Weekly Global Credit Wrap w/e 11 March 2022
More interesting two way activity beneath the surface...
*MAIN OBSERVATIONS*
Credit spreads
Spread widening theme continues however some tightening in spots. Within cash; EM, European HY and CoCos saw spreads tighten on the week. US IG, US HY wider on the week (+13bps and +18bps). HY spreads remain below 400 (394bps). Within CDS, most indices tightened except for US HY and CDX EM. Xover is below 400 (386).
Bond ETFs
*Note I use Bond ETFs to describe action in Fixed Income Assets here since they are the easiest to track compared to the hundreds of thousands of Mutual Funds out there."
Some interesting themes playing out. YTD returns are pretty abysmal as demonstrated by some of the biggest losers I track below:
AHYG (Asian HY) -15.8%
EMB -12.25%
CEMB -10.81%
LQD -8.95%
TLT-8.7%
Asian HY went into freefall echoing sentiment seen in China stock ETFs e.g KWEB down 19.3% this week. Single names shares like Didi and Baba plunged hard..
China Property HY sold off indiscriminately including issuers that have accessed new financing YTD. These “better” issuers have seen their bonds see large (20+ points) drop this month. The narrative behind the weakness appears to be the “temporary closure” of public debt refinancing channels and persistent outflows in Asian HY.
However, over the week there were some positive moves: EMB+1.2%, EMLC+1.5% (Local ccy EM), AT1 (Bank CoCo ETF) +2.7%.
Funding Markets - Very tentative signs of thawing led by huge bond deal by AT&T and Discovery. Issuers appear to be paying large concessions with Lloyds paying a 15bps concession this week on some USD funding. Generally this is a positive trend for new buyers of credit, i.e better pricing and better structures to lure buyers back in. Will we see other bond markets start to open up like HY, EM and Financials? I think for that to happen need increased investor confidence, improved inflows and signs of a resolution to the Russia/Ukraine situation.
Russia / Ukrainian credit - Better tone here with some more buying cares from dealers. But cares seem to be very specific. Some bonds appearing to be marked 5-10pts higher on the week.
YTC to YTM?: Due to market volatility, quite a few bonds have seen their trading “convention” go from yield to next call to yield to maturity which may have an associated impact on portfolio duration.
Mid-cap Oil company M&A rising - Whiting and Oasis announced a merger, could we see more? With a $100 backdrop, oil companies are turning into cash machines. With low ambitions for new drilling from governments/ESG advocates, companies are likely to see M&A as a good use of their cash alongside debt reduction, capex and shareholder payouts.
EM -Dissatisfaction with a number of governments with respect to economy and food prices is increasing - Iraq, Pakistan and Sri Lanka cropped up in the news this week. Restructuring candidate Sri Lanka looks set to go down the IMF path.
*MACRO*
Some new 2022 highs set in key US Treasury benchmark yields
2 year hit a new 2022 high of 1.748% and is starting to surpass levels seen in late 2019
10 year flirted with 2.0% and finished inside that to close the week
30 year US Bond hit a new 2022 high of 2.367%
Poland: The NBP raised its key policy rate by 75bp to +3.50%, above consensus expectations of a 50bp rate hike
*INFLATION / ENERGY*
Will inflation fall?- WSJ
Chinese officials vow to ensure food, energy security amid external uncertainties - Global Times
Iran Nuclear talks paused, but looks like they will get there in the end
Extracts from a WSJ article
“A pause in #ViennaTalks is needed, due to external factors,” Mr. Borrell said on Twitter. “A final text is essentially ready and on the table.”
After weeks of round-the-clock negotiations in Vienna between the U.S., Iran, Russia, China, Britain, France and Germany, the pause significantly raises the prospect that efforts to revive the 2015 nuclear deal may fail. The U.S. quit the deal in 2018 and Iran has since then expanded its nuclear work significantly in response to reimpose American sanctions.
US in talks with Venezuela re Oil exports, may look to rollback Trump era sanctions – WSJ
REPowerEU: Joint European action for more affordable, secure and sustainable energy - EC
Key extracts with my emphasis in bold:
“The European Commission has today proposed an outline of a plan to make Europe independent from Russian fossil fuels well before 2030, starting with gas, in light of Russia's invasion of Ukraine.”
“This plan also outlines a series of measures to respond to rising energy prices in Europe and to replenish gas stocks for next winter. Europe has been facing increased energy prices for several months, but now uncertainty on supply is exacerbating the problem. REPowerEU will seek to diversify gas supplies, speed up the roll-out of renewable gases and replace gas in heating and power generation. This can reduce EU demand for Russian gas by two thirds before the end of the year”
“Let's dash into renewable energy at lightning speed. Renewables are a cheap, clean, and potentially endless source of energy and instead of funding the fossil fuel industry elsewhere, they create jobs here.”
“The Commission will therefore propose that by 1 October, gas storage in the EU has to be filled up to at least 90%. We have also outlined price regulation, state aid and tax measures to protect European households and businesses against the impact of the exceptionally high prices.” “
“EU State Aid rules also offer Member States options to provide short-term support to companies affected by high energy prices, and help reduce their exposure to energy price volatility in the medium to long term.”
