*TL:DR*
WEEKLY MOVES
EM Bonds outperformed across CDS/ETF/Cash Credit spreads
Longer duration strategies underperformed
MACRO + INFLATION
US 2 yr yields hit 4.75%
NFP still showing strong jobs market, some economists pointing out underlying weakness
Doves gathering (?) - BoC/Norges/RBA and lone voices at the Fed…
US Air-Passenger Traffic Tops Pre-Pandemic Levels of 2019
Weak data out of Taiwan, Korea, HK and China last week
Inflation remains high in a number of regions including Eurozone
NEW ISSUES/TENDERS
Ford comes to HY market for fourth time, upsizes latest deal
Credit Suisse - only half of eligible bonds tendered by investors
Some £ bond tenders for legacy fins and Tesco
FINANCIALS
No major negative surprises in European Bank earnings
Moody's changes outlook for banking sectors in six European countries to negative from stable as economies slow
APRA “hand-grenade” launched into T2 and T1 callable markets
Some Korean perps in freefall (20-30pts down) due to non call
Insurance stocks are ripping higher vs S&P 500
IG
European earnings from Vonovia and German Autos were largely ok
HY
Distressed credit to lure more hedge fund investors next year -BNP survey
Travel & Leisure names post strong Q3s…Carvana suffering due to higher rates
Cineworld reaches bankruptcy settlement with landlords, lenders
Tech loans dominate B- ratings bucket within CLOs
CHINA
Market had a “dress rehearsal” for a China re-opening move on Friday
Olaf Scholz in China, first G7 leader since 2019 to visit, talks trade/Russia..
PRIVATE CREDIT / BUYSIDE
Earnings call highlights from Apollo Q3
Blackstone - syndicates its own bond deal (Emerson)
*KEY MOVES OVER 5D*
Credit spreads - Xover -22bps to 533bps, CDX EM -13bps to 283bps. Similar tightening reflected in cash credit spreads -26bps tightening in EM HY and -17bps tightening in EUR HY.
Bond ETFs - EM was a key area of strength this week (VEMT+2.75%, EMB+2.4%, EMLC+1.5%, CEMB+1.4%). Special mention for iShares Euro Corporate 1-5 year Bond ETF (SE15) which posted +2.2% return over 5 days. Generically, longer duration strategies underperformed.
*MACRO*
2 year US yields hit 4.75% (highest since 2007)
Whilst 2s10s spread is the most inverted since 1982 and the Fed Terminal rate rose above 5%.
People are taking notice of the high yields on risk free assets. Even Chamath and his pals were talking about the relative attractiveness of banking a 4%+ yield on T Bills vs betting on speculative high growth investments in this current climate. Link to video below, T-Bill chat is at 30:10 mins…on a related sidenote this week’s podcast was excellent on some of the macro concerns impacting Tech companies.
EY’s Chief Economist sees Labour market softening but not yet in an obvious way
Extract from Gregory Daco: From where I sit – at 35,000 feet above the ground 🛫 – the moderation in the 3-month rolling average of #jobs growth to 289k (its slowest since January 2021), the reduced breadth of jobs growth across only 62% of private-sector occupations, and the fact that employment in construction, real estate services, warehousing and professional & business services is cooling indicates the onset of a broader and faster slowdown in employment…
Global tightening update
US Air-Passenger Traffic Tops Pre-Pandemic Levels of 2019 - BBG
Extract: Airline passenger traffic in the US has been running above the comparable levels of 2019, the first time that’s happened since Covid-19 dramatically cut air travel. Just over 15 million people went through Transportation Security Administration security portals in the past seven days, about 39,000 more than in 2019, or an increase of less than 1%, according to TSA data.
Boston Fed Dovish talk…
Interesting that Boston Fed’s Collins would come out with this after J Powell’s most recent remarks.
BoC’s Macklem: Getting Closer to End of Tightening Phase but Not There Yet - MACE
Extract - Bank of Canada Governor Tiff Macklem on Tuesday indicated that the bank’s aggressive tightening mode is coming closer to an end but also stressed its job to restore price stability is not done yet amid elevated inflation. He repeated the bank’s rate hike statement from last week that the Governing Council expects the policy rate “will need to rise further” but didn’t drop any hints on the scale of the next rate hike, possibly at the Dec. 7 meeting. Instead, he said, “How much further will depend on how monetary policy is working to slow demand, how supply challenges are resolving and how inflation and inflation expectations are responding to this tightening cycle.”
