16 September 2022 Global Credit Wrap
Real yields nearing 2018 highs, higher beta credit markets come alive...
*TLDR*
MACRO
UST - 2 year yields highest since ‘06/07, 10yr & 30yr break through June highs
Real yields - 10 year US real yields within touching distance of 2018 highs
Recession watch - World Bank flags increasing recession risks
ENERGY/INFLATION
EU expects to raise €140bn from windfall tax on energy firms
Germany looking at nationalising Uniper and other Energy firms
Wage inflation - Material wage increase agreed for US Railroad workers
NEW ISSUES /TENDERS
Several higher beta new issue markets reopened last week:
Corp Hybrids, $EM, EUR HY, $ HY Drillers
Lloyds Bank and Cemex tendering for debt (again)
FINANCIALS
AT1 Non call for BNS 4.65% perp (largely expected)
Lloyds - Another tender offer for Lloyds 7.625% £ AT1
HY
Both HY CDS and Cash credit spreads widened this week
Lufthansa hybrids rallied as prospects of deferred coupon being paid increased
EM
Ukraine’s MHP expects to pay semi-annual bond coupon
El Salvador bond buyback
Argentina hiked rates by 550bp to 75%
CREDIT TRADING
Pimco wants to see all to all trading in the US Treasury Market
*MOVES OVER 5D*
CDS Indices - CDX HY +65bps, Xover +45bps, CDX EM +28bps. CDX HY now at +528bps which looks like its trying to make a dash towards the June highs of +587bps. In the IG space. ITRX Main is above 100 at +112bps.
Cash credit spreads - US HY +38bps to +487bps. Interestingly GBP IG Corp spreads tightened 4bps on the week, presumably due to the positivity emanating for Corporates from Liz Truss’s Energy plan and light positioning from market participants.
Bond ETFs - Convertibles, HY and EM took the brunt of the weakness. In descending order of losses; CWB, JNK, HYG, IHYG, EMB and EMLC were just some of the Bond ETFs that posted losses of more than 2pct on the week.
*MACRO*
Govt bond yields continue march higher…
US 2 year yields approach 4% (closed week at 3.8%) which is 38bps higher than where they ended August and the highest since 2006/7. This is creating an interesting dynamic in terms of how far out one needs to go in order to secure high yields within US Treasuries and Investment Grade Corporates. Pimco seems to agree on increasing attractiveness on the front-end.
Meanwhile, 30 year UST has broken above June highs (30 yr @ 3.5%) and the 10 year UST is close to its June 2022 highs (3.473% vs 3.449% currently). In terms of real yields, the 10 year real yield is within touching distance of the 2018 high of 1.164%. The latter is what is probably causing some serious pain in the equity markets, with Fedex’s profit warning not helping much either. On the Fedex point, its interesting that the besties on the All-in podcast were questioning whether the Fedex warning was more of a “kitchen sinking” by the new CEO…
Risk of Global Recession in 2023 Rises Amid Simultaneous Rate Hikes: World Bank
Extract: As central banks across the world simultaneously hike interest rates in response to inflation, the world may be edging toward a global recession in 2023 and a string of financial crises in emerging market and developing economies that would do them lasting harm, according to a comprehensive new study by the World Bank.
“Global growth is slowing sharply, with further slowing likely as more countries fall into recession. My deep concern is that these trends will persist, with long-lasting consequences that are devastating for people in emerging market and developing economies,” said World Bank Group President David Malpass. “To achieve low inflation rates, currency stability and faster growth, policymakers could shift their focus from reducing consumption to boosting production. Policies should seek to generate additional investment and improve productivity and capital allocation, which are critical for growth and poverty reduction.”
