Advanced Theory & Practice of Bonds

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1-2 December 2021

Two-day immersive course on bonds designed for private bankers and advisors. 90% funding* available to eligible company-sponsored candidates.

US Benchmark & Global Indices 23 Oct

US equities ended a choppy session up 0.5% with the energy sector up 4% and financials up 2%. US bond yields continued to inch higher with House Speaker Pelosi mentioning she was hopeful of a ‘spending deal’ before the election – US 10Y and 30Y yields were up 4bp and 5bp. US jobless claims fell to 787,000 for the week ending October 17, which was a larger than expected drop and a positive for the economy. US IG and HY CDS spreads were flat. European equities were flat with Europe main and crossover CDS spreads up 1.5bp and 6bp respectively. Asian equities are off to a slow start, up ~0.1% while Asia ex Japan CDS spreads are almost unchanged at 65.75bp.

We are conducting a Bond Fundamental Module termed as A Practical Introduction To Bonds on the coming Wednesday on special request. This is a 90 minute interactive session which will cover the key fundamentals dealing with bonds. This would be followed by more advanced topics on Thursday and Friday.

Masterclass Oct-20

 

New Bond Issues

New Bond Issues 23 Oct

Wens Foodstuff raised $600mn from a dual tranche offering. It raised $350mn via 5Y bonds at a yield of 2.349%, 25bp inside initial guidance of T+225bp area. It also raised $250mn via 10Y bonds at a yield of 3.258%, 25bp inside initial guidance of T+270bp area. The bonds, with expected ratings of BBB+, received final orders over $3.2bn, 5.3x issue size.

Jiaxing City Investment and Development Group raised $300mn via 3Y bonds to yield 2.6%, 40bp inside initial guidance of 3% area. The bonds, with expected ratings of BBB, received orders over $2bn when final guidance was announced, 6.67x issue size.

Powerlong Real Estate Holdings raised $200mn via 4.5Y non-call 2.5Y (4.5NC2.5) bonds at a yield of 6.1%, 40bp inside initial guidance of 6.5% area. The bonds, with expected ratings of B2/B and received orders over $2.3bn when final guidance was announced, 11.5x issue size. The proceeds are likely to be use proceeds for offshore debt refinancing.

Times China raised $250mn via a tap of its 5Y bond at a yield of 6.1%, 25bp inside initial guidance of 6.35% area. The bonds, rated B1/B+/BB–, received final orders over $1.35bn, 5.4x issue size. The tap offers a new issue premium of ~19bp over its initial listing in June, which is trading at 5.91% currently on the secondary market. The proceeds are likely to be used for debt refinancing.

Singapore-listed Straits Trading raised S$200mn ($147mn) 5Y bonds to yield 3.75%, 25bp inside initial guidance of 4% area. The unrated bond received final orders over S$400mn ($294mn), 2x issue size.

 

New Bonds Pipeline

  • Lenovo rated $ Bond
  • Korea Land & Housing $ Bond
  • Gansu Provinial Highway Aviation Tourism Investment Group $ Bond
  • Kookmin Bank $ bond
  • Galaxy Pipeline Assets Bidco $ Bond

 

Rating Changes

Fitch Downgrades WeWork to ‘CCC’

Oman Electricity Transmission Co. Downgraded To ‘B-‘ By S&P After Action On Sovereign; Ratings Withdrawn At Company’s Request

Fitch Downgrades Alpha Group SARL [A&O] to ‘CCC’

Moody’s assigns A3.mx rating to Elementia and NP/MX-2 rating to its certificados bursátiles program

Cardinal Parent Inc. (d/b/a Zywave Inc.) Assigned ‘B-‘ Rating On Acquisition By Clearlake Capital Group; Outlook Stable

Moody’s assigns B3 CFR to Zywave; outlook stable

Lenovo Group Ltd.’s Proposed U.S. Dollar Unsecured Notes Rated ‘BBB-‘ By S&P

Moody’s assigns Baa3 rating to Lenovo’s proposed USD notes

Fitch Rates Lenovo’s Proposed US Dollar Notes ‘BBB-‘

 

Turkey Springs a Surprise By Keeping Interest Rates Unchanged

CBRT, the Turkish Central Bank sprung a surprise when it kept its policy rate (one-week repo auction rate) unchanged at 10.25% given the fact a hike was forecasted by the respondents to a Bloomberg survey. The CBRT meanwhile raised the Late Liquidity Rate (upper bound of its interest-rate corridor) to 14.75% from 13.25% and doubled the gap with the overnight lending rate to 300bp. The Central Bank stated that “significant tightening in financial conditions has been achieved, following the monetary policy and liquidity management steps taken to contain inflation expectations and risks to the inflation outlook.”

On October 9, the increase in the local currency swap rate by CBRT by CBRT by 150bp to 11.75% was also seen as a precursor to a rate hike yesterday. The CBRT isn’t new to delivering unexpected decisions as it took the markets off-guard with a  a rate hike of 2% last month. Some believe that political pressures have kept the CBRT from raising rates as Turkish President Erdogan last year sacked the former CBRT Governor after a disagreement on monetary policy. One possible reason for the decision yesterday could be that inflation has been stable over the last three months ~11.75%. But, over the last one year inflation has risen 3% whereas the Lira has been depreciating continuously, down ~38%. Turkey’s credit rating was also downgraded from B1 to B2 by Moody’s last month.

