Global Credit Wrap 21 October
Plumbing issues, bond market cancelled??, some positivity in bond etfs/new issues, illiquid markets and some important rating updates!
*TLDR*
GLOBAL MACRO
10y US real rates jumped to 1.69%, the highest level since GFC 2009
10yr Treasury yield hit a 12yr high, 10 year bund at 11 yr high
5yr Treasuries topped 4.5% for first time since 2007
More evidence of “plumbing” issues in Global markets
Switzerland’s SNB lent US$ 11.1bn for one week to 17 domestic banks financed by an increased swap lines with the Fed
German Finance Agency (DFA) increased the amount of securities it can lend to traders in the repo market to drive down swap spreads
South Korea expands corporate bond-buying program amid credit crunch concern
Multiple interventions from the BoJ to reduce weakening of JPY vs USD
Recent intervention by the BoE in the Gilt market
How long before there is something that the Fed needs to act upon directly?
Bond vigilantes strike in Poland…
GS think credit is downplaying recession risk, raises spread forecasts for y/e
Leveraged loan market most exposed to ECB hikes: UBS Analysts
Akzo Nobel warns, joining number of Chems warning of macro weakness
A number of Bond ETFs posted positive performance over 5 days..
INFLATION / COMMODITIES
European Nat gas & electricity prices plunging from recent highs
Canada and NZ reported above expected inflation
Mining Giants Rio Tinto and BHP both warn on macro environment
NEW ISSUES
Some issuers and sponsors are avoiding the public credit market to finance deals/refinancing:
Utility ENBW looking to issue completely in private market for next financing
PE firms doing deals with no debt, according to BBG…just incredible!
More evidence of issuers leaning on Bank financing vs Bond financing
Despite the rates/credit vol, new issuance getting done generically in the 5-7% yield range in IG and HY/EM/AT1 at double digits now..
£ Sterling Credit market priced its first new issue in 6 weeks!
New issues are starting to trade up again !
IG
HQ corp issuance coming with juicy yields (JTI 10yr @ 7%, Diageo @ 5.3% for 5Y
Telcos: T- Mobile signs new $7.5bn credit facility, AT&T raised its forecast
HY
Airlines keep beating expectations - United and Lufthansa the latest examples
Two UK Rugby clubs go into administration, meanwhile AS Roma (Italian soccer club) repays bond early
‘CLO Whale’ Norinchukin Halts Purchases
Upsizing is back… Carnival and Fedrigoni both upsized their new HY issues due to investor demand
Banks Saddled With $30 Billion in Unwanted Debt - BBG
FINANCIALS
Corporate pension programs in the UK are increasingly looking to offload their risk to insurers - PIC
Schroders saw a 9% drop in AUM in its LDI Solutions business in Q3
Canada’s Scotia Bank issues Ltd. Recourse Capital Notes at big yield following TD..
Most UK/European Banks are set to report this week:
Tues: HSBC, UBS, UNICREDIT
Weds: BARCLAYS, DB, SANTANDER, SEB, STANCHART, SWEDBANK
Thurs: CS (Strategy day), LLOYDS
Fri: AIB, BBVA, CAIXA, NATWEST
EM
Kenya Wants China to Extend $5 Billion Debt Repayment
Colombian President Petro said higher US interest rate are sucking money out of South America
Turkey cuts base rate by 150bps, signals that November rate cut could be its last as it takes base rate to single digits
RATINGS
Moody's Puts Negative Outlook on U.K.
Germany Affirmed at AAA by Fitch
Citrix systems gets downgraded to B
Angola Outlook to Positive by Moody's
Egypt Affirmed at B by S&P
Nigeria Downgraded to B3 by Moody's, May Be Cut Further
Pakistan downgraded to CCC+ by Fitch
TRADING
BoFa Global FM Survey: Highest Cash Levels Since 2001
Liquidity is the worst it has been in a long while in a number of F.I assets; US Treasuries, Bunds, Gilts, and European Credit including Corporate Hybrids and EM
Bid/offer spreads in HY - MKTX says they are double where they were a year ago
Automation + Alternative Liquidity providers - Big growth areas in Credit
*GLOBAL MACRO*
Fed’s Terminal Rate now expected to be 5%
“According to futures markets that track the federal fund rate, traders have fully priced in the benchmark policy rate reaching 5 per cent in May 2023, up from 4.6 per cent before the latest inflation data released late last week." Source: FT
Fed B/S hit lowest level of the year this week - Charlie Bilello
This is one of the key reasons behind the heightened market volatility and surging global government bond yields this week.
