Advanced Theory & Practice of Bonds

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1-2 December 2021

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US Benchmark & Global Indices 21 Oct

US equities inched higher with the S&P up 0.5% led by the energy and financials sector up ~1% each. Tesla’s is scheduled to publish quarterly results after market close today. Meanwhile, the DoJ charged Google with multiple violations of US law; the stock did not react much, ending 1.4% higher. US stimulus hopes continue for a last minute deal with US Treasuries selling-off as the 10Y and 30Y yields rose 5bp and 7bp. US IG CDS spreads were tighter 0.6bp while HY was flat. European IG and Crossover CDS spreads rose 0.5bp and 1.8bp. Asian equities are slightly higher today, ~0.3% with Asia ex-Japan CDS spreads wider by 0.8bp. Another busy day for the primary markets in Asia with 10 new deals with 2 deals from the Middle East.

Masterclass Oct-20

 

New Bond Issues

  • Investment Corporation of Dubai $ long 5Y @ MS+300bp area
  • Sinochem $ 5yr/Perp NC3 @ T+170bp/3.3% area
  • Greentown China $ 4.5NC2.5 @ 5.2% area
  • China SCE Group Holdings $ 4.5NC2.5 @ 7.4% area
  • Arab National Bank $ Tier 2 sukuk @ MS+325bp area
  • KB Capital $ 5yr @ T+150bp area
  • Meituan $ 5/10yr @ T+230/275bp area
  • Shua Capital up to $150mn 3Y, final @ 7.5%
  • Guangxi Communications Investment Group $ 200 mn 5yr @ 3.3% area
  • Jiangning Jingkai Overseas Investment $ 364-day @ 3.6% area

New Bond Issues 21 Oct

Hon Hai Precision Industry, also known as Foxconn, raised a total of $1.4bn via a dual-tranche bond offering. It raised $800mn via 5Y bonds to yield 1.685%, 135bp over Treasuries and 40bp inside initial guidance of T+175bp area. It also raised $600mn via 10Y bonds to yield 2.532%, 175bp over Treasuries and 30bp inside guidance of T+205bp area. The bonds, with expected ratings of A-, received total orders of over $3.7bn, 2.64x issue size. Wholly-owned subsidiary Foxconn (Far East) will issue the bonds with a guarantee from Hon Hai.

China Everbright Limited raised $300mn via Perpetual non-call 3Y (PerpNC3) bonds to yield 3.8%, 55bp inside initial guidance of 4.35% area. The bond, with an expected rating of Baa3, received orders over $2.6bn when final guidance was announced, 8.67x issue size. The bond is callable in October 2023 and if not called, the coupon will reset at the initial spread of 361.2bp plus the prevailing 3Y Treasury yield with a 400bp step-up.

India Green Energy raised $325mn via 3.5Y non-call 3Y green bonds at a yield of 5.375%, 50bp inside initial guidance of 5.875% area. The bonds, expected to be rated Ba3/BB-, received final orders worth $1.8bn, 5.5x issue size. Proceeds from the issuance will be used to purchase senior secured INR denominated non-convertible debentures (NCD) to be issued by 11 subsidiaries of ReNew Power. India Green Energy is a limited liability company incorporated in Mauritius in 2019, held by a trust and not linked to ReNew Power Private or its subsidiaries, as per IFR. The company will not undertake any other business activities other than investing or participating in permitted transactions relating to the NCDs. Renew Power’s (BB-) 6.67% and 5.875% bonds due 2024 and 2027 are currently trading at 104.8 and 101.9 on the secondary markets.

CapitaLand Retail China raised S$100mn ($74mn) via Perpetual non-call 5Y bonds at a yield of 3.375%, 25bp inside initial guidance of 3.625% area. The unrated bonds, issued by the REIT’s trustee HSBC Institutional Trust Services Singapore, carry a coupon reset if not called on October 27, 2025 to the prevailing SGD SOR plus a spread of 287.5bp. Deferred coupons are non-cumulative in nature. The pricing was tighter compared to Suntec REIT’s S$200mn ($147mn) perpNC5 issuance at 3.8% yesterday given Temasek’s 37.25% stake in CapitaLand Retail China, which owns a portfolio of shopping malls in China. 66% of the issuance was bought by private banks with fund managers, insurance companies and banks taking the balance.

Hong Kong’s Peak Reinsurance raised $250mn via Perpetual non-call 5Y subordinated bonds at a yield of 5.35%, 40bp inside initial guidance of 5.75% area. The bonds, expected to be rated Baa2, will be issued by wholly-owned subsidiary Peak Re (BVI) Holding and guaranteed by Peak Reinsurance. Fosun International and Prudential Financial own a 86.51% and 13.05% stake in Peak. The perps carry a coupon reset if not called in 5Y to the initial spread of 501.1bp over the 5Y Treasury yield and if not called after 10Y, a step-up of 100bp.

