Macro
US Treasury yields across the curve had a volatile 2021, particularly in Q4. The yield curve, represented by the 2s10s began the year at 78bp and steepened sharply to a high of 158bp at the end of Q1 with inflation expectations rising and market participants finding comfort in the Fed being cautious about tightening policy. However, as the year progressed, market participants and the Fed saw more hawkish policy taking centerstage and while the curve flattened to ~120bp at the end of Q3, the current Q4 quarter has seen a dramatic flattening to 75bp. The massive flattening in Q4 emerged predominantly in November as market participants saw inflation threats leading to a frontloading of Fed rate hikes to mid-2022 from the earlier expectations of end-2022. The Fed also began its tapering of asset purchases by $15bn each month. The 10Y Treasury yield that started the year at 0.92% is now over 1.4%. Besides, Jerome Powell also acknowledged that the word “transitory” can be done with in regard to inflation and the Fed has now accelerated the taper to $30bn each month. With the short-end yields rising thanks to a faster than expected rate hike path, long-end yields dropped with the new Omicron variant fears.
With that macroeconomic backdrop, dollar bonds had an overall tough year with 80% of the dollar bonds in our universe delivering a negative price return (ex-coupon). Mark-to-market losses stood at a massive $145bn across our universe of dollar bonds. 85% and 70% of IG and HY dollar bonds yielded negative returns respectively.
In the chart below, we have compared the total returns of bond indices by region to give a sense of the performance of corporate bonds across geographies. As you can observe, the China HY index of USD-denominated bonds saw the worst performance this year, down 20% YTD led by the dramatic collapse in the real estate sector.
In particular, the second half was particularly dreadful for one rather large pocket of the Asian dollar bond market - Chinese property developers. The world's most indebted developer China Evergrande was finally brought to its knees by its mounting debt pile, leading to a default on its coupon payments months after liquidity concerns first emerged in September. The concerns quickly spread through the overall Chinese real estate industry, which spooked investors and banks, making it almost impossible for developers to refinance debt. We have seen 5 official defaults thus far with many more defaults and restructurings expected as we head in to 2022. Chinese property developers in 2021 got downgraded an alarming 140 times, 3.8x the number of downgrades from the sector in 2020 when the pandemic hit. Needless to say, the crisis led to massive volatility in Chinese property developers' bonds with 96% of dollar bonds ending the year in the red - some names losing as much as 90% of their value.
Many of our readers have been keeping track of the crisis on a daily basis via our Bond Market Daily newsletter, which has been dominated by news from China real estate in the past few months. Thus, for this report, we have excluded China real estate to give readers an overview of the noteworthy gainers/losers, largest deals, issuance volume and more - ex-China real estate. However, if China real estate is of interest to you, fret not as we have put together a separate report on the sector.
APAC ex-China Real Estate
The largest gainer across APAC ex-China Real Estate were Vedanta Resources' (VRL) dollar bonds. Vedanta was marred with a failed delisting in October 2020 of its subsidiary Vedanta Ltd. which quickly moved on from the event and recorded an all-time high EBITDA at end-March 2021. The mining major ultimately saw its senior unsecured notes upgraded to B3 from Caa1 by Moody's in August and later in September, VRL reported a reduction in net debt by $300mn. Other notable gainers include FWD's 0% Perp, Tianqi Finco and Soechi's dollar bonds besides Maldives which saw its economy reopen post the pandemic.
The biggest loser from the region was Malaysia's Serba Dinamik whose dollar bonds plunged over 85% to just 14 cents on the dollar beginning with audit concerns by KPMG followed by a series of downgrades by S&P and Fitch to CC and C from B+ and BB- respectively before the audit issues. The company also skipped the coupon on its sukuk in November. Another prominent loser was Sri Rejeki (Sritex) whose dollar bonds dropped over 80% to 20 cents on the dollar. The company was already having financial troubles with over $1.8bn in creditor claims and undergoing a debt restructuring. Garuda Airlines' dollar bonds also dropped ~70% after restructuring talks and suspending payments to avoid bankruptcy after the pandemic severely impacted its finances. The airline also missed the coupon payment on its $500mn 2023s sukuk even after a 14-day grace period. As recent as November, Garuda was said to be requiring at least $1bn in additional funding to reduce debt and stay afloat.
