US equities ended slightly higher as S&P and Nasdaq were up 0.2% and 0.4% respectively. The US House voted to impeach Trump for the Capitol Hill riots. US 10Y Treasury yields eased 4.6bp to go below 1.10% even as consumer price inflation (CPI) beat expectations at 1.4% YoY. The Fed’s Beige Book noted a modest increase in economic activity in recent weeks as employment fell, although coronavirus cases rose. European equities were also slightly higher ~0.1-0.4%. US IG CDS spreads were 1.7bp tighter and HY was 5.9bp tighter. EU main and crossover CDS spreads also tightened 1.2bp and 13.4bp respectively. Asia ex-Japan CDS spreads widened 0.8bp and Asian equities have opened ~0.3% higher.
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New Bond Issues
- Wheelock $ 5Y at T+230bp area; books over $1bn
- BOC Aviation $ 5Y at T+180bp area; books over $800mn
- Zhuhai Huafa $ 2.85% 2025 tap at 3.5% area
- Longjitaihe Property $ 364-day at 12.9 % area
- Sunkwan Properties $ 364-day at 13.5%
- Guangxi Investment Group $ 3.6% 2023s tap, final at 4.7%
- Nanjing Luhe $ 364-day credit-enhanced notes at 2.75%
Nippon Life Insurance raised $1.6bn via a 30Y non-call 10Y (30NC10) subordinated bond at a yield of 2.75%, 37.5bp inside initial guidance of 3.125% area. The bonds have expected ratings of A3/A-. The bonds are callable after 10 years and every five years thereafter. If not called, the coupon will reset every five years to the initial spread over 5Y Treasuries, plus 100bp. Coupons can be deferred at the issuer’s discretion, or if its capital levels drop too low.
China Hauneng raised $1bn from a two part issuance. It raised $500mn via a 5Y bond at a yield of 1.602% or T+108bp, 42bp inside initial guidance of T+150bp area. It also raised $500mn via a 10Y bond at a yield of 2.715%, or T+155bp, 30bp inside initial guidance of T+185bp area. The bonds have expected ratings of A2/A and received orders over $2.9bn, 2.9x issue size. Asia took 99% and EMEA 1% of the 2026s while banks bought 63%, asset managers and fund managers 29% and sovereigns, supranationals and agencies together with insurers and pension funds 8%. Asia took 99% while EMEA took 1% of the 2031s. Banks took 51% of the issue while asset/fund managers took 41%, insurance/pension funds 5% and private banks 3%. The bonds will be issued by China Huaneng Group (Hong Kong) Treasury Management Holding and guaranteed by the state-owned parent company. Proceeds will be used to repay overseas debt.
Japan Bank for International Cooperation (JBIC) raised $1.5bn via a 10Y bond at a yield of 1.358%, in line with initial guidance. The SEC registered bonds were rated A1/A+ and received orders over $4.5bn, 3x issue size.
Tower Bersama Infrastructure raised $300mn via a 5Y bond at a yield of 2.75%, 25bp inside initial guidance of 3% area. The bonds were rated BBB-.
Dominican Republic raised $2.5bn via a two-trancher. It raised $1bn via a tap of its 4.5% 2030s at a yield of 3.875%, 37.5bp inside initial guidance of 4.25% area. It also raised $1.5bn via a 20Y bond at a yield of 5.3%, 45bp inside initial guidance of 5.75% area. The bonds were rated Ba3/BB-/BB-. Proceeds will be used for general governmental purposes.
Chengdu Xingcheng Investment Group raised $445mn via a 5Y bond at a yield of 2.9%, 30bp inside initial guidance of 3.2% area. The bonds have expected ratings of BBB+ by Fitch, in line with the guarantor. Xingcheng (BVI) is the issuer and Chengdu Xingcheng Investment Group is the guarantor. Proceeds will be used for offshore refinancing and general corporate purposes. The company provides land development, project construction, asset management and real estate services.
