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 equity indices started lower with the Nasdaq falling ~4% in early trading before recovering most of the down move towards close. S&P ended 0.1% higher while Nasdaq was 0.5% lower. Tesla closed 2.2% lower and Bitcoin, in which Tesla recently invested $1.5bn, was down 11%. US 10Y Treasury yields eased 3bp to 1.34%. Fed Chair Powell said in his testimony that the Fed is not close to tapering their QE, inflation is soft and that they would continue buying bonds even as the economy recovers. Meanwhile in Europe, FTSE and CAC 40 rose 0.2% and 0.2%, while the DAX and FTSEMIB fell 0.6% and 0.3%. US IG CDS spreads were 1bp tighter and HY was 5.9bp tighter. EU main CDS spreads widened 0.9bp and crossover spreads widened 4.7bp. Asian equity markets have opened mixed today while Asia ex-Japan CDS spreads are 0.7bp wider with seven new dollar deals this morning, the busiest day at the Asian primary markets in three weeks.

Bond Traders’ Masterclass | Last Few Days to Get a 10% + 25% Discount on The Bundle

Register before the end of the month for the Bond Traders’ Masterclasses scheduled for late-March and early-April to get a 10% + 25% discount on the bundle package of five modules. Click on the image below to register.

The modules are specially curated for private bond investors and wealth managers to develop a strong fundamental and practical understanding of bonds. Given the ultra-low interest rate environment, flurry of new bond deals particularly from junk-rated issuers and tightening credit spreads, it is now more important than ever for investors to understand bond valuation, portfolio construction and new bond issues to help them get better return for risk.

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.

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New Bond Issues

  • Bharti Airtel PerpNC5.25/10.25 senior bonds at 4.375%/T+230bp areas
  • Guangzhou R&F Properties $ 3.5NC2.5 at 12% area
  • Far East Horizon $ 3Y at T+285bp area
  • Guotai Junan International $ 5Y at T+190bp area; books $1.5bn
  • Castle Peak Power $ 10Y energy transition bonds at T+125bp area
  • NTT $ 2/3/5/7/10Y at T+50/60/80/90/100bp areas
  • Bank of New Zealand $ 5Y at T+170bp area

 

New Bond Issues 24 Feb

Macquarie Bank raised $1bn via a 15NC10 Tier 2 bond at a yield of 3.052%, or T+170bp, 30bp inside initial guidance of T+200bp area. The bonds have expected ratings of Baa3/BBB/BBB+.

Agricultural Bank of China raised $600mn via a dual tranche offering. It raised:

  • $300mn via a 3Y bond at a yield of 0.82%, or T+60bp, 45bp inside initial guidance of T+105bp area
  • $300mn via a 5Y bond at a yield of 1.286% or T+70bp, 45bp inside initial guidance of T+115bp area

The bonds have expected ratings of A1, and received orders over $2.6bn, 4.3x issue size. The 3Y bond drew final orders of over $1.5bn – Asia took 89% and EMEA 11%. Banks were allocated 74%, the public sector 22%, fund managers 2% and private banks 2%. The 5Y tranche saw final orders over $1.1bn – Asian took 88% and EMEA 12%. Banks received 83%, the public sector 10% and fund managers 7%. Proceeds will be used for general corporate purposes.

ESR Cayman raised S$200mn via a PerpNC5 bond at a yield of 5.65%, 22.5bp inside initial guidance of 5.875% area. IFR notes that the bonds had healthy demand and thus the size was revised up from S$150mn. If not called in 2026, the coupon will reset to the prevailing SOR + initial credit spread of 473bp + a step-up of 200bp. Private banks will receive a 25 cent concession. Proceeds will be used to refinance debt, fund potential acquisition and investment projects and meet working capital and general corporate needs. Final pricing was slightly above fair value as per OCBC credit analyst Ezien Hoo had placed fair value at a yield to call of 5.4%–5.6%.

Taizhou Huaxin Pharmaceutical Investment raised $146mn via a 3Y guaranteed note at a yield of 5%. Huaxin Pharmaceutical (Hong Kong) is the issuer and Taizhou Huaxin Pharmaceutical Investment is the guarantor. The notes were rated BB+, in-line with the guarantor. Proceeds will be used for offshore debt repayment.