German Bund Yields surge due to easing of collateral scarcity
Due to a shortage of front-end Euro denominated paper, there has been a widening of swap spreads throughout this year. During the week, the German finance agency (DFA) announced an increase of its own bond holdings by €54bn, to used in repo markets. This had the effect of cheaper Bund repo, which tightened swap spreads by making it cheaper to short bonds, allowing bonds to realign closer to swaps.
Poland did “an England” and saw its bonds crumble - BBG
Bond Vigilantes are everywhere…Extract: [Poland’s] bond market meltdown accelerated on Friday, with 10-year yields surging 39 basis points to 9.01%. In the past month, Polish debt has fallen more than anywhere else in the world. The losses are even worse than the UK, where a massive selloff helped bring down the prime minister…The selloff was triggered by a surprise central bank decision to keep rates unchanged despite surging inflation. The move shook confidence in policy makers’ willingness to tackle price growth, especially as the government boosts spending on everything from energy subsidies to social handouts and the military before an election due in about a year.
South Korea expands corporate bond-buying program amid credit crunch concern | RTRS
Extract - (Reuters) - South Korea's government will expand its corporate bond-buying program among other liquidity supply measures amid growing worries about a credit crunch in bond and short-term money markets. The government will double the ceiling of its corporate bond-buying facility run by state-run banks to 16 trillion won ($11 billion), Minister of Economy and Finance Choo Kyung-ho said on Sunday. The measure is aimed at easing volatility and concern of tight liquidity in corporate bond and short-term money markets, Choo said after a meeting with top financial officials, including the central bank governor and regulatory chief.
Akzo Nobel warns, withdraws guidance, joins other Chems warning
Akzo joins warnings from other listed chems players like Dow, Huntsman, Chemours, Eastman, Lenzing. Common themes amongst the warnings were: deteriorating consumer demand in Europe (consumer durables, construction), lack of recovery in China with lockdowns continuing and US logistics constraints and build up of inventories.
Extract from BBG: -The paintmaker (Akzo’s) operating income missed earnings estimates this week. Akzo and firm warns macro turbulence will continue into next year. Akzo Nobel reported third-quarter operating income that missed estimates as the company continues to grapple with supply-chain disruptions and rising prices for raw materials. The Dutch paintmaker reported adjusted operating income of €184 million in the period, missing the average analyst estimate of €192 million. Akzo is among companies affected by surging prices for chemicals and metals, with Europe’s energy crisis and supply-chain snarls driving up input costs. Several of Akzo Nobel’s end markets are expected to experience “significant disruptions” due to a troubled macro-economic environment. It expects the turbulence to continue into next year and is therefore suspending its 2023 goal of €2 billion adjusted EBITDA. “Sharply increased macro-economic uncertainties negatively impacted consumer confidence,” said Akzo Nobel’s Chief Executive Officer Thierry Vanlancker. “This resulted in destocking across several distribution channels in decorative paints Europe and performance coatings, while the market in China was impacted by the ongoing zero Covid-19 policy.”
5D Bond ETF Moves - Several Bond ETFs closing in the green!
While long duration UST Bond ETFs like EDV (-8.0%) and TLT (-5.4%) had a rough week, a number of notable Bond ETFs posted positive 5 day performance. Unsurprisingly a number of UK Bond ETFs cheered the arrival of Jeremy Hunt and then the resignation of Former PM Liz Truss with big gains with the Linker ETF posting a near 20% gain over 5 days.
Sidenote: Decided to condense this into the Macro section due to time constraints, but on the plus side I am tracking more Bond ETFs weekly.
*INFLATION*
Canadian CPI came in hotter than expected but lower than prior month
Canadian CPI came in at 6.9% YoY in September, higher than the expected 6.7%. The figure eased from an annualized pace of 7.0% in the previous month.
New Zealand CPI came in well above expectations
Q3 CPI report came in well above expectations, with the headline printing at 2.2% q/q and +7.2% YoY, far above the 1.5/6.5% expected. This took RBNZ rate expectations sharply higher such that the market is now leaning for the RBNZ to hike by 75 bps at the November 23 meeting, which would be the first time the bank has hiked by more than 50 basis points for this cycle.
Inflation remains high in a number of nations
Inflation projections in Brazil fall yet again | MercoPress
Extract: Brazilian economic authorities have cut down projections regarding 2022's annual inflation from 5.71% to 5.62%, it was reported Monday. It was the 16th consecutive reduction of the National Wide Consumer Price Index (IPCA) estimate.
