President Trump testing positive for Covid-19 led S&P lower by ~1% on Friday though equities recovered some of the initial losses at the open. Major tech stocks like Amazon and Apple fell around 3%. Treasury yields fell 3bp on the news but later reversed with yields ending 3bp higher by day-end. The US employment report (NFP) for September came at 661k on Friday, lower than expectations and cues given by the ADP and ISM employment numbers earlier last week. A positive was that the unemployment rate fell to 7.9% from 8.4%. The theme for the moment is based on Trump recovering quickly and getting back into action for the presidential race. Asian equities have followed the lead of US equity futures, up over ~1%. CDS spreads are flat across the board.
New Bond Issues
The increase in yields on longer-dated Treasuries has pushed yields up and thus prices down on high-rated dollar bonds issued recently. Aaa-rated Temasek’s new dollar bonds are now trading below issue price with its longest-tenor 2070s down over 2.5% from issue price to 96.7 cents on the dollar. Aa2 rated KNOC saw its 1.625% 2030s down almost 1 point to 98.62 from issue price of 99.46. Aa3 rated TSMC saw its 0.75% 2025s down 0.80 points to 99.12 yielding 0.93%.
New Bonds Pipeline
Kasikornbank $ Basel III AT1
Star Energy $ Green amortizing bond
Pakistan $ Bond/Sukuk
Sumitomo Mitsui Trust Bank 7Y EUR covered bond
Moody’s upgrades Slovenia’s ratings to A3, outlook stable
Moody’s upgrades Morgan Stanley (A2 senior), outlook stable
Moody’s upgrades E*TRADE’s senior unsecured to A3, outlook stable
U.S.-Based Vistra Corp. Upgraded To ‘BB+’ By S&P On Deleveraging And Stable Operations, Outlook Positive
LyondellBasell Industries N.V. Downgraded To ‘BBB-‘ By S&POn Debt-Funded Acquisition; Outlook Stable
Fitch Downgrades Modernland Realty to ‘RD’ on Uncured Payment Default
Fitch Downgrades Santander’s Legacy Hybrid Preferred Securities to ‘CCC’
Fitch Withdraws Delphi Technologies’ Ratings Following Acquisition by BorgWarner
Morocco Outlook Revised To Negative By S&P On COVID-19-Induced Rise In Debt And External Financing Needs; Ratings Affirmed
The Week That Was
US Treasuries bear steepened (Term of the day, explained below) with the 2s10s spread up 5bp last week to 57bp. European Crossover CDS Spreads (a measure of tracking default risk in junk-rated European issuers) has widened ~50bp in over two weeks with a second Covid-19 wave combined with restrictions and Brexit related issues in the forefront. According to Reuters, European high-yield issuance is down 29% YTD compared to the same period in 2019 and is the lowest nine-month figure since 2012. On the other hand, US, a developed market peer has already witnessed an annual record of high-yield issuance this year with three months remaining. Asian issuance volumes were light last week with the Chinese holidays on Thursday and Friday. This week is also expected to be light on Asian issuance with the Golden week holidays continuing till Wednesday.
In the tables/charts below, we have listed the weekly and month-to-date change in benchmark rates, select fixed income ETFs, equities, commodities and currencies. We have also plotted the weekly move in CDS spreads and issuance volume by region.
Jingye Group Has Expressed Interest in Buying Tata Steel UK
Chinese steelmaker Jingye Group is exploring a takeover of Tata Steel UK, the largest steel producer in the UK according to Sky News, which cited unidentified banking sources. The speculated deal is still in a nascent stage as Jingye has only expressed ‘tentative’ interest to Tata Steel UK’s parent Tata Group and the UK government, with further updates. Jingye, which bought British Steel in March this year, would own the two largest plants in the UK – Port Talbot and Scunthorpe – if the deal goes through. Tata Steel UK has been struggling long before the pandemic, not broken even in the decade since it entered the UK. It failed to secure a bailout from the British government in mid-August even as its 8,000 employees stand to lose their jobs in case of a liquidity crunch. Sky News reported a Tata Steel spokesperson as saying over the weekend, “We remain in ongoing and constructive talks with the UK government on areas of potential support.” Tata Steel’s dollar bonds traded largely stable on the secondary markets.
For the full story, click here
Lippo Wins Bondholder Approval for Sale of Mall to LMIRT
Indonesian developer Lippo Karawaci won approval from holders of its $420mn 8.125% 2025s and $417mn 6.75% 2026s to sell Lippo Mall Puri in west Jakarta to Singapore-listed related company Lippo Malls Indonesia Retail Trust (LMIRT) for IDR 3.5tn ($238mn). LMIRT plans to fund the purchase through a S$280mn ($206mn) rights issue, underwritten by Lippo. Lippo, which holds a 32% stake and is the sponsor of the LMIRT REIT, may also extend a loan to the company. The consent solicitation was for waivers related to indebtedness, asset sales and restricted payments in the event that LMIRT becomes a subsidiary with an increase in its stake after the rights issue. Holders of its 2026s who gave consent by September 30 would receive $3 per $1,000 in principal, and nothing if they gave consent after that date.
