Despite Busy Week, Many New Issues Suffer Indigestion
Even though investors had plenty of cash ready to put to work, the sheer volume of new issuance and the lack of new issue concessions allowed for weakness in the secondary markets.
As we expected, last week was especially busy in the new issue market, with more than $40 billion of new issues priced. We are hearing from syndicate desks that this week should be busy as well: There could be another $30 billion of new issues primed to launch. While the current agreement in Washington, D.C., has resolved the tax increase issue and forestalled spending cuts under sequestration, it has addressed neither the fact that the United States has already reached its current debt ceiling, nor the longer-term issues of spending cuts and entitlement reform. CFOs thinking about issuing debt during the first quarter of this year would be well advised to tap the capital markets while the new issue window is open rather than risk trying to come to market after these issues return to the forefront. Once the next political battle heats up in earnest, access to the new issue market could quickly become impaired.
Even though investors had plenty of cash ready to put to work, the sheer volume of new issuance and the lack of new issue concessions led to a bout of indigestion in many of last week's deals. For example, Sunoco Logistics Partners' (SXL) (BBB) new issue struggled in the secondary markets. After pricing at +155, its new 10-year bonds ended the week almost 10 basis points wider, even wider than the +160 fair value estimate that David Schivell, our oil and gas credit analyst, assigned in his new issue note. Bank of America's (BAC) (BBB) new 10-year notes gave up much of their gains by the end of the week in the secondary market. Our bank credit analyst, Jim Leonard wrote that price talk for Bank of America's new issue was overvalued and preferred Morgan Stanley (MS) (BBB) or Citigroup (C) (A-) as better investments for their respective credit risk.
Other issuers whose bonds struggled in the secondary markets included Comcast (CMCSA) (A-) and Staples (SPLS) (BBB+), which either traded at or behind their new issue spreads. The new Comcast 10-year notes look particularly attractive, in our view, sitting about 20 basis points wide of the 10-year bonds that rival AT&T (T) (A-) issued last month. In addition, the 30-year bonds that Ford (F) (BBB-) issued last week continued to leak wider. Those bonds ended the week in the mid +190s, nearing the +200 fair value level that Rick Tauber, Morningstar's director of corporate bond research, opined in his new issue note. Investors who heeded Rick's advice were well served, as they have avoided almost a 2-point loss.
Most new issues still traded slightly higher last week, but considering that underwriters generally haven't been providing new issue concessions lately, only a few deals tightened to any significant degree in the secondary markets. Royal Bank of Canada's (RY) (AA-) new 5-year issue tightened from the new issue spread of +72 into the mid-60s, approaching our view of fair value at a spread of +60 basis points.
This week may foretell the near-term direction for credit spreads. Between $40 billion last week and potentially another $30 billion this week, the absolute volume of new issues may quickly outpace the amount of cash that needs to be put to work. In addition, with few to no new issue concessions and numerous deals trading wide of new issue spreads, many investors may decide to hold off on investing in new transactions until they have a better view on the fundamental outlook. As fourth-quarter earnings season ramps into full gear over the next few weeks, we should get a clearer read on how the economies here and abroad are holding up. However, if new issues perform well this week, it may be the green light to take credit spreads tighter.
The average spread in Morningstar's Corporate Bond Index tightened 2 basis points last week to +133, which is only 4 basis points higher than the tightest level reached since the 2008-09 credit crisis (+129 in April 2010). Credit spreads in the financial sector tightened 4 basis points, slightly outperforming the industrial sector, which tightened 1 basis point. In our First Quarter 2013 Outlook, we opined that the financial sector would outperform the industrial sector this quarter, and we continue to hold that view.
Credit spreads in Morningstar's Eurobond Corporate Index have continued to tighten and at +129 are 4 basis points tighter than Morningstar's U.S. Corporate Bond Index. The average credit spread in our European corporate bond index had traded as much as 81 basis points wide of the U.S. index (November 2011).
The corporate bond markets were not the only risk assets pricing in a benign outlook. Spanish bonds rallied last week after a very successful bond auction. The yield on Spain's 10-year bonds dropped 17 basis points to 4.89%, nearing the lowest yield and spread since October 2010. At 4.16%, the yield on Italian 10-year bonds dropped to its lowest since October 2010 and is 300 basis points tighter than where it peaked in November 2011. We continue to be leery of the economic conditions in Europe and don't think that the sovereign debt crisis has been fully resolved. As such, we recommend investors concentrate on issuers with high exposure to U.S. markets where we anticipate continued modest economic growth.
