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

US Benchmark & Global Indices 29 Jul

Sentiment soured overnight on Wall Street as democrats and republicans argue over the stimulus plan, raising doubts about whether an agreement can be reached by Friday when millions of Americans stand to lose unemployment benefits. US consumer confidence slipped to 92.6 from June’s 98.3 and some disappointing quarterly earnings added to the worries. US treasuries were in demand ahead of the FOMC meeting outcome today and yields dropped 2-5 bps across the curve. CDS spreads widened slightly for US and Europe and primary issuance markets’ supply trail last year’s pace for the month with only three days left. Asian markets are opening lower this morning.

 

New Bond Issues

  • China’s State Grid $ 5/10yr @ T+140/165bp area
  • Sunac China Holdings $ 4NC2 @ 7.25% area
  • Ronshine China $ 200 mio 4NC2 @ 7.25% area

New Bond Issues 29 Jul

Adani Ports and Special Economic Zone raised $750mn via a 7Y bond at a yield of 4.2%, 42.5bp inside initial guidance of 4.625% area. The bonds, with expected ratings of Baa3/BBB–/BBB–, received final orders of over $2.15bn, 3.07x issue size.

China Construction Bank Corp Hong Kong branch (CCB HK) raised a total of $1.2bn from a dual-tranche green bond offering. It raised $500mn via 3Y bonds at a yield of 1%, 93bp over Treasuries and 42bp inside initial guidance of T+135 area. It also raised $ 700mn via 5Y bonds at a yield of 1.25%, 105bp over Treasuries and 45bp inside initial guidance of T+150bp area. The green bonds have an expected rating of A1.

Chinese developer Country Garden Holdings raised a total of $1bn via a dual-tranche bond offering. It raised $500mn via 5.5Y non-call 3.5Y (5.5NC3.5) at a yield of 4.2%, 40bps inside initial guidance of 4.6% area. It also raised another $500mn via 10Y non-call 5Y (10NC5) at a yield of 4.8%, 50bp inside initial guidance of 5.3% area. The bonds, with an expected rating of BBB-, drew over $7.3bn when final guidance was announced, 7.3x issue size.

CSC Financial, a full-service securities firm with a nationwide network in China, raised $500mn via a debut 5Y bond to yield 1.763%, 150bp over Treasuries and 50bp inside initial guidance of T+200bp area. The bonds, with expected ratings of Baa1/BBB+, drew final orders over $5.4bn, 10.8x issue size. Wholly owned subsidiary CSCIF Asia will be the issuer with a guarantee from the parent company.

 

Rating Changes

Fitch Revises Outlook on Japan to Negative; Affirms at ‘A’

Moody’s downgrades Fosun to Ba3; changes outlook to negative

The Fed Extends Lending Facilities by 3 Months till 2020 End

The Federal Reserve Board extended its lending facilities by three months, now scheduled to expire on December 31. The extension has been granted to send a signal to the participants that the facility will be available to aid the economic recovery in the aftermath of the CoVid-19 pandemic. The lending facility has played an important role in stabilizing the economy by improving market functioning since March, when fears over the pandemic led to a lack of liquidity and froze the markets. It also helped to increase the flow of credit to households, businesses and state and local governments. As per CNBC, total loans have been to the tune of $10bn as per the most recent filing that the Fed has made to the Congress on the programs’ activities. The Municipal Liquidity Facility is already set to expire on December 31, with the Commercial Paper Funding Facility set to expire on March 17, 2021. The extensions is applicable to the following:

  • Primary Dealer Credit Facility
  • Money Market Mutual Fund Liquidity Facility
  • Primary Market Corporate Credit Facility
  • Secondary Market Corporate Credit Facility
  • Term Asset-Backed Securities Loan Facility
  • Paycheck Protection Program Liquidity Facility
  • Main Street Lending Program

According to the Treasury Secretary Steve Mnuchin, “The extraordinary Federal Reserve response to the COVID-19 pandemic, supported by Treasury’s equity capital, has played a vital role in improving liquidity and restoring market function,” He added that “Through this extension, we will continue to support the flow of credit to American workers, businesses and municipalities.”

