Weekly Global Credit Wrap w/e 19 March 2021
Bit of Financials, EM, HY and a trip down memory lane...
*MACRO*
US 10 and 30 year yields spiked this week, expanding the gap between short and long term US yields to the widest in years
CS’s Zoltan dispels worries about SLR Extension
In the short term, he might have been right since the Fed did the let the SLR exemption expire which did not seem to cause much of a reaction in the rates market (yet). Doesn’t mean it can’t be a slow burner.
Fed’s Open Market Trading Desk to No Longer Conduct Regular Operations to Buy Agency CMBS
Australian Employment figures were much better than expected, can we start to see the same in the USA soon?
Extract from ING: “After a very solid 29.5K increase in employment in January, Australia added a further 88,700 jobs in February. Not only that, but these were entirely in the full-time sector, which means that the spending power implications of this are much stronger than had this been split between part-time and full-time jobs.
The unemployment rate for January was revised lower to 6.3%, but the February release showed it falling still further to only 5.8%. This came about from a 28,200 fall in the numbers of unemployed.” ING Think
ICYMI: RBA had increased borrow cost for its April 2023/2024 bonds
Extract from FXLive on 10 March 2021: “RBA makes subtle change to its bond operations today. RBA governor Lowe may have done his part earlier in talking down the aussie and keeping the bond market in-check but the central bank also took an extra step in ensuring that investors got the message as they made borrowing shorter-dated bonds more expensive (h/t @ Stephen Spratt, Bloomberg).
The RBA announced that the indicative fee for borrowing of April 2023 and April 2024 bonds will be done at 100 bps as compared to the usual 25 bps charge.
Keep in mind that the RBA has a target rate of 0.10% for its three-year bond yield and this just makes it more expensive for short prospects to drive said rate higher.”
US Break evens continue to rise - inflation expectations
Spreads on US IG credit tightened 3bps but HY widened 11bps this week
The weakness in HY continued to be mainly in the longer duration BB space. Spreads in IG contracted as US Treasury benchmark yields widened significantly.
*New Issues*
<— INVESTMENT GRADE —>
Anglo American $500m 7Y Fixed (March 17, 2028) at +107
Anglo American $500m 10Y (March 17, 2031) at +130
Repsol EU750m PerpNC6 Hybrid 2.5% [ Corporate Hybrid
REITS - Several new issues came to market - Simon Property (EUR), Medical Properties Trust (GBP) and Vonovia (EUR Green)
AT&T $6b Debt Offering in 3 Parts (all short dated tenors).
$2.25b 3NC1 Fixed (March 25, 2024) at +60
$750m 3NC1 FRN (March 25, 2024) at SOFR+64
$3b 5NC2 Fixed (March 25, 2026) at +85
SSE Unit Issues $697 Million Green Bond to Fund Infrastructure - BBG
Verizon (borrowed from quite a few different markets including USD the prior week):
Verizon CHF700m Debt Offering in 2 Parts
Verizon CAD$1.5b Debt Offering in 2 Parts
Verizon EU2.75b 8Y, 11Y, 14.5Y
Verizon AUD1.25b Debt Offering in 3 Parts
The list above is not intended to be exhaustive.
<— HY / EM —>
IAG EU1.2b Debt Offering in 2 Parts:
€500m 2.75% IAG 2025 bonds
€700m 3.75% IAG 2029 bonds
Fortescue $1.5bn 4.375% 2031 bond - Bond issue size doubled vs initial expectations
Neiman Marcus - Upsized its CCC rated deal to $1.1bn from $1.0bn and issue 5NC2 paper at 7.125%. Neiman emerged from bankruptcy last September.
Petronas $600m 7Y +85bps (2.112% coupon for 2028 maturity)
Russian Railways CHF250m PNC6.25 Green 3.125% | Corporate Hybrid
T-Mobile USA $3.8b Debt Offering in 3 Parts
<— Convertible Bonds —>
Ford's $2bn Zero coupon 5 year Convertible Note Offering:
With An Initial Conversion Rate Implying a 40% Premium -- MarketWatch
Imax Prices $200mm convertible notes due 2026 with 0.5% coupon
On Wednesday, IMAX priced a private offering of $200 million in aggregate principal amount of 0.500% convertible senior notes due 2026 for expected net proceeds of about $193.3 million. The initial conversion rate of 34.7766 common shares per $1,000 principal amount of notes, which is equivalent to an initial conversion price of about $28.75 per share. (MT Newswires)
*Financials*
Divergence in performance between US and European Bank stock indices
I had an alert this week that European Bank stocks hit a new 52 week high. However, digging into it further, it was clear that European Banks still hadn’t retraced to level that they had reached just before the big drop in March 2020. Compare that to US Banks (using the XLF ETF as a proxy) which has already surpassed its high seen just before the cliff-edge style fall in March 2020.
Source: Google Finance
Comparisons for many data points (economic/corporate/share prices) are going to require extra analysis from around this time of the year vs “distorted” data points during the initial stages of the pandemic.
Green / sustainable bank bond issuance proving popular…longer term considerations
Companies that came to issue bonds in green format this week included Standard Chartered, Deutsche Bank and Paragon Group of Companies (UK FTSE 250 Specialist lender/Bank).
Bloomberg reported strong demand for ESG bonds from Yankee banks:
Standard Chartered’s 4 year (Non-call 3) sustainability offering was nearly 7x oversubscribed at its peak while Deutsche Bank was almost 6x covered before upsizing the deal to $800m from $500m.
According to the report, ESG offerings from Yankee Banks have been rare YTD, with Sumitomo being the only other one (books 7x covered).
