Advanced Theory & Practice of Bonds

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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 rated bonds outperformed with 80% of all investment grade dollar bonds in our universe delivering a positive price return in 2020 compared to 56% of high yield rated dollar bonds. The box and whisker plot above shows how investment grade 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, 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.

IG Dollar Bonds 2020 Table

As can be seen from the chart, Q1 saw majority of dollar bonds trade lower given the massive sell-off across asset classes in late March at the peak of the pandemic fears. With the benefit of hindsight, one can see that the recovery could not have come sooner as the following quarter Q2 witnessed a strong rally across the board with many of the names that were the worst performing bonds in Q1 emerging as top performing bonds in Q2. The positive momentum continued into Q3, albeit with lower volatility while Q4 was mixed for AAA to A- rated dollar bonds and positive for BBB+ to BBB- rated dollar bonds.

High yield bonds, true to their nature, traded through 2020 with a lot more volatility compared to investment grade bonds. We have put together a similar box and whisker plot and table for high yield rated dollar bonds in our universe below.

Price Returns of HY Bonds in 2020 - By Quarter 2-1

Almost all of the high yield dollar bonds in our universe delivered a negative price return in Q1 following the March mayhem. Similar to investment grade bonds, high yield too recovered swiftly in Q2. The highest rated junk bonds (BB+ to BB-) outperformed in Q2 with the positive momentum continuing through Q3 and Q4. B+ to B and B- to C rated dollar bonds in comparison had a mixed Q3 with 57% and 59% of the bonds in each category trading higher.

 

Top Gainers & Losers

In the tables below, we have listed the best and worst performing bonds in our universe. Do note that we have only taken one bond per issuer to capture more names and we have excluded distressed and non-USD bonds.

For the APAC ex-Japan region, High rated sovereigns and corporates stood out in the gainers list with names such as China, Malaysia and South Korea among sovereigns and Alibaba, Petronas, AIA and Foxconn among corporates. Sovereign dollar bonds from the island nation of Sri Lanka dominated the losers list with over 10 of its bonds making it to the list. The losers list also included distressed names such as Tuspark, Hilong, Garuda as well as Chinese real estate developers R&F Properties (Easy Tactic), China Fortune Land (CFLD Cayman) and Evergrande.

The best and worst performing bonds from China in 2020 were a mixed bag. Among the best performers, Beijing-based privately-owned investment company Oceanwide topped the list with its 14.5% 2021s up 22% through 2020. Interestingly, another bond from Oceanwide, 12% 2021s, made it to the worst performing bonds list, losing over 15%. Oceanwide has been in the news over its agreement to buy US-based insurer Genworth Financial for $2.7bn, which was announced back in 2016 but has still not concluded. The transaction may not go through after the two companies decided not to extend the deadline beyond December 31, 2020 after 16 extensions prior to that. Next on the best performers list is distressed lithium producer Tianqi’s 3.75% 2022s that rose 21% through 2020 as it received a $1.4bn lifeline from Aussie miner IGO in December, which catapulted the bonds from a low of ~38 cents in November to ~80 cents on the dollar currently. Other prominent names that made it to the best performing bonds list include China sovereign’s 4% 2048s, state-owned Three Gorges, Huarong, State Grid and real estate developers China South City, Country Garden, Future Land, Seazen, KWG, Evergrande and Vanke. Distressed names such as Tuspark and Hilong along with local government backed corporates Caiyun International, Haiguo Xintai and Zhongyuan Asset Management topped the worst performing bonds list losing ~20-30% in 2020. Others that made it to the list include real estate developers China Fortune Land (CFLD), R&F Properties (Easy Tactic), Evergrande, Greenland and China Jinmao.

In Singapore, among the best performing bonds, state-owned corporates Land Transport Authority (LTA), Temasek, Singtel, Housing Development Board (HDB) led the pack. Among the worst performing, real estate developers dominated the list with names such as First REIT, Hotel Properties, Frasers Hospitality (FH) REIT, Oxley, Lippo Malls and Fragrance Group.

