26th August Global Credit Wrap
Hawks everywhere, EM outperforming, China Property Bonds rally...
*TL;DR*
MACRO
Fed hawkish - Remember when I told you last week that Fed pivot was being faded by the market, well the big man J-Powell faded it in style at the JH Symposium.
ECB also hawkish - “…central banks must act forcefully to bring inflation back to target quickly” Isabel Schnabel, ECB Exec Board member.
Curve flattening continues - Expectation of continued high inflation in UK/Europe saw short dated bond yields surge as evidenced by 2 year UK Gilt which posted a post 2008 record high in yields (2.955%)
European and UK PMIs disappointed
Global rate hiking continues - Israel and Indonesia hiked rates more than expected, Korea also hiked.
Corporate Confidence (+ve) - M&A seems to be ticking along fine with two new UK Software company M&A situations announced this week (Micro Focus and Aveva).
INFLATION
US PCE (Fed’s preferred measure of inflation) cooled in July
Citi economists predicted CPI inflation to peak at over 18% in January
UK - Ofgem raises household energy cap to £3,549 starting in October 2022
Liz Truss is considering a ‘nuclear VAT cut of 5% across the board ‘- Telegraph
Brazil inflation index saw biggest dip since data series began in 1991
EM + ASIA
EM Outperformed US HY and Financials this week
Sri Lanka - IMF staff team plans to visit Colombo during Aug 24-31
Pakistan looks set to receive funding from Saudi and Qatar
Egypt and Bahamas bonds rose 4-5 pts generically over the week
IG
AUS IG - Qantas reported lowest net debt position since GFC, Scentre said its available liquidity is enough to cover all debt maturities until Q4 2025.
HY / Distressed
Lukewarm reports / ratings updates from Consumer names this week (e.g. UK’s Asda/Iceland and US Apparel Retailers)
Bed Bath and Beyond said to be in talks for $400m asset based loan - WSJ
Cineworld said to be in talks with secured lenders and DIP financing said to be expected according to sources.
FINANCIALS
Pershing Square Bill Ackman’s Interest Rate Swaption trade has been the top performing instrument for PSH generating a return of 9.9% YTD to 16 August.
CHINA
“Higher quality” China Property bonds rose +4-5pts in the week on new stimulus measures
Meanwhile, new problems re-surface: China heatwave is most severe ever recorded in the world according to the New Scientist
*MOVES OVER 5D*
Rates -2 year bond yields for the UK, US and Italy rose meaningfully in the week. The 2 year UK gilt hit a post 2008 high when it hit 2.955%. Even the 5 year gilt put in a decent move over the week, widening 30bps. 10 year JGB yields jumped to six-week high.
Bond ETFs - No major moves of note but it was noticeable that TLT closed up on the week vs a sell-off in short and medium dated USTs and the Gilt ETF. Despite what felt like a risk off week, EM Local and Hard currency bond ETFs were up 30-50bps.
CDS - Same trend as highlighted above in terms of EM CDX being tighter over the week but XOVER was wider by 35bps and CDX HY wider by 27bps.
Cash Credit spreads - EM HY rallied nearly 20bps compared to a 20bps widening in US HY and 14bps widening in $ CoCos.
*MACRO CREDIT*
Jackson Hole Summary - Hawkish
I’m not going to repeat what hundreds of others have written about regarding J Powell’s speech at Jackson Hole. But the summary is that he and the Fed board are still motivated to bring down inflation by tightening financial conditions. This tweet summed it up perfectly:
Meanwhile over at the ECB…
Useful tweet on recent US Consumer habits in July
US Housing - More weak data points from eco data and corporate earnings
Sales of new US homes fell for the 6th time this year to the slowest pace since early 2016. Furthermore, Luxury Homebuilder Toll Brothers cut its sales forecast and said it has increased buyer incentives to help navigate a slowdown in demand.
US business activity contracted for a second-straight month in August… (ET)
falling to the weakest level since May 2020, S&P Global data showed Tuesday.
