Investor Insights

May 2019 Investor Report

Published: June 4, 2019Updated: July 9, 2019

As of this writing, the Dow Jones Industrial Average just completed its fifth consecutive week with losses (the longest losing streak since 2011). Markets continue to reflect investor anxiety over the U.S.-China trade dispute. We would be surprised if there is a resolution in the immediate future. We also do not expect meaningful consumer inflation due to the tariffs since many companies are growing their inventory levels at near record highs. With this in mind, we feel you may also want to be aware of the following economic developments.

A new survey by indicates that the average American will not be traveling at the same rate as past years past during this economic cycle. 26 percent of Americans will not be doing any summer travel, while 22 percent are still deciding whether they will, 52 percent do plan on taking time off. Out of the 26 percent of Americans not planning to travel, 60 percent said they simply could not afford it.  Among this subset, 44 percent were worried about paying day-to-day bills and 22 percent were trying to pay down existing debt. All of this points to a decrease in earnings for hospitality and leisure sectors.

The minutes from the May 1, 2019 Federal Open Market Committee (FOMC) meeting suggest that the committee anticipates a stabilization in the global economy soon which should permit the Federal Reserve to postpone changes in interest rates. We expect the FOMC to hold off on additional changes until the end of the calendar year. Lower inflation expectations should remain, with ten-year Treasury yields around 2.3 percent. While it is unlikely, it is possible that ten-year Treasury shed a few basis points off of 2 percent.

Please review the following updates from some of the existing positions that we manage:

Andeavor Logistics LP. Jr. Subordinated Bond—(CUSIP: 03350FAA4): On May 8, MPLX announced that it would merge with Andeavor Logistics (ANDX) in a unit for unit transaction. This is the next step in the evolution of Marathon Petroleum (MPC). As a reminder, Marathon Petroleum acquired Andeavor Corp. (ANDV) in October of 2018. Andeavor Logistics and MPLX are the respective Limited Partnerships of the two parent companies (ANDV and MPC). This deal strengthens our junior debt position. The pro forma financials show a much larger company with increased cash flow prospects. Guidance from rating agencies were favorable and the outlooks suggest the possibility of one- or two-tier credit upgrades. The merger is expected to close in the second half of this year. There is no change of control provision in our bond, but we are pleased to hold this position. We will continue to monitor this development because energy analysts have speculated that the parent company, Marathon Petroleum, would roll up their limited partnership (which includes us now). If this were to occur, we project another credit upgrade in addition to what will happen shortly.

Teekay Corporation Senior Notes—(CUSIP: 87900YAA1): On May 13,  one of the firm’s oldest positions was repurchased as a part of a tender offer. Although the bonds were scheduled to mature in a January of 2020, the company offered an early tender premium of five percent to redeem our bonds. This premium was too large to pass up. We tendered all of the bonds on May 2.

Icahn Enterprises Senior Bonds—(CUSIP: 909218AB5): Icahn Enterprises recently  announced their intention to raise $500mm of seven-year senior unsecured bonds. By the end of the day, the company announced they were able to raise $750mm seven-year bonds at an interest rate of 6.25 percent. We mention this raise as there is a possibility our 2020 bonds may be called since we are next on the debt ladder. Dynagas LNG Bond due October 2019—On May 20 we sold out of one of our largest and longest tenured bond positions. Observing the credit markets and recent financial events, such as competitor Teekay Corporation’s refinancing of parent senior bonds, we decided it would be prudent to close out our position. We sold at a few cents north of $96 which was near the average price that we originally paid for the LNG shipper’s bonds. We believe the company will either be taken private by the general partner or be compelled to refinance at very high rates. There is a small but material chance the general partner will decide that it is not worth additional capital and let the limited partnership go.