Best Idea ArcelorMittal 22s Rally on Equity Issue; Still Decent Value, but Far Less Compelling
ArcelorMittal (MT) (BBB-) announced it would issue $3.5 billion worth of common stock and mandatorily convertible subordinated notes. The firm's 2022 bonds--which were on our Best Ideas list--rallied 4 points on the news. While we continue to see decent value in the bonds, we removed the notes from our Best Ideas list as further upside from these levels are limited in the near term. Given our less-than-rosy near-term outlook for steel market fundamentals, the principal short-term catalyst for the bonds would be a prospective reversal by the rating agencies, which would take ArcelorMittal back into the investment-grade territory management seeks. We continue to view the company as an investment-grade credit risk.
New Issue Notes
DirecTV 5-Year Notes Look Fair for the Sector (Jan. 10)
DirecTV (DTV) (BBB) is in the market looking to issue $750 million of 5-year notes, filling a hole in its debt maturity schedule. Initial price talk is around 125 basis points over Treasuries, a level that we believe is fair given our rating and relative to the sector. The firm's previous 5-year debt issue, its 2.4% notes due 2017, currently trades at about +117 basis points while its 3.8% notes due 2022 trade at about +166 basis points. The 2022 notes have traded within a range of 60 basis points tight and 30 basis points wide of the Morningstar Industrials BBB index since issuance last year, but have generally moved wider over time. The bonds currently sit right on top of the Index, which stands in contrast to the majority of the sector, which generally trades tight. For example, DirecTV notes trade well wide of rival Time Warner Cable (TWC) (BBB-), which we rate one notch lower. TWC's 4.0% notes due in 2021 trade at about +130 basis points, which we view as very rich.
We believe that DirecTV deserves to trade cheaply for our rating and relative to the rest of the sector. Our rating reflects DirecTV's solid cash flow generating capability balanced against what we believe is an aggressive leverage target given the maturity of the U.S. television business. In addition, DirecTV is mulling a bid to acquire assets in Brazil to bolster its competitive position in that country. The firm has said that it is committed to an investment grade rating but that it has one-notch of wiggle room if it does pursue an acquisition (the firm is rated Baa2/BBB at Moody's and S&P, respectively). DirecTV could also choose to use that wiggle room to continue its aggressive share repurchase program.
TransCanada's New 3-Year Issue Looks Attractive (Jan. 10)
TransCanada Corporation (TRP) (BBB+) announced Thursday it is issuing U.S. dollar 3-year notes out of its wholly owned subsidiary TransCanada PipeLines Limited, which we do not separately rate. While we award TransCanada Corporation a narrow economic moat, we view TransCanada PipeLines as a wide-moat business based on its stable cash flows and the regulated nature of its pipelines. As a result of our wide moat view, we have a similar opinion as the rating agencies that TransCanada PipeLines' credit rating is higher than that of its parent corporation. We anticipate the funds will be used to finance capital expenditures and for general corporate purposes. As of Sept. 30, on a consolidated basis, debt of CAD 21 billion amounted to roughly 4.7 times trailing-12-month EBITDA, and EBITDA covered interest 4.7 times. Over our forecast period, we project leverage to remain below 5.0 times and cash interest coverage to remain better than 4.0 times. Yesterday, TransCanada announced the company was selected to develop and own the $6 billion Prince Rupert natural gas pipeline. This project, which will bring natural gas from producing regions in western Canada to British Columbia for export, supports our view that TransCanada's credit profile will continue to improve with the addition of large growth projects.
Initial price talk on the new notes is +55 basis points above the 3-year Treasury, which we view as slightly cheap to our fair value estimate of +50 basis points. TransCanada PipeLines' existing 0.875% notes due 2015 recently traded at spread of +43 basis points above the 2-year Treasury. For comparison, Kinder Morgan Energy Partners (KMP) (BBB/UR), which we rate with a wide moat, has 3.50% notes due 2016 that recently traded at a spread of +58 basis points above Treasuries. Kinder Morgan is a master limited partnership, not a wholly owned subsidiary, so a higher percentage of its free cash flow is distributed to unitholders in the partnership. Given the difference in cash flow distribution and our assumed ratings differential, we peg fair value on the new notes at +50 basis points over the 3-year Treasury.
