1、Europe Credit Research19 June 2019 Summer sneak peekWhat lies ahead for US and European IG TMTInvestment Grade TMTChristian Crosby,CFA AC(44-20)7134 J.P.Morgan Securities plcBrian Turner AC(1-212)834-J.P.Morgan Securities LLCDean L Ash(1-212)834-J.P.Morgan Securities LLCSee page 21 for analyst certi
2、fication and important disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as onl
3、y a single factor in making their investment Rather be on the Cape than in Cannes.We find ourselves more positive on US TMT than in Europe as we take solace in a series of US de-levering stories for issuers which have recently closed acquisitions focus on debt reduction and execution.Meanwhile,we se
4、e limited value in Euro TMT(particularly TelCos and Media)at presently tight levels ahead of what may be a volatile summer as Italian risks emerge and trade tensions weigh on growth,despite recently accommodative monetary policy indications from the ECB.We recommend a rotation into high-quality TelC
5、os from lower-rated peers as we again see value in the decompression trade we firstadvocated in late-April,and separately prefer Tech to Media as we see Media names likely to re-lever(page 2).Sell in May and trade this way.We outline ten trades across securities in USD,EUR,and GBP,which represent th
6、e best ways to monetize our ideas.We provide options across structures(cash,CDS and hybrids)and provide a few cross-currency ideas to accommodate any mandate(page 5).Songs of the summer.We then discuss some of the most topical themes and catalysts well be watching over the next few months.In Europe,
7、we have our concerns around Italy,shareholders losing patience with weak TelCo equity prices,Huawei concerns,and issuer-specific news in SES and ITV.Meanwhile,we discuss trade and tariff concerns,de-levering initiatives,and the buildup of“streaming wars”for the west side of the Atlantic(page 9).Spec
8、trum cools off.With the German spectrum auction concluded,we discuss the latest trends weve seen as the US and Europe undertake auctions for 5G-eligible bands.We fear auctions in late-2019 and 2020 will result in elevated spending(specifically in Europe),but take some solace in a pausein the auction
9、 calendar until 4Q19.We also detail expected auctions up ahead(page 14).Summer love.After discussing a few of these themes,we turn to whos trying to get together and who might engage in some courtship as the temperatures rise.We provide our quick thoughts on a few pending tie-ups,the likelihood of a
10、 few deals closing,and provide a table to track pending deals and funding.We then shift the discussion to an ongoing trend of European TelCo infrastructure deals,which we expect to continue for the next few quarters,and highlight the reasons for our continued concernaround a possible buyout of KPN(p
11、age 15).New seasons issues.We conclude with a look into recent issuance trends and our expectations for the rest of the year.Issuance levels in Europe have been quite high thanks to a rather issuer-friendly environment which has limited Yankee activity and led Reverse Yankee US issuers to increasing
12、ly explore opportunities to bring new bonds overseas.We expect that trend to continue for M&A financing,thus increasing our EUR/GBP estimate to 65bn(versus 43bn YTD).Separately,we expect more muted USD issuance through year-end as we move towards a$140bn annual estimate($93bn YTD)as typically heavy
13、issuers like Comcast,AT&T,and Verizon focus on de-levering and M&A(in our view)remains sufficiently limitedoutside of the US Technology space(page 18).2Europe Credit Research19 June 2019Christian Crosby,CFA(44-20)7134 Table of ContentsSector views.3Europe.3US.3Trade ideas.5Euro/Sterling trades.5US D
14、ollar trades.7Cross-currency trades.7European TMT themes.9Italian risk.9Huawei European TelCo impacts.9Suppressed European TelCo equities.9C-Band/SES(SESGFP).10ITV(ITVLN).10US TMT themes.11US-China tariffs.11Huawei US Technology impacts.11Domestic TelCo balance sheet repair.12Content and streaming w
15、ars.12Spectrum auctions.14M&A and Infrastructure.15US M&A.15European M&A(Non-infrastructure).16European Infrastructure transactions.16Issuance.18EUR/GBP Issuance.18USD Issuance.183Europe Credit Research19 June 2019Christian Crosby,CFA(44-20)7134 Sector viewsEuropeAs we move into the summer,the JPM E
16、uropean Credit Strategy team is taking a more cautious stance(see last weeks mid-year outlook,Crazy Rich Bonds,here)on concerns over Italy and US-China trade tensions after recent spread performance.They anticipate 15bps of further spread widening for IBoxx Corporates,recommending a move into defens
17、ive duration as a low yield environment drives investors further out the curve.Yields have moved even lower since their publication last week on the back of dovish commentary from ECB head Mario Draghi yesterday,although we on the TMT team find ourselves unconvinced that we will see another corporat
