Advanced Theory & Practice of Bonds

Recognized under IBF-FTS | 7-8 June 2022 | 12 CPD Hours

Comprehensive 2-day course on bonds designed for private bankers, wealth managers and advisors.

US Benchmark & Global Indices 28 Oct

S&P ended 0.3% lower while Nasdaq moved higher by 0.6%. Microsoft’s results beat expectations while financials and industrials, down 2%, dragged the S&P lower. While pre-election stimulus plans are all but over, Trump has committed to a stimulus after the elections. US 10Y Treasury yields were down 3bp, US IG CDS spreads were up 1.1bp while HY was flat. Banco Santander and HSBC posted strong results with dividends expectations on the cards. European equities were lower by ~1% and European main and crossover CDS spreads widened 1.4bp and 3.3bp respectively. Asian equities are mixed today while Asia ex-Japan CDS spreads are flat. It’s a busy Wednesday for the primary markets with 14 new dollar bonds launched this morning.

We are conducting a Bond Traders’ Masterclass termed as A Practical Introduction To Bonds today, October 28 at 7pm Singapore / 11am London time. This is a 90 minute interactive session which will cover the key fundamentals of bond investing. This would be followed by more advanced topics on Thursday and Friday.

Masterclass Oct-20

 

New Bond Issues

  • Lenovo $ 10yr @ T+310bp area
  • CDB Financial Leasing $ 3yr @ T+170bp area
  • AVIC International Leasing $ perpNC3 @ 3.7% area
  • Pershing Square $ 500m 10yr @ 3.5% area
  • Indika Energy $ tap 8.25% 2025 final @ 8.25%
  • Kookmin Bank $ 10yr tier 2 covid sustainability bond @ T+205bp area
  • Sino-Ocean Capital $ 364-day @ 5.75% area
  • Changde Urban Construction and Investment Grp $ 3yr @ 3.4% area
  • Poly Property Group $ 5yr @ 4.5% area
  • Zhongyuan Yuzi $ 5yr @ 2.9% area
  • Yanzhou Coal Mining $ 3yr @ 4% area
  • Yincheng International $ 364-day @ 13.5% area
  • Qingdao Conson Development (Group) $ 3yr @ 3.25% area
  • Zhuhai Huafa Group $ 300 mn 5yr @ 3.2% area

New Bond Issues 28 Oct

 

Korea Land and Housing (Korea LH), the government-owned company that implements land and housing-related policies raised $300mn via a 3Y social bond at a yield of 0.668%, 48bp over Treasuries and 32bp inside initial guidance of T+80bp area. The bond is rated Aa2/AA and received orders over $1.7bn, 5.7x issue size. The company plans to use proceeds for financing or refinancing projects in social eligible categories in accordance with the issuer’s social, green and sustainability bond framework.

Gansu Provincial Highway raised $300mn via 3Y bonds at a yield of 3.25%, 5bp inside initial guidance of 3.3% area. The bonds, expected to be rated BBB/BBB+ received orders worth $850mn, 2.8x issue size at the time of final guidance.

 

New Bonds Pipeline

  • Central Nippon Expressway $ green bond
  • Shandong Iron & Steel unrated $ bond
  • Guangxi Investment Group $ bond
  • PetSmart $1.2bn 7Y senior secured bond, $1.15bn 8Y unsecured bond

 

Rating Changes

Gilead Sciences Inc. Downgraded To ‘BBB+’ By S&P Following $21 Billion Immunomedics Acquisition; Outlook Negative

Fitch Downgrades Turkey’s RGY to ‘B’; Outlook Negative

Fitch Downgrades Tupras to ‘B+’; Outlook Negative

Fitch Revises Victoria’s Outlook to Stable; Affirms at ‘BB-‘

Italian Insurer Allianz SpA Outlook Revised To Stable From Negative By S&P On Similar Action On Sovereign; ‘A’ Ratings Affirmed

AutoNation Inc. Outlook Revised To Stable From Negative By S&P On Steady Performance In Pandemic, Faster-Than-Expected Recovery

SNAM, Terna, And MM SpA Outlooks Revised To Stable From Negative By S&P After Similar Action On Italy; Ratings Affirmed

