EFTA00821594.pdf

From: leffrey E. <jeevacation®gmail.com> To: "Ens, Amanda" •;: > Subject: Re: Preferreds, thoughts on fixed income, mandatory converts Date: Mon. OR Aug 2016 20:39:37 +0000 Inline-Images: image015.jpg: image017.jpg: image010.jpg; image016.jpg: imagc0l8.jpg; imagc011.)pg; image019.jpg: image014.jpg: image020.jpg: image005.png: image021.gif can we put leverage on them, if so what rate On Mon. Aug 8, 2016 at 4:30 PM, Ens, Amanda - wrote: AGN mandatory convert preferred Ticker: AGN A Nd Coupon: 5.5% Maturity: 3/1/2018 Nd Price: 881.38 AGN stock ref: 248.31 Convert low stoke: 288.00 (at maturity, if AGN is at or below 288, you get 3.4722 shares) Convert high strike: 352.80 (at maturity, if AGN is at or above 352.7959, you get 2.8345 shares) Strip weld: 6.3% (versus common stock which pays no dividend) BofAML price target: $294 (Buy, US-1top picks list) Upside to BofAML price target: 18.4% If hold pref to maturity and stock is up 25%: 24.4% If hold pref to maturity and stock is down 25%: -15.7% QDI-eligible: No Amount outstanding: $5.06 bn TEVA mandatory convert preferred Ticker: TEVVF Nd Coupon: 7.0% Maturity: 12/15/2018 Nd Price: 895.07 TEVA stock ref: 54.21 Convert low strike: 62.50 Convert high strike: 75.00 Strip weld: 7.9% (vs common stock at 2.5%div yield) BofAML price target: $72.00 (Buy) Upside to BofAML price target: 32.8% If hold pref to maturity and stock is up 25%: 31.3% If hold pref to maturity and stock is down 25%: -7.8% QCH-eligible: No Amount outstanding: $3.7125 bn Assumes convert held to matunty; oil coupons included EFTA00821594 Source: Bloomberg Amanda Ens Director Bank of America Merrill Lynch Merrill Lynch, Pierce, Fenner & Smith Incorporated One Bryant Park, Sth Floor, New York, NY 10036 Phone: The power of Mahal connections' ;)id:image001.png@01D1B4D 2.34B2F410 From: jeffrey E. [mailto:jPeyacationghgmatISQM) Sent Monday, August 08, 2016 4:14 PM To: Ens, Amanda Subject Re: Preferreds, thoughts on fixed income, mandatory converts send more detail of the bond On Mon. Aug 8.2016 at 2:26 PM. Ens. Amanda wrote: Jeffrey. I continue to like the AGN. TINA and FTR mandatory convert preferreds. While AGN missed on sales today. is was mostly due to noise around the last minute divestiture of their ANDA distribution business to TEVA. While the generics sale to TEVA was already built into most analyst models. the ANDA sale was not. Revenue this looks in line. 13otox and Restasis. two important products. are still growing at 16% and 21% respectively. AGN has an aggressive buyback program. targeting $5bn this year and they should reach the lull SI0N-, approved by next year. market conditions permitting. Their pipeline looks strong; execution will be key going forward. There has been chatter in the market about them potentially doing a big deal such as 13118 but management said on the call that they're focused on being selectivedisciplined and will likely target smaller stepping stone opportunities. Outside of buybacks. the company has about S20bn of dry powder to invest for growth over the next 12-18 months. which could come in the form of acquisitions andfor debt repayment. Long story short: would look to build a position through the AGN A mandatory convert preferred at a 6.3% current yield to March 2018. Let me know if you have time for a call: I'm at Thanks. Amanda Amanda Ens Director Bank of America Merrill Lynch Merrill Lynch. Pierce. Fenner & Smith Incorporated One Bryant Park. 5th Floor. New York. NY 10036 Phone: Mobile: EFTA00821595 The power of global connections" • id:intage001.png€01DI 84D2.34B2F410 From: Ens, Amanda Sent Thursday, August 04, 2016 6:30 PM To: Yeeracationfigrrsicod Cc Richard Kahn' Subject Preferreds, thoughts on fixed income, mandatory converts Jeffrey. Rich mentioned you're interested in potentially buying preferreds. While they still pay a decent yield, I wanted to share some thoughts about why 1 would look at the more equity-like mandatory convertible preferred market instead. I've outlined a few points about fixed income, with some specific mandatory convert details further down. Would love to discuss in more detail at your convenience. Is fixed income the next "accident" waiting to happen in markets? • Japanese buying of US corporate credit is slowing • Supply is increasing • Investors arc trafficking as "tourists" in bond markets that they don't usually buy - unwind could be painful • Risk parity