*OVERVIEW*
Not much change in credit markets, i.e. credit spreads grinding tighter, riskiest parts of credit (AT1/CCCs) at or near record tights. Issuance machine continues rolling on, with European HY anecdotally seeing the biggest jump in issuance. The slowing of the rise in US Treasury yields seems to have given more investors confidence to participate in medium/longer dated credit. There have been interesting idiosyncratic situations like Huarong but overall the market remains very benign. The Russian sanctions announcement did not cause much of a stir for assets in the region since the sanctions were targeted at purchases by US Institutions of new RUB denominated OFZs (for now).
*MACRO CREDIT*
Maersk is upping the frequency of one of its key trade routes
Extract: “In response to the increasing customers' demand for Asia/Europe routing options, Maersk is picking up the pace of its AE19 service -a combination of a short-sea and intercontinental rail service between Northern European ports in Finland, Poland, Germany and Scandinavia and ports in Korea, China and Japan. “ Full text here.
*GREEN BONDS*
European Real Estate Co Gecina is looking to “requalify” its bonds as green…
Extract from the company: “Following on from the announcement of CAN0P-2030, its Carbon Net Zero Plan with a target for its operational portfolio to be carbon neutral by 2030, Gecina is launching the requalification of all its outstanding bond issues as Green Bonds, further strengthening the alignment between its environmental performance and its financial structure.” Full statement here: https://press.gecina.fr/news/gecina-wants-to-transform-100-of-its-bonds-into-green-bonds-within-a-global-dynamic-and-innovative-approach-e3c3-343e9.html
I believe this is the first time an issuer has carried out such an exercise…but I am happy to be corrected by any green bond experts.
*HY*
Rakuten issued Corporate Hybrids
$20bn equivalent market cap Japanese corporation Rakuten issued a multi-tranche Corporate Hybrid. It came slightly under the radar in a quiet Easter period for markets. Rakuten adds to the staple of Japanese issuers in the Corporate Hybrid space that currently include Softbank and Japan Tobacco. Rakuten is the leading e-commerce company in Japan. At the time of writing, these new hybrids have performed well in the secondary trading up around 2pts on bid side.
Details on bond issues:
Rakuten $750m PerpNC5 Variable at Par to Yield 5.125%
Rakuten $1b PerpNC10 Variable to Yield 6.25%
Rakuten EU1b PNC6 Hybrid 4.25%
Delta Airlines said its operation began generating cash again last month for the first time in a year…
…and passenger revenue that month jumped 50% from February, finally it also said that it is on track to potentially turn a profit this summer. Delta plans to accept a further $2.7 bn in federal aid from a third round of government funding, adding to the $16.6 bn in liquidity it had at the end of the quarter. The airline said it started paying down debt and plans to reduce its debt and pension obligations by $10 bn by the end of the second quarter. Source: WSJ
The resumption of corporate travel will boost the sector further as and when that happens. The Q1 reporting season will also give some good insight into how the other Airlines are faring too.
Air France KLM is looking to issue some “super subordinated” tranches as a part of its capital increase
To me, these proposed instruments read like Corporate Hybrids, and if issued would be the first Airline to issue such paper, which is surprising considering the level of “innovation” already achieved by DCM desks and corporate treasurers in COVID19 impacted sectors such as Travel and Leisure.
Extract: “…the Company will also proceed with the issue of undated deeply subordinated notes (recorded as equity in the Company's consolidated financial statements) for a total amount of €3 billion, subscribed in full by the French State by way of set-off on claims it holds on the Company pursuant to the shareholders’ loan granted in May 2020, fully drawn for the amount of €3 billion (the “Super-Subordinated Notes”).
This issue will be composed of three tranches with a perpetual maturity and a nominal amount of €1 billion each, with respective redemption options (Non Call) at 4, 5 and 6 years, and bearing interest at 7.00%, 7.25% and 7.50% respectively until these dates. Interest on the Super-Subordinated Notes will be capitalized.
These initial interest rates of each tranche of the Super-Subordinated Notes will be revised on the first early redemption date at the option of the Company of the relevant tranche and every 5 years thereafter, on the basis of the 5-year Euribor mid-swap rate increased by the initial margin retained for the initial fixed interest rate and the applicable Step-Up margin.
The interest rate would also be adjusted by applying the Step-Up margins from the first early redemption date:
- 4-year Super-Subordinated Notes: 1.50% as of the fifth year then 3.00% as of the eighth year onwards;
- 5-year Super-Subordinated Notes: 0.75% from sixth year then 2.75% from the eighth year onwards;
- 6-year Super-Subordinated Notes: 0.50%% from the seventh year then 2.50% from the eighth year onward.
Please read the full statement for the comprehensive details on these proposed instruments and the capital increase: Globe News Wire.
This is a similar playbook to when the Miners/Oil companies issued hybrids in order to keep a lid on leverage ratios during difficult times for the commodities sector (think BHP Corporate Hybrids and BP Hybrids).
