Advanced Theory & Practice of Bonds

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1-2 December 2021

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US Benchmark & Global Indices 9 Dec

US equities ended the day higher with S&P and Nasdaq up 0.3% and 0.5% while European shares ended mixed following the latest vaccine and Brexit developments. Tesla plans to raise $5bn via a share sale and Softbank plans to go private according to sources. On the data front, Germany’s ZEW Sentiment saw a strong positive surprise printing at 55 vs expectations of 45.5. The US Supreme Court rejected Trump’s appeal to block Biden’s Pennsylvania’s election win. Regarding the near-term $908bn bipartisan proposal for a coronavirus package, negotiations are hung up on differences over aid to state and local governments and liability protections for businesses. US 10Y and 30Y Treasury yields were flat and 1bp lower respectively. US IG CDS spreads widened 0.1bp while HY widened 4.6bp. Meanwhile, EU main CDS spreads were flat while crossover CDS spreads were tighter 2.6bp. Asia ex-Japan CDS spreads were wider by 0.4bp and Asian equities are off to a good start this morning, up 0.5%-1%.

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New Bond Issues

  • Vedanta $ 3NC2 at 14.5% area
  • Starhill Global REIT S$ at 4.125% area
  • Jinan City capped $200mn 364-day at 2.95%
  • Jinan Hitech Holding $ 3Y at 3.6% area

New Bond Issues 9 Dec

CK Asset raised $500mn via a perpetual non-call 3Y (PerpNC3) bond at a yield of 3.5%, 30bp inside initial guidance of 3.8% area. The bonds have expected ratings of A2 and received orders of over $2bn, 4x issue size. Asset managers took 69%, insurers 14%, financial institutions and banks 10% and private banks 7%. APAC bought 82% and the rest went to EMEA. Panther Ventures is the issuer and CK Asset is the guarantor. The fixed-for-life perpetuals carry a dividend stopper as well as a pusher. Proceeds will be used for the general corporate purposes of the guarantor and its subsidiaries.

Chinese property Seazen Holdings raised $450mn via a 4Y non-call 2Y (4NC2) bond at a yield of 4.8%, 55bp inside initial guidance of 5.35% area. The bonds have expected ratings of BB/BB+ and received orders over $4bn, ~8.9x issue size.  Asia took 86% of the bonds and EMEA 14%. Asset and fund managers received 89%, banks and financial institutions 5%, insurers 3% and private banks and others the remainder. New Metro Global is the issuer and Seazen is the guarantor. Proceeds will be used for offshore debt refinancing, including a tender offer for two of Seazen’s outstanding bonds – $500mn 6.5% 2021s and $300mn 7.125% 2021s at purchase price of $1,009.5 and $1,015 respectively per $1,000 in principal plus accrued and unpaid interest. Seazen’s 6.5% 2021s and 7.125% 2021s were unchanged at 100.88 and 101.38, yielding 4.04% and 4% respectively.

Kuwait’s second largest lender Burgan Bank raised $500mn via a 11Y non-call 6Y (11NC6) tier 2 bond at a yield of 2.75%, 50bp inside initial guidance of 3.25% area. The bonds have expected ratings of A- and received orders over $2bn, 4x issue size. The coupon of 2.75% is fixed until the reset date of December 15, 2026 and if not called, refixes at 5Y UST +222.9bp.

Guangzhou Development District raised $500mn via a 3Y bond at a yield of 2.6%, 45bp inside initial guidance of 3.05% area. The bonds are rated Baa1/BBB+ and received orders over $2.5bn, 5x issue size. The issuer is an investment holding company that is 100%-owned by the Guangzhou Development District Administrative Committee under the Guangzhou government. Proceeds will be used for debt refinancing and general corporate purposes.

