S&P ended 0.4% lower on Friday while Nasdaq was 0.1% lower. European equities also showed a similar picture, with the DAX, CAC and FTSE down 0.3%-0.4%. China threatened to impose countermeasures after US decided to blacklist more than 60 Chinese companies. “Such moves have seriously damaged the international economic and trade order and free trade rules, as well as the security of the global supply chain” said China’s commerce ministry. Over the weekend, US lawmakers reached a deal on a $900bn stimulus package. Meanwhile the UK went into an emergency lockdown and noted that a new strain of coronavirus is spreading rapidly. US IG CDS spreads were 0.6bp wider and HY was 2bp wider. EU main and crossover CDS spreads widened 0.4bp and 4.6bp respectively. Asia ex-Japan CDS spreads were 0.5bp tighter. Asian equities have followed Wall Street, opening lower ~0.2%.
Bond Traders’ Masterclass – Avail 30% + 10% Discount till 31 Dec 2020
BondEvalue is conducting a Bond Traders’ Masterclass across five sessions specially curated for private bond investors and wealth managers to develop a strong fundamental understanding of bonds. 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. Click on the image below to register.
Avail an additional 10% discount on the Masterclass package by registering before 31 Dec 2020
New Bond Issues
Powerlong Real Estate raised $100mn via a tap of their 5.95% 2025s at a yield of 5.69%. The bonds have expected ratings of B2/B. The tap trades at a new issue premium of 14bp over the initially issued bonds, which are currently trading at a yield of 5.55%.
Rating Changes
- Polyus PJSC Upgraded To ‘BB+’ By S&P On Strong Operating Performance And Lower Leverage; Outlook Stable
- Provident Funding Associates Upgraded To ‘B-‘ By S&P On Leverage Reduction And Improved Covenant Cushions; Outlook Positive
- Fitch Downgrades Seychelles to ‘B’; Outlook Stable
- Fitch Downgrades Avation to ‘CC’
- Fitch Downgrades Air Canada’s 2017-1 Class AA Ctfs; Affirms Remaining EETCs
- Fitch Affirms Spirit Realty Capital at ‘BBB’; Outlook Revised to Stable
- Fitch Places F&G Re’s IFS Rating on Rating Watch Negative Following Announcement
- Fitch Assigns Capital One Bank (USA), National Association ‘A’ Long-Term Deposit Rating
- Eletson Holdings Inc. Ratings Withdrawn By S&P
The Week That Was
Global primary market issuances dropped sharply last week as typical year-end seasonality kicked in. US primary market issuances dropped to $14.7bn from $38.7bn – IG issuances stood at $3.15bn and HY $11.55bn. In North America, there were a total of 38 upgrades and 54 downgrades across the three major rating agencies last week – Tesla’s upgrade to BB by S&P was among the highlights. LatAm primary markets were quiet with essentially no large deals. EU G3 issuances showed a different picture, jumping from $13.9bn to $28.8bn led by Mikro Fund’s multi-trancher and Casino Guichard’s issuance. Gulf issuance was soft with QNB’s $100mn deal being the sole issuance. Asia ex-Japan issuances were also soft at $1.74bn, down from $3.8bn in the previous week. The largest deals included Wynn Macau’s $750mn, Adani International Container Terminal’s $300mn and JSW’s $250mn tap. Across the major rating agencies, there were 3 upgrades and 7 downgrades across Asia ex-Japan.
Cash Strapped Oman Targets Fiscal Deficit by Cutting Subsidies
Battered by the effects of the pandemic and low oil prices, Oman has started a reform process to contain its fiscal deficit. The nation is embarking on spending cuts, privatization, new taxation law to add 5% value-added tax as well as lifting of subsidies as its fiscal deficit is forecasted to reach 10% by IMF. Oman’s Ministry of Finance had announced a Fiscal Balance Plan 2020-2024 on October 22 to achieve sustainable levels of fiscal balance. In keeping with its initiatives of the Fiscal Balance Plan (2020-2024), the Chairman of the Board of Directors of Authority for Public Services Regulation (APSR) announced reorienting electricity and water subsidy on December 20. Under the plan, the government plans to phase out utility subsidies in a phased manner from January 2021 to 2025. The Sultanate has not charged residential electricity tariff since 1987 under a subsidy that covers all citizens and non-residential categories including industrial, government and electricity segments. The burden of the subsidies has progressively mounted and has increased from OMR 650mn ($1.68bn) in 2016 to OMR 750mn ($1.94bn) in 2020. This subsidy alone constitutes 5% of the State Budget and about 20% of the expected deficit in 2021. The release said that “If the government does not undertake any action about the subsidy, it may grow to OMR 900mn ($2.33bn) by 2025.” The reduction in subsidies along with the other measures including increase in the tax will help contain the rising fiscal deficit.