AMC CEO Adam Aron does a 1.5 hour call with Youtuber; “Trey’s Trades”
I found this video quite useful as a stakeholder in AMC. There was a level of candidness from the CEO of a large corporation which you would not get on a regular earnings call. Without providing too many spoilers, Aron touches on his education and prior experience of running a company facing near-death experience, what he has to say to short-sellers and also a little on the upcoming shareholder vote. Well worth a watch in my opinion.
Netflix upgraded by Moody’s, now one notch away from IG
Extract of Moody’s comment: “Moody's upgraded Netflix’s corporate family rating (CFR) to Ba1 from Ba3…Additionally, Netflix's speculative grade liquidity (SGL) rating was maintained at SGL-1. The outlook remains positive. …RATINGS RATIONALE: The upgrade to Netflix's CFR and positive outlook reflects the company's rapid credit improvement due to continuing strong subscriber growth and operating margin expansion in most of its operating regions around the world. The COVID-19 lock downs around the world have led to greater than pre-crisis expected subscriber additions and pricing power due to significantly reduced out of home entertainment options and very strong viewer engagement in 2020. We expect the stronger momentum to continue to a degree through 2021. “
Netflix is now in a good position to be upgraded to IG by two agencies (Moody’s and S&P). Should this happen, it would enter the IG index.
Well known HY issuer Altice issued in both EUR and USD markets
It issued $2.5b 8NC3 bonds (2029 maturity) at par to yield 5.125% and EU400m of 8NC3 Fixed (2029) at Par to Yield 4%.
*FINANCIALS*
Moody's proposes updates to its banks methodology: Request for comment
Extract: “Moody's Investors Service is seeking feedback from market participants on proposed changes to its banks methodology. This proposal includes the revisions to Moody's Advanced Loss Given Failure (Advanced LGF) framework that were proposed in a March 2020 Request for Comment as well as some additional revisions. Unless changes are made following the comment period, this updated credit rating methodology will be adopted as proposed and replace the version from March 25, 2021. “
As a part of this exercise, Moody’s is looking to harmonize the analytical treatment of Additional Tier 1 (AT1) securities. According to their statement:
“The proposed change in treatment of AT1s would affect about 3% of rated banking groups, the preponderance of which would see single-notch upgrades or downgrades for particular classes of debt. “ Full statement here.
Rabo Bank issues EUR AT1 with lowest ever coupon…
Investment grade rated new Rabo AT1 set the lowest ever coupon (3.1%) on a European AT1 issue with a call date of 2028. The funny thing is that the previous record was held by Rabo for its bond that was issued in September 2019 which has a coupon of 3.25%. As with other high beta asset classes, the spread on the AT1 sector has contracted to a level such that it is only 10bps higher than the record low set in February 2020.
When looking at this bond on a yield to perpetuity basis using current offer levels, the YTP equates to less than 3% in Euros. It doesn’t take a genius to figure out that there is more risk than reward when you are getting such low coupons (and long duration) to participate in one of the riskier asset classes within credit.
Bank of Cyprus issued 300mm of T2 bonds at 6.625% in EUR
Bank of Cyprus issued 300mm of 10.5nc5.5 T2 with a coupon of 6.625% in a transaction that was said to be 4x oversubscribed. I cannot comment much on the credit since I am not familiar with it, however I do recall the same bank issuing in 2017 at much higher coupons ( i.e. Bank of Cyprus 9.25% 2027 EUR issue). Pretty impressive decline in funding costs for Bank of Cyprus by the looks of it..
Legacy bank bonds sector lifted again after call by SocGen
Soc Gen announced call of a disco bond (FR0000585564 ) at par, which lifted the whole sector the week after Natwest redeemed some series C instruments. For reference, this particular disco bond from Natwest traded sub 50 cash price in Q3 2019.
*EM / ASIA*
Huarong bonds improve after government breaks silence
Some Huarong bonds rose 10+ points off the lows after China’s financial regulator said on Friday that the bad-debt manager was operating normally and had ample liquidity. Full article on Bloomberg
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Tencent got its $4bn+ bond deal done brushing aside Huarong worries
Extract from Reuters: “Tencent Holdings Ltd raised $4.15 bn on Friday in its second major bond deal in less than a year as global investors were enticed by its attractive pricing and overlooked a regulatory crackdown on China's tech giants.
Asia's most valuable company said in a statement it raised $500 million in a 10-year tranche, $900 million in 20-year debt, $1.75 billion in 30 year and $1 billion in 40-year debt.
Final orders for the dollar-denominated bonds were worth $21 billion when the books closed early Friday during U.S. trading hours, according to two sources with direct knowledge of the matter.
The enthusiastic response contrasted with investor jitters around some state-owned Chinese issuers this week as the delayed release of China Huarong Asset Management Co's annual earnings prompted concerns over its ability to repay offshore debt.”
Read more: Reuters
*INTERESTING F.I TWEETS*
CCC bond yields below 7% - Tightest ever in history (apparently).
$12bn inflows YTD into Lev-loans
Good advice from JPM to corporates…lock in low costs now.
US HY Spreads - Trip down memory lane…
Fallen Angel Debt Is Projected To Fall To $195 Billion: S&P
Disclaimer: This is not investment advice. I may hold positions in some of the issuers mentioned. These comments above represent my own views and not those of any employer.