Media: Jason Kim

Sector View:

We have a Cautious coverage view on the Media sector as many credits in the space are asking investors to take both cyclical and secular risks at valuations that do not adequately compensate them for it, in our view. We see several distinct challenges for the sector in 2019. These include cyclical, secular, and technical. On the cyclical front, our economists expect growth rate to slow next year from robust levels in 2018. Even in this strong macro backdrop, core advertising trends have been lackluster for many of the traditional media companies with the exception of outdoor. With the exceptional level of political spending in 2018, it remains to be seen how much of a crowding out effect may have occurred impacting core ad trends of TV broadcasters. But at a minimum, the macro environment is unlikely to be a tailwind for media companies (and without the benefits of political spend in 2019).

On the secular side, we see increasingly indisputable evidence that digital’s share gains are coming from outside of print, and at an accelerating rate at that. The most obvious driver is simply that print media has become such a small part of the overall advertising pie that it can no longer cede ad share fast enough to satisfy digital’s relatively uninterrupted gains. Finally, on the technical side, we are watching IHRT’s expected emergence in 1Q19 closely. While it will still have relatively high leverage (~6x on LTM EBITDA based on the most recent plan), the structure now represents a more credible alternative to HY media investors who previously avoided the structure given over 10x+ leverage and a thin liquidity profile.

Source: MAGNA Global Source: MAGNA Global

Trade idea: Sell UVN 5.125% secured notes due 2025 as we see further widening from current trading levels given our view that a sustained return to growth will take more time and investment than the market is currently pricing in. Unlike other TV broadcasting names, UVN bondholders are taking both company specific turnaround execution risk as well as the broader macro/secular risks that impact peers.

Ratings declines continue to put pressure on top-line trends. Over the past 10 years, UVN’s viewership has contracted nearly 50%, meaningfully decoupling from changes in the Hispanic population which has grown 20-30% over the same period. At the same time, UVN’s main competitor Telemundo has been able to roughly keep pace, with ratings tracking the growth in Hispanic population. We believe declines in viewership have been driven by a change in consumer taste as Televisa’s classic telenovelas seem to have fallen out of favor, coupled with the cord cutting pressure the entire industry has faced. Given viewership drives both subscriber fees and advertising revenues, which make up a bulk of the company’s revenue and EBITDA, we view the downward trends being significant enough to drive widening in the name. While management has been proactive in deleveraging and has acknowledged the issues the company has faced, UVN still remains the most levered TV Broadcaster (6.8x, net), despite its idiosyncratic risks.

Key risks to our view: Improvement in viewership driving increased ability to grow subscriber fees and advertising revenue, aggressive asset sales driving meaningful deleveraging, and a potential acquisition by a higher quality strategic player.

Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research

Risks to our view: Improvement in viewership driving increased ability to grow subscriber fees and advertising revenue, aggressive asset sales driving meaningful deleveraging, and a potential acquisition by a higher quality strategic player.

Metals & Mining: Karl Blunden

Sector View

We maintain a Neutral coverage view on the sector after raising it in June 2018. Going forward, we see several drivers of credit upside, most notably derisking of emerging market operations (e.g., divestment resolution at FCX’s Grasberg mine and ramping of

FMCN’s Cobre Panama mine) and balance sheet improvement (at X/CSTM). The key macro risks are escalating trade tensions and, consequently, lower commodity demand, although we think most of the downside potential is priced in at these levels (particularly in copper). Potential potholes that credit investors should focus on are event risk (e.g. leveraging M&A at FMG or layering of select bonds at ARNC in the event of an LBO) and margin challenges (e.g. AKS is reliant on improved pricing in autos to offset volume risks).

Our top trade ideas in the sector are to (1) Buy the FMCN 2022s as we see multiple paths to a refinancing transaction, which we calculate could offer 5-7 points of upside and attractive carry, and (2) Buy the X 2025s, as the company’s lowered fixed cost base (through asset investment and debt reduction) and replenished secured capacity should support rating upgrades that drive the bonds to trade inside the sector (for ~2-4 points of relative upside). We also see opportunity in the front end of the FCX structure from potential liability management actions and in the ARNC 2020s/2021s as the bonds could be tendered or made whole under a range of strategic alternatives the company may consider.

