23 September 2022 Global Credit Wrap
Record move in Gilts, HY deals getting done, 88% of US IG bonds trading below par...
*TLDR*
MACRO
UK Gilts - Historic moves with 50bps widening in 3 year Gilt in one day!
Long end of US Curve dragged up by the moves in the Gilt market
1 year T-Bill yields 4% making it awkward for other risk assets..
Investors park a record amount in Fed’s RRP facility
Xover touching COVID highs (closed week at +637bps)
WTI now 35% below its YTD highs (closes at $78)
IG
88% of US IG bonds are trading below par vs 4% a year ago - BBG
GBP Credit - Some high-grade credits trading at distressed levels (below 50)
HY
New issues / financing getting done, but with hefty coupons / OIDs
Adnoc said to bid for Commodity Trader Gunvor
Earnings/corporate updates -Ford warns on supply chain, Chemicals companies warn. Airlines Delta and American still seeing strong demand in the US
FINANCIALS
Santander issues a senior pref bond at same coupon it issued an AT1 last year!
Some EU Banks raise guidance - DB and Unicredit
EM / ASIA
Hong Kong is set to announce end of quarantine regime on Friday, follows loosening of restrictions in Macau..
Brazil central bank holds interest rates after 12 straight increases
Pimco Keeps Russia Debt Wager With More Than $1.4 Billion Bid
Sri Lanka holds first meeting with creditors
PRIVATE CREDIT
Singapore’s MAS will invest $1 bn in Private Credit
Blackstone Private Credit has to pay up to issue in bond market
ESG
ECB provides details on how it aims to decarbonise its corporate bond holdings
*MACRO*
HISTORIC MOVES IN GILT MARKET!
1 day moves in 3 year gilts were +50bps wider at one point on Friday 23rd! 50! Even on longer time horizons, the moves are epic; MTD, the major benchmarks are wider by 90-130bps. Compared to the August 2020 lows (the 5 year low in Gilt yields) yields are anywhere from 340 to 420bps higher with most of the pain being taken in the 3 and 5 year tenors. Note how the 2,3,5 and 7 year were all negative in August 2020!
The moves are reflective of a number of factors - higher inflation expectations, material fiscal easing and significant future Gilt issuance.
Gilts began the serious widening on Thursday, and dragged other bond market yields higher with it (e.g. the long end of the US Treasury market).
One of the few positives of this move is the emergence of high yields in short tenors, meaning market participants do not need to take excessive duration in order to achieve good yields.
Here are some more Twitter takes on the historic Gilt Moves:
New Gilt issuance - the details
Gilts soon to join EMBI Index (joke…)
Rate volatility driven higher by Central Bank meetings and Gilts
It was a jam packed week for central bank rate decisions. Within DM, The Fed, BoE, SNB, RiksBank and Norges Bank all hiked. Meanwhile, the BoJ stood pat and held rates. EM CB meetings were interesting too with the Indonesia and Philippines hiking whereas Brazil and Egypt held rates and Turkey cut rates! Despite this the tightening trend continues in order to fight inflation globally.
Investors parked a record US$ 2.359tr at the Fed's RRP facility - WSJ
Extract: “On Thursday, the Federal Reserve Bank of New York said that a day after the U.S. central bank pushed up its short-term target rate by a large 0.75 percentage point to between 3% and 3.25%, money-market funds and others parked a record $2.359 trillion at the New York Fed’s reverse repo facility….The reverse repos might also be pulling in cash due to the unsettled and volatile movement of financial markets recently, making the safety and security of parking cash at the Fed an attractive option for many money managers.”
The behaviour from market participants makes sense as risk assets are exhibiting immense volatility at present.
