Weekly Global Credit Wrap w/e 12 Feb 2021
Quietish week ending on a steepening bias, HY issuance train continues
**Rates & Macro**
Longer US Treasuries and Gilts end week on steepening bias…
10 Year UK Gilt - Closed at highest level since last March 2020.
Long dated Gilt sold off on Friday with the UKT 5s30s curve steepening to highest since 2018.
30 Year US Treasury went through 2.0% again on Friday after touching 2.0% at the start of the week.
Meanwhile, yields at the short end keep narrowing…
US Treasury 2-Year yields dipped below 0.1% this week to a record low.
Real world Inflation as described by UK Investment firm Ruffer
Inflation has been a hot topic for fixed income folks for months, but it really seems to be gathering steam. Higher inflation if it materalises in the form of official economic data could be a risk to bond yields, so is definitely something worth monitoring. UK investment firm Ruffer published a good post on inflation, some of the key extracts:
“…a recent study of the prices of 750 ‘essential’ items sold on Amazon, showed that by December last year the prices of 409 were up by over 20% from pre-pandemic levels, while 136 had more than doubled.”
“….as production interruptions in the west have increased reliance on the east, the cost of shipping containers from Asia to northern Europe has increased even more sharply, from about $2,000 in November to more than $9,000 in January, according to importers.”
Full article: Ruffer
The Fed reported that Bank lending standards eased in Q4 2020 for Individuals
Banks reported demand for credit card and other consumer loans was constant in Q4 of last year and eased lending standards across all consumer loan categories of credit card loans, auto loans, and other consumer loans. Source: BankingExchange
*Issuance Trends*
European Banks issuance might slow YoY this year, particularly T2 and AT1
Looking through some of the commentary in the European Bank earnings this week, it seems that bond issuance is likely to be lower than last year, some highlights:-
Credit Agricole SA - Issued 105% of its €12bn programme in 2020. This year it is only looking to issue €9bn.
Rabobank said that its funding target includes EU3bn-EU5bn of senior non-preferred notes. Remaining funding needs will be filled by covered bonds and senior preferred.
BBVA reached €50.2 billion in sustainable financing at the end of December 2020. This means it has achieved half of its sustainable financing objective foreseen for the 2018-2025 period (€100 billion), one year ahead of schedule. Furthermore BBVA stated it is planning EU2bn-3bn of senior bond sales, while ruling out any covered bonds and subordinated issuance. BBVA does not see any need to sell new AT1 or Tier 2 bonds in public markets in 2021.
Unicredit said in a presentation that 2021 issuance plan is “more skewed” toward MREL-eligible senior notes because capital needs are “quite limited given the very substantial buffer.”
Sources: BBG, BBVA, Credit Agricole
Meanwhile, UBS announced a call notice on its $1.5b 6.875% CoCo bond
Which was largely expected by market participants.
*HY*
Average yield on US HY debt fell below 4% for the first time ever
The junk-bond market’s yield just sank below 4% for the first time ever. The average yield on junk bonds tracked by the Bloomberg Barclays U.S. Corporate High Yield Index sank to 3.96% on Monday, the least yield on record. Another index tracking the market, the ICE BofA US High Yield Index, pays 4.01%, also the lowest ever. Read more at Barrons.
Moodys analytics think HY Spreads could narrow further from here
US HY Energy Defaults - There were none in January 2021…
This is the first month without any HY Energy defaults since March 2019, according to independent research firm CreditSights.
Could Kraft Heinz see one of the fastest returns back to investment grade status?
Fitch revised its outlook on Kraft Heinz to Positive; affirmed IDR at 'BB+'. Source: Fitch. Moody’s affirmed its Baa3 rating on Friday (Yahoo Finance). Typically credit benchmarks require two investment grade ratings, and if Fitch were to follow through and upgrade Kraft from a positive outlook to an actual ratings change from BB+ to BBB- then Kraft would become IG again and return to IG indices.