The sector has posted a return of -1.5% YTD in 2018, underperforming the HY market average by 1.7%, driven by operational issues, the re-emergence of jurisdictional risks, concerns about China demand, and trade tensions. With the sector now trading at 7.5% YTW (vs the index at 7.3%), we expect total returns to be in line with the HY Market average in 2019.

Exhibit 92: We see upside in the X 2025s and downside in the FMG 2024s; several front-end bonds could benefit from refinancing activity, including those in the FMCN, FCX, and ARNC structures

HY Metals & Mining Relative Value

Source: Goldman Sachs Global Investment Research, Bloomberg, Company

Trade Idea #1: Buy the FMCN 7.25% 2022s (on the HY CL). The FMCN short-duration bonds offer upside from rapid deleveraging and potential refi activity, along with downside protection. The ~5-7 points of upside to a call for the 2022s (from $97.0 / 8.3% YTW today) drives our preference for them over the 2021s (~3-5 points of upside).

FMCN is positioned to deliver outsized deleveraging and derisking as Cobre Panama ramps and the company makes progress resolving a $7.6bn tax claim in Zambia. Cobre Panama’s production ramp (and modest upside in copper prices) should increase run-rate EBITDA by ~110% entering FY2020 (or 62% at flat copper prices), decrease run-rate capex to $600mn from $2,035mn LTM, and improve FMCN’s geographic diversification. 3Q18 disclosures suggest that FMCN intends to target $2bn of debt reduction using cash flow - matching the size of FMCN’s 2021/2022 bonds.

We recognize that FMCN has concentrated geographic exposure and that its bonds are susceptible to technical pressures given their inclusion in the EM index. However, we believe the fundamental impact of fiscal/constitutional challenges in Zambia/Panama should only have incrementally negative effects on FMCN’s cash flow (in the form of higher taxes/royalties/levies) and we think technical weakness in the bond complex has created attractive valuation for the near-dated bonds as they could be refinanced with less market-dependent bank/project debt. The bonds also offer downside protection as we see the entire debt stack as covered by the value of the non-Zambian assets and note that mining companies are distinctive in their ability to carve out assets for strategic buyers, and that multiples for high quality copper assets have been at least high-single-digits under a wide range of market scenarios (e.g. FCX’s sale of a Morenci stake in 1Q16).

Risks to our view: To the upside: maturity extension using bank/project debt; improved operating conditions in Zambia; interest in FMCN from strategic acquirers. To the downside: ramping obstacles at Cobre Panama, jurisdictional risks.

Trade Idea #2: Buy X 2025s. We see the X 2025s as attractive as they are the next bond maturity in the capital structure (following the recently announced make-whole of the X 2020s) and have relatively strong downside protection given X’s replenished secured debt capacity and strong current cash flow. We see the potential for ~50-80bp of spread tightening (or 2-4 points of outperformance) as debt reduction and plant investments reduce X’s balance sheet and business risk in the eyes of the credit agencies, driving it to trade toward BB peers (e.g. FMGAU).

We think X’s high yield under-appreciates the extent to which the company has reduced fixed costs, created optionality for addressing its unsecured bonds, and positioned itself for credit rating upgrades. While we do not expect X’s investments to be sufficient to move it to the lower end of the North American cost curve (given the structural cost advantage of mini-mills), and continue to see the potential for unplanned outages, we think continued operational improvements should lead to a higher floor in earnings even in a lower steel price environment. Management has reiterated its target of a BB credit rating and noted its intention to go beyond BB metrics to ensure rating sustainability through cycle volatility, and, importantly, demonstrated its commitment through bond tenders.

Risks to our view: To the downside, further operational headwinds, increased maintenance outages and capital spending, material steel price declines, M&A leading to higher leverage and a shift to more shareholder friendly activities (e.g., share buybacks and dividends).