In Hong Kong, among the best performing bonds, insurance company AIA Group led with a 11% return last year followed by ITC Properties’ (Treasure) that rose by 10%. Besides these, Hutch, Road King and Hysan were also among the best performers. Among the worst performers, several perpetual bonds from corporates and one bank made it to the list with names such as FWD, Chiyu Banking, CSI Properties’ Estate Sky and Far East Consortium.

From the Middle East region, a flight to safety among investors is apparent as the top performers list is dominated by sovereigns and state-backed corporates while the worst performing list includes lower-rated names from Turkey, Oman and UAE among other nations. Among the best performing hard currency bonds from Middle Eastern issuers in 2020, Dubai-based state-owned port operator DP World (DPW) topped the charts with a price return (ex-coupon) of 15.3% on its 4.7% bonds due 2049. Other top performing bonds include Israel-based Teva Pharma, Saudi energy companies Saudi Electricity and ACWA Power along with sovereigns Abu Dhabi, Qatar, Saudi Arabia and Jordan with returns of 10-12% through last year. Among the worst performers, Dubai-based Emirates REIT topped the list with its 5.125% sukuk due 2022 losing 49% of its value to currently trade at 55 cents on the dollar. Other bonds on the list include Omani lenders Bank Dhofar and National Bank of Oman, Turkish corporates including Global Liman, Turk Hava Yollari (THY), Odea Bank and Albaraka and sovereigns Iraq and Bahrain.

For Indian dollar bonds, 79% of the bonds ended the year higher than where they began. Among the best performing bonds, junk rated corporates Yes Bank, Indiabulls Housing Finance and Abja (Tata Steel) topped the list with its dollar bonds returning 9-18% ex-coupon to investors in 2020. Yes Bank’s 3.75% dollar bonds due 2023 rose over 18% after state-owned lender State Bank of India and certain private lenders including HDFC Bank infused capital into the bank, which gave confidence to bondholders. Other prominent names on the gainers list include India’s most valuable company Reliance Industries, telecom operator Bharti Airtel and several state-owned corporates such as Rural Electrification Corp, Power Finance Corp, ONGC, EXIM India and IRFC. Among the worst performing bonds, mining conglomerate Vedanta topped the chart with its 6.125% 2024s losing 22% of its value in 2020. The pull-to-par phenomenon was apparent from the list as several bonds maturing in 2021 saw its bond prices fall to trade closer to 100. Delhi International Airport (DIAL) saw its dollar bonds fall ~4% through the year following a downgrade by S&P to B+ from BB- in July last year on low passenger traffic due to the pandemic.

Carribean-based telecom operator Digicel led the best performing bonds from Latin America in 2020, with its 6.75% 2023s ending the year 32% higher in price terms ex-coupon. The bonds traded higher post the company’s debt reduction plan announced in June last year, which would reduce its total debt by $1.6bn to $5.4bn and reduce annual interest expenses by $125mn. This, coupled with a ruling by a Paris court that ordered French rival Orange to pay Digicel $280mn in compensation for anti-competitive practices led to the rally in its bonds. Other prominent names that made it to the best performing bonds list include Chile-based retailer Cencosud, Mexican corporates Grupo Bimbo, Mexichem (now Orbia), Grupo Televisa, IEnova, America Movil, Minera and Coca Cola Femsa, Brazil-based Klabin, Vale and Suzano and the Uruguay and Mexico sovereigns. The worst performing bonds in 2020 were largely corporates that were severely impacted due to the pandemic. Chile-based Latam Airlines topped the list with its 7% 2026s losing over half of its value through the year. Other travel-related corporates that made it to the list include Argentine airport operator Aeropuertos Argentina 2000 and Brazilian carriers Gol and Azul. Sovereign bonds from Bahamas, El Salvador, Costa Rica and Bolivia and local government bonds from Argentine provinces Cordoba and Neuquen also made it to the list.

