S&P and Nasdaq ended marginally higher by 0.3% on Friday. Barring the energy sector, others were in the green. The upcoming week sees big tech, the likes of Apple, Amazon and Microsoft reporting earnings. US 10Y Treasury yields were down 4bp and overall markets left hanging on stimulus plans before the elections. US Markit Flash PMIs showed positivity across the manufacturing and service sectors. Germany and French PMIs showed the services sectors were soft while manufacturing rebounded. US IG CDS spreads were down 0.6bp while HY was flat. European equities were flat while Europe main and crossover CDS spreads tightened 1bp and 4.6bp respectively. Asian equities are mixed, Asia ex-Japan CDS spreads are flat and no new bond deals today due to a holiday in Hong Kong.
We are conducting a Bond Masterclass termed as A Practical Introduction To Bonds this Wednesday, October 28. This is a 90 minute interactive session which will cover the key fundamentals of bond investing. This would be followed by more advanced topics on Thursday and Friday.
New Bond Issues
New Bonds Pipeline
- Lenovo rated $ Bond
- Korea Land & Housing $ Bond
- Gansu Provinial Highway Aviation Tourism Investment Group $ Bond
- Kookmin Bank $ bond
- Galaxy Pipeline Assets Bidco $ Bond
Rating Changes
Fitch Upgrades Intralot’s Senior Unsecured Notes to ‘CC’; Affirms IDR at ‘CC’
Moody’s downgrades the Isle of Man’s ratings to Aa3, outlook stable
Correction: Fitch Downgrades Morocco to ‘BB+’; Outlook Stable
Italy Outlook Revised To Stable From Negative By S&P ; Ratings Affirmed At ‘BBB/A-2’
Moody’s withdraws Delphi Technologies’ ratings after being acquired by BorgWarner
Emirate of Ras Al Khaimah Downgraded To ‘A-‘ By S&P On Increased Macroeconomic Risks; Outlook Stable
Sharjah Downgraded To ‘BBB-‘ By S&P On Increased Risks To Its Fiscal Position; Outlook Stable
Fitch Affirms MUFG Securities (Canada) Ltd.’s LT IDR at ‘A-‘; Outlook Revised to Stable
The Week That Was
US IG issuance was up 46% to $24.75bn while HY fell 11% to $6.9bn over the previous week. LatAm issuance was flat at $1.1bn. EU G3 issuance was down 24% from the previous week to $17bn while GCC issuance was up 3.6x over the previous week to $4.12bn, which included Oman’s $2bn issue, QIB’s $750mn sukuk and ICD’s $600mn sukuk. Asia ex Japan primary markets were busy with $12.65bn of issuance, which included popular names such as Foxconn and Greentown but also new names like Wens Foodstuff and Meituan. Bloomberg also reported Asia ex-Japan dollar bonds surpassing previous full month records for October at ~$31bn with a week to go.
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Sri Lanka’s Dollar Bonds Drop Under Pressure from Washington
Sri Lanka’s sovereign bonds dropped over 4% on Friday as the US urged the Asian island nation to make “difficult but necessary choices” on its economic relations concerning China. US Secretary of State Mike Pompeo would be visiting Sri Lanka this week and is to address the influence of China over Sri Lanka through debt-trap diplomacy (Term of the day, explained below). China’s foreign ministry spokesman dismissed the comments calling it a “Cold War mentality”. President Gotabaya Rajapaksa recently said that he plans to restart discussions with Beijing on a a free-trade agreement, following a high-level meeting between the two countries mentioning this is not a debt-trap. Last week, the President also clinched a majority vote to amend the constitution – increasing his powers, giving a higher say in appointing top officials and an ability to remove the President and Prime Minister’s office from the Auditor General’s scrutiny. The overall political context has kept bond markets worried.
Moody’s last month downgraded Sri Lanka to Caa1 Sri Lanka to Caa1, by two-notches stating that it expects Sri Lanka’s debt to GDP to cross 100%. CEIC data shows Sri Lanka has foreign exchange reserves of $6.2bn as of September 2020, a drop of ~$750mn from August levels. Overall, Sri Lanka has a total debt outstanding of $55.8bn, of which 60% is in local currency and the remaining 40% is in foreign currency. Total debt repayments amount to $1.71bn by year-end. We have plotted Sri Lanka’s upcoming debt repayments in the histogram below, which includes local and foreign currency debt.
On Friday, Sri Lanka 5.875% and 7.85% bonds due 2022 and 2029 fell 4.1% and 4.2% to 67.1 and 60.4 respectively.
For the full story, click here
Amazon Gets Temporary Stay on Future Retail’s Deal With Reliance In Singapore Court
Amazon scored the first victory over Future Group and Reliance in the battle for India’s retail sector. The world’s largest online retailer managed to get a temporary stay on Future Group’s $3.37bn deal to sell assets to India’s Reliance Industries. Amazon had sent a legal notice to Future Retail for breach of contract on sale to Reliance earlier this month. In its ruling, the Singapore based arbitration court restrained Future Retail Ltd. and its founders from going ahead with the sale to Reliance Industries. The breach of contract is related to the non-compete clause in its contract with Amazon, which owns 7.3% of Future Retail via its 49% stake purchase of Future Coupons for ~INR15bn (~$205mn) in Aug 2019. Reliance, however shrugged-off the stay order stating that it had entered into the transaction to acquire Future Retail “under proper legal advice” and that “RRVL intends to enforce its rights and complete the transaction in terms of the scheme and agreement with Future group without any delay.”