Sri Lanka went through a volatile year, with its near-term 5.75% bonds due January 2022 rallied to 91.05, up 15.6% YTD while its bonds maturing beyond 2022 like its 6.85% 2024s were in the losers list. While the country did get some positive news with regard to credit lines, currency swaps and paying its dollar bond due in July 2021, investor concerns were focused on its depleting forex reserves to its lowest in 12 years, its downgrade by Moody's to Caa2 from Caa1 and its downgrade on December 17 by Fitch to CC from CCC.
Top Gainers and Losers
Largest Deals and Issuance Volumes
The largest deal from the region was ICBC's massive $6.16bn Perp followed by Philippines' $2.25bn issuance. Other large deals include Petronas Capital and Tencent's $1.75bn issuance, China Cinda Asset Management's $1.7bn Perp amongst several others, by the China sovereign, TSMC, Alibaba etc.
China Real Estate
2021 was a year to forget for the Chinese property sector. What started out as a recovery from the pandemic in 2020 turned into a crisis just when the outlook seemed to be stable. The first half of the year was fairly steady - 87% and 81% of developers' dollar bonds were trading above 90 cents on the dollar at the end of Q1 and Q2 respectively. However the second-half of the year unleashed a wave of volatility and uncertainty in the sector. The year saw an alarming 140 downgrades across the three major rating agencies, 3.8x the number of downgrades from the sector in 2020 when the pandemic hit. Needless to say, the crisis beginning with Evergrande led to massive volatility in Chinese property developers' bonds with 96% of dollar bonds ending the year in the red - some names losing as much as 90% of their value.
We have compiled an exclusive report on China Real Estate in 2021. The report features interactive charts including the issuer ratings of developers, their three red-lines ratios and what to look forward to in the new year 2022. Click on the button below to access the report.
United States
The largest gainer in the US was Transocean’s bonds that saw several positives through the year - securing several new offshore rig deals that expanded its contract backlog to $7.4bn, the benefit of a 45%+ rally in oil prices since January especially after Brent Crude crossed $70b/bbl and a credit rating upgrade to CCC from CCC- by S&P on steps taken to improve its liquidity. WeWork's bonds also had a merry 2021 where its bonds rallied on news of the co-working company going public via a SPAC named BowX, more than two years after its failed IPO in 2019 despite its valuation dropping to $9bn from $47bn in 2019. Besides, its losses also narrowed in Q2 and was also upgraded by Fitch to CCC+ from CCC in late October 2021. Other notable gainers include Macy's that swung to its first quarterly profit in a year, O&G companies like Occidental, EnLink, Cenovus, Enable Midstream etc. with the backdrop of increasing oil prices.
The biggest losers were led by Diamond Sports and Washington Prime. The former's bonds started a steep fall from 64 to 46 cents on the dollar after it was downgraded by Moody's to B3 from B1. Its bonds continued its fall after the failed renewal of its Dish Network Corp. sports carriage deal which was said to have been able to help it undertake a much-needed debt exchange. Diamond Sports, owned by Sinclair Broadcast Group Inc., was negotiating with creditors for months over ways to refinance its $8bn debt load and the failed deal only worsened the situation. The latter, Washington Prime's bonds dropped after it missed a coupon payment on its 6.45% 2024s post which it was downgraded by S&P to D from CC and filed for Chapter 11 bankruptcy in June. However, a few months after filing for Chapter 11, the mall operator emerged from bankruptcy in late October. Other losers included long-dated bonds of high-grade companies like Oracle, Amazon, JPMorgan, Merck etc. owing to the rise in Treasury yields.
Top Gainers & Losers
Largest Deals and Issuance Volumes
Verizon raised $25bn via a jumbo 9-part offering, the largest this year. BofA and JPMorgan raised $15bn and $13bn in April to set the record for the largest bank bond issuances ever. Besides, Medline's $7.77bn issuance to finance a leveraged buyout, Goldman's $4bn deal and other banks' issuances took centerstage among the largest deals.
Middle East & Africa
Zambia's dollar bonds emerged at the top of the gainers list in 2021 from the region on positive news about hoping to reach a $1.3bn deal with the IMF soon to reduce the nation’s debt level. Also, its opposition leader Hichilema beat the incumbent which was seen as positive step towards reviving the economy and reaching the above deal. Tullow Oil's dollar bonds rallied after the Africa-focused producer underwent a financial overhaul - disposing of assets worth $750mn following 2020's oil price plunge, including its $575mn sale of a Uganda project stake to Total. With this, the company priced a $1.8bn 5Y bond at a yield of 10.25%, receiving over $4.2bn in orders, ~2.3x issue size to help manage its $2.4bn debt pile. Other notable gainers were Turkey's Odea Bank and Turkish Airlines.
