US equities retreated from the rally over the last week as S&P ended marginally lower 0.16% while Nasdaq outperformed, up 0.5% as Tesla continued its rally. US Treasury yields were largely stable with 10Y yields down 1bp at 0.87% even as jobless claims data for the previous week printed at 778k, rising for the second consecutive week, this time by 30k. The FOMC minutes, released on Wednesday, mentioned that the Fed had discussed lengthening the duration of its bond purchases. European equities were mixed with European indices up 1.2%. Oil has moved higher by 7% over the last two days. US IG CDS spreads widened 0.5bp while HY spreads tightened 2.9bp. EU main and crossover CDS spreads widened 0.9bp and 7.1bp while Asia ex-Japan CDS spreads were tighter by 1bp. Asian equities have opened mixed today.
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New Bond Issues
- TML Holdings capped $300mn 3.5NC2.5 at 6% area with letter of comfort (Term of the day, explained below) from Tata Motors
- Sunac tap of $ 6.65% 2024s/ 7% 2025s at 7.2%/7.5% area
- V Credit Holdings $ 2Y at 14.75% area
- Dexin China $ 200 mn 2yr @ 12.125% area
Macquarie Group raised €750mn ($892.5mn) via a 7.25Y bond at a yield of 0.378%,80bp over Mid-Swaps and 30bp inside initial guidance of MS+110bp area. The bonds have A3/BBB+/A- ratings, and received orders of over €3.25bn ($3.9bn), 4.3x issue size. The issuance is part of Macquarie Group’s $10bn Debt Instrument Programme dated June 12 2020.
Central Nippon Expressway raised $400mn via a 5Y climate resilience bond at a yield of 0.894%, 43bp over Mid-Swaps and close to initial guidance of MS+mid 40s area. The bonds have expected ratings of A1/AA+/AAA. Proceeds will be used exclusively to finance eligible projects that are expected to contribute to climate resilience and adaptations, like renewal work on selected bridges, the reinforcement and repair of slopes and the construction of special pavements with improved drainage capacities.
Ganglong China Property raised $150mn via a 364-day note at a yield of 13.5%, unchanged from initial guidance. The Hong Kong-listed company plans to use the proceeds from the unrated issue for refinancing and general corporate or working capital purposes.
- Moody’s upgrades Saudi Electricity’s ratings to A1 on increased government support
- Fitch Upgrades Agung Podomoro to ‘CCC-‘ On Loan Extension, Land Sale
- Transocean Ltd. Issuer Credit Rating Raised To ‘CCC-‘ By S&P Following Debt Repurchases, Outlook Negative; Debt Ratings Revised
- Delhi International Airport Downgraded To ‘B-‘ By S&P On Heightened Liquidity Risks; Remains On CreditWatch Negative
- Moody’s downgrades ratings of South African insurers following downgrade on the South African sovereign; maintains negative outlook
- Banco General S.A. And Banco Nacional De Panama Downgraded To ‘BBB’ By S&P On Same Action On Sovereign; Outlook Stable
- SM Energy Co. Downgraded To ‘SD’ By S&P On Below-Par Debt Repurchases; Senior Unsecured Debt Ratings Lowered To ‘D’
- Fitch Places Crown Resorts on Rating Watch Negative on Increased Regulatory Risks
- ING Belgium S.A./N.V. ‘A+/A-1’ Ratings Withdrawn By S&P At The Issuer’s Request
ECB Official Says Ban on Bank Dividends To Be Lifted in 2021; AT1s Trade Higher MTD
Yves Mersch, vice-chair of the ECB’s supervisory board told the FT on Wednesday that it would be difficult for the regulators to extend the dividend ban on banks beyond this year. He cited legal uncertainty over its enforceability and mentioned that other countries such as the UK would allow banks to resume dividend payouts. Soon after the pandemic spread across the Western countries, the ECB ordered eurozone banks to stop dividend payments and share buybacks to conserve capital in March. Since then, stronger banks have been lobbying for a resumption in dividends early next year. While Switzerland and Sweden have indicated that they would allow banks to payout dividends next year, the Fed and Bank of England have not provided any guidance on this yet. The FT reported that a final decision from the ECB on this would only be made after the central bank publishes its new economic forecasts on December 10.