South Korean chipmaker SK Hynix raised $2.5bn via a triple-trancher. It raised:
- $500mn via a 3Y bond at a yield of 1.066%, or T+85bp, 30bp inside initial guidance of T+115bp area
- $1bn via a 5Y bond at a yield of 1.529%, or T+105bp, 35bp inside initial guidance of T+140bp area
- $1bn via a 10Y green bond at a yield of 2.49%, or T+140bp, 40bp inside initial guidance of T+180bp
The bonds have expected ratings of Baa2/BBB-, in line with the issuer and received orders of over $12.25bn, 4.9x issue size. Proceeds of the 2024s and 2026s will be used for general corporate purposes. Funds raised from the green bond will be allocated to eligible projects in accordance with the issuer’s green financing framework. There is a change of control put at 100 if the notes are downgraded below investment grade and SK Hynix either substantially sells or transfers its properties or assets, or if SK Telecom and its affiliates cease to own at least 20% of SK Hynix. .
Melco Resorts raised $250mn via tap of its 5.375% 2029s at a yield of 4.918%, 30bp inside initial guidance of 3.2% area. Proceeds will be used for general corporate purposes.
New Bond Pipeline
- Shandong Guohui Investment $ bond
- SK Battery America $ two-tranche green bond
- Dubai Aerospace Enterprise $ bond
- Zurich Insurance $ 30.25NC10.25
- Sritex $ Yankee bond
- PFC $ bond
- REC $ bond
Rating Changes
- China-Based CAR Inc. Upgraded To ‘CCC+’ By S&P On Convertible Bond Issuance; Outlook Positive
- Moody’s downgrades CFLD’s CFR to B2; reviews ratings for further downgrade
- Moody’s downgrades SK Innovation and SK Global Chemical to Baa3; outlooks remain negative
- Zhenro Properties ‘B’ Rating Withdrawn By S&P At The Company’s Request
2020 Bond Market Round Up – Europe & UK
Among the best performing bonds from Europe and UK in 2020, prestigious British universities Cambridge and Oxford topped the list with its long-dated sterling denominated bonds returning over 30% to investors, ex-coupon. This was followed by shipping companies Navios and CMA CGM, whose bonds delivered a ~24% return through 2020. Other prominent names on the list include perps from lenders Barclays, Deutsche Bank and Banque Fed, sovereigns Greece and UK, telecom operators Vodafone and Telecom Italia and steel company ArcelorMittal.
The worst performers list was led by Ukrainian coal company DTEK with its dollar 10.75% 2024s losing 39% of its value through last year. As can be expected, the list was dominated by corporates operating in industries most affected by the pandemic. This includes bond from travel companies Europcar, TAP Air Portugal, Air Baltic, Lufthansa and KLM, restaurant operators Pizza Express and Foodco, retailer Matalan, cosmetics company Kirk Beauty and cruise operator MSC Cruises. The list also included some lenders including NORD/LB backed Fuerstenberg Capital, Metro Bank, Piraeus Bank and Allied Irish Banks.
The largest issuances from Europe in 2020 predominantly featured government backed/related entities with names like Sociedad de Gestion, Caisse d’Amortissement, KfW and UNEDIC. Financial issuers like ABN Amro, ING, Banco Santander also featured amongst the largest issuers. While the list excludes deals from supranationals, the EU’s SURE debut bond issuance was also amongst the largest deals in the region totaling €17bn, which received orders of over €233bn, ~14x issue size.
In case you missed it, we summarized the bond market in terms of best/worst performing bonds, largest deals and issuance volume for global and Asian dollar bonds in 2020. You can read the full report via the button below:
Singapore Airlines Raises $500 Million via Debut Dollar Bond Offering
Singapore Airlines raised $500mn via a 5.5Y debut dollar bond at a yield of 3.085%, or T+260bp, 40bp inside initial guidance of T+300bp area. The bonds were unrated. Proceeds will be used to buy a new aircraft as the global aviation industry prepares for a post-pandemic travel rebound. Singapore Airlines is the first major airline in Asia to tap the global debt markets in 2021. The debut dollar bond comes after the company raised a combined S$1.35bn ($1bn) late last year via privately placed bonds and convertible notes.
For the full story, click here
CFLD Downgraded Two Notches by Moody’s on Refinancing Risk; Curve Inverts On Liquidity Crunch
Rating agency Moody’s downgraded China Fortune Land Development (CFLD) to B2 from Ba3 and placed it on review for a further downgrade. “The downgrade reflects CFLD’s weaker-than-expected operating performance and cash flow generation, which has heightened refinancing risk given its weak liquidity position and sizable debt maturing or becoming puttable over the coming 12-18 months.” said Danny Chan, an analyst at Moody’s. He added that the review for a further downgrade was due to uncertainties on refinancing.
