Corporate Debt Restructuring Masterclass

18 July 2022 (Mon), 5pm Singapore/HK time

The Dow topped 30,000 for the first time while S&P and Nasdaq rallied 1.6% and 1.3%. Cyclicals like energy and financials rallied 5.1% and 3.5% respectively. US Treasury yields were higher with 10Y yields up 7bp and 30Y yields up 10bp. The positive risk-on sentiment was echoed in Europe with European indices up 1.2%. US IG CDS spreads tightened 2.6bp and HY spreads tightened 16bp. EU main CDS spreads and crossover CDS spreads tightened 2.8bp and 12.7bp. Asia ex-Japan CDS spreads were tighter 1.8bp and Asian equities are up ~0.2% today.

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Mod - 1 - Newsletter-2

 

New Bond Issues

  • Central Nippon Expressway (Nexco) $ 5Y climate resilience bond at MS+mid-40s
  • Ganglong China Property Group $ 364-day final @ 13.5%

New Bond Issues 25 Nov

Shui On Land raised $200mn via a tap of its senior green 5.75% 2023s at par. The bonds are unrated and proceeds will be used for funding or refinancing of eligible projects. The bonds are currently trading at 100.5 on the secondary markets.

Lufthansa raised €1bn ($1.19bn) via a 5Y bond at a yield of 3.125%, 62.5-75bp inside initial guidance of 3.75%-3.875% area. The bonds have expected Ba2/BB- ratings in-line with the issuer and received orders over €4bn ($4.7bn), 4x issue size.

 

New Bonds Pipeline

  • TML Holdings $ bond with letter of comfort from Tata Motors
  • CALG $70mn 5.9% 5Y privately placed bonds
  • IIX 4Y Women’s Livelihood bond

 

Rating Changes

 

EU Raises €8.5 Billion via 15Y Bonds, The Third SURE Bond Issuance 

The European Union (EU) raised €8.5bn ($10.1bn) via 15Y SURE social bonds at a yield of -0.102%, 5bp below Mid Swaps and 3bp inside initial guidance of MS-2bp area. The bonds are rated Aaa/AAA/AAA and met with solid investor demand with orders of over €114bn ($136bn), ~13.4x issue size. The proceeds from the EU SURE social bonds will be used exclusively to finance programmes with a positive social impact, in line with the EU SURE Social Bond Framework. Citigroup, JPMorgan Chase & Co.,  HSBC Holdings, Landesbank Baden-Wurttemberg, and Societe Generale SA were hired to manage the sale.

The €8.5bn issuance marks the EU’s third bond sale to fund the SURE unemployment scheme of up to €100bn ($119bn). The EU had already raised €31bn ($36.9) of funding, issuing 10Y and 20Y bonds in October and 5Y and 30Y bonds earlier in November. The October issuance totaled €17bn ($20bn) while the November issuance so far has totaled €22.5bn ($26.8bn). The EU SURE 0% 2030s are currently trading at 104.14, yielding -0.411% as compared to its issuance yield of -0.24% while the 0% 2040s are at 102.04, yielding -0.003% as compared to its issuance yield of 0.13%. Both bonds’ yields have dropped ~16bp since issuance. Peter McCallum, a rates strategist at Mizuho International Plc. said, “The very cheap pricing made this another no-brainer of a deal to take down. This has led to a large book once more, and the bond is likely to perform after launch.”

For the full story, click here

 

Turkey Raises $2.25 Billion via 10Y Bonds at 6%

Turkey raised $2.25bn via a 10Y bond at a yield of 6%, 25bp inside initial guidance of 6.25% area. The bonds have an expected B2/BB- ratings and carry a coupon of 5.95%. Goldman Sachs, HSBC and Morgan Stanley managed the bond issuance. The deal comes a week after Turkey’s central bank, led by new governor Naci Agbal, raised interest rates to tame its double-digit inflation.

Turkey last issued a dollar bond on October 6 raising $2.5bn via 6.375% bonds due 2025 currently trading at 104.87, returning 5% to investors that bought the bond at issuance at 99.894. Turkey’s long-dated bonds were trading in the red. Its 5.75% 2047s were down 0.42 at 89.63 while its 6% 2041s were down 0.3 at 93.50 cents on the dollar.

