*MACRO*
US Treasury yields rallied on the week
The main treasury benchmarks all tightened this week:
2yr -1bps to 0.141%
5yr -1.5bps to 0.87%
10yr -4.5bps to 1.68%
30yr -5.5bps to 2.38%
Source: Bloomberg
There are a number of reasons for the rates rally this week, but one factor seems to stick out most - rising geopolitical tensions. President Joe Biden’s inaugural address had some punchy statements towards China. Business Insider summed it up pretty well:
“President Joe Biden during his first news conference on Thursday said he would stand in the way of China's goal of becoming the world's most powerful country. "They have an overall goal to become the leading country in the world, the wealthiest country in the world, and the most powerful country in the world. That's not gonna happen on my watch," Biden said. He vowed to challenge China on trade and human rights, while underscoring that the US needs to invest more in science, technology, and research to stay competitive.”
The change in US President does not appear to have seen any let up in the ongoing power struggle between USA and China. China is not sitting back, judging by the more subtle but still aggressive moves against the US. This weekend CNBC reported that China is sanctioning two U.S religious rights officials and Canadian member of parliament. Oh yes, and North Korea launched a missile this week…It may all just be noise, but its probably enough to make Treasuries seem interesting again as the weapon of choice during a major risk-off event.
Can’t go without saying something about shipping…
As I write this blog, the Ever Given vessel remains stuck in the Suez Canal. Listed shipping/container company shares have been on an absolute tear over the past 6 months or so, and this recent event has provided another small boost. Most of these companies have bonds in either the HY or crossover market. The discussion is now moving onto which firms are insuring these vessels and how large the claims could be.
Companies such as CMA-CGM and Hapag Lloyd have seen their credit ratings upgraded recently due to improved financial positions as a result of higher shipping rates.
*CREDIT*
Nordstrom - US Luxury retailer’s new bond was 9x oversubscribed
Nordstrom issued a 3NC1 bond at +200bps over the treasury and a 10 year bond at +265bps over the treasury. Nordstrom is rated investment grade from two of the main ratings agencies and high yield from the other. This issue follows last week’s HY issuance from Neiman Marcus as issuers in the sector look to get deals done before borrowing costs rise more meaningfully.
*HY*
General comment on HY
The high yield market seems to be remarkably stable compared to some of the goings-on in the stock market. The US HY market saw $140bn of issuance in the 1st quarter, breaking the previous record set in Q2 2020. Leveraged loan issuance did not quite set a reocrd, but clocked up $169.9 bn (upto March 24th), which was the second-highest quarterly volume of all time and within striking distance of the record $171.4 bn (in Q1 2017) according to LCD. What could be behind the relative calm of HY vs other high beta asset classes? The search for yield is still on, but market participants are willing to take credit risk over duration risk to achieve that currently, and US HY still fits that bill.
US Firms Pay Penalties to Refinance as Inflation Fears Loom
Extract: “(Bloomberg) -- U.S. companies including hotel chain Hilton Worldwide Holdings Inc. are so anxious to lock in low borrowing costs now, before inflation fears push yields even higher or close the market altogether, that they’re paying millions of dollars in penalties to refinance debt early. The corporations, which also include car renter Avis Budget Group Inc. and financial index company MSCI Inc., are selling new bonds and using the money they raise to buy back existing notes. But those repurchases come at a cost: high fees they have to pony up to buy back securities early. Usually those fees, known as call premiums, would be lower or even zero if the company waited anywhere from a few months to a year.” Yahoo Finance
Bombardier - Tender offer and new issue
The HY new issue market is very much open and while front end treasury yields are still quite low, companies are using the opportunity to retire short dated debt and issue new paper at reasonable rates. Bombardier (CCC rating) this week launched a cash tender offer to purchase up to $1.1 bn across a series of notes in the 2021 to 2023 maturities.
Moody's upgrades Tesla's corporate family rating to Ba3; outlook is positive
Ratings agencies can often be behind the curve, but its still interesting either way to a credit raters’ perspectives on an issuer, some extracts from their statement on Tesla below (my highlights in bold):
The upgrade of the ratings reflects the improving outlook for the profitability of Tesla's core automotive operations (excluding the sale of regulatory credits), the expanding global market for battery electric vehicles (BEV), and the company's healthy liquidity position.
