US equities followed European equities lower as the S&P ended down 3.5% while the DAX and CAC fell 4.2% and 3.4% as Germany and France re-enforced lockdowns route given the surge in Covid cases. Apple and Amazon are scheduled to report earnings after market close. The overall risk-off sentiment saw S&P VIX up ~20% to 40, albeit US 10Y Treasury and Bund yields were flat. US IG CDS spreads were wider by 5bp to 63.85bp while HY CDS spreads soared 22bp to 413bp. European main and crossover CDS spreads jumped 7bp and 30bp to 65bp and 375bp respectively. Gulf equities also fell with the Saudi index leading losses, down ~1% while UAE, Qatar and Egypt indices fell ~0.3%. Asian equities have followed the risk-off tome, down ~1% while Asia ex-Japan IG CDS spreads are wider by 1.4bp. Asian markets saw 14 new bond deals worth $5.63bn priced on Wednesday. The proposed issuance from Local government-backed Zhongyuan Yuzi Investment was postponed on grounds of “a weak market backdrop and unmet yield expectations”.
We are conducting a Bond Traders’ Masterclass on Bond Valuation & Risk today at 7pm Singapore / 11am London time. This is a 60-minute interactive session that will cover z-spread, duration, factors that move bond prices, yield curve control and practical tips from our seasoned debt capital market speakers.
New Bond Issues
- Aston Martin $/GBP 5NC2 @ high 8-9%
- State Development & Investment Corp $ 300mn 5yr @ T+160bp area
- BOSCI (BVI) $ tap 1.25% 2023 @ T+180bp area
- Shandong Iron & Steel $ 3yr @ 6.8% area
New Bond Issues
China Development Bank (CDB) Financial Leasing raised $500mn via a 3Y bond at a yield of 1.5311%, 35bp inside initial guidance of T+170bp area. The bonds have expected ratings of A1/A+ and received orders of over $1.7bn, 3.4x issue size. The company plans to use proceeds for new capital expenditure, debt refinancing, working capital and other general corporate purposes. The bonds are issued by CDBL Funding 1 and guaranteed by CDB Aviation Lease Finance Designated Activity Co, a wholly-owned subsidiary of the Hong Kong-listed company. The bonds also carry a keepwell and asset purchase deed provided by CDB Financial Leasing.
Kookmin Bank raised $500mn via a 10Y Basel III compliant Covid-19 response sustainability Tier 2 bond at a yield of 2.518%, 30bp inside initial guidance of T+205bp area. The bonds have ratings of Baa1/BBB+ and received orders over $2.6bn, 5.2x issue size. The bond has a non-viability loss-absorption feature and is subject to legislation on the structural improvement of Korea’s financial sector, as per IFR. Proceeds will be used to support small and medium-sized enterprises affected by the Covid-19 outbreak, which satisfies the social eligibility criteria of Kookmin Bank’s sustainable financing framework.
Pershing Square raised $500mn via a 10Y bond at a yield of 3.25%, 25bp inside initial guidance of 3.5% area. The bonds are expected to be rated BBB+/BBB. The well-known hedge fund run by Bill Ackman will use proceeds for general corporate purposes including investments in Pershing Square Tontine, a SPAC listed earlier this year and targets minority positions in large private companies.
Poly Property raised $500mn via a 5Y bond at a yield of 4%, 50bp inside initial guidance of 4.5% area. The bonds are unrated and received orders of over $2bn, 4x issue size. The bonds will be issued by wholly-owned subsidiary Ease Trade Global and carry an unconditional and irrevocable guarantee from the company and a keepwell deed from China Poly Group. Proceeds from the issue will be used for offshore debt refinancing.
Yanzhou Coal Mining raised $500mn via a 3Y bond at a yield of 3.5%, 50bp inside initial guidance of 4% area. The bonds have expected ratings of Ba1 and received order of $1.9bn, 3.8x issue size. Proceeds from the issue will be used for debt repayment, working capital and general corporate purposes, including refinancing.
