4/4/2020 Citi Velocity

High Yield Trading Desk

NOT A PRODUCT OF CITI RESEARCH – THIS IS MARKET COMMENTARY INTENDED FOR

We’re opening down ¼ to ½pt this morning with global shares weaker and oil meaningfully stronger. U.S.
stocks are set to open lower on Friday as the market reacts to the March U.S. employment jobless rate rising to
4.4%, a decrease of 701,000 jobs, as employment plummeted for the first time since 2010. Treasuries are
unchanged with the 10yr yield at 0.59%.

High Yield secondary was mixed on Thursday as investors weighed an uptick in crude prices against worsening
economic indicators from the coronavirus. Despite reports that 6.6 million U.S. workers filed for unemployment
last week, stocks were led higher by energy shares yesterday as President Trump said shared that Russia and
Saudi Arabia could soon cut output by as much as 15mm barrels. While we continue to reach historic highs in
unemployment with over ~10mm jobs lost in the last two weeks, Brent and WTI both surged more than 20% on
the prospects of a potential decline in production and end to a painful price war. While equities bounced
momentarily, Treasury yields remained largely unchanged around ~0.58%. High Yield secondary weathered the
broader-market volatility, trading mixed on relatively slim volumes. As oil bounced off 18-year lows, energy
advanced in afternoon trading with beta up +.5pt to +4pts as we saw bonds backing Whiting Petroleum and
Occidental Petroleum push higher. High Yield Cyclicals opened down .5-3pts with general market heaviness as
COVID-19 names continue to struggle on decreased economic activity. The desk remained active in the Ford
capital structure, both FMCC and Ford Co and CDS. The struggling auto company announced Deliveries were
down 12.3% in the first quarter. Although results came in above Q1 estimates of -16%, the structure traded
lower with the Ford Motor 5.596% notes due 2022 were 1.5 points lower on the day at 94, from a low of 66.375
last week. As we look forward into next week, investors will anticipate more discussion regarding
implementation of oil production cuts and additional economic indicators assessing the severity of the COVID-
19 shut down. The current reported Death toll from the deadly coronavirus now stands at 54,458 with 1,034,085
confirmed cases globally. The desk was active in SBAC, KCI, CCL, and NMG.

Top News

TESLA (TSLA): In the first quarter of 2020, Tesla produced 102,672 vehicles and delivered
approximately 88,400 vehicles. This is Tesla's best ever first quarter performance and results came in well
above street estimates which of 80,640 deliveries. Model Y production started in January and deliveries
began in March. Additionally, the Shanghai factory continued to achieve record levels of production,
despite significant setbacks. Call Brad Liff to discuss.

Tenneco (TEN): Announced today that they drew down $700mm of revolver, and will draw down
additional amounts during this shutdown period. The company also lowered capex spend, furloughed
some employees, and cut salaries, in order to preserve liquidity. Call Brad Liff to discuss.

Arconic (ARNC): Yesterday the company announced it has drawn $500mm on its $1bn Revolving Credit
Facility as a proactive measure to bolster its liquidity and preserve financial flexibility. The company also
withdrew guidance for the second through fourth quarter of 2020 which was previously provided at their
Investor Day on February 25, 2020. Call James Finnerty to discuss.

Homebuilders:
- Lennar (LEN) posted an 8-K late yesterday with the outlook section of the to be posted 1Q20 10Q. In it
they highlighted that post quarter end stay at home orders in some markets that operate which has
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prevented the company from constructing and selling homes. In markets where they are allowed to
continue to construct and sell homes traffic and sales have slowed significantly. LEN also highlighted that
given the shutdown of large portions of the U.S. economy that they expect sales to continue to slow and
that they are taking actions to reduce costs and cash uses. The company highlighted that as of the end of
February that they had $785mm of cash and $2.1B of unused capacity on their revolving credit facility.
Lastly LEN noted that their mortgage lending operations (residential and commercial).
- MDC Holdings (MDC): MDC filed an 8-K yesterday with preliminary unit data for 1Q20. The
company highlighted that as a result of the pandemic that they have experienced increasingly adverse
business conditions, especially in the latter half of March which have negatively impacted operating
results. 1Q20 Operating Stats: Orders +23% YoY, Deliveries +14% YoY, Backlog +32% YoY. March-
2020: Orders -27% YoY, Cancellation Rate as a % of Gross Orders – 31.8% vs. 15.4%, Cancellation Rate
as a % of Backlog – 6.0% vs. 4.5%, Deliveries - +10% YoY. Lastly they highlighted their financial
position as of the end of March 31, 2020: Liquidity = $1.4B (Cash & Investments of $450mm,
Availability of $950mm under RCF due 2023), Next maturity is 2024, Dividend intact. 1Q20 results due
out on May 12, 2020.
- Bottom Line: We continue to be cautious on homebuilders given the negative impacts from the
pandemic: (1) >75% of population under stay at home orders; (2) Seizing up of economy; (3) Job losses &
fears of future job losses; & (4) Negative wealth effect. Call James Finnerty to discuss.