IKEA hikes prices 80% on some items in the U.K - Marketwatch
Extract - The world’s biggest furniture store, IKEA, appears to have delivered a shock to some U.K. customers, after a survey showed the price of some items surging as much as 80% over a year due to biting inflation costs. A ‘JOKKMOKK’ table and four chairs, with antique stain, would have set a consumer back £99 in 2021, but the price was up to £149 this past summer, and to £179 by October, according to a recent survey from U.K.-based Retail Week. That meant a 20% increase for 2022 and a total gain of 80%.
*NEW ISSUES*
More and more issuers are successfully tapping bank financing over bond financing
T-Mobile (US IG) – Boosted the size of its RCF by $7.5bn.
EnQuest (US HY) – Recently took out its $797m 2023 HY bond and replaced it with a smaller $300m bond, while upping its RBL facility from $300 to $500m...
Beazer Homes (US HY) – Replaced its $250m senior secured RCF maturing 2023 with a new $265m senior unsecured RCF expiring 2026. Moodys liked this and upgraded the credit.
Some prospective borrowers also look like they would look to tap up bank financing instead of bond markets. E.g. European REIT Aroundtown referred to its level of unencumbered assets and strong banking relationships in order to demonstrate its diversified access to bond markets:
LBOs without leverage - buyout firms committing to some deals with 100% Equity!
This is an incredible development imo, demonstrating the lengths some stakeholders are going to avoid the debt market…
Extract: Francisco Partners, Thoma Bravo and Stonepeak Partners are among those that announced new acquisitions in recent weeks without debt financing in place, effectively backstopping the entire purchase price -- in some cases worth north of $2 billion -- with cash from their own funds. Though likely temporary, the all-equity move is a dramatic departure for an industry famously hooked on leverage and constantly on the hunt for ever-more creative ways to boost returns. BBG
Notable high quality Corporate USD issuance this week at very wide yields
Diageo and Japan Tobacco, both A rated issuers priced debt in USD this week at noticeable high yields. E.g. JTI issued $500m 10yr bonds at +295bps (priced to yield 7.069%) and Diageo issued a three trancher including a $750m 5Y Fixed (Oct. 24, 2027) at +100bps ~ 5.334% yield.
Northumbrian Water poised to break a six-week dry spell for £££ Bond sales
In a sign of increasing confidence post the departure of UK PM/Chancellor and installation of Jeremy Hunt, the UK Corporate Credit market appears to be thawing. Northumbrian Water, an IG issuer is looking to issue a 12 year bond + UKT+ 250bps.
Some new issues starting to trade up after issue
Some large coupon deals in Global Credit have had positive after market outperformance after being issued. Permanent TSB’s 13.25% EUR AT1 traded up as high as 104 after being issued at par. Then Latam Airlines recent 2029 issue has traded +4pts higher vs where it was issued but still yields 13% after being priced at 15% yield at the new issue stage.
Rare LATAM EM Issuance - Uruguay issued $1b 12Y SLB +170bps over UST
Bond was priced to yield 5.935% . There was a concurrent tender offer for its 2024, 2027 and 2031 bonds. EM issuance has been rare this year, so this bond issue stood out. Uruguay is a BBB rated IG EM issuer.
Carnival hit the HY market for the 9th time since the pandemic
It priced $2bn of 5.5NC2.5 bonds at 98.465 to yield 10.75%. Note that Carnival upsized its issue size from $1.25bn to $2.03bn.
Fedrigoni - Italian paper co upsizes HY issue and issues at 11.75% yld
Fedrigoni increased its HY issue from €875m to € 1.025bn. The €300m fixed rate tranche came at 97.25% of nominal, with a coupon of 11% (for a yield of 11.75%). The € 725m variable rate tranche came at 91% of nominal, with a coupon of EUR+6.00%.
Bank of Nova Scotia raised U$ 750m via a 60NC5 bond at a yield of 8.652%
Scotiabank priced 60-year so-called limited recourse capital notes at a yield of 8.625%, down from around 8.75%. Only a week or so earlier, TD issued similarly structured notes. The notes are IG rated (BBB-).