Hubei Science Technology Investment Group raised $300mn via 5Y bonds to yield 2.9%, 45bp inside initial guidance of 3.35% area. The bonds, with expected ratings of BBB+, received final orders over $2bn, 6.67x issue size. Wholly-owned subsidiary Hubei Science & Technology Investment Group (Hong Kong) is the issuer and state-owned parent company Hubei Science Technology Investment Group is the guarantor.

 

New Bonds Pipeline

  • Oman $ Bond
  • Korea Land & Housing $ Bond
  • Gansu Provincial Highway Aviation Tourism Investment Group $ Bond
  • Straits Trading SGD Bond
  • Wenns Foodstuff debut $ Bond

 

Rating Changes

PetSmart Inc. Upgraded To ‘B’ BY S&P On Refinancing Transaction And Lower Debt; Outlook Stable; New Debt Rated

Moody’s upgrades PetSmart to B2; outlook positive

Moody’s downgrades UKs  HSBC Bank, Lloyds Bank, Santander LTDRS & Barclays CRR, changes outlook to Negative; Natwest Outlook Revised to Positive

Fitch Downgrades Findep’s Ratings to ‘BB-‘; Removes Negative Watch; Assigns Negative Outlook

Fitch Places Concho’s Ratings on Positive Watch Following Announced Merger with ConocoPhillips

Vedanta Resources ‘B-‘ Ratings Affirmed By S&P And Removed From CreditWatch; Outlook Negative On Tight Liquidity

Moody’s places Vedanta Resources’ ratings under review for downgrade

Moody’s changes Panama’s outlook to negative, affirms Baa1 ratings

 

EU’s €17 Billion SURE Bonds Smash Record With €233bn of Orders

The European Union (EU) priced its debut SURE bonds on Tuesday with a total size of €17bn across two tenors. It raised:

  • €10bn via 10Y bonds at a yield of -0.24%, 3bp over Mid Swaps and 3bp inside initial guidance of MS+6bp area
  • €7bn via 20Y bonds at a yield of 0.13%, 14bp over Mid Swaps and 3bp inside initial guidance of MS+17bp area

The keenly awaited social bonds with proceeds earmarked to mitigate unemployment risks, shattered records with a combined order book of over €233bn (~$275bn), almost 14x issue size. This is the largest order book size ever for a bond issuance as per IFR. The strong demand can be explained by the yield pick-up offered by the new EU bonds vs. sovereign bonds from high-rated member countries such as Germany and France. The bankers on the deal included Barclays, BNP Paribas, Deutsche Bank, Nomura and UniCredit. In the table below, we have compared the issuer ratings, benchmark 10Y and 20Y bond yields and size of outstanding debt for EU and select core member countries – sorted by the 10Y yield (lowest to highest):

SURE

Proceeds from the bonds will be transferred to member states in instalments through loans to cover costs related to the financing of national short-time work schemes and similar measures. These are in response to the Covid19 pandemic. Johannes Hahn, EU Commissioner for Budget and Administration told Reuters on October 8 that they were looking at €30bn ($35.5bn) in issuance for 2020. Global social debt issuance stands at ~$101bn for 2020 including the new SURE bonds with another ~$15bn expected through the rest of the year based on Mr. Hahn’s comments.

 

Sri Lanka’s Dollar Bonds Plunge by 5-8%

Sri Lanka’s offshore bonds tanked by as much as 5-8% on a single day yesterday as the Sri Lankan Parliament gets ready to debate on the 20th constitutional amendment. The ruling party under Prime Minister Mahinda Rajapaksa enjoys a majority in the parliament along with its allies and could pass the bill that could overturn some of the provisions of the 19th amendment passed by the last government. The bill would expand President Gotabaya Rajapaksa’s powers and give him a higher say in appointing top officials. It will also remove the President’s and Prime Minister’s office from the Auditor General’s scrutiny.

Sri Lanka’s politics is dominated by the Rajapaksa family with five members holding important portfolios. A provision in the amendment could allow another member of the family holding US citizenship into the legislature. The island nation has also been struggling with its high debt pile. Last month Moody’s downgraded the sovereign by two-notches  to Caa1 as it felt that the government’s liquidity and external risks will increase due to external debt payments of ~$4bn between 2020 and 2025. Meanwhile Sri Lanka’s highest court has ruled that the proposed amendment to the constitution will need approval in a public referendum to become law since these are against the people’s sovereignty. The investor confidence has taken the biggest hit since the March meltdown that was echoed by a member of the Sri Lankan parliament who commented, “A major check and balance on finance, performance and corruption is being eliminated by the amendment”. Sri Lanka’s dollar bonds are down 7-14% since the news of the proposed amendment. The table below shows the price at the end of the last four quarters and the fall in bond prices for October.

