EFTA02454468.pdf

From: Ens, Amanda O> Sent: Monday, August 8, 2016 6:26 PM To: jeevacation@gmail.com Cc: Richard Kahn Subject: RE: Preferreds, thoughts on fixed income, mandatory converts Jeffrey, I continue to=like the AGN, TEVA and FTR mandatory convert preferreds. While AGN missed =n sales today, is was mostly due to noise around the last minute divestitu=e of their ANDA distribution business to TEVA. While the generics sale to TEVA was already built into most analy=t models, the ANDA sale was not. Revenue thus looks in line. Botox and Res=asis, two important products, are still growing at 16% and 21% respectivel=. AGN has an aggressive buyback program, targeting $5bn this year and they should reach the full $10bn app=oved by next year, market conditions permitting. Their pipeline looks stro=g; execution will be key going forward. There has been chatter in the mark=t about them potentially doing a big deal such as BIIB but management said on the call that they're=focused on being selective/disciplined and will likely target smaller step=ing stone opportunities. Outside of buybacks, the company has about $20bn =f dry powder to invest for growth over the next 12-18 months, which could come in the form of acquisitions and/or=debt repayment. Long story short: woul= 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 hav= time for a call; I'm at Thanks, Amanda Amanda Ens Director </=pan> Bank of America Merril= Lynch Merrill Lynch, Pierce,=Fenner & Smith Incorporated One Bryant Park, 5th F=oor, New York, NY 10036 Phone Mobile: <=p> The power of global co=nections'm EFTA_R1_01556242 EFTA02454468 From: Ens, Ama=da Sent: Thursday, August 04, 2016 6:30 PM To: 'jeevacation@gmail.com' Cc: 'Richard Kahn' Subject: Preferreds, thoughts on fixed income, mandatory converts Jeffre=, Rich m=ntioned you're interested in potentially buying preferreds. While th=y still pay a decent yield, I wanted to share some thoughts about why I wo=ld look at the more equity-like mandatory convertible preferred market instead. I've outlined a few points abo=t fixed income, with some specific mandatory convert details further down.=Would love to discuss in more detail at your convenience. Is fix=d income the next "accident" waiting to happen in markets? Japanese buying of US corporate credit is sl=wing • Supply is increasing • Investors are trafficking as "tourists=#8221; in bond markets that they don't usually buy — unwind co=ld be painful • Risk parity quant funds might need to rebala=ce if the correlation between bonds and equities turns higher • High yield keeps climbing despite falling oi= prices • Poor liquidity in a crowded trade (Volcker r=Ie and other structural changes) The Ja=anese had been huge incremental buyers of US corporate credit this year bu= last week's data shows this fell buying has fallen towards zero. This is happening in a market where supply is increasing. Charts =elow. 2 EFTA_R1_01556243 EFTA02454469 I atte=ded some buyside meetings this week with our cross-asset and credit strate=y teams and what really stood out to =e 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 preferreds= 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 m=re favorable at this point for US equities vs. fixed income. Equities are under-owned: institutions have net so=d equities this year if you exclude buybacks= cash levels are at 15 year highs, investors have been buying prote=tion but not much upside. Bonds don't seem to be pricing in sufficient risk premium, especially at the long end.=span style="font-size:11.0pt;font-family:"Calibri","sans-=erif""> WeR=7;ve been closely following quant fund positioning, leverage levels and po=ential for forced selling in the future. With risk parity fund leverage hi=h 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 e=uities potentially less dangerous than the bond market. A few more deta=ls about risk parity funds are in the attached report (pages 9-11: Market impact of quant funds: Separating fact from fiction) and in t=e 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). =span style="font-size:11.0ptfont-family:"Calibri","sans-=erif—> =span style="font-size:11.0pt;font-family:"Calibri","sans-=erif""> Mandatory Convertible Preferreds As investors continue to search and stretch f=r 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 an= mandatorily convert into common stock at maturity. Due to the mandatory c=nversion, they lack a bond floor and are equity-like with yield enhancemen=. You're "paid to wait" while the underlying company's fundamental story develops, so they are attract=ve for names where we like the company's longer term prospects but a=e 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 downsi=e profile for holding the mandatory convert vs the common stock. Allergan, Teva and Frontier Communications ar= three names we have high conviction on and they have mandatory convert pr=ferreds that I recommend buying. 