Bombardier Back in the Market With Up to $2 billion Offering; Price Talk Looks Attractive (Jan. 9)
We are hearing that Bombardier (BBD.B) (BB+) has resuscitated its recently pulled $1 billion senior unsecured bond offering and may increase it to $2 billion. The offering, originally planned in mid-November, now appears to include 3-year and 10-year tranches. Price talk on the new 10-year tranche is 6.00%-6.25%, with the 3-year in the 4.25% area. We view this as attractive and see fair value closer to 5.25% on the 10-year note, given our credit rating and long-term outlook. Bombardier's 7.75% senior notes due 2020, which remain on our high-yield Best Ideas list, yield about 5.4% and a provide a spread of 414 basis points above Treasuries, roughly in line with the new 10-year price talk when adjusting for maturity. Proceeds are expected to be used to enhance the firm's liquidity during the ongoing heavy capital spending phase of some programs.
Our recent downgrade to junk on Bombardier reflects the higher-than-expected cost of the C-Series related to the delay in the first flight and launch. Management had guided to ending the fiscal year with about $3 billion of cash, which is about $1 billion more than its minimum targets. We now look for additional cash burn in 2013 versus our previous expectations of reversion to positive free cash flow. We remain encouraged by strong order activity across the portfolio, however. In December, Bombardier announced orders for 22 C-Series aircraft as well as additional business jets and trains. For 2012, the firm reported net orders of 481 business and commercial aircraft compared with 249 in 2011. Backlog continues to grow. We are maintaining our thesis that this backlog will eventually flow through to earnings and cash flow, although we are pushing our expectations to 2014 and beyond. We note that Alliant Techsystems (ATK) (BB+) has 2020 senior subordinated notes trading to the 2015 call date at a yield of 4.0% and a spread of about 368 basis points above Treasuries, which we view as fairly valued. Oshkosh's (OSK) (BB+) 2020 senior unsecured bonds, which are subordinated to secured bank debt, trade at 4.7% to the 2015 call date and offer a spread of 440 basis points above Treasuries, which we view as cheap.
Best Idea ArcelorMittal 22s Rally on Equity Issue; Still Decent Value, but Far Less Compelling (Jan. 9)
In a move sure to warm the hearts of bondholders, ArcelorMittal (MT) (BBB-) announced this morning that it would issue $3.5 billion worth of common stock and mandatorily convertible subordinated notes (half of each, subject to adjustment). Proceeds will be put toward reducing the firm's outstanding debt load.
Management indicated in its news release that year-end 2012 net debt would be in the neighborhood of $22 billion (down from $23.2 billion as of Sept. 30, 2012), putting net leverage/EBITDA at 3.1 times, as it reiterated 2012 EBITDA guidance of $7 billion. The company further indicated it now believes it can pare net debt down to $17 billion by June 30 (imminently achievable, in our view) and intends to "accelerate the achievement of a medium-term net debt target" of $15 billion.
The move doesn't strike us as terribly surprising. ArcelorMittal hasn't been shy about raising equity in the past, and our modeling has incorporated expectations of an equity raise for several months (see our Aug. 3 note, "Credit Downgrade Increases Cost of Debt and Likelihood of Rights Offering for ArcelorMittal").
It also serves to highlight management's long-articulated commitment to an investment-grade rating (since lost from all three major agencies), a factor we've previously cited as a reason the bonds looked attractive. Indeed, ArcelorMittal's 2022s, which reside on our high-yield Best Ideas list, seem to be performing very well this morning. This morning the bonds are being bid at around 111.25 (yielding 5.18% or 331 basis points over Treasuries), up from 107.25 yesterday (5.72% or 385 basis points over Treasuries). This extends a lengthy run of strong performance of the notes, which as recently as June traded at 95 (yielding 6.9% or 530 basis points over Treasuries).
We continue to see decent value in the bonds, which still offer what passes today for speculative grade yield. But remaining upside has undoubtedly been crimped and we're electing to remove the bonds from our Best Ideas list. Given our less-than-rosy near-term outlook for steel market fundamentals, the principal short-term catalyst for the bonds would be a prospective reversal by the rating agencies that would take ArcelorMittal back into the investment grade territory management seeks.
