SOVEREIGN DEBT RESTRUCTURING | MASTERCLASS

A deep dive masterclass on sovereign debt restructuring, to be conducted virtually by Asian high yield bond expert Florian Schmidt.

30 June 2022 (Thu), 5pm Singapore/HK time

US Benchmark & Global Indices 4 Jan (1)

US equity markets closed on an upbeat note on the last trading day of 2020 with the S&P and Dow up 0.6%, ending the year with gains of 16% and 6.8% respectively. Andrew McCaffery, Global CIO at Fidelity explained the strong investor sentiment stating, “In 2020, investors consistently chose to believe the best-case scenario, buoyed by liquidity from the Fed and other major central banks” and sounding warning bells by adding, “I’m concerned this optimism will not always be matched by the economic reality of 2021.” US Treasury yields inched up with the 10Y and 30Y higher by 2.6bp and 3.1bp to 0.947% and 1.68%, ending the year with yields tighter by a massive 87bp and 60bp respectively. Across the Atlantic, sentiment was rather muted following the finalization of the Brexit deal on December 24 with the FTSE 100 down 1.45%, ending the year lower by 15%, its lowest annual performance since 2008. The DAX and CAC 40 closed on December 31 lower by 0.31% and 0.86%, ending the year higher and lower by 3.5% and 8% respectively. Asian markets have opened on a mixed note with the Nikkei down 0.36% after reports of a possible state of emergency for Tokyo and three surrounding prefectures due to an increase in Covid-19 cases. The Hang Seng is up 0.51% while the STI is up 0.13%. US IG and HY CDS spreads tightened by 1.2bp and 3.3bp, the EU main and crossover CDS spreads widened by 0.1bp and 4.3bp, while Asia ex-Japan CDS spreads were flat. The primary bond markets have opened to a busy day in the new year with six new dollar deals and a formosa from Mexico sovereign.

Bond Traders’ Masterclass – Avail 30% on a Bundle Ticket of 5 Sessions

BondEvalue is conducting a Bond Traders’ Masterclass across five sessions specially curated for private bond investors and wealth managers to develop a strong fundamental understanding of bonds. The sessions will be conducted by debt capital market bankers who have previously worked at premier global banks such as Credit Suisse, Citi and Standard Chartered. Click on the image below to register.

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New Bond Issues

  • Export-Import Bank of India $ 10yr @ T+185bp area
  • SMFG 3yr/5yr/10y/20yr SEC-registered @ T+60/85/110/125bp area
  • Yuzhou Group Holdings $ 6NC4 green @ 6.9% area
  • Powerlong Real Estate $ 100 mn tap 5.95% 2025 @ 5.75% area
  • Shimao Group $ 10NC5 @ 3.9% area
  • Zhenro Properties $ 5NC3 green @ 7.15% area
  • Mexico $ 50yr global formosa @ 4.15% area

New Bond Issues 4 Jan

 

Rating Changes

 

67% of Dollar Bonds Delivered a Positive Return in 2020

2020 was an eventful year to say the least. In terms of the bond market, it was a cheerful year as bond prices rallied and yields fell to record lows. Of all the dollar bonds in our universe, 67% delivered a positive price return (ex-coupon). Investment grade (IG) rated bonds outperformed with 80% of all IG dollar bonds in our universe delivering a positive price return in 2020 compared to 56% of high yield (HY) rated dollar bonds. The box and whisker plot below shows how IG dollar bonds moved in price terms (ex-coupon) in 2020 – by quarter and credit rating. The horizontal line inside each of the eight boxes indicates the median price return, while the box area above and below it represents the upper and lower quartile respectively. The dots that fall above and below the bounds are outliers with each dot representing a bond. In the table below the chart, we have given the split of the percentage of bonds in terms of positive/negative price return for each quarter in 2020 and the full year.

Price Returns of IG Bonds in 2020 - By Quarter 2

Click on the button below to read more on the price return of HY dollar bonds, top gainers & losers, issuance volume and largest deals for the year.

Read the 2020 Bond Market Report

Over the next few days, we will also highlight the best and worst performing bonds in 2020 by select regions and industries so do keep an eye out for that in the Bond Market Daily through this week.

 

US Starts Delisting Chinese Telecom Companies; Oil Companies Could be Next

The New York Stock Exchange (NYSE) announced on Dec 31 that it had commenced proceeding to delist three major Chinese telecom companies – China Telecom Corporation Limited, China Mobile Limited and China Unicom (HK) Limited pursuant to Listed Company Manual Section 802.01D in light of Executive Order 13959 (the “Order”), which was signed on November 12, 2020 to prohibit trading by companies under Chinese military control. The trading by these companies will be prohibited from Jan 11, 2021. The Department of Defence had released the list “Communist Chinese military companies” last year to counter the People’s Republic of China’s (PRC) Military-Civil Fusion development strategy. While the Chinese telcos were in the direct line of fire of the US regulators, Chinese oil companies also face the risk of delisting. Some of the oil companies including China National Offshore Oil Corporation (CNOOC) figure in the Pentagon’s list of companies under the control of Chinese military. The other oil companies under the threat of the delisting are PetroChina Co and China Petroleum and Chemical Corp (Sinopec).

