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Bond Market News
LQD Sees $1.3bn of Outflows; Vedanta Raises $1bn via 3NC2s at 13.875%; Tsinghua Defaults on First $ Bond; Morocco, Montenegro Issue Bonds
December 10, 2020
US equities fell after opening higher with S&P down 0.8% and Nasdaq down 1.9%. Energy and industrials were the only sectors in the green up 0.3%. Tesla fell 7% while Amazon and Apple shares were down over 2%. Facebook slumped 1.9% after the US Federal Trade Commission and almost all US states sued them for abuse of monopoly power. Both US Treasury 10Y and 30Y yields fell 1bp. All eyes now focus on the European Central Bank (ECB) meeting today where many expect them to boost asset purchases and extend the duration of the stimulus. China reported its first consumer price deflation in 11 years as the CPI for November fell 0.5% YoY led by a drop in food prices. Chinese credit growth also showed some signs of slowing, growing by 13.6% last month. US IG CDS spreads widened 1.2bp while HY widened 2.3bp. EU main CDS spreads and crossover CDS spreads were wider 0.3p and 2bp respectively. Asia ex-Japan CDS spreads were down 0.2bp and Asian equities have opened lower ~0.3%.
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New Bond Issues
City Developments raised S$200mn ($150mn) via a 5.5Y bond at a yield of 2%, flat to initial guidance of 2% area. The bonds were unrated.
Starhill Global REIT raised S$100mn ($74.8mn) via a perpetual non-call 5Y bond (PerpNC5) at a yield of 3.85%, 27.5bp inside initial guidance of 4.125% area. The subordinated unrated bond is issued by HSBC Institutional Trust Services, rated BBB by Fitch, in its capacity as the REIT trustee. There will be a reset at the end of the fifth year and every five years thereafter at the prevailing SOR rate or a replacement benchmark rate plus a credit spread of 329.2bp. There will be no step-up, as is typical for perpetual notes issued by Singapore-listed REITs. Coupons are deferrable and non-cumulative. Proceeds will be used to refinance debt and to fund capital expenditure and/or working capital needs.
Jinan City Construction raised $200mn via a 364-day note at a yield of 2.4%, 55bp inside initial guidance of 2.95% area. The bonds were unrated and received orders of over $1.4bn, 7x issue size. Asia took 99.7% of the notes and EMEA 0.3%. By investor type, banks booked 75%, and asset managers, fund managers and hedge funds 25%. Partially owned indirect subsidiary Jinan Urban Construction International Investment is the issuer and Jinan City Construction Group, rated Baa2/BBB+ (Moody’s/Fitch), is guarantor.
Jinan Hi-tech Holding Group raised $180mn via a 3Y bond at a yield of 3.3%, 30bp inside initial guidance of 3.6%. Jinan Hi-tech International (Cayman) Investment Development is the issuer and Jinan Hi-tech Holding Group is the guarantor. Proceeds will be used to fund onshore construction projects and to replenish working capital. Jinan Hi-tech Holding Group is the primary entity for infrastructure development of the Jinan Innovation Zone in Jinan, Shandong province. It is wholly owned by the Jinan Innovation Zone State-owned Assets Supervision and Administration Commission, an agency under the Jinan SASAC.
New Bond Pipeline
- Shandong Chenming up to $1bn bond
- Laos $ bond
- Huayuan Property $ bond
Rating Changes
- Community Health Systems Inc. Downgraded To ‘SD’ From ‘CC’ By S&P On Distressed Exchange; Debt Rating Lowered To ‘D’
- Nabors Industries Ltd. Guaranteed And Unsecured Notes Lowered To ‘D’ From ‘CC’ By S&P Following Distressed Exchange
- Moody’s takes rating actions on nine Mongolian banks following update to country ceilings methodology
- Moody’s upgrades ratings of three Hong Kong banks and one foreign bank’s Hong Kong branch following update to country ceilings methodology
- Moody’s changes Freeport’s outlook to stable; affirms all ratings
- Moody’s upgrades Raizen to Baa3; stable outlook
LQD ETF Sees Second Biggest Outflows
Blackrock’s $56bn Investment Grade ETF widely known as LQD, saw its second largest daily outflow of $1.3bn from the fund on Wednesday. This comes just a month after it posted its biggest withdrawal on record of $1.4bn before the US elections. With the vaccine rollouts and November’s equity market rally, risk appetite has seen equity funds gain steam with ETFs tracking equities luring a record $81bn last month, bringing their total for the year to $196bn, according to Bloomberg data. Since the March pandemic lows of 105, the LQD ETF has moved up almost 30% especially with the Federal Reserve coming out with a backstop to credit markets even though the Fed has only purchased about $8.7bn worth of corporate bonds ETFs in total for now. “All-in yields are low, so as people start to believe in inflation and higher Treasury yields, they may be looking to reduce exposure to interest-rate-sensitive bonds,” said Peter Tchir, head of macro strategy at Academy Securities. Below is a chart showing the net flows into the LQD ETF this year with values above 0 indicating inflows and below 0 indicating outflows.
