Weekly Global Credit Wrap w/w 19 Feb 2021
Rates action dominating again, credit spreads narrowing...
*Rates*
A week of further steepening of government yield curves. While the current move might be causing pain for the “40” portion of a traditional 60:40 stocks/bonds portfolio, folks who don’t have enough bonds may be looking at the current move with interest. Without having to re-invent the wheel I share below some of the excellent tweets from people I follow on Twitter regarding the steepening of yield curves:
10 Year US Treasury yields hit a fresh pandemic high @ 1.335% on 19 Feb
Rise in 10yr yield resembles previous moves, but does not resemble 1994 yet..
10 Year UK Gilt yield has tripled this year
French 10 Year Bond nearing 0.0%
10 year real yields on track for biggest weekly jump since last March
30 year TIPS yields turned positive for the first time since June 2020
New York Fed GDP Nowcast stands at 8.3% for 2021 Q1
https://www.newyorkfed.org/research/policy/nowcast
*Inflation*
Walmart will be raising wages for 425,000 more people - BBG
Article extract:
“Walmart, the nation’s largest private employer, is raising wages for 425,000 of its nearly 1.5 million employees.
“We completed a strong year and a strong Q4 thanks to our amazing associates. They stepped up to serve our customers and members exceptionally well during a busy holiday period in the midst of a pandemic. Change in retail accelerated in 2020. The capabilities we’ve built in previous years put us ahead, and we’re going to stay ahead. Our business is strong, and we’re making it even stronger with targeted investments to accelerate growth, including raises for 425,000 associates in frontline roles driving the customer experience,” Walmart CEO Doug McMillon said in a statement in the retailer’s fourth-quarter earnings results.
In a memo to U.S. associates obtained by Yahoo Finance, U.S. CEO John Furner said the wages for Walmart’s 425,000 store associates in the digital and stocking workgroups would increase to a range of $13 to $19 per hour, depending on location and market. The pay increase will take effect on March 13.”
Uber drivers entitled to workers' rights, UK supreme court rules - Guardian
Decision taken last week means drivers should receive minimum wage and paid holidays, say lawyers. The UK supreme court has dismissed Uber’s appeal against a landmark employment tribunal ruling that its drivers should be classed as workers with access to the minimum wage and paid holidays. Six justices handed down a unanimous decision backing the October 2016 employment tribunal ruling that could land Uber with a big compensation pay out and lead to better terms for millions of workers in the gig economy.
Uber, like many delivery and courier companies, has argued that its drivers are independent self-employed “partners” not entitled to basic rights enjoyed by workers, which include the legally enforceable minimum hourly wage and a workplace pension.
But the supreme court said any attempt by organisations to draft artificial contracts intended to side-step basic employment protections were void and unenforceable.
Judges criticised the controversial contracts Uber asked their drivers to sign, saying they “can be seen to have as their object precluding a driver from claiming rights conferred on workers by the applicable legislation”.
The court concluded that the drivers were workers because of Uber’s level of control over them, including setting fares and not informing them of a passenger’s destination until they were picked up. Read more here:
*Credit & New Issuance*
Fairly quiet week for Credit in general, but the main story is that credit spreads are thinning as government bond yield curves steepen across developed markets.
ETF Fund Flows show outflows out of Credit YTD
Source: ETF.com
Investors appear to be allocating still to broad Fixed Income ETFs like Vanguard Total Bond Market ETF, but redeeming from ETFs like LQD and HYG.