S&P’s downgraded the Sultanate to B+ with a stable outlook on October 16 on rising net debt levels. Fitch had downgraded it to BB- from BB with a negative outlook on August 17. It was also downgraded by Moody’s to Ba3 with a negative outlook on June 23. Oman had also raised $2bn via dual-tranche bonds in the second half of October to shore up capital. Its bonds were stable with the 7.375% 2032s and 6% 2029 sukuk up 0.17 and 0.24 to trade at 110.75 and 103.755 respectively.
For the full story, click here
Fed Allows US Banks to Resume Buybacks
The US Federal Reserve in a statement on Friday said that banks can start buying back stock and paying dividends albeit with some restrictions. The statement came alongside the results of their regular stress tests, which mentioned that large banks have built strong levels of capital, despite setting aside about $100bn in loan loss reserves. The statement on buybacks and dividends read “For the first quarter of 2021, both dividends and share repurchases will be limited to an amount based on income over the past year. If a firm does not earn income, it will not be able to pay a dividend or make repurchases.”
Soon after the Fed’s announcement on Friday, banks began disclosing plans to resume buybacks as soon as the first quarter – JPMorgan said its board approved $30bn in buybacks subject to various considerations; Citi’s CEO stated their intentions of buybacks subject to financial conditions, board approval and any of Fed’s changes to capital requirements; BofA‘s CEO mentioned last week that they would continue buybacks as soon as they are allowed to; Morgan Stanley said that its board authorized up to $10bn of buybacks next year, starting in Q1.
A couple of months back, the Fed announced extension of limits it had set in June for the biggest US banks till the end of the year. “The Fed’s tests show banks have a substantial capital cushion… But for some lenders, the extent of payouts allowed “could lead to a significant decline in capitalization, a clear credit negative”, said David Fanger, SVP in Moody’s financial institutions group.
For the full story, click here
GE Buys Back Bonds Worth $2.2 Billion, Bonds Trade Up
American conglomerate General Electric (GE) bought back $2.2bn in bonds, thereby slashing its debt load. GE said it cut debt by ~$16.6bn this year and ~$30bn since the beginning of 2019. This follows CVS Health’s buyback of $4bn of debt maturing through 2028 using cash and proceeds from a $2bn new issue and AT&T, the world’s most indebted company as per Bloomberg, has also been on the path of reducing debt. Bloomberg reports that GE joins other blue-chip borrowers in paring over $350bn in incremental debt taken this year. “The tender is one step in its multi-year journey to lower net leverage towards 2.5x” said Bloomberg Intelligence analyst Joel Levington. “We think this will be much the theme for 2021…A lot of that incremental debt issuance we saw this year is now just cash sitting on the balance sheet. The question is, what will they do with that excess cash?” said George Bailey, an investment-grade portfolio manager at Aviva Investors.
GE’s bonds were trading slightly higher. Their 5% Perps callable on January 21, 2021 at 100 were up 0.2 to 93.54, with a yield to call of 94% and yield to maturity of 3.86%.
Beijing Announces Economic Plan for 2021; Former Finance Minister Criticizes Regulators for Oversight
China’s top policymakers revealed the country’s economic priorities for 2021 at the Central Economic Work Conference, which concluded last Friday. The statement had a triumphant tone, given China’s recovery from the pandemic as the only major economy to post positive growth this year. The economic plan for 2021 appear to be strategic with a focus on boosting innovation, self-reliance in the supply chain and domestic demand, as reported by SCMP. “Other than the curb on big tech [anti-monopoly], the rest are all under the so-called dual circulation, which has two implications: self-sufficiency and domestic demand. Beijing adopted such a strategy because it views a decoupling between China and the US as its biggest long-term challenge” said Larry Hu, chief China economist at Macquarie Group.
