S&P ended the day higher by 0.8% after it went as much as 1.5% higher midday. The rally was led by tech and healthcare. Amazon reversed most of its rally to end flat. Asian equities are modestly higher today. 10Y US Treasuries sold off 6bp intraday to end with yields up ~4bp aided by ADP Jobs data. ADP Nonfarm Employment printed 749,000 well past expectations of 649,000 signalling some labour market recovery – creating higher anticipation for the Nonfarm Payrolls (NFP) report tomorrow. Earlier yesterday, the first presidential debate saw more accusation than content with Trump seeming to overpower Biden, although CNN polls suggested six in ten saying Biden was better. Meanwhile US Treasury Secy. Mnuchin said an agreement between $1.5tn and $2.2tn for a new stimulus bill was possible but would not make significant progress in discussions last night with House Speaker Pelosi. US IG CDS tightened 1.5bp, HY was flat, LatAm CDS spreads widened 5.5bp and Asia Ex-Japan CDS tightened marginally.
New Bond Issues
Singapore-based Keppel REIT raised S$150mn ($110mn) via a tap of its 3.15% subordinated Perpetual NC5 at par. The bonds carry a coupon reset if not called on September 11, 2025 and every five years thereafter to the prevailing SGD SOR plus a spread of 257.7bp.
New Bonds Pipeline
Star Energy $ Green amortizing bond
Pakistan $ Bond/Sukuk
Sumitomo Mitsui Trust Bank 7Y EUR covered bond
Mizuho EUR 5Y green and/or 10Y bond
Q3 2020: 75% of Dollar Bonds Traded Higher; IG Led The Rally
The third quarter of 2020, ended September 30, finished on a cheerful note for bond investors as 75% of dollar bonds in our universe delivered a positive price return ex-coupon. The rally translated into unrealized gains of $55bn, calculated by multiplying the change in bond price in Q3 by the amount outstanding. For perspective, Q2 saw 81% of dollar bonds delivering a positive price return, which translated into an unrealized gain of $226bn.
Q3 was stronger for investment grade (IG) credits compared to high yield (HY) or junk credits. 79% of IG dollar bonds had a positive price return. In comparison, 66% of HY dollar bonds had a positive price return in Q3. In the table below, we have listed the quarterly price return for IG and HY dollar bonds.
We further broke down the quarterly price return by rating to see how they moved through 2020. In the box and whisker plots below, we have plotted the price return ex-coupon on the Y axis and the rating category on the X axis. The horizontal line inside each of the 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, some of which are labeled by the issuer name.
In the box and whisker plot for IG dollar bonds, we can see that while 79% of bonds moved up in price, the quantum of price increase was significantly lower compared to the rally in Q2. AT&T, FedEx, JP Morgan and AIG led the rally in the BBB category, while Tiffany & Co., Mexico and Thai Oil saw their bonds sell-off in Q3.
HY dollar bonds, true to their nature, witnessed a much higher variance in their price returns vs. IG. Within HY, bonds rated between B- and C and Unrated had more outliers vs. bonds rated BB and between B+ and B. Bed Bath and L Brands led the rally in the B+ to B category while Hertz, Frontier and Ecuador led the rally in the Unrated category.
Q3 2020: New Bond Issuance
Global corporate dollar bond issuance in September stood at $165bn, bringing the Q3 volume to $398bn. This was lower compared to the $560bn in Q2 and slightly higher than the $392bn in Q1. The month of September marked a milestone for US HY issuance, which reached a record annual high of 329.8bn with three months remaining in the year.
G3 issuance volume for Asia ex-Japan stood at $54bn for September, up 71% over issuance in August. Q3 issuance stood at $132bn vs. $137bn in Q2 and $122bn in Q1. September saw an increase in IG and Unrated deals while HY issuance saw a decrease compared to the earlier few months.
September 2020: Largest Deals
Q3 2020: Top Gainers & Losers
Tupperware, Ecuador, Bombardier and L Brands topped the gainers list with its dollar bonds yielding a price return of 58%, 45%, 37% and 35% respectively. The losers were led by Yihua Enterprises, HK Airlines and Revlon.
In Asia and Middle East, SriLankan Airlines, Oceanwide and Future Retail led the gainers list yielding a price return of ~30%. Future Retail recovered after the Indian retailer paid its first coupon on its first dollar bond on the last day of the grace period and then announced Reliance’s acquisition of the company. This led to a rally in its dollar bonds.
