Advanced Theory & Practice of Bonds

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US Benchmark & Global Indices 24 Aug

Strong economic data in the US supported Wall Street to close higher on Friday. IHS Markit flash composite PMI for August was up 4.4 points to 54.7 and a 24.7% jump in existing home sales supported investor sentiment after a slightly higher than expected initial claims number a day earlier. European shares fared badly as spikes in coronavirus cases and muted PMI numbers caused major indices to decline. The US treasury curve flattened around 2-3bp. Europe’s CDS spreads widened a bit and US and Asian IG CDS spreads were mostly unchanged. Asian markets are also opening mostly unchanged this morning.

 

LinkdIn event cover - 1584 X 396

 

New Bond Issues

  • KT Corp $ 5yr benchmark @ T+125bp area
  • Shandong Guohai Investment $ 5yr @ 3.7% area
  • Jiangsu Kewei Holding $ 100 mio 3yr @ 3.8% area

New Bond Issues 24 Aug

 

Rating Changes

Fitch Revises Outlook on Turkey to Negative; Affirms at ‘BB-‘

Moody’s downgrades Tanzania’s rating to B2; outlook stable

Estonia Outlook Revised To Stable From Positive On COVID-19-Related Risks; ‘AA-/A-1+’ Ratings Affirmed

Several Lebanon Bonds Downgraded To ‘D’ On Missed Payment; ‘CC/C’ Local Currency Ratings Affirmed; Outlook Negative

Fitch Downgrades Metro Bank to ‘B+’; Outlook Negative

WeWork Companies LLC ‘CCC+’ Issuer Credit Rating Affirmed, Off CreditWatch On New Note Agreement; Outlook Negative

U.S.-Based Park-Ohio Industries Inc. Ratings Affirmed And Removed From CreditWatch Negative, Outlook Negative

 

HNA to Sell its Electronics Arm Ingram to PE Firm Platinum Equity for $7 Billion

California-based private equity firm Platinum Equity is in talks with Hainan based Chinese aviation and shipping conglomerate HNA Group Co Ltd to buy out its electronics distributor, Ingram Micro Inc for ~$7bn. The deal includes the debt component of Ingram. HNA had acquired Ingram Micro in Dec 2016 for ~$6bn in an all cash deal. Ingram deals with full spectrum global technology and supply chain services to businesses around the world through a network of 1,700 suppliers using its ~190 logistics centers worldwide. The acquirer Platinum Equity focuses on leveraged buyouts and is owned by Tom Gores. HNA Group operates in the aviation and shipping sectors and has stakes in 14 airlines among other assets. The group has been under the Chinese government’s lens due to the sale of its real estate assets in an attempt to reduce its debt pile. The group has been trying to sell Ingram for some time now allegedly in talks to sell Ingram to Apollo Global in late 2018.

The bonds of HNA group and Ingram Micro were largely stable with HNA’s 6.25% bond due 2021 trading at ~54 cents on the dollar and Ingram’s 5% bonds due 2022 trading at ~102 cents on the dollar.

For the full story, click here

 

Founder Group’s Administrators Rejects Keepwell Deed on $300 Million Bond

Intelligence provider Redd reported on August 23 that administrators of troubled Peking University Founder Group (PUFG), which consists of China’s central bank, the Ministry of Education and relevant regulators and departments of the Beijing municipal government, is not recognizing the keepwell deed on the $300mn bond issued by Nuoxi Capital. Bank of New York Mellon, trustee of Nuoxi Capital’s bonds due later this year sent a notice to bondholders informing them of the administrators’ decision. This puts into question the enforceability of keepwell deeds, which have been common in bond issues by Chinese local governments.

PUFG is a state-owned corporation that was founded in 1986 and deals mainly in IT, pharmaceuticals, real estate, finance and commodities.The group has been struggling with a massive debt pile having missed a payment of CNY 2bn ($283mn) on onshore bonds in Dec 2019 due to a liquidity crunch. One of its creditors, Bank of Beijing Co. Ltc. had approached a court to restructure the indebted conglomerate in Feb this year. Nuoxi Capital Limited operates as a special purpose entity. The Company was formed for the purpose of issuing debt securities to repay existing credit facilities, refinance indebtedness, and for acquisition purposes. Dollar bonds of Nuoxi Capital were largely stable with its 7.45% bonds due 2022 and its 5.35% bonds due 2023 trading at 26 and 16 cents on the dollar respectively.

For the full story, click here

 

Future Retail’s 30-Day Grace Period to Make Coupon Payment Ends

Struggling Indian retailer Future Retail failed to make the debut coupon payment on its debut dollar bond within the 30-day grace period, which ended on August 22. The company failed to make the coupon payment of $14mn on its $500mn 5.6% bonds due 2025 on July 22 as it faces a severe liquidity crunch on the back of strict lockdowns across India on the back of the pandemic. As covered by us last week, Future Retail’s proposed acquisition by Reliance Industries hit a roadblock on Amazon’s stake in the new combined entity. A senior executive of a bank with large exposure to Future Group said, “Whatever each bank in the consortium could do individually, we have all done. Now we have to see if they have enough to repay. They (Future Group) have taken whatever loans were available under the COVID-19 Emergency Credit Line from a few public sector banks.” This marks the induction of Future Group into the undesired No-coupon-at-all club. The 5.6% dollar bonds due 2025 have interestingly traded up ~2 points since Friday’s close, currently at 64.3 cents on the dollar.