Over the weekend, China’s former finance minister Lou Jiwei criticized the country’s financial regulators at the China Wealth Management 50 Forum in Shenzhen on Sunday. Lou said that the central bank failed to take precautions against systemic risks, citing examples of the collapse of Baoshang Bank last year and the recent string of bond defaults as poor regulatory oversight. On the bond defaults, Lou said:
“Since the beginning of this year, bond defaults have occurred frequently, especially defaults of large state-owned enterprises, which have affected the credibility of state-owned enterprises and governments in the relevant regions. The first problem is that the market is segmented and issuance and supervision are not unified. The review of issuance includes the China Securities Regulatory Commission, the People’s Bank and the National Development and Reform Commission.”
“In addition, most of the interbank market bonds are held by banks in large quantities. Commercial banks underwrite and hold [bonds], and market liquidity is poor. Once the debt defaults, commercial banks suffer. There are still many problems in the bond market, and the basic condition is to have an unification of issuance standards, transaction circulation, and regulatory mechanisms.”
Metro Bank Sells Mortgage Portfolio to NatWest For $4.2 Billion
British lender Metro Bank Plc said on Friday that it will be selling a portfolio of mortgages to NatWest Group Plc for up to £3.13bn ($4.2bn) in a bid to boost its capital levels that have been hit by the pandemic. The portfolio consists of owner-occupied residential mortgages with a weighted average current loan to value of 60%. Metro said that the transaction is at a 2.7% premium to gross book value, resulting in a gain of £83mn ($111mn). Metro Bank had warned in October that its core capital ratio including additional funding, known as MREL (minimum requirement for own funds and eligible liabilities) was below the excess buffer level set by the regulators at 20%. Completion of this deal will improve Metro’s total capital plus MREL ratio by 400bp to 24.2% as per Reuters. “Growing our mortgage book is an important strategic priority as we build a bank that delivers sustainable returns for shareholders. The addition of this loan book will supplement the strong organic growth that we continue to achieve” said NatWest CEO Alison Rose. Metro Bank CEO Daniel Frumkin said, “The sale (will) enable us to shift our asset mix and expand our unsecured lending portfolio, following our entry into the market with the acquisition of RateSetter earlier this year. The transaction also removes any current need to issue MREL qualifying debt.”
Metro Bank’s GBP 5.5% 2028s traded up by 2 points to 54.5 pennies on the pound while NatWest’s GBP 5.125% perpetuals traded stable at 104.68.
For the full story, click here
Olam to Acquire US Chile Pepper Biz to Expand Portfolio
Olam International’s food business, Olam Food Ingredients (OFI) will be acquiring the US chile pepper business (CPB) of Mizkan America for $108.5mn in a bid to expand its portfolio of spices. The acquisition that is likely to complete in January next year will be funded through internal accruals and existing debt facilities of the company and is subject to regulatory approval from the US antitrust regulatory body. A Shekhar, chief executive officer (CEO) of OFI said, “This is a fitting first acquisition for OFI, as CPB fulfils OFI’s vision to help its customers meet consumer preferences…”. CPB is located in New Mexico in close proximity to Olam Spices and its high-quality green chiles will add to the chile portfolio of OFI.
For the full story, click here
Seychelles Downgraded to B by Fitch
Fitch has downgraded Seychelles deeper into junk to B from B+ as the government debt to GDP rose faster than the earlier predictions by the rating agency. The outlook assigned is stable. The pandemic has adversely affected the country’s financial metrics on twin accounts of expenditures towards fiscal measures to counter the pandemic and the slower recovery of tourism. The exchange rate depreciation has also added to the woes of the island nation. In the rating action, the rating agency highlighted the following.