Fed Extends Limits on Bank Dividends and Buybacks; European Banks Criticize ECB on their Limits
The US Federal Reserve announced extension of limits it had set in June for the biggest US banks till the end of the year. Large banks with assets greater than $100bn are prohibited from making share repurchases while dividends have been capped and tied to a formula related to recent income – an assessment based on June’s stress tests. The stress tests showed loan losses for the 34 large banks ranged from $560bn to $700bn in the sensitivity analysis and aggregate capital ratios declined from 12% in 4Q2019 to between 9.5% and 7.7% under hypothetical downside scenarios. The Fed mentioned that capital positions remained strong in the last quarter with these restrictions but wants to continue the policy to provide further cushion against loan losses and to help lending.
In Europe, Societe Generale and Banco Santander criticized the European Central Bank’s (ECB) dividend ban policy enforced in March which required banks not to pay FY2019 and FY2020 dividends at least until October 1 2020. ECB also mentioned that banks should refrain from buybacks. Two weeks back, sources said that ECB was planning to lift the ban and now we are close to an update by the ECB on the same. Banco Santander last week became the first EU major bank to propose dividends on this year’s earnings for 2021 as per Bloomberg but acknowledged it would depend on ECB lifting the ban. Even tying dividends to capital levels would mean “the incentive for banks is to have more capital and lend less, to support the economy less,” a former ECB executive board member said.
Moody’s Notes Asian HY Covenant Quality at All-Time Lows
Moody’s in a report today said that the average Covenant Quality (CQ) for Asian HY bonds reached an all-time weakest score of 3.48 in 3Q2020 from the earlier 3.11 in 2Q2020. The CQ is scored on a scale of 1-5 where 1 denotes strong CQ and a higher score towards 5 denotes weak CQ. The assessment was done on 23 HY bonds totalling $8.1bn in issuance with an average coupon of 7.6%. The drop in CQ was led by Chinese property bonds from repeat issuers. “The average CQ score for full-package Chinese property bonds from January 2011 through September 2020 is 3.13 (moderate), 25% weaker than the 2.50 (good) score for full-package Asian bonds excluding Chinese property bonds”, they noted. Moody’s highlighted that prior to Central China Real Estate (CCRE) USD 7.25% 2024 senior note, no full-package Asian bond had ever scored in the weakest category going by their prospectus and assessment of:
- Lien subordination – CCRE’s prospectus notes “Permitted Liens also gives us and our Restricted Subsidiaries flexibility to incur debt secured by certain assets, the security interest of which may not be shared with holders of the Notes. The Notes will therefore rank behind such secured debt to the extent of the value of such security, the amount of which may be material”
- Restricted payments income basket predated to 2010 with no disclosure of accumulated credit. The prospectus mentions “For the avoidance of doubt, the 2010 Dividend shall not be included in such calculation”
- Leveraging – credit facility under joint debt basket capped to 35% of total assets, which can be secured under the permitted liens carve-out. This could be done without rating and securing the bonds.
In related news, Chinese developer Evergrande’s dollar bonds continued to rally with the 13.75% 2023s moving the most, up ~9.5%.
Bondholders To Block Zambia’s Plans to Delay Interest Payments
American Air Downgraded to B- from B by Fitch Ratings; American and United To Lay off Thousands of Employees
Fitch has downgraded American Airlines to B- from B. The downgrade for the heavily indebted carrier comes due to slower than expected recovery in the air travel sector. The airline also remains on negative watch due to the uncertainty surrounding the aviation sector. The top line revenues of the company is extremely stressed due to the low demand for travel and the company reported a daily cash burn of $30mn at the end of June earlier this year. This cash burn could increase in the future as per the rating agency. That said, the airline has adequate liquidity to meet its obligations in the near term. It has a liquidity of ~$13bn bolstered by a $5.5bn loan from Coronavirus Aid, Relief, and Economic Security (CARES) Act. The liquidity could further strengthen in case the aid under CARES is enhanced to $7.5bn and/or the airline could also be included in the list of companies which would get an extension of the Payroll Support Program. The next major maturity of $750mn for American’s unsecured bonds is in June 2022. However, the principal amortization, interest costs and pension obligations over the next year will continue to weigh heavily and will continue to be a drain on cash.
Meanwhile Bloomberg reported that American and United are looking at laying off 19,000 and 13,000 employees respectively unless the payroll support is extended for the US carriers. The US Treasury Secretary Steven Mnuchin has urged the airlines to delay layoffs and is negotiating a $25bn in payroll aid for the airlines with the Congress. Delta Air Lines is not likely to go the layoff route since 17,000 of its employees left voluntarily and another 40,000 took unpaid leave. The American Airlines CEO, Doug Parker in a letter to its employees wrote that “I am extremely sorry we have reached this outcome,” and added that “It is not what you all deserve.”