Signs of hiring slowing
The job market will once again come into the Federal Reserve’s focus if it looks like there is a risk of rising unemployment. This week saw yet more companies warning of cuts or reduced hiring:
Meta, Facebook parent is looking to reduce costs by at least 10% - Barrons
Walmart to *only* hire 40k people this Christmas vs 150k people last Xmas..Yahoo Finance
Banks reducing ECM staff due to lack of deals - EFC
Gap Is Cutting 500 Corporate Jobs During Profitability Crunch - BBG
Klarna is reducing workforce again - Techcrunch
1 year bill and two year UST yield at least 4% now (first time since 2007)
Attractive yields on short duration “risk free” assets are putting pressure on risk assets, some of which (e.g. dividend stocks, certain HY bonds, Corporate Hybrids, Sub financials) yielded 4% or less only a year ago.
Stocks looking expensive vs Credit…
By purely looking at Stock earnings yield vs Bond earnings yield
RBA Sees Rates Getting Closer to Normal Settings Minutes Show - BBG
Out of all the major CB’s Australia appears to be the most dovish…
(Bloomberg) -- Australia’s central bank said interest rates are getting closer to “normal settings,” according to minutes of its Sept. 6 meeting when it raised the benchmark by a half-percentage point for a fourth straight month. “The board expects to increase interest rates further over the months ahead, but it is not on a pre-set path given the uncertainties surrounding the outlook for inflation and growth,” the Reserve Bank said Tuesday in a record of this month’s meeting, where it raised the cash rate to 2.35%.
*INFLATION/ENERGY*
Components of US inflation coming down but not feeding through to CPI
H/T @TheStalwart Joe Weisenthal who posted this in his daily morning email:
The chart below shows how many aspects of inflation are coming down but these do not seem to be filtering through to consumer prices. The first chart includes trucking costs, international shipping costs, gasoline prices, the ISM Prices Paid index, used cars, and Zillow's measure of rent.
The Cleveland Fed’s Trimmed Mean Index shows a completely different picture. According to the Cleveland Fed the “16 percent trimmed-mean CPI can provide a better signal of the underlying inflation trend than either the all-items CPI or the CPI excluding food and energy (also known as core CPI).”
Apple Jacks Up App Store Prices as Currencies Tumble Worldwide - BBG
(Bloomberg) -- Apple Inc. unveiled major increases to its price tiers on apps and in-app purchases from Europe to Asia, protecting its margins as major currencies tumble against the US dollar. Customers in nations that use the euro as well as those in Sweden, Japan, South Korea, Chile, Egypt, Malaysia, Pakistan and Vietnam will all see price hikes as early as Oct. 5, the company said in a message to developers…In Japan, prices are rising by roughly 30%, a significant hike that follows the yen’s dramatic weakening this year.
*COMMODITIES*
Germany Closes In on Gas Deals With UAE to Narrow Russian Gap - BBG
(Bloomberg) -- Germany may secure supplies of liquefied natural gas from the United Arab Emirates in the coming days as part of the country’s push to offset Russia’s moves to slash supplies. Chancellor Olaf Scholz is likely to sign delivery contracts during a two-day trip to the Middle East, Economy Minister Robert Habeck said on Monday, indicating that talks are well-advanced especially with the UAE. “The gas supply is gradually broadening and the government is permanently in talks with many countries, also with nations on the Arabian peninsula,” Habeck said. “The chancellor is traveling next week to the UAE and will certainly be able to sign some contracts for LNG there.”
These actions by the German Government along with others are reducing the reliance on Russia which reduces President Putin’s leverage with respect to Energy supplies.
UAE’s Adnoc Considers Bid for Oil Trader Gunvor - Swissinfo.ch
Extract - Abu Dhabi National Oil Co. is considering a deal to buy all or part of commodity trading house Gunvor Group, according to people with knowledge of the matter, in what would be one of the industry’s biggest deals in years. The United Arab Emirates’s biggest oil producer has held early-stage talks about a deal that would combine Gunvor with the Middle Eastern company’s own trading arm
The news sent Gunvor’s 2026 bonds a cool 7 pts higher. If the rumour is true, then it suggests more mainstream interest in the high margin commodity trading business. It also suggests some longer term validation of their business model of finding buyers and sellers of oil globally while navigating sanctioned territories.
