Weekly Global Credit Wrap w/e 12 March 2021
Steepening discussion moving from rates to credit...
*OVERVIEW*
Fed and BoE hawkish for now, ECB and RBA less so
US IG credit spreads bounce +10bps wider off 1 year lows, remain well below longer term averages
Bond Funds saw outflows of $15.4bln (the largest in a year) last week
Large single name issuance out of US IG (VZ) and HY credit markets (AAL)
Financials - Some weakness in long call $ AT1s.
EM sovereigns continue to drag due to long duration and LATAM weakness
*MACRO*
Dovish/hawkish divide amongst major global central banks
The Fed and BoE are currently in the more hawkish camp vs some of its counterparts. Both the Fed and the BoE are speaking this week, which should provide more evidence of which way they wish to guide markets in the short term. Some nice previews from Citi and Nordea below:
Citi Central bank preview – Fed FOMC, BoE and BoJ meetings this week.
Nordea FX - a more detailed viewpoint piece on the Fed in particular.
Last week, the ECB’s comment re “significantly higher pace” of purchases under its PEPP program gave a boost to both credit and equity markets. However, some of this was reversed on Friday as yields in the US in particular continued their ascent. The Reserve Bank of Australia’s chief Philip Lowe pushed back against bond markets pricing in an earlier tightening of monetary policy which sent bond yields lower, according to Bloomberg. More on the RBA from ABC
10 and 30 year US Treasury yields reach their highest in more than a year
TLT – iShares 20 year+ US Treasury Bond ETF is down 20% from its highs
US Inflation expectations hit the highest the highest in over 12 years
*INVESTMENT GRADE*
US IG Credit spreads bounce +10bps wider off 1 year lows
US IG credit spreads* have widened off the recent lows of +88bps to +98bps. Sectors moving wider appear to be Banks and Tech initially. IG rated oil and oil services companies have seen their spreads tighten in this year as the oil price has rallied. It’s interesting to note that the average IG spread over 5 years is +124bps and the long term average is +133bps. Some food for thought there for those trying to predict where spreads could go next…
*Bloomberg Barclays US Agg Corporate Avg OAS (LUACOAS Index)
US high-grade borrowers paid the most in nearly eight months to get deals done: BBG
Extract of BBG Article: Tuesday’s 13bps in average concessions is the highest daily figure we have observed since borrowers paid 14bps in late June. For context, high-grade issuers have paid less than 1bp YTD.
Verizon sold $25 bn of bonds as it looks to help finance purchases of 5G airwaves - BBG that it needs
This is the largest bond sale in the IG market in 2021. Read more here: WSJ
Last week saw the largest weekly outflow out of IG/HY/EM in 1 year
*HY*
US HY – February saw the second month without any corporate defaults
This was according to research from Credit Suisse. Furthermore, Independent Research firm Creditsights stated that there had been no defaults in the US HY Energy space in February for the second month running, and that the default rate in that space fell for the 1st time since October.
American Airlines issued largest ever Airline debt deal backed by frequent-flyer program
American Airlines (“AAL”) priced a $10 bn bond and loan offering backed by its frequent-flyer program. These sort of structures have been extremely popular with investors as demonstrated by Delta and United Airlines previously. AAL had around $45 bn in orders on the total $10 bn deal, so deal coverage of around 4.5x according to Bloomberg. American’s deal will be used to refinance its loan from the US Treasury. The HY Airlines and Cruise ship operators have employed some innovative financing structures during this pandemic, which has helped them extend their liquidity runway in anticipation of a “return to normality” after the pandemic. The ideas for financing would have originated from the debt capital markets desks at the main Wall Street and UK/European Investment Banks.
US Investment Firms eye up investment in UK Pubs
Extract: “Los Angeles real estate investor Oaktree Capital Management recently announced it would invest 200 million pounds — or around $278 million — into the recently founded hospitality venture Redcat Pub Co., according to the Wall Street Journal. Redcat was founded by Rooney Anand, the former CEO of Greene King, the country’s largest pub retailer. Anand reportedly plans to buy up smaller pubs in the south and east of England, the publication said, citing sources close to the firm.” Watch this space for future deals…
https://therealdeal.com/national/2021/03/13/investors-bet-big-on-comeback-for-uk-pubs/
*FINANCIALS*
Movers/shakers – Sub Financials
Prices of US Dollar denominated longer call/longer maturity sub paper appears to be most impacted by the steepening of the US yield curve. EUR and GBP AT1 are likely less affected due to a slower rate of steepening of those curves. The AT1 ETF is putting in a better price performance YTD vs other high beta credit ETFs as shown below:
Credit Suisse bonds have experienced some spread widening vs peers due to its name being associated with the Greensill saga.
S&P ratings agency updated its thoughts on the Banks sector (positive)
Extract: “We continue to believe that COVID-19-related downgrades to banks will be limited by banks' strengthened balance sheets over the past 10 years. Furthermore, we expect that support from public authorities to households and companies will be only gradually removed as the economic recovery takes hold later this year.