After the decision yesterday, Turkish dollar bonds dropped with the 11.875% bond due 2030 down 1.4 points to 132.14, yielding 7.07% while the 6% bond due 2041 fell 1.8 points to 83.93, yielding 7.56%.

For the full story, click here

 

WeWork Downgraded to CCC from CCC+ by Fitch

Fitch Ratings has downgraded WeWork Companies and The We Company to CCC from CCC+, deeper into the junk territory and just four notches from default. According to the rating agency, the business model of WeWork is less viable specially since the demand for the office space is down perhaps permanently given that the companies are shifting to a hybrid office model. Fitch also considers the $3.3bn financing commitment by SoftBank inadequate to address the liquidity requirement of the WeWorks even though the company has managed to reduce its cash burn rate from $4bn in 2019 to $2.5bn in 2020. Under a base case which does not consider a second wave of COVID, the rating agency expects WeWork’s cash burn to reduce to ~$900mn in 2021 and a slightly positive FCF in 2022. Fitch also acknowledges that the pandemic has allowed the management to negotiate exits from additional desks signed in anticipation of the failed IPO in 2019. According to the rating agency “the company’s negotiation position substantially reduces the risk of having to walk from committed leases which special purpose entity structures theoretically allow, a move which would severely harm WeWork’s reputation and destabilize its business model.” WeWorks had also witnessed a downgrade in its ratings after the IPO fiasco in 2019. The rating changes are given in the table below. Its 7.875% bonds due 2025 are down 13 cents to 63.6 cents on the dollar, yielding 20.65%

WeWorks Rating

In a related news SoftBank Group stated that it would pay an interim dividend  of a similar amount as of last year indicating that the worst is over for the group. The asset sales by the group to stabilize its finances included the $40bn sale of its chip designer Arm to Nvidia.

For the full story, click here

 

Mexico Plans a $20 Billion Bail Out for Pemex

Mexican authorities are considering a new proposal to help state-owned oil and gas company Pemex (Ba2/BBB/BB-) to regain investor confidence and to increase its capital base according to a report. The government is planning a $20bn bail out to refinance the debt held by Pemex at lower rates and also to lower its tax burden and allow it to issue oil-denominated bonds locally, known as new ‘petrobonos’ (Term of the Day, explained below). As per the report, central bank’s excess balance from 2019 will be used to fund Pemex with most of it going towards debt repayment. The oil-denominated bonds would allow Pemex to raise cash locally kept which would be used for spending on exploration and production targets. The bonds’ value would be tied to the price of Pemex’s oil exports.

The overall plan would allow Pemex to close the year with $87bn in debt instead of over $106bn currently held according to the report. A portion of Pemex’s debt would have to be bought by the government, to be repaid to the central bank’s balance. Of the total debt of Pemex, almost 80% is held as external debt mostly denominated in USD according to the Mexican Deputy Finance Minister. Pemex has a very high debt/EBITDA ratio 14x and an interest coverage of 0.66x based on latest numbers. Pemex’s 4.25% dollar bond due January 2025 was up 0.6 points to 93.96 cents on the dollar, yielding 5.9% while the 6.375% bond due January 2045 was up 1.3 points to 76.35, yielding 8.74%.

For the full story, click here

 

Goldman Sachs (Asia) fined $350 Million By SFC for Regulatory Failures Over 1MDB

The Securities and Futures Commission (SFC) of Hong Kong has fined Goldman Sachs (Asia) $350mn for regulatory failures in the 1Malaysia Development Berhad (1MDB) bond offering. The $6.5bn bond issuance in 2012 and 2013, arranged and underwritten by Goldman Sachs International had led to a misappropriation of $2.6bn. The deal was conducted in multiple jurisdictions and the revenue generated was shared among the entities of the bank. Goldman Sachs Asia based in Hong Kong was the recipient of $210mn, 37% of the total revenue of $567mn generated from the bond offerings. According to the SFC investigation, the commercial rationale of the bond offerings was questionable specially due to the weak financial position of 1MBD. Goldman Sachs Asia failed to both supervise diligently its senior personnel involved in the execution of the bond deal and to address the money laundering and bribery concerns. SFC also took into account that Goldman Sachs has settled criminal proceedings with the Malaysian government for $2.5bn plus a $1.4bn guarantee and Goldman Sachs Asia’s acceptance of the SFC’s findings.

On the issue SFC said that “In particular, Goldman Sachs Asia, the compliance and control hub of Goldman Sachs in Asia and based in Hong Kong, had significant involvement in the origination, approval, execution and sales process of the three 1MDB bond offerings.” Mr Ashley Alder, the SFC’s Chief Executive Officer, said “This enforcement action is the result of a rigorous, independent investigation conducted by the SFC…” and added “These failures led to multiple, serious breaches of the rules which set out the high standards of behaviour expected of all firms supervised by the SFC,”.