Moody’s changes Votorantim’s outlook to stable; affirms Ba1 ratings

Unigel Participacoes Outlook Revised To Stable From Negative By S&P On Likely Lower Leverage, ‘B+’ And ‘brAA’ Ratings Affirmed

U.K.-Based Coca-Cola European Partners ‘BBB+/A-2’ Ratings Placed On CreditWatch Negative By S&P On Possible Acquisition

Moody’s places Coca-Cola Amatil’s A3 ratings on review for downgrade; P-2 ratings affirmed

Moody’s assigns first-time Baa1 rating to Jiangxi Railway; outlook stable

CEC Entertainment Inc.’s Debtor-In-Possession Facility Assigned ‘B’ Rating By S&P ; ‘D’ Issuer Credit Rating Unchanged

 

HSBC and Santander Report Profits as Dividend Expectations Kick-In

HSBC and Banco Santander reported profits in their Q3 earnings after pandemic-induced losses in the prior quarter. Both banks have indicated a willingness to pay dividends subject to regulatory approval. Earlier this year, the BoE had suspended HSBC amongst other big banks from paying dividends following the ECB’s decision to suspend dividends until October 2020, which got extended to January 2021.

HSBC reported net profits of $2bn in Q3, up $1.4bn vs Q2 that translated into an EPS of $0.07. CET1 capital was at $133bn vs $128bn in the previous quarter with the CET1 Ratio (Term of the day, explained below) inching 0.6% higher to 15.6%. Loans and deposits were relatively unchanged vs. the prior quarter. They also reduced Expected Credit Losses (ECL) charges by 80% from the prior quarter to $800mn from $3.9bn and expects this year’s ECL charge to be towards the lower end of their $8bn-13bn range.

Banco Santander reported net profits of €1.75bn ($2.06bn), 14% higher than the prior quarter and 249% higher than the same quarter last year, which was hit by a write-down of its UK business. CET1 Ratio came at 11.98%, up 0.13% in the quarter and near the top end of its target range. Non-performing loans (NPL) fell to 3.15%, down 0.32% with 66% of its moratorium expired and 2% in the credit impairment stage. They lowered full-year loan loss provisions’ forecast to 1.3% from an estimate of 1.4%-1.5%. The bank expects to achieve cost savings of €1bn ($1.18bn) by year-end and an additional savings of the same measure in its Europe operations by 2022.

HSBC’s 6.375% dollar perpetuals were up 0.16 to 106.1, yielding 4.83% while Banco Santander’s 7.5% dollar perpetuals were up 0.30 to 105.2, yielding 5.74% on the secondary mark

 

Mercedes Comes To The Rescue of Aston Martin

Loss making British luxury carmaker Aston Martin has announced that Mercedes is set to increase its stake to 20% in the company through a £1.3bn ($1.69bn) refinancing package. The deal also gives the beleaguered carmaker access to Mercedes’ hybrid and electric vehicle technology worth £286mn ($373mn). Astons’ CEO Tobias Moers, who took over the ailing company in January is executing a turnaround plan for the luxury carmaker. The carmaker associated with James Bond films is also likely to receive a £125mn ($163mn) investment in new shares from Zelon Holdings. According to Daimler, the stake increase will take place over the next three years. The deal comes at a time when Aston Martin reported dismal Q3 results in which it saw a pre-tax loss of £29mn ($38mn) vs a profit of £43mn ($56mn) for the same quarter last year. Mercedes and Aston Martin had first collaborated in 2013, when Daimler acquired a stake in the British carmaker. “We take another major step forward as our long-term partnership with Mercedes-Benz AG moves to another level, with them becoming one of the company’s largest shareholders,” said Aston’s chairman and biggest shareholder Lawrence Stroll.

Aston Martin Bonds Rally as Daimler Expected to Increase Stake

Aston Martin Capital Holdings 6.5% dollar bonds due 2022 is up ~10% this morning, trading at 100.9 points. Its 5.75% sterling bonds due 2022 is trading at 90.9, up ~0.35 points at the time of writing.