quant funds might need to rebalance if the correlation between bonds and equities turns higher • High yield keeps climbing despite falling oil prices • Poor liquidity in a crowded trade (Volcker Mc and other structural changes) The Japanese had been huge incremental buyers of US corporate credit this year but last week's data shows this fell buying has fallen towards zero. This is happening in a market where supply is increasing. Charts below I attended some buyside meetings this week with our cross-asset and credit strategy teams and what really stood out to me was the relative acceptance of the continued theme of "tourism" in various credit markets ranging from US corporates to EM to European subordinated bank bonds to prefenrds. With the incessant hunt for yield, there was even the joke that the yield craze has approached Pokemon-like levels. While the music could play on for a while, it seems that the risk-reward is more favorable at this point for US equities vs. fixed income. Equities arc under-owned: institutions have net sold equities this year if you exclude buybacks. cash levels are at 15 year highs. investors have been buying protection but not much upside. Bonds don't seem to be pricing in sufficient risk premium, especially at the long end. We've been closely following quant fund positioning, leverage levels and potential for forced selling in the future. With risk parity fund leverage high and bond-equity correlation moving from negative to --zero now, the potential for rebalancing is on our radar. Risk parity portfolios own more bonds than equities (due to the lower bond vol), so there is more notional size of bonds to sell to rebalance, making US equities potentially less dangerous than the bond market. A few more details about risk parity funds are in the attached report (pages 9-11: Alagef impact of quant fiends: Separatingfactfrom fiction) and in the Risk Parity Risky in Fixed Income writeup further down. Japanese buying of foreign bonds FELL again toward zem as of July 29 (vs LQD in yellow). EFTA00821596 g)id:iniagc005.jpg®0IDIEE78.B98D33A0 gid:inizigc003.jpg®0IDIEE78.C95838E0 id:inizigc006jpg®0IDIEE783398D33A0 Mandatory Convertible Preferreds As investors continue to search and stretch for yield, mandatory convertible preferreds stand out to me as an attractive yet often overlooked opportunity. In case you're not familiar with them, they are generally short-dated, pay a high dividend and mandatorily convert Into common stock at maturity. Due to the mandatory conversion, they lack a bond floor and are equity-like with yield enhancement. You're "paid to welts while the underlying company's fundamental story develops, so they are attractive for names where we like the company's longer term prospects but are only neutral to slightly bullish in the near term. The yield, along with the conversion ratio sliding scale, can result in an attractively skewed upside vs downside profile for holding the mandatory convert vs the common stock. Allergen, Teva and Frontier Communications are three names we have high conviction on and they have mandatory convert preferreds that I recommend buying. Allergen (AGN) - BAML reaffirming BUY on AGN after the FTC approval of generics sale to Teva. We like AGN due to its healthy product mix, solid pipeline and flexibility to deploy capital to drive shareholder return. Next catalyst will be 2Q earnings/2/116 Outlook on 8/8. AGN is on our firm's US-1list of best investment ideas. Teva Pharma (TEVA) - BAML reiterating BUY on TEVA after the FTC's approval of AGN generics deal. We continue to like TEVA's positioning In generic pharma where scale and product diversity are increasingly important. TEVA remains one of our top picks in Spec Pharma. rontler Comm (FIR) - BAML reaffirming BUY after Frontier reported its first post-Verizon assets merger results. Fifes earnings miss was due to a decline in the legacy business but FIR is targeting ncreased deal synergies that should offset the decline in legacy business. We like FTR with Its 8.6% dividend yield and estimated 56% dividend payout ratio in 2017. We continue to think the market Is mlspridng Fut. Yield BAML BAML Stock Stock Up Stock Down Stock PM Low High Current Advantage Ranking Price Tgt Upside to 25%: Pfd 25•A: Pfd Notional Name Ref Level Strike Strike Yield over Stock (Stock) (Stock) Price Tin Return Return Outstanding AGN (AGNprA) 5.5% 3/1/18 a 252.95 893.45 