Looking at the chart (ERIXP) below, seems renewable energy stocks appear to have rallied into this announcement, and also reversed the downtrend of most of 2021.
Oil Minister Novak added that an embargo on Russian oil could push prices over $300/barrel
Chevron CEO Mike Wirth said there's no evidence of physical oil or gas shortages yet
Russia Bans Grain Exports to Eurasian Economic Union: Tass via Reuters
Wheat price cooled mid-week after USDA report
Wheat extended losses after a US report showed global supply is on the rise thanks to a bigger Australian crop and robust exports from India. The cooling off in wheat prices may have been why some MENA bond curves recovered a little this week, e.g Egypt, Nigeria and Pakistan.
*NEW ISSUES / FUNDING MARKETS*
AT&T and Discovery have borrowed US$ 30bn in one of the largest corporate bond deals ever completed
Berkshire Hathaway raised US$ 4.5bn in a three-part offering
2 March - Bahamas Govt. Enters 24-month Repo Agreement on US Securities - Bahamas.Gov
Peabody Gets a $534 Million Margin Call on Coal from GS
Extracts from this fascinating article:
“Locking in a price to sell coal at $84 a metric ton must have seemed like a good bet a year ago for Peabody Energy Corp….The Australian benchmark coal price is up more than 400% in the past 12 months, hitting $425 on Wednesday. And instead of reaping rewards from those hedges, Peabody got slammed with a $534 million margin call. “
This will have market participants wondering how many other firms are not fully capitalising on high energy prices due to sub-optimal hedging strategies.
*IG*
Fund Flows - High-grade and junk bond funds have suffered nine straight weeks of sizable outflows
…totaling $12.8 billion and $2.8 billion respectively, according to BOFA citing EPFR Global data. In the U.S., investors pulled $5.4 billion from corporate high-grade funds in the biggest weekly exodus since April 2020, according to data from Refinitiv Lipper for the period ended March 9.
BlackRock’s LQD Fund Flashes Credit Warning After ETF Discount Grows - BBG
About 60% of bond ETFs are trading at a discount, the highest since March 2020 and double the long-term average of 28% - BBG Intelligence
France looking to nationalise debt-laden power company EDF - Power Tech
This headline late in the week sent EDF’s Corporate Hybrid stack higher for the first time in weeks.
More Fuel Surcharges Coming as Airlines Grapple With Surge in Oil Prices - Skift.com
*FINANCIALS*
Banks exposure to Russia/Ukraine
A number of Banks reported their Russia / Ukraine exposure (DB/CS/Unicredit, BNP, UBS, Santander to name a few). The general theme was one of manageable net exposures. Related considerations include the second order effects of the Russia / Ukraine crisis and exposure to those, e.g. JPMorgan Is the Biggest Counterparty for Nickel Tycoon’s Short Bets - BBG
Pimco had $2.5bn exposure to Russia vs $2.2tn AuM - FT
BlackRock Russia exposure down $17 billion since February | RTRS
*UKRAINE / RUSSIA*
8 March - Beijing reaffirmed its support for Russia and opposed sanctions
Ukraine Raises Additional $220.8M Via 11% 1Y War Bonds
Ukrainian Railways ready boost grain exports by train | RTRS
Extract: “March 6 (Reuters) - Ukraine's state-run railway operator is ready to organise agricultural exports by rail as a matter of urgency, it said on Sunday, after closure of the country's Black Sea ports because of the military invasion by Russia.
A major global agricultural producer and exporter, Ukraine has historically exported its grain, vegetable oils and other food products by ship.
"This situation causes problems not only for Ukraine. The share of Ukrainian grain on the world market is 11%, the share of sunflower oil is 55%," Ukrainian Railways said on social media.
"To prevent the global food crisis and save Ukrainian exports, Ukrainian Railways is ready to organise agricultural products delivery by rail urgently."
China is considering buying or increasing stakes in Russian energy and commodities companies - BBG
E.g Gas giant Gazprom and aluminum giant Rusal International.
*HY*
Oasis Petroleum and Whiting announced a merger of equals
Container shipping /logistics - Strong figs from key players - ZIM, Hapag Lloyd, CMA CGM
I tweeted about Hapag Lloyd, but their full figs are here:
For enthusiasts interested in the sector, Atlas Corp, parent company of Seaspan has a capital markets day on 30 March 2022. Seaspan is the largest independent owner and operator of containerships in the world.
CINEMAS - ‘The Batman’ Revives Moviegoing With Top Opening This Year - WSJ
Extracts: "The Batman" -- it had the biggest box office haul of 2022 after just one weekend on screens and the second-best gross of the pandemic era.
The result represents the fourth-largest opening weekend gross ever for a Batman movie. The best was $166 million for "Batman vs. Superman: Dawn of Justice" in 2016. Warner Bros. had predicted an opening weekend gross of between $80 million and $90 million.