For the full story, click here

 

Fitch Downgrades Turkey’s RGY & Tupras to B/B+

In its latest rating actions, Fitch downgraded two Turkish corporates, Ronesans Gayrimenkul Yatirim A.S.’s (RGY) and Turkiye Petrol Rafinerileri A.S.’s (Tupras). Turkish property company RGY has been downgraded to B from B+ while Tupras has been downgraded to B+ from BB-. The outlook for both the companies is Negative.

The downgrade of RGY comes as the Turkish lira has depreciated to record levels this year and ~90% of of the company’s debt is denominated in euros or US dollars. According to Fitch, “The company is also exposed to the weak Turkish economy and retail market, which are still suffering from the effects of the pandemic”. RGY’s revenues took a hit as it could not collect most of its rent from retailers during Turkey’s 73-day lockdown of shopping centres that started in March. The weak Lira and the slowing economy only aggravated the leverage metrics. Fitch forecasts a net debt/EBITDA of ~16x in 2020 for the company.

Even though Tupras holds a leading position in Turkey, it has received a downgrade on the back of lower than forecasted cash flows due to the drop in oil demand. The negative impact of the pandemic coupled with the Tupras’ high leverage led to lower refining margin. The company reported a negative EBITDA of TRY800mn ($97.6mn) in 1H20 against a positive EBITDA TRY2.3bn ($280.7mn) in 1H19 on low demand. The rating agency expects the net leverage to rise to 17.3x in 2020, up from 4.0x in 2019. Tupras held 60% of its debt and 39% of its cash balances in foreign currency at the end of Jun 2020.

Bond investors seem to have shrugged-off RGY’s downgrade as its 7.25% bonds due 2023 were up 2.5 points at 87.5 cents on the dollar. Tupras’s 4.5% bonds due 2024 were up 0.07 points at 92.7 cents on the dollar.

For the full story on RGY, click here and on Tupras, click here

 

Abu Dhabi Gas Pipeline Consortium Raises $4 Billion via Amortizing Bonds

The consortium that acquired a stake in the Abu Dhabi gas pipeline network is refinancing its bank debt via a $4bn multi-tranche bond issuance on Tuesday. In July 2020, Galaxy BidCo (the issuer) purchased a 47.7% interest in Abu Dhabi National Oil Company (ADNOC) Gas Pipeline Assets, financed via an $8bn bridge loan with 17 banks. Galaxy is an SPV owned by a consortium of investors that include GIC, Brookfield Asset Management NHI&S, GIP, SNAM and Ontario Pension Plan Board. Details of the bond issuance are as follows:

  • $1.1bn via 7Y amortizing bonds at a yield of 1.75%, 12.5bp inside initial guidance of 1.875% area. The bonds have a weighted average life (WAL) of 4-5 years
  • $1.55bn via 16Y amortizing bonds at a yield of 2.625%, 12.5bp inside initial guidance of 2.75% area. The bonds have a WAL of 11-12 years
  • $1.35bn via 20Y amortizing bonds at a yield of 3.25%, 12.5bp inside initial guidance of 3.375% area. The bonds have a WAL of 17-18 years

Moody’s assigned an Aa2 rating rating to the senior amortizing bonds on the back of credit strength, which includes the critical strategic nature of the pipelines to ADNOC and the Government of Abu Dhabi, high predictability of revenue under a long-term pipelines use and operation agreement.

For the full story, click here

 

Las Vegas Sands Considers Sale of Flagship Vegas Casinos for $6 Billion

The world’s largest casino operator Las Vegas Sands Corp is considering a sale of its flagship casinos in Las Vegas for ~$6bn, as per a Reuters’ source. The casino properties in Las Vegas include the Venetian Resort Las Vegas, the Palazzo and Sands Expo Convention Center. The sale, if goes through, would concentrate the company’s portfolio in Macau and Singapore, marking an exit from the US gambling industry. Casinos have been one of the hardest hit industries as its success thrives on air travel and large groups of people in close proximity, both factors restricted by the pandemic. Ben Lee, a Macau-based managing partner at IGamiX said, “The growing insignificance of the U.S. market explains to you why Las Vegas Sands is looking to offload their U.S. properties. It is 15% of revenue but 80% of regulatory pain and burden.” The company reported Q3 net revenues of $586mn, down 82% vs. last year and net loss of $731mn vs. a net income of $669mn last year. Total outstanding debt stood at $13.9bn as of September 30. Sheldon Adelson, chairman and CEO said that operating earnings were supported by a recovery in Asia with Singapore’s Marina Bay Sands having a profitable quarter on the back of resumed operations during the summer. Fitch affirmed the company’s rating of BBB- and revised its outlook to negative in August.  Las Vegas Sands’ 3.2% bonds due 2024 inched up by ~0.2 points to 101.9 while Sands China’s 4.375% bonds due 2030 traded lower by 0.2 points to 104.1 on the secondary markets

