US equity markets bounced back after consecutive days of losses on Wednesday with the S&P and Nasdaq up 1.1% and 2% each. Sectoral gains were led by Consumer Discretionary, up over 2.5%. US 10Y Treasury yields fell 6bp to 2.68%. European markets were broadly flat – the CAC and FTSE were ~0.1% higher while DAX was down 0.3%. Brazil’s Bovespa ended 0.6% higher. In the Middle East, UAE’s ADX was down 0.1% and Saudi TASI was down 0.8%. Asian markets have opened with a positive bias – Shanghai, HSI and Nikkei were up 0.7%, 0.3% and 1.3% while STI was flat. US IG CDS spreads tightened 1.2bp while HY spreads were 5.7bp tighter. EU Main CDS spreads were 1.6bp wider and Crossover CDS spreads were 8.1bp wider. Asia ex-Japan CDS spreads were flat.
In central banking news, China’s PBOC is expected to cut its key one-year loan policy rate by 5-10bp to 2.8% or 2.75%, the second cut in 2022. The PBOC is also likely to reduce the Reserve Requirement Ratio (RRR) by up to 50bp. In Singapore, the MAS tightened policy by re-centering its policy band higher and raising the slope of appreciation. Meanwhile in the west, the Bank of Canada raised its benchmark interest rate by 50bp to 1%, its biggest hike in 22 years.
New Bond Issues
Credit Agricole raised S$250mn via a 10.25NC5.25 Tier 2 bond at a yield of 3.95%, 25bp inside initial guidance of 4.2% area. The bonds are rated Baa1/BBB+/A-, below the French bank’s ratings of Aa3/A+/A+. If not called, there is a coupon reset on July 22, 2027 to the prevailing SORA-OIS plus the initial credit margin of 160.9bp.
Bank of East Asia (BEA) raised $500mn via a 10NC5 Tier 2 bond at a yield of 4.91%, 30bp inside initial guidance of T+260bp area. The bonds are rated Baa2/BBB– (Moody’s/S&P). The bonds received orders over $2.5bn, 5x issue size. About 94% of the bonds were allocated to Asian investors, 4% to EMEA and 2% to offshore US accounts. Asset and fund managers took 59%, banks 15%, private banks 14%, and central banks, insurers and pension funds 12%. Proceeds will be used for general corporate purposes.
Sembcorp Industries raised S$300mn via a 7Y sustainability-linked bond at a yield of 3.735%, 21.5bp inside initial guidance of 3.95% area. The bonds are unrated. Sembcorp has a sustainability performance target of achieving greenhouse gas emissions intensity to 0.40 tCO2e/MWh or lower by end-2025. If not achieved, there will be a one-time 25bp coupon step-up on or after April 1, 2026. Sembcorp Financial Services is the issuer while the Temasek-owned parent is the guarantor. Proceeds will be for general corporate purposes and debt refinancing.
China Citic Bank International raised $600mn via a PerpNC5 AT1 bond at a yield of 4.8%, 32.5bp inside initial guidance of 5.125% area. The bonds are rated Ba2 and received orders over $2.15bn, 3.6x issue size. Proceeds will be used for funding and general corporate purposes. The bonds have a dividend stopper where on any coupon distribution date, if the payment distribution is not made, the issuer cannot declare or pay in cash any other distribution, dividend or repurchase shares. If a non-viability event occurs, the issuer will reduce the then outstanding principal amount and cancel any accrued but unpaid distribution. A non-viability event occurs if Hong Kong Monetary Authority (i) is of the opinion that a write-off or conversion is necessary, without which the issuer would become non-viable, or (ii) a decision has been made by relevant regulatory bodies that a public sector injection of capital or equivalent support is necessary, without which the issuer would become non-viable. If not called by the call date of April 22, 2027, the coupon resets to the 5Y US Treasury + 210.4bp.
