Advanced Theory & Practice of Bonds

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1-2 December 2021

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US Benchmark & Global Indices 4 Dec

S&P ended flat, while Nasdaq was up 0.2%, DAX and FTSE up 0.4% and CAC up 0.2%. Boeing’s shares rallied 6% while their longer maturity bonds due 2030, 2050 and 2060 were up 1.1, 1.6 and 2.8 points respectively following a Ryanair order for 75 extra 737 Max jets at a price of $9bn. Tesla’s shares rallied 4.3% after Goldman Sachs upgraded them to “buy” ahead of its inclusion in the S&P500. Senate Majority leader McConnell said there had been some movement towards a compromise congressional aid bill though the timing was unclear. Initial jobless claims for the previous week fell by 75k to 712k, falling for the first time in three weeks and bettering expectations of 775k. On the vaccine front, Pfizer will be forced to reduce vaccine production by half for 2020 due to supply chain problems. US10Y yields dipped 3bp to 0.91% while US IG CDS spreads tightened 0.3bp and HY widened 0.7bp. EU main CDS spreads were tighter 0.7bp while crossover CDS spreads were 8.6bp tighter. Asia ex-Japan CDS spreads were tighter 0.4bp. Chinese and Japanese equities have opened lower ~0.3% while other Asian markets are up ~0.3%.

 

New Bond Issues

  • Jinan Lixia $ 3yr @ 4.7% area

New Bond Issues 4 Dec

E-House raised $200mn via a 2.5Y bond at a yield of 7.875%, 22.5bp inside initial guidance of 8.1% area. The bonds were rated BB-, on par with the issuer. Hong Kong-listed E-House provides real estate agency, brokerage, data and consultancy services to property developers in China, including EvergrandeVanke and Country Garden, which are also shareholders.

Barclays raised $1.5bn via 4Y non-call 3Y (4NC3) bonds at a yield of 1.007%, 35bp inside initial guidance of T+115bp area. The bonds have expected ratings of Baa2/BBB/A. Proceeds will be used for general corporate purposes of Barclays and its subsidiaries to further strengthen their capital base.

 

New Bond Pipeline

  • Vedanta $ bond
  • Suzhou $ bond

 

Rating Changes

 

Vedanta Downgraded By Moody’s to B2 from B1

Indian mining major Vedanta Resources Limited (VRL) was downgraded a notch by Moody’s to B2 from B1 late on Thursday. Their senior unsecured notes were downgraded to Caa1 from Ba3 and all ratings remain under review for downgrade. Moody’s highlighted persistent weak liquidity, high refinancing needs and governance issues. VRL’s liquidity is challenged with $2.8bn in debt maturing from January 2021 to June 2022 including intercompany maturities of $507mn and $325mn besides interest payments of $470mn. Moody’s cautions that the group’s complex structure with less than 100% shareholding in key operating and cash rich subsidiaries restricts the amounts of dividends they could get from them. While VRL’s funding has benefitted from Indian and MNC banks’ support, VRL being made to repay its $425mn debt maturity recently from one of its relationship banks, as opposed to rolling it over or refinancing it shows a sign of reduced bank support.

Besides, subsidiary Vedanta Limited’s (VDL) latest statements contain a qualified conclusion from the auditors pertaining to a $956mn intercompany loan from VDL’s wholly owned subsidiary Cairn India to the holdco VRL. Moody’s added that at a time when liquidity has been relatively weak, four senior management personnel have left this year while statutory auditors have opted not to be re-elected while providing qualified reports and conclusions. Also credit strength has been further affected with an accident in their South African mine leading to suspension of operations hurting cash flow generation. On the positive side, Moody’s expects VRL’s consolidated adjusted debt/EBITDA in March 2021 to marginally improve to less than 5x from ~5.5x in September 2020 and 5.3x in March 2020.

Meanwhile, VRL hired bankers for a dollar bond issuance to fund a tender offer of its $670.157mn 8.25% 2021s. VRL is offering to buy back any and all of its 8.25% 2021s, using proceeds from the new issue. It will pay par for any bonds tendered by the early deadline of December 17, or $980 per $1,000 in principal for bonds tendered after the early deadline but before January 4. Vedanta’s dollar bonds were lower with their 8% 2023s and 8.25% 2021s down 1.2 and 1 point to 67.5 and 93.5 respectively.

For the full report, click here

 

Citi Raises $1.5 Billion via a Perpetual Preferred Stock Issuance

American banking major Citigroup raised $1.5bn via a perpetual non-call 5Y (perpNC5) preferred stock issuance, priced to yield 4%. The final pricing on Thursday was 50bp inside initial guidance of 4.5% area. The securities were issued at par, pay a quarterly coupon and have expected ratings of Ba1/BB+/BBB-. If not called by the call date of December 10, 2025, the preferred’s coupon will reset to the 5Y constant maturity Treasury (CMT) yield plus a spread of 359.7bp. Citi was the sole bookrunner for the deal.