Bank of America: Notes Are Still Rich (Jan. 8)
Bank of America (BAC) (BBB) announced today that it is issuing new benchmark 3-, 5-, and 10-year notes. Initial price talk is spreads of 100, 130, and 160 basis points over the Treasury curve for the 3-, 5-, and 10-year notes, respectively. We view all of this price talk as overvalued. Since August 2011, we have had a rating of BBB on Bank of America due to our assessment of mortgage-related losses stemming from legal claims associated with past underwritings, as well as our conservative estimates around the extent and timing of the company's return to "normalized" earnings. Essentially, we felt that the market had underestimated future losses and the announcement yesterday of the $10 billion settlement with Fannie Mae only serves to prove our point. Although the announcement helps to clarify some of B of A's future earnings, we still think the bank is a long way from producing acceptable returns on capital. While other banks' capital positions continue to improve, we project Bank of America's capital position will continue to stagnate at current levels and we don't expect to change our rating anytime soon. We recommend investors look to Morgan Stanley (MS) (BBB), where one can pick up approximately 50 basis points of yield at the 10-year point for the same rating, or Citigroup (C) (A-), where one can pick up two notches of rating for less than 30 basis points of lower yield at the 10-year point.
Ford Motor Credit Follows Daimler and Toyota Finance Subs With 5-Year Deal; Price Talk is Cheap (Jan. 8)
Ford Motor Credit (BBB-) is following closely in the footsteps of Daimler's (DAI) (BBB+) and Toyota Motor's (TM) (A) finance subsidiaries with a benchmark 5-year issue. Daimler Finance priced its 5-year deal yesterday at +115 basis points over Treasuries, which we viewed as slightly cheap to our +110 fair value assessment. Toyota Credit priced its 5-year yesterday at +60 basis points over Treasuries, which we viewed as about 10 basis points rich. We are hearing both are trading tighter in the secondary market. Meanwhile, last week Ford Motor Company (F) (BBB-) priced a $2 billion 30-year deal at +180, which we viewed as about 20 basis points rich. This bond has backed up about 5 basis points. We view the new Ford Credit 5-years as fairly valued around +150 basis points over Treasuries, supported by the entity's positive trending credit fundamentals. As such, initial price talk of +170 basis points looks cheap. Ford Credit's recently issued 10-year bond is currently trading in the +170 area as another point of reference.
Ford recently reiterated its goal of reducing manufacturing debt to $10 billion by "mid-decade" and had a bit over $14 billion of debt outstanding as of the third quarter. We believe this goal is achievable and in line with our view that the credit continues to improve on the back of strength in the North American auto market. The new $2 billion offering may result in a modest increase in total debt as proceeds are targeted for the reduction of higher cost outstanding debt and to accelerate contributions to its pension plans. However, we expect healthy free cash flows over the next few years to support intermediate-term debt reduction targets.
New Comcast Notes Probably Fairly Priced at Worst (Jan. 8)
Comcast (CMCSA) A-) is in the market looking to issue benchmark-size 10-, 20-, and 30-year notes. The firm is one of our favorites in the U.S. telecom sector on the strength of its network assets and the steady pace at which it is taking share from phone companies like AT&T (T) (A-). Comcast also has the strongest balance sheet among its cable peers, with consolidated net leverage at 1.5 times EBITDA. As a result of our favorable view of the firm, we upgraded our rating on the firm from BBB+ last year, putting it on equal footing with telecom giants AT&T and Verizon (VZ) (A-). Comcast has amassed a huge cash balance recently following the sale of its spectrum assets and NBC Universal's stake in A&E. At the end of the third quarter, consolidated cash totaled $8.9 billion, with $4.2 billion of that held at NBCU. Comcast management has yet to announce plans for the cash, but we expect the firm will remain conservative with shareholder returns. For 2013, we expect the firm will complete its $6.5 billion share repurchase program, keeping buybacks well below free cash flow. We suspect that Comcast is readying its balance sheet to buy the remainder of NBCU, a move that we believe it can make without jeopardizing our rating.
Initial price talk on the new 10-year notes is in the range of 100 basis points over Treasuries, a level that we would view as attractive, if it holds. Comcast's 3.125% notes due 2022, issued last June, currently trade at +85, which is right in line with AT&T's 2.625% notes due 2022. We view both of those levels as approximately fairly valued given that the Morningstar Industrials A- index trades at about +105 and telecom names typically trade inside the index. In addition, we strongly prefer both Comcast and AT&T to either Verizon or Time Warner Cable (TWC) (BBB-). Verizon's 2.45% notes due 2022 trade at about +65 basis points, which we believe is far too tight given the comparable credit risk we see between it and Comcast. TWC's 4.0% notes due 2021 trade at +121 basis points, which we also believe is too tight given the significantly higher leverage that the firm targets (3.25 times EBITDA) relative to Comcast.
