Advanced Theory & Practice of Bonds

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US Benchmark & Global Indices 20 Nov

S&P inched 0.4% higher and Nasdaq rose 0.9%. Tesla continues to move higher, up over 20% this week continuing its index inclusion rally. US initial jobless claims for the week ending November 14 rose by 31k to 742k, which was also higher than forecasts showing some signs of economic weakness. European equities fell 0.7%-0.9% with further lockdown fears. US 10Y Treasury yields were down 3bp while US IG and HY CDS spreads tightened 0.7p and 6.3bp respectively. Europe main CDS spreads were 1.1bp wider and crossover spreads were wider by 2.6bp respectively. Asia ex-Japan CDS spreads are slightly wider 1bp while Asian equities have opened flat today.

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Mod - 1 - Newsletter-2

 

New Bond Issues

New Bond Issues 20 Nov

Dubai Aerospace Enterprise raised $750mn via a 5.25Y sukuk at a yield of 3.875%, 50bp inside initial guidance of 4.375% area. The senior unsecured notes have expected ratings of Baa3/BBB- (Moody’s/Fitch). The bonds will be drawn off the issuer’s $2.5bn Trust Certificate Issuance programme. Dubai Aerospace Enterprise is wholly owned by the Investment Corporation of Dubai.

Kuwait International Bank raised $300mn via a 10Y non-call 5Y (10NC5) Tier 2 sukuk at a yield of 2.375%, 32.5bp inside initial guidance of 2.75% area. The bonds have expected ratings of A- by Fitch and received orders over $2.4bn, 8x issue size. The bonds have a coupon reset to the then prevailing Treasury yield plus initial margin after five years if not called, but there is no step-up.  Proceeds will be used for overseas project financing and general corporate purposes.

 

New Bonds Pipeline

  • HDB 15Y up to S$900mn
  • CALG $70mn 5.9% 5Y privately placed bonds
  • IIX 4Y Women’s Livelihood bond

 

Rating Changes

 

Turkey’s Central Bank Hikes By 4.75% to 15%

The CBRT, Turkey’s Central Bank, led by new Governor Naci Agbal on Thursday lifted the one-week repo rate to 15% from 10.25%. The move to hike comes after the CBRT surprisingly kept rates unchanged last month post which the governor of the central bank was sacked by President Erdogan. With the hike, the benchmark rate is 20bp higher than the central bank’s weighted average cost of funding, which Oxford Economics said “translates into a symbolic tightening.” The CBRT mentioned it will only use its one-week repo rate to fund commercial banks, a step toward making policy more predictable. “This was the platform for Turkey under its new…governor Agbal to wow markets by restoring predictability to monetary policy – and they delivered,” said Ehsan Khoman, head of MENA research and strategy at MUFG Bank. The Lira was up over 1.5% after the decision with Turkish dollar bonds also higher.

Turkey’s 5.125% 2022s were up 0.2 to 101.5, the 6.125% 2028s up 1.3 to 104.13 and the 6.75% 2040s up 1.4 to 102.96.

For the full story, click here

 

Greenland Global, China Fortune Land’s Dollar Bonds Drop 3-6 Points

Two of China’s real estate developers, Greenland Holdings and China Fortune Land Development (CFLD), saw its dollar bonds fall considerably yesterday. Greenland’s 5.875% 2024s6.75% 2023s and 6.25% 2022s dropped 5.8, 5.8 and 3.7 points to 81.81, 90.08 and 93.75 respectively. CFLD’s 8.6% 2024s8.05% 2025s and 9% 2021s dropped 5.5, 3.9 and 3.1 points to 83.04, 78.51 and 94.25 respectively. “It seems Greenland’s dollar bonds would continue to be under pressure amid the current uncertainties until the new government-owned shareholder comes in as investors need to be fully convinced on its solid status as an SOE (state-owned enterprise)… Weak sentiment toward state-owned enterprises in the wake of recent defaults also weighed on Greenland’s dollar bonds” said Daniel Fan, a credit analyst at Bloomberg Intelligence.

Greenland Global & China Fortune Land Bond Prices Down (1)

A closer look into Greenland’s ownership shows that while there is no majority shareholder (i.e. with over 50% stake), Shanghai Municipal Investment Group, a wealth fund of the municipal government held a 20.55% stake in Greenland as of March 2020, as per Bloomberg. The wealth fund is a related entity to the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) highlighting the government’s involvement in Greenland. But more recently, Fitch in a report published on November 4 noted that Shanghai SASAC sold a maximum 17.5% equity stake, as it will retain moderate control over the company, indicating reduced government involvement. Similarly, CFLD’s ownership shows that Ping An Insurance Group Co of China holds a 25.05% stake, with Shenzhen Investment Holdings, a government entity holding an 8% stake in Ping An.

Fitch recently affirmed Greenland at BB- with a stable outlook. Greenland had available cash of CNY 75bn ($11bn) at end-1H20, which was insufficient to cover its short-term debt of CNY 124bn ($18.8bn). However, the company had CNY 226bn ($34bn) in available bank facilities and has the ability to raise funds through multiple channels domestically as well as issue bonds in offshore markets as per Fitch. Its available cash was adequate to cover CNY 32bn ($4.9bn) in maturities due in one year. In the case of CFLD, Moody’s had affirmed the company at Ba3 but changed the outlook to negative with its credit strength constrained by its high debt leverage because of high funding needs, and its concentrated geographic coverage.

