S&P continued to make a record high, up 1.2% with Moderna’s vaccine trial showing 94.5% efficacy in preventing Covid in participants. With oil up 3% yesterday, the energy sector led the gains in the broader market up 6% followed by industrials and financials up over 2%. With Tesla set to be added to the S&P 500 index on December 21, the stock rallied 11% in after-market trading. US 10Y Treasury and Bund yields were higher by 1-2bp. US IG and HY CDS spreads tightened 2.4bp and 14.7bp respectively. Europe main and crossover spreads also tightened 2.7bp and 15.2bp respectively. Asia ex-Japan CDS spreads are slightly wider 0.8bp while Asian equities are mixed today.
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New Bond Issues
- ANZ $ 15NC10 Tier 2 at T+200bp area
- Aviva Singlife 10.25NC5.25 Tier 2 at 3.75% area
- Central China Real Estate 3.5NC2 at 8.15% area
Renault raised €1bn ($1.18bn) via a 5.5Y bond to yield 2.375%, 37.5bp-50bp inside initial guidance of 2.75%-2.875% area. The bonds have expected ratings of Ba2/BB+. The bonds have a make-whole call provision at benchmark plus 50bp, a type of call option on a bond that gives the issuer the right to redeem a bond before its maturity date by compensating (making whole) bondholders for future coupon payments.
Jingrui Holdings raised $240mn via a 2.25Y bond to yield 14.5%, 12.5bp inside initial guidance of 14.625% area. It raised $142.815mn in an exchange offer and $97.185mn in a new money issue. The bonds are rated B3 and received orders over $510mn, ~2.1x issue size. Proceeds will be used for debt refinancing.
New Bonds Pipeline
- China Govt 5Y, 10Y and 15Y EUR bond
- Saudi Aramco 3Y, 5Y 10Y, 30Y and/or 50Y $ bond
- China Gezhouba Group $ subordinated perpetual bond
- CALG $70mn 5.9% 5Y privately placed bonds
- IIX 4Y Women’s Livelihood bond
Rating Changes
- Belgian Insurer Ageas And Core Subsidiaries Upgraded To ‘A+’ By S&P On Resilient Earnings Growth; Outlook Stable
- Golden Eagle Retail Group Upgraded To ‘BB+’ By S&P On Improving Market Position; Outlook Stable
- Moody’s upgrades PulteGroup’s senior unsecured rating to Baa3; outlook stable
- Moody’s upgrades HEP’s ratings to Ba1 from Ba2; outlook stable
- Pfizer Inc. Downgraded To ‘A+’ Following Divestiture Of Upjohn; Outlook Stable
- Moody’s downgrades Pfizer to A2 from A1 following Upjohn separation; stable outlook
- Fitch Downgrades Jababeka to ‘B-‘; Outlook Stable
- Transocean Ltd. Downgraded To ‘SD’ By S&P On Completion Of Distressed Exchanges; Ratings On Affected Issues Lowered To ‘D’
- Live Nation Entertainment Inc. Downgraded To ‘B’ From ‘B+’ By S&P, Outlook Negative; Debt Ratings Lowered
- Moody’s places El Salvador’s B3 ratings on review for downgrade
- Fitch Revises Belarus’s Outlook to Negative; Affirms at ‘B’
- Moody’s changes Phillips 66’s outlook to negative; rates proposed notes A3
- Phillips 66 Outlook Revised To Negative From Stable By S&P On Slower-Than-Expected Recovery; ‘BBB+’ Ratings Affirmed
- Auchan Holding Outlook Revised To Stable By S&P On Restored Credit Metrics; ‘BBB-‘ Rating Affirmed
- Fitch Removes RWN on Nomura’s VRs; Revises Outlook to Stable; Affirms IDRs
- Fitch Places BBVA USA on Watch Positive Following Announced Sale to PNC; SR Placed on Watch Negative
China Plans Euro Denominated Bond Issuance
The Chinese government, acting through the Ministry of Finance plans to issue EUR denominated bonds in a multi-tranche offering, subject to market conditions. The planned benchmark offering is expected to be across 5Y, 10Y and 15Y maturities, as per a note sent to investors as reported by IFR. Bloomberg reports that China, rated A1/A+/A+, is said to be turning to the European bond markets due to recent tensions between the nation and the US where Trump plans to take new hard-line moves against China. “Developing a larger euro bond market serves to diversify China’s reliance on dollar issuance, with political risks underscored by Trump’s recent targeting of Chinese military-linked companies… euro-denominated financing is rather attractive at this juncture, with yields on China’s current euro bonds having slipped to record lows” said Chang Wei Liang, a macro strategist at DBS Bank. The planned issuance follows their EUR issuance last year where they raised €4bn ($4.4bn) across 7Y, 12Y and 20Y bonds with a demand of nearly €20bn ($22bn). Bank of China, Bank of Communications, China International Capital Corporation, Bank of America, Credit Agricole, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Societe Generale, Standard Chartered Bank and UBS are joint lead managers and bookrunners. China’s EUR 0.125% 2026s are currently at 100.45, yielding 0.05% while their 0.5% 2031s and 1% 2039s are at 99.64 and 99.69, yielding 0.5% and 1.02% respectively.