Norges Bank executed a “dovish hike”
@fwred went one step further and connected up the dots from Central Banks doing similar things to Norges Bank:
Some Asian eco data points were very weak this week
Taiwan's posted its weakest manufacturing PMI since 2009 while South Korea clocked its fourth month of contraction.
HK - Prelim Q3 GDP comes in significantly below estimates
Extracts from SCMP:
Hong Kong remains stuck in recession as economy shrinks by 4.5 per cent in third quarter.
Gross domestic product (GDP) decreased in the quarter after contracting by a revised 1.3 per cent, year on year, in the second quarter, according to preliminary data.
“Looking ahead, the markedly deteriorating external environment will continue to pose immense pressure on Hong Kong’s export performance in the remainder of the year,” the spokesman said. “Elevated inflation and aggressive monetary policy tightening in major advanced economies will dampen global demand further. Heightened geopolitical tensions and the development of the pandemic will also add downside risks.” - Govt Spokesperson.
Maersk Q3 provides some good colour re state of global economy on earnings call
“…We also saw some softness in activity given the higher inventories and economic slowdown in the US, which affected margins.”
”As a result of weakening end consumer demand, we saw volumes decline by 7.6% with an acceleration of the decline during the quarter”
”As a result of increasing inflation and economic slowdown, demand for Ocean shipping began to decline in August and this was clearly observed in both rates and volumes.”
”The positive aspect of this normalization is that the lower demand will allow global supply chains to progressively improve even if it still remains elevated in some geographies.”
”Ocean business has seen 7% lower volumes, evenly spread between contracts and shipments”
”Average expected full year contract rates are now slightly lower than what we expected in August when we reported Q2. This is a result of mix effect where greater volume decline has been experienced in the highest rate lanes.”
”Based on what we observed in the first nine months of the year, we are pulling back our outlook for the industry and now expect global container demand to decline by 2% to 4% in 2022.”
”We see that our average freight rate was up nearly 42%, but the rate of change has slowed versus prior quarters and is essentially flat on a sequential basis.
Based on the current market situation, we expect this to decline going forward with a pronounced deterioration of the shipment rates as the long-awaited normalization has started.”
Oil companies - Both US and UK looking at Windfall taxes
Both the UK and US administrations appear to want to introduce Windfall taxes to oil companies’ profits. So far, this news has not weighed on credit spreads of oil companies meaningfully, as firms are still making attractive profits and free cashflow in this high oil price environment.
*NEW ISSUES/TENDERS*
Ford Motor Credit issued $1.5b 5Y at Par to Yield 7.35%, deal was upsized.
This was the fourth time Ford has issued bonds this year, demonstrating superior access to funding vs most HY peers. Side note: S&P stated a week ago that Ford could still be on track to regain IG status.
Natwest issues in GBP and USD - Natwest issued what look liked very wide senior paper in GBP and $. The Dollar senior deal priced at ~7.4% for a 4NC3 for a bond split rated across A and BBB from different agencies.
GBP Financials Tenders- Barclays legacy bond (BACR 5.3304%) was called at par (only 33m outstanding) and Tesco Personal Finance put out an any and all tender for its Tesco Personal Finance 3.5% 2025. The Tesco bonds were trading around 90 at the start of October vs a tender price ~96.
Credit Suisse Bond Tender
Bloomberg reporter @tasosvos summarised the CS Bond Tender quite well in one Tweet, but you can see the full details here.
Balder Accepts $146 Million Tenders In Repurchase Offers for o/s floating rate senior notes
Tesco Property – Bond tender ££
Tesco published a bond tender for its GBP denominated Tesco Property Finance Bonds.
*INFLATION*
Eurozone inflation set new record and came in higher than BBG estimates
Hard for the ECB to be anything other than hawkish with inflation data still coming in so strong.
Argentina's inflation seen peaking over 130% next year, EcoGo says - BA
Turkish Inflation Tops 85% In Likely Peak For This Year - BBG
South Korea: headline CPI inflation inched up to 5.7% YoY in October
Up from 5.6% in the previous month.
