EFTA00821586.pdf

From: "Ens, Amanda" < 1:, To: "[email protected]" <[email protected]> Cc: Richard Kahn Subject: RE: Preferreds, thoughts on fixed income, mandatory converts Date: Mon 08 Aug 2016 19:53:06 +0000 Attachments: AGN_8.08.2016.pdf; Revision_Ratios.pdf Inline-Images: image005.png; image010.jpg; image011 jpg: image014.jpg; image015.jpg: iniage016jpg; image017.jpg; imagc018.jpg; image019.jpg; image020jpg; image021.gif: image00Ljpg I should also note that healthcare is the one sector with Improving Earnings Revision Ratios, Sales Revision Ratios and Management Guidance Ratios. Here's our post-earnings report for AGN. Allergan Ok quarter• weakness presents particularly good opportunity Reiterate Rating: BUY P0:204.00 USD I Price: 253.85 USD Equity 108 August 2016 Key takeaways • AGN reported 2O16 adj. EPS of $3.35 beating our estimate of $3.26 (ex. Anda) and consensus of $3.30. • Revenue was modestly lighter but. higher gross margin/lower tax rate helped drive the beat vs. our model. • We like AGN due to healthy product mix/pipeline and flexibility to depby capital, and believe weakness presents opportunity. Noisy as we expected, reiterate Buy AGN reported 2O16 adj. EPS from continuing operations of $3.35, which beat our estimate of $3.26 (ex. Anda distribution) and consensus of $3.30 (may not have been on the same basis). While revenue was modestly lighter (-$46mn), higher gross margin and lower tax rate helped drive the beat vs. our model. Given the moving parts (generics and distribution businesses being divested to Teva), there was some 'noise" in the numbers as yaajnantated. That said, we were not too surprised by AGN's 2016 outlook, which came in largely as we expected vs. our model going into 2O. We continue to believe AGN is well positioned with a product mix that includes lucrative/sticky franchises (eg, Botox). several launches in 2016+, a robust pipeline of 65+ programs, and today's weakness presents a particularly good buying opportunity. in our view. See Table I below for a series of potential upcoming catalysts. Tweaking model, remain conservative on pipeline value We are updating our model post-2O results. Our new 2016/17E EPS are $13.78/16.74 vs. prior S13.82/16.76. Our modestly lower EPS is mainly driven by a higher share count (potential variance based on timing of share buybacks). We are tweaking down our revenue numbers and raising our gross margin estimates (based on product mix). Our model continues to include almost no specific value for AGN's pipeline, which could be too conservative. Our DCF-based PO remains at $294. Sumant S. Kulkami Amanda Ent The power of global connections'" cioclimage00long@0101840 2.3482F410 From: Ens, Amanda Sent: Mond 08 2016 2:26 PM To: Cc: Richard Kahn Subject: RE: Preferreds, thoughts on fixed income, mandatory converts EFTA00821586 Jeffrey, I continue to like the AGN, TEVA and FTR mandatory convert prefeneds. 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 thus looks in line. Botox and Restasis, two important products, are still growing at 16% and 21% respectively. AGN has an aggressive buyback program. targeting S5bn this year and they should reach the full Sl0bn approved by next year, market conditions permitting. Their pipeline looks strong; execution will be key going fonvard. There has been chatter in the market about them potentially doing a big deal such as BBB but management said on the call that they're focused on being selective/disciplined and will likely target smaller stepping stone opportunities. Outside of buybacks, the company has about 520bn of dry powder to invest for growth over the next 12-I8 months, which could come in the form of acquisitions and/or debt repayment. Long story short: would look to build a position through the AGM 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 Amant Inc The power of global connections'• P;id:image0Otong0M01840 2.3482F410 From: Ens, Amanda Sent: Thursday, August 04, 2016 6:30 PM To: jecvacation(t)gmail.com' 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, l wanted to share some thoughts about why I 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 ofUS corporate credit is slowing • Supply is increasing • Investors are 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 rule and other structural changes) The Japanese had been huge incremental buyers ofUS 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 are under-owned: institutions have net sold equities this year if you exclude buybacks. cash levels arc 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: Market impact ofquota fiords: Separating fact from fiction) and in the Risk Parity Risks in Fixed income writeup further down. Japanese buying of foreign bonds FELL again toward zero as of July 29 (vs LQD in yellow). EFTA00821587  KI:image005.jpg€01D1EE78.B98D33A0 d:image003.jpg(g01DIEE78.C95838E0 d:image006.jpg(g01DIEE78.B98D33A0 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 wait" 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. EFTA00821588 Allergan, 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 eamings/2H16 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 FTCs approval of AGN generics deal. We continue to like TEVA's positioning In generic pharma where scale and product diversity are increasingly important. TWA remains one of our top picks In Spec Pharma. Frontier Comm (FTR) - BAML reaffirming BUY after Frontier reported its first post-Verizon assets merger results. FTR's earnings miss was due to a decline in the legacy business but FTR 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 mispricing FTR. Yield BAML BAML Stock Stock Up Stock Down Stock Pfd Low Nigh Current Advantage Ranking Price Tgt Upside to 25%: Pfd 25%: Pfd Notional Name Ref Level Strike Strike Yield over Stock (Stock) (Stock) Price Tgt Return Return Outstanding AGN (AGNprA) 5.5% 3/1/18 252.95 893.45 288.00 35210 6.2% 6.2% 1 - Buy $ 294.00 16.2% 22.7% -15.5% $5.06bo EL VA if ONE) /l>: :2/:5/2018 53.50 886.08 62.50 75.00 7.9% 5.4% 1 - Buy $ 72.00 34.6% 32.6% -7.8% $3.7125bn FIR (sTRPR) 11.125% 6/29/18 4.85 93.85 5.00 5.87 11.9% 3.2% 1- Buy $ 7.50 54.6% 33.6% 1.2% 51.925bn Source: Bloomberg, sANIL. Up/down return vs undenying stock prke .1- 25% o sumes preferred a held to maturity From Aug 2: Risk Parity Risks in US Fixed Income c' id:38917479 Today's 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 risk in US Axed 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. Mardi 2017 ATM LQD vol is around 7.5% so a 100% Put costs —12% 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 parity 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 close 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 Strateulg: 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 Fngjty Volatility_asjghti" from June 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&P500 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 rebalancing is required. ia, id:98338928 Chart Two: Investment Grade ETF, LQD, is at the top of a long term channel with shares outstanding around an all time high. EFTA00821589 Lrlticl:[email protected] Chart three is from -Ginhai Fquity Vnl tyin.s.ights." from June 28 and suggests risk parity fund leverage is high and we do not think the relationships have changed significantly. PC:199,1904455 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 dnllers and producers, talung the broader junk index with them, as defaults and bankruptcies pile up. Source: Bloomberg 8/4/1016 EFTA00821590 this message, a-,a any attathments. is for the Lmerided reopient(s)only, myi contact informahai that is vivItqcd.ccofideibal and/or proprietary and uilliect to important terms and cord:ions sea}lable at tealtwwwlaatikofaci a natyrtilfireilmit If you are not the ntoldod recosent. please dette this message. The power of global connechons— it t)cid.image001.ongheO1D1WID 2.3482F410 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 http://www.bankofamerica.comiemaildisclaimer. If you arc not the intended recipient, please delete this message. EFTA00821591