Qingdao Conson Development raised $500mn via 3Y bonds to yield 2.8%, 55bp inside initial guidance of 3.25% area. The bonds, with expected ratings of BBB/BBB+, received final orders exceeding $1.35bn, 2.7x issue size. This is Qingdao’s second dollar bond issue after making its debut dollar issuance in 2017. Wholly-owned subsidiary Haitian (BVI) International Investment Development is the issuer and Qingdao Conson Development (Group) is the guarantor.
Indonesian integrated coal miner Indika Energy raised $225mn via a tap of its 8.25% 2025s at 8.25%, at par with final price guidance. This brings the total outstanding to $675mn. The tap offers a new issue premium of ~8bp over its initially launched 2025s, which are trading at 8.17% currently on the secondary market. Proceeds from the tap will help redeem Indika’s $285mn 6.375% 2023 bonds in full.
Government of Sharjah raised $250mn via a tap of its 10Y sukuk issued last year at a yield of 2.75%, 15bp inside initial guidance of 2.9% area. Sharjah Sukuk Programme is the issuer and the Sharjah government, rated Baa2/BBB- (Moody’s/S&P), is the obligor. The bonds are currently trading at yield of 2.59% on the secondary markets.
AVIC raised $200mn via a perpetual non-call 3Y (PerpNC3) at a yield of 3.425%, 27.5bp inside initial guidance of 3.7% area. The bonds, expected to be rated Baa1, will be issued by wholly-owned subsidiary Soar Wise. The bond has a coupon reset to the initial spread of 324.2bp over 3Y Treasuries and a 300bp step-up if the bond is not called on its first call date of November 4, 2023. Orders were said to be over $960m when final guidance was announced. Proceeds from the issue will be used to replace debt and funding projects. The bonds offer a new issue premium of 16bp over its 3.45% perps (callable in October 2022) issued last year, which are trading at 3.48% currently on the secondary market.
Zhuhai Huafa Group, the largest government-related entity and primary urban developer in Zhuhai, raised $250mn via 5Y bonds to yield 2.8%, 50bp inside initial guidance of 3.2% area. The bonds, with expected rating of BBB, received orders of over $1.1bn when final guidance was announced, 4.4x issue size. Despite the order book size, the deal was smaller than the capped $300mn it initially indicated. Wholly-owned subsidiary Huafa 2020 I Company will issue the bonds with a guarantee from Zhuhai Huafa.
New Bonds Pipeline
- Central Nippon Expressway $ green bond
- Guangxi Investment Group $ bond
Lenovo Extends Dollar Bond Curve With New 10Y $1 Billion Bond
Lenovo, the Chinese PC maker raised $1bn via a 10Y bond at a yield of 3.421%, 265bp over Treasuries and 45bp inside initial guidance of T+310bp area. The new bond comes after Lenovo received an investment grade rating by all three agencies a couple of weeks ago. Moody’s, S&P and Fitch rated the group Baa3 (Stable), BBB- (Stable) and BBB- (Positive) respectively. The new bonds are rated at par with the issuer rating and received orders of over $3.9bn, 3.9x issue size. In terms of allocation, investors from the US took 39% of while EMEA and Asia took 31% and 30% respectively. Asset/Fund managers booked 81%, insurers; pension funds, sovereigns, supranationals and agencies combined took 11% while private banks and other banks took 6% and 2% respectively.
The issuance will fund a tender offer for Lenovo’s outstanding $500mn 3.875% 2022s and $750mn 4.75% 2023s, and its $1bn 5.375% perpetual preferred shares, as per IFR. The cap for the tender offer is yet to be announced. If the amount of notes submitted exceeds the tender offer cap, Lenovo will accept first the perps, then the 2022s and then the 2023s, until the cap is reached. Lenovo is offering to pay $1,037 per $1,000 in principal for the preferred shares, $1,032 for the 2022s and $1,055 for the 2023s. The bonds are currently trading at 103.63, 102.62 and 105.34 respectively on the secondary markets.