Fed: Barkin says Fed will curb inflation even at risk of recession
German government bonds are recording their biggest swings since the eurozone debt crisis - FT
Extract continued: “ …a decade ago as the European Central Bank’s withdrawal strips the market of one of its most important buyers… The yield on Germany’s 10-year Bund has moved in at least a 0.1 percentage point range on 79 days in 2022, according to Financial Times calculations based on Refinitiv data. Bund yields have not swung in such a wide range so regularly since 2011 and only did so on one day last year.”
Eurozone and UK PMIs surprised to the downside
Eurozone (via ING): “The August PMI indicates this economy is heading towards recession quickly if it’s not already in one. Meanwhile, weaker demand is leading to some fading of inflationary pressure, but the question is how soaring energy costs will impact this in the coming months”
UK (via FX Street): UK Manufacturing PMI contracts to 46.0 in August, a big miss. Services PMI in the UK eases to 52.5 in August, beats estimates. “Excluding the initial phase of the pandemic in early-2020, the reduction in manufacturing output was the quickest seen since the start of 2009. Meanwhile, the service sector registered the weakest increase in activity since the recovery began in early 2021.”
The Bank of Israel raised its policy rate by 75bp to +2.00%, above consensus of +50bp
*INFLATION*
PCE (Fed’s preferred measure of inflation) cooled in July
US Gasoline prices were down for a 70th straight day
Singapore headline inflation touched 7% in July, highest in 14 years
French Electricity Price Exceeded 1,000 Euros for First Time
UK inflation to breach 18% as gas prices soar, banking giant Citi forecasts
UK - Ofgem raise household energy cap to £3,549 starting in October - Guardian
Extract: “In a blow for hard-pressed consumers already struggling with soaring inflation, Ofgem approved the £1,578 increase on the current figure of £1,971 for the average dual-fuel tariff – a rise of 80%. The cap will be almost treble what it was a year earlier last October, when it was raised to £1,277.”
Liz Truss is considering a ‘nuclear VAT cut of 5% across the board - Telegraph
To tackle the cost-of-living crisis; largest ever reduction could save families £1,300 a year in £38bn boost to economy. Yahoo Finance
Tesla announced the price of Tesla Inc.’s “Full Self-Driving” feature will rise by 25% next month, from $12k to $15k
*NEW ISSUES/TENDERS*
Mexico, which traditionally opens up the $ EM new issue market issued a Samurai
Mexico raised 75.6bn yen ($553 m) from the sale of its first Samurai bond tied to the United Nations Sustainable Development Goals. Note that Mexico is set to redeem $1.7bn of its 3.6% 2025 notes.
Schuldschein issuance doubled in H1 2022
On this note, BBG highlighted that European Auto Parts firm ZF was looking to raise an ESG loan in the Schuldschein market at a cheaper rate than what is possible in the HY market currently.
Southwest Airlines called its 4.75% 2023 notes early.
*IG*
VW looks to take stakes in Canadian Miners in order to secure supplies for EVs
Extract: “Volkswagen AG and the Government of Canada aim to promote e-mobility in the country and to explore opportunities across Canada’s automotive and battery supply chain”
Qantas shares rallied meaningfully on share buyback / better than expected demand
Other highlights from investor deck:
2H22 Underlying EBITDA of $526m in top half of guidance range, after employee recovery boost cost of $102m
Positive Underlying EBIT for Group Domestic in 4Q22, record full year Freight performance and Qantas Loyalty returning to double digit growth5 in 2H22
Three consecutive quarters of positive net free cash flow and record free cash flow in 2H22
Lowest Net Debt since GFC, strong liquidity; $3.3b cash balance, prepaid $450m of gross debt, >$1b increase in unencumbered assets
Scentre has enough available liquidity to cover all debt maturities until 4Q 2025
In its latest results, Australian Mall Real Estate giant made this comment regarding its debt:
Scentre Group CFO and CEO-Elect Elliott Rusanow said: “Our approach to capital management during the period has seen the Group execute new and extended bank facilities of $2.6 billion, including syndicated bank facilities of $1.4 billion.