Since 2019 there have only been two movies that have opened with more than $100 million at the box office," said Jeffrey Goldstein, president of domestic distribution for Warner Bros.
*EM / ASIA*
China cenbank to pay over 1 trln yuan in profit to govt this year - RTRS
Extract: “China's central bank said on Tuesday it will pay more than 1 trillion yuan ($158.31 billion) in profit to the central government this year.
The People's Bank of China will be among state financial institutions paying some of their profits, including arrears, to the government this year to help boost fiscal spending, the finance ministry said on Tuesday.
The payments will mainly fund tax relief and a rise in transfer payments to local governments - in a bid to support firms and stabilize employment, the central bank said in a statement on its website.”
The yield on Chinese junk dollar bonds just climbed to an all-time high of 25.8% -BBG
CIFI, Country Garden Dollar Bonds Set for Record Weekly Drops - BBG
China Orient (China Asset mgmt. co) raising $1.6bn to buy lend to china property / buy bad assets - BBG
Pakistan opposition holds major rally, demanding PM's ouster - Yahoo Finance
Thousands of supporters of Pakistan’s key opposition party held a major antigovernmental rally in the capital of Islamabad on Tuesday, demanding Prime Minister Imran Khan step down over his alleged failure to improve the country’s economy.
Sri Lanka to devalue currency - Al Jazeera
Iraqis Take To The Streets In Protest Of Soaring Food Prices - Al Jazeera
The central bank also said it’s “of the view” that transactions would be capped at 230 rupees per dollar, about 12% below the prevailing market level of 201.49 rupees.
Airtel Africa Completes Early Repayment Of $505 Million Senior Bonds
Airtel Africa Plc confirmed that it has completed the early repayment of its c. $505 million 5.125% Guaranteed Senior Notes, originally due in March 2023, using cash balances available at Group level.
Tullow Oil Earnings call - Highlights for debt focused stakeholders
Extracts:
With another year of free cash flow generation, which resulted in further deleveraging with net debt down about 10%, and gearing approaching 2 times. We also ended the year with around $900 million of liquidity headroom with an undrawn $500 million corporate facility and almost $400 million of cash flow on the balance sheet.
We expect to grow operating cash flows high return, short payback investment opportunities and our producing assets deliver production growth. We will do this with a continued focus on costs, expect decommissioning cost to drop significantly in 2023, and we also seek to reduce that annual financing costs through the financing as we've reduced debt in a constructive environment.
January and February [2022] where realized price after hedging was around $89 per barrel.
A $75 per barrel will reach our gearing target of less than 1.5 times by the end of 2023
Source: Tullow presentation
Vedanta - Debt market ponders refinancing for 2022 debt, meanwhile founder Agarwal has other matters on his mind. Vedanta has a track record of securing financing even during very difficult periods, EM participants wait to see if they can do it again, but this time with a very strong, supportive commodity price backdrop.
Pimco Income Reports $647 Million Stake in SoftBank Vision Loan - BBG
Brazil’s economy exited recession at the end of 2021, lifted by higher raw material prices
*RATINGS*
Gabon Affirmed at B- by Fitch Kenya Affirmed at B by S&P
Kraft Heinz Company Raised to Investment Grade by S&P
Logan Group was downgraded to B2 from Ba3 by Moody's and to B+ from BB- by Fitch
Montenegro Affirmed at B by S&P
Occidental Upgraded to Ba1 by Moody's
Paragon Group of Companies Upgraded to BBB+ by Fitch
Telecom Italia Downgraded to Ba3 by Moody’s (1)
Times China Downgraded to B+ by Fitch (1)
Tritax - Fitch Upgrades Tritax EuroBox's Senior Unsecured Rating to 'BBB'; Affirms IDR at 'BBB-'
Russia/Ukraine related:
Belarus Downgraded to Ca by Moody's
BP - Fitch Ratings: BP's Credit Profile to Be Unaffected by Exit from Rosneft Ferrexpo Downgraded to Caa2 by Moody's, Outlook Negative
Fitch Ratings downgraded Belarus deeper into junk
Kernel Downgraded to B- by S&P, May Be Cut Further
MHP Downgraded to Caa3 by Moody's, Outlook Negative
Russia Downgraded to C by Fitch
Ukraine Downgraded to Caa2 by Moody's, Still May Be Cut Further
Veon Downgraded to CCC+ by S&P, May Be Cut Further
*CREDIT TRADING*
MarketAxess Launches Axess All Prints - MarketAxess
Extract: “[MarketAxess] announced the launch of Axess All Prints, an enhanced real-time transacted price service for the most actively traded fixed income instruments in the EU & UK.”"
It will be interesting to see how this pans out, at the moment it looks like its a service for MarketAxess users only, and it is unclear if its paid or free. However buyside participants could (mainly) benefit from the same transparency (and tighter spreads?) seen in US Corporate bonds whose activity is posted on TRACE.
Increased transparency would be most useful during times of market stress. Real traded price data in UK/European securities would come in handy (particularly for the buyside) when compared against bid/offer quotes which often widen out considerably during times of stress (e.g. Russian/Ukrainian credits).