Pemex posts First Quarterly Profit in Two Years
Pemex, the Mexican state-owned oil company reported its first quarterly profit at MXN 1.4bn ($66mn) since Q3 of 2018. Last quarter, they reported a loss of MXN 44bn ($2.1bn). The recent numbers were helped by currency gains and a lower tax bill. Pemex reported currency gains to the tune of $1.7bn due to a stronger peso compared to a currency loss of nearly the same amount YoY last year. Its tax bill fell to ~$2bn down 43% YoY due to tax-reduction packages. Export revenues were down along with national sales, leading to a revenue decrease of ~30% YoY. Pemex’s debt rose to $110.3bn, from $107.2bn at the end of the previous quarter. Bloomberg reports that Pemex’s profit is a win for the populist president AMLO who has sought to dial back on the opening of Mexico’s energy industry to international competition. Pemex’s 4.25% dollar bonds due January 2025 are lower by 0.60 points to 93.85 cents on the dollar, yielding 5.9% while its 6.375% bonds due January 2045 were down 1.6 points to 77.24, yielding 8.6%.
For the full story, click here
Sri Lanka’s Dollar Bonds Continue Freefall After Pompeo Visit
The 12-hour visit of US Secretary of State Mike Pompeo to Sri Lanka (SL) was not a happy event for SL’s bondholders. The visit, which was meant to boost ties with the debt-ridden nation, ended with Pompeo remarking that “The Chinese Communist Party is a predator”. This comes close on the heels of a visit by a high-ranking Chinese Communist Party politburo member who pledged more economic help to SL. The island nation has been reeling under pressure of high debt and the US and China seem to be engaging in “Debt Trap Diplomacy” over the sovereign. SL has already been forced to lease a port for 99 years to a Chinese firm after it failed to repay a $1.4bn loan to China.
According to Moody’s annual credit analysis on SL, the credit profile indicates government liquidity and external vulnerability risks specially amid the coronavirus. The government faces challenges due to the large debt, high reliance on external funding, and low foreign exchange reserves. The report highlights the financing risks arising from the political environment in the country. It also brings out the delay in securing additional funding from creditors as well as a delay in the IMF’s Rapid Financing Facility which would result in an increase in the credit cost.
Sri Lanka’s dollar bonds had been witnessing a freefall since September. They dropped by ~4% last Friday when the US urged the Asian island nation to make “difficult but necessary choices” on its economic relations concerning China. Prior to that, the bonds tanked on news of the 20th constitutional amendment, after Moody’s downgraded the sovereign by two notches to Caa1 in September and after one of its ministers had stated that the urgency for Sri Lanka to secure IMF funding was not there.
The sovereigns bonds have been trading in the red since Pompeo’s visit. Its 7.55% bonds due 2030, 7.85% maturing in 2029 and 6.2% maturing in 2027 were down 3-4 points on Wednesday, trading at ~54.5 cents on the dollar.
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Deutsche Bank Reports Q3 Profits Boosted by Trading
Deutsche Bank reported a profit of €309mn ($365mn), the highest quarterly profit this year. Revenues were up 13% YoY to €5.9bn ($7bn) led by investment banking revenues. Fixed Income, Currencies and Commodities trading, which falls under investment banking, saw revenues jump 47% YoY to €1.8bn ($2.1bn). “Net revenues in Rates more than doubled versus the prior year quarter while Credit Trading net revenues were significantly higher, on increased client activity. FX net revenues were also significantly higher and benefited from higher market volatility”, the report mentioned. Deutsche Bank set aside €273mn ($322mn) as provisions for bad loans in the quarter, slightly less than a previous guidance of €300mn ($354mn) while Stage 3 (credit impaired) provisions remain elevated. The lender in previous quarters provisioned less than many competitors for the pandemic, citing the quality of its loan book and its exposure to Germany, according to Bloomberg. CET1 ratio stood at 13.3%, 2bp over the prior quarter. The company’s 7.5% dollar perps were down 0.90 to 89.7 cents on the dollar, yielding 8.6%.