The growing scale of Tesla's BEV operations will support gradual improvement in the company's automotive profitability and margins, excluding the contribution from its sale of regulatory credits. The company has been successful at scaling up the global production on the Model 3 and expanding capacity. Moody's estimates that industry shipments of BEVs will grow from approximately 1.4% of total global automotive unit sales in 2020 to approximately 10% by mid-decade, and could reach 25% by the end of the decade. Tesla's large cash position of $19 billion will support its ability to fund the planned expansion of its production facilities in Europe and the United States as the market grows.
However, Tesla's earnings performance has been significantly boosted by the sale of emission credits to other automotive companies that cannot meet emission requirement in various geographic regulatory regimes. The sale of credits amounted to $1.6 billion in 2020, resulting in operating income excluding regulatory credits of $414 million. Absent credit sales, Tesla's operations have generated losses through the first half of 2020. The company's future automotive profitability, excluding emission credit sales, could be challenged as traditional auto manufacturers begin to aggressively launch BEVs that will play a critical role in their meeting emission requirement levels. Moreover, as these manufacturers introduce BEVs and a range of other alternative fuel vehicles (AFV), Moody's expects that Tesla's sale of emission credits will decline.
The positive outlook reflects Tesla's leading position in the BEV sector, the favorable long term growth prospects for electric vehicles, and a liquidity position the should comfortably fund near-term expansion plans. The outlook also recognizes the potentially supportive policies under the Biden administration for electric vehicles.
Tesla's $19 billion of cash affords it a strong liquidity position with ample capacity to: 1) repay approximately $1.8 billion of debt maturing over the next twelve months; 2) fund a $4.5 to $6 billion capital expenditure program; and, 3) cover negative free cash flow that could be as much as $1 billion.
The outlook is positive, so there is a possibility of a further upgrade to the next notch (BB equivalent). All things being equal (which they rarely are in such a fast changing sector) this is a positive development for Tesla and should enable it to issuer cheaper debt if needed…watch this space. BB rated issuers nowadays tend to achieve bond pricing, especially since there are more buyers of BB paper as Investment Grade Funds make bigger allocations to this rating bucket in the absence of attractive yields in the BBB space.
Europe's High-Yield Default Rates to Peak in March; Forecast Revised
Extract: “European leveraged credit default rates will peak in March 2021 and moderate later in the year...We have lowered our high-yield bond and leveraged loan default rate forecasts for end-2021 to 2.0% and 3.5%, respectively, from 5.0% and 5.5% in our previous forecast and from 3.3% and 3.7% in 2020. We have also lowered our expectations for 2022 to 3.0% and 4.0% for bonds and loans, respectively, from 4.5% and 4.6%.” Continues here: Fitch
*FINANCIALS*
Jefferies Q1 figs to 28 Feb read positively, good sign ahead of Q1 bank earnings
Investment Bank Jefferies reported a strong quarter to the end of February 28th. This from Bloomberg:
“Jefferies delivered record quarterly earnings results on Wednesday after the closing bell, with increased market share across its lines of business. For the first quarter ended Feb. 28, Jefferies — considered a bellwether for Wall Street banks — posted total revenues of $2.13 billion, up 82% from the $1.17 billion reported a year ago, a record at that time. The quarter's net earnings came in at $494 million, up 188% from the $171 million reported during the first quarter of 2020. The bulge-bracket banks will report results next month.”
Banks that have been actively involved in arranging capital markets issuance (SPACS/Equity offerings/ HY Bonds/Lev Loans) should have done well. Furthermore, the steeper yield curve is helpful for banks.
Moody’s upgraded several banking System outlooks to stable from negative
Most of the EU Banking systems were moved to stable from negative (France, Italy, Spain, Belgium, Holland, Denmark) with Switzerland and Sweden kept at stable. However the UK and Germany were kept at negative.
Fed to end restrictions on bank dividends and share buybacks in June..
….after stress tests are carried out. We may see other prudential authorities follow soon.
London Stock Exchange issued bonds in EUR, GBP and USD
LSE Group issued a four tranche EUR, single tranche GBP and a five part US Dollar offering in the past week. There appeared to be strong demand for the name. This is in contrast to its shares which are down just over 20% ytd.