The restriction on dividends coupled with investors’ hunt for yield has played out well for banks’ additional tier 1 (AT1) perpetual bonds, which have rallied across the board particularly this month. In the table below, we have listed the top performing dollar AT1s in terms of month-to-date (MTD) price returns. European lenders BBVA, Deutsche Bank, Commerzbank and Socgen led the pack with MTD returns of ~5-9% so far this month.
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China Regulators Probe New Energy Vehicle (NEV) Companies; Singles Out Evergrande & Baoneng
Evergrande Group’s dollar bonds reversed intraday gains yesterday, and shares of its electric-vehicle unit fell ~11%, after a Reuters report said that the Chinese state planner had asked local governments to investigate new energy vehicle projects (NEVs) by the company and others in the auto industry. NEVs include battery-powered electric, plug-in petrol-electric hybrid and hydrogen fuel-cell vehicles. The National Development and Reform Commission (NDRC) told local branches to report investments in new-energy vehicle and auto-part projects since 2015 as per SCMP. NDRC had asked local officials to investigate construction and production details of projects related to the property and financial services conglomerate’s NEV unit Evergrande New Energy Vehicle and Baoneng.
Evergrande had set sights on becoming the world’s biggest electric-vehicle maker. The EV unit of the company in September proposed a listing on the Shanghai stock exchange’s Science and Technology Innovation Board. Evergrande has spent more than $3.6bn on an array of EV-related companies as per Bloomberg. Bloomberg says that China’s electric car industry is reliant on government support, subsidies and local government benefits, which has attracted players like Evergrande. Evergrande’s 8.75% 2025s are lower by 0.03 to 77.25 and its 10.5% 2024s are flat at 83.
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Delhi International Airport Downgraded By Two Notches to B- by S&P
S&P has downgraded Delhi International Airport Ltd (DIAL) by two notches to B- from B+, further into junk while continuing to maintain it on CreditWatch Negative. The rating action comes as the rating agency takes cognizance of the delays of over a year in the company’s receipt of commercial property development (CPD) income and deposits from Bharti Realty Ltd. The rating agency said, “The complexity in obtaining Airport Authority of India (AAI) approval for DIAL’s CPD transaction with Bharti Realty is higher than we had expected.” S&P also acknowledged that Bharti Realty and DIAL are in the process of finalising a deal by Dec 31. The deal was earlier expected to close in September. The deal has the potential of bringing ~INR3.6bn/year ($49/mn) and a one time security deposit payment of INR15.3bn ($207mn). The rating agency views DIAL’s capital structure as unsustainable in the absence of the CPD deal even though DIAL’s interest servicing ratio is below 1.0x. The reduced passenger traffic volumes in India have also led to lower revenues which would be inadequate to mitigate the absence of CPD cash flows. However, DIAL’s cash balance of INR29.5bn ($400mn) as of September 30, 2020 is seen to be sufficient to meet its capital spending till Sept. 30, 2021 due to minimal debt maturities during this period.
DIAL’s dollar bonds traded slightly lower with the 6.45% 2029s down 0.69 at 103.8 and 6.125% 2026s down 0.64 at 103.7 on the secondary markets.
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Saudi Electricity Upgraded to A1 by Moody’s
Moody’s upgraded Saudi Electricity Company (SEC) to A1 from A2 on account of increased government support. The outlook on all ratings is negative, in line with the Government of Saudi Arabia (A1 negative). Moody’s revised its assumption of government support to “Very High” from “High” under their methodology for Government-Related Issuers (GRI). This is supported by a proposed new regulatory framework to be implemented on January 1, 2021. The framework will offer a more transparent and predictable compensation mechanism for SEC. In addition, the refinancing of unpaid payables and soft loans in an SAR 167.9bn ($44.8bn) shareholder instrument (SHI) represents further evidence of government support according to the rating agency. The latter leads to a cleaner capital structure given the perpetual nature of the SHI and its subordination to senior debt holders.
Moody’s reports that as of September 30 2020, planned operating cash flows stood at around SAR 25.1bn ($6.7bn) for the next 12 months (after a SAR 3.8bn semi-annual profit payment on the SHI), SAR 8.1bn ($2.2bn) under committed credit facilities and a cash balance of SAR 5.8bn ($1.5bn). The above are insufficient to cover SAR 10.4bn ($2.8bn) of short-term debt, expected dividends of around SAR 2.9bn ($0.8bn) and expected capital expenditures of around SAR 35.7bn ($9.5bn) for the next 12 months. However, SEC is set to generate significant operating cash flows under the new regulatory framework, and will benefit from financial flexibility around the payment of periodic distributions under the SHI and capital spending.
