Advanced Theory & Practice of Bonds

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1-2 December 2021

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US Benchmark & Global Indices 8 Dec

US equities ended the day mixed, as S&P ended 0.2% lower and Nasdaq ended up 0.5%. Fears of a no-Brexit deal saw the GBP fall from highs of 1.35 to a low of 1.32, currently at ~1.33. US 10Y and 30Y Treasury yields dipped 2bp each on the back of increased coronavirus hospitalizations and the resulting restrictions that include a new lockdown in northern California. IG CDS spreads widened 0.9bp while HY widened 2bp. EU main CDS spreads were 2.1bp wider while crossover CDS spreads were 9.8bp wider. Asia ex-Japan CDS spreads were 0.2bp wider and Asian equities have opened lower ~0.2%.

 

New Bond Issues

  • CK Asset Senior $ PerpNC3 at 3.8% area
  • Guangzhou Development $500mn at 3.05% area
  • Seazen Holdings $ 4NC2 at 5.35% area

New Bond Issues 8 Dec

SMC Global Power raised $350mn via a tap of their 7% perpetual non-call 5Y (PerpNC5) bond at a yield of 6.4%, 22.5bp inside initial guidance of 6.625% area. The bonds are unrated and received orders of over $1.25bn, ~3.6x issue size. If not called in October 2025, the coupon will reset to the initial spread of 669.9bp over 5Y Treasuries plus a step up of 250bp and every five years thereafter. Proceeds will be used for repurchasing, refinancing and/or redeeming undated subordinated capital securities, financing investments in LNG facilities and general corporate purposes. The tap was priced at a new issue premium of 21bp over their initially issued 7% PerpNC5 bond, which currently yields 6.19%.

Suzhou SND Group raised $300mn via 3Y bonds at a yield of 2.7%, 40bp inside initial guidance of 3.1% area. The bonds have expected ratings of BBB+ and received orders of over $1.1bn, ~3.7x issue size. The bonds will be issued by SND International (BVI) Co and come with a keepwell and liquidity support deed and a deed of equity interest purchase undertaking provided by Suzhou SND Group. Proceeds from the deal will be used for debt repayment and project construction.

Logan Group raised $300mn via a 6Y non-call 4Y (6NC4) bond at a yield of 4.85%, 50bp inside initial guidance of 5.35% area. The bonds with expected ratings of BB- received orders of over $3.3bn, 11x issue size. Investors from Asia took 85% of the bonds, Europe 12% and US 3%. Asset managers, fund managers and hedge funds received a combined 82%, insurers and pension funds 10%, private banks and corporates 6%, and banks and financial institutions 2%. Proceeds will be used for offshore debt refinancing.

Mapletree Investments raised S$200mn ($149.4mn) via a 3Y bond at a yield of 1.2%, 10bp inside initial guidance of 1.3% area. The unrated benchmark Reg S bond will be issued through Mapletree Treasury and will be guaranteed by parent company Mapletree Investments, which is owned by state-owned investment fund Temasek Holdings. The notes will be drawn from a $5bn EMTN programme with the proceeds to be used for general corporate purposes, including debt refinancing.

 

New Bond Pipeline

  • Burgan Bank KPSC $ Tier 2 bond
  • Shandong Chenming up to $1bn bond
  • Laos $ bond
  • Vedanta $ bond

 

Rating Changes

 

SocGen & Morgan Stanley Raise $2/$2.5 Billion via 6NC5 Bonds

French banking major Societe Generale (SocGen), raised $2bn via a 6Y non-call 5Y (6NC5) bond at a yield of 1.488% or T+110bp, 25-30bp inside initial guidance of T+135/140bp area. The senior non-preferred bonds have expected ratings of Baa2/BBB/A-and proceeds from the issue will be used for general corporate purposes.

American investment bank Morgan Stanley raised $2.5bn via a similar 6Y non-call 5Y (6NC5) bond at a yield of 0.985% or T+60bp, 15bp inside initial guidance of T+75bp area. The senior unsecured bonds are SEC-registered and have expected ratings of A2/BBB+/A. Proceeds from the issue will be used for general corporate purposes.