LMIRT’s 7.25% 2024s traded stable at 92.5 cents on the dollar yielding 9.7%. Lippo’s 8.125% 2025s and 6.75% 2026s, issued by Theta Capital, have traded lower by ~5 points since end August to 89.1 and 79.8 cents on the dollar respectively.
For the full story, click here
Malaysia Airlines Warns of Cash Crunch Unless It Gets More Funding from Khazanah
Malaysia Airlines Bhd said in a letter to lessors that it is unlikely to be able to make payments that are due after November unless it receives more funding from Malaysian sovereign wealth fund Khazanah. As reported by Reuters, which saw the letter to lessors, the airline has an average monthly cash burn of $84mn, liquidity of just $88mn as on August 31 and an additional $139mn available from Khazanah. The letter said, “Based on the current run-rate, absent further funding from shareholders, the group will likely be unable to meet its obligations, including payments to lessors, post November 2020.” If the airline is unable to complete restructuring by the end of the year, its sole shareholder Khazanah “intends to divert all efforts and funds to an alternative company with an existing air operator’s permit to ensure connectivity for Malaysia (i.e. Plan B).” The letter seeks steep discounts from its lessors, which include AerCap, Avolon and Standard Chartered’s leasing arm. Reuters reported, “The lessors are already under pressure in this market and what Malaysia Airlines is asking is just not doable,” said a banking source, adding that the carrier was seeking discounts as deep as 75% or so.
Khazanah’s dollar 3.035% bonds due 2021 issued by Danga Capital traded largely stable on the secondary markets at 100.5 with a yield of 1.68%. AerCap and Avolon bonds also traded stable.
For the full story, click here
New World Development’s Online Sales Surge
In its earnings release published on September 30, Hong Kong-based developer New World Development reported annual revenues of HKD 59bn ($7.61bn), down 23.1% YoY. Net income for the year ended June 30 was down 94% to HKD 1.09bn ($0.14bn), largely attributed to an 84% slide in revaluation gains on investment properties. The underlying profits were down 25.2% at HKD 6.59bn ($0.85bn) excluding the revaluation items. The company described the results as, “Moderate decline in results notwithstanding a very challenging operating environment due to social events in 1H FY2020 and COVID-19 in 2H FY2020.”
On the positives, non-core disposals stood at HKD 10.6bn ($1.37bn) and exceeded the target. Sales from its shopping centres and property projects rose as the company was able to exploit online platforms to boost sales at a time when the Covid-19 restrictions were in place. The company cited the example of its flagship K11 Musea mall which achieved a 35% increase in quarterly sales to ~HKD 300mn ($38.7mn) due to attractive digital promotions despite a slump in the broader industry. The sales are significant as consumer spending has dropped 30% YoY in Hong Kong. Executive vice-chairman Adrian Cheng Chi-kong said, “If you react quickly, Covid-19 opens up new business opportunities that will put you in a much better position when it eventually subsides,” while adding, “We cannot control the virus, but we can control our reaction time to new measures and the changing habits of our customers. Speed and decisiveness is everything.”
NWD’s bonds were largely stable, trending marginally lower by around 1% in the secondary market after the results. Its 5.25% and 4.75% bonds due 2021 and 2027 traded at 101.2 and 103.9 respectively while its 5.25% perpetuals traded at 104.8.
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Softbank ‘Whale’ Trade Reportedly Back to The Market With Strong Options Volume
Reports suggest that Softbank (Ba3) may be back with large bets on US tech stocks similar to that in August. Termed as the ‘Nasdaq whale’ after it bought an estimated $4bn worth of call options on US stocks. The rally in August across big tech saw Tesla up 74% while Apple, Amazon and Google rallied 21%, 9% and 10% respectively – a filing with the SEC showed stakes of almost $2bn across Apple, Amazon, Microsoft and Tesla. The Nasdaq Composite overall was up ~10% in August. FT in September mentioned that a person familiar with the trades said that even people within Softbank were nervous given the size of these trades. Late last week CNBC reported multiple sources saying that $200mn was spent on buying call options for Netflix, Amazon, Google and Facebook with Softbank being the likely buyer. While Softbank’s dollar bonds went up in August, they have been on the decline in September – initially with the tech-led sell-off but have maintained those levels even after Nasdaq stocks recovered. Softbank’s 4.75% 2024s are currently at 92.65 yielding 4.8% while its 6% Perp is at 102.25 yielding 9% currently.
For the full story, click here
Term of the Day
Bear Steepening refers to a move in the yield curve where longer dated bond yields move higher than the shorter dated bond yields (longer tenor bonds sell-off more than short tenor ones). Last week, the 2s10s Treasury curve bear steepened – on September 29, the 10Y yield was at 65bp while the 2Y yield was at 13bp. The 10Y and 2Y yields closed on Friday at 69bp and 13.3bp respectively. Thus, the 2Y yield moved higher by 0.3bp while the 10Y yield moved higher by 4bp – the net effect being a bear steepening of 3.7bp. A bear steepening move can occur due to different reasons, some of them being long-term expectations of inflation picking up, higher supply of longer-dated bonds and central banks tapering purchases with a focus on the long-end bonds.