 

Itaú Unibanco Could Raise ~$1 Billion from Sale of XP Stake, Dollar Bonds Inch Up

Brazilian lender Itaú Unibanco said that it could earn up to $1.05bn from the sale of part of its stake in XP Inc through a follow-on equity offering on Nasdaq. Itaú added that its subsidiary ITB Holding Brasil Participações sold $935mn worth of shares, representing 4.4% of XP’s capital stock and that it could sell a total of 5% if it exercised the greenshoe option. Itaú now holds 41.1% of XP, but it will lower its overall stake to 40.5% if it sells the extra shares. XP priced 31.7mn common equity at $39 each in the follow-on offering on Wednesday. The brokerage firm sold 7.1mn shares while ITB sold 24.5mn. XP pocketed $278 million for its shares. Itaú also announced on Thursday that it has raised BRL 2.1bn ($408mn) via local currency bonds to boost its tier 2 capital ratio. If the issuance is approved by the central bank, Itaú Basel ratio would increase by 0.2%.

Itaú’s dollar 4.625% perps rose by ~3 points to 97.35 while its 6.125% perps rose by ~1 point to 102.1 on the secondary markets.

For the full story, click here

 

Braskem Idesa’s Dollar Bonds Fall After Mexico’s Decision to End Nat Gas Supply

Braskem Idesa has pushed back against a decision by Mexico’s natural gas control center Cenagas to cut off services to transport natural gas supplied by Pemex to its Etileno XXI petrochemical complex in Veracruz state. The firm argued that the move by the regulator violated its rights, claiming it would take any legal steps necessary to revert the decision. According to Braskem, the decision led to a stoppage in natural gas supplies starting on December 1, forcing the full shutdown of the plant’s operations. The dispute comes in the context of protracted negotiations between Braskem and NOC Pemex about a contract for ethane supply signed in 2010, when the Etileno XXI plant was built. The NOC has repeatedly asked to adjust the terms of its ethane supply agreement, which the government claims unduly favor Braskem. President López Obrador stated that the gas transport contract with Cenagas had not been unilaterally cancelled but had instead reached its natural expiration date and the administration had refused its renewal, which would protect the government from any legal blowback.

Braskem

Braskem Idesa Sapi, the Mexican arm of Braskem, saw its 7.45% dollar bonds due 2029 plummet 10 points to 90.6 cents on the dollar on the news.

For the full story, click here

 

China’s CNOOC & SMIC Among New US DoD List of Chinese Military Companies

In the ongoing deterioration in trade ties between the US and China, the US Department of Defense (DoD) released the tranche 4 list that contains the names of additional “Communist Chinese military companies” operating directly or indirectly in the United States. China National Offshore Oil Corp. (CNOOC), Semiconductor Manufacturing International Corp. (SMIC), China Construction Technology Co. (CCTC) and China International Engineering Consulting Corp. (CIECC) figured in the new list. The original tranche 1 list of 20 companies was submitted to Congress in June this year and tranche 2 and 3 with a list of 11 companies was added later. The companies in the list include advanced manufacturing and technology companies including Aviation Industry Corporation of China (AVIC), China Shipbuilding Industry Corporation (CSIC), ChemChina and telecom major Huawei. The DoD release said, “The Department is determined to highlight and counter the People’s Republic of China’s (PRC) Military-Civil Fusion development strategy, which supports the modernization goals of the People’s Liberation Army (PLA) by ensuring its access to advanced technologies and expertise acquired and developed by even those PRC companies, universities, and research programs that appear to be civilian entities.”

Meanwhile, China has also tightened export rules for sensitive tech, which allow it to take action against any country that violates restrictions or endangers national security. The regulation, which came into effect on Tuesday, is widely viewed as a response to US curbs on Chinese technology firms. “I see the Export Control Law as a milestone for China because this new law provides [it] with the first comprehensive regulatory framework for restricting exports of military and dual-use products and technology for national security and public policy reasons,” said Julien Chaisse, a law professor at City University of Hong Kong.

CNOOC is the 3rd largest oil company in China. It also owns US oil and gas fields in partnership with companies like Exxon. It’s 3.3% Perps were most affected and were down 0.68 at ~100.9. These were trading at 109 levels in the second half of November. CNOOC’s other bonds and SMIC’s bonds on the other hand were stable.

https://lh3.googleusercontent.com/-TU9mZvQ94b8/X8nBPvHGfkI/AAAAAAAABRU/WssUkVij5ukqaWAYRI25DIR9TloreTG3gCK8BGAsYHg/s0/2020-12-03.png

For the full story, click here

 

Caixabank and Bankia Get Shareholder Approvals For Merger

Caixabank and Bankia shareholders gave their approval for the merger between the two Spanish lenders over the past two days. In September, Caixabank agreed to buy Bankia for €4.3bn ($5.2bn) in an all-share deal underpinned by annual cost savings of €770mn ($924mn). That would create Spain’s largest domestic lender with over €650bn ($780bn) in assets. The deal is yet to get approval from Spain’s competition watchdog CNMC, which could force divestitures in some businesses or limit the impact of the transaction in some regions where the banks have a dominant market share. Caixa’s EUR 5.25% Perp was up 0.2 to 102.13 yielding 4.2% while Bankia’s EUR 6% Perp was up 0.1 to 103.75 yielding 3.6%.