 

UOB Issues Singapore’s Largest EUR Covered Bond & First Negative Yielding Issue

Singapore’s United Overseas Bank (UOB) on Tuesday raised €1bn ($1.19) via a 7Y covered bond (Term of the day, explained below) at a yield of -0.21%, 17bp over Mid Swaps and 5bp inside initial guidance of MS+22bp area. The lender set the record for the largest euro-denominated covered bond from a Singapore-based issuer and the city-state’s first negative yielding bond. This is the first euro covered bond from a Singapore-based issuer since UOB’s €500mn ($595bn) 5Y covered bond issued in September 2018. The bonds are backed by SGD denominated residential mortgage loans. The lack of supply of such bonds from Asian issuers and a strong expected rating of Aaa/AAA led to €2.1bn ($2.5bn) of demand for UOB’s new covered bond. “It’s the largest order book we’ve ever seen for a Singaporean covered bond, and it shows that the scarcity and strength of the name really appeals,” said one of the lead bankers as per IFR. The deal comes after the Singapore regulator MAS raised the asset encumbrance limit, allowing lenders to have cover pool assets capped at 10% of the bank’s total assets, up from 4%. Moody’s said that this limit increase is “credit positive for the Singapore covered bond market if it leads to increased issuance, deepening the market and therefore reducing refinancing risks.”

For the full story, click here

 

US Retailers’ Bonds & Stock Rally on Vaccine Hopes & Black Friday Anticipation

US-based retailers Macy’s and Nordstrom saw its long-dated bonds and stocks rally on the back of progress on the Covid-19 vaccines and in anticipation of Black Friday, the Friday following Thanksgiving that marks the beginning of the Christmas shopping season in the US. Macy’s stock rose by 4.3% to $10.86, up a massive 75% month-to-date while Nordstrom’s stock rose by 4.8% to $24.55, more than doubling (102%) month-to-date. Macy’s and Nordstrom’s bonds, while relatively stable through the month, rallied this morning with Macy’s 4.3% 2043s up ~5.7 points to 66.6, its 5.125% 2042s up 6.3 points to 70.6 and Nordstrom’s 7% 2038s up 3.2 points to 98.1 on the secondary markets.

Macys and Nordstrom Bonds Rally on Vaccine Optimism

 

Singapore Airlines Raises S$500 Million via 10Y bonds at 3.5%

Singapore Airlines (SIA) raised S$500mn ($372.57mn) via 10Y bonds issued at par at a yield of 3.5% in a private placement to help it overcome the pandemic slowdown. The initial offer size was S$300mn ($223.54mn) which was subsequently raised to S$500mn ($372.57mn) on strong investor demand. DBS and UOB were the joint lead managers for the issue. The aviation sector is amongst the worst hit due to the pandemic. Even though domestic travel is picking up in larger countries, severe restrictions remain on international travel. The loss in demand for international travel has particularly hit SIA. To sustain itself, the airline has raised ~S$12.7bn ($9.46bn) this year through the following deals:

  • S$8.8bn ($6.56bn) from a rights issue
  • S$2bn ($1.49bn) from secured financing
  • S$850 mn via a convertible bond issue
  • ~S$500 mn ($372.57mn) through new committed lines of credit (LoC) and a short-term unsecured loan. SIA has ~S$2.1bn ($1.56bn) in committed credit lines including this

SIA has the option to raise up to S$6.2bn ($4.62bn) in additional mandatory convertible bonds till July 2021. The state-owned airline is not rated by the big three credit rating agencies. It’s 3.13% 2026s were up 0.09 at 98.66 cents on the dollar and its 3.13% 2027s were down 0.14 at 98.26 cents on the dollar.

For the full story, click here

 

Baoshang Bank Cleared for Bankruptcy Proceedings; Yongcheng Coal Creditors Agree to Repayment Plan

China’s banking regulator, The China Banking and Insurance Regulatory Commission (CBIRC), has given approval to the troubled Baoshang Bank to enter bankruptcy procedures. Tomorrow Group-owned Baoshang Bank was taken over by the Chinese government in May 2019 as part of a clean up by the financial and banking regulators and was forced into bankruptcy in August this year. Upon the takeover by the government, Huishang Bank and Mengshang Bank were mandated to control the operations, assets and liabilities of the beleaguered bank. Baoshang had indicated earlier this month that it would write off a $980mn subordinated capital bond after it was deemed non-viable by regulators. According to Bloomberg, “The move highlighted the difficult balancing act faced by Chinese regulators as they try to clean up risky lending practices without triggering a loss of faith in banks that might damage the world’s second-largest economy.”