They expect CFLD’s revenue-to-adjusted debt and interest coverage to decline to 35%-40% and 1.5x-2.0x, over the next 12-18 months. This is in comparison to the 50% and 2.8x numbers it recorded for the 12 months ended June 2020. The worsening would be driven by weak revenue growth and sustained high debt with some evidence from CFLD’s weak property sales – contracted sales fell 40% YoY for the three quarters ended September 2020 driven by weak residential property development business. CFLD has ~CNY90bn ($14bn) of debt maturing in 2021 with onshore bonds of CNY24bn ($3.7bn) and offshore notes of $1.6bn. Debt exceeds its cash balance of RMB38bn ($5.9bn) as of September 2020.
Moody’s further noted that CFLD’s refinancing risk could be mitigated by support from Ping An, its second-largest shareholder which owns a 25% equity stake in CFLD. Ping An and its affiliates have provided debt funding to CFLD over the past 6-12 months, including Ping An Life’s subscription to CLFG’s CNY12bn ($1.8bn) perpetual bonds. However, CFLD’s refinancing risks could escalate if there are any signs of weakening support from Ping An. CFLD now has an inverted yield curve (Term of the day, explained below) on liquidity risks as the front end yields rose (prices fell) and longer maturing bond yields fell (prices rose). CFLD’s 8.625% 2021s trade at 79.6, yielding 237% while its 6.92% 2022s trade at 56.8, yielding 55% and their 8.05% 2025s are at 54, yielding 28%.
For the full story, click here
Greenland’s Dollar Bonds Continue to Slump Along With Some Other Property Developers’ Bonds
In the aftermath of China Fortune Land Development’s (CFLD) financial issues, bonds of peer Greenland Holding have also been falling. Greenland’s 7.25% 2025s and 6.75% 2023 fell ~9.5% on Wednesday, marking two straight days of losses. Greenland currently flouts two of the three-red lines drawn by the authorities, with short-term debt to cash at 1.5x and debt to equity at 170% vs. thresholds of 1x and 100% respectively. Chinese authorities have taken actions to curb debt levels, particularly of developers who are among the most indebted, that include policies like the three-red lines and bank lending caps. Bonds of select developers like Risesun Real Estate’s Rongxingda Development BVI 8.95% 2022s, priced just last week have fallen ~6% to 93.24 and even Evergrande’s 8.75% 2025s have fallen ~5% since the new year began, its seventh consecutive day of losses. Evergrande/Risesun also flout two of the three-red-lines with net debt to equity at 219%/100.5% and short-term debt to cash at 2.8x/1.2x respectively.
Spain Raises €10 Billion via New 10Y Bond; Order Book Halved After Tightening
Spain, rated Baa1/A/A-, raised €10bn ($12.2bn) via a new 10Y bond priced on Wednesday at a yield of 0.114%, 4bp over its older 1.25% bonds due October 31, 2030 and 4bp inside initial guidance of SPGB+8bp area. While orders were flowing in strong at over €130bn ($157.9bn) during bookbuilding, final orders halved to €55bn ($66.8) after the pricing was tightened by 4bp from guidance. The spread on Spain’s 10Y government bond yield over its German counterpart fell to its lowest level since the euro debt crisis a decade ago to less than 55bp earlier this week. Mohammed Kazmi, a portfolio manager at Union Bancaire Privée said, “It’s the start of the year and there’s a lot of cash waiting to be put to good use. Meanwhile you still have this search for yield.” Spain is rated Baa1/A/A-.
For the full story, click here
Alibaba, Tencent and Baidu to be Spared from US Blacklist
China’s tech giants Alibaba, Tencent and Baidu have been spared from being blacklisted by the US after the Treasury blocked an attempt by Pentagon and state departments to blacklist Chinese companies considered to be close to the Chinese government. The big three Chinese tech companies had been earmarked by the defense department to have links to the Chinese military. President Donald Trump had signed an executive order in November to bar Americans from investing in Chinese companies with links to the People’s Liberation Army (PLA). The move is seen as a win for Steven Mnuchin, the Treasury secretary against the secretary of state Mike Pompeo, and the defense secretary Chris Miller and comes after Matt Pottinger, a proponent of imposing tougher security policies on China resigned as the deputy national security adviser in protest over the storming of Capitol Hill. “Removing the ‘Big 3’ from the Pentagon list of Chinese PLA-linked companies risks sending the message that concern over potential US investor losses supersedes the protection of vital American national security interests,” said Roger Robinson, a former US National Security Council official while adding, “That said, the overall use of highly effective capital markets sanctions against such PLA-affiliated Chinese enterprises is now established.”
