US Treasury yields eased slightly with the 5Y, 10Y and 30Y yields down 4bp, 3bp and 2bp respectively. The peak Fed Funds Rate eased 2bp to 4.67% for the FOMC’s March 2023 meeting, with further rate hikes by the Fed continuing to be priced in. In the credit markets, US IG CDS spreads widened 1.9bp and HY CDS spreads saw a 12.9bp widening. US equity markets ended lower with the S&P and Nasdaq down 0.7% and 1.1% respectively.
European equity markets ended lower too and CDS spreads widened – EU Main and Crossover CDS spreads tightened by 0.5bp and 6.1bp respectively. Asia ex-Japan CDS spreads widened 8.1bp and Asian equity markets have opened broadly lower today by over 0.7%. The IMF cut its global GDP growth forecast for 2023 to 2.7% vs. its July forecast of 2.9%. This is on account of higher interest rates that is expected to slow down the US economy, while Europe struggles with a spike in gas prices and China contends with continued lockdowns and a weakening property sector.
New Bond Issues
Syngenta Group $ 3.5Y at T+125bp area
Yancheng Oriental Investment and Development Group raised $164mn via a tap of its 7% 2025s at a yield of 7%, in-line with the final guidance. Proceeds will be used for refinancing of existing offshore indebtedness which includes a $400mn 7% note due October 17. The bonds are issued by Oriental Capital and guaranteed by Yancheng Oriental Investment & Development Group.
LatAm Airlines raised $1.15bn via a two-tranche deal. It raised:
- $450mn via a 5NC2 bond at a yield of 15%, ~200bp wider than the initial guidance of low 13% area.
- $700mn via a 7NC3 bond at a yield of 15%, ~200bp wider than the initial guidance of mid 13% area.
Proceeds will be used for repayment of existing DIP (Term of the Day, explained below) facilities in connection with its emergence from bankruptcy and the remainder for general corporate purposes. If the emergence from bankruptcy does not occur on or prior to 10 January 2023, holders will have the right to put the bond to the at the issue price.
New Bonds Pipeline
- Aozora Bank hires for $ 3Y Green bond
- Moody’s downgrades Pakistan Water and Power’s rating to Caa1; outlook negative
- Moody’s downgrades five Pakistani banks’ ratings; maintains negative outlook
- Fitch Downgrades CIFI to ‘CC’ on Rising Liquidity Risk
- Fitch Revises Repsol’s Outlook to Positive; Affirms IDR at ‘BBB’
- Moody’s changes outlook on AkzoNobel’s rating to negative, affirms Baa1 rating
- Moody’s withdraws Evergrande’s and its subsidiaries’ ratings due to insufficient information
- Moody’s withdraws Kaisa’s ratings due to insufficient information
Term of the Day
Debtor-in-Possession (DIP) Financing
Debtor-in-possession (DIP) Financing is a funding option available to distressed companies that have filed for Chapter 11 bankruptcy protection, where lenders believe that the company has a realistic chance of turning itself around. DIP financing is not an option available to distressed companies that simply want to liquidate the company. DIP financing can be a lifeline for distressed companies as it may find it hard to borrow from typical channels after filing for Chapter 11. From a lender’s perspective, DIP financing can be attractive given the special treatment of such financing under US bankruptcy laws, which dictate that DIP lenders are to be paid before other creditors. DIP financing is subject to court approval wherein the distressed borrower must prove to the courts that the existing or older creditors will not be made worse by the new financing.
If I’m right, then global bond prices really are starting to look enticing. Just look at the scale of adjustment we have seen. The global government bond benchmark now yields 3 per cent compared with 1 per cent at the start of the year, global investment grade now has a yield of over 5 per cent versus less than 2 per cent and global high-yield is once again worthy of such a title with a yield of almost 10 per cent… The correction in global bond markets, while painful, is nearing completion.
“The economy is starting to go through the windshield, the financial system is starting to go through the windshield. This is the most front-loaded interest-rate cycle that we have seen in a very long time, and it didn’t need to be this.”
“I get concerned that a much stronger dollar will create a lot of pressure, particularly in hedging US dollar assets back to local currencies. When the central bank steps on the brakes, something goes through the windshield. The cost of financing has gone up and it will create tension in the system… The Fed is very clear that they want to get inflation back to 2%. When you start piecing everything together, rates have got to go higher than where they are, and they are going to stay there for a while”.
“The global environment is fragile… Financial stability risks have increased and the balance of risks is tilted to the downside… Soaring borrowing costs and tighter lending standards, coupled with stretched house valuations, could lead to a sharp decline in house prices”.
“A serious debt crisis is unfolding across developing economies, and the likelihood of a worsening outlook is high… It is urgent for us to step up and find ways in which we can deal with these issues before they become at least less manageable and perhaps unmanageable