US equities ended the week flat on Friday with the S&P and NASDAQ almost unchanged. European equity indices were slightly lower, down ~0.5%. Treasury yields jumped with the 10Y up ~6bp to 0.83% as US jobs data signaled some positivity – unemployment rate down to 6.9% and NFP at 638k for the month of October vs. an estimate of 600k. Joe Biden emerged as the winner of the US presidential election although Trump continues to challenge the election result. US investment grade CDS and HY CDS spreads narrowed 0.1bp and 3bp respectively. Europe main and crossover CDS spreads tightened 0.6bp and 3.4bp respectively. Asian equities are again higher over 1% with Asia ex-Japan CDS spreads tighter 0.6bp.
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New Bond Issues
- Westpac $ 15NC10/10yr tier 2 @ T+215/170bp area
- China Orient Asset Management (International) $ 5/10yr @ T+195/240bp area
- Yango Group $ 270 mn 4.25NC2.25 green @ 8.25% area
- Agile Group $ 183 mn tap 6.05% 2025 @ 6.25% area
- Kaisa Group $ 200 mn tap 11.95% 2023 @ 10.85% area
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CIFI Holdings raised $350mn via a 5.5Y non-call 3Y at a yield of 5.25%, 35bp inside initial guidance of 5.6% area. The bonds have ratings of Ba3/BB/BB and received orders over $1.2bn, ~3.4x issue size – Asian investors took 76% of the bonds and Europe and offshore US 24%. Proceeds will be used to fund a concurrent tender offer for three of its outstanding dollar bonds. CIFI is offering to buy its outstanding $400m 7.625% 2021s, $500m 6.875% 2021s and $300m 5.375% perps with a cap equal to the new bond issue size. The purchase price for the three bonds is $1,017.5, $1,018 and $1,004 per $1,000 in principal amount, respectively, plus accrued and unpaid interest. If the validly tendered notes exceed the maximum acceptance amount, priority will be given to the 7.625% 2021s, then the 6.875% 2021s, and lastly the 5.375% Perp. The deadline for the tender offer is November 16. The tender offer and the concurrent new bond issue are part of efforts to manage its balance sheet liabilities and optimize debt structure.
KWG Group raised $400mn via a 5.25Y non-call 3.25Y at a yield of 6.3%, 45bp inside initial guidance of 6.75% area. The bonds are rated B1/B+/BB- received orders ~2.2bn, 5.5x issue size. Proceeds will be used for refinancing its debt.
Jiayuan International raised $100mn via a tap of its 12.5% 2023 bond at a yield of 13.75%, unchanged from its initial guidance. The issuer is rated B2 and the bonds have an expected B3 rating. Proceeds will be used for debt refinancing. The tap offered a 7bp new issue premium to its initial bond, currently at 13.67% on secondary markets.
New Bonds Pipeline
- Longyuan Power 3Y $ bond
- Wuhan Trading Group $ bond
- Halcyon Agri $ Perpetual with a guarantee from Sinochem International
- CALG $70mn 5.9% 5Y privately placed bonds
- IRFC up to $1bn bond
- Central Nippon Expressway $ green bond
- Guangxi Investment Group $ bond
Rating Changes
Moody’s upgrades Greece’s rating to Ba3, outlook remains stable
Moody’s changes PetSmart’s outlook to stable; affirms B2 CFR
Fitch Revises Russia-based Sovcombank’s Support Rating Floor to ‘B+’
Moody’s announces completion of a periodic review of ratings of Shinhan Bank Japan
The Week That Was
Bond and equity markets were volatile last week due to the US elections. US 10Y Treasury yields touched ~0.93% mid-week and eased with the vagaries of the election to 0.83%. Equities were in a strong risk-on mode with the election results favoring risk-assets with most western indices up over 7% for the week. Among the updates last week was Ant Group’s record IPO getting stalled due to regulatory issues.
Primary market issuance volumes dipped across the spectrum last week due to the US elections and associated volatility. Given the dampened issuance levels last week, with the election out of the way and tighter credit spreads, Bloomberg reports that ~$30bn in high-grade debt is expected to be issued this week with 10 bonds on Monday alone. Similarly, the primary market in Asia has picked up with 5 new deals launched today – Chinese corporates Agile, Kaisa, Yango, China Orient and Australia’s Westpac. Ratings actions across Asia ex-Japan saw Fitch with 5 upgrades and 4 downgrades, Moody’s with 1 upgrade and 3 downgrades and S&P with 2 upgrades and 3 downgrades for the week ending November 8. Downgrades included names like Lippo Malls and Huarong Industrial while upgrades included names like China Aoyuan and Jiangsu Nantong Sanjian.
Turkey’s Central Bank Chief Fired; Finance Minister Resigns on Health Grounds
Turkey President Erdogan removed Central Bank Governor Murat Uysal from his post on Saturday and replaced him with former finance minister Naci Agbal. The move comes after the Turkish lira weakened to a record low against the dollar falling past the TRY 8.5 per USD and down ~30% YTD. Erdogan had appointed the then deputy governor Uysal to head the central bank in July 2019 when he fired his predecessor for not cutting rates to boost the economy. “Foreign currency reserves are precariously low and falling… gross external financing needs are still very large as a result of the banking sector’s huge short-term external debts. We are becoming increasingly concerned that the central bank will not deliver the monetary tightening required to shore up investor confidence”, Capital Economics said before before the ousting.