18、e bond purchase program for now.In keeping with our Strategy team views,we have raised our Telecoms recommendation to Neutral from a long-standing Underweight.We continue to hold the same concerns that have driven our cautious view for a while(no/low growth,high spending needs,increased balance shee
19、t aggression),but,with a reprieve in spectrum auctions for the next few months and a fair amount of high-quality long duration paper outstanding with some government-related issuer benefits,we acknowledge that the sector could outperform in a selloff.We therefore again recommend a“decompression”(per
20、 our late-April note here)rotation into high-quality or government-related TelCos(such as ORAFP,VZ,ENFP,and TELIAS)from their large cap mid-and low-BBB equivalents(TELEFO,VOD,and BRITEL).While our bearish view proved correct throughout May(IBoxx corporates moved+22bps on the month),recent spread tig
21、htening has reversed some of that and we again see current levels attractive from the short side.Outside of Telecoms,we remain Underweight in Media where,even after attractive re-pricing following recent acquisition-related issuance from VIVFP and PUBFP,we expect further re-levering and therefore ad
22、ditional supply.We have meanwhile upgraded Technology to Overweight as recent widening in the subsector(largely driven by new BBB supply from payments firms)leaves us with a more attractive entry point and we believe the space will hold in well against broad market weakness given a skew towards A-ra
23、ted names with high cash balances to insulate credit.USWe remain Overweight on Domestic Telecoms,arguing that an increased focus on profitability and ongoing balance sheet improvements at subsector leaders VZ and T should support levels currently 30bps wide of the JULI index.Similarly,we hold an Ove
24、rweight on Yankee Telecoms due to the defensive nature of the space and much more attractive levels than in Europe(generically 25-35bps cheap on an XCCY basis)as most constituents focus on balance sheet repair in 2H19 after recent re-levering.We are Neutral on Diversified Media,with improved fundame
25、ntals offset by an ongoing consolidation theme(possibly CBS/VIA),and intensifying“streaming wars”as content names are challenged by adverse ad revenue and viewership trends.Meanwhile,we are Overweight in Cable/Satellite as M&A should be limited while CMCSA and CHTR focus on integration and execution
26、,respectively,and we will be monitoring the ability of broadband growth to offset structural linear video and telephony declines.In Technology,we maintain our Underweight recommendation as the sector has underperformed the broader corporate market in 2019 on the back of elevated supply coupled with
27、slightly weaker earnings results and guidance.We continue to believe there is limited upside for the IG Technology sector heading into the second half of 2019 with spreads currently 26bps through the JULI.4Europe Credit Research19 June 2019Christian Crosby,CFA(44-20)7134 See Table 1 below for a full
28、 breakdown of our High Grade TMT company coverage universe in both USD and EUR/GBP securities.Table 1:Investment Grade TMT coverage and ratings summary USD&EUR/GBPSource:J.P.Morgan.Brian Turner has primary issuer coverage of all US-domiciled issuers(and their$securities)while Christian Crosby has pr
29、imary issuer coverage on European-domiciled issuers(and their /securities).“NC”issuers are not covered while“NR issuers are not rated at this time due to current or recent coverage restriction.TickerName$Rating/RatingTickerName$Rating/RatingGlobal Telecoms SectorOWNGlobal Technology Sector UWOWAMTAm
30、erican TowerNNCARWArrow Electronics IncNNCTAT&T IncNOWASMLASML Holding NVNCOWENFPBouygues SANCOWAVTAvnet IncNNCBRITELBT Group PLCOWNCAPFPCapgemini SENCNCCICrown CastleNNCCSCOCiscoNNCDTDeutsche Telekom AGNRNRGLWCorningNNCILDFPIliad SANCNEFXEquifaxOWNCKPNKoninklijke KPN NVNCUWFISVFiserv IncNRNCORAFPOr
31、ange SANOWHPQHP IncNNCPROXBBProximus SANCNIFXGRInfineon Technologies AGNCNRSCMNVXSwisscom AGNCUWIBMIntl Business Machines CorpNRNRODGRTelefonica Deutschland AGNCNKLACKLA-TencorOWNCTELEFOTelefonica SANUWMSIMotorola Solutions IncNNCTKAAVTelekom Austria AGNCNMUMicron TechnologyNNCTELNOTelenor ASANCUWNX
32、PINXP SemiconductorsOWNCTELIASTelia Co ABNCNORCLOracleNNCTLSAUTelstra Corp LtdNCUWPBIPitney Powes IncNNCVZVerizon Communications Inc.NOWSAPGRSAP SENCOWVODVodafone Group PLCOWNSTXSeagate TechnologyNNCVRSKVerisk AnalyticsOWNCEuropean Media SectorNCUWBERTELBertelsmann SE&CoNCNDMGTLNDaily Mail General&T
33、rustNCUWUS Diversified Media SectorNNCETLFPEutelsat CommunicationsNCUWFOXA21st Century FoxNRNCITVLNITV PLCNCUWCBSCBS CorporationNNCDECFPJCDecaux SANCUWDISCADiscovery CommunicationsNNPSONPearson PLCNCNIPGInterpublic Group OWNCPSMGRProSiebenSat.1 Media SENCUWTWXTime Warner,IncNRNCPUBFPPublicis Groupe
34、SANCNRVIABViacomNNCRELLNRELX PLCNCNSESGFPSES SANCUWSKYLNSky PLCNROWUS Cable SectorOWNCVIVFPVivendi SANCNCMCSAComcast CorporationOWNCWKLNAWolters Kluwer NVNCUWCOXCox CommunicationsNNCWPPLNWPP Group PLCNCOWTWCTime Warner CableOWNC5Europe Credit Research19 June 2019Christian Crosby,CFA(44-20)7134 Trade