UK: British shop-price inflation accelerated to 6.6% in October
*FINANCIALS*
European Bank earnings were largely positive again
Good week of earnings for Banking sector – with BNP, Erste Bank, ING, SocGen and Intesa reporting. This is a continuation of the theme started by the US Banks earnings a few weeks ago. There appeared to be no major surprises which most bond investors will be thankful for!
RBIAV non-call on AT1 (6.125%) – bonds closing largely unchanged
Raiffeisen Bank (RBIAV) announced that it will not proceed with the early redemption of its 6.125% AT1 whose first call date is 15 December 2022. Judging by the market reaction, the decision was largely expected. According to BBG this is the last AT1 with a call date in 2022. The focus will shift to the next instruments which have call dates in early 2023 (UBS 5% perp and HSBC 6.25% perp) which currently trade in the 90s.
APRA throws “hand grenade” into callable instruments debate…
The Australian Prudential Regulation Authority (APRA) published a letter on AT1 & T2 Capital which sent a number of Aussie issuer’s bonds wider. The overall gist of the letter is to call bonds if it is economically sensible to do so, and not just for the sake of maintaining relationships with bondholders. This resulted in weakness in USD and EUR paper for Australian Financials, some of which traded as much as 4.5pts lower over 5 days.
Korea Credit Crisis Spreads as Bond Uncalled in First Since 2009 - BBG
The effects of Global QT have sent a ripple through various sectors of global markets; High growth Tech stocks, EM Bonds, Investment Grade Bonds and more recently; perpetual bonds. The instances of non calls in callable perps sector is growing and in cases like Australia, non calls appear to be encouraged by the regulator in certain instances. What’s going on in Korea with respect to the perps situation and the general health of their credit market is worth observing since Korean Institutions are a large investors in developed market credit.
Extract: (Bloomberg) -- A South Korean insurer took the unusual step of delaying buying back perpetual bonds, in the first such case for the nation’s issuers since 2009 that adds to signs of a crisis in the local credit market. Heungkuk Life Insurance Co. will postpone exercising a Nov. 9 call option for its dollar perpetual note, citing market conditions that prompted it to delay a planned security issuance that would have repaid the bonds, a spokesman said. It plans to exercise the call option, which it can do once every six months, in the future after issuing dollar securities.
Korea has been scrambling to prevent a credit market meltdown from sparking broader contagion, after local corporate bonds suffered one of the most rapid selloffs ever in the past three months. Things worsened after a rare default on commercial paper by the developer of the Legoland Korea theme park in late September. The broader selloff has been one of the worst in Asia’s local-currency markets amid a global fixed-income slump this year.
Pershing Square Oct-22 Net Performance +9.9% outperforming S&P 500
Insurance stocks are ripping to ATHs
*IG*
October 2022 saw large outflows from Active Managers
Second chart is also interesting as it shows the relatively strong relationship between total returns and Active Fund Flows.
BP Q3 Debt + cashflow highlights - BP Q3
- Net debt reduced for 10th successive qtr to $22bn at end of Q3
- Debt buybacks:$2.9bn of finance debt bought back in Q3 consisting entirely of $ bonds, YTD total $7.4bn
- Surplus cash flow in Q3 $3.5bn. In 9m ended 2022: +14.2bn surplus cashflow vs $3.3bn in 9m ended 2021
Vonovia - German Real Estate Co | Q3 report
Key bullet points from Slide deck:
Segment revenues up 31.4%, EBITDA up 37%, Group FFO up 35%.
Vacancy rate at an all-time low; customer satisfaction at highest level since survey began.
Synergies from merger with Deutsche Wohnen higher than expected.
Secured financing expected to be rolled over
Bonds expected to be mostly retired with available liquidity and free cash flow generation from operating business and disposal proceeds
Advanced discussions for sizeable secured financing
Liquidity position before 2023E free cash flow generation: ~€1.3bn est. cash on hand as per YE2022, €3.0bn undrawn RCF/Commercial Paper Program
Major European Autos reporting better than expected Q3s
There were worries going into the reports for the likes of Stellantis and BMW that Europe’s gas problems could cause issues with profitability. However both reported Q3s that read ok. Snippets below from BMW:
An uptick in pricing for new and used vehicles, itself a response to a rise in raw material and energy expenses, helped fuel BMW's performance during the period.