*HY*
Xover approaching COVID highs
The thing is, under the surface plenty of assets are already trading below COVID price lows, e.g. many European Real Estate bonds and Corporate Hybrids.
HY Deals / Financing getting over the line despite significant rates volatility
I noted this week that several HY / LevFin deals got completed despite the immense rates volatility. Names that secured financing included:
Citrix total LBO debt package - Sold $4.05bn and $500m € equivalent TLBs at a price of 91 cents, $4bn of HY bonds at 83.56 for all in yield of 10%.
RAC- New £300m senior term facility agreement to refinance Class A1 Notes in full for the roadside recovery firm. Source: RAC
Groupe Casino - French Grocer announced it got a €350m bridge loan for one month from Farallon Capital Management. The company could now use the money to buy back its unsecured bonds which are trading ~50 cents on the euro. H/T @irenegperez
Royal Caribbean - raised money from the HY market for the third time this year, the two new bonds were used to redeem existing 2023 notes.
Inetum - French IT services provider issued a leverage loan for €600m. According to BBG it decided against to drop the HY bond part of the deal that was set to come between 10.25% and 10.5%.
Interestingly, earlier on in the week, press reports suggested that investor demand was swinging more towards HY bond issuance, but by the end of the week it seems loans were actually more popular, go figure…
Citrix deal seemed to be a tough one to place according to EFC
HY bonds were sold this week for Citrix, the US Cloud computing/virtualisation firm. It was one of the last big LBOs to be struck before the Russian invasion of Ukraine. This week saw $4bn of HY bonds sold for Citrix at a loss to the syndicate banks:
The headline figure [$4bn issue size], if anything, understates how badly this deal went. The yield that had to be offered was significantly higher than the top of the range that had been estimated only a couple of weeks ago, and the order book was barely covered. Rather than being in the position of deciding which clients to allocate the limited supply of bonds to, the underwriters were apparently reduced to calling round smaller hedge funds that didn’t even usually invest in the high-yield space, just to get the sale to happen at all. And as much as $1bn of the bonds ended up with Elliott Investment Management, the original sponsors of the deal.
The above anecdotes represented a stark contrast to the days when buyside accounts used to fight for allocations on new issues…
American Air Says Work-Leisure Trips Are Fueling Sales Growth - BBG
North American Air travel seems to be holding up better than Europe.
American Airlines Group Inc. says the carrier’s revenue expansion is coming from an increasing number of trips that mix business and leisure.
The number of such trips has almost doubled over about the last nine months and now accounts for about 50% of revenue
American is now operating about 90% of its 2019 capacity, but producing 110% of revenue
North American travel demand recovered fastest from pandemic
Short-haul markets have recovered faster than longer international trips
Cheniere CFO Aims for IG Credit Rating as Natural-Gas Prices Soar - WSJ
Cheniere has been a key beneficiary from the rise in popularity of LNG.
Extract - Cheniere Energy Inc.’s finance chief is working toward landing an investment-grade credit rating in the coming year, as the largest U.S. exporter of liquefied natural gas pays down debt and benefits from the run-up in energy prices.
Earnings / corporate updates - Ford, Chemicals companies, Fedex
Ford - said its quarterly results would be impacted by about $1 bn in higher payments to suppliers to account for inflationary effects. This resulted in the largest one-day % drop in Ford’s share price in 11 years. Goes to show how sensitive this market is to bad news. One of the issues that is causing a build up of vehicle inventory is key parts like the Ford badge being unavailable. More here by WSJ
Chemicals companies - Several profit warnings have been announced ahead of Q3 earnings, in the past few weeks. Reuters summarises:
Chemicals company Huntsman Corp cut its third-quarter profit forecast, citing soaring European energy costs and a slower-than-expected demand recovery.
"Huntsman is feeling the same pressures as others in the industry," the company's Chief Executive Peter Huntsman said.