Litigation Finance co Burford issued inaugural institutional HY bond deal
Litigation Finance specialist; Burford Capital issued $400m of 7 year non call 3 (7NC3) bonds on Friday. It was the first time Burford had issued bonds in the institutional HY market. It follows after Burford ($1.7bn market cap) secured a dual equity listing on the NYSE in 2020. Earlier in the week, Burford reported its FY figs and received a ratings upgrade from Moody’s to Ba2.
*EMERGING MARKETS*
General comment on EM
The issuance train is set to start up with Ghana, Pakistan and Kenya just some of the issuers looking to issue paper in the near term.
Pakistan to get $500m from IMF and is said to hire banks for bond sale - BBG
Furthermore, the World Bank signed agreements with Pakistan to provide USD 1.336 billion worth of assistance to boost the cash-strapped country's foreign exchange reserves and help support social sector programmes. See link for more.
Tribune article on Pakistan pitching 2bn of Eurobonds to investors.
Ghana - Talking about a zero coupon bond issue
This from FurtherAfrica:
“West Africa’s second-biggest economy targets to issue its first zero-coupon dollar bond with four-year maturity, alongside a seven-year, 12-year and 20-year instruments.
…Ghana also offered to buy back as much as US$250M of its outstanding 7.875% notes due 2023… The country last sold Eurobonds in February 2020, just before the coronavirus pandemic sent benchmark U.S. Treasury yields to record lows. The country, rated ‘B’ by Fitch Ratings and ‘B-’ by S&P Global Ratings, is seeking to raise US$5B, of which US$1.5B would be used to finance the 2021 budget and the rest for liability management of domestic and international debt.”
The zero coupon bond when issued is likely to be issued at a discount to par (Original Issue Discount or “OID”).
Kenya to Sell $1 Bn in Eurobonds, Followed by Euro Debt
Extract: ”(Bloomberg) -- Kenya plans to raise $1 billion by the end of June and an additional 1 billion euros in the fiscal year starting July through Eurobond sales, according to Haron Sirima, director general of the nation’s Public Debt Management Office.” Bloomberg
Maldives is to issue a Dollar denominated Sukuk
The Republic of Maldives has hired banks to arrange a potential five-year U.S. dollar-denominated Sukuk. The nation also concurrently announced a tender offer of its outstanding $250 million 7% 2022 note for cash.
Maldives is just one of the many tourist nations that has been hit hard by the pandemic, and this new issue is likely to play into the demand for “re-opening type” trades in the wider market.
Korea consumer sentiment turns positive - 1st time since pandemic
Extract: “Consumer confidence in South Korea turned positive for the first time in March since the outbreak of Covid-19 in February last year amid hopes of normalization of lives through rollout of vaccines. The composite consumer sentiment index (CCSI) reached 100.5 in March, up 3.1 points from a month earlier, showed the Bank of Korea data on Friday. It is the first time for the index to go above 100 since January last year or before the Covid-19 crisis began. It is the third month in a row for the index to rise.“
*ESG*
Shipping company Hapag Lloyd issued sustainability linked bond
Shipping company Hapag-Lloyd AG has successfully placed its first sustainability-linked note of €300 million. The senior note has a coupon of 2.5% and a maturity of 7 years. According to the company: “the sustainability-linked senior note is associated with a clearly defined sustainability target: By 2030, the CO2 intensity of Hapag-Lloyd’s own fleet is to be reduced by 60% compared with 2008, the reference year of the International Maritime Organization (IMO). Improvements in the CO2 intensity will be measured and annually disclosed according to the so-called Average Efficiency Ratio (AER) indicator, which was 11.68 in 2008 and is expected to fall to 4.67 by 2030. “
Lendlease completes 2nd oversubscribed green bond in five months
Extract: “The new $300 million 10-year fixed rate green bond, which pays a coupon of 3.7 per cent, follows the successful issue of Lendlease’s $500 million debut green bond in October 2020. In raising a total of $800 million across the two transactions, Lendlease has become the largest non-bank ASX listed issuer of green bonds to date.”
*LINKS*
WeWork bonds catch a bid on news it is to combine with a SPAC
Gilts
Asset Allocation
Rebalancing predictions for quarter end
Disclaimer: This is not investment advice. I hold positions in some of the issuers / securities listed above. These comments reflect my own views and not that of my employer.