87x 4.10x Secured levg. 3.03x 2.77x 2.94x FCF/Total debt 3.1% 8.6% 8.5% EV/EBITDA 7.79x 6.04x 5.22x (EV Multiple/Gross levg) 1.54x 1.56x 1.27x Source: Raymond James

30 Thermal Coal Supply/Demand Source: EIA, Bloomberg

31 China Reliance Source: EIA

32 U.S. Coal Company Market Share Source: Energy Information Administration

33 Cloud Peak Jewel or Junk Source: EIA, Raymond James

34 U.S Fuel - Market Share (2017) Source: Energy Information Administration

35 Cloud Peak (December Fiscal) 2016 Q1'17 Q2'17 Q3'17 Q4' E Coal shipments (mm tons) Average realized prices $ $ $ $ $ $ $ Average Production Cost $ 9.00 $ 9.78 $ 9.72 $ 9.57 $ $ 9.78 $ 9.70 Source: Raymond James, Company Filings Owned & Operated Mines Logistics & Related Other 18.3 (6.1) (15.5) (16.8) (12.3) (50.7) Revenues % chg y/y -28.8% 8.0% 17.8% 14.6% 3.0% 10.9% 4.2% Cost of Goods Sold Other op. expenses (13.5) EBIT 68.5 (6.6) Depreciation and amort EBITDA Interest Taxes (benefit) - (0.3) (0.1) (0.1) (28.9) (29.4) - Cash & Marketable Securities Total debt CFFO (7.2) 44.5 (5.0) CapEx Share buybacks Free cash pre - buyback (11.0) 39.0 (8.9) Free cash post buyback (11.0) 39.0 (8.9) Market cap Enterprise value Ratios EBIT Margin 8.6% -3.4% 1.1% 4.4% 19.8% 0.7% 0.9% EBITDA Margin 12.0% 6.1% 9.5% 12.0% 19.2% 11.8% 10.7% EBIT/Interest 1.45x -0.51x 0.25x 1.15x 4.70x 0.14x 0.21x EBITDA/Interest 2.02x 0.93x 2.19x 3.10x 4.57x 2.53x 2.41x Gross levg 5.04x 3.87x 4.10x Secured levg. 3.03x 2.77x 2.94x FCF/Total debt 3.1% 8.6% 8.5% EV/EBITDA 7.79x 6.04x 5.22x (EV Multiple/Gross levg) 1.54x 1.56x 1.27x