For the full story, click here

 

S&P Upgrades Tesla to B+ and Netflix to BB

S&P Global Ratings upgraded the world’s most valuable carmaker, Tesla Inc. from B- to B+ with a stable outlook. The two notch upgrade was on the back of strong second quarter (Q2) earnings that showed improving profitability and cash flow generation. While US light vehicles sales witnessed a 35% decline in Q2, Tesla saw just a 5% drop in deliveries for the same period. S&P expects ongoing improvements in product and manufacturing costs coupled with improved improved aftermarket software and connectivity revenue to help Tesla sustain EBITDA margins over 10% over the next two years, which will augur well for the electric carmaker’s cash flows. Its debt to EBITDA is expected to fall below 3.5x in 2021 and the $8.6bn of cash on its balance sheets should support expansion of its manufacturing facilities and allow it to address the maturing convertibles over the next 12 months.

In the chart below, we have plotted the price of Tesla’s $1.8bn 5.3% bonds due 2025 since issuance with a history of its rating actions. Recent investor confidence in the company is evident, as its bonds have been trading at a premium to par since June this year.

Teslas 5.3% Bonds Due 2025 with Rating Action History (1)

For the full story, click here

Another American “new-age” company, Netflix was upgraded by S&P to BB from BB- with a stable outlook. S&P cited accelerating subscriber growth, improving margins and positive trends for the streaming video on demand (SVOD) industry as reasons for the one notch upgrade. It added that Netflix is likely to generate positive free operating cash flow (FOCF) in 2020 given delays in production from the pandemic. However, the longer-term impact of the pandemic will likely reduce the FOCF deficit in 2021 and accelerate it towards FOCF break-even. Consumers have been spending more time at home due to the pandemic, which has increased engagement with video content. Netflix added 26mn subscribers in the first half of 2020, more than double last year’s addition of 12mn for the same period. S&P expects net subscriber additions to cross 35mn this year.

Like we did for Tesla above, we have plotted the price of Netflix’s $1bn 4.375% bonds due 2026 since issuance with a history of its rating actions. Excluding the March mayhem in the financial markets this year, Netflix’s bonds have been trading at a premium to par since mid-June last year.

Netflixs Bond Rally Leading Up to The Upgrade (1)

For the full story, click here

 

Moody’s Lowers Vedanta’s Outlook to Negative; Rating Affirmed at B1

Moody’s affirmed Vedanta Resources Limited’s B1 corporate family rating and B3 rating on the company’s unsecured bonds, while changing its outlook to negative from rating under review. The unsecured bonds are rated two notches lower due to the complex structure of the group. The negative outlook reflects the company’s weak liquidity and sizeable upcoming refinancing needs under extremely challenging market conditions. The rating action is based on a forecast that the company’s adjusted debt/EBITDA will be at 5.0x-6.0x in 2021 and will improve to 3.5x-4.0x during fiscal 2022. The privatization of the company is considered a credit positive move even though this could result in an increase in leverage as it would aid in simplifying the company’s complex group structure and give it better access to future cash surpluses and cash of around $1.7bn held at Vedanta Limited and its subsidiary, Cairn India Holdings. The Moody’s commentary echoed S&P’s in May, when S&P said, “A successful privatization of Vedanta would improve Vedanta Resources’ access to the subsidiary’s cash flows. This will be due to more efficient dividend upstreaming (compared to about 50 per cent that is currently paid to minority shareholders).”

Anil Agarwal, who along with his family holds a 50.14% stake in Vedanta had announced the delisting of the company in the first half of May. As per the initial offer, the share buyback was priced at INR 87.5 per share, totaling a cost of INR 16,000 crore ($2.14bn) to the company. However, the shares have surged since the privatization news and according to business today the delisting of the company could cost the promoter an additional INR 4,000 ($534.5mn). The bonds of Vedanta had surged in the second half of May after the announcement. However, these have cooled off in June and July. The 8.25% and 7.125% bonds due 2021 and 2023 were trading at 86 and 67.5 cents on the dollar respectively.