As a result, the Group has available liquidity of $4.8 billion, sufficient to cover all debt maturities until the fourth quarter of 2025. “In addition, we have increased our interest rate hedging profile, with 80% hedging for the second half of 2022, 70% at January 2023 and 67% at December 2023.
*HY*
Asda Half year figs - Source: @Euroyield
Average UK family weeks spending power change YoY is £-45, down 16.5% YoY in July
Q2 Revenue £4.916 bn down 1.78% YoY
EBITDA £235mm -25.4% YoY
Adj EBITDA margin 3.6% vs, 5.2% YoY
FCF £189mm -14.86% YoY
Secured Leverage 3.1x vs Q1 @3.2x
Total Leverage 3.9x Flat YoY
The supermarket delivered positive like-for-like sales towards the end of the quarter and this growth trajectory has continued into the third quarter, Asda said, driven by its continued investment in price and quality in core categories, including produce, meat, fish, and poultry. Source: Retail Gazette.
There was weakness in consumer facing names:
Abercrombie & Fitch Co on Thursday cut its full-year sales forecast
US Apparel retailer Nordstrom dropped 14% last night on lowered forecasts
U.S. retailer Macy's cuts forecasts on weak consumer spending, macro downturn
Dell’s Earnings & Guidance Disappoint as Pandemic-Era PC Boost Fades
Iceland Supermarket bonds went lower on ratings downgrade/fears over consumer
Moody's downgraded Iceland VLNCo Limited to B3 from B2; outlook negative. Extract of the statement:
“The rating action reflects Moody's expectations that Iceland's credit metrics will deteriorate more than factored in the previous rating over the next 12-18 months. Moody's views reflect an increasingly challenging economic environment, with already strong evidence of high inflation affecting consumer spending even for groceries, as well as rising input and energy costs, as only partly mitigated by ongoing initiatives to increase productivity.” The agency went on to say that the above will have negative implications for its leverage over the medium term.
Cineworld - Re-org podcast’s sources suggest “company is in discussion with lenders and DIP financing is expected”
Sources told Re-Org that “the company is in confidential discussion with its lenders and debtor in possession financing is expected.” Extract from Re-Org podcast.
Further colour was provided from sources quoted by the Daily Mail: “A source close to the process warned that Cineworld's creditors, including Cineplex, could lose out. 'There's going to be a significant haircut here for everybody,' the source told the MoS. “
Finally, the FT wrote a detailed article on some of the background leading up to Cineworld’s problems and discussed a few different possibilities e.g. possible sale of Eastern European business to pay back debts filing chapter 11 and letting lenders take over (taking it out of the hands of the original founders).
Bed Bath and Beyond said to be in talks for $400m asset based loan - WSJ
I tweeted about this basically making the point that if BBBY can get financing, then clearly financial conditions must be too loose!
Extract: “Sixth Street is in exclusive talks with Bed Bath & Beyond and is nearing final terms for a loan of close to $400m to shore up the troubled retailer’s liquidity, according to people familiar with the matter…The company told prospective lenders it had selected a proposal for an asset-based loan, The Wall Street Journal reported Tuesday citing people familiar with the matter.”
Good article on European loan market ahead of September - LPC
Extracts of article:
Bankers were hoping volatility would ease during August, and sentiment improved slightly during the first half of the month, with average bids on Europe's top 40 leveraged loans trading up to 94.97 of face value on August 16 from around 90 in mid-July, according to LPC data.
Bankers believe some banks may test the market in September as there is a potential weaker set of third quarter earnings coming in October that could increase volatility.
Lead banks backing buyout of UK supermarket Morrisons are still looking to shift a £1.5bn-equivalent euro-denominated term loan B and a £500m TLB2, after taking a hit by placing senior secured sterling and euro notes at deep discounts earlier of the year.