The company blamed energy costs in Europe and lower-than-expected demand across its units, particularly its polyurethanes and performance products segment, while adding that COVID-19 curbs in China have also hit demand.
Specialty chemicals company Eastman Chemical Co on Tuesday also slashed its third-quarter profit forecast, citing a stronger dollar and other market pressures.
Chemours slashed its full-year guidance for adjusted EBITDA due to falling demand in Europe and Asia affecting the chemicals company's Titanium Technologies segment.
The company said it now expects adjusted EBITDA for 2022 of $1.4 billion to $1.45 billion. The midpoint of the new range is about 7% lower than the midpoint of the company's prior range, but it still reflects growth of about 9% over 2021.
"In our TT segment, we have experienced a continued decline in our demand outlook throughout the third quarter, most notably in Europe and Asia," Chief Executive Mark Newman said. "Lower demand, coupled with continued high input costs, have impacted our projected results for the full year.
All the companies stated they will be taking action on their cost base to stem the margin decline. Sources: Reuters / Marketwatch
*FINANCIALS*
Santander issued a € Senior Pref at same coupon as an AT1 from 2021!
In what has become a common occurrence, Banks continue to issue senior and SP paper at yields previously seen in AT1 bonds. This week it was Santander which issued a 4NC3 SP bond with a coupon of 3.625%. Compare this to just one year ago when Santander issued a € CoCo at the same yield.
Biggest US Banks Scale Back on Property Lending as Rates Climb - BBG
Extract - Banks including Wells Fargo & Co., Bank of America Corp. and JPMorgan Chase & Co. have pulled back on financing for offices and other commercial real estate following a record burst of lending in the first half of this year.
The biggest US lenders which also include Morgan Stanley and Goldman Sachs Group Inc. have become more selective and stiffened borrowing terms while issuing fewer new commercial property loans… That pullback is partially due to weaker client demand, as well as concerns about the surge in interest rates. In some cases, heightened regulatory oversight has played a role. “A couple of the big money-center banks have been asked to pull back from their commercial real estate lending, specifically on office,” Brock Cannon, head of national loan sales for Newmark Group Inc., a commercial real estate brokerage.
Super thread on European Banks and benefit of higher rates vs expected NPLs
Unicredit and DB raised guidance at Banks Conference - BBG
Extract: Deutsche Bank is on track to reach the “top end” of its revenue guidance for the year, according to its CFO, while UniCredit CEO Andrea Orcel said that the bank will give a “substantial upgrade” to its targets alongside third-quarter results. Both executives were speaking at a BofA conference in London.
Berkshire Hathaway got upgraded by an analyst because of its holding in T-Bills!
I don’t believe I’ve ever seen a stock get upgraded because of its holdings in T-Bills but an Analyst at a firm called Edward Jones upgraded Berkshire because it recognized that it will earn more from its holdings in T-Bills:
Extract of Barrons Article: “Berkshire is benefiting from higher short rates, which are lifting the interest income on its more than $100 billion of cash and equivalents, mostly Treasury bills. Rates on T-bills are above 3% now, compared with near zero at the end of 2021.”
Bills are closer to 4% yield currently.
*IG*
88% of US IG bonds are trading below par vs 4% a year ago - BBG
Extract - About 88% of high-grade bonds in a Bloomberg index are trading below par through Tuesday, according to data compiled by Bloomberg. That compares to just 4% a year ago, highlighting the destruction on fixed-income returns wrought by inflation and a historically aggressive Federal Reserve rate-hike program.
£ Credit Market - Side effects from significantly higher Gilt yields..
A lot of corporate bond issuance during the COVID-era was price at very low coupons. With surging gilt yields, there are now performing, highly rated credits trading at distressed valuations:
Wellcome Trust for example is a AAA credit, which trades at the same level as a distressed EM Sovereign!