In other news on China’s distressed corporates, state-owned coal miner Yongcheng Coal got a breather from its creditors when they unanimously approved a restructuring plan. The creditors have agreed to  receive 50% of the principal on the CNY1bn ($151.9mn) short-term commercial paper initially while extending the repayment by 270 days on the remaining amount. Yongcheng also revealed on Monday that it was not in a position to repay two other CNY1bn commercial papers by the deadline. Yongcheng had created ripples in the Chinese market when it had defaulted on principal and interest payments on Nov 10 just weeks after issuing new debt. The company was rated AAA by a domestic rating firm when it defaulted. China’s regulators have been forced into action after the defaults from YongCheng Coal, Brilliance Auto and Tsinghua Unigroup and have indicated a “zero tolerance” approach to violations in the bond market.

For the full story on Baoshang Bank, click here and for the full story on Yongcheng Coal, click here

Term of the Day

Covered Bonds

Covered bonds are senior secured debt instruments that are typically issued by banks. These bonds are secured (i.e. covered) by a pool of assets referred to as the “cover pool”, which typically consists of mortgages or loans. In an event that the bank defaults, holders of covered bonds have a preferential claim to the cover pool, which ensures interest payments and repayment of principal. This makes covered bonds relatively more secure vs. other debt and therefore results in a higher credit rating. While they have similarities with Mortgage-Backed Securities (MBS) in terms of the pool of assets there is a difference – the transfer of mortgages to an Special Purpose Entity (SPE) in a MBS issue means that the issuing bank no longer bears the risk of the loans and the mortgage pool is static. This is in contrast to Covered Bonds where, because the mortgage pool is constantly adjusted to maintain the pool size, the issuing bank bears the credit risk of the mortgages.

 

Talking Heads

On the need for Congress to approve use of clawed-back Fed loan funds – Ron Wyden, Senator and top Democrat on the Senate Finance Committee

“As the economy backslides amid skyrocketing COVID-19 cases, Secretary Mnuchin is engaged in economic sabotage, and trying to tie the Biden administration’s hands,” Wyden said.

On the warning that stimulus cannot remain forever – Ravi Menon, managing director of the Monetary Authority of Singapore

“The world is now entering a phase where the crisis is long, drawn-out, the peak of the crisis is behind us, but we’re not in full recovery,” Menon said. “In this undefined twilight zone of sorts, what is the appropriate policy mix?” Menon said. “Fiscal policy would have to start unwinding, but gradually.”

“If you unwind too rapidly, that will harm the recovery,” Menon said. “But if you stay on current levels of support — be it monetary or fiscal — that will create its own problems, the most prominent being debt accumulation.” “That’s one way to give confidence to the markets, that you’re not just pumping stimulus into the economy and borrowing to fund it. You’re also spending to help restructure the economy,” Menon said.

On Chinese portfolio managers seeing more foreign money flowing into China – ShiBin, head of China equities of UBS Asset Management (Hong Kong) Ltd

“Investors who have already invested in China would consider increasing their investments. Those who haven’t invested in China before would consider doing so,” said Shi.

On China’s bond defaults showing Beijing’s war on debt is back

Andrew Collier, managing director, Orient Capital Research

“It’s really more of the messaging than anything else, and unless there’s some threat to the financial or economic stability of China then the central government is happy to let the state firms go under,” said Collier. “Clearly the central government does not want to step in and is now basically telling local governments that they’re on their own.”

Rocky Fan, economist at Sealand Securities.

“It’s like telling investors: I don’t want to pay back your money,” Mr Fan said. “If that’s the case, there’s no way you can assess a company’s risk, or price a bond, based on its fundamentals.”

Michel Lowy, founder and chief executive officer of asset management group SC Lowy

“Most sophisticated investors understand that there is a major difference between lending to a state-owned enterprise, and lending to the state,” said Lowy. “(This) is a quick reminder of the difference, and of the fact that China does not have the intention to bail out every state-owned enterprise that has made wrong choices.”

Tiansi Wang, senior credit analyst at Robeco in Hong Kong

“For us, as fundamental investors, it’s not a market to play,” said Wang. “It’s not healthy if nobody ever takes the pain – then you don’t have a proper risk pricing environment.”

On Indonesia’s plans to tap global markets more to finance 2021 deficit – Perry Warjiyo, Indonesia’s central bank governor

“The (finance) minister will be going in more on the global market to finance the budget. She will increase the allocation for global issuance,” Warjiyo said.

On Brazil debt issuance nearly three times pre-crisis levels – Bruno Funchal, Brazil Treasury Secretary

“Just so you have an idea, the average volume of bonds issued at our monthly auctions was 60 billion per month. In the last few months we have been at around 150, 170 billion reals,” Funchal said. “It is a very high volume.”

 

Top Gainers & Losers – 25-Nov-20* 

BondEvalue Gainer Losers 25 Nov

 

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