*FINANCIALS*
Pershing Square (PSH) reports H1 Figures, extracts below
“PSH’s debt profile is comprised of a laddered set of maturities due over the next nearly 17 years which matches our long-term investment horizon.
Following the redemption of the 2022 Bonds, the Company’s average cost of capital as of August 16, 2022 is 3.1%.
Our total debt to total capital ratio as of August 16, 2022 is 18.8% and is conservative, particularly given that PSH’s portfolio is liquid and easy to value”
The value of PSH’s interest rate swaptions grew from $840m as at end of 2021 to $1bn as at 30 June 2022. The Interest Rate Swaption trade has been the top performer for PSH which has generated a return of 9.9% YTD to 16 August.
UK/European Tier 2 bonds calls
Natwest put out a call notice on its £ Natwest 7.125% T2 bonds. Bank of Ireland published call notices for its £ (XS1685476175) and $ (XS1685476092) T2 bonds.
*CHINA*
China Property Bonds rally on latest stimulus measures
The PBOC cut 5 year LPB by 15bps to 4.3%, which represented the third cut this year. Authorities also proposed a plan to provide a guarantee from China Bond Insurance for major developers. Names like Country Garden and CIFI are up +4-5pts on the week generically. An ETF which owns China Property bonds is up more than 20% this week alone, bearing in mind it is down a lot YTD.
The restructuring of other developers debt continued, with Shimao proposing paying its $11bn of offshore debt over a period of 3-8 years.
BlackRock, UBS Among Funds Cutting China Property Exposure - BBG
Extract: “Asia’s largest high-yield bond funds are steering clear of China’s real estate sector as a worsening liquidity crisis weighs on the debt, according to research firm Morningstar Inc. The average weighting of China property bonds in the Asian junk funds dropped to 16% in June from almost 28% at the end of last year…
Yet, China Property is still the largest segment within Asian HY according to GS
China heatwave is most severe ever record in the world - New Scientist
The problems that China is facing currently are not just economical. This from New Scientist:
“Low rainfall and record-breaking heat across much of China are having widespread impacts on people, industry and farming. River and reservoir levels have fallen, factories have shut because of electricity shortages and huge areas of crops have been damaged. The situation could have worldwide repercussions, causing further disruption to supply chains and exacerbating the global food crisis. People in large parts of China have been experiencing two months of extreme heat. Hundreds of places have reported temperatures of more than 40°C (104°F), and many records have been broken. Subway stations have set up rest areas where people can recover from the heat.”
The situation is not too dissimilar to those experienced in UK / Europe with respect to record breaking temperatures and droughts. It is yet to be seen what the long term implications are, but in the short term the impact appears to be in the energy market where power prices have surged globally.
*EM*
Central Bank Indonesia unexpectedly raised its policy rate by 25bps to 3.75% - ING
Bank of Korea hiked 25bp where the rhetoric was notably more hawkish (Gramercy)
Brazil Lifts Mask Requirement For Planes & Airports
“We are excited about the news, because thanks to the advance of vaccination efforts and the reduction of COVID-19 cases throughout the entire country, air travel is returning to normal. Now, the smiles of our Crew and our Clients, which were previously hidden, will now be seen onboard our flights.”
Source: simpleflying
Brazil inflation index saw biggest dip since data series began in 1991 - Rio Times
Extract: “Inflation in Brazil fell 0.73% in the first two weeks of August after declining 0.68% in July, the official Brazilian Institute of Geography and Statistics (IBGE) reported today. This was the lowest inflation rate since November 1991, when IBGE analysis began mid-month. The trend indicates that there will be "deflation" in the calculation of the whole of August, as was the case in July. According to analysts, these two consecutive reductions are due to lower fuel and household gas prices.”