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Aramco Hires Banks for Up To $6 Billion Multi-Tranche Dollar Bond
Saudi Aramco, the state-owned oil company is planning a return to the international bond markets for the first time since April 2019 with a proposed multi-tranche dollar bond. The proposed issuance is to fund the massive $75bn annual dividend commitment, majority of which goes to the Saudi government. The company announced an $18.75bn dividend in its Q3 earnings release, when it reported a 45% drop in profits over the same quarter last year. The sovereign relies on the dividend payout to fund its budget deficit, which is expected to widen to 12% this year on the back of falling oil prices. Bloomberg reported that the deal size could be up to $6bn, according to people familiar with the matter while IFR reported that the issuance may consist of a 3Y, 5Y, 10Y, 30Y and/or 50Y tranche.
Aramco has slashed spending, cut jobs and is considering asset sales to shore up cash. Despite this, its gearing (debt/equity) has increased from its target range of 5-15% to 21.8%. One of the reasons for this was the debt it incurred to fund the $70bn acquisition of Saudi chemical company SABIC earlier this year. For the new bond issuance, Aramco has hired Citigroup, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley and NCB Capital as active joint bookrunners. Its older 3.5% bonds due 2029, 4.25% bonds due 2039 and 4.375% bonds due 2049 are currently trading at 111.2, 116.8 and 122.2, yielding 2.04%, 3.05% and 3.18% respectively on the secondary markets.
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BBVA-Sabadell Merger Talks; Santander to Acquire Wirecard’s Core Business
Spanish bank BBVA confirmed that it is in talks with Banco Sabadell for a merger, according to the FT. Sabadell has a market cap of $2.7bn as compared to BBVA’s market cap of $29bn. The merger follows the CaixaBank-Bankia deal in mid-September as Spanish banks try to consolidate their position. BBVA stressed that no final decision had been taken over whether a merger would ultimately take place or what its terms and conditions would be. The merger talks come after BBVA announced the sale of its US subsidiary to PNC for $11.6bn in cash yesterday. BBVA stated that the sale would have a positive impact on BBVA’s CET1 ratio of ~300bp, or $10bn of CET1 generation. BBVA’s EUR 6% Perps were up over 1 point to 107.6 while their USD 6.125% Perps were up 1.8 to 102.55.
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In related news, Spain’s Banco Santander is paying about €100mn ($118.6mn) to acquire Wirecard’s core European technology business. The technology business of Wirecard processes electronic payments for merchants and its credit card issuing business in Europe. The acquisition is solely for the technology platform and Santander will not assume any liabilities for Wirecard AG and Wirecard bank, the Spanish bank noted. The deal, which is meant to accelerate Santander’s position in merchant payments, is expected to be completed by the end of the year and is subject to certain conditions, including regulatory approvals. Santander’s 3.8% dollar bonds due 2028 were down 0.2 to 110.93.