Yunnan Provincial Energy raised $230mn via a 3Y green and sustainability-linked bond at a yield of 5.5%, 50bp inside initial guidance of 6% area. The bonds are rated BBB-. Proceeds will be used to refinance offshore debt that is related to green projects. The bonds’ sustainability-linked aspect gives it a coupon step-up of 15bp each year if the issuer fails to increase its wind power generation capacity and a step-up of 10bp annually if it fails to increase its solar power generating capacity by June 30 2024, with the interest payment going into effect on October 22, 2024. The company’s goals are to increase wind generation by 173% by the end of December 2023, compared to a benchmark of the end of December 2021, and solar power by 43% by the same date, also compared to the end of 2021.
Towngas Smart Energy raised $200mn via a 5Y sustainability-linked bond at a yield of 4.096%, 30bp inside initial guidance of T+170bp area. The bonds are rated Baa1/BBB+ and received orders over $1.1bn, 5.5x issue size. The issuer has pledged to reach 8GW of total photovoltaic installed capacity by 2025 under sustainability performance target 1, and increase solar energy sales to 7% of total energy sales by 2025 under SPT 2. A 25bp coupon step-up will apply if Towngas does not achieve either of the sustainability performance targets. CCL Finance is the the issuer and Towngas the guarantor. Proceeds will be used to refinance debt, fund capital expenditure and meet general corporate needs.
Korea Midland Power raised $300mn via a 5Y bond at a yield of 3.678%, 30bp inside initial guidance of T+130bp area. The bonds are rated Aa2/AA. Proceeds will be used for general corporate purposes, including debt repayment.
New Bonds Pipeline
- Korea Water Resources hires for $ Green bond
- Mirae Asset Securities hires for 3Y/5Y SLB bond
- Jubilant Pharma hires for $ bond
- Sael Limited hires for $ 7Y Green bond
- Kalyan Jewellers India hires for $ bond
Rating Changes
- Fitch Downgrades Sri Lanka to ‘C’
- Sri Lanka Foreign Currency Rating Lowered To ‘CC’ From ‘CCC’; Outlook Negative
- Fitch Downgrades Kaltex to ‘RD’
- Moody’s affirms CIFI’s Ba2/Ba3 ratings, changes outlook to negative
Term of the Day: Bid-to-Cover
Bid-to-cover is a ratio of the number of bids or orders received for a particular security issuance vs. the amount issued. The bid-to-cover ratio indicates the demand for an issuance – higher the ratio, higher the demand and lower the ratio, lower the demand.
Talking Heads
Hedge Funds Looking to Buy Sri Lanka’s Distressed Dollar Bonds
Wai Ho Leong, a strategist at Modular Asset Management
“The months of denial and kicking the can are over and we have now entered a new and more hopeful phase. The “debt could start to rally as the IMF package could be rolled out over the next few months given that the technical discussions have started”
On Treasury Traders Pare Bets on Fed Hikes as Two-Year Yield Falls
Ian Lyngen, head of interest rate strategy at BMO Capital Markets
“The regime shift narrative to higher rates has been exhausted and the terminal rate might be lower than previously thought”
Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities
“We’ve been taking some of the expectations for a terminal rate near 3.25% to inside 3% on the back of the narrative of peak inflation. The move has been big due to positioning and expectations around the terminal rate are extremely volatile.”
On China hesitating to bailing out Sri Lanka, Pakistan as debt soars
Raffaello Pantucci, senior fellow at the S. Rajaratnam School of International Studies at Nanyang Technological University
“Beijing has for the past couple of years been rethinking its external lending because their banks realised they were carrying a lot of debt with countries whose prospects of paying back were quite limited. This came on top of a tightening economic situation at home which also required a lot of spending, so there was less appetite to just throw money around wantonly.”
On need fast rate hikes, but not a Volcker moment – Fed’s Waller
“I don’t see value in trying to shock the markets; we are not in a Volcker kind of moment… Right now our main concern is getting these prices down and we can do that without causing a recession… We don’t need to be shocking anything just to cause a shock…if inflation doesn’t cool off, we’ll keep going; we’ll do what it takes to get inflation back down. But we can do that in an orderly way without causing a lot of financial market stress… I think we want to get to above neutral certainly by the later half of this year, and get closer to neutral as soon as possible”
Top Gainers & Losers – 14-Apr-22*