Datatrek research suggests UST and IG are cheaper than HY
This extract from Bloomberg’s Weekly Fix
DataTrek Research co-founder Nicholas Colas posed that question in a note. Leaving aside details such as corporate fundamentals and default risk, the numbers alone suggest that Treasuries and blue-chip bonds are the better opportunities right now. Using the iShares 20+ Year Treasury Bond ETF (ticker TLT), the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and the iShares iBoxx High Yield Corporate Bond ETF (HYG) as proxies, here’s the math: Investment grade and +20-year Treasuries are similarly oversold just now relative to the long run history. The 100-day trailing returns for each (TLT: -11.5 pct, LQD: -6.5 pct) is 40 percent worse than the 1 standard deviation downside level (TLT: -8.2 pct, LQD: -6.5 pct). High yield performance over the last 100 days is only about in line with its 1 standard deviation downside level (-7.4 pct vs. the 1-sigma lower band of -7.0 pct).
h/t @KGreifield
*NEW ISSUES / TENDERS*
Two high coupon deals re-open EUR HY market in September
Lottomatica SpA priced a 5NC2 Senior secured bond at 9.75% (tightened in from 10% IPT)) and NES Fircroft priced a $300m 4NC2 Sustainability Linked Bond (SLB) with a coupon of 11.75% and offering price of 97.5. Lottomatica is a leading betting and gaming company owned by PE Firm Apollo. Lottomatica follows 888 Holdings, the UK gambling operator which priced fixed rate debt in July at a yield of 11.5%.
NES Fircroft is an experienced staffing provider to the Renewable Energy industry according to its website.
Corporate hybrid market re-opens with Telia, KPN and Enbridge
The Global Corporate Hybrid market re-opened with two TMT issuers and a North American Oil Pipeline company after being largely shut since Q1 2022. In Europe, the market was receptive to the non-cyclical nature of the TMT sector and also both Telia and KPN were replacing existing Hybrids . The issuance of Corporate Hybrids has contrasted with that of sub financials which have seen a lot more issuance in the past few months.
Telia, the Swedish Telco issued €600m 60.25NC5.25 Hybrid to Yield 4.875% in EUR (Baa3/BBB-). Books were more than 5x covered according to BBG. Telia offered to redeem one of its existing Hybrids at 100.625.
KPN, the Dutch Telco issued a PerpNC5.25 Green Hybrid to yield 6.2%. The deal was rated BB+/BB+. KPN had announced an offer to purchase any and all of its $600m existing Corporate Hybrids.
In North America, Canadian Energy pipelines firm Enbridge raised $1.1bn of Corporate Hybrids in two parts with 5 year and 10 year callable bonds pricing above 7%. The issues were both IG rated.
HY Drillers secure financing deals
@Ultradeep3 nicely summarised the deals for Transocean (RIG) and Shelf Drilling last week.
Thawing of EM Corporate Bond market continues with new Korean Air issue
Korean Air raised $ 300m of 3 year bonds at a yield of 4.765%. The senior unsecured bonds which are guaranteed by KDB have expected ratings of Aa2/AA/AA-, and received orders over US$ 1bn.
CEMEX Tender offer - Company statement
Cemex launches tender offer to buy upto $400m of its outstanding USD bonds (2029, 3030, 2031). This is the second time Cemex has tendered for its bond debt in a matter of months as it seeks to gain Investment Grade status in the next few years.
Intesa issued a T2 GBP Bond ahead of Italian elections
Intesa Sanpaolo issued £400m of 10Y Tier 2 UKT at+545bps (coupon of 8.505%). This issuance came ahead of *that* CPI number last week and Italian elections later this month.
Lloyds Bank announced another tender offer for its Lloyds 7.625% AT1s
This is the second time Lloyds is tendering for this 2023 callable AT1 (XS1043552188). The bond had just over £1bn outstanding prior to this tender. According to the release it is looking to buy all of the outstanding.
Fly Leasing to purchase upto $50mm of 7% 2024 notes
This sent the price of its bonds more than 10 points higher.
*INFLATION + ENERGY*
Inflation Is Biggest Danger for Germany’s Economy, Lindner Says - BBG
Extract - “Fighting inflation is always associated with a temporary economic slowdown, but that’s the price of stopping this inflation,” according to Lindner. “What we can do is protect healthy companies, healthy livelihoods” and “we must cushion people’s social hardships: no one will freeze in winter or go hungry for financial reasons,” he said. “But we cannot work with borrowed money like we did during the coronavirus pandemic.”
Germany Working on Historic Takeover of Three Gas Companies -BBG
In a move similar to the nationalisation of Banks during the GFC, Germany is resorting to possible state ownership of some of its largest Utilities in order to take control of the Energy crisis it and other countries are facing.