35、 ideasAs“short-term”trades these ideas can be considered closed when the underlying fundamental rating on the issuer or issue changes,or at the end of three months.Euro/Sterling tradesIn this note,we subscribe to a few themes(TelCo decompression,periphery risk)and take views on some pending/speculat
36、ed M&A.We see the below trades as a few ways to put our views to work and encourage you to reach out to us with any questions as to why we selected certain issuers or points in the curve over others.Buy Telia(TELIAS)3.000%notes due 2027 at z+86bps,sell BT Group(BRITEL)1.500%notes due 2027 at z+108bp
37、s.We continue to view the TELIAS story more favorably after recent M&A-led re-pricing has levels attractive for a high-BBB issuer with a 37%ownership stake held by the Swedish state.We see the firm committed to ratings,highlight expected operating improvements in 2H19,and would expect hybrid rather
38、than senior issuance in the event that its pending Bonnier Broadcasting deal is approved later this year.Conversely,we see little reason for BT Group to tighten in the near-term because management remains committed to an accelerated fiber build,rates remain quite low(therefore its pension deficit re
39、mains high),and the path to improvement will likely be protracted.We see earnings in late-summer as the next opportunity to cut an onerous dividend,but believe it will not do so until later in 2019(or in 2020)after not electing to cut in May during new CEO Philip Jansens first earnings call in his r
40、ole.Buy Verizon(VZ)1.875%notes due 2029 at z+69bps,sell Telefonica(TELEFO)1.788%notes due 2029 at z+85bps.Verizon has underperformed in the last month,having been trading(in our view,justifiably)flat to ORAFP just a few weeks ago and now even trading inside of some front-end VZ USD equivalents on an
41、 XCCY basis.As the firm continues to deliver on earnings expectations and spectrum spending remains rational enough,we see its trajectory to single-A clear and find ourselves bullish on the story.If were right in our view that periphery risk may heat up this summer,we see TELEFO as a fair pairing as
42、 it would likely incur a fair amount of widening versus current levels which trade extremely tight versus higher rated and lower levered peers.We fear that the firms recent pace of credit-friendly activity is now set to slow,and see limited capacity for organic EBITDA improvements to drive additiona
43、lde-levering,hence our Underweight.Buy AT&T(T)2.900%notes due 2026 at+133bps,sell Vodafone(VOD)5.625%notes due 2025 at+100bps.We continue to believe that VOD trades too tight across the sterling curve,and believe that the name is due for reversion closer to mid-and low-BBB peers similar to how it tr
44、ades in euros.We believe a current 34bps differential between it and AT&T(which has less peripheral risk and is more aggressively reducing leverage)is unjustified even after accounting for one year of additional duration on the AT&T notes we have selected.6Europe Credit Research19 June 2019Christian
45、 Crosby,CFA(44-20)7134 Figure 1:EUR TMT benchmark senior z-spreads(mid)Source:Source:J.P.Morgan,Bloomberg.Spreads current as of 19 June 2019.ILDFP(+244)and ETLFP(+166bps)off scale for clearer visibility into peer levels.Sell WPP(WPPLN)5yr CDS at+67bps,buy SES(SESGFP)5yr CDS at+80bps.We continue to p
46、refer WPP to SES on a valuation basis(in EURs),with both balancing structural concerns with asset monetization upsides.We believe WPPs credit-friendly catalyst will occur first(Kantar,with Bloomberg reports indicating final bids being due by June 25th)as SES likely wont have an FCC order on a C-Band
47、 spectrum auction until the fall at the earliest.As such,we expect WPP to rally in the coming weeks while SES remains range-bound or widens with the market,and we further do not expect improvements in SESs2Q19 results on July 26th(we expect soft results from WPP too,but those wont be released until
48、August and we see expectations set appropriately low).Figure 2:EUR TMT 5yr CDS Spreads(mid)Source:Source:J.P.Morgan,Bloomberg.Spreads current as of 19 June 2019.7Europe Credit Research19 June 2019Christian Crosby,CFA(44-20)7134 US Dollar tradesBuy CHTR IG notes.We remain Overweight CHTR IG bonds,as
49、we believe the discount to BBB comps continues to offer strong relative value.We continue to like overall CHTR risk on a relative basis,based on significant size/scale,good growth prospects,meaningful FCF generation and,importantly,a well understood financial policy.The latter includes total leverag
50、e no higher than 4.5x(including wireless drag)and maintaining IG ratings on its secured debt.Buy Comcast(CMCSA)notes.Comcasts core cable business continues to perform well,and we expect improvement at NBCU and Sky as the year progresses.Most importantly for credit investors,management is focused on