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Vedanta Raises $1 Billion from 3NC2 Bonds at 13.875%; Dollar Bonds Rally
Vedanta Resources Ltd (VRL) raised $1bn via a 3Y non-call 2Y (3NC2) bonds at a yield of 13.875%, 62.5bp inside initial guidance of 14.5%. The bonds have expected ratings of B- and received orders of over $2bn, 2x issue size. Proceeds will be used to fund a tender offer for its $670.157mn 8.25% 2021s and use the remaining proceeds for debt servicing of guarantors and/or to acquire shares in Indian subsidiaries. The bonds have an optional redemption from December 2022 till July 2023 at a price of 106 plus accrued and unpaid interest or at par thereafter. Subsidiary Vedanta Resources Finance II (wholly owned) is the issuer with a parent guarantee from Vedanta Resources and subsidiary guarantees from Twin Star Holdings and Welter Trading. The latter two guarantor cum subsidiaries own a combined 38% stake in Vedanta Limited implying that the new bonds will rank higher in the capital structure with a better recovery value in theory than the old 2021s, which do not have that guarantee.
The planned issuance comes after Moody’s downgrade of Vedanta last Thursday to B2 from B1 alongside cutting the senior unsecured ratings to Caa1 from Ba3 and keeping the ratings on review for a further downgrade. Vedanta’s dollar bonds were among the top gainers yesterday – 7.125% 2023s, 9.25% 2026s and 6.125% 2024s up 13.6%, 12% and 11.2%. The above bonds are currently at 73.45, 68.25 and 64.25.
For the full story, click here
Softbank Rumored To Go Private With Slow-Burn Buyout
Japanese conglomerate Softbank Group is considering going private by gradually buying back stock until founder Masayoshi Son has a sufficient stake to force out other investors, as per Bloomberg sources. This would likely take more than a year to pan out with Softbank selling assets to fund buybacks as Son’s stake increases without any additional purchases of Softbank stock. Under Japanese regulations, Son could compel other shareholders to sell when he reaches a 66% stake in the company, with a possibility of not paying a premium, the sources said. Son currently holds 26.8% through various entities.
Insiders call this a ‘slow-motion/slow-burn’ buyout that is a strategy where a company buys back stock gradually vs. a standard buyout where the company would have to pay a premium (typically ~25%). Bloomberg reports that Softbank’s stock trades at a discount to the total value of its holdings that include Alibaba, Uber, and the recently listed DoorDash which may entice shareholders to participate in the buyback. Softbank has bought stock worth ~$13bn holding 12% of shares outstanding. It has also announced plans to buy another ~$14bn in stock through July next year which could increase the founder’s stake to almost 35%. The value of stock outside Son’s control is ~$87bn with SoftBank sitting on cash of $80bn. Softbank’s dollar bonds were marginally lower – 6.875% Perps down 0.2 to 99.13 and 6.25% 2028s down 0.1 to 111.13.