Nasdaq Raises $1.9 Billion to Fund Verafin Acquisition

American exchange Nasdaq raised $1.9bn on Monday via a three-tranche bond issuance to fund its acquisition of Verafin, a Canadian fraud detection technology company. It raised:

  • $600mn via 2Y non-call 1Y (2NC1) bonds at 0.445%, 30bp over Treasuries and 40bp inside initial guidance of T+70bp area
  • $650mn via long 10Y bonds at a yield of 1.686%, 75bp over Treasuries and 35bp inside initial guidance of T+110bp area
  • $650mn via 20Y bonds at a yield of 2.5%, 80bp over Treasuries and 35bp inside initial guidance of T+115bp area

The bonds are expected to be rated Baa2/BBB and carry a change of control put at 101. The bonds also have a special mandatory redemption at 101 if the consummation of the Verafin Transaction does not occur by February 2022, or if the Verafin Transaction Agreement is terminated in accordance with terms prior to the consummation. The notes also carry a coupon step-up provision with the coupon increasing by 25bp per credit rating agency (Moody’s and S&P) per rating downgrade below investment grade, capped at 100bp per agency (200bp total). The step-up provision will be removed permanently if its ratings are upgraded to Baa1/BBB+.

While orderbook details were not available, the bonds seem to have met with strong investor demand. The pricing on Nasdaq’s new 10Y was the tightest among BBB rated US corporates this year at 75bp. The pricing on its 20Y was the tightest among BBB- to BBB+ rated US corporates this year at 80bp.

The proceeds from the issuance will be used to fund the Verafin acquisition, announced on November 19 and valued at $2.75bn, repay certain Verafin debt and for general corporate purposes. The transaction is pending regulatory approvals but is expected to close in Q1 of 2021.

For the full story, click here

 

China Becoming a Yield Play; Deleveraging Drive Getting Priced

China’s government bond yields have become a global yield play as yields across the world tighten on account of the pandemic, as reported by Bloomberg. The China-US 10Y spread is ~230bp compared to 125bp at the beginning of the year. Foreign holdings of China’s debt have surged to a record CNY 1.79tn ($274bn), according to data published by ChinaBond. Citi notes that with China’s relatively restrained easing, its bonds getting included in global bond indexes, and its yield differential vs developed markets, the Chinese debt market could see $100bn of annual inflows through 2023. For example, yield-hungry Japanese investors have already sold Indian and South American debt and reduced Southeast Asian debt while investing ¥420bn ($4bn) into Chinese bonds in the first nine months of 2020. With China’s ratings relatively stronger compared to other EMs, this continues to be a market to invest in bonds as per analysts.

For the full story, click here

China Treasuries (1)

Whilst the yield play goes on, Chinese policymakers are taking a relatively more conservative stance with regards to debt compared to other major economies. While the PBOC has acted to support the economy, it has not actively suppressed yields like in many DMs – for example, the central bank added liquidity last week on account of the recent defaults by SOEs and another CNY 600bn ($90bn) is expected to come this month through their Medium-Term Lending Facility (MLF). Yet, a move towards deleveraging has kicked-in where liquidity is relatively tight with big banks not lending as much to smaller firms as the cost of 1Y interbank debt stands at 3.34%, about twice that in April. Besides, coming out of the pandemic earlier than other countries as evidenced by macro data and a stronger currency has resulted in policy makers focusing on reducing debt with debt-to-GDP currently at ~277%, its highest level.

For the full story, click here

 