Deliveries of all-electric cars - in particular of BMW's iX3, iX and i4 models - doubled versus the previous year to over 128,000 units.
Meanwhile, income at BMW's financial services unit - which provides funding options to buyers - missed expectations, as the business took out greater provisions against bad loans in the face of "geopolitical uncertainties and [the] weaker macroeconomic outlook."
Looking ahead, BMW warned that elevated inflation and interest rates will likely impact consumer purchasing in the coming months. It added that raw material costs will remain high, but said it does not see energy supply shortages disrupting production.
*HY*
Distressed credit to lure more hedge fund investors next year -BNP survey | RTRS
Extract: Global investors will ramp up allocations to distressed credit hedge funds next year, expecting opportunities to buy companies’ debt on the cheap as tighter monetary policy from the Federal Reserve and other central banks weighs on growth, according to a BNP Paribas survey. Allocations to hedge funds focused on U.S. corporate debt are expected to increase by 35% over the next 12 months compared with year-to-date allocations, and by 29% for those focused on European credit, the survey showed.
Allocations are also set to increase for event-driven credit hedge funds, with 23% of the BNP survey participants looking to ramp up bets on "special situations" such as bankruptcy or restructuring, as companies fight the economic downturn. That's up from 10% so far this year.
The survey was based on data from 90 investors that collectively invest in or advise on $380 billion in hedge fund assets. They include intermediaries such as funds of funds, as well as private investors and institutional investors.
Germany Backstops Commodity Traders as War Drives Resource Dash - BBG
Germany is not messing around with respect to securing vital energy/key metals as it offers loan guarantees to commodity traders:
Germany is offering loan guarantees to commodity trading houses to buy energy and key metals, as Russia’s invasion of Ukraine sparks a global scramble for resource security. Trafigura Group, the world’s biggest trader of copper, has already agreed to supply German customers with non-Russian metals for the next five years, helped by $800 million in bank credit that’s ultimately guaranteed by the German government. The trading house is now discussing a similar deal for liquefied natural gas.
US Travel and Leisure an area of strength in Q3 earnings
There were positive reports from Avis, Marriott, Booking Holdings and Royal Caribbean during the week. This was what Avis said:
We ended the quarter with revenues 18% above third quarter 2021, at $3.5bn, a new quarterly revenue record, surpassing our second quarter 2022 record, driven by continued strong demand and increased revenue per day.
Net income was $1.0bn and our Adjusted EBITDA was $1.5bn, our best quarterly net income and Adjusted EBITDA in our history.
Our liquidity position at the end of the quarter was approximately $1.7bn, with an additional $2.6bn of fleet funding capacity. We have well-laddered corporate debt and no meaningful maturities until 2024.
Hertz CFO Sees Limited Impact From Rising Interest Rates on Company Finances - WSJ
Extract- WSJ: How far is Hertz impacted by rising interest rates? The Fed this week implemented another 75 basis point hike.
Mr. Cheung: We have a strong balance sheet and our debt profile insulates us from interest rate volatility. Changes in interest rates have had limited sensitivity to our business as approximately 75% of vehicle debt [Note: used to purchase vehicles] and 70% of total debt has a fixed interest rate. If underlying interest rates move by 1%, it will impact our profit and loss [statement] by about $30 million net at current debt levels. We don't have any material corporate debt maturities until 2026. Our asset backed securities maturities are typically in the three-to-five year period. On the variable portion of the ABS, we have an interest rate cap in place to manage our exposure to fluctuations in interest rates.
American Axle share went as high as +20% on takeover rumours | BBG
Extract: American Axle & Manufacturing Holdings Inc., a maker of drivetrain components, is attracting preliminary interest from suitors including Melrose Industries Plc, people familiar with the matter said.
London-listed Melrose is weighing a combination of its GKN Automotive unit with American Axle, according to the people, who asked not to be identified because the information is private. A deal could help GKN Automotive build scale in the car-parts industry and gain a public listing in New York. Shares of American Axle gained as much as 23% in New York trading Thursday…American Axle has also had contact with other industry peers including BorgWarner Inc. and Dana Inc. to gauge their interest in potential tie-ups or asset deals, the people said.
