Advanced Theory & Practice of Bonds

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US equities ended higher with the S&P and Nasdaq up 0.4% and 0.3% respectively. Materials and Real Estate led sectoral gains, up 1% each. US 10Y Treasury yields were 1bp lower at 1.55%. European stocks were mixed with the DAX and CAC up 0.9% and 0.5% while FTSE was down 0.2%. Brazil’s Bovespa was closed. In the Middle East, UAE’s ADX was up 0.7% and Saudi TASI was up 0.3%. Asian markets have opened lower – Shanghai, STI and Nikkei were down 0.4% each while HSI was down 1% . US IG and HY CDS spreads were 0.6bp and 4.5bp tighter. EU Main CDS spreads were 0.4bp wider and Crossover CDS spreads were 2.4bp tighter. Asia ex-Japan CDS spreads widened 0.5bp.

US ISM Services PMI and the November Federal Reserve’s meeting are due on Wednesday with market participants keeping a keen eye on the events. A tapering of bond purchases is widely expected to be announced during the FOMC meeting.


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New Bond Issues

  • Medco Energi $ 7NC3 @ 7.25% area
  • Jinan City Construction Group $ 3Y @ 2.7% area
  • China Bohai Bank HK branch $ 3Y @ T+120bp area
  • Jiangsu Fang Yang Group $ 150 mn 3Y @ 2.15% area
    New Bond Issues 3 Nov

 

Deutsche Bank raised $2.5bn via a two-tranche deal. It raised $1.75bn via a 2Y bond at a yield of 0.962%, 28bp inside initial guidance of T+80bp area, and $750mn via a 2Y FRN bond at a yield of 0.55% or SOFR+50bp vs initial guidance of SOFR-equivalent. The bonds have expected ratings of A2/BBB+/A-. Proceeds will be used for general corporate purposes.

Goldman Sachs raised €1bn via a 7.5Y bond at a yield of 0.885%, 10bp inside initial guidance of MS+90bp. The bonds have expected ratings of A2/BBB+/A. Proceeds will be used for general corporate purposes.

Teva Pharmaceuticals raised $5bn-equivalent via four-tranche dollar and euro sustainability-linked bond deal.

This is the largest sustainability-linked bond deal ever, overtaking Enel SpA’s $4.1bn-equivalent multi-currency deal in September. The bonds are linked to Teva’s efforts to boost access to medicines in low and middle-income countries by 150% and new climate action targets, including a 25% reduction of Scope 1 and 2 greenhouse emissions by 2025 from a 2019 baseline. The bonds have the following coupon step-up if it fails to meet its Sustainability Performance Targets (SPTs):

  • Both the 5.5Y EUR and USD bonds have a 15bp premium payment each at maturity for every SPT missed (capped at 45bp).
  • The 7.5Y USD bond and 8.5Y EUR bond have a 12.5bp coupon step-up each for every SPT missed per annum from Nov 2026 until maturity (capped at 37.5bp per annum).

Proceeds will be used to fund a $3.5bn tender offer that was announced last week, to repay outstanding debt  and for general corporate purposes. The new 5.5Y dollar bonds are priced 33bp wider to its existing 3.15% non-SLB October 2026s that were yielding 4.42%.

Bank of China Group Investment (BOCGI) raised $600mn via a 5Y green bond at a yield of 1.914%, 40bp inside initial guidance of T+115bp area. The bonds have expected ratings of A1/A (Moody’s/Fitch), and received orders over $1.3bn, 2.2x issue size. Proceeds will be used to finance and/or refinance eligible green projects as defined in BOCGI’s green bonds management statement. The bonds are issued by wholly owned subsidiary Amipeace and guaranteed by the Bank of China Macau branch. The new bonds are priced 1.6bp tighter to the guarantor’s existing 3.5% non-green April 2027s that yield 1.93%.