Among the best performing bonds from the US in 2020, grocery chain Fresh Market led the pack with its 9.75% bonds due 2023 more than doubling through the year. Before the pandemic broke out in the US, Fresh Market was struggling due to the $1bn debt it had accumulated post its acquisition by Apollo Global in 2016. However, the pandemic was a blessing in disguise for the company as consumers started stocking up on groceries amid lockdowns, which led to a 25% boost in revenues for the company in Q2 of last year. Its bonds rallied on the pick-up in revenues from lows of ~38 cents on the dollar in late March to ~103 levels currently. Other prominent names that made it to the best performers list include L Brands, General Motors, FedEx, Freeport McMoran, Bed Bath and GE.The worst performing bonds list was dominated by corporates operating in industries that were most impacted by the pandemic. These include names from the travel industry such as Hertz, Carnival and Royal Caribbean, energy companies Transocean, Nabors, Gran Tierra, W&T, Gulfport and Occidental and real estate companies Washington Prime and WeWork.

Among the best performing bonds from Europe and UK in 2020, prestigious British universities Cambridge and Oxford topped the list with its long-dated sterling denominated bonds returning over 30% to investors, ex-coupon. This was followed by shipping companies Navios and CMA CGM, whose bonds delivered a ~24% return through 2020. Other prominent names on the list include perps from lenders Barclays, Deutsche Bank and Banque Fed, sovereigns Greece and UK, telecom operators Vodafone and Telecom Italia and steel company ArcelorMittal. The worst performers list was led by Ukrainian coal company DTEK with its dollar 10.75% 2024s losing 39% of its value through last year. As can be expected, the list was dominated by corporates operating in industries most affected by the pandemic. This includes bonds from travel companies Europcar, TAP Air Portugal, Air Baltic, Lufthansa and KLM, restaurant operators Pizza Express and Foodco, retailer Matalan, cosmetics company Kirk Beauty and cruise operator MSC Cruises. The list also included some lenders including NORD/LB backed Fuerstenberg Capital, Metro Bank, Piraeus Bank and Allied Irish Banks.

Among the best and worst performing bonds and largest deals from issuers from Rest of Asia – APAC excluding Singapore, Hong Kong, China and India, all the big four Aussie lenders, ANZ, Westpac, CBA and NAB, made it to the best performers list – ANZ’s EUR 1.125% 2029s leading the pack, returning over 20% to investors ex-coupon. The list also included sovereign bonds from South Korea, Malaysia and Indonesia, mining companies Rio Tinto and Glencore, and iPhone assembler Foxconn. Among the worst performers, island nation Sri Lanka dominated the list with its dollar sovereign bonds losing 30-40% of its value during the year on the back of increased government spending due to the pandemic and shrinking forex reserves. Carrier SriLankan Airlines‘ 7% 2024s topped the list, falling over 40% in 2020. Another state-owned distressed carrier, Indonesia’s Garuda saw its 5.95% sukuk due 2023 fall 22% on the back of travel restrictions. Junk rated sovereigns Maldives, Laos and Mongolia and Indonesian corporates PB International, Soechi, MNC Investama and SSMS also made the list.

Among the best performing bonds from financials in 2020, long-dated bonds and certain bank perpetuals dominated the list. Indian NBFC Indiabulls Housing Finance, rated B3, topped the list with its 6.375% 2022s gaining 18% through last year, following successful fundraises of INR 26.7bn ($365mn) via a sale of shares and a stake in OakNorth Bank. This was followed by Deutsche Bank’s sterling denominated 7.125% perp, Temasek’s 1.25% euro bonds due 2049 and Banque Fed’s floating-rate perp. Other prominent names on the list include insurance companies Brighthouse Financial, Ageasfinlux, AIG, Legal and General, AIA, Principal Financial and Prudential, European lenders Lloyd’s, Banca Monte, Credit Suisse and Asian lenders Huarong and MUFG. The worst performing bonds list was dominated by lower-rated lenders Fuerstenberg Capital, Metro Bank, Bank Dhofar, Credito Real, Banco Comercial and Bank of Cyprus. The list also included insurance companies Generali, FWD, Allianz, CNP and Everest Reinsurance. BBVA’s 8.875% euro denominated perp, HSBC’s 6% euro perp and Lloyds’ 12 % perp also made the list, losing 5-6% through 2020.