Saudi Electricity’s dollar sukuk were trading higher – the 4.723% 2028s were up 0.13 to 119.13, yielding 2.06% while their 5.06% 2043 were up 0.61 to 124.7, yielding 3.46%.
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Brazil’s Balance of Payments Improve, Inflows Rise & Dollar Bonds Move Up
Brazil’s balance of payment (BoP) position has improved significantly in October. Some of the key metrics revealed for the month of October are as follows:
- The sovereign had a current account surplus of $1.5bn against an expectation of $1.3bn as per a Reuters poll of economists
- The surplus helped it to reduce the 12-month accumulated deficit to the lowest since February 2018
- The overall deficit of 1% of GDP over the last 12 months has been the smallest since February 2018
- Though exports dropped by 8.6% in October, the imports also fell by 26.3% resulting in a trade surplus of $4.9bn during the month. The year has seen a drop of 7.8% in exports and a drop of 15.1% in imports
- The current account deficit till October stood at $7.6bn
The improved BoP position seems to have resonated well with the investors. The country saw inflows of $5.3bn in October, the highest since January 2019. The net inflows of $2.65bn into the domestic stock market was the highest since July 2019 and $2.7bn into the local debt market was the highest since January this year. “The short-term current account dynamics are quite favorable given solid export demand and improving terms of trade compounded by the significant contraction of domestic demand and real effective currency depreciation,” said Alberto Ramos, head of Latin American research at Goldman Sachs in New York. However, according to the central bank, even though the inflows have gained pace during the recent months, they dwarf the outflows of $21.6bn and $27.4bn from the local stock debt market respectively.
Brazil’s longer dated bonds have trended up since the beginning of this month. Its 4.75% 2050s were trading at 106 levels up from 98.5 levels seen in the beginning of the month, a rise of ~7.5%. Similarly, its 5.625% 2041s were trading at 118 levels, up ~8% and its 3.875% 2030s at ~105, up 3.5% from the beginning of the month.
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Merger of Lakshmi Vilas Bank with DBS Cleared
Lakshmi Vilas Bank (LVB) is all set to merge with DBS India as the merger has got the approval from the Indian authorities. The Reserve Bank of India (RBI) had prepared a draft scheme for the amalgamation of LVB with DBS Bank India Ltd. (DBIL), which is a wholly owned subsidiary of DBS Bank Ltd, Singapore earlier in the month. Chennai based LVB with a 94-year history has been struggling for some time now and had been put on a moratorium by the RBI till November 27, similar to the action on Yes Bank in March 2020. Although the merger will be accompanied with the liabilities of the Non-Performing Assets (NPA) of LVB, DBS is seen to gain with the extensive coverage of LVB, its customer base and a deposit base worth INR210bn ($2.85bn). According to the central bank notification, “Customers, including depositors of the Lakshmi Vilas Bank Ltd will be able to operate their accounts as customers of DBS Bank India Ltd with effect from November 27, 2020,”.
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Oil Rallies With Some Oil Company Bonds Inching Up
Brent and WTI Crude have rallied 30% and 28% MTD and some oil company bonds have also rallied in the process. With the vaccine news, expectations of a pending decision by OPEC+ to extend the current production cuts of 7.7mn bpd into next year, rotation trades and inventory drawdowns, oil has been on the rise. Echoing the move in oil have been bonds of oil and energy companies. Over the last three days, oil has risen over 7% helping bonds in the Western hemisphere. A similar move has not been seen across Asia. Below is a chart of some of these companies’ bonds over the last few months.
Term of the Day
Letter of Comfort
Letter of Comfort (LoC) is a letter issued to a lending institution by a stakeholder of the company acknowledging support of the attempt for financing asked by that company. A letter of comfort does not imply that the parent company guarantees repayment of the loan being sought by the subsidiary. It is merely a reassurance to the lending institution that the parent is aware of the credit facility being sought by the subsidiary company, and supports its decision. For example, the TML Holdings $300mn 3.5NC2.5 new issue has an LoC from Tata Motors.
On the Fed’s discussion of providing more guidance on bond-buying strategy “fairly soon”
According to meeting minutes published by US Federal Reserve
“Many participants judged that the Committee might want to enhance its guidance for asset purchases fairly soon,” according to meeting minutes. In addition, “most participants judged that the guidance for asset purchases should imply that increases in the Committee’s securities holdings would taper and cease sometime before the Committee would begin to raise the target range for the federal funds rate,” the minutes showed.