Poor quarterly results send Carvana’s bonds down 10 points, stock down 40% in a day | BBG
CEO Garcia said “interest rates have moved up materially,” which has sapped demand for financing a car, in explaining Carvana’s results to analysts on Thursday
Cineworld reaches bankruptcy settlement with landlords, lenders | RTRS
Extract: Cineworld Group on Monday announced a bankruptcy settlement with its landlords and lenders, clearing the way for the company to borrow an additional $150 million and make a $1 billion debt repayment. Landlords and junior creditors dropped their opposition to the billion-dollar debt repayment after Cineworld agreed to pay at least $20 million in rent that will accrue after Sept. 30. Britain's Cineworld, which filed for bankruptcy protection in Texas in September with less than $4 million in cash on hand, previously did not intend to make any post-September rent payments until the end of its bankruptcy.
Tech loans dominate B- rated Bucket within CLOs
Golar LNG sale of approximately $100 million of shares in CoolCo
Golar announced that it has sold ~8m shares in Cool Company raising net proceeds of circa $100m. Golar will still own 8.3% of CoolCo after the sale. Proceeds of the sale are set to be utilised on FLNG growth opportunities according to its CEO.
DNO Q3 - Cash position of nearly $250m, EBITDA +59% YoY
Extract of statement: “With a free cash flow of USD 151m in the quarter, DNO continued to pare back gross debt. The outstanding amount of the DNO03 bond was reduced from USD 176m to USD 131m, while drawdowns under the reserve-based lending facility dropped from USD 95m to USD 35m. At the end of the quarter, gross cash deposits stood at USD 818m and net cash totaled USD 252m.”
Atlas Corp agrees to be taken private for $15.50 by Poseidon Shareholders
The de-listing of Atlas Corp could trigger a Put Option Event, in which holders of Seaspan’s 2024 and 2026 Nordic bond maturities can require the company to buy back bonds at 101% of par. Meanwhile, the US HY 2029 bond continues to trade in the mid 70s.
*PRIVATE CREDIT*
Blackstone $14bn deal to take stake in Emerson Electric, syndicates debt itself, bypasses banks - Blackstone
Blackstone Inc. agreed to buy control of Emerson Electric Co.’s climate technologies arm in a deal valuing the business at about $14 billion. The deal could mark the biggest private-equity buyout in months when such activity is on a downward trend amid market volatility.
Blackstone and its co-investors would contribute $4.4 billion in equity toward the deal, supplemented by $5.5 billion of debt financing.
Joseph Baratta, global head of private equity at Blackstone, said its ability to get the deal done illustrates the firm's competitive advantage as a trusted counterparty for an array of lenders.
"I think it will take at least six months for the credit market to normalize, and we will continue to transact in this market," he said. "We like to invest in these moments. This is when you can do interesting things."
"If anyone can get a financing done somewhere, it's us, and I think you'll see some examples of that in the not-too-distant future," he said.
*RATINGS*
Moody's - Moody's changes outlook for banking sectors in six European countries to negative from stable as economies slow
The outlooks for banking sectors in the Czech Republic, Germany, Hungary, Italy, Poland and Slovakia have changed to negative from stable; Austria and the UK remain stable
Rising prices and rates will affect the creditworthiness of many businesses and households, triggering the formation of new problem loans
S&P: Ford Remains Positioned for Upgrade to Investment-Grade Rating in 2023
Anglo American Upgraded to BBB+ by S&P, Outlook Stable
Vedanta Resources was downgraded to B3 from B2 by Moody's
Following this, Vedanta stopped using Moody’s to rate its debt.
CS downgraded by both S&P and Moody's
S&P cut the Group a notch to BBB-/stable (one level above junk)
Moody's affirmed the group at Baa2 negative but cut the main Opco rating from A3 to A2.
Fitch Revises Energean's Outlook to Positive; Affirms IDR at 'B+'
The revision of the Outlook reflects Energean's faster-than-expected improvement in financial performance over 2021-2023, due to a stronger price environment and timely delivery of expansion projects.
