US equities ended higher with the S&P and NASDAQ up ~1.8%. A similar move was also seen in Europe where the FTSE, DAX and CAC were up over 2%. US Treasury yields tightened on the long-end with the 10Y and 30Y yields down 3bp and 2bp respectively. While early election results are coming in, it appears that a blue sweep is less likely and the election is more contested than it appeared during the polls. Besides the elections, other events today include the FOMC meeting and the ADP employment numbers ahead of Friday’s non-farm payrolls data. Meanwhile in APAC, the RBA cut rates by 15bp and said it plans to buy A$100bn (~$70bn) of government bonds with 5-10Y maturities over the next six months. The US investment grade CDS spread narrowed 3bp to 60.5bp while HY narrowed 18bp to 400bp. Europe main and crossover CDS spreads tightened 2bp and 9bp to 61bp and 349bp. Asian equities are slightly higher ~0.2% with Asia ex-Japan CDS spreads tighter by 1bp.
New Bond Issues
- Heeton Holdings S$ 3yr @ 7% area
Fujian Yango raised $175mn via 2.5Y bonds at a yield of 12%, unchanged from initial guidance. The bonds are rated B- and proceeds will be used for refinancing debt and for general corporate purposes. The bonds are issued by Yango (Cayman) Investment and Fujian Yango Group is the parent guarantor.
New Bonds Pipeline
- IRFC up to $1bn bond
- Central Nippon Expressway $ green bond
- Guangxi Investment Group $ bond
Ant’s $37 Billion IPO Suspended On Regulatory Matters
Alibaba-backed Ant Group, China’s largest fintech company was suspended from listing it’s ‘A shares’ on the STAR Market of the Shanghai Stock Exchange (SSE) on Tuesday. The company was supposed to get listed across the Shanghai and Hong Kong stock exchanges as the largest ever IPO at $37bn on November 5, topping Saudi Aramco’s $29.4bn listing. The Ant IPO saw ~$3tn in demand at the end of last week. The SSE’s news release mentioned – “The ultimate controller, the executive Chairman, and the Chief Executive Officer of your company have been summoned to a joint regulatory interview by the relevant regulators, and your company has also reported on material matters including a change in the regulatory environment on financial technology. Due to the material matters reported, your company may no longer meet the conditions for offering and listing, or the requirements for information disclosure.” Ant in a statement also mentioned that its Hong Kong listing of ‘H shares’ was suspended due to a similar regulatory interview where matters were materially important.
Alibaba, the Chinese e-commerce major that owns 33% of Ant Group, saw its shares tumble ~7% while their dollar bonds dropped initially but recovered. Alibaba’s 3.4% bonds due 2027 are slightly lower by 0.07 to 111.13, its 4.2% bonds due 2047 are lower by 0.4 to 123.7 and its 4.4% bonds due 2057 are lower 0.7 to 130.4.
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Aramco Reports 45% Drop in Profits; Announces $18.75 Billion Dividend
Saudi Aramco, reported a Q3 net profit of $11.8bn, a 45% drop over the same quarter last year on the back of lower oil prices and the adverse impact of the pandemic. Capital expenditures also declined 21% to $6.4bn, expected to be at the lower end of the $25bn-$30bn range for 2020, compared to $32.7 billion for 2019. As of September 30, the A/A1 rated company has $109.7bn and $25.8bn in long-term and short-term debt, collectively 27% of total assets. In December 2019, debt was 11.8% of total assets while long-term debt stood at $40bn and short-term debt at $6.6bn. The company declared a dividend of $18.75bn for the quarter and expects to pay a similar dividend for the next quarter. The oil giant reported free cash flows at $12.4bn, which are lower than the dividend declared. This might imply that they would need to borrow/raise debt to pay the dividends. Neil Beveridge at Bernstein said the gearing (Term of the day, explained below) increase “raises questions of sustainability”.
Aramco’s dollar bonds’ z-spreads have been widening across the curve over the last few weeks, reflecting idiosyncratic risks. Their dollar bonds’ prices have moved lower since October 20 with the 2.875% 2024s down 0.7 points (~0.7%) to 104.78, the 4.25% 2039s and 4.375% 2049s down 5.15 points (~4%) and 5.47 points (~4.5%) to 110.2 and 117.9 respectively during the same period.
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Oman to Introduce Tax on Individuals in 2022, Sovereign Dollar Bonds Trade Up
Oman plans to introduce an income tax on wealthy individuals starting from 2022, as part of a program to reduce its growing budget deficit caused by low oil prices and the pandemic. As per a statement by the Ministry of Finance, the plan is expected to lower the budget deficit from 19% of GDP in 2020 to 1.7% by 2024. “Currently, the government is evaluating the tax and how it can be implemented. The government will evaluate the tax from all aspects including, societal impacts, economic impacts, and fiscal impacts, in order to ensure the most efficient and equitable tax for all,” the Ministry said. The government is also planning to gradually pare subsidies on electricity and water, eventually removing them by 2025, and expanding visa-fee exemption to more countries in a bid to spur tourism. Neighboring governments are closely monitoring Oman’s tax implementation, which would be a first in the tax-free Gulf region, as the coronavirus pandemic continues to add strain to their economies.
Oman’s sovereign dollar bonds have moved up since the Ministry’s statement on Sunday. Its 4.875% bonds due 2025 traded higher by 1 point to 97.5 while its longer-dated 6.5% 2047s traded up by 3 points to 84.4 cents on the dollar.