PetSmart (PETM): Chewy (CHWY) reported strong 4Q results with margin improvement driving an
EBITDA beat in the quarter. 1Q revenue guidance was well ahead of consensus, while CHWY withheld
providing FY20 guidance in light of the uncertain operating environment tied to COVID-19. We expect
CHWY will be a net beneficiary from reduced store traffic though acknowledge that may have a near term
impact on the improving trend in margins as CHWY manages through a spike in customer acquisitions
and demand. Call Geoffrey McKinney to discuss.

Caesars (CGPHLC/CEOLLC): Caesars announced it will furlough 90% of its workforce due to the
uncertain duration of property closures. Call Geoffrey McKinney to discuss.

L Brands (LB): LB will test reopening two Bath & Body Works stores in Ohio as it seeks to be deemed
an essential retailer for its soaps and hand sanitizer products. Call Geoffrey McKinney to discuss.

Recent CSS NOTES:

CITI HY CSS - BUILDER BRIEF - LEN 1Q20 BEAT; Pulls FY20 Guidance on Coronavirus

CITI HY CSS: February Decile Analysis

CITI HY CSS TMT: February Month-in-Review

CITI HY CSS TMT: UVN acquired by Searchlight Capital

CITI HY CSS Trade Idea: Rotate Out Of HQ Long Duration

CITI HY CSS - Basics Brief - FMCN 4Q19 Inline; Guidance Reiterated

CITI HY CSS - CC 4Q19 OK, FY20 Guidance Inline, TiO2 Margins Squeezed

CITI HY CSS - Basics Brief - CF 4Q19 Inline, Debt Reduction Supports Xover Story

CSS HY CHEMS - TIO2 UPDATE - MARGIN SQUEEZE COMING?

CITI HY CSS TMT: S/TMUS approved by Judge Barrea

Primary Market Update

Source: LCD, an offering of S&P Global Market Intelligence

The High Yield primary market showed signs of strength on Thursday with deals launching for three different i
ssuers totalling $2.3 billion. Companies accessing capital markets will use the new influx of capital to repay AB
L facility borrowings and general corporate purposes as COVID-19 continues to weigh on short term liquidity.
Year-to-date volume stands at $74.7 billion, for a nearly 20% increase year-over-year

Yesterday's Spread Moves

Source: Bloomberg Barclays US Corporate High Yield Index

High Yield secondary closed marginally wider on Thursday on the back of volatile price action. While BB’s
closed wrapped around unchanged, B’s underperformed severely, widening 41bps on the day. Energy lead gains
on positive news from Trump regarding production cuts, tightening 47bps on the day. Transportation and
Capital goods struggled, widening 49bps and 24bps, respectively.

Chart of the Day (Click chart to view on Citi Velocity)

https://www.citivelocity.com/cv2/go/DATA_ANALYTICS_TOTAL_CREDIT/X19OQVZJR0FUSU9OX0JBU0U2NF9fY3YtY29udGVudC1zdGF0aWMvcm… 3/5
4/4/2020 Citi Velocity

Source: Bloomberg Barclays US Corporate High Yield Index

Click the chart above to view in Citi Velocity. To view the most recent dashboard from our HY Strategy
Research Team click here: Link to Dashboard

Sam Berberian
Head of US HY Trading
(212) 723-1463
[email protected]

Fran Sutter
Head of US Loan Trading
(212) 723-7510
[email protected]

Chris Totman
Co-Head of US Leveraged Credit Sales
(212) 723-6001
[email protected]

Patrick Kris
Co-Head of US Leveraged Credit Sales
(212) 723-6065
[email protected]

Cristina Rosenberg
Head of IG/HY/Loan Credit Sector Specialists
(212) 723-6199
[email protected]

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4/4/2020 Citi Velocity

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