On agreement on US airline payroll assistance imminent – Nancy Pelosi, US House Speaker
Pelosi said the House will either pass “bipartisan stand-alone legislation or achieve this as part of a comprehensive negotiated relief bill.” She called on airlines to hold off on furloughs and firings “as an agreement for relief for airline workers is being reached.”
On scepticism over ramping up Fed’s quantitative easing policy – Robert Kaplan, Dallas Federal Reserve President
“My concern about asset purchases is they can distort markets,” Kaplan said. “It’s a tool that I’d want to be careful with.” If longer-term rates rose dramatically, “that would be something I would look at but… the 10-year already is at relatively, historically low levels and I don’t know that it would be worth doing more on asset purchases to make it lower.”
On the need for the European Central Bank to issue digital euro – Fabio Panetta, ECB board member
“We should be ready to issue a digital euro if and when developments around us make it necessary,” Panetta said. “This means that we already need to be preparing for it.”
On the need for French government to be more careful on non-coronavirus related spending and debt
Francois Villeroy de Galhau, Bank of France Governor and European Central Bank policy maker
“As things improve, ‘whatever it costs’ should turn into when it’s worth it, if it’s worth it,” Villeroy said. “It’s crucial to maintain the confidence in our ability to pay back debt,” Villeroy said. If investors were to lose such confidence, it would mean higher interest rates, he added. “I say very clearly, we are not there on controlling spending,” Villeroy said. “We can’t offer ourselves everything all the time. There’s debt that’s justified, and this is Covid-19 debt, and there’s debt that’s dangerous,” the Bank of France governor said. “That’s where we need to pay attention.”
Bruno Le Maire, France Finance Minister
Le Maire said the government’s priority is employment, investment and economic recovery. “All the debt linked to this crisis is investment. It will have to be repaid, I’ve always said that. But this reimbursement will come when we have got growth back,” Le Maire said.
On Asian stock and bond markets more interesting than US markets – Suresh Tantia, Swiss investment bank Credit Suisse
“Given the election risk in U.S. and more expensive valuations, I think the Asian markets look more interesting – (there is) strong economic recovery, strong earnings and much cheaper valuations compared to the U.S. equity market,” said Tantia. “Asian (investment grade) bonds are offering yield of around 3%, compared to 2% yield in the U.S. We think there is slightly higher yield for similar rated companies in Asia,” he said.
On the risk of German debt shortage amid slowing government debt sales and continued ECB purchases
In a note by Jamie Searle and Aman Bansal, strategists at Citigroup
Strategists Searle and Bansal estimate that monthly debt issuance this quarter by the German finance agency will average 10 billion euros (S$16 billion), about 60 per cent less versus the April-September period. That, coupled with central-bank buying under its pandemic debt-purchase programme, is likely to leave investors scrambling to get hold of the euro area’s safest asset. The ECB may extend its asset-buying programme next year, while Germany’s self-imposed borrowing limits should be back in place by 2022 after a temporary relaxation due to the coronavirus pandemic – and that suggests “bund shortages look set to persist for years,” the Citi analysts wrote.
On questions on top-rated sovereign bonds as safe assets after absence from market activity
Francois Savary, chief investment officer at Swiss wealth manager Prime Partners
“It confirms that the attraction of government bonds as a diversification tool has been significantly reduced by the coronavirus crisis,” said Savary. “So, if investors are retrenching from equities because of risk-off, they are absolutely not putting money into bonds.”
Mike Kelly, head of multi-asset at PineBridge Investments.
“In the last month, we have all been disappointed that during risk-off days, the yield curve has been like a zombie. There is a lot of soul searching going on (regarding safe havens)…We need a longer dated government security that will trade as a safe asset.”
Seema Shah, chief strategist at Principal Global Investors
“You get a (yield) pick-up and the central bank backstop means it is relatively safe,” she said. “The threshold for what is considered a crisis is a bit higher than what it used to be,” Shah added.
On Italy’s 10-year yield hitting record low after inflation data sinks further in September
Nicolas Forest, global head of fixed income at Candriam
“If there is no improvement in the data, Lagarde should announce an expansion of the bond purchase programme before end of the year,” said Forest.
Richard McGuire, head of rates strategy at Rabobank
“BTPs narrowed versus Germany regardless through risk on and risk off, which I think is important, because you could argue that there is an asymmetric risk on offer here,” said McGuire.
On calls from Saudi official to boycott everything Turkish
Recep Tayyip Erdogan, Turkish President
“It should not be forgotten that the countries in question did not exist yesterday, and probably will not exist tomorrow; however, we will continue to keep our flag flying in this region forever, with the permission of Allah,” said Erdogan.
Ajlan al-Ajlan, Saudi Arabia’s Chamber of Commerce head
“Boycotting everything Turkish, whether on the level of import, investment or tourism, is the responsibility of every Saudi – trader and consumer- in response to the continued hostility of the Turkish government against our leadership, our country and our citizens,” said al-Ajlan.
Top Gainers & Losers – 5-Oct-20*