Braskem Idesa Downgraded by Fitch to B+ Following S&P’s Downgrade to B

Fitch Ratings has downgraded Braskem’s Mexico entity Braskem Idesa to B+ from BB- while placing the company on Rating Watch Negative after the shutdown of its petrochemical operation in Mexico. The petrochemical producer was also downgraded to B from B+ by S&P, which also placed it on Creditwatch Negative due to the uncertainties surrounding the gas transportation services. The rating actions come after Mexican government controlled gas line operator Centro Nacional de Control del Gas Natural (CENAGAS) terminated the natural gas transportation services to the company following a failed renegotiation over an ethane supply contract between Braskem Idesa and Petroleos Mexicanos (Pemex). S&P stated, “We believe that there’s significant uncertainty over the timing in which the company can re-establish the natural gas transport services with CENAGAS. Therefore, the potential impact on the company’s polyethylene production, revenue, and EBITDA is highly uncertain.” Both Fitch and S&P acknowledged the company’s Fast Track strategy to diversify its procurement through import from the U.S. The termination of the contract came as the government was looking to renegotiate as Pemex’s fall in production “made it difficult for it to fulfil its ethane supply commitments under this contract.” A Braskem Idesa press release on December 2 stated, “The decision violates our rights including multiple legal provisions in force” while adding, “We have repeatedly expressed our willingness to discuss with the authorities the issues that are raised today.”

Braskem Idesa manages a petrochemical complex for the production of polyethylene in Mexico, created in 2010 as a consortium of Brazil’s leading petrochemical company Braskem (75% share), Mexican Grupo Idesa (25% share). The company’s shares have fallen 10% since the termination and its 7.45% 2029s were trading at 92 cents on the dollar, down from 100.5 on December 2.

 

Greece – Letting Yields Slip

Greece 10Y bond yields recently hit an all-time low of 0.61%, breaking through the lows it hit in February (0.91%) before the Covid19 induced crisis. The country which was at the center of the Eurozone debt crisis and considered the riskiest debt in Europe over the last decade has made a spectacular comeback.

The country is rated Ba3/BB-/BB by Moody’s/S&P/Fitch. With yields dropping to an all-time low, they have inched closer to that of other advanced countries. This article aims to explain the falling Greek bond yields and to explore the factors that have aided it while analyzing other structural developments in the Greek bond markets.

Greece feature image-1

For the full insight, click here

 

Suntec REIT Trustee Enters Into S$900 Million Facility Agreement

ARA Trust Management (Suntec) Limited (the Manager) announced via an exchange filing as manager of the Suntec REIT that HSBC Institutional Trust Services (Singapore) Limited, Suntec REIT’s trustee, has entered into a S$900mn ($673mn) facility agreement with various banks. The facility is towards “financing or refinancing acquisitions and/or investments, refinancing existing borrowings and/or general working capital purposes (including payment of fees in relation to the facility granted under the Facility Agreement).” The agreement states that an event of default would occur if (a) The Manager ceases to be an affiliate of ARA Asset Management Limited, or (b) The Manager ceases to be the manager of Suntec REIT and the replacement manager is not appointed in accordance with terms of the Trust Deed. The aggregate level of facilities that will be affected by this condition is ~S$4.94bn ($3.69mn), of which S$3.8bn ($2.8bn) is drawn.

Suntec REIT’s SGD 3.8% perps traded stable at 99.68 while its SGD 2.6% bonds due 2025 traded higher by 0.14 points to 99.23.

For the full story, click here

Term of the Day

Masala Bonds

Masala Bonds are bonds denominated in Indian Rupees (INR) that are issued outside of India. These bonds come under the External Commercial Borrowings (ECB) route as categorized by the Reserve Bank of India (RBI). Masala bonds are typically issued by Indian entities that are looking to raise debt offshore. If an Indian corporate that earns majority of its revenues/profits in INR has to raise money in foreign currency, the interest and principal have to be paid in foreign currency, which can lead to foreign currency risk. Since masala bonds are denominated in INR, the issuer does not bear foreign currency risk. This makes masala bonds an issuer-friendly fund raising option.

From an investor’s perspective, masala bonds would offer a yield pick-up as rates on INR debt are higher than rates on hard currency (USD, EUR, GBP, JPY) debt. However, investors may need to hedge the currency risk to protect against depreciation of the INR.

NTPC, one of India’s largest utility companies has announced a tender offer to buy back its Masala bonds totaling INR40bn ($542mn) to manage its maturity profile.

 

Talking Heads

On investors betting that the ECB will do what it takes to keep borrowing costs low

Sandra Holdsworth, head of global rates for the UK at Aegon Asset Management

“The commitment to keeping spreads low has impressed markets this year,” said Holdsworth. “Why wouldn’t you buy Portuguese or Italian bonds if you know they have the support of the central bank?”  “There are things Lagarde likes to talk about that the ECB has no control over, like the need for more fiscal support,” she said. “That tells you they are fully aware of the limitations of monetary policy, but they’re not going to admit publicly they are at the end of the road.”