For the full story, click here
Oman Gets $1bn Financial Support from Qatar
Oman received $1bn of direct aid from Qatar, the amount deposited at the central bank of Oman with more to come, as per officials. Investors said that the support was welcome but more was needed. Oman has been hit by lower oil prices and the IMF expects its GDP to contract by 10% this year.recently downgraded by S&P to B+ expecting its fiscal deficit to widen considerably and debts to rise significantly. Gross and net debt is expected to be 85% and 34% of GDP in 2022 vs. an expectation of 84% and 15% respectively for 2020. As compared to 2019’s gross and net debt of 60% and -3.1%, this would be a significant increase. S&P calculates external debt payments of $4.3bn, and $6.4bn in 2021 and 2022, a total of ~7.5% of GDP. Reuters data shows that Oman has Eurobond repayments of $1.5bn in 2021 and $1bn in 2022. The support from other GCC nations was considered a positive for Oman’s credit worthiness and Qatar is the first to come out in support since the downgrade. Oman had recently raised $2bn via a dual-trancher, its first dollar bond issuance since July 2019. Oman’s recently issued 6.75% 2027s and 7.375% 2032s are down 0.24 and 0.11 to 98.16 and 97.33 respectively.
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Boeing Posts Fourth Quarterly Loss; Long-End Dollar Bonds Trend Lower
American plane maker Boeing reported Q3 earnings on Wednesday. Revenues came in at $14.1bn, down 29% vs. last year, bringing the nine-months (9M) revenue to $42.8bn, down 27% vs. last year. The BBB-/Baa2/BBB rated company reported operating margins fell to negative 2.8% vs. positive 6.3% last year resulting in a net loss of $466mn for Q3 vs. a profit of $1.2bn last year. Boeing President and Chief Executive Officer Dave Calhoun said, “The global pandemic continued to add pressure to our business this quarter, and we’re aligning to this new reality by closely managing our liquidity and transforming our enterprise to be sharper, more resilient and more sustainable for the long term.” Total consolidated debt stood was down marginally QoQ at $61bn as at Q3-end vs. $61.4bn as at Q2-end.
Boeing’s 5.15%, 5.805% and 5.93% bonds due 2030, 2050 and 2060 fell 1.5, 2 and 2.7 points to 113.7, 122.2 and 123.4 respectively on the secondary markets.
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Alam Sutera Reaches Exchange Offer Threshold
Alam Sutera Realty’s exchange offer launched in end-September finally met the acceptance threshold of 85%. Below is a gist of the exchange offer:
- Exchange the 11.5% April 2021s for new 3.5Y bonds. The new 2024s will pay either:
- 6% in cash for its first two coupons or
- 6.25% in-kind for the first and 6% in cash for the second; coupon step-up of 8% and 11% beginning in the second and third year
The 2024s will also amortize 5% of the principal on each of the last three interest payments prior to maturity.
- Exchange the 6.625% April 2022s in two portions. $250 of the new 3.5Y bond and $750 of the new 5Y bond for every $1,000 in principal of the old bonds tendered. The new 2025s will pay either:
- 6.25% in cash for the first two coupons or
- 6.5% in-kind for the first and 6.25% in cash for the second. There is a coupon step-up to 8.25%, 11% and 12% in the beginning of the second, third and fourth year respectively.
The 2025s will amortize 7.5% of the principal on each of the last two interest payments prior to maturity.
Moody’s assigned the new notes and the corporate a rating of Caa1 with all ratings’ outlook to negative given that the refinancing risk has not been eliminated and that the company would rely on external funding. S&P downgraded Alam Sutera to D from CC as they consider the exchange offer to be equivalent to default. Fitch also downgraded the company’s rating to RD from C as they consider the amendments to constitute a material reduction in original terms and done to avoid default. Alam Synergy, the SPV that issued the bonds saw its 11.5% 2021s and 6.625% 2022s up 1.13 and 0.75 points to 90.1 and 69.8 cents on the dollar respectively.
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Zambia Gets a Breather Through Deferral of Payments to China Development Bank
China Development Bank (CDB) gave a much required breather to Zambia by allowing a deferral of repayments that were due this month, according to Zambia’s government. While the exact amount of the deal is not known, Zambia owed CDB ~$391mn at the end of 2019. The sovereign has been in focus after the government could not honor a $42.5mn coupon payment due on October 14 on its Eurobonds. The repayment is currently in the grace period. The total debt held by the sovereign amounts to ~$8.8bn according to Bloomberg. Zambia also owes ~$3bn to various Chinese entities. The deal is significant as its efforts to secure a deferral for interest payments due till April 2021 have so far been rejected by the bondholders.“This is a good step in the right direction but they still need to do more to appease the creditor group,” according to a member of the Zambia External Bondholder Committee. Fitch downgraded Zambia to C in late September and its foreign currency ratings have been lowered to SD by S&P late Oct.