Diane Swonk, chief economist at Grant Thornton
“Moves by Treasury to limit their lending powers at year end are a particular concern. Treasury could be pulling support when the economy needs it most and the Fed will have to fill the void,” said Swonk. “They have to be concerned about the aftershocks of Covid on bankruptcies, defaults and overall financial market stability.”
Brett Ryan, a senior U.S. economist at Deutsche Bank Securities
“At least as of three weeks ago, the committee was more focused on nailing down forward guidance on asset purchases and there didn’t seem to be urgency to provide more accommodation,” Ryan said.
On ECB’s plans to lift ban on bank dividends next year
Yves Mersch, vice-chair of the ECB’s supervisory board
The decision “would all depend on the conservatism of internal models in the banks, on conservatism in provisioning and a sound view of the capital trajectory of a bank”, Mr Mersch said. “In other jurisdictions, there also seems to be a move towards a case-by-case approach,” he said.
Luis de Guindos, vice-president of the ECB
“Provisions have increased but look optimistic in some cases, while guarantees and moratoria may have lengthened the time it takes for weak economic performance to translate into loan losses,” said de Guindos.
On spell of bond indigestion amid emerging market bond bonanza – Stefan Weiler, head of debt capital markets for central and eastern Europe, the Middle East and Africa at JPMorgan
“We can look into 2021 quite optimistically,” Weiler said. “A risk for next year could be stretched valuations if spreads continue tightening and there may be periods of indigestion if new-issue supply is too strong.” “Investors are cash rich, and post the elections and vaccine news it was clear that no one wanted to be on the sidelines during this market rally,” Weiler said.
On debt monetization in Asia given nod by IMF in policy shift
Jonathan D. Ostry, acting director of the IMF’s Asia and Pacific Department
“These are highly unusual and exceptional times,” said Ostry. “In such highly exceptional circumstances, in cases where inflation remains low, debt monetization could be appropriate, provided it is well communicated, time-bound, and implemented within a clear operational framework that preserves central bank independence and does not impede monetary policy,” he said.
Brad Setser, senior fellow on leave from the Council on Foreign Relations and former economist at the US Treasury Department
“The constraints that Asia faced in 1997 simply aren’t there,” he said. “It would be very strange for the IMF to recognize needs for asset purchases to address constraints of zero lower bound in advanced economies and not recognize that some emerging economies are in a similar position,” Setser said.
On increasing regulatory pressure on state-owned coal miner that rattled China’s bond market
Chang Li, a Beijing-based director at S&P Global Ratings
“The Chinese authorities have shown increased tolerance of SOE defaults in recent years and have been encouraging market-based debt restructuring while cracking down on financial misconduct to mitigate potential systemic risk,” he said.
Xing Zhaopeng, a China markets economist at ANZ in Shanghai
“This wave of shock brought by the surprising defaults by state companies like Yongcheng has ebbed,” Mr. Xing said. “But overall, these incidents are like wake-up calls” for investors to be cognizant about default risks,” he said.
On China’s state-owned enterprises forced to issue bonds at higher interest rates after slew of high-profile defaults shatters confidence
Zhang Pan, head of credit rating at a Shanghai-based bond fund
“We used to price SOE bonds based on how strong their government backing was,” said Zhang. “We will have to pay more attention to their fundamentals in the future.
David Huang, a Hangzhou-based bond fund manager
“What we care about is not raising coupon rates by 20 or 30 basis points,” said Huang. “It is whether issuers will make an effort to repay the debt when things go wrong.” “That means hopes of government bailouts remain,” said Mr Huang.
On policy minefield ahead for Turkey as it unwinds Albayrak’s legacy
Hakan Kara, former chief economist at the Turkey central bank
“Unwinding swap restrictions may create volatility in central bank reserves and the currency, which could weigh on market sentiment,” said Kara. “The authorities should design a plan in coordination with banks to ease the offshore restrictions gradually and meanwhile conduct central bank FX purchases to replace the swaps.”
Evren Kirikoglu, an independent market strategist in Istanbul
“No doubt that the next step should be on easing swap restrictions to normalize markets. But it is difficult to move fast on this given thin liquidity in the FX market is making the lira more vulnerable to speculative attacks,” said . “Therefore, I expect the restrictions to be eased gradually.”
Top Gainers & Losers – 26-Nov-20*