New Windstream Notes Likely Not Attractive; We Prefer Frontier (Jan. 8)
Windstream (WIN) (BB-) announced that it is looking to refinance the $1.1 billion of debt it has maturing in 2013. The firm has about $300 million of term loans that come due in July and $800 million of 8.125% notes that mature in August. It is seeking $300 million of new term loans under its existing senior secured facilities to replace the maturing loans and hopes to have the new loans in place by the end of January. Windstream also plans to issue $700 million of new senior unsecured notes due in 2023 and callable beginning in 2018. The firm doesn't plan to use the proceeds to refinance the notes maturing in August, though, but will instead tender for $650 million of 8.875% PAETEC notes due in 2017. For the August maturities, Windstream highlighted that it has $1.25 billion available under its revolving credit facility to meet this obligation if needed. Getting through the 2013 maturities will give the firm some breathing room, as it faces no maturities in 2014. However, Windstream will have work to do in 2015, with $1 billion of term loans and its revolver maturing late in the year.
We don't expect the new Windstream 2013 notes will price attractively. The firm's existing 7.5% notes due in 2023 currently trade at a yield to worst of 6.3% to a par call in 2019. Similarly, its 7.5% notes due in 2022 trade at a yield to worst of 6.3% to a par call in 2020. We would peg fair value for the new notes at a yield of about 6.75%, reflecting the fact that these notes sit behind $2.8 billion of secured debt (potentially more if the firm draws down on its revolver). Given the yields on Windstream's existing notes, we wouldn't be surprised to see the new issue price with a yield of 6.25-6.5%. We would still prefer to hold Frontier (FTR) (BB) notes over Windstream. Frontier's 7.125% notes due in 2023, which aren't callable, currently provide a yield of 6.2% to maturity. We like the fact that Frontier carries no meaningful secured debt and that its management team has prioritized debt reduction, cutting its dividend sharply last year. We currently have Frontier's 2020 maturity bonds on our high-yield Best Ideas list and believe they have 50 basis points of tightening potential.
Staples Terming Out Debt With New Issue; Initial Price Talk Attractive (Jan. 7)
Staples (SPLS) (BBB+) is coming to market with 5- and 10-year paper to fund a tender offer for as much as $750 million of its $1.5 billion 9.75% notes due 2014, also announced today. Initial price talk looks attractive: the low 200s for the 5-year and mid- to high 200s for the 10-year. Fellow retailer Macy's (M) (BBB), which we rate one notch lower, has 5-year bonds that trade in the low 100s and 10-year bonds that trade in mid-100s. While Macy's operates in a more stable retail environment, we think the 100-basis-point differential is much too wide. We see fair value at closer to where Macy's bonds are trading, or at least mid-100s for the 5-year and high 100s for the 10-year.
Despite the competitive challenges Staples is facing and our less-than-rosy view of the office supply industry, we believe management is very prudent in its use of leverage. Staples' lease-adjusted leverage is under 3 times and we expect the firm to reduce leverage during the next couple of years. We believe Staples will return to more conservative debt levels (comparable with levels reported before its 2008 acquisition of Corporate Express). This would bring leverage down to the low to mid-2 times range. Additionally, while the firm has expressed an increased willingness to return cash to shareholders and recently raised its share-repurchase target, management specifically stated that it would not consider leveraging the balance sheet further to fund this activity.
5-Year Initial Price Talk Is Attractive on One of Canada's Strongest Banks (Jan. 7)
Royal Bank of Canada (RY) (AA-) announced today that it is issuing new U.S. dollar-denominated benchmark 5-year notes. Initial price talk is a spread in the area of 70 basis points above the Treasury curve. In mid-December 2012, Bank of Nova Scotia (BNS) (A+) issued a new U.S. dollar-denominated benchmark 5-year, and those notes currently trade with a spread in the high 60s above the Treasury curve. Given we rate Royal Bank one notch higher, we think this initial price talk is very attractive and we would recommend these notes all the way down to a spread of 60 basis points.