*COMMODITIES*
Mining Giants Rio Tinto and BHP both warn on macro environment
BHP: We expect global macro-economic uncertainty in the short term to continue to affect supply chains, energy costs, labour markets and equipment and materials availability. BHP remains well positioned, with a portfolio and balance sheet to withstand external challenges and a strategy positioned to benefit from the global mega-trends of decarbonisation and electrification.” Statement
Rio Tinto on its various markets in Q3 (extracts of statement)
Iron ore Platts CFR prices trended down from $120/dmt to $96/dmt during the third quarter (averaging $103/dmt, down from $138/dmt during the second quarter) as the loss of confidence in China’s property market and COVID-related disruptions to construction activity curtailed China’s steel production and consumption by ~9% August year to date versus the same period of 2021. The major iron ore producers shipped the same aggregate volume during the first three quarters of 2022 as they did over the same period of 2021. With supply from other producers down 17% year to date – due to, among other factors, the war in Ukraine and export taxes in India – total seaborne supply contracted 4.5% during August year to date versus the same period of 2021
The LME aluminium price extended further losses, dropping 20% over the quarter, averaging $2,354/t. Additional smelter curtailments in Europe and China on high power prices and low hydropower generation, respectively, were insufficient to offset the weak macro environment. Aluminium demand has deteriorated, especially in Europe, which placed downward pressure on prices. Shipments in the US and Canada have been resilient and there are signs of improvement in demand in China.
The copper LME price dropped 7% over the third quarter to $3.47/lb. A strong US dollar, tightening monetary policy and challenging economic outlook weighed on market sentiment. Nevertheless, prices have been partly supported by supply concerns and low exchange inventories, which currently remain at multi-year lows
Nat Gas and Electricity prices are plunging - @AndreasSteno
Trafigura warns the world is running low on copper, Freeport Mcmoran agrees
Kostas Bintas, co-head of metals and minerals trading at Trafigura, said the copper market is today running with inventories that cover 4.9 days of global consumption and is expected to finish this year at 2.7 days, according to its forecasts. But note that the copper price has fallen 30% since March. Freeport Mcmoran Ceo said a similar thing this week as a part of FCX’s results: It’s “striking how negative financial markets feel about this market and yet the physical market is so tight,” said Richard Adkerson, chief executive officer of Freeport-McMoRan Inc.
Impressive deal for Trafigura - new loan guaranteed by German Govt
I believe this is a first, and cements large commodity traders’ position in the energy supply chain as viewed by credit market participants.
*IG*
Goldman Strategists Warn Credit Is Downplaying Recession Risk - BBG
Extracts - Risks are “largely skewed to the wider side” for Goldman’s spread forecasts in 2023, credit strategists including Lotfi Karoui wrote in a report Oct. 20. This means that credit, which fell into a bear market in 2022, may be headed for further pain. “While the last four decades have seen credit spreads justifiably shrug off rising recessionary fears, we think the current episode is different,” the Goldman strategists said. “Higher policy rates and real yields will continue to bolster the value proposition of cash, pushing the credit risk premium higher.” Spreads on US investment-grade and junk credits below historical highs Goldman expects US investment-grade spreads to widen to 175 basis by year-end, and for junk yield premiums to climb to 625 basis points. They may then tighten in the first half of 2023, it said.
AT&T raises annual profit forecast on strong wireless additions
AT&T raised its annual profit forecast, buoyed by strong demand for its phone and internet services and as more Americans upgraded to 5G plans. The company now expects adjusted profit per share for the full year to be US$ 2.50 or higher compared with earlier expectations in the US$ 2.42-2.46/share range. In Q3, AT&T's total revenue rose 3% to US$ 30bn, exceeding expectations of US$ 29.86bn. Adjusted earnings per share came in at US$ 68/share.
T-Mobile, Now Investment Grade, Gets $7.5 Billion Credit Line - BBG
Extract: T-Mobile US Inc. boosted the size of its revolving credit facility to $7.5 billion and removed certain collateral pledges as it takes advantage of its recently achieved investment-grade rating to gain more financial flexibility. The move increased the special type of loan, also known as a revolver, by $2 billion, according to a filing on Monday.
Proctor & Gamble: Unfavorable foreign exchange had a 6% impact on net sales.
Extract: July - September Quarter Discussion | Net sales in the first quarter of fiscal year 2023 were $20.6 billion, a one percent increase versus the prior year. Unfavorable foreign exchange had a six percent impact on net sales. Organic sales, which exclude the impacts of foreign exchange and acquisitions and divestitures, increased seven percent.
Uniper may need another €40bn from Germany Govt - Handelsblatt via RTRS
Extract - The German government needs to pump tens of bns of euros of additional funding into Uniper to weather a European gas crisis after a previous scheme to help the stricken gas importer was scrapped, two sources said on Thursday.
Chancellor Olaf Scholz agreed to nationalise Uniper in September, committing 29bn euros to prop up Germany's largest gas importer and prevent what it feared could be a Lehman style collapse of energy firms. His ruling coalition had planned to supplement that support with funds raised through a gas levy that was subsequently scrapped, meaning the government will now have to commit additional funding separately.