For the full story, click here
Tsinghua to Default on $450mn 6% Bonds Due Today Following Onshore Bond Default
Tsinghua Unigroup, a semiconductor manufacturing company that is indirectly owned by state-owned Tsinghua University, announced via an exchange filing on Wednesday that it will not be able to repay $450mn 6% dollar bonds due today issued by Unigroup and guaranteed by Tsinghua International. This follows the company’s default on CNY 1.3bn ($199mn) worth of onshore bonds on November 16 and triggers a cross default on its $1.05bn 4.75% bonds due 2021, $750mn 5.375% bonds due 2023 and $200mn 6.5% bonds due 2028. The suspension of trading in its bonds, which came into effect on November 18 will continue until further notice. The exchange filing stated “The Issuer will keep holders of the Bonds updated by way of further announcement(s) as and when appropriate. Bondholders are advised to exercise caution when dealing in the securities of the Issuer and the Guarantor.” Andrew Chan, an analyst for Bloomberg Intelligence said, “We should see rising refinancing and repricing risk for weaker state-linked firms, which will lead to a rising default rate. Bailouts are unlikely, in our view, as China aims to restructure, consolidate and eliminate zombie-like state-linked firms unless it leads to systemic risk.”
Bondholders saw this coming when the company decided to not redeem its CNY 1bn ($153mn) 6.5% perpetuals on its first call date of October 30, following which its 4.75% bonds due 2021 and 5.375% bonds due 2023 fell ~40 and ~20 points respectively to currently trade at 32.4 and 25.3 cents on the dollar.
For the full story, click here
HNA to Sell Ingram Micro to PE Platinum Equity for $7.2 Billion
California-based global investment firm Platinum Equity confirmed on Wednesday that it had entered a definitive agreement with Hainan-based Chinese conglomerate HNA Group Co Ltd to acquire electronics distributor Ingram Micro Inc for $7.2bn. HNA group has been looking for suitors for its electronic arm for a while and the news on the deal with Platinum was first reported on August 24 when it was speculated that the deal would come with the debt component of Ingram. The sale of the world’s largest technology distributor and leading provider of logistics solutions is expected to be completed by the first half of 2021. The deal would help HNA tide through its current liquidity crunch thrusted after a slew of aggressive offshore acquisitions as the proceeds are expected to be used towards debt repayments.
Ingram Micro, which deals with full spectrum global tech and supply chain services to businesses around the world through a network of 1,700 suppliers and 190 logistics centres and caters to customers including Apple and Cisco, was acquired by HNA group in 2016 for ~$6bn . It had reported ~$47bn in annual revenues for fiscal 2019. Platinum Equity Chairman and CEO Tom Gore said, “Ingram Micro is an industry leader, one of the largest companies in the world and will be a cornerstone investment in our portfolio” and added, “We have the resources and the experience to help the company pursue an aggressive agenda of growth and transformation.”
HNA’s 6.25% 2021s were trading on the secondary markets at ~57.5 cents on the dollar. Ingram Micro’s 5.45% 2024s were up 1.8 at 109.9 while it’s 5% 2022s were down 0.25 at 102.25.
For the full story, click here
EMs Morocco & Montenegro Make a Late-Year Dash to The International Bond Markets
Emerging market sovereigns are making a late dash to the international markets before the holidays, capitalizing on the low interest rate environment and investors’ hunt for yield. North African sovereign Morocco raised $3bn via a three-tranche bond issuance priced on Tuesday that was followed by small Balkan nation Montenegro’s €750mn ($907mn) issuance of 7Y bonds. Details of Morocco’s issuance are as follows:
- $750mn 7Y 2.375% bonds at a yield of 2.412%, 175bp over Mid Swaps and 40bp inside initial guidance of MS+215bp area
- $1bn 12Y 3% bonds at a yield of 3.043%, 200bp over Mid Swaps and 50bp inside initial guidance of MS+250bp area
- $1.25bn 30Y 4% bonds at a yield of 4%, 50bp inside initial guidance of 4.5% area
The bonds, expected to be rated BBB-/BB+ met with solid investor demand with orders exceeding $13bn, over 4x issue size. This is the first dollar bond issuance from the sovereign in seven years and the second eurodollar issuance this year following a euro-denominated two tranche issue in October.
Montenegro sold €750mn of 7Y bonds at a yield of 2.95%, 42.5bp inside initial guidance of 3.375% area. The nation with a population of 650k and rated B1/B+ received strong demand from investors with orders exceeding €2bn, 2.7x issue size.