- Government debt is forecasted to rise to 86.5% of GDP by the year end from 50.5% last year. This is higher than the B rating median of 63.8%
- The current account deficit is forecasted to be wider than previous predictions. The deficit is projected to be 19%, 3.9% higher that predicted
- GDP is likely to contract by 15.5% this year as tourism accounts for ~25% of GDP and ~55% if indirect factors are included
- The support to economic activity comes from
- Growth in canned tuna sector
- Large fiscal stimulus
- 200bp interest rate cut
- Robust credit growth
Seychelles 8% 2026s were up 0.28 at 93.2 cents on the dollar, yielding 9.75%.
Term of the Day
Consent Solicitation
Consent solicitation is an offer by the issuer to change the terms of the security agreement. These are applicable for changes to bonds or shares issued and can range from distribution payment changes and covenant changes in bonds to changes in the board of directors with regard to equities. IFR reported today that Beijing Hongkun Weiye Real Estate Development is seeking bondholders’ consent to amend certain terms of its $205mn 14.75% senior bonds due 2022 to give it more financial flexibility and facilitate a potential IPO. The proposed amendments include the lowering of the minimum threshold of the change-of-control clause to 40% from 50.1%, permitting a dividend payment on or prior to the completion of the IPO, and the deletion of the covenant on the personal guarantees.
Talking Heads
On Yields at Risk of Shooting Up
Charles Ripley, an Allianz Investment Management strategist
“Given where financial conditions are at now and expectations for a recovery in the economy, it doesn’t make sense to use WAM at this point… But other risks could present themselves and it’s hard to pinpoint exactly when the Fed might step in… the probability of a WAM extension from the Fed decreases the further along the recovery is. “For market participants, this means the Treasury curve can continue to steepen.”
Mark Heppenstall, chief investment officer of Penn Mutual Asset Management
“The Fed will have the pandemic-related uncertainty to justify defending the long end of the curve if needed…And that’s true even if economic growth surprises to the upside.”
On the new stimulus bill – San Francisco Fed’s Mary Daly
“This support is unequivocally beneficial”
On new coronavirus strain is more infectious, but vaccines should still work
Boris Johnson – PM of the United Kingdom
“There’s no evidence that it causes more severe illness or higher mortality, but it does appear to be passed on significantly more easily”
Britain’s Chief Scientific Adviser Patrick Vallance
“We think it (the variant) may be in other countries as well…It may have started here, we don’t know for sure…. “This virus has taken off…It’s moving fast and it’s leading inevitably to a sharp increase in hospital admissions. There is no evidence it causes a more severe disease, causes more hospitalisation, causes more trouble than the other virus, it basically looks similar.”
On Desperate Need for Yield Pushes Investors Into Frontier Markets
Leo Hu, lead fund manager for frontier-market debt at NN Investment Partners
“It’s a matter of time before investment-grade markets run out of spread… The next one they can look at is indeed frontier markets. There is nowhere they can invest to get decent yields”
Kevin Daly, investment director for emerging-market debt at Aberdeen Standard
“We are expecting to see continued inflows into emerging markets amid a low global yield environment, which should bode well for the high-yield component of the asset class…While there’s a risk of further frontier defaults in 2021, most low-income countries now have access to the Eurobond market, which will reduce default risk over the next year.
On How Top Funds Are Trading America’s Superpower Clash With China
Mark Mobius, Partner and co-founder at Mobius Capital Partners
“I don’t think you will see much improvement in U.S.-China relations in the near term… There are many companies in China that are dependent on what is happening locally and not on U.S. trade. So we are focusing on those rather than companies that will be hurt… With technology what we have done is gotten access through Taiwan. Taiwan won’t be impacted so much by sanctions.”
Andy Rothman, Investment strategist at Matthews Asia
“Most people are unaware that the Chinese economy has evolved into one that is driven by domestic demand, and not by manufacturing or exports… prospects are better for Chinese companies oriented toward internal growth…there are also opportunities in Chinese technology companies that are trying to be an alternative source for IP and equipment.”
Kelvin Tay, Singapore-based APAC CIO at UBS Global Wealth Management
“The Chinese equity market has done really well. It’s time to do a little bit more of a rotation, and I would re-balance my Chinese equity exposure into Asian high yield and the Chinese yuan relative to the dollar.”
Top Gainers & Losers – 21-Dec-20*