The Handelsblatt newspaper, which first reported the need for additional funding, said the total extra support could be up to 40bn euros, citing government and financial sources. The additional money will come from a 200bn euro government programme to help households and industry that had envisaged "tailor-made" solutions to support the gas importers Uniper, Sefe and EnBW's sources said.
European Utilities seem to be hungry for funding as also demonstrated by Enel which is looking for a state backed credit line of €16bn. Note, however that Enel does not appear to be in the same level of distress as Uniper.
Real Estate Corporate Hybrids in the slammer again last week..
RE Corp Hybrids sector traded down another 5pts this week with larger moves in certain bonds of Aroundtown, CPI Property (which was d/graded this week), Heimstaden, Grand City Properties and Unibail. The current price action is similar to that seen in June 2022 when the market was “bidless.”
Various factors could be driving current moves; further increases in Bund yields, risk aversion in credit (outflows), lack of support from ECB for senior corporate spreads, non-call risk, downgrade risk. With prices at all time lows in most cases, at least some of these concerns are being reflected.
*HY*
Leveraged Loans - View from UBS analysts
‘CLO Whale’ Norinchukin Halts Purchases | BBG
Extract - Norinchukin Bank, once known as the CLO whale, has stopped buying new deals in the US and Europe for the foreseeable future because of volatility sparked by UK pension funds, according to people familiar with the matter…The move by an important buyer to stay on the sidelines will make new issuance even more challenging, they said. Nochu historically acted as an anchor investor, buying all of the safest AAA bonds in a particular deal. CLOs are created by repackaging leveraged loans into bonds with varying levels of risk and return.
Saipem wins largest single offshore contract in history
Saipem shares rallied strongly on the announcement and marks a change from the problems it had over the last year or so. Extract of Offshore-Energy article:
Italian oilfield contractor Saipem has secured a contract by Qatargas worth approximately $4.5 billion, the largest single offshore contract by value in its history.
Saipem said on Wednesday that it has been awarded a contract by Qatargas for the North Field Production Sustainability Offshore Compression Complexes Project – EPC 2 located offshore the northeast coast of Qatar.
The contract value amounts to about $4.5 billion. The scope of work encompasses the engineering, procurement, fabrication and installation of two offshore natural gas compression complexes aimed at sustaining the production of the North Field, including two of the largest fixed steel jacket compression platforms ever built, flare platforms, interconnecting bridges, living quarters and interface modules.
There seemed to be a consistent positivity regarding oil services/offshore sector as judged by Schlumberger which reported Q3 figs:
Seadrill To Sell Its Entire 35% Shareholding In Paratus Energy Services
Extract - Seadrill Limited (SDRL) agreed to sell its entire 35% shareholding in Paratus Energy Services Limited, formerly know as Seadrill New Finance Limited, and certain other interests. Paratus Energy Services Limited is the entity through which investments in SeaMex Group, Seabras Sapura and Archer Ltd are held. Completion of the Sale is anticipated to occur within the fourth quarter of 2022 or early 2023.
While I am not an expert in this area, the fact that there is more transaction activity in oil services is another indicator of the strength in the sector.
Lufthansa doubled revenue in Q322 YoY
Lufthansa posted preliminary revenue of € 10.1bn in the 3Q22, doubled from the €5.2bn in the same period last year. Other key figs:
Adjusted EBIT: € 1.1bn, including an impact from strikes of around € 70m.
Adj FCF: Group generated adjusted FCF of roughly € 400m in 3Q22 while
Net debt: Decreased to around € 6.2bn.
The company sees strong demand for air travel in the coming months and expects another record result from Lufthansa Cargo in 2022.
United Airlines continued the solid Q3 earnings reports for the sector.
INC summarised the earnings well:
The airlines have just emerged from one of the most challenging periods of their history, as customer demand plummeted during the pandemic. Of course, the CARES Act and other big government actions were significantly responsible for their survival, but that wasn't exactly a sustainable long-term plan.
Second, air travel is back. At United Airlines, Kirby reported in an earnings call this week that United had its best third quarter since 2019 (and best-ever in some categories. In fact, some travelers on all airlines might say things have rebounded a little too robustly, with shortages and supply issues leading to crowds, cancelations, and higher fares.
Third, and most interesting to me, is what Kirby says has partly driven the rebound at United Airlines. In his words, it's due to "a permanent structural change in leisure demand, because of the flexibility that hybrid work allows. With hybrid work, every weekend could be a holiday weekend."