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CAR Inc to Sell ~21% Stake to MBK Partners; Seeks Bondholders’ Consent to Amend Terms
Chinese car rental company CAR Inc announced via an exchange filing last week that private equity firm MBK Partners will be acquiring a 20.86% stake in the company for CNY 1.8bn ($228mn). CAR’s parent UCAR has inked an agreement with MBK’s subsidiary Indigo Glamour Company to sell 442.6mn shares at a price of HKD 4 ($0.5) per share. The completion of the deal will mark UCAR’s exit from the Hong Kong-listed CAR Inc. The transaction is subject to certain conditions including an unconditional PRC antitrust approval and no trigger of a change of control or default clause on its outstanding debt. CAR has thus launched a consent solicitation on its $300mn 6% bonds due 2021, $372.33mn 8.875% bonds due 2022 and CNY 750mn ($114mn) 6.5% dim sum bond due 2021. The company is seeking to amend provisions including the definitions of “permitted holders”, “change of control” and “rating decline” to facilitate the completion of the deal. It is offering a consent fee of $3.5 per $1,000 in principal for the two dollar bonds if consent is given by November 23 and $2.5 if given after that date but by November 30. It is offering a consent fee of CNY 35 per CNY 10,000 in principal for the dim sum bonds if consent is given by November 23 and CNY 25 if given after that date but by November 30.
CAR’s bonds traded higher on Monday with its 6% bonds due 2021 up 1.6 points to 93.5, its 6.5% dim sum bond due 2021 up 3.7 points to CNY 92.2 while its 8.875% bonds due 2022 up 3.3 points to 89.5 cents on the dollar.
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Unigroup Defaults on Local Bond; BMW’s China JV Partner Parent Applies for Restructuring
Tsinghua Unigroup announced on Monday that it has defaulted on CNY 1.3bn ($197mn) of domestic bonds due to tight liquidity. The chipmaker will keep raising funds to repay investors the principal and interest, the company said after creditors’ vote on their repayment plan was considered invalid. Unigroup was seeking creditor approval to repay 10% of the principal on its yuan bond and extend the rest by six months. Unigroup’s 6% bonds due 2020 rallied ~25% to 35.4 in the morning after news that Bank of Beijing was considering providing funding support to help address its debt issues, according to Bloomberg sources. But once the default was announced, their 6% 2020s fell 30% to 25.6. Tsinghua’s 4.75% 2021s are down 4.9 points to 25.75.
In related news, creditors of the parent of BMW’s Chinese JV partner, Huachen Automotive Group, applied for the company’s restructuring. Huachen said that if the court was unable to approve a restructuring plan, or if the approved plan could not be executed, the court would end the restructuring process and declare the company bankrupt. Huachen defaulted on a CNY 1bn ($151.9mn) bond last month adding to a list of China’s state-owned enterprises becoming delinquent.
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South Korean Flag Carrier KAL Set to Take Over Asiana Airlines
South Korean flag carrier, Korean Air Lines (KAL) is all set to take over rival Asiana Airlines for KRW1.8tn ($1.63bn). KAL plans to buy new shares worth KRW1.5tn ($1.36bn) issued by Asiana and also buy Asiana bonds worth ~KRW300bn ($270mn) to facilitate the deal. The pandemic has had an adverse effect on the entire airline sector and both KAL and Asiana have suffered the brunt. With the merger, the two airlines would be able to lower their costs on account of improved operational efficiency. To fund the acquisition, parent company Hanjin KAL will receive investment worth KRW800bn ($720mn) from state-owned Korean Development Bank (KDB) in the form of share purchase. Of that, KRW300bn ($270mn) would be used towards the bond purchase of Asiana and another KRW300bn ($270mn) would be used to fund the operations of Asiana. Korean Air said that “Considering that Korean Air’s financial status could also be endangered if the Covid-19 situation is prolonged, it is inevitable to restructure the domestic aviation market to enhance its competitiveness and minimize the injection of public funds”. KAL’s 5.875% bonds due 2021 and 6.875% bonds due 2047 were up 0.78 and 0.1 points, both trading at 100.23 on the secondary markets.
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Piraeus’s CoCo Likely to Convert Into Equity After ECB’s Supervisory Board’s Draft
Greece’s Piraeus Bank in a press release yesterday noted, “It has received a draft preliminary decision of the Supervisory Board of the European Central Bank (ECB) indicating the supervisor’s intention not to approve the request of the Bank to pay in cash the coupon of the Contingent Convertible Security (CoCo) in the amount of €165mn to the Hellenic Financial Stability Fund (HFSF), due on 2 December 2020.” The final decision will be taken by the ECB’s Governing Council and is expected to be communicated to Piraeus in the coming days. The bank is expected to convert its state-held CoCos into equity this week, which will put the firm under Greek government ownership as per Global Capital.