The best performing bonds’ list for Sovereigns was dominated by long-dated bonds (>25 years), indicating that investors were willing to take on tenor risk for a higher yield amid growing expectations of interest rates remaining lower-for-longer. In terms of ratings, the list was a mixed bag with both investment grade sovereigns such as UK, Uruguay, China, Israel, Mexico, Malaysia and Russia and junk rated sovereigns Greece, Ivory Coast, Jordan, Senegal, Brazil and Nigeria. Distressed sovereigns dominated the worst performing bonds’ list, topped by Ecuador and Sri Lanka, whose dollar bonds took up the top 18 spots (the list below only takes one bond per issuer). While Ecuador completed its debt restructuring late last year, which involved a debt exchange and led to a rating upgrade to B-/B-/Caa3, Sri Lanka is still struggling with financial woes as debt repayments are piling up amid dwindling forex reserves. Other prominent names on the worst performers list include African nations Zambia, Angola, Ethiopia, south/central American sovereigns Bahamas, El Salvador, Costa Rica and Bolivia, and low-rated Asian sovereigns Maldives, Seychelles, Laos and Mongolia. Bonds trading above par at the beginning of 2020 and maturing in 2021 witnessed pull-to-par moving closer to 100 as the bond approaches maturity date.

Among the best performing bonds from energy companies in 2020, state-owned companies dominated the list with the likes of EDF, China Three Gorges, Saudi Electricity, Petronas, Aramco, TAQA, KOGAS, State Grid, Comision Federal De Electricidad (CFE), Petrobras and ADNOC. In terms of region, bonds from the Americas dominated with North America-based names such as Antero, Southwestern, TransAlta, National Oilwell, Edison, EQM and Latin American names such as IENova, Edenor, Enel and AES. The worst performing bonds were dominated by deep junk rated names such as Nabors, Gran Tierra, Gulfport, Tullow, Hilong and YPF, all rated CCC to D. The world’s most indebted oil company, state-owned Pemex also made it to the list with its dollar bonds losing 4-7% across the curve through 2020.

Among the sukuk deals launched last year, state-owned corporates and sovereigns dominated the best performing sukuk list with Saudi Electricity’s 5.06% 2043s topping the list with a price return ex-coupon of 12.4%, followed by Malaysia’s sovereign due 2046 and TNB Global 2026s that returned 11.4% and 8.4% respectively. In terms of country of risk, UAE led with names such as DPW, Alpha Star, Aldar, Majid Al Futtaim (MAF), Ras Al Khaimah (RAK), DIB and Tabreed. Other sovereigns that made the best performers list include Indonesia, Hong Kong, Sharjah and Dubai. The worst performing sukuk in 2020 list was topped by scandal-hit healthcare operator NMC, whose 5.95% sukuk due 2023 lost 85% of its value last year to currently trade at 6 cents on the dollar. This was on the back of an accounting scandal that revealed a massive hidden debt pile. Other names that made it to the list include Emirates REIT’s 5.125% sukuk due 2022 and Indonesian carrier Garuda’s restructured 5.95% sukuk due 2023 that lost 49% and 22% of its value in 2020. The list also included perpetual sukuk from financials such as Kuwait’s Boubyan, Warba, Ahli United, Bahrain’s ABG and UAE’s Noor, which witnessed pull to par as all of these perpetual sukuk have upcoming call dates over the next 18 months.