According to Steven Leung, executive director at UOB Kay Hian, “More Chinese companies could get delisted in the U.S. and the oil majors could come as the next wave”. However, according to the expert, the telecom companies were ‘thinly-traded’ in the US and their removal from NYSE would have minimal effect. The China Securities Regulatory Commission termed the move as unwise and said in a press release on Jan 3 that “The liquidity, trading volume and fund-raising functions of the ADRs have been relatively low, therefore the direct impact of a potential delisting would be rather limited on the companies’ growth and general market performance.”

CNOOCs 4.875% 2044’s were up 0.23 at 123.48 and its 3.3% 2049’s were up 0.55 at 99.08.

For the full story, click here

 

China Puts a Limit on Bank Loans to Real Estate Companies

China is taking steps to provide long-term stability to the real estate sector by imposing a limit on banks from disbursing loans to real estate companies. The banks are being put into five categories to define the ceiling on the loans extended to the developers. The loan cap to these companies is aimed at preventing the systematic risks that arise from high leverage. Starting Jan 1, 2021, the People’s Bank of China and China Banking and Insurance Regulatory Commission have laid a limit of 40% on loans to developers by the largest state-owned lenders. The move comes as real estate prices in China have continued to rise despite regulatory clampdowns. Chengyu Huang, an investment manager at China Cinda (HK) Holdings Co. said, “The new policy is in line with the direction of strengthening supervision and preventing bubbles” and added, “That will further dampen investor sentiment toward the real estate stocks.” The new regulations come after China had ordered 12 developers including China Evergrande Group, Sunac China Holdings Ltd. and China Vanke Co. to report their finances regularly.

For the full story, click here

 

Vedanta Raises $1.4 Billion via Privately Issued Debt

Mining conglomerate Vedanta Ltd announced via exchange filings last week that it has raised  $1.4bn in privately issued debt to retire previous debt. The company sold notes worth $1bn to Citicorp International Ltd and $400mn to an entity backed by Oaktree Capital Group. Both the notes will be partly backed by shares in its Mumbai-listed entity Vedanta Ltd. While the $1bn from Citicorp will be used to fund its tender offer for Vedanta Resources’ (VRL) $900mn 8.25% bonds due 2021, the $400mn from Oaktree will be used for the acquisition of shares up to 11.5% in Vedanta Ltd. by Vedanta Holdings Mauritius II Limited. Last week, VRL raised its stake in the India listed entity Vedanta Ltd. to 55.11% by buying 185mn shares from the open market for INR 29.59bn ($406mn). This comes after Vedanta’s failed delisting in October last year.

Vedanta’s dollar bonds have been trending higher over the past few weeks with its 6.375% 2022s up ~8 points since December 1, 2020 to 88.93 while its 6.125% 2024s traded higher by ~5 points during the same period to 71.78 cents on the dollar.

For the full story, click here

 

Oman Announces Plans to Fund $4.2 Billion Fiscal Deficit By Borrowing

The Oman government plans to borrow to cover 73% of its OMR 2.2bn ($5.73bn) budget shortfall in 2021 caused by a decline in oil prices and the pandemic. This would amount to OMR 1.6bn ($4.2bn) and the remaining OMR 600mn (~$1.56bn) is expected to be drawn from reserves. Oman’s 2021 budget has been planned based on an oil price of $45 per barrel. The sovereign has been trying to deal with its leverage and has taken many measures to manage its budget deficit, such as reduced spending and plans to impose a 5% value-added tax in 2021. The International Monetary Fund estimates that Oman’s economy has shrunk 10% in 2020, which is among the steepest in the Gulf region, and Oman bond spreads have widened in 2020 compared to its neighbors. Its 3.625% 2021s have traded up 0.12 points to 100.37, while its 3.875% 2022s and 4.125% 2023s have fallen 0.39 and 0.06 points to 100.49 and 101.03 respectively.

For full story, click here

 

Fitch Warns that US Energy Sector Could Account for 1/3rd of Junk Bond Defaults This Year

Credit rating agency Fitch has warned that the US energy sector could account for one-third of all junk bond defaults in 2021. The warning comes on the back of a Fitch prediction of bond defaults to the tune of $15bn-$18bn in 2021. According to the rating agency, the default rate in the sector could be 7-8%, which is well above the historical average of 4.4% however below ~15% over the last twelve months. The drop in demand post pandemic and the low oil prices have adversely affected the oil sector and the US energy majors have been forced to curtail production and lay off workers to reduce losses as the oil market was flooded with Saudi crude. While Chesapeake and Whiting were forced into bankruptcies in the year just gone by, 43 producers and 54 service providers are facing financial pressures according to Haynes and Boone. Charles Beckham, a partner at Haynes and Boone said, “It was a monumental weight of debt that was in jeopardy and is getting resolved in those bankruptcies” while adding that services providers were particularly vulnerable to bankruptcy in 2021. Fitch’s “bonds of top concern” includes 35% of companies from the energy sector and include Gran Tierra Energy and Northern Oil and Gas. A senior director of leveraged finance at Fitch commented that “Low crude oil prices coupled with capital market accessibility will likely hamper many of the weaker energy issuers in 2021”.