Piraeus mentioned that if the ECB rules out the cash payment of their CoCo coupons with that leading to conversion of the CoCos into equity, the bank’s capital trajectory would materially improve with an increase in tangible book value and ~40bp of additional CET1 capital generation per annum. This would lead to €495mn ($584mn) in coupon savings in three years by 2022, further strengthening the overall capital structure. With respect to the terms of the CoCo, the fully discretionary non-payment of the coupon does not constitute default. Piraeus’s total capital adequacy ratio (Term of the day, explained below) currently stands at 16.1% with CET1 ratio at 14.1%. Their EUR 5.5% 2030s and 9.75% 2029s are up 1.6 and 2.4 points to 61.4 and 78.5 respectively.
Term of the Day
Capital Adequacy Ratio
This is the ratio of a bank’s capital in relation to its risk-weighted assets. Capital here includes Tier 1 and Tier 2 capital. Risk weighted assets account for credit, market and operational risks with certain weights. Under Basel III, banks must have a capital adequacy ratio (CAR) at a minimum of 8% of risk weighted assets. CAR is used as a measure to ensure that banks have a cushion to absorb losses and is used while doing stress tests. In Piraeus Bank’s case, their CAR is more than twice the minimum required at 16.1%.
Talking Heads
On central banks lacking tools on their own to combat savings glut and resulting economic stagnation
Janet Yellen, former Federal Reserve Chair
“There is a glut of savings and a shortage of investment,” which is the core problem facing developed countries’ economies, said Yellen. “We have to have fiscal policy, structural policy other than just relying on central banks to achieve healthy growth.” “At this point, they’re doing about all they can do,” Yellen said of the Fed.
Lawrence Summers, ex-US Treasury Secretary
“There has been no boldness at the global level comparable to the boldness at the national level,” he said. “That could get us in real trouble down the road.”
Mervyn King, former Bank of England central banker
“It’s much, much wider than that to deal with this problem of excess saving in the world as a whole,” he said. “If we’re going to do stress tests on climate change, we need to do stress tests for the next pandemic. There are many ways that the financial system is threatened other than climate change,” King said.
Raghuram Rajan, former Indian central banker
“There really is no global leadership right now,” said Rajan. “Hopefully it will emerge,” he added
On the next ECB stimulus focused on bond buying and loans
Christine Lagarde, European Central Bank president
“We are seeing the other side of the river, but there is a lot of work that still needs to be done,” Lagarde said. “There is a lot of support that needs to be displayed and financing conditions that need to be kept favorable and conducive to investment in research and development by firms, in financing by banks and non-banks.”
Pablo Hernandez de Cos, Bank of Spain Governor
“In order to face the second wave of the pandemic, the recalibration of monetary policy instruments should include, at the very least, the use once again of our emergency bond buying program, and our long-term refinancing operations,” said Hernandez de Cos.
Luis De Guindos, ECB Vice President
The toolbox “was diversified, it was able to be calibrated to different situations, to changing circumstances and, if needed, able to evolve,” he said. “We will continue in the same spirit to try to live up to our responsibilities and in the present crisis don’t forget that the toolbox that we have extended was the PEPP and the TLTRO.”
“Mexico does these types of refinancing transactions when it identifies ideal opportunities in the market and they are carried out without incurring additional debt,” Yorio said.
“Global sustainable finance volumes will approach $425 billion in 2020 after a strong third quarter,” says Kuchtyak . “We now forecast around $250 billion of green bonds, $100 billion of social bonds and $75 billion of sustainability bonds for the full year.”
“Developing a larger euro bond market serves to diversify China’s reliance on dollar issuance, with political risks underscored by Trump’s recent targeting of Chinese military-linked companies,” said Chang.
“Political uncertainty will persist into the April general elections, but the strong fundamentals vs other Latam peers and the prospects of a global economic recovery should limit the downside,” said Pham.
Top Gainers & Losers – 17-Nov-20*