 

New Bond Pipeline

  • Shandong Chenming up to $1bn bond
  • Laos $ bond
  • Huayuan Property $ bond

 

Rating Changes

 

JLR Raises $650 Million via 7NC3 Bond at 5.875%

Jaguar Land Rover (JLR) raised $650mn via a 7Y non-call 3Y (7NC3) bond at a yield of 5.875%, over 12.5bp inside initial guidance of low 6% area. The bonds have expected ratings of B/B (S&P/Fitch) in-line with the issuer’s ratings. Proceeds will be used for general corporate purposes. The deal was upsized from $500mn to $650mn. The bonds have a change of control put at 101 and a springing lien (Term of the day, explained below) clause that essentially states that if JLR incurs specified debt greater than £400mn ($535mn) that is secured by a lien on certain assets like principal manufacturing property, capital stock of any manufacturing subsidiary or specified intellectual property prior to October 2022, the new bonds will also be secured by a lien on the same assets. More details on the lien can be found on Page 228 of the prospectus.

As per Fitch, JLR’s issuer rating of B is based on their assessment of Tata Motors’ (TML) credit quality and of moderate linkages between the two entities with TML having a weaker credit profile than JLR. They note that apart from the restricted payment covenants within the UK export finance debt facility, there are no other major restrictions limiting TML’s ability to extract cash from JLR. JLR has £300mn ($401mn) of senior unsecured notes maturing in January 2021 and £425mn ($569mn) maturing in 2021. With ~£5bn ($6.7bn) in liquidity including £3.05bn ($4.1bn) in cash as of September 2020 and a spread out debt maturity profile, S&P expects the company to weather short-term uncertainty.

JLR’s new bond trades at a new issue premium of 30bp over their existing 4.5% 2027s trading at 94, yielding 5.57%.

 

S&P Revises Tata Steel’s Outlook to Stable from Negative on Strong Earnings

Tata Steel and its subsidiary Abja Investment Co Pte Ltd’s rating outlook was revised by S&P to Stable from Negative while affirming its B+ rating. The Indian steel major has had a better than expected recovery after the pandemic slowdown. The rating agency expects the financial position of Tata Steel to improve over the next 18 months with an EBITDA interest coverage ratio above 2.0x, as against an expectation of it being lower than 2.0x in April this year that led to its downgrade to B+. Tata Steel’s ratio of funds from operations (FFO) to debt is likely to increase ~12% in fiscal 2022 against previous expectation of ~6% and its debt-to-EBITDA ratio is likely to decline to ~5x as of March 2022 against previous estimates of 6.7x in March. The company also has strong liquidity of INR 178bn ($2.42bn) against upcoming debt maturities of just ~INR 18bn ($240mn) over the next one year and ~INR 130bn ($1.76bn) of short-term debt. The drivers for the rating action are as follows:

  • The return of the steel prices to pre-pandemic levels seen in the beginning of this year
  • Reduction in the input costs due to drop in coking coal prices ~30% YoY
  • Higher estimated domestic steel prices of ~INR3,000 per ton ($40.7 per ton) in 2H2021
  • Lower weakness than expected in the European operations

In a press release in November, Tata Steel had informed that all its Indian sites were operating at close to full capacity and that the second quarter (ending September 30) was “one of the best quarterly financial results in recent times” with it’s consolidated EBITDA up 10.4x QoQ and 60% YoY to ~INR62.2bn ($840mn)  The company’s rating was lowered to B+ from BB- with a negative outlook on April 14 this year due to the forecasted effects of the ongoing pandemic and a resulting increase in leverage. Fitch had followed suit by downgrading the company to BB- from BB in May. Moody’s has held its rating of Ba1 steady. Abja’s 5.95% 2024s were up 0.5 at 107.6 and its 4.95% 2023s were trading stable at 101.5.

For the full story, click here

 

Occidental Raises $2 Billion via Bonds

American oil company Occidental Petroleum (Oxy) raised $2bn via a dual tranche bond offering. It raised $750mn via a 5Y bond at a yield of 5.5%, 0-25bp inside initial guidance of 5.5-5.75% area. It also raised $1.25bn via a 10Y bond at a yield of 6.125%, 12.5bp-37.5bp inside initial guidance of 6.25%-6.5% area. The deal was upsized from $1.5bn to $2bn in total. The bonds are SEC-registered and have expected ratings of Ba2/BB-/BB. Proceeds will be used to repay existing indebtedness (including a concurrent tender offer for certain bonds with maturities through 2023) and for general corporate purposes. Oxy has commenced tender offers to purchase for cash the following bonds with a tender offer deadline of January 5 2021:

oxy-1


Oxy’s 6.625% 2030s were down 0.85 to 106.7 and their 4.4% 2049s were down 0.33 to 84.25.

