S&P ended flat on Friday while Nasdaq was 0.8% higher. The US 10Y Treasury yield was 2bp lower. Financials underperformed the index as the Fed confirmed it would not extend the Supplementary Leverage Ratio (Term of the Day, explained below) beyond the March 31, 2021 deadline set last year. Meanwhile, European equities fell with the DAX down 1%, CAC and FTSE down ~1.1%. US IG CDS spreads were 0.4bp tighter and HY was 4.3bp tighter. EU main CDS spreads were 0.2bp tighter and crossover spreads widened 1.2bp. Asian equity markets have opened slightly higher, up 0.3% and Asia ex-Japan CDS spreads are tighter 0.1bp.
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New Bond Issues
- Naver $ 5Y sustainability bond at T+90bp area
- Hong Kong JunFa Property $ tap of 11% 2022s at 11%
NMG Holding Co Inc/Neiman Marcus Group raised $1.1bn via a 5Y non-call 2Y (5NC2) bond at a yield of 7.125%, inside initial guidance of mid-high 7%s. The bonds have expected ratings of Caa2/CCC+. Proceeds from the senior secured first lien bonds will be used to payback its $125mn first-in, last-out (FILO) facility and ~$748mn exit term loan and bonds due 2025 that will result in a “modest reduction” in interest as per an S&P report. The deal was upsized from $1bn to $1.1bn.
AT&T raised $6bn via a three-part offering. It raised:
- $2.25bn via a 3Y non-call 1Y (3NC1) bond at a yield of 0.932%, or T+60bp, 25bp inside initial guidance of T+85bp area
- $750mn via a 3Y non-call 1Y (3NC1) floating rate note at a yield of SOFR+64bp, as against initial guidance of SOFR equivalent
- $3bn via a 5Y non-call 2Y (5NC2) bond at a yield of 1.735%, or T+85bp, 25bp inside initial guidance of T+110bp area
Asian junk rated sovereign Laos yet again pulled its dollar bond offering, the third time in over three months, citing unfavorable market conditions. The initial guidance of the planned issue was at 11%.
New Bond Pipeline
- Maldives $ 5Y sukuk
- Science City (Gunagzhou) Investment Group $ bond
- IRFC $ 5Y bond
- Doha Bank bond
- Bank Negara Indonesia hires $ Tier 2 bond
- Tunas Baru Lampung $ bond
- Pakistan sovereign bond
- Nickel Mines $ 3NC2 bond
- Merck $10.5bn offering
- Meinian Onehealth Healthcare $ bond
Rating Changes
- L Brands Inc. Upgraded To ‘BB-‘ By S&P On Lower Debt And Improved Performance Expectations; Outlook Stable
- Moody’s upgrades Gerdau’s ratings to Baa3; stable outlook
- Tenet Healthcare Corp. Outlook Revised To Positive By S&P On Better Performance; ‘B’ Rating Affirmed
- Par Petroleum LLC Outlook Revised To Stable From Negative By S&P On Improved Liquidity, Ratings Affirmed
- LafargeHolcim Ltd. Outlook Revised To Positive By S&P On Strong Performance And Cash Generation; ‘BBB/A-2’ Ratings Affirmed
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Moody’s changes Mong Duong Finance’s outlook to positive; affirms Ba3 senior secured rating
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Fitch Affirms Hudbay’s IDR at ‘B+’; Outlook Revised to Positive
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Moody’s downgrades Banco Nacional de Panama’s ratings; changes Outlook to stable
The Week That Was
US primary market issuances dropped to $33.5bn, down 46% vs. $62bn the week prior. The fall in issuance can be attributed mainly to IG at $20.4bn, down 57% WoW while HY was at $12.7bn, down 15% WoW. The largest deals in the IG space were led by AT&T’s $6bn three-trancher, followed by Charles Schwab’s $2.25bn issue. In the HY space, T-Mobile’s three-part issuance amounting to $3.8bn led the table, followed by Neiman Marcus’ 7.125% 5NC2 issue. In North America, there were a total of 78 upgrades and 37 downgrades combined, across the three major rating agencies last week. LatAm saw just $178mn of deals last week vs. $1.1bn in the week prior with Unifin Financiera leading with a $128mn issuance. EU Corporate G3 issuance saw an increase last week to $32.3bn vs. $24bn priced in the week prior – Nordea Hypotec’s €3bn ($3.6bn) was the largest single deal followed by Traton Finance’s €1.25bn ($1.5bn) and Santander’s €1bn ($1.2bn). GCC and Sukuk G3 issues were at a meagre $55mn vs. $520mn in the week prior with Emirates NBD raising $40mn overall. APAC ex-Japan G3 issuances stayed relatively higher at $7.7bn vs $5.4bn in the prior week. FMG Resources’ $1.5bn led the table followed by CCB International’s $800mn, Krung Thai Bank’s debut $600mn AT1, Petronas’ $600mn, Clifford Capital’s $500mn and Cliffton/DIAL’s $450mn orphan SPV structure issues. In the Asia ex-Japan region, there were 18 upgrades and 6 downgrades combined, across the three major rating agencies last week.
Term of the Day
Supplementary Leverage Ratio (SLR)
The Supplementary leverage ratio (SLR) is a ratio used in the US to calculate the amount of tier 1 capital banks must hold relative to their total leverage exposure. Large US banks must hold capital of at least 3% of their assets and Global Systemically Important Banks (G-SIBs) must hold an extra 2% buffer, totaling 5%. In April 2020, the Fed loosened the SLR requirement to exclude holdings of Treasuries and reserves maintained with the Fed while calculating the ratio – this reduces the denominator (by increasing banks’ ability to take more deposits) and thereby allows more capital to be employed for lending purposes. FT reports that JPMorgan had the lowest SLR among US banks at 6.9% as at 2020 end vs. 5.8% without the concession. To learn more about the SLR, click here.
Talking Heads
“The market might push them to make a change in their behaviour but for now [Fed policymakers] have clearly indicated they do not want to directly participate in having an impact on the yield curve,” Bhandari said.
“Markets have become incredibly concerned that the Fed will make a policy error in terms of higher inflation,” said Malik. “The market can handle an increase in yields, but it needs to be orderly and driven by stronger growth and not going higher because the economy is overheating.”
“If they are too successful and inflation expectations threaten to become de-anchored, then it becomes an issue and would make it a lot harder for the Fed to maintain very loose policy,” he said.
“Looking through near-term volatility introduced by energy prices and other volatile price components, we see inflation remaining low in the near-term, with central bank inflation targets elusive over the next 18 months or so. The global economy has spare capacity to accommodate rising demand. If the spending were to be increased steadily over years, however, this would likely end up in higher inflationary pressures.”
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