For the full story, click here

 

US MGM Resorts to Buy British Gaming Company Entain

US-based MGM Resorts is seeking to buy one of the UK’s largest gaming companies Entain in a bid to build its online business. This is MGM’s second bid after its earlier all-cash bid for ~$10bn was rejected by the British gaming company. The new bid has the support of MGM’s largest shareholder, InterActiveCorp (IAC) which could finance an additional $1bn for the takeover. The merger with Entain, the parent of the sports betting company Ladbrokes, could help the US casino major to enhance its online presence by creating one of the world’s largest gaming companies at a time when its business in Las Vegas has taken a hit due to the pandemic. The move is seen as a pivot in the business strategy as more people have taken to online gaming amidst the pandemic. In 2018, the Supreme Court of US had allowed sports betting after which MGM and Entain had entered a $200mn joint venture. The two companies have also partnered in another venture called Roar Digital. IAC has also increased its online presence through various digital businesses including Expedia and Match Group.

MGM resorts 7.75% 2022’s were up 0.25 at 107 while its 6% 2023’s were down 0.56 at 107.

For the full story, click here

 

Mexico Takes Controversial Step to Limit Fuel Imports by Private Players; Pemex to Benefit

Mexico’s government has issued new regulations to limit the ability of private firms to import fuel, according to a decree released over the weekend. According to the new decree, the import permits have been reduced to 5 years from the earlier 20 years. Further, the permits of 1 and 5 years may be extended only once for the same period after their volume has been exhausted or their validity expired. The import of specific categories of fuel, such as gasoline and its derivatives, are also subject to receiving prior permission from the Mexican Secretary of Energy. The new regulations only apply to hydrocarbons and petroleum, and would result in an significant advantage for the national oil company Petroleos Mexicanos (Pemex).

In a bid to make Mexico self-sufficient, the government seems to be aiding Pemex in line with President Lopez Obrador priority of reviving Pemex. According to FT, “President Andrés Manuel López Obrador has made reviving Pemex a top priority, in part by clawing back more control of energy policy and by breaking with the last government’s aim to treat Pemex on equal terms as the new private and foreign entrants to the market.”

Pemex’s 5.95% bonds due 2031 traded stable at 99.39 while its 6.375% bonds due 2045 traded 1 point higher at 91.79 cents on the dollar.

For the full story, click here.

Term of the Day

Reflation

Reflation refers to a fiscal and monetary policy mix orchestrated to stimulate the economy after a contraction in the economic output or outright recession. A contracting economy is often characterized by falling prices, when inflation falls below 0% and reflation policies like cutting taxes, lowering interest rate, increasing money supply and large spending projects are used to spur additional spending and raise prices and economic output.

In current macroeconomic context, the massive monetary and fiscal stimulus since March 2020 were designed to achieve reflation and have raised inflation expectations significantly. Furthermore, the results of US presidential elections have fueled speculations of a potential change in US fiscal policy towards even higher spending and hence reflation, especially if the Democrats are able to wrest control of the Senate in the forthcoming runoff elections tomorrow.

 

Talking Heads 

On regional governments across China evading borrowing limits – Liu Pengfei, president of Taiyuan Longcheng Development Investment, 

“Many of our assets do not generate much economic value,” Liu Pengfei, said and added “The Taiyuan government gave them to us so we can meet [the debt-to-asset] requirements set by our creditor banks and bond investors.”

On a case for a continued rally in bond markets in 2021

Robert Tipp, chief investment strategist at PGIM Fixed Income

“The market for rates is a global market,” according to Tipp who added “People think the US is the central market, but look around and it’s on the fringes. It’s a low rate world, and Treasury yields already look too high.”

Steven Oh, global head of credit and fixed income at PineBridge Investments

“You can’t get the US curve steepening materially in relation to Europe. The ECB is not going to allow European rates to go up much at all. If the gap opens much further, European investors will start buying Treasuries. It keeps a cap on how high [US] yields can go.”

On Treasury Market’s Bets on 2021 Reflation – Subadra Rajappa, head of U.S. rates strategy at Societe Generale

“The bias is going to be toward higher yields broadly speaking, but it’s going to be hard to break out of the range in the first few weeks of the year,” said Rajappa, Economic data will provide “a reality check,” but Democratic victories in the Georgia Senate races “could push yields higher given the propensity for more spending coming from the Biden administration,” she said.

On Treasury Market’s Bets on 2021 Reflation -Bryce Doty, portfolio manager at Sit Fixed Income Advisors

“Never underestimate the psychological boost of the new year, though it won’t come through in the data for another month or two, if not a full quarter,” Doty said. “The yield curve remains stable until we see the first upticks in CPI in February and March. TIPS will be a play and the curve will steepen, but you’ll have four-to-six weeks to prepare.”

 

Top Gainers & Losers – 4-Jan-21*

BondEvalue Gainer Losers 4 Jan

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