Key figures from UAL IR:
Q3 2022 net income of $942m, adjusted net income1 of $927m.
Q3 2022 capacity down 9.8% compared to third quarter 2019.
Q3 2022 total operating revenue of $12.9bn, up 13.2% compared to third quarter 2019.
Q3 2022 pre-tax margin of 9.0%, adjusted pre-tax margin1 of 8.9%.
Q3 2022 payments of long-term debt, finance leases and other financing liabilities of $810m.
Q3 2022 ending available liquidity of $20.4bn.
AMC CEO talks about its most recent refinancing
AMC Entertainment/Odeon Finco isssued $400M of 12.75% secured notes at 92 to yield 15%.
Football (Soccer) outperforming Rugby issuers in Credit Market
AS Roma Investors to be repaid early as club eyes new debt - BBG
Rugby Clubs Wasps, Worcester Warriors have filed for administration - BBG
Banks Saddled With $30 Billion in Unwanted Debt - BBG
Extract - The world’s biggest banks have already had to use about $30 billion of their own cash this year to fund loans for acquisitions and buyouts that they weren’t able to offload to investors. The lenders have been forced to fund at least 15 deals in the US and Europe as inflation and fears of a recession sap investor appetite for risky corporate debt.
The total tally, based on calculations using data sourced by Bloomberg, could nearly double over the coming months as more deals are scheduled to close. While it’s not uncommon for banks to self-fund deals when market sentiment sours, the sheer amount of hung debt -- including $3.9 billion for Apollo Global Management Inc.’s purchase of Brightspeed and more than $8 billion for a buyout of Nielsen Holdings Plc -- is deterring banks from making new financing commitments.
*FINANCIALS*
Pension Buy-in and buy-out volumes hit £12bn in first half of 2022 - Hymans Robertson
Extract - Total pension scheme buy-in and buy-out volumes reached £12bn in the first half of 2022 according to the latest research from Hymans Robertson. Demand for transactions was steady at the start of the year, the analysis from the leading pensions and financial services consultancy found, and gathered pace from Q2 onwards. During the same six-month period, Hymans Robertson led the advice on £2.5bn of pension scheme risk transfer transactions. In total £12bn of buy-ins and buy-outs took place across over 78 transactions during H1 2022 with an average transaction size of £153m. Approximately 75% of that volume was in relation to buy-ins and the remaining 25% related to buy-outs.
Insurers Eye Taking On More UK Pension Risk After Bond Turmoil - BBG
Extract - PIC says it has a busy pipeline from pension programs. Higher yields makes it easier to meet future liabilities. Corporate pension programs in the UK are increasingly looking to offload their risk to insurers as they try to insulate themselves from future market turmoil.
Pension Insurance Corporation, one of the biggest players in the UK market, is seeing more requests for so-called full buyouts. That’s where the corporate pension program is wound up and the insurer takes on future payments to pensioners.
U.S.-Based Pensions Rush to Assess Interest-Rate Risk - WSJ
Extract - David Eisenberg got a call this month from a finance official at a U.S.-based multinational company. The executive wanted to know whether the company had derivatives in its retirement portfolio. “We explained that they don’t,” said Mr. Eisenberg, an investment adviser with Buck, a New York-based pension-actuary and human-resources consulting firm. “They were worried that if they were using derivatives they were exposed to risk.”
…“The likelihood of an event like what happened in the U.K. is so small in the U.S.,” said Michael Clark, a managing director on the derivatives team at Boston-based Agilis, a pension actuary and investment consultant. “The way that liability-driven investment structures are implemented, they are just fundamentally different from in the U.K.”
IBs are cutting jobs - MS and DB are couple of examples
Deutsche Bank Trims Investment Banking Staff Amid Slowdown - BBG
Morgan Stanley boss James Gorman: ‘We’re looking at head count’ - FN
UK Banks could partly absorb impact of a recession in 2023 - Fitch
Extract - Major UK banks’ rating headroom has reduced due to the UK’s weaker economic outlook, Fitch Ratings says in a new report. The banks have built up strong capital and liquidity buffers and reported strong profitability in recent years, which should help absorb the impact of the recession in 2023. The strong earnings uplifts from higher interest rates, however, will diminish as funding costs rise, and some ratings could come under pressure if the operating environment deteriorates beyond our latest forecasts. Economic policy uncertainty and volatile market conditions also increase second-order risks for banks.