State Power Investment Corp raised $900mn via a PerpNC3 preference shares at a yield of 3.38%, 42bp inside the initial guidance of 3.8% area. The bonds have expected ratings of Baa1 (Moody’s). Proceeds will be on-lent to a group of offshore subsidiaries of the parent under intragroup financing agreements guaranteed by the parent. The bonds are issued by wholly-owned subsidiary SPIC Preferred Company No.1 Ltd. State Power Investment Corp has provided a keepwell. The notes are callable from October 9, 2024 to November 9, 2024, and have a change of control (CoC) put at 101 before the first call date and at par from the first call date onwards. If the securities are not called, the dividend will reset to 5.633%. There is a dividend stopper and pusher. State Power Investment Corp is one of the five largest state-owned electricity producers in China, and the first unlisted Chinese company to issue preference shares.

 

New Bonds Pipeline

  • China plans for € 3/7/12Y bond
  • Plaza Indonesia hires for $ sustainability-linked bond
  • VNET Group hires for $ senior bond

 

Rating Changes

 

Term of the Day

Bridge-to-Bonds

Bridge-to-Bonds are a structured transaction generally used in acquisition financing. Since acquisitions tend to require a committed funding in place, the buyer seals a bridge loan which is used as a backup in case a planned bond issuance for the acquisition does not happen in time. Essentially, while the bridge loan is secured, it is not drawn upon until it is necessary since it is intended to be replaced in the future with a mid-to long-term financing in the form of bond issuance(s). Carlyle Group raised $1.01bn in bonds as part of buying Indian company Hexaware Technologies – Carlyle had the bridge loan in place, but did not draw down on it and cancelled it after it issued the bond.

 

Talking Heads

On the need to improve information access in the US corporate bond market – Gary Gensler, U.S. Securities and Exchange Commission Chair 

“Many professionals have access to some amount of pre-trade price information in the corporate bond market,” Gensler said. “I wonder if broadening the dissemination of that type of information might make this market more accessible, competitive and liquid.”

On the warning that a spike in real interest rates could knock Big Tech from all-time high

In a note by Wells Fargo

“The Fed’s anticipated taper announcement this week may potentially catalyze a significant directional change in real rates.” “We believe the eventual real/break-even reversion will be sharp.”

Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management

“A revaluation may be ahead for long-duration assets like the megacap growth stocks that dominate the major indexes.”

Peter Garnry, head of equity strategy at Saxo Bank

“If the world is moving into a world of a sustained higher inflation rate and nominal yields suddenly reflect that, then global equity valuations will be reset to a lower level causing a substantial drawdown in equities.”

On whether the Fed’s easy money policy has created opportunities or a new normal

David Sherman, president at Cohanzick Management LLC

“I think the question is can the Fed pull back?” “The problem is the world has sort of gotten hooked.”

David Tawil, president and co-founder of Maglan Capital LP

“The investment community has come to count on the fact that the Fed will ride in as quickly and forcefully as possible at the first sign of stress.”

Matt Warren, a partner at law firm King & Spalding

“The credit markets are incredibly frothy, and they have been this entire year,” he said. “There’s so much money chasing a smaller sub-set of deals, the leverage shifts to the person needing the financing to increasingly dictate terms.”

Dominique Mielle, a former partner at credit hedge fund Canyon Partners

“The Fed’s intervention is relatively new, but it is so embedded now that it has transformed the distressed market.”

On the view that the Fed may lift interest rates ‘a bit later, a bit faster and a bit further’ – Krishna Guha, vice chairman and Peter Williams, director of Global Policy Strategy at Evercore ISI

The interest rate environment seems to show “fear that central banks have boxed themselves into a corner and will be forced into hawkish policy mistakes that end up generating a weak economy, [and] that is hard to square with strength in equities and credit.” “Some more hiking than we saw previously will likely be warranted, but relative to market pricing, our bias is a bit later, a bit faster and a bit further.”

 

Top Gainers & Losers – 03-Nov-21*

BondEvalue Gainer Losers 3 Nov

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