For the full story, click here

 

Vedanta’s Liquidity Buffer to Deplete by March 2021– Moody’s

Moody’s expects Vedanta Resources Ltd’s (VRL) liquidity buffer to deplete by March 2021 end. VRL (B1) can repay its debt through dividends from Vedanta or subsidiaries upstreaming cash but expects it to be insufficient after 3Q2021. “Without operations of its own, VRL – as the holding company – needs to refinance debt maturities at a time of tight capital market liquidity, putting undue pressure on key subsidiaries to upstream cash” said says Kaustubh Chaubal, a Moody’s Vice President and Senior Credit Officer. The company has bank loans worth $1.2bn due in FY2021 and $1.02bn due in FY2022.

According to Moody’s, VRL has been weakly capitalized with no equity infusion by its sole shareholder Volcan Investments since its IPO in 2003 even during periods of stress. Hence, Moody’s does not expect them to support with new funds in the future either. On a positive note, the report mentioned that consolidated credit metrics that includes Vedanta Ltd and Hindustan Zinc, remain far stronger than the economic reality. VRL’s 6.375% dollar bonds due 2022 are down 1.3 points to 76, yielding 23.9% while its 8% bonds due 2023 are down 1.6 points to 68.1, yielding 26.3%

For the full story, click here

 

AMD to Acquire Xilinx in an All-Stock Deal Valued at $35 Billion

AMD, rated Baa3 agreed to acquire Xilinx in an all-stock transaction valued at $35bn, expected to close by end-2021 whilst also posting its quarterly results. 1.7234 shares of AMD would be exchanged for every share of Xilinx, which amounts to $143 per share of Xilinx. The acquisition would see AMD shareholders hold 74% of the company and Xilinx with the remainder. AMD expects to achieve operational efficiencies of approximately $300mn within 18 months of closing the transaction, primarily based on synergies in costs of goods sold, shared infrastructure and through streamlining common areas. AMD expects the transaction is to be immediately accretive to its margins, EPS, cash flows and deliver industry-leading growth. The acquisition comes at a time when chipmakers are scaling their businesses to take advantage of the technological revolution – recently competitors Nvidia acquired ARM for $40bn and Analog Devices bought Maxim Integrated Products for $20bn.  AMD’s 7.5% bond due 2022 were up 25 cents to 111.25, currently yielding 1.14%.

For full story, click here

 

Garuda to Make 700 Workers Redundant In a Bid to Survive

Struggling Indonesian state carrier Garuda Indonesia announced on Tuesday that it will be laying off 700 workers, about 10% of its workforce, next month as part of its cost-cutting measures. Chief executive Irfan Setiaputra said, “We have to take this tough decision in the midst of a situation that is still full of uncertainty. This pandemic is causing a long-term impact, beyond our expectations, to the company’s performance, which, up to this point, has yet to show significant improvement.” The airline plans to issue convertible bonds capped at $581mn, which will be bought by Indonesia’s finance ministry to bailout the carrier. Garuda managed to extend the maturity on $500mn sukuk from June 2020 to June 2023 in June, which helped the sukuk recover from lows of ~40 in March to 69 cents on the dollar currently.

For the full story, click here

Term of the Day

CET1 Ratio

Common Equity Tier 1 (CET1) Ratio is a financial ratio applicable to banks to measure its core capital as against its Risk Weighted Assets (RWA). Core Capital (CET1 Capital) includes common equity and stock surplus (share premium), retained earnings, statutory reserves, other disclosed free reserves, capital reserves representing surplus arising out of sale proceeds of assets and balance in income statement at the end of the previous financial year. RWAs are calculated to measure the minimum regulatory capital required to be held by banks to maintain solvency. The calculation methodology is such that the riskier the asset, the higher the RWAs and the greater the amount of regulatory capital required. CET1 capital must be at least 4.5% of RWAs according to Basel III.