Svenska Handelsbanken and Nordea reported good figures echoing strength from leading US Banks
Svenska snippets: Profit well above expectations Q3 operating profit SEK 7.27 bln vs forecast 6.72 bln, Interest income surges to SEK 9.58 bln in quarter, rising interest rates boost bank (RTRS)
Nordea snippets: Q3 op profit EUR 1.30 bln vs forecast 1.26 bln, Profit rise driven by higher interest income, interest income boosted by tighter monetary policy, credit quality remains strong | RTRS
Many other UK/European Banks are set to report this week:
Tues: HSBC, UBS, UNICREDIT
Weds: BARCLAYS, DB, SANTANDER, SEB, STANCHART, SWEDBANK
Thurs: CS, LLOYDS
Fri: AIB, BBVA, CAIXA, NATWEST
*EM*
Kenya Wants China to Extend $5 Billion Debt Repayment | BBG
Extract - Kenya plans to ask China for a longer repayment period on $5 billion of loans it used to build a railway, Transport Secretary-designate Kipchumba Murkomen said. Servicing the Export-Import Bank of China loans, which mature in 15 to 20 years, is choking the economy, Murkomen told lawmakers Wednesday at a confirmation hearing in the capital, Nairobi. “If we can manage to renegotiate to 50 years, then it will ease the burden” and enable the government to use money for other parts of the economy, he said. “We are choked by loans.”
This follows on from other large African Sovereign issuer Nigeria which talked about “restructuring” its debt.
Colombian President Gustavo Petro said higher US interest rate are sucking money out of South America | BBG
Gustavo Petro sums up the most important global macro factor this year…
Extract: (Bloomberg) -- Colombian President Gustavo Petro said higher US interest rate are sucking money out of South America, and called on investors to keep their funds in the country even as the peso weakened to a record low. “Don’t send money overseas en masse, because in Colombia there are opportunities,”
Turkey slashes interest rates by 150 bps, signals that November could see last reduction in rates
Extracts from CNBC:
Market analysts expected a 100bps cut, so the move still managed to take many by surprise despite the increasing regularity of Turkey’s slashing of interest rates.
Turkey’s central bank signaled that another rate cut would follow in November but that may be the last reduction, saying that financial conditions had to remain “supportive” of growth amid a weakening demand environment.
It added that slowing foreign demand and pressures on the manufacturing industry are being “closely monitored,” and that “credit, collateral and liquidity policy options will continue to be implemented.”
“The Committee evaluated taking a similar step in the following meeting and ending the rate cut cycle,” the bank said. “This guidance appears to be an admission that lowering interest rates is hardly the right thing to be doing when inflation is so high,” Liam Peach, senior emerging markets economist at London-based Capital Economics, said in an email note. “But at the same time, it would take interest rates to 9% and satisfy President Erdogan’s wish to bring rates down into single digits.”
*PRIVATE CREDIT*
Apollo, JPMorgan Help Propel Boom in Secondhand Private Credit - BBG
The rise in secondary trading of private credit was always going to happen. Different types of investors in the private credit space have different reasons for buying/selling. In the most recent case, Pension Funds / Institutions that needed liquidity needed to sell and firms are stepping up to buy these at a discount. This is likely to be a huge growth area as more and more firms enter the private credit market.
Extract - Secondaries funds are snapping up pension, insurance holdings. Wall Street mainstays from Apollo to JPMorgan are increasingly looking to scoop up stakes in direct-lending funds from institutional investors in need of liquidity, helping propel a boom in the little-followed secondary market for private credit. While transactions have been increasing the past few years, recent global market volatility has sent activity soaring, industry insiders say. Pantheon Ventures expects to see as much as $23bn of private debt change hands on the secondary market this year, up from around $5bn just four years ago.
German Utility ENBW looks to issue in the private market instead of public | BBG
Extract: German power company EnBW Energie Baden-Wuerttemberg AG is looking to sidestep the volatility of public debt markets to raise the equivalent of $1 billion privately, according to people familiar with the matter. The utility, which is wrestling with spiking energy prices since Russia’s invasion of Ukraine, is looking to tap the private placement market for dollars, euros and possibly sterling, with maturities ranging from three to 15 years, the people said, who aren’t authorized to speak publicly.
Blackstone said its Q3 distributable earnings fell 16% yoy
Due to a sharp drop in asset sales amid a downturn in the market. Blackstone said its net profit from asset divestments across its portfolio, including real estate, private equity, and hedge funds, fell 61% to US$ 402.6m, down from US$ 1.03bn a year ago, amid the turmoil. Blackstone reported a net income of just US$ 2.3m, a big drop from US$ 1.4bn posted a year earlier.