For the full story, click here

Term of the Day

Negative Convexity

Convexity is a measure of the sensitivity of the bond’s duration to changes in the bond’s yield. In other words, convexity is the measure of the curvature in the relationship between a bond’s yield and price. A characteristic feature of convexity is that the absolute price increase in a bond due to yields falling is more than the absolute price decrease in the same bond when yields rise. Hence convexity is known as bondholders friend and is higher for longer maturity bonds.

A characteristic of callable or prepayable bonds that causes investors to have their principal returned sooner than expected in a declining interest rate environment. In this scenario, investors are faced with ‘call risk’, since the issuer calls back the bond earlier than expected leading investors to a risk of reinvesting their capital at lower rates.

 

Talking Heads

On European Central Bank to extend and boost stimulus to battle longer crisis

Philippe Gudin, chief European economist at Barclays Plc

“The end of the health crisis, which now appears likely in the course of 2021, does not mean the end of the economic crisis,” said Gudin. “The ECB is likely to communicate its willingness to ensure that the path toward a full recovery will continue to be facilitated by very supportive liquidity and financial conditions.”

Lauri Halikka, SEB strategist

“The ECB will adjust its most important policy levers, PEPP and TLTROs, to assure markets that asset purchases remain unchanged through next year,” said Halikka. “A new series of TLTROs will secure favorable funding conditions for banks.”

Claus Vistesen, chief euro-area economist at Pantheon Macroeconomics

“Lagarde will focus on the near-term pain from new lockdowns in calibrating her message, downplaying the otherwise obvious good news on the vaccine front,” said Vistesen.

On China state firms once deemed ‘safe’ now rocked by defaults

Brock Silvers, chief investment officer of Adamas Asset Management

“State-linked credits have been hammered, but the quality of those credits is inextricably connected to government policy, which can be very opaque,” according to Silvers. “State-linked credits can thus be particularly treacherous, especially for investors without significant local expertise.”

Ivan Chung, analyst at Moody’s Investors Services

“Investors should pay more attention to the market competitiveness and solvency of each company, instead of relying too much on government support,” said Chung.

Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group Ltd

“Repricing is already happening in SOE bonds with the low recovery expectations” according to Gallimore.

Rollin Cai, fund manager at HSBC Jintrust Fund Management Co

“As the domestic situation gradually stabilizes, the determination to resolve local debt risks and reduce overall leverage is being reflected in the prudent monetary policy” of China’s central bank, said Cai.

Yuanyuan Li, head of fixed income at HSBC Jintrust

“For bonds that were originally overvalued, we will now definitely require higher premiums and better protection,” said Li. “Investors are returning to look at the fundamentals of pricing by evaluating an issuer’s solvency,” she said, “rather than their government background and ratings.”

On China’s corporate bonds market heading for another year of record defaults

Noelle Chiang, a senior investment strategist with AllianceBernstein

“There remain lots of uncertainties in China’s economic recovery, and there are chances that defaults will arise in the recovery process,” said Chiang. “Investors need to be cautious.”

Martin Dropkin, Fidelity’s head of Asian fixed income

“This is a natural evolution of a bond market, and it actually shows the maturation and the sophistication of the Chinese fixed-income market generally,” said Dropkin. “China government bonds, for investors looking for a bit of diversification, offer a good deal of that, and we think that will continue,” Dropkin said. “Management teams within China are just getting used to talking to investors like us, answering questions. Data flow is improving.”

On the outlook for India’s nonfinancial companies is ‘stable,’ sharp GDP rebound expected

Sweta Patodia, Moody’s analyst

“These improving business conditions will increase rated issuers’ earnings, which we expect to return to pre-pandemic levels by the end of fiscal 2022,” she said. “A combination of higher earnings and reduced capital spending will support (debt reduction) over the next 12-18 months.”

According to Moody’s ratings agency

“Specifically, around 39% of the total ($)16 billion of debt maturing through 2022 pertains to such financially weaker, speculative-grade issuers,” the ratings agency said.

On $5.4 billion drawn by Columbia from IMF flexible credit line – in a statement by the IMF

“The authorities will use the drawing to help meet higher financing needs whilst maintaining strong external buffers in a context of heightened global uncertainty,” the IMF said.

On Euro zone bond yields holding ground as Treasuries calm after sell-off – Annalisa Piazza, fixed income analyst at MFS Investment Management

“Of course, there is a directionality that also comes from the U.S. and speculation that the U.S. could do more fiscal policy that could lead to a bit of a steepening not just into year end, but could be amplified by some profit taking,” Piazza said. “We cannot rule out a slight steepening of the (yield) curve, but this is not going to take yields much higher than they are now.”

 

Top Gainers & Losers – 4-Dec-20* 

BondEvalue Gainer Losers 4 Dec

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