Oasis Petroleum File for Chapter 11 Bankruptcy; Downgraded to D-PD from B3-PD
The company’s bonds have been trading at stressed levels. However, after the news the bonds surged by 30%. The 6.5% bonds maturing in 2021 traded at 22.9 cents on the dollar, up 6.44 points and the 6.875% bonds maturing in 2022 traded at 23.75 cents on the dollar, up 7.25points.
Adidas Places its First Sustainability Bond
Adidas placed a €500mn 0% 2028 bond to be listed on the Luxembourg Stock Exchange adding that the offer was more than five times oversubscribed. “Following the first-time bond placements as an investment-grade-rated issuer earlier this month, today’s successful sustainability bond offering marks another milestone for our company,” said Adidas CFO Harm Ohlmeyer. The proceeds will go to fund environmental and social initiatives at Adidas in accordance with the sustainability bond framework validated by a second-party opinion from Sustainalytics. S&P rated Adidas A+ while Moody’s gave them an A2 rating, both with a ‘Stable’ outlook. Adidas placed two bonds amounting to €1bn in total – a €500mn 0% 2024 and €500mn 0.625% 2035.
Term of the Day
“There may be enough resources right now, at least for 2020,” Bullard said. “It probably not so much hinges on whether Congress acts or not before the election here or after the election,” he said. “You could probably wait until next year and then you could assess the situation at that point and make a decision.”
“I have been more bullish on the economy and think it is recovering faster than what was expected,” Bullard said, adding that growth trackers for the third quarter show the economy expanding at an annualized pace above 30%.
“The markets and the public have pretty good clarity,” Kaplan said. “The markets expect that the fed funds rate is going to stay at zero probably until 2023.” “Beyond that point, I believe that the committee should retain greater policy rate flexibility to decide on the appropriate stance of monetary policy,” he said.
“Large-scale purchases of government bonds can be a legitimate and effective tool of monetary policy,” he said. “But, as I have stressed numerous times, they risk blurring the lines between monetary policy and fiscal policy.”
“We should also pay close attention to how we interpret our mandate,” he said. “The more widely we interpret our mandate, the greater the risk that we will become entangled with politics and overburden ourselves with too many tasks.”
He warned “now is not the time for the economics of Chicken Licken,” referring to a folk tale known as Chicken Little in other parts of the world, in which a bird believes the sky is falling because an acorn fell on its head.
“If the economy were sat on a psychiatrist’s sofa, the diagnosis would not be especially difficult,” Haldane said. “These are the psychological symptoms of anxiety. And collective anxiety is as contagious, and could be as damaging to our well-being, as this terrible disease.”
“I wouldn’t sell Italian bonds on a risk-off event, simply because the ECB is there,” said Christiansen. “That commitment with its yield curve cap and flexibility embedded in the PEPP shouldn’t be underestimated.”
Alonso Hidalgo, Latin America officer at the Natural Resource Governance Institute’s (NRGI)
“Well into the second year of the administration, the government’s struggle to turn Pemex around has been well documented. Now, with the pandemic in full swing – and no relief in sight for oil producers – there are reasons to question this strategy.” Longer term, Hidalgo said, “the propping up of Pemex as the economic backbone of the country could entail huge risks for Mexico’s overall financial stability,” especially if an accelerated global energy transition leads to lower long-term oil prices.
In a statement by Consejo de Estabilidad del Sistema Financiero (CESF), Mexico’s financial system stability council
As for the economy, “global and national financial conditions are subject principally to the pandemic,” CESF said. “It could be necessary to implement new confinement measures, with the risk of limiting the economic recovery.” “In this context, Mexico showed a reduction in risk premiums and interest rates for government bonds showed moderate movement throughout the yield curve.”
“The shift to green, on a broad level, is too slow, way too slow,” she said. “The green bond market is far too little.” She warns that “the interest from investors will diminish over time” if green issuers don’t step up.
“If green bonds account for about 5%-7% of the European bond universe, it doesn’t give us much if you make those bonds ultra green,” she said. “We’d get much more bang for the buck if we make the 95% which aren’t yet green a little greener.”
Lindahl says “the investor base is going mainstream with sustainability,” and that means all corporate issuers “need to have a good and credible ESG story — full stop!”
Top Gainers & Losers – 1-Oct-20*