Extract: State ownership of Uniper, VNG AG and Securing Energy for Europe GmbH, formerly Gazprom Germania GmbH, is the main solution under discussion, the people said. The government is considering buying Fortum Oyj’s controlling stake in Uniper for a nominal price and would then inject billions of euros into the company through a capital increase, according to some of the people.
France to limit energy price hikes to 15% in 2023, announces PM Borne - Le Monde
Italy expected to push ahead with €13.5bn energy aid package - BBG
Extract: Italian PM Mario Draghi is expected to push ahead with a new aid package worth about 13.5 billion euros a week before Italy’s general elections, in an effort to ease the impact of high energy prices on families and businesses. New measures aimed at protecting businesses and citizens from the recent rise in energy prices will include the extension of tax breaks for both businesses and citizens and the ability to pay energy bills in instalments.
EU expects to raise €140bn from windfall tax on energy firms - Carbon Brief
Extract: The EU executive plans to raise around €140bn (£121bn) by imposing windfall taxes on energy companies’ “abnormally high profits” and redirecting proceeds to households and businesses struggling with soaring bills, the Guardian reports. Under the European Commission’s proposals, oil, coal, gas and refining companies would be required to contribute 33% of their taxable surplus profit for the 2022-23 fiscal year, the Guardian explains. In addition, “the commission wants EU member states to sign up to a legally binding target to cut electricity use by 10% overall and by 5% during peak hours, via efficiency campaigns and incentives”.
Maduro: Venezuela ready to supply world oil and gas market - Al Arabiya
Extract: President Nicolás Maduro said Wednesday that Venezuela, which has the largest proven reserves of crude oil on the planet, is ready to supply the global oil and gas market in coordination with the OPEC+ alliance, led by Saudi Arabia and Russia. “Venezuela is ready and prepared to fulfill its role and supply the oil and gas market with the oil and gas that the world economy needs (…) in coordination with OPEC+,” the president said. Maduro, accompanied by OPEC Secretary General Haitham al-Ghais, who is visiting the Caribbean nation, said Venezuela has been “substantially recovering” its oil industry from the “corruption of a mafia” that destroyed its “fundamental structure of morality and functioning.” He added that the country is also ready to “progressively and rapidly increase” its production of refined products and fertilizers.
US Railway Labor Unions reach deal, material wage increase agreed - Yahoo
Extract: After 20 straight hours of negotiating, the new contracts give 24% pay increases through 2024, with a 14.1% wage increase effective immediately, and five annual $1,000 lump sum payments.
What other sectors could be looking for this quantum of wage hikes ahead of the US Mid-Terms, when President Biden is likely to be in a “giving” mood!
*FINANCIALS*
Credit Suisse’s securitized unit said to attract interest from Apollo/BNP - BBG
A successful deal here could help with CS’s capital ratios, but would result in a loss of a profitable division.
Extract: The Zurich-based firm is exploring deals to sell the entire business, while potential investors may pitch to acquire specific portfolios or risk classes, the people said, asking not to be identified because the matter is private. Credit Suisse previously said that it’s looking for third party funds for the unit, which is profitable but uses a lot of capital.
BNS: $ 4.65% AT1 non call, coupon reset higher & becomes an AT1 FRN
UBS / Unicredit increase share buybacks - RTRS
“Europe’s banks are funnelling cash to shareholders as the region speeds towards recession. Switzerland’s UBS on Tuesday hiked here its full-year dividend by 10% and said that its share buyback programme would exceed a $5 billion target. Italy’s UniCredit recently said here that the European Central Bank authorised the second tranche of its buyback programme, allowing it to repurchase 1 billion euros worth of shares, equivalent to 32 basis points of common equity Tier 1 capital. “
Lloyds Syndicate Insurer Hiscox raised senior 5 year bond in GBP at 6.075%
What was interesting about this transaction is that its existing subordinated issue has a coupon of 6.125% and its senior bond maturing in Dec-2022 had a 2.0% coupon. The combination of higher gilt yields and wider credit spreads is raising coupons on new issuance.