Sri Lankas Dollar Bonds Plunge Before Parliamentary Debate (1)

For the full story, click here

 

Vedanta’s Dollar Bonds Inch Up With Dividend Inflows; Ratings Agencies Provide Mixed Stances

Vedanta’s dollar bonds moved up yesterday with the company expected to receive an INR 5.8bn ($795mn) dividend from Hindustan Zinc. . Vedanta holds a 64.92% stake in Hindustan Zinc, which announced a dividend of INR 21.3 ($0.29) per share. This cash flow is expected to temporarily boost balances at Vedanta.  Moody’s meanwhile placed Vedanta Resources (B1) under review for a downgrade due to increased refinancing risk and funding needs following the failed delisting. S&P meanwhile reaffirmed Vedanta’s ratings at B- whilst revising the outlook to negative. The positives stated by them were dividend payments and intercompany loans being adequate for debt servicing over the next one year alongside a positive operational outlook (EBITDA of $530mn in the first quarter of fiscal 2021 in the aftermath of Covid). The negative outlook was an indication of a possible downgrade if Vedanta was unable to lower refinancing risk and service debt sustainably. Vedanta’s 8.25% bonds due 2021 have risen by ~3 points since Monday’s close to 86.2 cents on the dollar, yielding 34.6% on the secondary markets.

 

United Airlines Raises $3 Billion via 7Y Bonds Backed By Spare Parts

American carrier United Airlines raised $3bn via 7Y bonds at a yield of 5.875% on Tuesday. The issuance, led by Goldman Sachs, is backed by a fleet of 352 aircrafts, 99 spare engines and other spare parts. As per the preliminary bond prospectus, the “assumed aggregate collateral value” at the time of issuance was $5.82bn resulting in a loan to value (LTV) ratio of 51.6%. The collateral assets will be placed in a trust until United repays the debt, thus offering stronger protection to lenders. Further, Goldman has also provided a liquidity line to cover interest expenses for 18 months if United faces a liquidity crunch. The bonds, termed as Class A pass through Enhanced Equipment Trust Certificates (EETC), received a relatively strong investment grade rating of  A3 by Moody’s and preliminary A (sf) by S&P  (sf denoting structured finance). This puts the new bonds five and eight notches higher than Moody’s and S&P’s issuer rating of Ba2 and B+ respectively. Proceeds from the issuance will be used to repay a total of $2.75bn across three term loans due in March/April 2021. The pricing on the new bonds was generous compared to its 6.5% 2027 MileagePlus bond (Baa3/BBB-) issued in June, which are currently trading at 105 yielding 5.16%. The new bonds received orders worth ~$6bn, 2x issue size as per the FT. United’s older unsecured 4.25% 2022s and 4.875% 2025s traded at 93.5 and 87 cents on the dollar, yielding 7.93% and 8.6% respectively.

For the full story, click here

 

Moody’s Downgrades UK Banks In Line With Sovereign Downgrade

Moody’s has initiated rating actions on six UK banks post the sovereign downgrade to Aa3 over the weekend. Significant among the rating actions is the downgrade of the long-term deposit rating of HSBC Bank plc, Lloyds Bank plc and Santander UK plc to A1 from Aa3 and the downgrade of long-term deposit issuer rating of HSBC Bank, HSBC UK Bank plc (HBUK), Lloyds Bank and Santander UK. The outlook for all these ratings has been changed to stable from negative. While Moody’s “maintained a Strong+ macro profile for the UK”, the rating actions on the banks is indicative of the proximity of banks to the sovereign. While there were a slew of downgrades, the rating agency affirmed the deposit rating of National Westminster Bank Plc (NatWest Bank) at A1 while revising the outlook to positive from stable.

For the full story, click here

 

Shandong Sanxing’s Dollar Bonds Drop to 68 Three Months Before Maturity

Shandong Sanxing, which operates in machinery manufacturing to oil refining, saw its $200mn 7.99% dollar bonds due January 2021 (issued by Knight Castle Investments) drop 10% on Tuesday. S&P had downgraded the issuer’s long-term rating to B- from B in the beginning of the month with refinancing pressures for its 2021s and strained liquidity, according to Reuters. S&P estimated cash balances of RMB 1.5bn ($226mn), and bullet maturities over the next six months totaling up to RMB 3.4bn ($511mn). Of the $511mn, $200mn are outstanding through the 7.99% 2021s bonds that carry a guarantee from Shandong Sanxing. S&P noted that Shandong Sanxing had recently announced new funds worth RMB 2.3bn ($346mn) from China Cinda Asset Management Co. Ltd., which helped improve market sentiment on the company, alleviating refinancing pressures for maturities due in September and October 2020. The 7.99% bonds due 2021 are currently trading at 67.8 cents on the dollar, down 7.6 points since Tuesday’s close.