Delta Airlines - CFO keen on strengthening B/S and driving debt down - WSJ
Extract - Apart from improving the company's overall financials, Mr. Janki is focusing on bringing down debt. Delta had $22.9 billion in net debt at the end of the second quarter, down from $24.5 billion at the end of 2021, according to data provider S&P Global Market Intelligence. "We are keenly focused on continuing to strengthen the balance sheet and drive debt down," Mr. Janki said.
The company is targeting adjusted net debt of $15 billion by 2024, which would mean a reduction of $5 billion in adjusted net debt between now and then. Adjusted net debt stood at $19.6 billion at the end of the second quarter, Delta said. The airline is looking to opportunistically pay down debt and doesn't see a big impact on its financing costs from rising interest rates, as 85% of its debt is fixed rate, Mr. Janki said.
*EM / ASIA*
Brazil central bank holds interest rates after 12 straight increases - RTRS
Extract - The bank's rate-setting committee, known as Copom, decided by a vote of 7-to-2 to leave its benchmark Selic interest rate at 13.75% after 12 consecutive increases…With that, policymakers likely ended what had been the world's most aggressive rate-hiking cycle, lifting the Selic rate from a record-low 2% in March 2021 and putting Brazil ahead of many central banks that only started raising rates recently. Brazil’s CB decided to stop hiking rates after consumer prices registered their second straight monthly drop in August, helped by tax cuts on fuel and energy. read more.
Pimco Keeps Russia Debt Wager With More Than $1.4 Billion Bid - BBG
During an interesting few weeks in the Russia/Ukraine conflict, there has been some interesting developments on the Russian Govt bonds…
Extract - Pimco took on more than $1.4 billion of Russian government bonds as part of an auction to settle credit derivatives trades, essentially extending the investment giant’s wager on the nation’s debt, according to people familiar with the matter.
Things haven’t been going Russia’s way lately; discomfort at home with President Putin’s army call-up and their' Army’s retreat from key areas in Ukraine. There are reports of flights to Dubai costing $5k from Russia due to the demand for Russians wanting to leave the country. Furthermore, China expressing its dissatisfaction of a long drawn out war is also putting pressure on President Putin. Could this change the direction of the Ukraine/Russia conflict meaningfully?
Sri Lanka has first call with creditors - Nikkei Asia
Key takeaways:
Sri Lanka expects the International Monetary Fund board to approve a $2.9 billion loan by year-end, officials from the country's central bank told investors during a virtual presentation on Friday, sources participating in the event said.
From now until mid-November, the country aims to get financing assurances from public- and private-sector creditors.
"It's going be very tough, but so much of it depends on China, basically one creditor, so maybe it can be done," said a bondholder who requested anonymity.
"This was a fairly typical kind of introductory presentation that we've seen a lot of times before," the bondholder said. "The government lays how bad the situation is basically trying to anchor expectations towards a deep haircut."
As a middle-income country, according to the World Bank, Sri Lanka is not able to engage in talks with bilateral creditors under the G20 common framework for debt treatments.
The country officials added that the ad-hoc platform should be established by the creditors themselves as soon as possible, while the government is only promoting it.
The sources said Lazard, which is advising the government, said that this initiative would resemble the G20 platform. It will offer equal footing for creditors to access relevant information and a forum to discuss emergency credit lines, the presentation showed, according to the sources.
Government officials added that the perimeter for a local debt restructuring is still being looked into because of its impact on the domestic banking system, and no final decision has been made yet. No default on any local currency debt has occurred so far, they added.
The central bank governor said that the country has paid Sri Lanka Development Bonds in both dollar and local currency. These bonds make up $2.6 billion, which is 3.3% of GDP, according to an IMF review released in March.
LATAM Airlines looks to issue lev loan sale to repay DIP facilities
A real test of the market as LATAM airlines looks to issue a TLB. Extract of BBG article: A group of banks led by Goldman Sachs Group Inc. launched a leveraged loan sale that will support Latam Airlines Group SA’s exit from bankruptcy. The $750 million term loan will repay existing debtor-in-possession facilities and cover general corporate purposes, according to a person familiar with the matter, who asked not to be identified discussing a private transaction. The Santiago-based airline company won court approval for a restructuring in June after a struggle to win lender support. The carrier entered Chapter 11 protection in New York more than two years ago.