*HY*
Lufthansa hybrid bond upgraded to CCC+ from CC by S&P
Lufthansa announced they were going to pay the deferred coupon which sent the bonds higher.
Cineworld bankruptcy - Super article from Petition summing up current events
*EM / ASIA*
Argentina hiked base rates +550bps to 75% in response to record inflation in August
El Salvador launched a partial bond buyback operation - Gramercy
Extract: The government of El Salvador formally launched a partial buyback operation for its global securities maturing in January 2023 and 2025. Gramercy commentary: The size of the buyback, around $360mm out of $1.6bn outstanding face value (approx. $1.1bn current market value), of the two global bonds is somewhat lower than the initially announced $560mm earmarked by the authorities for the operation. The article continues…
Tunisia expects deal on IMF loan in weeks, central-bank governor says | RTRS
Extract - Tunisia expects to reach a deal with the International Monetary Fund in coming weeks on a loan of between $2 billion and $4 billion over three years, the central bank governor said on Sunday. Tunisia, which is suffering its worst financial crisis, is seeking to secure an IMF loan to save public finances from collapse.
IMF Staff Concludes Visit to Georgia - IMF
Extract: Despite a challenging external environment, the Georgian economy is set to achieve strong growth and buoyant fiscal revenues this year.
With uncertainty unusually high, it is important to continue prudent macroeconomic policies, maintain exchange rate flexibility, and strengthen fiscal and foreign exchange buffers.
Successful implementation of fiscal structural reforms and continued vigilance against inflation would enhance the resilience of the Georgian economy over the medium-term.
Shamaran (Kurdish oil name): Closes Sarsang Acquisition - Statement
The acquisition (from Total Energies) will propel Shamaran from being a single asset company into one with a portfolio of three producing fields. In its statement announcing the closure of this deal it also announced that it has been buying back its bonds in the market, yet held $118m of cash with net leverage below 1x net Debt/EBITDA.
Ukraine’s MHP expects to pay semi-annual bond coupon - Statement
Extract: “Following the strong support demonstrated in March 2022 by holders of our Eurobonds and our bankers, the Group is funded to maintain operations and business continuity and expects to pay its forthcoming semiannual bond coupons in full and on time. Taking into account the uncertainties of the war, it should be noted that any potential further actions by the National Bank of Ukraine could affect MHP's future bond coupon payments.”
Wynn Macau bonds rally +9pts on Ferry resumption
Wynn Macau bonds rallied after a Macau government statement showed passenger ferry services between the gaming hub and Shenzhen will resume from Wednesday.
*CHINA*
China’s Economy Shows Signs of Recovery as Stimulus Ramps Up - BS
Extract: Industrial production growth accelerated to 4.2%, the National Bureau of Statistics said Friday, beating economists’ forecast of a 3.8% increase. Retail sales rose 5.4% from a year earlier, higher than the expected pace of 3.3%, and up from 2.7% in July. The rebound came on the back of a low comparison base last year and remained well below the pre-pandemic levels. Fixed-asset investment gained 5.8% in the first eight months of the year, also better than the 5.5% rise projected by economists. The urban jobless rate slid to 5.3% from 5.4% in July. “The economy withstood the impacts of multiple unexpected factors and sustained the momentum of recovery and growth with major indicators showing positive changes,” the NBS said in a statement.
*RATINGS*
Moody’s downgraded Chile’s rating to A2 from A1, outlook to stable from Neg
El Salvador was downgraded to CC from CCC by Fitch
*CREDIT TRADING / BUYSIDE*
Pimco would like to see all-to-all trading in the Treasury Market: BBG
Pimco would like to see the all-to-all trading concept used in Corporate Bond Trading to be applied to the US Treasury Market.
Extract - “We would like the entire Treasury market to move to all-to-all trading - a platform where asset managers, dealers, and non-bank liquidity providers are able to trade on a level playing field, with equal access to information,” wrote Pimco’s Libby Cantrill, Tim Crowley, Jerry Woytash, Jerome Schneider and Rick Chan. “The vast majority of the bond market, including most parts of the Treasury market, liquidity remains intermediated, making the market more fragile, less liquid, and more susceptible to shocks.”