Stefan Weiler, head of central and eastern Europe, Middle East and Africa debt capital markets at JPMorgan said, “I’ve not seen it as busy in December ever before. The market is red-hot for higher-yielding assets, and lower-rated sovereigns are particularly interesting for investors.” Southeast Asian nation Laos, rated Caa2/CCC is planning a dollar bond issuance too having hired Oppenheimer & Co as sole lead manager to arrange investor calls this week.
For the full story, click here
LatAm Power Company EnfraGen Issues Debut Dollar Bond
Latin American power company EnfraGen sold $710mn worth of 10Y non-call 5Y bonds on Wednesday in its first dollar bond issuance in the international market. EnfraGen, owned by the US energy infrastructure developer Glenfarne Group and the Swiss private equity firm Partners Group, priced the bonds at 99.039 with a coupon of 5.375% to yield 5.5%. The final pricing on the bonds was 25bp inside initial guidance of 5.75%. The deal was more than two times oversubscribed. The company will use the proceeds to pay off debt and cover investments. EnfraGen builds, owns and operates conventional power plants and renewable energy assets through its subsidiaries Prime Energía and Fontus in Colombia, Chile and Panama. Moody’s assigned for the first time a Ba3 rating to EnfraGen and to its new bonds.
For the full story, click here.
Term of the Day
Yulan Bonds
Yulan bonds named after Shanghai’s city flower, a magnolia are bonds that are denominated mainly in US Dollars and Euros. These bonds will be issued through Shanghai Clearing House, a Chinese interbank bond market clearinghouse with the first issuance expected in the next few months. Whilst similar to traditional dollar and euro denominated bonds, Yulan bonds will help international investors be able to benefit from real time multi-currency DVP (delivery-vs-payment) settlement with any counterparty within Euroclear Bank’s network. Chinese issuers will now be able to access a deeper liquidity pool in a cost efficient way. For mid-sized Chinese companies with little experience in global markets, Yulan bonds offer “much wider access to an international investor base, and… a lower cost of borrowing”, said Ms Urbain, CEO of Euroclear Bank.
Talking Heads
On emerging markets making a late-year dash to bond markets
Stefan Weiler, head of central and eastern Europe, Middle East and Africa debt capital markets at JPMorgan
“I’ve not seen it as busy in December ever before,” said Weiler. “The market is red-hot for higher-yielding assets, and lower-rated sovereigns are particularly interesting for investors.” “As an issuer you never know what markets will look like in the future so it makes sense to utilise this favourable window. Especially for infrequent borrowers it’s a nice window to grab investors’ attention ahead of the wall of sovereign supply that usually emerges in January,” he said
Richard House, head of emerging market debt at Allianz Global Investors
“The sell-off was pretty indiscriminate in high yield, so as long as you are selective, there is room for spreads to compress further,” he said.
On low-yielding Treasurys a poor investment right now – Jamie Dimon, JPMorgan Chase CEO
“I would not be a buyer of Treasuries,” Dimon said. “I think Treasuries at these rates, I wouldn’t touch them with a 10-foot pole.”
“(We) will be assessing in the coming weeks how the IMF could support the authorities’ reform efforts through a possible Fund program,” said Selassie. “Authorities reiterated their intention of restoring the credibility of the budget, increasing debt transparency, strengthening public financial management, as well as improving governance and preserving financial stability,” he added.
On Turkey’s current account deficit at $62 mln in Oct – Daglar Ozkan, economist at Is Yatirim
“Imports weren’t as high as they were in September, the reduction of gold imports contributed to this. Therefore, we will see the one of the best monthly performances this year of the current account in October,” he said, adding that the deficit would likely increase again in November.
On Japanese funds ramping up China’s bond purchases while shunning most other emerging-market debt
Tsutomu Soma, a bond trader at Monex Inc
“Except for China, where it is seen recovering from the coronavirus crisis quickly, investors’ interest in buying EM debt is clearly fading compared with the past years because yields have become too low,” said Soma. “The current yield levels in many emerging countries don’t match the amount of risk involved.”
Toru Nishihama, an economist at Dai-ichi Life Research Institute Inc
“Chinese sovereign bonds could be one of the important investment destinations for Japanese bond investors,” said Nishihama. “Investors will be reluctant to invest in other emerging countries where their fiscal conditions are very fragile and unsustainable.”
Top Gainers & Losers – 10-Dec-20*
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