Meanwhile the finance minister Berat Albayrak said on Sunday that he was resigning on health grounds. “I have decided that I cannot continue as a minister, which I have been carrying out for nearly five years, due to health problems,” the statement said.
The Lira has rallied 2% on the back of both the news with Goldman Sachs and TD Bank analysts expecting a monetary tightening of ~600bp from the 10.25% policy rate currently. There is an opinion that the new central bank chief might do a better job at hiking rates and stem the overall Lira fall given his earlier experience with the government and ruling party. Turkish dollar bonds are lower with the 7.625% 2029s down 0.67 to 102.45 and the 6.75% 2040s down 1 point to 91.63.
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Moody’s upgrades Greece to Ba3; 3Y Govt Yield Goes Negative for The First Time
Rating agency Moody’s upgraded Greece by a notch to Ba3 from B1 late Friday with a stable outlook. This comes despite the pandemic’s negative effects across the globe including on Greece’s economy, which has a strong focus on tourism. Reasons for the rating upgrade include:
- Ongoing strength in institutional reforms – areas such as the independent revenue administration resulting in higher tax revenues and improved compliance, digitization of the public administration and social security system having a positive implication for tax compliance as well as an improving business environment. Also with the government taking steps on non-performing exposures of banks and a new insolvency framework, Moody’s sees positives to address the crisis of the last decade
- Positive growth prospects over the medium-term – EU recovery funds disbursement would see Greece as the largest euro area beneficiary (€32bn/$38bn) relative to GDP (17% of 2019 GDP), providing significant support to both headline growth and investment. Despite expecting Greece’s economy to contract by ~9% in 2020, a strong recovery is expected in 2021
Moody’s projects Greece’s debt ratio to increase to ~200% of GDP (from ~180% in 2019), before declining again from next year onward on the back of the expected economic recovery. Debt affordability, as measured by interest payments in relation to government revenue, is much stronger (forecast at 6.2% for 2021) than the median of Ba-rated peers (10.9%) and is expected to continue to improve, supported by very favorable financing conditions.
In related news, Greece saw its 3Y bond yield go negative to -0.02% for the first time. With the ECB’s overall stimulus and continued liquidity, Greece’s yield curve has come down with yields at their record lows across tenors. Greece’s bonds are relatively unchanged with its 4.2% 2042s at €156, yielding 1.19%.
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Alibaba Unit Sells Stake in Meinian Onehealth
Caixin reported late last week that Alibaba (China) Network Technology Co. Ltd, a unit of the e-commerce major Alibaba sold part of its equity stake worth CNY 850mn ($128mn) in Chinese healthcare provider Meinian Onehealth. The 54mn shares sold accounted for 1.4% of the total shares outstanding in Meinian. After the sale, Alibaba now holds 8% of Meinian. The healthcare company’s stock has fallen ~30% since end-October to CNY 12.33 ($1.9) currently. The stake sale has raised concerns as the timing closely follows the abrupt suspension of Alibaba affiliate company Ant Group’s $35bn IPO. Meinian was downgraded by Moody’s to B1 from Ba3 in mid-September on increased leverage, expected to improve to 4.8x in 2021 and upcoming maturities. The rating agency mentioned Alibaba’s stake, which stood at 14.39% at June-end, to be a positive for the company as it may lead to operational efficiencies and support. Fitch had also downgraded Meinian in May to BB- from BB citing similar reasons. The reduction in Alibaba’s stake may impact ratings of Meinian.
Meinian saw its $200mn 7.75% dollar bonds due April 2021 fall ~4 points last week to 95.5 cents on the dollar after news of a stake sale. The bonds have recovered this morning, currently trading at 98.75.
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India’s Future Retail Moves to Court Against Amazon
In a battle that continues to get murkier, India’s Future Retail Ltd (FRL) has filed a caveat against Amazon in a New Delhi court. As per the petition, the Kishore Biyani-led Future group wants to ensure that no adverse order is passed against it without it being heard. Future Group is in final stages of closing a deal worth $3.4bn that involves the sale of Future Retail to Reliance Industries.
In 2019, Amazon had invested INR 14.1bn ($190mn) in Future Coupons Pvt Ltd (FCPL) acquiring a 49% stake. FCPL owns a 7.3% interest in FRL. A clause in the agreement restricts Future Group from selling its retail assets to anyone on a “restricted persons” list, which includes Reliance. Amazon won an injunction from a Singapore Arbitration court last month to temporarily halt the sale for assets by Future Retail to Reliance alleging that the deal breaches the non-compete contract. Future Retail filed a response with the Singapore stock exchange stating that the Singapore arbitrator’s order is not enforceable under Indian law and not binding on the company. Amazon had also lodged a complaint with India’s market regulators through a letter. Future Group responded by saying “Evidently, Amazon’s letter is motivated by other considerations. Amazon’s claims are a contractual dispute between Amazon and the promoters of FRL, and Amazon has already initiated arbitration for the same”.
