SOVEREIGN DEBT RESTRUCTURING | MASTERCLASS

A deep dive masterclass on sovereign debt restructuring, to be conducted virtually by Asian high yield bond expert Florian Schmidt.

30 June 2022 (Thu), 5pm Singapore/HK time

S&P ended 0.8% lower while Nasdaq saw a sharp fall of 2.5%. Tesla fell 8.5% while Apple, Amazon, Microsoft and other tech stocks were down ~3%. US 10Y Treasury yields were stable despite the negative sentiment in equity markets. Fed Chair Powell is due to appear before the Senate Banking Committee later today for his semi-annual testimony. European equities were also lower ~0.5% and German Bund yields dipped 4bp. US IG CDS spreads were 2.2bp wider and HY was 8bp wider. EU main CDS spreads widened 2.2bp and crossover spreads widened 4.4bp. Asian equity markets have opened flat while Asia ex-Japan CDS spreads are 0.6bp wider.

Navigating The Bond Markets by Leveraging the BEV App

New to the BEV App? BondEvalue will be conducting a complimentary session on Navigating The Bond Markets by Leveraging the BEV App tomorrow, February 24. This session is aimed at helping bond investors in tracking their investments using the BondEvalue App.

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New Bond Issues

  • Agricultural Bank of China $ 3Y/5Y at T+105bp/T+115bp areas
  • ESR Cayman S$ PerpNC5 at 5.875%
  • Macquarie Bank $ 15NC10 Tier 2 Note at T+200bp area

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SocGen raised $1bn via a 20Y subordinated Tier 2 bond (Term of the day, explained below) at a yield of 3.629%, or T+160bp, 25bp inside initial guidance of T+185bp area. The bonds have expected ratings of Baa3/BBB-/BBB. The bonds will be issued under their $25bn medium term note (MTN) programme.

China Aoyuan raised $350mn via a 6Y non-call 4Y (6NC4) bond at a yield of 5.95%, 25bp inside initial guidance of 6.2% area. The bonds have expected ratings of BB and received orders over $2.1bn, 6x issue size. The Chinese real estate company will use proceeds for debt refinancing. The final pricing was wider than the 5.8% fair value estimate by both Nomura’s trading desk and CreditSights. The new bond has the longest tenor issued by the company, optimizing the maturity profile and lowering borrowing costs, the company said in a press release. The deal is also the first from China’s property sector in the new year of the Ox.

 

New Bond Pipeline

  • Vedanta Resources $ 4Y and 7Y bonds
  • Bharti Airtel perpNC5.25 and/or senior 10Y bond
  • Far East Horizon $ bond
  • Bank of New Zealand $ 5Y bond
  • NTT multi-trancher $/€ bond
  • HCL Tech $ bond
  • Microsoft $ bond alongside exchange offer
  • JSW Steel $ bond

 

Rating Changes

 

Term of the Day

Tier 2 Bonds

Tier 2 bonds are debt instruments issued by banks to meet their regulatory tier 2 capital requirements. Tier 2 capital (and thus tier 2 bonds) are called ‘gone concern’ capital since it gets affected only when the company/bank is a gone concern whereas Tier 1 is called ‘going concern’ capital. Tier 1 consists of Common Equity Tier 1 (CET1) and Additional Tier 1 (AT1) capital which are the highest quality of regulatory capital as they are the first to absorb losses. Tier 2 instruments must absorb losses after tier 1 but before depositors and general creditors do. Thus in terms of a bank’s liability structure, Tier 2 is less risky and ranks senior to Tier 1 capital. From a bond investor’s perspective, Tier 2 bonds are senior, and therefore less risky, compared to AT1 bonds as AT1s would be the first to absorb losses in the event of a deterioration in bank capital.

Aussie lender Macquarie Bank has launched a new USD 15NC10 Tier 2 note issuance this morning following French lender SocGen, which raised $1b via a 20Y Tier 2 bond on Monday.

 

Talking Heads 

On Yellen, Powell wary of financial froth as they push for stimulus

Janet Yellen, US Treasury Secretary

There “may be sectors where we should be very careful,” Yellen said when asked about possible speculative sizzle.

Tobias Adrian and Fabio Natalucci, International Monetary Fund officials

“With investors betting on persistent policy backstop, a sense of complacency appears to be permeating markets,” they wrote.

Alan Blinder, former Fed Vice Chairman

“That’s what makes it hard to tell what’s an asset bubble and what’s fundamental because they’re both pointing in the same direction,” said Blinder.

Glenn Hubbard, Columbia University professor and former White House chief economist

“I would encourage her to think about where there are holes” in the financial system. “I don’t see a crisis around the corner,” he added. But “if you keep interest rates very low for a long period of time you need to watch out for froth.”

On the need to inflation-proof debt-market portfolios

Lotfi Karoui, chief credit strategist at Goldman Sachs

“You don’t buy leveraged loans today because you expect the floating rate component to go up,” said Karoui. “That is not the thesis. The floating rate component is going to stay flat for the foreseeable future. You buy it because the reflation theme is something that hurts more the high-yield bond market relative to the loan market.”

Sebastien Page, head of global multi-asset at T. Rowe Price

“We’ve increased our allocation to bank loans, in part by selling high yield,” Page said. “Put it this way: if we can get a similar yield on high yield and loans, on a risk adjusted basis the asset class that should behave best in rising rates — loans — looks more attractive.”

Arvind Narayanan, head of investment-grade credit at Vanguard

“The big risk in the market really is inflation, whether it is transitory or whether it is something more deep rooted,” said Narayanan. “There’s just a tremendous amount of stimulus in the marketplace, both monetary and fiscal, that favor economic growth.”

Dominic Nolan, a senior managing director at Pacific Asset Management

“Inflation will be more transitory than sustained,” said Nolan. “We have to see how steep the curve gets and if the perceived inflationary pressures actually materialize into inflation.”

John Reed, head of global trading at KKR

“Rising rates could very well be a prelude to inflation as we take into account the current macroeconomic environment,” Reed said. “A modest rise in rates off current levels seems likely for the remainder of 2021, but the Fed has been transparent in willing the market to invest behind yield, growth and recovery.”

On New Zealand’s sovereign rating raised after V-shaped recovery – according to S&P

“New Zealand is recovering quicker than most advanced economies after the Covid-19 pandemic and subsequent government lockdown delivered a severe economic and fiscal shock to the country,” S&P said. “While downside risks persist, such as another outbreak, we expect New Zealand’s fiscal indicators to recover during the next few years.”

“Reflecting substantial fiscal support, New Zealand’s net general government debt is much higher than in the past but remains lower than most of its peers,” S&P said. “We believe that New Zealand’s relatively better management of the pandemic means that its credit metrics are in a good position to weather potential deteriorations associated with further negative pressures, including from a possible weakening of the real estate market, at its current rating level.”

On BlackRock’s bearish stance on credit and government bonds due to high valuations and inflation expectations – in a note by Jean Boivin, head of the BlackRock Investment Institute, and others

“A key risk is a further increase in long-term yields as markets grapple with an economic restart that could beat expectations,” the firm said. “This could spark bouts of volatility, even though we believe the Fed would lean against any sharp moves for the time being.”

 

Top Gainers & Losers – 23-Feb-21*

BondEvalue Gainer Losers 23 Feb

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