As with other major Canadian banks, we are positive on Royal Bank from a credit perspective due to Canada's highly regulated banking oligopoly. In the group of Canadian banks, we view Royal Bank as one of the strongest, if not the strongest. Royal Bank of Canada is the largest of Canada's big six banks, with CAD 815 billion in assets. It is one of North America's leaders in diversified financial services, providing personal and commercial banking, wealth management services, insurance, corporate and investment banking, and transaction processing services, serving 15 million clients in 57 countries. The firm's largest segment, Canadian banking, generates more than 50% of the net income. Royal Bank maintains strong regulatory capital positions, with its Core Tier 1 ratio above 10% and its Tier 1 ratio above 13%.
Initial Price Talk on New ADT Issuance Looks Attractive (Jan. 7)
ADT (ADT) (BBB+) is expected to be in the market today with a $500 million issuance of 10-year notes. We expect proceeds will be earmarked for share repurchases. In response to pressure from activist investor Corvex Management, ADT management recently announced a capital allocation plan that includes $2 billion of share repurchases, a leverage target of 2 times TD/EBITDA (compared to 1.6 times for the latest 12 months ended Sept. 30), and a commitment to maintain investment grade ratings. Pro forma for this offering, leverage will be around 1.9 times, close to the company's target level. At 2 times leverage, we would view the company as weakly positioned within our BBB+ rating. If management were to stray further from this target, our rating would likely be lowered.
ADT's existing 2022 notes were recently quoted around a spread of 215 basis points over Treasuries and initial price talk for the new notes is the "mid-200s", which we view as attractive. Looking across the industrial landscape, spreads for similar-rated names are meaningfully tighter, with Eaton's (ETN) (BBB+) new 10-year bond quoted around a spread of 100 basis points over Treasuries, which we view as slightly rich. Roper Industries (ROP) (BBB), which is strongly positioned within its rating, has a new 10-year that was quoted around 130 basis points over Treasuries, which we also view as slightly rich. Looking a little further down the credit curve, Ford (F) (BBB-), which we view as an improving credit, has a 2022 bond that was recently quoted around a spread of 172 basis points over Treasuries, which seems fair to us. Although investors in ADT should definitely be compensated for the lingering uncertainty regarding the Corvex situation, we think fair value for a new 10-year should be closer to a spread of 180 basis points over Treasuries.
ADT, recently spun off from Tyco International, enjoys an enviable position within the $13 billion North American residential and small-business security market--its 25% market share is 6 times its next-largest competitor. We expect that ADT's industry-leading brand name, superior scale, and expansive dealer network will allow this wide-moat firm to outgrow the industry over the long run and generate around 20% returns on invested capital in the process. However, competition from incumbent cable and telecom companies represents a potential threat to growth, tempering our enthusiasm to a certain degree.
Toyota and Daimler Finance Subs to Issue Benchmark Offerings; Daimler Looks Cheaper (Jan. 7)
Toyota Motor (TM) (A) and Daimler (DAI) (BBB+) finance subsidiaries are in the market today with benchmark offerings. We view the finance sub credits as similar to the parent's due to the inextricable linkage in the businesses. Toyota Motor Credit is offering 5- and 10-year notes while Daimler Finance North America is offering 2-year floaters as well as 3- and 5-year fixed notes. We view fair values on Toyota at +70 and +90 basis points over Treasuries for the 5s and 10s, respectively. We view fair value on the Daimler 5-years at +110 with the 3-years at +85. Other comps include Honda (HMC) (A) subsidiary American Honda Finance with 2017 and 2021 maturities indicated around +93 and +110 basis points above Treasuries, respectively, which we view as cheap. Volkswagen's (VOW) (A-) finance sub U.S. dollar-denominated bonds due 2017 and 2020 indicated at about +95 and +120 basis points above Treasuries, which we view as fairly valued. Finally, Ford Motor Credit's (BBB-) 5-year and 10-year bonds are trading at +150 and +172 basis points above Treasuries, which we view as fair. Overall, we remain very constructive on the North American market with mixed views elsewhere globally. This supports Ford, but a recent sharp rally in spreads makes them only fairly valued. Honda continues to trade cheap to the group. Initial price talk of +120 on the Daimler 5-years looks somewhat cheap while the Toyota 5-years in the "low +60s" looks somewhat rich.