Vedanta Dollar Bonds

For the full story, click here

 

Pemex Reports Nearly $2 Billion Loss in Q2

Mexican state-owned oil major, Pemex reported a net loss of MXN 44.3bn ($1.9bn) for the second quarter, 16% lower than its net loss of MXN 53bn ($2.4bn) for the same period last year. Revenue on the other hand more than halved from MXN 377bn ($17.2bn) last year to MXN 182bn ($8.3bn) this quarter. This adds to the bad news for Pemex as its former CEO Emilio Lozoya made his first appearance in court after being extradited to Mexico by Spain to face corruption charges. The former Pemex boss has accepted state protection in exchange for naming politicians who accepted bribes. The court hearing is related to charges of money laundering and linked to the company’s purchase of a fertilizer plant from AHMSA in 2013. While production was flat at 1.673mn barrels per day, prices for Mexico’s crude export mix averaged about $24 per barrel during the quarter, or about 60% less than during the same period in 2019. Pemex’s debt pile rose by $2.4bn to $107.2bn, one of the largest for any oil company worldwide. Aaron Gifford of asset manager T Rowe Price said, “No one is optimistic on Pemex’s finances but there’s the sense that they’ll be OK in the very near term and when they’re not OK, the government will step in.” Pemex’s dollar bonds traded largely unchanged on the secondary markets.

For the full story, click here

 

Term of the Day

Portfolio Trading

Portfolio trading, as the name suggests, refers to the practice of bundling several securities into a single package (portfolio) to trade. This technique, often adopted by institutional investors, improves efficiency in trading as it involves trading multiple securities in a single trade. In a portfolio trade, an asset manager first picks the basket of securities to buy or sell, and then analyzes them on various metrics such as liquidity, inclusion in ETFs and transaction size. Once constructed, an order is sent, either directly to or over trading platforms, which quote a price reflecting the value of all the securities the portfolio contains.

Technology coupled with illiquidity seen in corporate bonds during the March mayhem this year has made portfolio trading increasingly popular. David Arnaud, a fixed income fund manager at Canada Life Investments said, “We have been doing (portfolio trading) a lot more since March and that’s because it reduces the size of the outright risk associated with a one-way trade on a single bond.”

For more on portfolio trading, click here

 

Talking Heads

On the Reign of the Dollar in the Global Foreign-Exchange Markets

Goldman strategists including Jeffrey Currie

“Gold is the currency of last resort, particularly in an environment like the current one where governments are debasing their fiat currencies and pushing real interest rates to all-time lows,” wrote Goldman strategists. There are now, they said, “real concerns around the longevity of the U.S. dollar as a reserve currency.”

“The resulting expanded balance sheets and vast money creation spurs debasement fears,” the analysts at Goldman wrote. This creates “a greater likelihood that at some time in the future, after economic activity has normalized, there will be incentives for central banks and governments to allow inflation to drift higher to reduce the accumulated debt burden,” they said.

Michael Krupkin, head of G-10 FX spot trading for the Americas, at Barclays Plc

The U.S. “isn’t anywhere close to losing its reserve currency status given the depth of capital markets and overwhelming volume of U.S. dollar-denominated global transactions,” said Michael Krupkin.

On Sovereign Wealth Funds Joining the Fight Against Covid

Kevin Bong, head of asset allocation at GIC, which invests Singapore’s more than $100bn worth of foreign reserves

“We may be called on,” said Kevin Bong. “We may see outflows as Singapore uses its reserves to support government policy,” he said.

Shin Sung-hwan, president of the Korea Money and Finance Association and a professor at Hongik University in Seoul

Investment funds such as South Korea’s National Pension Service, one of the largest pension funds in the world, with about $600bn under management, “are vulnerable to political influence”, says Shin Sung-hwan. “They must minimise the risk of politicisation. They need to be more independent and have the right governance.” The NPS, for example, expects inflows for the next 10 years but then, that trend will dramatically reverse, according to calculations from Mr Shin.

Suyi Kim, the Hong Kong-based head of Asia-Pacific for Toronto-based Canada Pension Plan Investment Board, which shepherds around $300bn on behalf of the nation’s retirees

“The slowing economy means we are looking at lower contributions, while low rates mean expected returns are going down and may even be negative in real terms,” says Suyi Kim. “And many funds are facing liquidity issues since [they] have to set aside money in case they are asked by the government to share the burden and perform ‘national service’,” she added.

Ahn Hyo-joon, chief investment officer at the NPS

As a result of this and other market headwinds, “we have to put more weight on risk assets”, says Ahn Hyo-joon. “Central banks have driven yields to zero,” Mr Ahn adds. “It is a big obstacle to meet our [targeted] returns and achieve our dual mandate of profitability and sustainability. The fund has little choice other than to diversify its investments, he says. “That means putting more money offshore…and more money into alternatives,” such as private equity and real estate.

 

Top Gainers & Losers – 29-Jul-20*

BondEvalue Gainer Losers 29 Jul

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