Shandong

 

Term of the Day

Transition Bonds

Transition bonds are bonds aimed at industries with high greenhouse gas (GHG) emissions a.k.a. “brown industries” to raise capital with the objective of becoming “less brown” and thereby shift to greener business activities. Industries issuing transition bonds could range from mining, utilities, transport, chemicals etc. These bonds are different from ‘Green Bonds’ in that the use of proceeds is less clear; also the latter are generally issued by industries/companies already on the path of reducing emissions.

Etihad Airways is  planning to sell dollar denominated transition Islamic bonds or sukuk, the proceeds of which are expected to be used to gradually switch to environmentally sustainable operations.

 

Talking Heads

On investors’ bet that US recovery will force long term bond yields higher

Andrew Sheets, chief cross-asset strategist at Morgan Stanley

“If you look at how much yields can go down, compared with how much they can go up, it is an attractive trade,” he said. “The two catalysts for reduced uncertainty are a vaccine, which we could have a readout on in the second half of November, and the election.”

Russell Clark, chief executive of Russell Clark Investment Management

“Treasuries are obvious shorts, just like corporate bonds,” said Mr Clark, whose fund is up 8.4 per cent this year. “The real issue is when will the Fed let [prices] fall,” he added. “On that, I have no idea.”

On EU’s first social bond setting global demand record for over $275 billion in orders

Jan von Gerich, chief strategist at Nordea Bank Abp

I was expecting a three-digit book but not quite this high,” said von Gerich. “These bonds were clearly eagerly awaited, and these issues only strengthen the picture that there is a huge demand for bonds at the moment.”

James Athey, investment director at Aberdeen Standard Investments

“It’s another grab for yield,”, said Athey. “You look at where it trades relative to Germany and you look at where it trades relative even to France, you would suggest this is high-quality paper with a yield pick-up against similarly-rated issuers in the region.”

On inflation signs possibly thwarting Fed’s plans to leave interest rates unchanged – James Bianco, president of Bianco Research

“The Fed is like a post in the ground and the market is like a horse tied to that post,” he said. “When that horse gets spooked by something — call it inflation — it could tear the post right out of the ground and run wherever it wants. It will run, and the Fed might have no choice but to follow it.” “The market loves the idea of stimulus, and it’s really been pushing it because it doesn’t perceive inflation as a problem,” Bianco said.

On borrowers returning to Turkey’s debt market after international debt sale – Mustafa Bagriacik, senior country officer for Turkey and Azerbaijan for JPMorgan Chase & Co.

“With this deal, international capital markets will open up for issuances from Turkey again,”, said Bagriacik. “We expect the interest in Turkey’s debt market to come back next year as international investors see more stability in the economy.”

“Doing the right things on the monetary and fiscal policies will attract more investors,” Bagriacik said. “As the country implements market-friendly policies in the right direction, I am hopeful that people will first invest in fixed-income assets and then move to equities locally.”

“In general, investors like Turkey corporate risk so I’d suspect more Eurobond issuances from Turkish corporates” going forward, Bagriacik said. “Every new deal will make the market more confident,” Bagriacik said. “Corporate issuances are more of a cost concern rather than a matter of accessibility. We have a strong pipeline for the upcoming period.”

On Oman seeking to boost investor confidence for bond sale by hinting possibility of bailout from neighbours

Todd Schubert, head of fixed-income research at Bank of Singapore

“Given the weakness in external balances, the buyers will likely be those who ascribe a greater probability of support if it comes down to it, in the Bahrain-type of model,” said Schubert.

Abdul Kadir Hussain, the head of fixed-income asset management at Arqaam Capital in Dubai

“The new deal comes at a tricky time for the country,” said Hussain. “The market knows they need the funding. It’s relatively close to year-end, so investors generally tend to get a bit defensive around this time of the year anyway.”

On Bolivia dollar bonds tumbling following election results – Claudia Calich, a London-based money manager

“This isn’t an Ecuador or Argentina for the next six to 12 months, but there could be greater challenges if they don’t put the proper policies in place and reassure investors,” Calich said.

 

Top Gainers & Losers – 21-Oct-20*

BondEvalue Gainer Losers 21 Oct

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