In the UK, Paragon Group of Companies issued a small £150m T2 bond (Paragon 10.5NC5.5 Green Tier 2 bond @ 4.375%). It concurrently ran a tender for its existing (non-green) Tier 2 bond. The proceeds will be used to finance a pool of green residential real estate loans. IFR ran a good story on the topic.
I’m intrigued as to what the reaction would be for a green bond issue if (when) there is a scandal, fraud or anything of a nature that suggests unethical behaviour from individuals or a division within a bank (or even from the top). There have been many banks that have been involved in controversies, and just in the past few weeks we have seen some new cases (Credit Suisse - Greensill, Onesavings Bank - £28.6m suspected fraud). Could the uncertainty caused by a controversy be the catalyst for better trading opportunities in green securities vs being part of the crowd buying bonds at the new issue stage? Watch this space…
More legacy bonds being called/tendered (h/t @jeuasommenulle)
LASER COFINOGA SA (A subsidiary of BNP I believe).
La Mondiale
Barclays launched a share buyback, the good days are coming back?
Extract of statement:
“Barclays PLC -Commencement of Buy-back
Barclays PLC (the "Company") announces that, as outlined in its announcement on 18 February 2021, it will commence a share buy-back programme to purchase ordinary shares of 25 pence each in the Company ("Ordinary Shares") for up to a maximum consideration of £700m (the "Buy-back"). The Buy-back will commence on 19 March 2021 and end no later than 4 August 2021 (subject to regulatory approval remaining in place). The purpose of the Buy-back is to reduce the share capital of the Company and therefore Ordinary Shares purchased under the Buy-back will be cancelled.”
*HY*
AMC Cinemas - S&P views a “bankruptcy filing as less likely.”
Extract of comment from S&P re: AMC Cinemas this week (X-S&PGRBulletin: AMC Entertnmnt Hldgs Rtgs Same On Imprvd Liqdty - 18 March):
“S&P Global Ratings today said that it now expects AMC Entertainment Holdings Inc. (CCC-/Negative/--) will have sufficient cash to fund its monthly cash burn of about $125 million until global theater attendance materially improves, which we expect to occur in the second half of 2021.
The company had about $1.1 billion cash on hand as of Feb. 28, 2021, after raising $579.8 million in equity and $441 million of incremental debt in January and February of this year. Given the company's extended liquidity runway and lack of covenants, we now view a bankruptcy filing as less likely. However, we continue to believe AMC may pursue other forms of debt restructurings over the near term given its heavy debt load and high interest burden stemming from the debt it raised during the coronavirus pandemic.“
AMC reported earnings already this month, but we see sector peer Cineworld reports prelims in the coming week, Cineworld historically has also earned most of its revenue in the US:
Source: https://www.cineworldplc.com/en/about-us/key-facts
American Airlines CEO says it is not looking to raise any more money…
“For the first time since the crisis hit…we at American are not looking to go raise any money,” American’s chief executive, Doug Parker, said Monday. Even after accounting for roughly $30m of cash burned each day, American expects to have $17 bn of liquidity at the end of March and no major debt coming due until 2023. Source: WSJ
JPM hosted a conference on Airlines in the past week, see links below for best extracts of the meeting:
https://seekingalpha.com/article/4414246-american-airlines-aal-presents-j-p-morgan-virtual-industrials-conference-slideshow
https://uk.sports.yahoo.com/news/us-airlines-see-surge-fliers-180000935.html
https://www.bloomberg.com/news/articles/2021-03-15/jetblue-southwest-see-leisure-travel-rebound-boosting-demand
*EM*
Taking a trip down memory lane - low coupon EM issuance
While doing some screening of EM Sovereign bonds this week, I came across some stunning low coupon bonds that were issued when borrowing costs were ultra low for pretty much anyone. Selection of these below:->
$ Abu Dhabi 2.7% 2070
$ China 2.25% 2050
€ Lithuania 0.5% 07/28/50
€ Mexico 2 1/8 10/25/51
$ Indonesia 3.05% 2051
$ Peru 2.78% 2060
Is it any wonder than EM Sovereign benchmarks are doing so badly YTD with a high weighting towards long duration, low coupon paper…
EM Central Banks are hiking…
Russian CBR hiked rate to 4.5% vs estimate of 4.25% (BBG)
Brazil’s central bank lifted the Selic by 75 basis points to 2.75% Wednesday, the first rate increase since 2015
Georgia - National Bank of Georgia raised its policy rate by 50 bps on March 17, citing rising inflation, despite the country’s severe economic contraction.
Turkish CBRT hiked policy rate by 200bps to 19% (higher than expected).
Poor guy Naci Ağbal (formerly of the CBRT) got fired soon after in what seems like an annual (??) changing of the guard there!
Mexico to Absorb $6.4 Billion in Pemex Debt Payments This Year - RTRS
Extract of aritcle: “Mexico’s government will absorb regular debt payments this year for Petroleos Mexicanos (Pemex), as President Andres Manuel Lopez Obrador intensifies his efforts to prop up the heavily-indebted state-run oil company.”
*RATINGS*
Zurich Insurance upgraded by S&P
Core operating entities moved to 'AA' from 'AA-'. This takes the Subs to A+ from A
Panama Downgraded to Baa2 by Moody's, Outlook Stable
*LINKS ON THE WEB/TWITTER*
Oaktree’s Howard Marks 2020 in review - https://www.oaktreecapital.com/docs/default-source/memos/2020inreview.pdf
Long Term US Govt Bonds - worst quarter since early 1970s
A short history of bond market sell-offs - BOFA h/t @WallStJesus
30 Year Bond Yield - TA
US IG issuers are starting to issue more shorter dated bonds (e.g AT&T)
Disclaimer: Not investment advice. I hold positions in some of the issuers listed above. These views represent my own views and not those of my employer.