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 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.


Bond Traders’ Masterclass | 25% Discount on a Bundle of Five Sessions

Keen to learn bond market fundamentals from industry professionals? Sign up for our Bond Traders’ Masterclass that consists of five modules starting on March 24. Avail a 25% discount on a bundle of five sessions!

The modules are specially curated for private bond investors and wealth managers to develop a strong fundamental and practical understanding of bonds. Given the ultra-low interest rate environment, flurry of new bond deals particularly from junk-rated issuers and tightening credit spreads, it is now more important than ever for investors to understand bond valuation, portfolio construction and new bond issues to help them get better return for risk. The sessions will be conducted by debt capital market bankers who have previously worked at premier global banks such as Credit Suisse, Citi and Standard Chartered.

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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%

New Bond Issues 22 Mar

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

 

The Week That Was

BEV Weekly Top Half 22 MarBEV Weekly Bottom Half 22 Mar

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

On the US Federal Reserve locked in a high-stakes showdown with markets

Gene Tannuzzo, global head of fixed income at Columbia Threadneedle Investments

“It is not the level of yields that matters, but how it interacts with risky assets,” said Tannuzzo. “If yields are moving up at a pace that is causing the stock market to fall and credit spreads to widen, then [Powell] will be a lot more concerned.”
Rish Bhandari, a senior portfolio manager at hedge fund Capstone
“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.
Mike Collins, senior portfolio manager at PGIM Fixed Income
“Financial conditions do remain pretty loose, but if rates go up another [0.5 to 1 percentage point], that could really slow things down,” he said.
Saira Malik, head of global equities at Nuveen
“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.”
Brian Rose, chief economist at UBS Global Wealth Management
“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.
Gen Li, chief executive officer of Beijing BG Capital Management Ltd
“China is facing an increasingly complex environment,” said Li. “Officials have repeatedly expressed their concern about asset prices deviating from economic fundamentals, and there’s also the risk of financial turmoil abroad.”
Shi Min, director of credit investment at Beijing Lakefront Asset Management Co
“Markets are in danger of experiencing a replay of 2017 and 2018,” said Min. “In 2018, private enterprises and real estate suffered the most. This year, local state-owned enterprises with excess capacity and high leverage are the targets.”
In a report by Mark Haefele, Min Lan Tan and team from UBS Global Wealth Management’s chief investment office
“We remain optimistic that China can manage the deleveraging process without a credit crisis or a hard landing,” they wrote.
In a report by Christian Keller and Michael Gapen, Barclays Capital
“The tug of war between accommodative policies and robust growth is unlikely to derail the recovery, but it could result in heightened volatility nonetheless,” they wrote. “Emerging market challenges from higher U.S. yields and a rising dollar were illuminated” by the central bank decisions.
Danny Fang, strategist at BBVA
“The rise in U.S. rates is a reflection of the ongoing inflation concerns. There are inflation concerns in parts of the emerging markets too, but beyond inflation, the higher U.S. rates can lift local rates up too on a short-term basis as well.”
Alberto Gallo, partner and portfolio manager at Algebris
“There will be rotation into real-economy assets such as small caps, financials and energy stocks instead of rates and credit, and that will generate a lot of volatility. We like convertible debt in value sectors which are linked to an acceleration in the cycle.”
Nicola Mai, sovereign credit analyst at Pimco

“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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