October 28, 2019

Income Strategy Update for Week Ended 10/25/19

Retail Advances on Trade Optimism While McDermott Falls on New Financing Package

Last week, the Income Strategy advanced 0.26%, underperforming both the Merrill Lynch U.S. High Yield Master II Index’s 0.28% gain and the S&P 500’s 1.23% rise. (Exhibit 1). The strategy ended the week up 15.87% YTD, or 379 basis points ahead of the high yield index and 667 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 10/25/191

Time Period Income Strategy ML HY II S&P 500
Last Week (10/18 – 10/25) 0.26% 0.28% 1.23%
MTD 1.42% 0.52% 1.64%
QTD 1.42% 0.52% 1.64%
YTD 15.87% 12.08% 22.54%
Inception (annualized since 4/2/2009) 13.35% 11.05% 15.82%

Source: Bloomberg, Miller Value Partners

Equities comprised last week’s top five contributors (Exhibit 2). Apollo Global Management (APO) advanced in sympathy with peer Blackstone (BX), who reported better-than-expected results driven by strong fundraising, fee-related earnings growth, and solid deployment activity. Chemours (CC) advanced as court documents show former DuPont (DD) CEO Ellen Kullman stated that management’s current view that Chemours faces unlimited exposure to DuPont liabilities is not consistent with her or the Board’s intent at the time of the spin-off. Abercrombie & Fitch (ANF) and Chico’s (CHS) rose above closely watched technical levels as specialty retailers advanced on US/China trade optimism. There was no price-changing news on Quad Graphics (QUAD).

Exhibit 2: Significant Contributors to Performance, 10/18/19 – 10/25/19

Name Type Return
Apollo Global Management Equity 3.1%
The Chemours Co Equity 10.2%
Abercrombie & Fitch Co Equity 5.8%
Quad Graphics Equity 5.6%
Chico’s FAS Equity 4.2%

Source: Miller Value Partners

Two equities and three bonds comprised last week’s top five detractors (Exhibit 3). Debt of McDermott (MDR) fell after the company announced a new superpriority credit agreement that will provide access for to up to $1.7B of financing ($1.3B term loan and $400M letter of credit) split into four tranches. The new financing, however, comes with significant contingencies such as mandatory asset sales, significant equity dilution, and tranches that only become available if current debtholders and McDermott satisfy lender conditions. BGC Partners (BGCP) reported revenue of $521M, topping consensus of $511M while EPS of $0.15 was in-line and covered the $0.14/share dividend (10.5% annualized yield). Management noted investment spending on Fenics initiatives and the on-going build-out of the insurance brokerage business are expected to weigh on margins over the next 1-2 years. Alrosa (ALRS RX) fell as UBS remains cautious on the diamond market, but believes we could be getting closer to the end of the destocking cycle. Debt of Endo International (ENDP) fell despite peer Teva Pharmaceuticals (TEVA) announcing an agreement in principal on a global opioid settlement. There was no price-changing news on the debt of Chaparral Energy (CHAP).

Exhibit 3: Significant Detractors from Performance, 10/18/19 – 10/25/19

Name Type Return
McDermott 10.625% 5/24 Bond -28.4%
BGC Partners Equity -8.2%
Alrosa Equity -4.9%
Endo International 6.0% 7/23 Bond -5.1%
Chaparral Energy 8.75% 7/23 Bond -3.0%

Source: Miller Value Partners

Did you know that we write this piece for Opportunity Equity as well? Check it out.

1The performance figures reflect the results of a representative account net of management fees and certain other expenses. For important additional information about Income Strategy performance, please click on the Income Strategy Composite Performance Disclosure. The performance returns shown in this report are preliminary and are subject to revision. Past performance is no guarantee of future results.

Significant Contributors and Significant Detractors are the Strategy holdings that had the greatest effect on Strategy performance for the week. Holdings that have been in the Strategy since the end of the most recent calendar quarter are identified by name. For information on how Contributor/Detractor data were calculated and a list showing the contribution to the Strategy’s weekly performance of each investment held at such quarter end, contact us.

Any views expressed are subject to change at any time, and Miller Value Partners disclaims any responsibility to update such views. The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. Past performance is no guarantee of future results, and there is no guarantee dividends will be paid or continued. Content may not be reprinted, republished or used in any manner without written consent from Miller Value Partners.

©2019 Miller Value Partners, LLC

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