Contingent Convertible (CoCos) bonds/AT1s commonly have triggers based on CET1 ratios – if the bank’s CET1 ratio falls below a certain threshold, the bonds would convert into equity.

 

Talking Heads

On the dip in Euro zone bond yield as coronavirus cases continues to rise amid lack of progress on US stimulus

Piet Haines Christiansen, chief analyst at Danske Bank.

“Ahead of the ECB on Thursday and the U.S. presidential election in just one week, we expect EGB (euro government bond) markets to stay in a tight range with no additional risk positions being taken on,” Christiansen said.

In a note by ING analysts to clients

“With almost unanimous expectations, including ours, of a QE (quantitative easing) boost in December, we fail to see how the ECB could deliver a dovish enough message to validate them on Thursday,” ING analysts told clients. “Higher-volatility fixed income markets, the ones depending the most on ECB intervention to sustain their pricing, appear most at risk,” they said, seeing room for the 10-year Italian spread to widen to 140 basis points.

On sovereign default risks to rise further in 2021 – in a note by Goldman Sachs

Across all emerging market high-yield credit, the probability of debt default was on course to rise further in 2021 based on the IMF’s forecasts for high public debt levels and current account deficits, Goldman Sachs said.

On liquidity pressures at emerging market high-yield firms back to record highs – in a report by Annalisa Di Chiara, senior vice president at Moody’s

The steep rise from April’s 23% reading to September was driven by a rise in the Latin America sub-indicator, Di Chiara said. “Our … indicator is likely to remain elevated amid longer-term performance concerns and rising refinancing risks, particularly for lower rated companies,” Di Chiara said.

On Japanese life insurers returning to domestic bond market as yield gaps with foreign debt narrows

Koichi Nakano, general manager for investment planning at Meiji Yasuda Life

“We have long been investing primarily in U.S. dollar bonds but now that their yields have fallen to so low, we are not in a position to buy them aggressively anymore,” said Nakano.

Akifumi Kai, general manager of investment planning at Dai-ichi Life

“We plan to increase the holdings of Japanese government bonds (JGBs) regardless of market environment. But if their yields rise further, we could consider accelerating buying,” said Kai.

On investors piling into Colombian debt despite downgrade risk – Anders Faergemann, a money manager at PineBridge Investments

“We’re not so worried about a downgrade as we feel it’s unjustified,” said Faergemann. “We see numbers coming through for next year that should prevent that downgrade.” “You see how far emerging markets have come since March and April,” he said. “We’re very constructive on them going into next year.”

On IATA’s airline revenue forecast for 2021 worsening due to renewed Covid-19 outbreaks – Alexandre de Juniac, IATA director general

“The fourth quarter of 2020 will be extremely difficult and there is little indication the first half of 2021 will be significantly better, so long as borders remain closed and/or arrival quarantines remain in place”, said de Juniac. Even with drastic cost-cutting, airlines will need further government aid to avoid running out of cash, de Juniac said. “Even if we maximize our cost cutting, we still won’t have a financially sustainable industry in 2021,” de Juniac said.

On direct lending in Europe shrinking in first half of 2020

Floris Hovingh, partner and head of alternative capital solutions at Deloitte

“We haven’t seen a massive wave of companies going to private markets to raise more stressed debt given that governments have stepped in,” said Hovingh. “Some of the opportunities which might have been done by direct lenders went to the high yield market and loan market given the pricing is slightly cheaper,” he added.

Cécile Mayer-Levi, head of private debt at Tikehau Capital

Mayer-Levi said: “There is a very limited number of transactions and competition is really fierce among advisers, among private equity sponsors and among private debt funds.”

Rajeev Misra, SoftBank Vision Fund chief

It is “very difficult to deploy capital” because companies can raise plenty of funding through public markets rather than accept private backing with strings attached. “Anyone looking for capital . . . the public markets are the best option,” he said.

 

Top Gainers & Losers – 28-Oct-20*

BondEvalue Gainer Losers 28 Oct

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