Zambia’s 8.5% bonds due 2024 and 8.97% bonds due 2027 were up ~0.2 points and were trading at 42.9 and 41.3 cents on the dollar in the secondary markets. The bonds were trading at ~60 till mid-September, before news of a possible default.
For the full story, click here
Term of the Day
Greenwashing is a term used to describe corporate/government marketing practices that emphasize on its environmentally-friendly initiatives that are, in truth, vastly overstated. While this is not a new term, its relevance has increased over the past few months with the surge in green, social and sustainable bond issues from corporates and sovereigns. Dutch asset manager NN Investment Partners expects the size of the green bond market to swell from €660bn ($776bn) currently to €2tn ($2.3tn) in 2023. However, it found that 15% of such bonds are issued by companies “involved in controversial practices that contravene environmental standards”.
The term greenwashing was coined by environmentalist Jay Westerveld in 1986 and originates from his visit to the Beachcomber Resort in Fiji in 1983. He noticed that the resort had placed a note beside the towel stand that encouraged patrons to reuse towels to reduce ecological damage. However, looking at the ongoing construction of new bungalows and vast amounts of wastage at the resort, it was clear to Westerveld that the resort did not care much for the environment and were simply looking to reduce its expenses associated to towel cleaning.
“What they have left is really on the margin,” said Zandi. “They just don’t have much room to maneuver with regard to monetary policy. I don’t really see what more they can do. That’s why they’ve been so explicit in telling fiscal policymakers to do more, because they know they can’t help.” “There’s no game-changer here,” Zandi said. “There’s nothing big they can do to help the economy in the near term.”
There’s “room for more consolidation in global equities,” he said. While U.S. corporate debt — particularly high yield — and emerging market debt have a positive correlation with equities, they continue to benefit from “ultra loose” monetary policy from developed market central banks, he added.
“The reality with Sri Lanka is that it has very high debt levels and a very large deficit, but they are not in an IMF programme and nor is the government willing to do what it takes to make the debt sustainable,” said Daly. “So the market is looking at the credit and thinking something has got to give.”
“Pressures on inflation and the lira are likely to push the Turkish central bank to being more conventional,” said Tuzun. “October inflation, the U.S. elections, the global Covid-19 trends, and the effect of the sharp lira liquidity squeeze on local dollarization.”
Tom Chinery, corporate bond portfolio manager at Aviva Investors
“We don’t buy a bond because it’s green, but because the company is,” said Chinery. “And when we meet with a company that is selling a green bond, the first question we ask is if they are doing anything they wouldn’t be doing anyway.” On the example of car companies selling green bonds to fund development of electric vehicles, Chinery said: “To us that’s business as usual. Every car manufacturer on the planet should already be doing this.”
Ulf Erlandsson, founder of advocacy group Anthropocene Fixed Income Institute
“Queensland’s expansionary coal policy is directly in opposition to all you’re trying to achieve with the green bonds,” he said. “We declare that as a clear greenwash.” “Green bonds are a gentleman’s agreement saying that we expect an issuer to do what they say they’re intending to do with the money,” said Mr Erlandsson. “There’s usually no legal hardcoding in the bond contract saying that we have some legal recourse in case they don’t do what they’re supposed to do.”
Joshua Kendall, ESG analyst at Insight Investment
“There’s a lot less wiggle room,” said Kendall, highlighting the increased coupon for missed targets. “That is within the prospectus and that is legally enforceable so if an issuer doesn’t meet a sustainability target the investors will get a reward for that.” “Businesses recognise that it isn’t just simply about building wind farms,” he added. “It’s about ensuring that their overall strategy is more sustainability aligned.”
Top Gainers & Losers – 29-Oct-20*