Ethiopia's dollar bonds dropped over 35% leading the losers list with geopolitical pressures at the forefront and the US President planning to cut off the country from duty free access to the US due to human rights violations. Turkey's dollar bonds also sold-off with political pressures at the wheel - what began with a sacking of its Central Bank ex-chief Naci Agbal after a 200bp rate hike to 19% in March led to the appointment of Sahap Kavcioglu, a former member of parliament for Erdogan’s ruling AK Party (AKP) at the helm. Despite the Turkish Lira falling like a rock (down over 45% YTD) and inflation rising from 14.6% in January to 17% in April, the new chief resorted to surprise rate cuts by a combined 400bp since his appointment to 15%. Turkish November YoY CPI stood at 21.3%. Longer-dated bonds of Egypt, Ghana, Jordan, Morocco and Kenya also featured in the losers list.
Top Gainers & Losers
Largest Deals and Issuance Volumes
The largest deal in the region was led by Qatar Energy $10.5bn three-trancher followed by Saudi Arabia's $5bn dual-trancher. Other large issuances were led by Aramco and sovereigns like Oman , Abu Dhabi and also UAE's debut issuance as an Emirate nation.
Latin America
The biggest gainer in the region was Chile's LatAm Airlines - the carrier's bonds were ~50 cents on the dollar to begin the year, and trended higher through the year. The company had filed for Chapter 11 bankruptcy protection in May 2020 and during the course of the year, retooled its fleet and slashed operating costs to compete with low-cost carriers. The company held talks with creditors on restructuring and initially received an offer from Azul for its Brazil operations. As recent as November, it proposed a $8.19bn capital infusion plan as part of its reorganization to exit Chapter 11. Ecuador's dollar bonds rallied after Guillermo Lasso won the presidency over the left-wing's Andrés Arauz. Another positive was reaching an IMF disbursement deal to receive $1.5bn.
Losers from the region were led by Alpha Holdings' dollar bonds that plummeted over 80% after it acknowledged a $200mn derivatives error in its 2018 and 2019 financials post which it was downgraded by Moody's, S&P and Fitch to Caa2, CCC and CC from B3, B- and B respectively. Chile's Guacolda Energia's dollar bonds lost more than half its value with its weak business conditions followed by a downgrade by S&P to B+ from BB- in June, followed by another downgrade to B in November after rising refinancing risks. Another prominent loser was Credito Real whose dollar bonds crashed ~50% after it revised its 2020 annual statements' NPLs by 82% in April. The lender later came out and calmed investor fears post which its bonds trade stable. However in November, its dollar bonds again plunged after Barclays highlighted an accounting change in the company’s Q3 results without which it likely would have reported a net loss. The company was also downgraded by S&P and Fitch through the year from BB and BB+ at the start of the year to B+ and BB- respectively. El Salvador's dollar bonds fell after IMF negotiation concerns, its President gaining power for reelection and protests and the sovereign's adoption of crypto as legal tender.
Top Gainers & Losers
Largest Deals and Issuance Volumes
LatAm's largest deals were led by sovereigns like Mexico, Peru, Chile, Colombia, Brazil and Dominican Republic. Among corporates, Cemex, Petrobras, MC Brazil Downstream, Aeropuerto and Ecopetrol were the largest issuers.
Europe
Greek Shipping company Navios led the gainers, up ~85% after its deleveraging and fundraising efforts combined with consecutive quarters of profits to pay off its dollar bonds due 2022. UK-based E&P Enquest saw its bonds rally with the pick-up in oil prices, narrowing losses and acquisition of Golden Eagle. Other notable gainers include beverage company Roust, multi-metals company Nyrstar, agrichemical company Syngenta and HSBC's ultra-long dated bonds due 2097.
Belarus' dollar bonds topped the losers list beginning with the nation forcing a Ryanair flight to land at Minsk to arrest a journalist on board, leading to a risk of sanctions. Coordinated sanctions by the EU, UK, US and Canada further weighed on its bonds which were trading above par in the beginning of the year, with long-term notes falling over 20%. Other losers included Telecom Italia, Ukraine amongst others.
Top Gainers & Losers
Largest Deals and Issuance Volumes
The largest deals in Europe were led by German-based KfW. In terms of the largest combined deals, AerCap's $21bn 9-part deal for GECAS. Other large issuances included banks like Credit Suisse, HSBC and BNP Paribas amongst others.