 

 

Issuance Volume

We have put together the annual and monthly new bond issuance volume for global dollar bonds and Asia-ex Japan G3 currency bonds. 2020 saw the highest annual issuance volume ever as issuers rushed to raise capital to tide through the global pandemic. 2021 is off to a strong start with 6 new dollar bonds launched in Asia on January 4, 2021.

Global Corporate USD Issuance Volume Dec

Global Corporate USD Issuance Volume 2020 (1)

AxJ G3 Bond Issuance Volume Dec (2)

AxJ G3 Bond Issuance Volume 2020 (1)

 

Largest Dollar Bond Deals

In the table below, we have listed the largest dollar bond issues in 2020 with the return since issuance.

The global list was dominated by US corporates with T-Mobile, Microsoft, Boeing, Oracle and Carnival topping the list with issuances worth $4-7bn. Boeing clearly outperformed with its 5.93% bonds due 2060 delivering a price return (ex-coupon) of a massive 42% since issuance in May.

Among the new bond issues from issuers in APAC and Middle East, Petronas, Nissan, Takeda, Saudi Aramco and Tencent priced the largest deals with an issue size of $2.25-2.75bn. In fact, Petronas also topped the list in terms of return since issuance with its 4.55% bonds due 2050 delivering a 35% return since issuance in April.

Among the largest corporate deals from Chinese issuers, financial institution perpetual bonds led the pack with ICBC, Bank of China and Bank of Communications (BOCOM) issuing over $2.8bn each. China sovereign was next on the list with both, their October dollar bond issuances and November euro bond issuances among the largest last year. Other prominent names on the list include Tencent, Pinduoduo, China Construction Bank (CCB), Evergrande and Sinopec. Meituan’s debut dollar bond issuance also figured among the largest deals.

Among the largest corporate deals from Hong Kong issuers, AIA Group led the pack with a $1.75bn issuance followed by a green bond issuance by state-owned transport services company MTR Group with a $1.2bn deal. Other notable issues were the HK Airport Authority’s combined $1.5bn issuance in December, NWD Finance BVI and Melco Resorts Finance’s $850mn issuance each.

Among the largest deals from Singapore-based issuers, local lenders DBS Bank, OCBC and UOB and state-owned Temasek and HDB led the pack. In terms of return since issuance, insurance company NTUC Income, China state-backed aircraft leasing company BOC Aviation, and port operator PSA International led the charts with returns exceeding 6%.

The largest deals from Middle Eastern issuers in 2020 were dominated by sovereigns including Israel, Qatar, Abu Dhabi, Turkey and Saudi. Among corporate bonds, Saudi Aramco was the largest issuer followed by Mamoura, the debt issuing company under UAE’s sovereign wealth fund Mubadala Investment Company. In terms of return since issuance Qatar, Abu Dhabi and Saudi sovereign bonds led the charts with price returns (ex-coupon) ranging from 22%-28%. Many of Turkey’s dollar bonds also rallied ~5% even as the Turkish Lira fell ~25% last year.

The largest deals in India were shared by Vedanta, Bharti Airtel, EXIM and Adani Electricity issuing $1bn each followed by JSW Steel, Adani Ports and PFC at $750mn each. Future Retail, which was marred by the Amazon-RIL tiff also made it among the largest issuers, raising $500mn via a 5Y bond. In terms of returns since issuance, Bharti Airtel’s 5Y topped the list followed by Adani Ports’ 7Y issue.

Amongst the largest new bond deals from the US in 2020, only Ford and United Airlines featured from the high yield space with the remaining dominated by investment grade bonds. US banking majors were among the largest issuers last year with names like Wells Fargo, BofA, Citigroup, JPMorgan, Morgan Stanley and Goldman Sachs making the list. The largest single issuance was Boeing’s 5.805% 2050s, part of its jumbo $25bn offering covering various tenors in May last year. All but one bond from the list delivered positive returns (ex-coupon) to investors on the bank of the Fed’s stimulus measures. The two largest deals from Boeing and Wells Fargo delivered solid returns in excess of 30% since issuance, followed by lenders BofaML, Citi returning 18-20%.