MicroStrategy Inc - Issued $1.05bn of Convertible Bonds to buy Bitcoin…
Microstrategy Inc is a $9.2bn Nasdaq listed company, raised money from the Convertible bond market last week. It priced up $1.05bn of Convertible bonds maturing in 2027 with a 0% coupon and 50% conversion premium. According to the company’s press release, the company intends to use the net proceeds from the sale of the notes to acquire additional bitcoin. Microstategy had all its cash in Bitcoin prior to this deal according to a recent article citing Cathie Wood, the head of the Ark Invest group of funds. Other companies to hold Bitcoin on their balance sheets include Square and of course Tesla. An interesting viewpoint from Cathie Wood’s firm is that if more corporate cash is held in Bitcoin, then that could see Bitcoin climbing to $400k (vs a current price of around $57k):
“According to Ark’s Big Ideas for 2021, if all S&P 500 companies were to allocate 1% of their cash to bitcoin, its price could increase by approximately $40,000. If those companies moved 10% of their cash to bitcoin, Ark sees the cryptocurrency climbing by $400,000. “
On the topic of Bitcoin, Crypto Bull Mike Novogratz mentioned on an Odd Lots podcast this month, that he had not seen institutional interest in Bitcoin pick up really until around April 2020.
Texas Storm hit the profitability of some Utility issuers
Barron’s ran a good article on how the extreme weather in Texas has impacted Utility companies that operate in the region. For example, RWE expects a hit to profits due to a double whammy of a) Wind Turbines being offline due to freezing conditions and b) Having to buy electricity from the market (during a period of surging prices) to meet supply obligations amid its wind turbine problems.
According to the article, other Utilities that operate in Texas may face a similar hit to profits. Barrons
Another European Telco creates Towers business - this time; Orange
“Orange takes a major step forward with the creation of TOTEM, its European TowerCo.
In the context of its Engage 2025 plan, Orange is reinventing its operator model and is creating a European TowerCo destined to become a value-creating entity by:
capitalizing on its industry-leading passive mobile infrastructure assets, focusing on revenue growth and optimising operational efficiency; and
delivering both organic and inorganic growth.
The TowerCo, which has been named TOTEM, will be run by a fully independent and dedicated management team that will be appointed in the first half of this year with a view to launching operations by the end of the year.”
Full statement: https://www.orange.com/en/newsroom/press-releases/2021/orange-takes-major-step-forward-creation-totem-its-european-towerco
*HY*
Washington Prime (mall owner) - Misses interest payment
Washington Prime, the Columbus-based mall owner told the SEC that it would miss a $23.2m interest payment on its series-2024 senior notes while it continues negotiations with its lenders. In the meantime, it has engaged Kirkland & Ellis LLP as legal counsel and Guggenheim Securities LLC as investment banker in negotiations. Read more here.
*Emerging Markets*
Mexico to Inject $1.3B-$1.6B Into Pemex: Reuters
Taken from Reuters Article: “MEXICO CITY (Reuters) - Mexico’s government will inject between $1.3 billion and $1.6 billion into state oil company Petroleos Mexicanos (Pemex) this year and offer a tax break of 75 billion Mexican pesos ($3.68 billion), a senior official told Reuters on Thursday.
The source also said the first of several capital injections, scheduled within the next two weeks, will be used to pay down debt, and that it is unlikely Pemex will issue bonds on the international market this year.”
I find the last bit most interesting since Pemex is the most heavily traded EM issuer on the US TRACE corporate bond reporting system. Pemex tends to be a regular issuer of debt and so this would have been a bit of a surprise for some.
*Sustainable Investing*
2020 saw a new record set for Green bond Issuance: Climatebonds.net
Record $269.5bn green issuance for 2020 boosted by late surge sees pandemic year pip 2019 total by $3bn. While the headline of record green bond issuance is not exactly surprising, what I did find interesting is that the largest issuer of green bonds in 2020 was in fact Fannie Mae, the US GSE.
Click on the link for more interesting details: https://www.climatebonds.net/2021/01/record-2695bn-green-issuance-2020-late-surge-sees-pandemic-year-pip-2019-total-3bn
Clothes Retailer H&M (BBB rated) issued €500m of 8.5 Yr bonds at 0.397% yield
Coupon is 0.25% and the new bond saw around EUR 3.8bn of demand for the €0.5bn issue. Without knowing much about the financial state of H&M, it seems like very cheap funding for a company in a competitive and often challenging sector. The sustainability linked bond (“SLB”) carries a coupon-step up provision that is linked to recycled material and emission targets.
Disclaimer: Not investment advice. Views are solely my own, not my employer’s. I may have holdings in some of the investments mentioned on this substack post.