Most bonds of the three companies were trending positive. Alibaba’s 4.4% 2057s and 4.2% 2047s were up 0.67 to trade at 119.21 and 112.72 respectively. Tencent Holdings’ 3.24% 2050s and 3.925% 2038s were up 0.77 and 0.99 to trade at 95.79 and 109.59 respectively. Baidu’s 2.375% 2030s were up 0.65 to trade at 100.11 while its 3.425% 2030s were down 0.2 to trade at 107.79.
For the full story, click here
Lenovo to Raise $1.4 Billion via Chinese Depository Receipts
Lenovo, the world’s largest PC manufacturer revealed through a filing on the Hong Kong exchange that it is looking to sell Chinese Depositary Receipts (CDRs) that could help it raise HK$10.8bn ($1.4bn). The company’s board of directors has approved the proposed issuance of CDRs and the application for listing and trading of the CDRs on Shanghai’s STAR Market. The company is now seeking shareholders approval for the sale, where it will issue 1.3bn new shares constituting not more than 10% of its enlarged capital. The proceeds from the issuance, subject to market conditions and regulatory approvals, are likely to be used for R&D, development of new technologies, products and solutions, strategic investments in related sectors, and replenishment of the company’s working capital.
The pandemic has led to an increase in the usage of the PCs which benefitted Lenovo’s business. According to the latest IDC data, PC shipments saw a rise of 13.1% YoY in 2020 and Lenovo’s shipments grew by 29% YoY helping it retain the top spot in the global market with a market share of 25.2% in Q4. The company was assigned an investment grade rating in October with Moody’s rating it Baa3/stable, S&P BBB-/stable and Fitch BBB-/positive. Lenovo’s bonds were trading in the green. Its 5.875% 2025s and 3.421% 2030s were up 0.09 and 0.28 respectively to trade at 114.44 and 102.75 respectively.
For the full story, click here
Cemex Plans to Redeem $750 Million of Its 5.7% 2025s
Mexican cement company Cemex announced plans to redeem $750mn of its $1.07bn 5.7% bonds due 2025 on February 16 at a price of 101.9 plus accrued interest, as per Latin Finance. This comes after Cemex raised $1.75bn via the sale of new bonds due 2031 priced last Thursday. The 2025s are currently trading at 102.1 on the secondary markets.
For the full story, click here
Term of the Day
Inverted Yield Curve
An inverted yield curve occurs when short-term yields move higher than the long-term yields. With respect to Treasury bonds, an inverted yield curve (3M10Y curve or 2Y10Y curve) has historically shown an impending recession. Similarly, for corporate bonds, an inverted yield curve would indicate that while the company may struggle to meet short-term payments, it is likely to improve its financial position in the longer-term. An inverted yield curve would highlight liquidity risks for the issuer while solvency might still be fine. Chinese developer CFLD’s corporate dollar bond yield curve has inverted following liquidity and refinancing risks.
Talking Heads
On the need for Treasury to substantially boost maturity of debt
Robert Rubin, Former US Treasury Secretary
“At today’s yield curve, I’d do as much as I could” to extend the maturity, Rubin said. “I’m not arguing against it,” he said. “I’m just saying it’s something you’d want to study very carefully because it’s something new.” “It was our view that probably underestimates the likelihood of an increase in rates at some point.”
In a paper authored by Rubin, Joseph Stiglitz, Nobel Prize-winning economist, and Peter Orszag, Lazard Group LLC executive
They proposed “reducing the budget’s exposure to interest rate variation while also making it respond more automatically” to the economy’s ups and downs and to an aging society. The authors wrote that they “support creation of bond maturities beyond the 30-year bond to preserve the flexibility to take advantage of relatively flat yield curves.”