288.00 352.80 6.2% 6.2% 1 - Buy S 294.00 16.2% 22.7% -15.5% 45.06bn Ili VA (TEVVF) 7% S 12/15/2018 53.50 886.08 6150 75.00 7.9% 5.4% 1 - Buy 72.00 34.6% 32.6% -7.8% 53.7125bn EFTA00821597  I FTR (FTRPR) 11.125% S 6/29/18 4.85 93.85 5.00 5.87 11.9% I 3.2% I 1 - Buy 7.50 54.6% 33.6% I 1.2•4, I 51.9251al Source: Bloomberg, BAWIt. Up/down return vs underlying stock price 4125% assumes peele ed is held to maturity From Aug 2: Risk Purity Risks in (S Fixed Income le:10d:38917479 Today% simultaneous weakness in the US bond long end and weakness in US equities is unusual of late and tells us there is implications for risk parity portfolios. We expect a 165k change in Non•Farm Payrolls on Friday but a strong number sets up for some left hand tail nsk in US Fixed Income. Risk parity portfolios own more bonds than equities (due to the lower bond vol), so there is more notional size of bonds to sell to rebalance making US equities less dangerous than the bond market. March 2017 ATM LQD vol is around 7.5% so a 100% Put costs —3.2% which given the long term chart below and all time high in shares outstanding looks cheap. Chart One shows hourly data of IEF (7.10y US Treasury ETF) and SPY (S&P500 ETF). Using 60 hourly data points, correlation has moved from around -80% a month ago to zero now. This means the volatility/leverage of risk panty portfolios is increasing and rebalancing is more likely to be required. This is happening while the US yield curve is steepening with Investment Grade Supply increasing. Yesterday, $23.4b of new investment grade credit priced, the highest daily volume in dose to 3 months. As supply of duration has been increasing a few other topical IG issues are: On July 28 Apple issued — $7 billion On August 1, Microsoft issued —$20 billion Today, Alphabet — $ 2 billion Chart Two shows Investment Grade ETF, LQD, is at the top of a long term range with shares outstanding around an all time high. Hans Mikkelsen noted on Friday in "Credit Market qtrategist" with Japanese inflows into IG market already at max strength there are mostly downside risks to US credit spreads associated with developments in Japan. Chart three is from "Global Fquity Volatilityjagglite from lune 28 and suggests risk parity fund leverage is high and we do not think the relationships have changed significantly. Chart One shows hourly data of IEF (7-10y US Treasury ETF) and SPY (S&PS00 ETF). Using 60 hourly data points, correlation has moved from around -80% a month ago to zero now. This means the volatility of risk parity portfolios are increasing and rebalandng is required. [..:`,ad:98338928 EFTA00821598 Chart Two: Investment Grade ETF, LQD, is at the top of a long term channel with shares outstanding around an all time high. [email protected] Chart three is from "Global Fquity Volatility_lusighte from June 28 and suggests risk parity fund leverage is high and we do not think the relationships have changed significantly. ad: 1994904455 Today on Bloomberg: Junk Debt Keeps Climbing Despite Plunging Oil Prices After moving in lockstep with oil markets for much of the last two years, high-yield bonds have gone their own way and posted modest gains while crude entered a bear market in early June. The Bloomberg USD High Yield Corporate Bond Index has advanced more than 2 percent with help from energy debt that comprises about 16 percent of its value. The question now is whether turmoil in oil markets will drag down bonds of drillers and producers. taking the broader junk index with them, as defaults and bankruptcies pile up. EFTA00821599  Somme: Bloomberg 8/4/2016 "Ilu, message. iltii any attachment.. is for the intended reciptena(s) only. may 40(1414 iniomunion that is vv.Ile-go& confidential andor pnvneury and subject to IMII011.1111 team and cendmons IV.11111)k at bgmsliankidamonsia emajfiladajmet Ii you arc not the intended recipient please Mew this manage. Amanda Ens Director Bank of America Merrill Lynch Merrill Lynch. Pierce. Fenner & Smith Incorporated One lin ant Park. 5th Floor, New York NY 10036 in MI The power of global connections", g)id:imagc001.png(0.0ID I IMD2.3482F410 This message. and any attachments, is for the intended recipient(s) only, may contain information that is privileged, confidential and/or proprietary and subject to important terms and conditions available at blipamm.w.baniscifameticammkmaiklisglanner. 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