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Default Protection on Whirlpool Debt Hits 2-year High as Costs, Tariffs Bite

Market pros see leveraged loan default rate holding at low levels

S&P: BBB downgrade risks in Europe look manageable

As specter of rate cuts grows, investors retreat from leveraged loan asset class

Retail investors flock to US high yield bond funds with $1.8B inflow


Default Protection on Whirlpool Debt Hits 2-year High as Costs, Tariffs Bite

whirlpoolThe cost of buying protection on the debt of Whirlpool yesterday tested the highest readings since the shock Brexit vote late in June 2016, after the appliance maker detailed a difficult second quarter on rising raw material input costs, transportation setbacks, and uncertainty regarding the emerging tariff regime.

Five-year CDS referencing Whirlpool debt increased nearly 15% yesterday morning, with bids at 95 bps, from 83 bps at the start of this week, according to Markit. Costs haven’t held north of 100 bps since the oil-rout days of 2016’s first quarter, and readings were below 50 bps as recently as late January, when President Trump’s initial tariff impositions appeared narrowly tailored to specific products, including imported washers.

Whirlpool today revealed a material $50–100 million increase in its raw-material cost assumptions for the year, now putting the year-to-year increase at roughly $350 million. The company noted some protections against rising steel cost inputs from contract hedging, but lamented its inability to hedge mounting costs for critical resins as oil prices trend higher. It also warned that freight costs were a freshening headwind amid higher fuel costs and an imbalance between heated demand and the more limited availability of freight carriers.

While the company is still positive on the medium- to long-term benefits of tax reform to consumer demand and corporate competitiveness, it also said it was beginning to feel the pinch of tariffs, either as a direct importer or via its suppliers, adding to the weight of cost inflation. Its efforts to cull running costs from its structure helped bolster EBIT margins through a rough patch in its European operations and a steeper-than-expected 4% decline in consolidated 2Q revenue, but Whirlpool now faces a tightrope exercise in attempting to pass through its higher production costs to consumers amid crosscurrents in global macro demand.

“Since mid-May, a number of elements in the macro environment worsened significantly. In addition to continued raw material inflation, we experienced a temporary but significant decline in U.S. industry demand, headwinds related to the U.S. tariff as well as the Brazilian trucker strike and currency fluctuations in Russia and Latin America,” CEO Marc Bitzer said on today’s call with analysts. “In Europe, we were unable to overcome macro headwinds due to slower progress when expected as we work to recover volumes in the region.”

He went on to note the expected benefit to free cash flow from leaner inventories, strong product mix trends, working capital optimization, and reduced structural costs. Still, the projection for free cash flow of roughly 4% of net sales for all of 2018 is shy of the company’s stated long-term goal of 5–6% and a downshift from projections at the start of the year.

On the liquidity front, Whirlpool on April 24 announced the sale of its Embraco subsidiary to Japan’s Nidec for roughly $1.1 billion, the proceeds of which backed a $1 billion share repurchase via tender offer. The company said today that it would continue to buy back shares under its remaining $950 million authorization.

Whirlpool during the quarter also entered into a term loan agreement via a Wells Fargo–led lender group, providing for an aggregate lender commitment of €600 million (roughly $703 million) which was earmarked for general corporate purposes, including the repayment of commercial paper. — John Atkins

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