Yi Gang, People’s Bank of China governor
“Stability is the top priority for monetary policymaking in 2021,” told the official Xinhua News Agency last week, adding that policy-exit concerns were relatively small for China, as it is “one of the few countries implementing a normal monetary policy that hasn’t flooded [the economy] with money”.
In a note by Morgan Stanley economists
“The weaker credit readings in December support our view that countercyclical tightening is under way to rein in leverage and financial risks,” they wrote. However, “the pace of [China’s] stimulus exit will likely be gradual and flexible”, they added.
On Alibaba’s jumbo bond deal going quiet with Ma out of sight
Geof Marshall, who runs the fixed-income team at CI Global Asset Management
“If I were the underwriter I would wait until the Biden Administration gets underway and perhaps take a more considered tone with China,” said Marshall.
Alejandro Arevalo, head of EM fixed-income at Jupiter Asset Management
“At the moment, it is not something we would participate in given the uncertainty around the actions of the Chinese regulator in this sector, Jack Ma’s recent criticism of China’s bureaucratic system and how the government will react to it,” said Arevalo. “There are too many unknowns.”
Georges Gedeon, chief investment officer at credit fund Antler Capital Partners
“There is a price for everything. It will have to be juicy but Alibaba is here to stay,” said Gedeon. “China will never destroy its tech champion.”
On the warning from global banks of market chaos if court abolishes Libor
Anne Beaumont, partner at Friedman Kaplan Seiler & Adelman LLP
“You have to take it seriously because it would be a catastrophe if it was granted,” said Beaumont. “They’re likely going to continue to get sued like this as long as it’s there.”
Joseph Alioto, attorney at Alioto Law Firm representing the plaintiffs
“It must be stopped one way or another or neutralized because it’s an illegal price-fixing agreement,” Alioto said. Banks argue “that the sky is falling and all kinds of economic havoc will take place. In the United States that doesn’t matter,” he said. “If you’re fixing prices you can’t do it, regardless of the consequences or the business excuse.”
On China’s bond market attracting record foreign inflow in 2020
Xu Gao, chief economist of BOC International (China)
“Last year we saw that bond issuance in China increased a lot compared with the previous couple of years. That could be attributed to the authority’s supportive policy stances. Huge amounts of capital flowed into the real economy through bond issuance and effectively fostered the recovery,” said Xu. “We projected that the social financing will maintain relatively high growth this year, hence could better meet the financing needs of the real economy. That’s why we predict that the default risks would actually be lower this year,” Xu reasoned.
Ivan Chung, associate managing director of Corporate Finance Group from Moody’s Investors Service
“China’s onshore bond market is massive and diverse, providing attractive diversification opportunities to investors. Moreover, as more and more countries have begun to allocate some of their international reserves to RMB-denominated assets, their demand for higher-yielding RMB assets has gone up. This has made onshore bonds an increasingly attractive asset class for them,” said Chung. “Given still relatively low absolute international investment in onshore bonds,” adding that “further growth will also be helped by the inclusion of onshore bonds in major global indices.”
Frank Zheng, head of International Fixed Income of China Asset Management
“We could see more investors outside of Asia choosing to participate in China’s dollar bond market. In addition to the strong fundamentals of the Chinese economy, the relatively low default rate of Chinese issuers also added fuel to the attractiveness of the market. During recent years we saw more domestic issuers, including those non-investment grade ones, have chosen to issue dollar bonds. We prefer to invest in bonds with relatively higher yields and their issuers are already in the process of deleveraging,” said Zheng.
On the run-up in US Treasury yields a ‘savior’ for income-starved investors
Gary Kirk, a portfolio manager at TwentyFour Asset Management
Some bond fund managers were starting to fret over stretched market valuations in corporate debt “given the increasingly meager yields being offered in the ‘high yield’ sectors of the market,” said Kirk.
Rob Daly, director of fixed income at Glenmede Investment Management
“It does present a good buying opportunity. But I’m not ready to put all my chips in,” said Daly. The recent rise in yields has helped “create a better balancing act,” said Daly.
“The spreads between Thai debt and U.S. treasuries are also very small, so foreign funds may not flow in anymore,” he said. “But not too much money may flow out as passive funds will keep investing,” Tada said. “Up to three-year bond yields are below the policy rate, reflecting amble liquidity,” Tada said.
Top Gainers & Losers – 14-Jan-21*