For the full story, click here

 

AMLO’s Tight Fist Over Fiscal Spending Leads to Underperformance of Its Dollar Bonds

Mexican President Andres Manuel Lopez Obrador or AMLO has kept a tight fist towards fiscal spending even as the Mexican economy slumps into its steepest recession in 100 years. This is in contrast to its Latin American peers that have boosted fiscal spends to contain the economic contraction brought on by the pandemic. Its budget deficit in the first half of the year stood at $12.7bn, double of last year’s number. Brazil in comparison saw its deficit widen by 10x at $75.6bn compared to last year. Mexico’s GDP contracted by 19% in Q2, compared to a contraction of 7.3% in Colombia and 14.1% in Chile. The IMF expects Mexico’s economy to shrink by 10.5% this year, more than its comparable peers within the region. Jens Nystedt, a senior portfolio manager at Emso Asset Management in New York said, “[The policy] risks creating a bigger hit to potential output in Mexico than other Latin American countries. Some fiscal loosening to buttress short-term growth would have been a better policy prescription.” as he cut exposure to Mexican dollar and peso denominated sovereign bonds last month. In the chart below, we compared dollar bonds of Mexico vs. Brazil, Chile and Peru in terms of price return by rebasing the bonds to 100 at the start of the year.

Dollar Bonds from LatAm Sovereigns

Chile and Peru, rated A+ and BBB+ respectively, led the pack returning over 6.5% to bond investors since the start of the year. Peru’s 2.844% bonds due 2030 and Chile’s 3.125% bonds due 2028 have gained 23% and 22% respectively since its low during the March mayhem. Their investment grade rated peer, Mexico (BBB) has lagged in comparison with its dollar bonds trading similar to BB- rated Brazil’s dollar bonds. Brazil’s 4.5% bonds due 2029 and Mexico’s 4.5% bonds due 2029 have returned 1.1% and 1.9% since the start of the year and have risen by 15% and 18% respectively since their lows in late March.

For the full story, click here

 

Term of the Day

Jackson Hole

Jackson Hole, Wyoming is the location of The Federal Reserve Bank of Kansas City’s annual monetary policy symposium, one of the most important events attended by central bankers and economists across the globe. For the first time in 40 years, the symposium will not take place at the mountain resort and will instead be a virtual event due to the Covid-19 pandemic. All investors’ eyes will be on the virtual conference later this week (August 27-28) where Fed Chair Jerome Powell will be speaking.

The symposium has an interesting history with the venue shifted to Jackson Hole in 1982 to entice then Fed Chair Paul Volcker to attend. Volcker was an avid fly fisherman and Jackson Hole has world class trout fishing.

 

Talking Heads

On bond traders bracing for Fed’s next crucial policy move

Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets

“The fact that Powell is going to be speaking at Jackson Hole on the change in the Fed’s framework is really going to make it a potentially tradeable event,” said Lyngen. “The notion of a framework shift would be dovish, locking in the low-rate environment,” he said.

Glen Capelo, head of rates trading at Mischler Financial

“The supply is tremendous, but the Fed is still buying every day for the most part,” said Capelo. “And real accounts are still buyers of the long-end because there’s no alternative if you want yield.”

On global dividend plunge to be worst since financial crisis

In the Global Dividend Index report by Janus Henderson

“2020 will see the worst outcome for global dividends since the global financial crisis,” Janus Henderson said. “We now expect headline global dividends to fall 17% in a best-case scenario, paying $1.18 trillion… Our worst-case scenario could see payouts drop 23% to $1.10 trillion.”

Ben Lofthouse, Janus Henderson’s head of global equity income

“Dividend trends are reflecting the trends in society and the stock market at the moment,” said Lofthouse. “Probably we are going to see increases from parts of the tech sector,” he added. “There are a lot of very strong balance sheets in that area.” “The big question for the U.S. is what will happen in the fourth quarter. If many companies make significant cuts to their dividends, payouts will be fixed at a lower level until towards the end of 2021.”

On the resilience of the Asian credit market during pandemic crisis – Patrice Conxicoeur, chief executive and head of South-east Asia at HSBC Global Asset Management (Singapore)

“A common issue facing bond markets is liquidity – the ability to buy and sell securities at will without excessive bid offer spreads. Bonds are generally not traded on exchanges and are transacted bilaterally between independent counter-parties. So when the market has more people intending to sell, with very few investors wanting to buy, it is difficult to match up buyers and sellers to ensure a good two-way flow. This means that valuation prices can get marked down viciously as the clearing price in the market can be much lower than the fundamental value of the security.”

On governments’ worry over pandemic-induced public debt as unnecessary – Robert Skidelsky, economic historian and member of the U.K. House of Lords

“It’s mad to worry about debt at the moment,” Skidelsky said. “The only way to reduce the debt burden for future generations is to get the economy to grow again. It’s paradoxical: you have to spend more to grow your revenue. You just have to look at all things that could be done, particularly at a local level, to be convinced that it’s not just a matter of sweeping leaves or filling up holes and digging them up again,” Skidelsky said.

 

Top Gainers & Losers – 24-Aug-20*

BondEvalue Gainer Losers 24 Aug

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