Hong Kong is set to announce end of quarantine regime on Friday
This from the BBC: “Hong Kong's government says that from Monday people arriving in Hong Kong will no longer have to go into mandatory hotel quarantine. Travellers will also no longer have to show a negative Covid test before boarding a plane to Hong Kong. Instead they will monitor themselves for possible infection for three days. The news sparked a rush for flight tickets to Hong Kong, with the Cathay Pacific website operating a queuing system to book.”
The move seems to be okay by the Chinese State which itself is rumoured to be looking at relaxing the zero covid strategy at its next meeting in October, which could generate some positivity amongst a wave of bearishness in global markets.
Apollo to provide $1.5 billion in funding to Embraer's customers | RTRS
(Reuters) - Brazil’s Embraer SA said on Thursday that it signed a memorandum of understanding with Apollo Global Management to provide up to $1.5 billion in funding for the planemaker’s regional aircraft customers. According to a securities filing, funding would be available through Apollo’s aviation business, but Apollo could also “access additional low-cost capital across its broader investment platform.” Under the agreement, the companies also reached a deal for the sale and leaseback of six E195-E2s aircraft to Porter Airlines, which are scheduled for a 2023 delivery.
Useful table from BofA on EM Sovereign Default history
Taken from Linkedin.
*PRIVATE CREDIT*
Blackstone Private Credit has to pay up to issue in US IG market
In March 2022 Blackstone Private Credit (BCRED) priced bonds at +260bps, this week’s new BCRED 3Yr came at +320bps (BCRED 7.05 09/29/25 Corp) for a BBB- credit.
Singapore’s MAS will invest $1 bn in Private Credit - AsianInvestor.net
The Monetary Authority of Singapore (MAS) will invest $1bn with global private credit fund managers, as it expands its Private Markets Programme (PMP), managing director Ravi Menon announced on Tuesday (September 20). The PMP was launched in 2018 through which MAS would place up to $5bn with private equity (PE) and infrastructure fund managers. “There are opportunities for private credit to play a larger role in Asian enterprise financing just like its private equity counterpart,” Menon said. Because private credit uses floating rates, investors benefit from larger coupons when interest rates rise, he said. “Asset owners are swapping out part of their fixed income exposure for private credit, supporting demand for this asset class.”
Howard Marks of Oaktree on Top Misconceptions About Private Credit - Youtube
*ESG*
ECB provides details on how it aims to decarbonise its corporate bond holdings
Decarbonisation to be based on issuer-specific climate score
Corporate bond holdings to be tilted towards issuers with better scores
Tilting to be applied to all corporate bond purchases settled as of 1 October 2022
More details here.
Fortescue plans to spend $6bn on renewables, phase out fossil fuels by 2030 - DJ
(Dow Jones) -- Fortescue plans to spend $6 billion on renewables, phase out fossil-fuel use by 2030. Fortescue will spend more than $6 billion on renewable energy and stop using fossil fuels by 2030, a pledge that the Australian iron-ore giant says will lower energy costs and mark a key step toward producing low-carbon steel. Fortescue is committing to use a combination of wind and solar power, battery storage and hydrogen produced from renewable energy to generate the electricity and fuel needed to extract iron ore, company officials said. Buyers in the steel supply chain could then turn that "green iron ore" into steel.
*RATINGS*
Natwest Group upgraded to A3 from Baa1 with a stable outlook by Moody’s
JPMorgan Affirmed at AA- by Fitch
Fitch revised the outlook on B- rating of Gol airline from stable to negative
Country Garden has been downgraded to BB from BB+ by S&P
*LINKS*
Pace of Fed hikes this cycle…
Negative rates update - Japan hanging in there
2022 YTD is the worst year for the US Bond Market