 

Distressed Tianqi Lithium Gets $1.4 Billion Lifeline from Aussie Miner IGO

Distressed Chinese lithium producer Tianqi Lithium got a lifeline from Australian nickel and gold miner IGO Ltd in the form of a 49% stake purchase in Tianqi Lithium Energy Australia (TLEA) worth $1.4bn. Tianqi was in the news late last month after it failed to make a $1.88bn loan repayment but secured a one-month extension. The Sichuan-based company said that it plans to use proceeds to repay $1.2bn of principal plus interest on a loan taken to purchase a stake in Chile’s SQM in 2018 and extend the loan repayment deadline to November 25, 2022. The latest transaction would give IGO ~25% in Greenbushes and 49% in Tianqi’s suspended Kwinana lithium processing plant, both in Western Australia as reported by Reuters.

Tianqi’s 3.75% dollar bonds due 2022 rose over 8 points on Tuesday to 59 cents on the dollar, having recovered over the past few weeks from lows of ~39 in end November.

For the full story, click here

Term of the Day

Springing Lien

A springing lien is a covenant that leads to a lien on assets of the issuer on the occurrence of a specific event. Essentially the lien on assets springs into place for creditors when for example, the issuing company’s credit rating or cash balance falls below a particular level.

British luxury carmaker Jaguar Land Rover priced dollar bonds on Tuesday that carry a springing lien provision wherein the holders of its new bonds would get a lien on certain assets if the company incurs certain debt in excess of £400m ($535mn) prior to October 2022 that is secured by a lien on those same assets.

 

Talking Heads

On strong end to year on Wall Street for JPMorgan Chase – Jamie Dimon, chief executive officer of JPMorgan Chase

“You didn’t ask me, so I’ll tell you anyway, trading and investment bank numbers are up about 20 per cent, maybe a little more (in the fourth quarter),” he said. “It’s reflective of the extraordinary environment,” Mr Dimon said. “I do think we hit the bottom, and we’re growing,” he said.

“There’s no question that things are better than people thought a few months ago,” he said. “People want to be comfortable, and most banks don’t want to be in a position with a swing of reserves up and down every quarter . . . in a way you can’t understand,” he said.

On US companies sitting on record cash pile – according to S&P Global Ratings

“S&P Global Ratings believes near-term economic uncertainty likely will keep balance sheets relatively conservative,” the ratings agency said. “However, if the outlook brightens in 2021 as coronavirus vaccines become widely available, we believe some issuers will revert to more aggressive financial policies.”

On the coronavirus bill in Congress likely all that American may get despite Biden’s pledge

John Lieber, managing director of the Eurasia Group political risk consultancy and former adviser to Senate Majority Leader Mitch McConnell

“If they do the full bipartisan $900 billion, then I think it’s a big ask to do anything new after Biden takes office,” said Lieber. Additional stimulus “would only become possible in a downside scenario where the vaccine rollout doesn’t go smoothly and the economy continues to drag well into 2021, leading to serious strains” on households, small businesses and local governments,” Lieber said.

Michael Strain, director of economic policy studies at the American Enterprise Institute

“I expect that there will be difficulty in passing another economic stimulus measure in February,” Strain said.

On soaring eurozone government debt reigniting call for cancellation

Carsten Brzeski, economist at ING

“There are so many reasons not to be concerned by rising debt levels at the moment, but in the future we will need to have this discussion at some point,” said Brzeski. “Some kind of debt forgiveness may be needed, whether it is done directly by the ECB, or by swapping debt into perpetual bonds with a zero interest rate.”

Lucrezia Reichlin, economics professor at London Business School

“We have to distinguish the political position from the economic position,” said Reichlin. “From the purely economic perspective debt relief could make sense in some circumstances, but it depends on how you do it. From a political point of view it is extremely dangerous. So it seems extremely unproductive to raise it now.