Carnival Upsized its new issue by $1bn and Priced 2027 Senior Unsecured Notes
It priced private offerings of $3.5 billion 5.75% 2027 senior unsecured notes. People may recall that Carnival issued 1st lien secured (more senior ranking paper) with an 11.5% coupon for a 3 year maturity in 2020. Link
Ford also joined the sub-3 per cent club for US HY
With its credit financing arm issuing a seven-year bond offering a coupon of 2.9% in USD. Source: FT
“Like buses”…Sterling HY issuance (Asda, Iceland)
Asda and Iceland Supermarkets finally issued their bonds this week. Asda came first and Iceland duly followed. Pricing details:
Asda £2.25b 5NC2 Snr Secured Bonds (Feb. 16, 2026) at Par to Yield 3.25%
Asda £0.5bn 6NC2 Fixed (Feb. 16, 2027) at Par to Yield 4%
Iceland £250m 7NC3 Snr Secured Fixed (May 15, 2028) at Par to yield 4.375%
A point which I was personally curious about was why neither issuer chose to make them sustainability bonds (as Tesco did) which could have had further positive pricing outcomes for both Asda and Iceland.
*Sustainable Investing*
JPM and GS both issued social bonds this week, here are the details:
JPM completed a $1 billion offering of 0.563% four-year (non-call three), fixed-to-floating notes due Feb. 16, 2025, at T+37.5. Proceeds will be used to fund eligible social projects under JPMorgan’s social bond principles. Source: S&P
GS issued its first $800 million Sustainability Bond, to accelerate climate transition and advance inclusive growth across nine core thematic areas: clean energy, sustainable transport, sustainable food and agriculture, waste and materials, ecosystem services, accessible and innovative healthcare, accessible and affordable education, financial inclusion, and communities. The 5-year bond, which is callable in 4-years, will pay interest semi-annually at a fixed rate of 0.855% for the first four years, and then quarterly at a floating rate of SOFR+0.609% in the final year, if not called. Source: GS
Danske Bank saw very good demand for its T2 bond despite poor ESG score
Danske issued €750m 10.25NC5.25 Tier 2 Subordinated bonds at € Mid Swaps +140, with a coupon of 1%. The current “high risk” rating by ESG risk rating company Sustainalytics did not seem to deter demand in the name as demonstrated by a tightening of initial pricing talk by 20bps.
*Emerging Markets*
“How do you predict a sovereign default?” - Analysis by Countryrisk.io
Excellent article on the topic of predicting sovereign defaults. Worth a read especially as there are more than a handful of Sovereigns trading at or near distressed levels. Medium
Mexican broadcaster Azteca to postpone coupon payment as part of $400 mln restructuring
Mexican broadcaster TV Azteca said on Tuesday it would postpone a coupon payment due this month as part of a plan to restructure $400m of foreign currency debt after its financial situation deteriorated during the coronavirus pandemic.
The company, owned by Mexican billionaire Ricardo Salinas, blamed the pandemic for aggravating an already difficult landscape driven by a 40% drop in the advertising market over the last five years. Source: Reuters
An interesting fact about Mr Salinas is that he has personally done very well from the rise in the Bitcoin price, this from Coin Telegraph (Dec-2020):
Ricardo Salinas Pliego, chairman at conglomerate Grupo Salinas and Mexico’s second richest man, has revealed to Cointelegraph in an interview that he bought his first Bitcoin in 2013, when it was worth around $200. That, according to the billionaire, was his “best investment ever”. After holding it all the way until its 2017 highs, he sold all his positions at $17,000 and bought it again later at a cheaper price. Coin Telegraph
Meanwhile, the largest Mexican Telecommunications firm seems to be doing just fine..
Mexican telecommunications firm America Movil on Tuesday reported a surprise net profit of $1.87 billion in Q4, driven up nearly 80% by a favorable exchange rate. The company, which is controlled by the family of Mexican billionaire Carlos Slim, reported the bonanza despite sales falling by 3.1% from the same quarter last year to 255 billion pesos. Net profit rose to 37.3 billion pesos ($1.87 billion) from 20.8 billion pesos for the same period a year earlier, an increase of 79.6%. Source: Reuters
Have a good week.
Disclaimer: This is not investment advice. I may hold investments in issuers listed above. These comments represent my views only and not any of my employer.