Isabelle Vic-Philippe, head of euro government bonds at Amundi
“The ECB is doing some kind of yield curve control and spread control,” said Vic-Philippe. “They can’t say that, but this is what they are doing, frankly speaking.”

Jane Foley, head of FX strategy at Rabobank

“The problem with verbal intervention is it only works for a while,” said Foley. “Then you need to back it up.”

Richard Barwell, head of macro research at BNP Paribas Asset Management
“Actions speak louder than words: we have the biggest shock to activity in living memory and they haven’t cut the policy rate,” said Barwell.

On China’s closer ties with Hong Kong’s bond market to create ‘enormous opportunities’ for city

Eddie Yue Wai-man, Hong Kong Monetary Authority (HKMA) chief executive

“Launching Southbound Bond Connect will further enhance the mutual access between the capital markets of the two places,” said Yue. “It will generate enormous opportunities for Hong Kong’s financial services industry.”

Alicia Garcia-Herrero, Asia Pacific chief economist at investment firm Natixis

“More Chinese companies would want to come to Hong Kong to issue [yuan and US dollar-denominated] bonds when Chinese residents are eventually allowed to purchase them,” Garcia-Herrero said. “At the end of the day, there could be a bigger pool of US dollar assets coming from the mainland.”

Tai Hui, Asia chief market strategist at JP Morgan Asset Management

“When you get yuan strength, authorities can use this as an opportunity for capital account liberalisation,” Hui said. “These policies will introduce more two-way risk so that it is not just a one-way [yuan appreciation] bet.”

Sitao Xu, Deloitte China chief economist

“The question is whether countries in the region will use yuan for their foreign exchange reserves,” said Xu. “[China’s] ultimate goal is to achieve macroeconomic stability [through yuan internationalisation]. Greater flexibility in the yuan exchange rate would be in preparation [for this].”

Chen Yulu, People’s Bank of China vice-governor

“The strategic goal for the yuan is to continuously enhance the industrial competitiveness of the real economy through technological innovation, industrial innovation and management innovation, so as to lay a solid foundation for the realisation of full yuan convertibility,” said Chen. “In the process of yuan internationalisation and financial innovation, we have the conditions and ability to lead the country and make greater achievements.”

Iris Pang, Greater China chief economist at ING Bank

“Unless there is an acceleration of exchange rate liberalisation reform and capital account reform, the use of the yuan will only pick up gradually due to the country’s unwillingness to fully liberalise capital flows,” added Pang.

On European government bond yields dropping as Brexit deal hopes take a hit

Peter Chatwell, head of rates at Mizuho

“There is no clear sign that a deal will be made, and a French veto of any unfavourable deal limits chances,” said Chatwell.

Annalisa Piazza, fixed income analyst at MFS Investment Management

“We anticipate an expansion of the ongoing PEPP programme by 300-400 billion euros and an extension of the programme until late 2021,” said Piazza. “Generous TLTROs will likely be extended further and some tweaks might be added in order to further incentivise loans from the banking sector.”

On the demand for corporate bonds driving inflation-adjusted yields to zero – Nicholas Elfner, co-head of research at Breckinridge Capital Advisors

“Most individuals and institutions don’t have the luxury of being [invested in] 100% equities,” said Elfner. Investment-grade bonds remain “a way to add some incremental yield,” Mr. Elfner said.

On Asia’s climate ambitions set to drive up green bond sales – Mervyn Tang, global head of ESG research at Fitch

“We will see a pick up in green-labeled issuance in APAC as attention moves away from pandemic relief measures to financing the green projects needed to meet the major net-zero emission pledges across the region,” Tang said. “This is combined with policy pushes to support the green finance market.”

 

Top Gainers & Losers – 8-Dec-20* 

BondEvalue Gainer Losers 8 Dec

 

Other Stories

China’s closer ties with Hong Kong’s bond market to create ‘enormous opportunities’ for city

 

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