LatAm issuances were dominated by sovereigns with Brazil, Mexico, Panama, Peru and Argentina featuring among the largest issuers. Among corporate issuances Petrobras, FEMSA and Ecopetrol were the largest issuers with sizes between $2-2.5bn followed by Vale. Whilst not in the largest deals, a noteworthy issuance was Suzano’s $750mn sustainability-linked bond (SLB) in September, the first of its kind from the LatAm region, which carries a coupon step-up of 25bp if it does not reduce GHG emissions by15% by 2030.

The largest issuances from Europe in 2020 predominantly featured government backed/related entities with names like Sociedad de Gestion, Caisse d’Amortissement, KfW and UNEDIC. Financial issuers like ABN Amro, ING, Banco Santander also featured amongst the largest issuers. While the list excludes deals from supranationals, the EU’s SURE debut bond issuance was also amongst the largest deals in the region totaling €17bn, which received orders of over €233bn, ~14x issue size.

Among the largest deals from the rest of Asia, Japanese issuers led the pack – Mitsubishi UFJ Financial Group (MUFG), Takeda, Sumitomo, JBIC and Nomura featured among the largest issuers last year. Sovereigns Indonesia, and Philippines and Aussie lenders Westpac, NAB and CBA also made the list. In terms of returns since issuance, while most bonds gave a moderate profit with mid-single digit returns, Indonesia’s sovereign bonds due 2030 and 2050 returned 16-20% to investors ex-coupon.

Among the largest deals in the Financials space, US banks dominated the list with Wells Fargo, Bank of America (BofA), Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan accounting for over ~90% of the top 25 deals. The list was completed by Chinese lenders ICBC, Bank of China and BOCOM, the only non-US names with no European banks featuring in the 25 largest deals. In terms of returns since issuance, all the bonds in the list gave positive returns. Wells’ 2051s returned a massive 38% ex-coupon after issuance at the peak of the Covid crisis in late March followed by BofA’s 2051s, JPMC’s and Citi’s 2031s returning 20-22% through 2020.

Among the largest Sovereign bond deals in 2020, Israel led the pack with a $5bn 3.8% bond due 2060 sold in May, which has returned over 16% since issuance to investors ex-coupon. This was followed by Brazil’s $3.5bn 3.875% bond due 2030. The list also included several bonds from Mexico and Turkey, who hit the international bond markets with new deals thrice and six times respectively during 2020. Mexico led the pack in terms of return since issuance as its 5% 2051s rose ~28% since issuance, followed by Panama’s 4.5% 2056s that rallied 23% since issuance.

The largest issuances in the energy and utilities sectors were topped by British Petroleum (BP) followed by Exxon Mobil making 8 of the top 10 deals with Petrobras and Total Capital being the only other names to feature. Chevron, Pacific Gas and Electric, Shell, NextEra, Ecopetrol, Iberdrola and Energy Transfer were the other players to feature in the top 25 largest deals. In terms of returns since issuance, most bonds ended the year in the green as oil prices have steadily recovered since the pandemic wreaked havoc and oil prices hit all-time lows in April last year. The highest returns since issuance were generated by Ecopetrol’s 6.875% 2030s and Exxon’s 4.327% 2050s of over 27% while most other bonds generated high single to low double digit returns.

The largest Sukuk deal in 2020 was led by Saudi’s Islamic Development Bank followed by port operator DP WorldRiyad Bank and the State of Dubai. In terms of returns since issuance, all sukuk generated positive returns topped by Dubai’s 4.85% 2029s at 17% and DP World’s 6% Perp at 10% being the only ones generating double digit returns ex-coupon among the top 25 largest deals. UAE based First Abu Dhabi Bank, DIB and Sharjah Islamic Bank also featured among the top five returns since issuance at over 4% each.

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