The recent developments in the bonds of Greenland and CFLD come after a series of defaults in local currency by China’s SOEs like Huachen AutomotiveTsinghua UnigroupYongcheng Coal which saw their bonds drop significantly.

 

China Probes 3 Underwriting Banks on SOE Yongcheng’s Default

China extended its probe into last week’s bond default by a state-owned coal miner Yongcheng Coal & Electricity Holding Group, saying that three underwriting banks were suspected of misbehavior. The Chinese interbank bond market regulator said it will launch investigations into Industrial Bank Co, China Everbright Bank and Zhongyuan Bank Co. Yongcheng Coal, rated AAA by a domestic rating firm, said on November 10 that it was unable to make principal and interest payments on CNY 1bn ($151mn) of short-term CPs maturing that day due to tight liquidity, constituting a default. Only a few weeks earlier on October 20, the company issued a CNY 1bn ($151mn) 3Y note. Post the default, the rating was cut a massive 11 notches to BB. National Association of Financial Market Institutional Investors (NAFMII), a self-regulatory body said it would launch an investigatory action into Yongcheng regarding risk disclosures after the default.

For the full story, click here

 

Carnival Launches Dual Currency $2 Billion Unsecured Bond Issuance

The world’s largest cruise operator Carnival Corp returned to the the bond markets on Thursday with a dollar and euro-denominated bond issuance, expected to price later today. It has launched:

  • a $1.425bn 5.25Y non-call 3.25Y bond at mid-high 8%
  • a €500mn ($594mn) 5.25Y non-call 3.25Y bond also at mid-high 8%

Unlike its earlier issuances this year that were backed by its fleet of ships as collateral, the new proposed issuance are unsecured. However, Bloomberg reported that the new bonds carry a guarantee and thus rank higher than its other unsecured debt but below its secured debt. Andrew Wilmont, senior investment manager at Pictet Asset Management said, “The fact that they did come to the market and they can still come to the market shows the confidence of the market in this company.” The size of the dollar tranche was upsized from the originally planned $1bn to $1.425bn, according to Bloomberg sources. The issuance comes at a time when the Covid-19 vaccine seems to be in sight, which would bode well for hard-hit industries like cruises.

Carnival’s secured $4bn 3Y bonds issued in April at the peak of the pandemic at a yield of 11.9% have since rallied to trade at 112.8 yielding 5% on the secondary markets.

For the full story, click here

 

Rabobank Raises €1 Billion via 20Y Covered Bond

Dutch lender Rabobank raised €1bn ($1.19bn) via 20Y covered bonds on Thursday at a yield of 0.066%, 3bp over Mid-Swaps and 3bp inside initial guidance of MS+6bp area. The bonds, expected to be rated Aaa by Moody’s, received orders worth €1.6bn ($1.9bn), 1.6x issue size. The issuance is backed by Prime Dutch residential mortgages and guaranteed by Rabo Covered Bond Co BV, as per Bloomberg. “There have been some questions about the depth of demand when it comes to 15-year and 20-year covered bonds, and recently we’ve seen order books for De Volksbank and MunHyp all around low-to-mid one billion,” said a syndicate banker at one of the leads. “This book is similar but the transaction today has shown that you can allocate sizeable deals in this tenor spectrum, even at relatively low yields” a syndicate banker told IFR. The deal is also the second tightest 20-year euro benchmark covered of the year, behind only a €500m issue from MuenchenerHyp priced at 2bp on October 27, as per IFR.

Rabobank’s 4.625% euro perpetuals traded higher by ~0.5 points to 107.7 with a yield to call of 2.99% (call date in December 2025).

For the full story, click here

 

Frontier Begins Marketing $2.8 Billion Junk Bond

American telecom company Frontier Communications is looking to sell $2.8bn in junk bonds as it tries to emerge from bankruptcy. Sources say that they are seeking to issue $1.8bn in first-lien bonds at a yield of around 5.25% and $1bn in second-lien bonds at around 7%-7.25%. The new bonds are being offered concurrent with an increase to an existing term loan, both of which will help Frontier repay debt maturing in 2024 and 2026. Frontier filed for bankruptcy in April as it tried to restructure to cut down borrowings by more than $10bn. The restructuring was approved in court in August and the company aims to exit bankruptcy by 1Q2021. Frontier sold $1.65bn of debt in October as part of its exit from bankruptcy. Frontier’s 9% 2031s were down 0.5 to 44.75, yielding 22.27% while its 6.875% 2025s were up 0.88 to 45.38, yielding 30.63% and 10.5% 2022s up 0.5 to 48 cents on the dollar, yielding 58%.