Vonovia: Moody’s cut the Group's rating to Baa1 from A3
*CHINA*
Markets rallied strongly on China re-opening hopes
There were some large moves in securities that have their fortunes tied closely to China’s economy. Friday’s moves acted like a “dress rehearsal” for any real tapering of COVID-19 restrictions. However weekend news out of Chinese Government affiliated news sources are denying the change in approach to containing COVID-19 which could see some moves reverse in the week commencing 7 November. Largest moves appeared to be in Copper and Iron ore related names. Copper had its best day since 2009, while Copper + diversified Miners rose meaningfully (FCX +11.5%, FM CN + 14.5%, Rio Tinto +7.5%)
Germany’s Olaf Scholz meets China’s Xi Jinping | Al Jazeera
…Marking the first first visit by a leader of the Group of Seven (G7) nations to China in three years. Further extracts:
Received by a smiling Xi at Beijing’s Great Hall of the People, Scholz said he hoped to “further develop” economic cooperation – while alluding to areas of disagreement.
“It is good that we are able to have an exchange here about all questions, including those questions where we have different perspectives – that’s what an exchange is for,” Scholz said.
“We also want to talk about how we can further develop our economic cooperation on other topics: climate change, food security, indebted countries,” he said.
Xi told Scholz that as large nations with influence, China and Germany should work together during “times of change and turmoil” for the sake of world peace, according to state broadcaster CCTV.
Scholz also spoke with Chinese Premier Li Keqiang later in the afternoon at a meeting in which he called for fair trade between the two countries. He urged Beijing to do more to press its ally Russia over the war in Ukraine.
*TRADING*
Record E-Trading Brings More Liquidity to Corporate Bond Market | BBG
Extract: Electronic trading of corporate bonds has reached record levels, as credit-trading algorithms get smarter, grab market share, and make it easier for investors to buy and sell corporate bonds without affecting prices too much.
Banks, money managers and others on average traded $15 billion of company bonds electronically daily in September, according to a report from Coalition Greenwich, looking at both investment-grade and high-yield debt. That record level compares with a $12.7 billion daily average in 2021. For junk bonds, about a third of trading volume was through online platforms last month, up from about a quarter in the same period last year.
TP Icap got boost from rates volatility + strong US Dollar (Q3) - Statement
Extracts: Total Group revenue of £1,588m in the first nine months of 2022 was up 10% (+15% in reported currency), compared with the same period in 2021. The Group benefitted from favourable market conditions in Global Broking, particularly in Rates, our largest, and most profitable, asset class. The ongoing strengthening of the US Dollar has been a meaningful tailwind: approximately 60% of the Group's revenue (and approximately 40% of costs) are US Dollar denominated. Excluding Liquidnet (completed on 23 March 2021), revenue increased by 7% (+12%).
Agency Execution revenue, including Liquidnet, was up 34% (+40%). Liquidnet revenue, on a proforma basis, declined by 9% (-7%). In Europe, there was a decline in larger block market trading activity. In the US, there was a shift in mix towards lower rate client segments. Liquidnet's market share in the US and Europe was broadly unchanged
Apollo earnings call- useful snippets on Credit Markets
Further extracts:
This is an amazing time for Alts, alternatives, particularly for credit.
In credit, the areas where we do the majority of our business, which is fixed income replacement, senior secured top of the capital structure are still open and the recent market dislocation is creating an abundance of attractive deployment opportunities for those who can invest with size and scale.
We're seeing pre-financial crisis pricing frameworks allowing us to generate higher returns with less credit risk. For example, the yield on the CCC index one year ago is now the same as the yield on an investment grade index. We're buying new issue 10-year IG corporate paper between 6.25% and 6.75%. And in Sterling, there's single A rated opportunities yielding 7.25% to 7.5%. These attractive high-grade assets are finding a home across our platform,
In another recent example, our size, scale and ability to move quickly allowed us to step in and provide stability to the UK market in response to LDI related for selling at a favorable entry point.
The other nice thing about what's happening in the business is on average, the credit quality of the portfolio is going up market. We have been able to earn these spreads, taking less risk rather than more risk, we've seen minimal impact of capital on capital from ratings migration, 95% of the fixed income assets continue to be investment grade
The credit markets are more exposed to rising interest rates than ever before, and we're diligently preparing for deployment opportunities in distressed debt. With the supply of sub investment grade debt, three times as large as it was during the financial crisis, and was suppressed default levels for almost 15 years. We believe many corporates will need to be leveraged.
During the quarter, we announced the signing of a framework agreement for the Credit Suisse SPG business. This would be our 14th platform. We believe that asset-backed origination has the potential to be as large market as corporate credit. This is a product set that is primarily investment-grade.