Slightly less than one-third of our bank ratings globally carry a negative outlook or are on CreditWatch with negative implications, mainly due to rating actions we took closer to the onset of the pandemic after we lowered our economic forecasts.
Although the asset quality picture is likely to remain blurry until much later in 2021, earnings recovery prospects and business model resilience will continue to be key considerations as we review banks during the year.
Earnings pressure and other factors have reignited consolidation in a number of markets--including the U.S., Spain, Italy, and Saudi Arabia--leading to some rating actions in recent months.”
Full article: S&P Global
UK listed Insurer Lancashire issued $450m of T2 bonds last week
Terms: 20.5 maturity with first call in 10.5 years with a coupon of 5.625%
Natwest issued a GBP AT1
NatWest issued a £400m AT1 with a 4.50% Coupon and first call in 7.5 years. There tends to be less issuance in Sterling AT1 compared with USD and EUR.
CaixaBank issued EU1b 10.25NC5.25 Green Tier 2 Bond at Mid Swaps +163
*EM / Asia*
EM hard currency bonds still weighed down by LATAM and long duration assets
Increased political noise in Brazil (What Happens Next in Brazil Now That Lula Has Returned -BBG) continues to be a burden for EM assets. The weakness in long duration is now appearing in countries like Malaysia and Indonesia which have long dated bond issuance outstanding. The other thing to consider is with the oil price strength, market participants maybe favouring oil producers/exporting nations over consumers of oil.
Emerging-market currencies posted the longest streak of weekly losses since August 2019 – BBG
The Turkish lira led declines as investors sold high-beta currencies. The benchmark tracking EM currencies is set for its fourth-consecutive weekly loss.
Tencent Faces Broad China Clampdown on Fintech, Deals – BBG
Extract: Asia’s largest conglomerate was censured by China’s antitrust watchdog on Friday as Beijing expands a crackdown that began with Jack Ma’s online empire. The token fine is just the beginning. China’s top financial regulators see Tencent as the next target for increased supervision after the clamp down on Jack Ma’s Ant Group Co., according to people with knowledge of their thinking. Like Ant, Tencent will probably be required to establish a financial holding company to include its banking, insurance and payments services, said one of the people, seeking anonymity as the discussions are private.
Read more here: https://finance.yahoo.com/news/tencent-faces-broad-china-clampdown-075403307.html
The Chinese Government made similar moves on Alibaba previously which saw heightened volatility in its shares. The news on Tencent also impacted its major shareholder Naspers’ shares which are listed on the JSE in South Africa. In the bond market, both Tencent and Naspers has debt outstanding (in the latter – Prosus).
India's fuel consumption fell for the second month in a row in February…
Extract: “Consumption fell to its lowest since September as record-high prices hindered demand recovery. Petrol and diesel prices across the country rose to their highest levels last month before state-owned fuel retailers put on hold any further price increase ostensibly to contain political fallout for the ruling party in the ensuing assembly elections in states like West Bengal. Diesel, the most used fuel in the country, fell 8.5% to 6.55 million tonnes while petrol consumption was down 6.5% to 2.4 million tonnes.”
China approves $1.5bn currency swap with Sri Lanka, IMF follows up with comment
Extract from Reuters: “China has approved a 10 billion yuan ($1.54 billion) currency swap with Sri Lanka, a government spokesman in Colombo said on Wednesday, giving some respite from concerns about public finances.”
After this news, the IMF’s Gerry Rice also provided an update on its status with Sri Lanka:
“On Sri Lanka, just a reminder, the extended Fund program with the IMF was approved in 2016. That expired last year, June 2020. We did receive a request (in April 2020) from the Sri Lankan authorities for emergency financial support to help fight the COVID pandemic. The assessment of that support has taken longer than for other countries due to Sri Lanka's daunting economic challenges and high public debt. So we have sought, but not reached understanding, on how to fulfill the key requirements for what could be a rapid financing instrument which would include policies to continue ensuring debt sustainability to address the balance of payment challenges including from the COVID‑19 impact on tourism and to preserve international reserves. Indeed, Sri Lanka has relied on important restrictions since last year and recently introduced additional measures such as a requirement to convert 25 percent of export proceeds. We continue to closely monitor these economic policy financial developments in Sri Lanka including the recent agreement on a swap line with the People's Bank of China.” IMF
USD bonds of Sri Lanka Sovereign rallied post the China news.
3 Indian corporate bond issues were scrapped last week as US yields rose
According to BBG, Indian Railway Finance Corporation scrapped two deals (one in USD and one in INR) and National Cooperative Development Corp withdrew rupee note deal.
*LINKS*
Goldman Sachs forecasts on US Treasury Yield Curve upto 10 years
US Bond yields to foreign investors reaching levels last seen in 2017
Relationship between rates vol and spreads - BoFA
Twitter thread on Credit spread behaviour
KKR sees room for a tantrum in HY as Fed exits / Firm would be buyer in event of disorderly sell-off in credit - BBG
DISCLAIMER: These are my personal opinions and not that of my employer. I may hold positions in instruments discussed above. This is not investment advice.