*RATINGS*
UK Sovereign Ratings update on Friday 21 October…WSJ
Moody's Puts Negative Outlook on U.K.
S&P maintained the UK's rating of AA - its third highest rating level - and maintained its previously-changed outlook from stable to negative.
Moody’s Investors Service put a negative outlook on U.K. sovereign debt but stopped short of a downgrade, sparing the fifth-largest economy an indignity that could have further raised the temperature in its politics and markets.
S&P Global Ratings said separately that it did a semiannual review of its U.K. sovereign ratings without taking action yet. S&P's rating remains at AA, and Moody's stays at Aa3, one notch lower on its scale.
Moody's said that the negative outlook was driven by "heightened unpredictability in policymaking amid weaker growth prospects and high inflation," as well as "risks to the UK's debt affordability from likely higher borrowing and risk of a sustained weakening in policy credibility."
Fitch upgraded BPCE’s Senior rating to AA-
X-S&PGR Upgrades Banco De Sabadell To 'BBB/A-2'; Outlook Stable
Aston Martin Upgraded to CCC+ by S&P, Outlook Stable
Beazer Homes Outlook to Positive by Moody's | rating affirmed B2
Moody's upgrades EnQuest's Corporate Family Rating to B2; stable outlook
Moody's Changes Glencore's Outlook to Positive From Stable;
Moody's places Baa3 ratings of Fastighets AB Balder on review for downgrade
CPI Property Group Downgraded to Baa3 by Moody's, Outlook Stable
Bed Bath & Beyond Downgraded to CC by S&P
Iamgold Downgraded To 'CCC+' From 'B-' On Looming Funding Gap; Outlook Negative, at S&P Global Ratings
S&P DOWNGRADES CITRIX SYSTEMS TO 'B', OFF CW NEG, OUTLOOK STBL
Telecom Italia Downgraded to B+ by S&P
Angola Outlook to Positive by Moody's
Egypt Affirmed at B by S&P
Nigeria Downgraded to B3 by Moody's, May Be Cut Further
Pakistan Downgraded to CCC+ by Fitch
Marfrig Upgraded to BB+ by Fitch, Outlook Stable
*CREDIT TRADING*
BoFa Global FM Survey: Highest Cash Levels Since 2001
In times of volatility, “you can get two years worth of trading in one year” - Millennium Co-CIO: BBG
Extract - A high volatility environment is great for multi-manager firms like Millennium Management LLC, according to Bobby Jain, co-chief investment officer one of the world’s largest hedge funds. In times of volatility, “you can get two years worth of trading in one year,” Jain said at the Capitalize for Kids Investors Conference in Toronto on Wednesday.
Schroders CEO Sees More Bond Sales by Pension Funds (globally)
Extracts: Schroders Plc Chief Executive Officer Peter Harrison sees further bond sales tied to the pension-fund crisis in the UK, he said in an interview with Le Figaro.
“Other countries that have similar characteristics, such as the Netherlands, could experience the same problems,” he said. “Moreover, we could see such revaluations of risk in other pockets of finance, such as private equity or private credit.”
“Getting rid of inflation will be much harder than we thought. Expect a three- to five-year period of adjustment to monetary tightening, high interest rates and value destruction.”
Also, Schroders updated the market this week and reported that its total declined by 2.7%, and its Solutions unit AUM (which houses LDI products) fell by 9% in Q3 -RTRS.
MarketAxess Earnings call - Snippets
…If you look at our high-grade and high-yield bid/ask indices, they are near -- they are approximately double where we were a year ago, and already at about 80% to 85% of where they were in March of '20.
The high-grade market volumes are actually holding up reasonably well year-to-date, given the extreme volatility in the market and the challenges with liquidity.
I don't think most investors are used to these kind of price changes in corporate bond, mutual funds and ETFs. It's not anything I've ever seen in my career. And in fact in the last 20 years, if you look at the high-grade index, the worst year we've had was down about 4% and here we are down 22% year-to-date. So, it has driven some outflows as well.
Automated trading increased to $52 billion in volume and over 290,000 trades in Q3, reflecting continued strong adoption during a period of heightened volatility.
So, obviously, ETF market makers are an important part of our overall market across all of our products, not just high-yield. Our open trading -- record open trading market share penetration of 53% is certainly reflective of seeing alternative liquidity providers of stepping up and filling the gaps of liquidity in the market as other traditional liquidity providers are more challenged from a balance sheet perspective.
The market will benefit from centralizing clearing at DTC of treasury activity because of the net settlement benefits that DTC provides and the guaranteed settlement that DTC provides