Future Group has been financially stressed and the pandemic has only increased the woes of the retailer. Future Retail’s 5.6% bond due 2025was up 0.38 trading at 71.25 cents on the dollar.
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Term of the Day
Non-Call Risk
As the name suggests, this is the risk of bonds not getting called by the issuer. This is particularly significant in the case of perpetual bonds (Perps). Perps typically have call dates and investors tend to assume that the bonds will be called on the first call date, especially if the bonds have coupon resets or step-ups. However, it is important to note that the option lies with the issuer who may choose to not exercise their call option, as issuers from China have recently shown on local currency bonds.
Tsinghua Unigroup whose bonds have been falling over the last few weeks, recently skipped a call on October 29 following liquidity concerns. It said that it would not redeem its CNY 1bn ($150mn) 6.5% Perp non-call 5Y bonds on the first call date of October 30, but would pay the related interest. The Perps have a coupon reset and 300bp step-up. The non-call event triggered a sell-off in its bonds, even though the company had redeemed two privately placed bonds totaling CNY 1.6bn ($240mn).
In another example, Qinghai State-owned Assets Investment and Management said that it would not call its CNY 1.5bn (~$223mn) 4.58% Perps on the first call date of November 5 despite saying on September 30 that it would call the perps. The Perps had an initial spread of 169bp over the prevailing 5Y Chinese government bond yield plus a 300bp step-up. The company highlighted the pandemic as the reason for not redeeming the bonds.
This year alone, 33 local currency perps from Chinese issuers with a combined principal amount of CNY 50bn (~$7.5bn) were not called as at July 28, according to CICC research. Some opted to do so because of a cost advantage, as their perps do not have coupon step-up clauses, but more were pressured by weak liquidity.
Talking Heads
On Treasuries’ best year since 2011 still has headwinds to conquer
Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets
“We’ve had headwinds that prevented the Treasury market from pricing to economic reality,” said Lyngen . “There is already a ton of economic and monetary-policy stimulus in the system that will eventually translate to upward pressure on prices — which will correspond to higher inflation expectations and a steeper curve.”
Chris Leonard, head of U.S. rates trading at Barclays
“The economy is recovering way faster than anyone anticipated,” said Leonard. “Yet some people have remained skeptical. So the more the recovery continues, it will put pressure on investors and speculators to think Treasury yields will rise.”
“We have a number of issuers who’ve indicated, if there is stability post election, that they want to come to market and take advantage of the positive technicals and the resilience in spreads,” said Philipson.
“Central banks have been buying up more debt than governments can throw at them,” said Dowding . “That’s been pushing yields down in spite of the huge fiscal expansion.” “It’s pushing people out of cash and high-quality assets and into taking more risk,” Mr Dowding said. “People are looking for a return that’s greater than nothing.”
On the dollar extending its downward trend following US presidential election result
Jim Wilding, wealth manager at Confluence Financial Partners
“What appears to be divided government at this point provides more continuity of the current environment rather than the potential for wide-sweeping changes,” said Wilding. “We view this is as a net positive for equity markets, particularly in this scenario given it puts the odds of higher taxes very low in the years to come,” he added. “While we remain positive over the intermediate term outlook and believe divided government reduces the chances of a bear case scenario playing out, we would refrain from unbridled enthusiasm at current levels,” Wilding said.
Matt Sherwood, Australian fund manager at Perpetual
“In the end we think the U.S. economy is still fairly fragile and growth’s slowing down,” Sherwood said. “You could potentially gravitate your portfolio more towards higher-beta type markets, such as emerging markets, and there is potential for better prospects in the energy space than would have been the case with a Democrat clean sweep.”
On the surprise resignation of Turkish finance minister after lira slide
Selva Demiralp, director of the Koc University-TUSIAD Economic Research Forum.
Agbal “might do a better job in getting approval for a rate hike” given his former experience with the government and ruling party, said Demiralp. “Absent a rate hike, I am afraid the financial crisis will only get worse with the depreciation in the lira that increases the external debt, triggering bankruptcies.”
“These developments bode well for the Asian bond market, which has performed strongly this year despite the pandemic,” says Mr Lau. “With a better-than-expected credit matrix, earnings, and earnings outlook, we’ve become more constructive on Asian corporate credit profiles since the second half of the year,” says Mr Lau. “There remains a lot of moving variables, that’s why we focus on in-depth research by our team on the ground in Asia to thoroughly understand each issuer, how they would be impacted and how would they respond to rapidly evolving environment,” says Mr Lau.
“We believe China will continue to aim to boost investment in environmentally friendly and infrastructure projects and some of these investments will likely be funded through the new issuance of green bonds,” says Mr. Lau. “China’s pivot to renewable energy has already created opportunities in fixed income, and we expect this opportunity set to continue to expand.”
“Leveraged loans are an important business for the economy and many banks, including Deutsche Bank. We have a strong track record in the business and we follow a prudent risk management approach in line with regulatory requirements. As a matter of principle we do not comment on dialogue with our regulators.”
Top Gainers & Losers – 9-Nov-20*
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