Future Group has been facing a severe liquidity crunch this year as the pandemic led to a drop in revenues while debt-servicing costs piled up. It managed to pay its debut coupon on its debut dollar bond at the eleventh hour at the end of its grace period in late August but defaulted on its local currency debt earlier this month. It has been looking to sell its assets to Reliance to get over its cash woes. However, now with the deal under the scrutiny of the court, the group may be forced to resort to a debt restructuring plan to prevent its loan from being declared a non-performing asset (NPA), according to a report in the Economic Times. A reclassification of loans as NPA has a direct bearing on the company’s valuation and potentially could impact the deal with Reliance. India’s consumer retail sector is estimated to be worth $1tn. While Amazon is the biggest online retailer in India, Reliance is India’s biggest brick and mortar retailer. Reliance is expanding its retail operations to the online domain and is seen to challenge the dominance of Amazon.
Yields on Future Retail’s dollar bonds have risen by ~500bp since Amazon filed the litigation to 14.9% currently with a price of 71.5 cents on the dollar, reflecting investors’ fears over its ability to service its dollar debt.
For the full story, click here
Tata Steel’s Europe Business Rumored to Merge With Sweden’s SSAB
Swedish steelmaker SSAB is reportedly considering an association with Tata Steel’s Europe business amongst its merger options, according to Bloomberg sources. This is expected to be a backup plan to SSAB’s deal with Thyssenkrupp, given news of Liberty Steel’s indicative offer to Thyssenkrupp. After Tata Steel and Thyssenkrupp were not able to have a joint venture last year due to regulatory actions, an association with SSAB could be an option as Chairman Natarajan Chandrasekaran talked about the need to restructure its European business sustainably in August. Abja’s 5.95% bonds due 2024 which are guaranteed by Tata Steel were unchanged at 104.75, yielding 4.56%.
For the full story, click here
Oman’s New Dollar Bonds Slump on Secondary Markets
Last week, Oman raised $2bn via dollar bonds across two tranches. The bonds have now fallen 1.3-3.0% on the secondary markets after the bonds priced on October 22. Its 7.375% bonds due 2032 have fallen almost 3 points to 97.05 while its 6.75% bonds due 2027 have fallen 1.3 points to 98.66, down from issue price of 100 for both tranches. The new 2032s/2027s are now yielding 7.76/7% respectively on the secondary markets. Soon after the new bonds were priced, Oman’s Finance Ministry stated that the sovereign “will need further measures to keep its budget deficit in check”, adding that the budget deficit may average 16% of GDP over the next five years, or OMR 5bn ($13bn) annually between 2021 and 2025. The Finance Ministry said that public debt could rise to 130% of GDP in 2025 vs. an estimated debt to GDP of ~78% in 2020 as per the IMF. The challenging financial position of Oman led S&P to downgrade the sovereign by one notch to B+ last Monday.
For the full story, click here
Cenovus to buy Husky in $7.8bn deal
Cenovus Energy announced over the weekend that it will be buying Husky Energy for $7.8bn. The new company will be worth $18bn with 61% held by Cenovus shareholders and the remaining by Husky’s. They mentioned annual synergies amounting to $1.2bn to be achieved majorly within the first year with free cash flows at $36 a barrel for WTI crude. Cenovus has paid a 21% premium (overall 23% including warrants) to Husky’s shareholders. This deal comes after ConocoPhillips agreed to buy Concho Resources for $9.7bn last week. FT notes that the Cenovus deal points to the sector’s further consolidation in the hands of local companies in Canada. Cenovus’ 4.25% bonds due 2027 are up ~1 point to 94.3, yielding 5.3%. Husky’s 4% bonds due 2024 were flat at 106.82, yielding 1.81%.
For the full story, click here
Term of the Day
Debt-trap Diplomacy
Also known as debt diplomacy, this refers to lending money that may not get repaid in order to get concessions, in simple terms. This has particularly been targeted at China where China has lent money cheaply to developing countries that might need help on debt relief, funds for projects involving substantial investments and their like. In return for the loan(s), China asks for concessions – in the case of Sri Lanka, they were forced to hand over control of the Hambantota port project to China for 99 years giving China a key port position and a strategic advantage. Similarly, in exchange for funds, China constructed its first military base in Djibouti.
Talking Heads
Carsten Brzeski, economist at ING
“The ECB could pave the way for more stimulus in December without showing its cards,” said Brzeski.
Lael Brainard, Fed governor
“Apart from the course of the virus itself, the most significant downside risk to my outlook would be the failure of additional fiscal support to materialise,” said Brainard.
“We are encouraged that despite today’s unpredictable global climate, China continues to open up its financial markets, presenting enduring opportunities for global investors and Chinese financial institutions,” he said.
“Rising market perceptions that this week’s issuance marks the start for the irreversible establishment of a joint euro safe asset adds weight to the general spread convergence,” said Rieger.
“Under the low-interest rate environment, the guaranteed 2 per cent yield, as well as the semi-annual interest payment, is very attractive to investors who seek a stable return,” said Chow.
On $476 million payout for Vedanta investors before potential downgrade – in a report by S&P Global
“The significant reduction in cash at the subsidiaries in this scenario would make subsequent debt maturities, for example the $1 billion bond due in July 2022, more challenging”, S&P Global said.
“It tells you investors are willing to take on a greater level of risk,” he said.
“The massive rally in all asset prices is destroying their potential to provide investors a return comparable to those they have gotten used to in recent decades,” Dulake and team wrote.
Top Gainers & Losers – 26-Oct-20*