Fabio Panetta, the former Italian central bank deputy governor who joined the ECB board in January

“If we cancel a debt, we cancel the corresponding credit and this could have broader, destabilising consequences. Only growth can protect us from debt.”

Volker Wieland, a professor at the Institute for Monetary and Financial Stability in Frankfurt

“Where is the gain?” said Wieland. “Only at some point in the future when the ECB stops reinvesting money from maturing bonds, and that is very far in the future.” Because of this, he said advocates of debt cancellation were “really shooting themselves in the foot”.

On Shanghai court’s nod to Hong Kong ruling on keepwell clause boding well for offshore creditors of defaulting Chinese bonds

Jonathan Leitch, restructuring partner at international law firm Hogan Lovells

The Shanghai verdict, the first known ruling on legal claims involving keepwell clauses, “represents helpful guidance for bondholders in future where a similar set of facts apply,” said Leitch, though he warned that “it does not necessarily set a broad precedent for the future enforcement of keepwell claims in China.” “The difficulties in enforcing insolvency related judgments and recognising liquidators and administrators appointed in Hong Kong and China has long been an issue,” said Leitch.

Naomi Moore, financial restructuring partner at Akin Gump Strauss Hauer & Feld

“One example is the discussions which are continuing between the Supreme People’s Court in China and the Hong Kong government [on] a potential framework for dealing with cross-border insolvency matters,” she said. “If that is agreed, it will be the first of its kind for China and will materially enhance the legal landscape for cross border insolvencies involving China and Hong Kong.”

On investors cooling on debt from riskier Chinese companies after missed payments by state-backed firms

Chang Li, a Beijing-based director at S&P Global Ratings

“The campaign of resolving those highly indebted companies…stalled in 2019, with the economic slowdown and heightened U.S.-China trade tensions and has been delayed further due to the pandemic,” said Mr. Li at S&P.

Leland Miller, chief executive of research firm China Beige Book

“It’s a guessing game or more of a political game, said Miller. “It would be very tough for investors in general to peer through the haze and pick the corporates that might survive.”

On Brazil’s borrowing binge giving investors the jitters

Paolo Guedes, Brazil’s economy minister

“If he has a better plan, then ask him what his plan is.” “The day that the stock market is falling 50 per cent and the dollar exploding, then I will say that credibility is lacking.”

Zeina Latif, an economic consultant in São Paulo

“The problem is essentially political,” says Latif. “The economy ministry knows what needs to be done but we are seeing an economy minister who has been greatly weakened and who now doesn’t convince.

Ilan Goldfajn, chairman of Credit Suisse Brazil and a former central bank head

“If that’s the case, Brazil can surf the risks for a couple of months,” he says, if nothing will happen on extending coronavirus spending or progressing reforms until February

Marcos Casarín, Latin America chief economist at Oxford Economics

“It’s increasingly likely that it will become the baseline scenario unless we see a U-turn from Bolsonaro.”

On Zambia’s request for financing arrangement with the IMF – Jan Dehn, head of research at Ashmore Group

“I need to see concrete commitments from Zambia on macroeconomic policy,” Dehn said. “I do not trust the Zambian government, so I also want to see the IMF agree with the government and define a clear and transparent adjustment program,” he said.

On a new exchange for small traders with the potential to turn US Treasuries upside down

Peter Mulmat, Small Exchange Chief Commercial Officer

“This is the first time a future’s been launched in yield versus price terms,” said Mulmat. “We think that simplicity will really resonate.”  “We built this exchange with the retail, self-directed trader in mind,” Mulmat said. “It affords people the efficiency of futures, while getting exposure in the appropriate size.”

George Goncalves, an independent strategist

The Small Exchange innovation brings “bond-directional views to the masses,” by “taking away the confusion and the technical aspects” of bonds and bond futures, said Goncalves. He said the smaller contract sizes fit with the recent theme of “the miniaturization of everything financial,” such as CME’s lower-value “micro” version of its S&P 500 futures franchise. “We like to take bets, and smaller sizes help,” Goncalves said.

 

Top Gainers & Losers – 9-Dec-20*

BondEvalue Gainer Losers 9 Dec

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