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Adani Group to Develop Sri Lanka’s Port Terminal
Indian conglomerate Adani Group has emerged as the frontrunner to develop Sri Lanka’s stalled East Container Terminal in Colombo port, as reported by Business Times. Adani Ports and SEZ and its local partner received an in-principle approval to close the deal with the Sri Lanka Ports Authority, which would hold a majority stake in the project.
While Adani had signed a preliminary agreement last year, the project was delayed after protests by labor unions and a review ordered by President Gotabaya Rajapaksa. The deal, if confirmed would strengthen ties between India and Sri Lanka. The island nation has previously relied on support from Beijing for its infrastructure development.
Adani Ports, rated BBB-, also reported Q3 earnings on Tuesday with a consolidated net profit of $186mn, a 31% growth over the same quarter last year. They saw a 300bp growth in the overall cargo market share to 24% as compared to 21% in Q1 FY21. “We continue to increase our free cash generation,” CEO Karan Adani said. Adani Ports’ dollar bonds traded stable with its 3.375% bonds due 2024 at 101.6 and its 4.375% bonds due 2029 at 100.9 on the secondary markets.
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In related news, group company Adani Total Gas Ltd, a joint venture between Adani Gas Ltd. and France’s Total Gas Ltd., said that it plans to raise $400mn via dollar bonds. Proceeds from the issuance will be used for its capex over the next two years. The company did not disclose the timing of the proposed issuance.
Shanghai Court Recognizes Keepwell on CEFC Shanghai’s EUR bonds
The Shanghai Financial Court issued an order on Tuesday that recognizes creditors’ claims on CEFC Shanghai International’s euro denominated bonds that are backed by a keepwell agreement, according to people familiar with the matter, reported by Bloomberg. The 2.8% €29.9mn ($35mn) bonds carry a keepwell provision from CEFC Shanghai. Keepwell provisions are common with offshore Chinese bonds wherein an entity related to the bond issuer (typically a parent) provides a commitment to maintain solvency at the issuer level. However, keepwell provisions are not as legally binding as a guarantee and hence its enforceability has been thrown into question.
This ruling is in contrast to the verdict on Nuoxi Capital’s $300mn bond in late August, when the administrators of distressed Peking University Founder Group (PUFG) did not recognize the keepwell provision on subsidiary Nuoxi’s dollar bonds. The administrators of state-owned PUFG include China’s central bank, Ministry of Education among other regulators and departments of the Beijing municipal government.
The Shanghai court order on CEFC, which is in line with a previous Hong Kong court ruling on the same matter, is the first official recognition of a keepwell agreement in mainland China. This may set a precedent for other offshore bonds from Chinese issuers backed by keepwell agreements. However, neither CEFC nor the Shanghai Financial Court have made official announcements on the matter.
Term of the Day
Gearing refers to the financial leverage a company takes in the form of debt. While gearing ratio is typically calculated as a company’s debt divided by its equity, it could also be measured as a company’s debt divided by its total assets, since it ultimately shows leverage.
In the case of Saudi Aramco, gearing is a measure of the degree to which Aramco’s operations are financed by debt. Aramco defines gearing as the ratio of net debt to net debt plus equity – total borrowings less cash and cash equivalents to total borrowings less cash and cash equivalents plus total equity. Based on their calculations it stands at 21.8% as at September 30, 2020.
“The combination of the RBA’s bond purchases and lower interest rates across the yield curve will assist the recovery by: lowering financing costs for borrowers; contributing to a lower exchange rate than otherwise; and supporting asset prices and balance sheets.”
“It’s reasonably clear that a bond purchase program that’s equivalent to 5% of GDP, which is what A$100 billion here is, has noticeable and meaningful effects on long-term bond yields, and it can have an effect on the exchange rate,” he said. “If it turns out that that’s the wrong number, we’re prepared to adjust over time and we’ll keep this under review at our meetings next year.”
David Yim, head of debt capital markets for Greater China and North Asia at Standard Chartered
“Most countries in the region are pretty much done for this year.” But “there are still plenty of [Chinese] issuers that for different reasons have funding left to do post-US election”, Mr Yim added. “We’re going to be busy all the way to the year’s end.”
Paul Lukaszewski, head of corporate debt for Asia and Australia at Aberdeen Standard Investments
“Despite this massive stress event, Asia’s defaults have basically barely risen above the long-term average,” he added. “As a global investor, if you’re not looking to Asia for yield, you’re basically leaving returns on the table.”
Haitham Ghattas, head of capital markets for Asia Pacific at Deutsche Bank
“The hunt for yield has enabled corporate borrowers in Asia to lock in favourable rates. We’re as busy as we’ve ever been over the summer months” and autumn.”
“The robustness of the market is very encouraging as it gives corporates more confidence to rely on funding from the international debt capital market more consistently going forward.”
Daniela Russell, head of UK rates strategy at HSBC
“The Bank of England is running out of room with QE. They are likely to start looking for a better way to get more bang for their buck.”
Peter Goves, European interest rate strategist at MFS Investment Management
“Of course a lot depends on what the DMO [debt management office] does, but I don’t think there’s a constraint in the near term.”
“We need transparency, engagement and a credible programme. There has to be a credible plan that the debt can be sustained, which we don’t have at the moment.”
Top Gainers & Losers – 4-Nov-20*