3 EFTA_R1_01556244 EFTA02454470 Allergan (AGN) - BAML reaffirming BUY on AGN after the FTC approval of gener=cs sale to Teva. We like AGN due to its healthy product mix, solid pipe=ine and flexibility to deploy capital to drive shareholder return. N=xt catalyst will be 2Q earnings/2H16 Outlook on 8/8. AGN is on our firm :=17;s US-1 list 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 =emains one of our top picks in Spec Pharma.<=span> 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 increased deal synergi=s that should offset the decline in legacy business. We like FTR with its =.6% dividend yield and estimated 56% dividend payout ratio in 2017. We continue to think the market is misprici=g FTR. Name Stock Ref Pfd Level Low Strike High Strike Current Yield Yield Advantage over Stock BAML Ranking (Stock) BAML Price Tgt (Stock) Stock Upside to Price Tgt S=ock Up 25%: Pfd Return S=ock Down 25%: Pfd Return N=tional Outstanding AGN =AGNprA) 5.5% 3/1/18 252.95 893.45 288.00 4 EFTA_R1_01556245 EFTA02454471 352.80 6.2% 6.2% 1 - Buy $&nb=p; 294.00 16.2% 22.7% -15.5% $5.06bn TEVA=(TEVVF) 7% 12/15/2018 53.50 886.08 62.50 75.00 7.9% 5.4% 1 - Buy $&nb=p; 72.00 34.6% 32.6% -7.8% $3.7125bn FTR =FTRPR) 11.125% 6/29/18 4.85 93.85 5.00 5 EFTA_R1_01556246 EFTA02454472 5.87 11.9% 3.2% 1 - Buy $&nb=p; 7.50 54.6% 33.6% 1.2% $1.925bn Source: Bloomberg, BAML. Up/down return vs underlying stock price &=43;/- 25% assumes preferred is held to maturity From Aug 2: R=sk Parity Risks in US Fixed Income Today's simultaneous weakness in =he US bond long end and weakness in US equities is unusual of late and tel=s us there is implications for risk parity portfolios. We expect a 165k change in Non-Farm Pay=olls on Friday but a strong number sets up for some left hand tail risk in=US Fixed Income. Risk parity portfolios own more bonds t=an 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. 6 EFTA_R1_01556247 EFTA02454473 March 2017 ATM LQD vol is around 7.5% s= 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 (7-1=y US Treasury ETF) and SPY (S&P500 ETF). Using 60 hourly data points, =orrelation 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 cu=ve is steepening with Investment Grade Supply increasing. Yesterday, $23.4= of new investment grade credit priced, the highest daily volume in close to 3 months. As supply of duration has been increasing a f=w other topical IG issues are: On July 28 Apple issued - $7 billion On August 1, Microsoft issued —$20 bill=on Today, Alphabet — $ 2 billion Chart Two shows Investment Grade ETF, L=D, is at the top of a long term range with shares outstanding around an al= time high. Hans Mikkelsen noted on Friday in "Credit Market Strategist <http://rsch.baml.com/r?q=OaYw89Yo1lRsHX6GXUP0lw=amp;a=amanda.ens%40baml.com&h=QasuWw>" with Japanese inflows i=to 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 Equity Volatility Insights <http://rsch.baml.com/r?q=ctKMaUu0ebACu=DgScvGRQ&e=amanda.ens%40baml.com&h=14iNOg> " from June 28 a=d suggests risk parity fund leverage is high and we do not think the relat=onships have changed significantly. Chart One shows hourly data of IEF (7-10y US Treasury ETF) and SPY (S&am=;PS00 ETF). Using 60 hourly data points, correlation has moved from around -80% a month ago to zero now. This means the volatility of ris= parity portfolios are increasing and rebalancing is required.<=> Chart Two: Investment Grade ETF, LQD, is at the top of a long term chann=l with shares outstanding around an all time high. 7 EFTA_R1_01556248 EFTA02454474 Chart three is from "Global Equity Volatility Insights" from June 28 and s=ggests risk parity fund leverage is high and we do not think the relations=ips have changed significantly. Today on Bloombe=g: Junk Debt Keeps Climbing Despite Plunging Oil Prices<=b> After moving in lockstep with oil markets for much o= the last two years, high-yield bonds have gone their own way and pos=ed modest gains while crude entered a bear market in early June. The Bloom=erg 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 =arkets will drag down bonds of drillers and producers, taking the broader =unk index with them, as defaults and bankruptcies pile up. Source: Bloomberg 8/4/2016 This message, and any attachments, is for the inte=ded recipient(s) only, may contain information that is privileged, confide=tial and/or proprietary and subject to important terms and conditions available at http://www.bankofamerica.com/emaildisclaimer <http://www.bankofam=rica.com/emaildisclaimer> . If you are not the intend=d recipient, please delete this message. Amanda Ens Direct=r Bank o= America Merrill Lynch Merril= Lynch, Pierce, Fenner & Smith Incorporated=o:p> One Br=ant Park, 5th Floor, New York, NY 10036 Phone: Mobile: 8 EFTA_R1_01556249 EFTA02454475 The power of global co=nectionsTM This message, and any attachments, is for the intended recipient(s) onl=, may contain information that is privileged, confidential and/or propriefrry and subject to important terms and conditions available at http://www.b=nkofamerica.com/emaildisclaimer. If you are not the intended recipient, =lease delete this message. 9 EFTA_R1_01556250 EFTA02454476