Toyota recently announced calendar 2013 sales and production forecasts. Japanese sales are guided to fall by more than 15% from calendar 2012 to 2.04 million vehicles, including Daihatsu and Hino brand sales. International sales are guided to increase 8% to 7.87 million and global sales are forecast to rise 2.2% to 9.91 million units. We remain optimistic about Toyota's prospects in the U.S but we see 2013 as a year to maintain share rather than to gain large pieces back, as was the case in 2012 following natural disasters in 2011. Competition in the U.S. from many players, foreign and domestic, will remain fierce, which we think will make consistent share gains difficult. Global production for Toyota is projected to remain roughly flat at 9.94 million vehicles, with a 10% decrease in Japanese production and an 8% increase in international production. Despite a fall in Japanese volume, we think the recent weakening of the yen to a 27-month low against the dollar following the Liberal Democratic Party's election win is excellent news for Toyota. Toyota produces more of its vehicles sold overseas in Japan compared with competitors and per previous management disclosures, a JPY 1 change in the dollar affects Toyota's operating income by JPY 35 billion.
Daimler's results have been mixed including a third-quarter earnings miss driven by weakness in its core European market. Nonetheless, we continue to like the firm's heavy exposure to the luxury segment and reasonable geographic diversity away from Europe, supporting existing ratings.
Sunoco Logistics Partners to Issue 10-Year and 30-Year Bonds to Finance Capital Plan (Jan. 7)
Sunoco Logistics Partners (SXL) (BBB) announced Monday that it plans to issue 10-year and 30-year bonds to partially finance its expansion capital plans and to fully repay borrowings under its credit facilities. As of Dec. 31, Sunoco had $119 million outstanding under its revolving credit facilities. We recently raised Sunoco Logistics' economic moat to wide with a stable trend based on the integration of its scaled-up marketing and logistics business with the company's first-class physical assets. Following the October acquisition of Sunoco Logistics' parent company by Energy Transfer Partners (ETP) (BBB/UR), Sunoco Logistics is now an operating subsidiary of ETP. We believe the deal is a net positive for Sunoco Logistics, as Sunoco Logistics could see faster growth as Energy Transfer Partners seeks to optimize pipelines held by both partnerships. We do not anticipate that the acquisition will affect our rating on Sunoco Logistics.
Based on its similar segment mix, we view Magellan Midstream Partners (MMP) (BBB+), which we rate with a wide moat, as a fair comparable to Sunoco Logistics. Magellan's 4.25% notes due 2021 are quoted at a spread of +107 basis points over the 10-year Treasury, while its 4.20% bonds due 2042 are quoted at a spread of +147 over the 30-year Treasury, both of which we view as fair value. Sunoco Logistics' 4.65% notes due 2022 recently traded at a spread of +155 basis points over the 10-year Treasury, which we view as fair value, while its 6.10% bonds due 2042 are quoted at a spread of +219 basis points over the 30-year Treasury, which we view as cheap to fair value. Accounting for our ratings differential to Magellan and the potential for faster growth under Energy Transfer Partners, we believe fair value for the Sunoco Logistics' new issues is +160 basis points for the 10-year and +200 basis points for the 30-year, both of which are 10 basis points tighter compared with initial price talk of +170-175 for the 10-year and +210 for the 30-year.
MarkWest Energy Partners to Issue 10-Year Notes to Redeem Outstanding Notes (Jan. 7)
MarkWest Energy Partners (MWE) (BB) announced Monday that it plans to issue $1 billion of 10-year notes to redeem, along with proceeds from its recent common units offering, all of the company's outstanding 8.75% notes due 2018 ($81 million), as well as $175 million of its 6.50% notes due 2021 and $245 million of its 6.25% notes due 2022. The balance of the proceeds will be used to fund the company's capital expenditure program and general corporate purposes. We award MarkWest a narrow economic moat based upon its competitive advantages within the gathering-processing business. As a first-mover in the Marcellus and the emerging Utica, MarkWest is positioned for strong organic growth as it builds an integrated midstream footprint in these long-lived shale plays.
MarkWest's 5.50% notes due 2023 recently traded at a yield to worst of 4.01%, or an option-adjusted spread of +245 basis points over Treasuries. We view Regency Energy Partners (RGP) (BB+), which we also award a narrow moat, as comparable to MarkWest. Regency's 5.50% notes due 2023 recently traded at a yield to worst of 4.33%, or an OAS of +263, which we view as rich to our fair value estimate of 4.75%. Although MarkWest has strong growth potential, it has weaker credit metrics than Regency, while also having a significantly lower percentage of fee-based cash flows. As such, our fair value estimate for MarkWest is 5.00%.
David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.