Sri Lanka - IMF staff team led by Peter Breuuer and Nozaki plans to visit Colombo during Aug 24-31
An IMF staff team led by Peter Breuer and Masahiro Nozaki plans to visit Colombo during August 24-31 to continue discussions with the Sri Lankan authorities on economic and financial reforms and policies.
Pakistan looks set to receive funding from Saudi and Qatar
King Salman orders $1 billion to be invested into Pakistan - Arabnews
Qatar to invest $3bn in Pakistan economy - Al Jazeera
Egypt Financing agreement with IMF likely soon: PM (Arab News)
Extract: “CAIRO: The Egyptian government is in the final stages of signing a new financing agreement with the International Monetary Fund, Al-Arabiya reported citing Prime Minister Mostafa Madbouly. His statement came hours after a Moody’s report, which expected a gradual devaluation of the Egyptian pound in order to curb inflation in the North African country.”
$ Bonds of Egypt have advanced generically between 4-5pts in the past week continuing their rally from much lower levels seen in July 2022.
Bahamas - bond prices rise ~4-5pts at front end this week
In a risk off week for most of EM, Bahamas bond prices rose (potentially) due to two news articles, one from a Rothchild Head of Sovereign Debt Advisory claiming that “Debt doomsday is not imminent” and the other from the opposition leader urging Bahamians to buy International bonds while prices are low.
Tinkoff Group reports 1H performance, currently unable to call 9.25% eurobond
Extract: “The Group continues to honor its obligations to bondholders and aims to make the coupon payments under its two outstanding Eurobonds in due course in September subject to regulatory environment. Given current limitations in the operation of the capital markets infrastructure, the Group will not be able to execute a call option for its 9.25% perpetual Eurobond in September 2022. To ensure coupon delivery to all bondholders, settlement to Russian residents will be made in Rubles via local settlement agents.” Source
*LOANS / PRIVATE CREDIT*
Two UK Software companies saw bid interest this week (Micro Focus/Aveva)
Open Text agreed to buy Micro Focus for about US$ 6bn. Buyer will fund the deal with new debt, an existing credit line and cash.
Schneider considering buying out minority shareholders in Aveva: French industrial conglomerate Schneider is considering buying out minority shareholders in software company AVEVA. Sources: Reuters/BBG
*RATINGS*
Bombardier was upgraded to B- from CCC+ with a stable outlook by S&P
S&P UPGRADES US STEEL TO 'BB-' FROM 'B+'; OTLK STABLE
S&P revised its outlook on Gol to stable from positive and affirmed its global scale 'CCC+' issuer credit rating on the company
Fitch Upgrades JSC Ukrainian Railways to 'CC' on Sovereign Rating Action
S&P lowered credit outlook for Hungary from stable to negative
Hungarian assets continued to fare poorly after credit rating agency S&P Global Ratings lowered its credit outlook for Hungary from “stable” to “negative” due to the country’s high dependence on Russian energy exports as well as tensions with the European Union (EU). However, S&P maintained its BBB rating on Hungarian sovereign debt. Source: T- Rowe Price.
Fitch Affirms OSB GROUP at 'BBB-'; Outlook Stable
*CREDIT TRADING*
MarketAxess share price hit a new 52-Week Low at $248.96 (near COVID lows)
Interested in hearing people’s feedback on why the stock has been such a poor performer YTD. Some of it is likely down to macro factors such as the impact of rates on high P/E multiple stocks.
*LINKS*
$HYG sees outflows after a few weeks of inflows
US IG and Loans also saw outflows in the same week.
US corporate debt to equity is currently very low
Corporates - Interest coverage update
Profit margins - Last shoe..?
Guggenheim Q3 outlook
Extract: “Guggenheim Investment…today provided its Third Quarter 2022 High-Yield and Bank Loan Outlook. Titled “Credit Yields Look Attractive Despite Rising Recession Risks,” the report explores opportunities for credit investors at a time of rising yields for both high-yield corporate bonds and leveraged loans.”