For the full story, click here

 

Uzbekistan Taps The Bond Market With a $555 Million 10Y Bond

Uzbekistan tapped the global bond market again after its debut in 2019 with a $555mn 10Y bond at yield of 3.7%, 55bp inside initial guidance of 4.25% area. It also raised $193mn worth of 3Y local currency bonds. The bonds are expected to be rated BB-/BB- (S&P/Fitch). The nation, with a young population is one of the few that is expected to have a positive growth this year despite the pandemic, as per IMF. Lutz Roehmeyer, the chief investment officer at Capitulum Asset Management GmbH in Berlin said “We expect the second issue to perform only half as good, but that would still be an outperformer.”

Uzbekistan’s 4.75% 2024s were up 0.02 at 106 yielding 2.8% and its 5.375% 2029s were up 0.03 at ~112 yielding 3.69%.

For the full story, click here

 

Term of the Day

State-Contingent Debt Instruments (SCDIs)

State-Contingent Debt Instruments (SCDIs) are sovereign debt instruments which have pay-outs based on certain economic variables which can indicate the economic state of the sovereign. The IMF states that SCDIs are debt instruments that have pay-outs that are higher in good states of the world than bad states, based on the value of a state variable, such as GDP or commodity prices, which is linked to the sovereign’s capacity to service debt. By tying the payments of restructured debt contracts to future outcomes, SCDIs may reduce conflicts over current valuations and facilitate more sustainable agreements between creditors and debtors. The IMF on Thursday said that wider and more standardized use of state-contingent debt instruments (SCDIs), which allow for increased pay-outs based on improved economic outcomes, could play an important role in sovereign debt restructurings.

 

Talking Heads

On the proposal to allocate $580 billion stimulus to buoy US economy – Steven Mnuchin, US Treasury Secretary

“I hope that Congress will seriously consider reallocating $580 billion of funds that have already been appropriated that wouldn’t cost taxpayers an additional penny,” he said.

But “for companies that are impacted by Covid — such as travel, entertainment and restaurants — they don’t need more debt, they need more PPP money, they need more grants,” he added. “I believe it will have a significant impact for people whose businesses have been impacted by Covid — they can then get through to the beginning of next year when we will have vaccines broadly distributed and fully reopen the economy,” Mnuchin said.

On dip in yields on Mnuchin clawback from Fed – Subadra Rajappa, head of U.S. interest rates strategy at Societe Generale

“The focus has shifted away from exuberance on vaccines to the rising infection rate and the start of the deterioration of the fundamentals we’re seeing in the data heading into Q4,” said Rajappa.

On Europe’s negative-yielding government bonds at highest ever level – Gilles Moec, chief economist at Axa Investment Managers

“What I think is key there is the negative depo rate, what the market is reflecting is that the ECB will keep the depo rate in negative territory for some time,” said Moec.

On China borrowing at negative interest rates for the first time

Samuel Fischer, head of China onshore debt capital markets at Deutsche Bank

“People want more exposure to China,” Mr. Fischer said. “China’s financial markets are opening, but there is still a broad scarcity of the sovereign [debt] among investors. The story of China’s Covid[-19] turnaround and the resilience of its economy are also things people like.”

Rohan Khanna, a rates strategist at UBS

“You can think of it as a yield grab: you are starved for return and any opportunity you get to pick up some extra premium on a yield, you’re going to buy that up quite quickly,” said Khanna.

James Athey, investment manager at Aberdeen Standard Investments

“China also wants to be less reliant on the U.S. and U.S. dollar markets,” he added.

Andrew Mulliner, a bond portfolio manager at Janus Henderson

“China’s also benefiting currently from big inflows from people being forced to own their bonds anyway through indexation,” said Mr. Mulliner.

On Zambia seeking ‘win-win’ deal with bondholders after default – Richard Musukwa, Zambia Mines Minister

“We don’t expect Zambia’s assets to be auctioned or taken away,” he told a news conference. “We are very positive that we will get a win-win situation between the bondholders and the government.”

On bank chief picked by Erdogan returning to policy mainstream

In a statement by Turkey central bank

“The Committee has decided to implement a transparent and strong monetary tightening in order to eliminate risks to the inflation outlook, contain inflation expectations and restore the disinflation process,” the central bank said.

Piotr Matys, a London-based strategist at Rabobank

Agbal made the first important step to restore the shattered credibility of Turkey’s central bank by delivering a proper rate hike and simplifying monetary policy,” said Matys. “The initial market reaction implies that this should be enough for the lira to maintain its bullish momentum.”

Nigel Rendell, a senior analyst at Medley Global Advisors

“The repo rate is now in line with market rates, so the net tightening is minimal,” said Rendell. “At least the market is relieved over the fact that the central bank is returning to a conventional monetary policy.”

On economic recovery from COVID-19 likely to be painfully slow – Sunny Verghese, CEO of Olam International

“I don’t see V-shaped recovery. We’ve come down in an escalator, but we’re going to go back up the stairs,” said Verghese.

On Oman’s discussion with banks on a loan of at least $1 billion – in a statement by S&P Global Ratings

“Oman will continue to rely on external debt to fund its large government deficits and maturing debt and remain vulnerable to shifts in investor sentiment,” the ratings agency said.

 

Top Gainers & Losers – 20-Nov-20* 

BondEvalue Gainer Losers 20 Nov

 

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