 

New Bond Pipeline

  • Qingdao China Prosperity State-owned Capital Operation Group $ bonds
  • Vedanta Resources $ 4Y and 7Y bonds
  • NTT multi-trancher $/€ bond
  • HCL Tech $ bond
  • Microsoft $ bond alongside exchange offer
  • JSW Steel $ bond

 

Rating Changes

 

Term of the Day

Energy Transition Bonds

Energy Transition Bonds are bonds issued with the purpose of enabling a shift towards greener, energy efficient operations. These bonds fall within the bracket of transition bonds. Hong Kong coal-fired power station operator Castle Peak Power is marketing a dollar 10Y energy transition bond at initial price guidance of T+ 125bp area this morning with proceeds earmarked to finance or refinance construction of a second additional gas-fired power generation unit using a combined cycle gas turbine within the guarantor’s Black Point Power Station in Hong Kong.

 

Talking Heads 

On the Fed’s stance to keep buying bonds even as outlook improves

Jerome Powell, Federal Reserve Chairman

“The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved,” he said. “In a way, it’s a statement on confidence on the part of markets that we will have a robust and ultimately complete recovery,” he said. “The economic dislocation has upended many lives and created great uncertainty about the future.” “I really do not expect that we’ll be in a situation where inflation rises to troubling levels,” Powell said.

In a note by Roberto Perli and Benson Durham, Cornerstone Macro analysts

The chairman “gave absolutely no indication that the Fed is thinking about changing its very dovish policy stance,” they wrote

On benchmark Treasury yields dipping after Powell’s comment on the need for support for the economy – Julia Coronado, president of analysis firm Macropolicy Perspectives

“His basic stance was the same and it provided some reassurance to the bond market,” said Coronado. “In Powell’s even-keeled way he said, ‘Our job is far from over. We’re going to be here buying Treasuries for some time.'”

On China’s distressed debt investors getting a louder say in restructuring – Brock Silvers, chief investment officer of Kaiyuan Capital

“As a long-time distressed asset investor in China, I can see that creditors are clearly becoming more aggressive in defense of their financial interests. Regulators have been generally supportive as they attempt to improve the efficiency of credit markets.”

As a result, many borrowers are facing hard choices as regulators turn away from bailouts and investors clamor for more rule-based, less political enforcement options, Silvers added.

On the opportunities in the burgeoning China bond haven trade – Stephen Jen, CEO of Eurizon SLJ Capital and inventor of dollar-smile framework

“In risk-off episodes in the past 20 years, Chinese bonds have reliably rallied,” Jen wrote. There are “very few safe-haven assets that carry any meaningful yield. If we look around the world, all yields have collapsed, making the 3.0-3.5% annual return on sovereign debt in China that much more interesting.”

 

“Given the demographic trend and the need for European/British savers to earn a meaningful risk-adjusted return on their savings, there will continue to be significant demand from this part of the world for higher-yielding investments elsewhere,” Jen said.

On Latam assets recovering from recent losses and Petrobras’ recovery supporting stocks

According to strategists at BCA Research

“Bolsonaro’s decision to replace Petrobras’ CEO is dashing hopes of Brazil’s return to economic orthodoxy,” they said. “The central bank is likely to lift the policy rate in response… which would keep government borrowing costs above
the nominal GDP growth rate,” they said. “A violation of the fiscal spending rule would weigh further on the real amid higher inflation expectations, and bonds are likely to underperform as rates rise.”

Ilya Gofshteyn, senior EM macro strategist at Standard Chartered

“One reason for Latam FX struggles may be that markets expect that an inflation overshoot in the U.S. would spill over to other economies, and would be harder to contain in Latam, where central bank credibility is perceived to be weaker,” said Gofshteyn.

On Saudi Arabia turning to euro bonds amid near record-low yields – Richard Briggs, money manager at GAM Holdings AG

“The yields will probably be particularly low, sub 1%, and it makes sense for them to try and diversify their funding a little,” said Briggs. “Things have been marginally weaker in emerging-market credit over the last few days, but the timing isn’t shocking, and the big surge we’ve seen in oil prices should add further support to the credit.”

 

Top Gainers & Losers – 24-Feb-21*

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