For the full story, click here

 

Italian 30Y Receives ~11x Demand

Italy launched a €8bn ($9.5bn) 30Y bond which saw investors gather with an overwhelming €90bn (~$106bn) demand, 11.25x issue size. The bids for the 30Y was second only to its €110bn ($130bn) bids for two bonds sold in April. The issuance comes two days after the EU’s  SURE bond issuance  which got a record demand of $275bn (~14x). “I’m not sure the Italian deal would have materialised if the EU demand hadn’t been quite so strong,” said an ING strategist. Yesterday’s issuance also included an operation to buy back some bonds maturing in 2021, 2023 and 2025 indicating lengthening the average maturity of its debt and reducing any refinancing risks. Italy, rated BBB is due to be reviewed by S&P today. Italian 30Y BTP yields are around 1.71%, a two-week high. The 6.875% dollar bond due September 2023 was down 12 cents to 116.40, yielding 1.15%.

For the full story, click here

 

Bank of Israel Tries to Boost the Battered Economy

Bank of Israel is taking actions to boost its battered economy by expanding the scope of local currency government bond purchases. Israel’s economy is estimated to contract between 5-6% this year and the country has seen a ~20% rise in unemployment. To bolster its economy, the central bank plans to increase its debt purchase by 70% and will buy ILS 35 bn ($10.35bn) more in government bonds with an aim to provide cheap credit for small business. However, the central bank maintained the base lending at a record low of 0.1% disappointing some investors.

Guy Beit-Or, head of macro research at Psagot Investment House said that “The markets did not wait and were quick to express their disappointment with the decision not to cut interest rates,” and added “If the Bank of Israel’s goal was to calm the markets and increase confidence that yields will remain low for the long term, at least today it has not worked for them.”

Israel’s bonds were trending in the red. Its longer dated 4.5% and 3.8% bonds maturing in 2043 and 2060 were down ~0.5 points are were trading at 130.5 and 117.5 respectively.

For the full story, click here

Term of the Day

Petrobonos

Petrobonos are bonds which are backed by a certain number of barrels of crude oil. They may have an amortization value converted at the exchange rate vs the dollar on the amortization date. Depending on the bond, it could be denominated in local or foreign currency. According to The Oxford Institute of Energy Studies, Mexico had issued Petrobonos in 1977 as an experiment with the yield being adjusted by the oil price and allowed the government to issue public debt at a lower cost. In Pemex’s case, if the report is true, the value of the bonds would likely be tied to the price of Pemex’s exports.

 

Talking Heads

On Turkish lira sinking to record low after decision to keep benchmark one-week repo rate on hold

Phoenix Kalen, emerging markets strategist at Société Générale

Kalen said a rise to the main rate would have sent “a credible signal” to investors that the central bank was “addressing the deterioration in inflation expectations and continuing with the gradual shift back towards more conventional monetary policy”. “But clearly we did not see that,” Ms Kalen added, saying that the bank had instead returned to a strategy of “stealth tightening”.

Jason Tuvey, senior emerging markets economist at the consultancy Capital Economics

“Political pressure is clearly making the [central bank] reluctant to enact further conventional rate hikes,” said Tuvey. “This will inflict fresh damage to its credibility and raises the risk of more abrupt falls in the lira.”

Timothy Ash, analyst at BlueBay Asset Management,

Ash said the Turkish central bank “never seems to learn”. He added: “It seems like they will be stress-tested again after this failure to hike the base rate.”

On Brazil ready for huge bond maturity schedule in early 2021 – Bruno Funchal, Brazil Treasury Secretary

“Following our strategy, we (will) arrive at the end of this year ready to roll over the debt maturing in the first four months of next year, no matter how large it may be,” Funchal said. “We are increasing the volume of issuance precisely because of that,” he said. “But what will really help to keep debt costs down is (economic) reforms,” Funchal said.

On Italian yields advancing further as 30-year BTP sale massively oversubscribed – Lyn Graham-Taylor, a fixed income rates strategist at Rabobank

“Everyone is finding really difficult to pick up large chunks of Italy,” Graham-Taylor said. “A large order book size creates demand for even a larger order book size next time.” “There’s a general hunt for yield obviously and also there’s been a very positive spin on the peripheral in general because of the European Union recovery fund,” he said. “Talks surrounding more U.S. near-term fiscal stimulus adds noise to the U.S. Treasury yields,” they said.

On Argentina bondholders accusing government of undermining recovery

Argentina creditor committee representing holders of beforehand restructured change bonds

“Argentina’s financial authorities haven’t solely failed to revive confidence, however coverage actions taken within the rapid aftermath of the debt restructuring have dramatically worsened the nation’s financial disaster,” wrote members of the group.

They added: “As an alternative of heralding a reopening of entry to markets to assist Argentina’s manifest funding wants, the aftermath of the debt restructuring is a digital wasteland for Argentine credit score.”

This vicious cycle must be damaged,” the traders stated. “Collectors have already performed their half, offering a historic alternative to Argentina for a recent begin. It’s now as much as Argentina and the IMF to play theirs.”

 

Top Gainers & Losers – 23-Oct-20*

 

BondEvalue Gainer Losers 23 Oct

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