S&P and Nasdaq rose 0.2% and 0.5% with the latter at a record closing high. US retail sales fell 1.1% from the prior month, more than forecasted. US Markit manufacturing PMI beat expectations at 56.5 while services were slightly short at 55.3. The Federal Reserve maintained status quo at the FOMC meeting that concluded on Wednesday and committed to maintain its bond buying until ‘substantial’ progress is seen in the economy. The US Treasury yield curve steepened slightly after the meeting with the 2s10s at 80bp. German bund yields rose ~5bp as Eurozone PMI numbers surprised to the upside, particularly the services print at 47.3 from 41.7 last month. The DAX rose 1.5% while the FTSE and CAC gained 0.88% and 0.31% respectively. US IG CDS spreads tightened 0.03bp while HY widened 3.8bp. EU main and crossover CDS spreads were tighter 0.1bp and 2.4bp respectively. Asia ex-Japan CDS spreads were 0.2bp tighter and Asian equities have opened ~0.2% higher.
Vedanta Resources Ltd (VRL) has initiated talks to acquire Indian state-owned oil company Bharat Petroleum Corp Ltd (BPCL) and plans to raise ~$8bn in the process, as per two sources. VRL is expected to make this capital raise through a mix of debt and equity. “The talks are currently on to appoint an anchor bank for the purpose and discussions with JP Morgan are at an advanced stage” said one of the sources. Analysts questioned if VRL would be able to raise the required financing on its own given its current financial position and the recent downgrade. VRL has ~$15bn in debt, $5bn in cash and net debt at 3.3x EBITDA. Moody’s downgraded VRL to B2 from B1 highlighting persistent weak liquidity, high refinancing needs and governance issues. “Vedanta is aware of the challenges it faces in raising funds and is, therefore, keen to on-board equity partner(s) to jointly acquire BPCL…It has also initiated discussions with several global private equity funds to jointly bid” said the other source.
Last month, VRL submitted an expression of interest (EOI) (Term of the day, explained below) to buy a 52.98% stake in BPCL as part of synergies for their existing oil and gas business when talks were in preliminary stages. BPCL operates four refineries in India, runs 24% of the 71,843 retail outlets and has a share of 26% of LPG consumers in India. Most recently, after the rating downgrade, VRL raised $1bn via 3NC2s at a yield of 13.875%. Vedanta’s 9.25% dollar bonds due 2026 were up 1.1 points to 72.25 and their newly issued 13.875% bonds due 2024 were up 0.35 to 103.08. BPCL’s dollar bonds were marginally lower. Its 4.375% 2022s were down 0.03 to 103 and its 4% 2025s were down 0.21 to 105.73.
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Naci Agbal, the newly appointed Turkish central bank governor announced that they would not sell the dollar to help prop up the Lira. He noted that the central bank was planning to shore up forex reserves over the next year. He added that once Turkey sees both, sufficient inflows of foreign capital and reduced demand by citizens to buy dollars, the central bank would begin auctions to buy foreign currency and build-up reserves. He also said that there would be a gradual unwind of currency swaps with commercial lenders and indicated that he would be willing to further raise interest rates. Most recently in November, he raised rates by 475bp to 15%. Goldman estimates that the policy of selling dollars to prop up the lira has heavily depreciated reserves and cost them almost $150bn over the past two years. He also promised to do away with the system of multiple interest rates, which market participants consider opaque. Turkish dollar bond were higher – 5.125% 2022s up 0.13 to 102.38, 5.25% 2030s up 1.45 to 98.48 and 4.875% 2043s up 1.25 to 84.76.
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Moody’s said via a semi-annual update on Wednesday that Mexico’s state-owned oil major Petroleos Mexicanos (Pemex) could be downgraded deeper into junk territory, currently at Ba2, if the sovereign’s Baa1 rating is downgraded. In the event that Mexico’s sovereign debt is downgraded, Pemex’s “baseline credit assessment would have to substantially improve” for it to maintain its Ba2 rating, Moody’s said.
Pemex, which has a huge debt pile of $105bn, was downgraded to junk status by the rating agency in April from an investment grade rating of Baa3 to Ba2, a two notch downgrade. Pemex is rated BBB and BB- by S&P and Fitch respectively. In its latest update, Moody’s said that low oil prices, a massive debt burden and under-investment would keep Pemex’s credit metrics weak for the foreseeable future, adding that “a change in our assumptions about government support and its timeliness could lead to a downgrade.” Risks related to Pemex’s creditworthiness seem to be shrugged off by investors, going by the rally in its dollar bonds over the past month. Pemex’s 6.84% 2030s and 6.5% 2041s have rallied ~13 points from ~90 and ~79 in early November to 102.9 and 91.3 respectively.
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Investigative agency REDD said that China Fortune Land (CFLD) expects additional support from its second-biggest shareholder Ping An Insurance and from state-run China Resources Group. According to REDD, CFLD was in late stage negotiations with Ping An for a new cooperation agreement for three years. CFLD was also in talks with China Resources to become a shareholder and help in raising capital. Ping An holds a 25.05% stake, with state-owned Shenzhen Investment Holdings holding an 8% stake in Ping An. Moody’s had completed a review on CFLD in November in which it had revealed that the company’s standalone credit strength is constrained by its high debt leverage because of high funding needs, and its concentrated geographic coverage. CFLD’s 9% 2021s traded higher by 1.5 points over the past week to 96.09 while its 8.05% 2025s traded up by ~7 points over the past month to 85.65.
Saudi oil major Aramco may be required to sell assets and borrow debt to fund $75bn in dividends. Even though the company is not obligated to pay the dividends, it is likely to pay these despite its profits dipping due to lower oil prices. The company may be able to fund the dividend incase the oil prices remain above the $50/barrel according to a senior director at Fitch. However, in case the oil price goes lower, it may have to resort to a sale to the tune of $10bn in its pipeline assets to global investors according to a Reuters source. “If oil prices range around $50 per barrel, Aramco will probably need to tap the market again even if they manage to sell some of their assets,” according to a fixed income expert at fixed income at StoneX Group. The dividends from the world’s largest oil producer are vital to Saudi Arabia as it accounts for a major part of its GDP. This year Aramco has accounted for more than half of the oil rich nations total income. The dividends from the company will also go a long way to contain the budget shortfall even as the non-oil revenues grow. Saudi government owns 98.2% of Aramco even after it was listed in 2019 in a record $29.4bn IPO. The oil company has already raised debt twice after the pandemic. It raised $12bn through bond issuance in Apr. The deal was highly oversubscribed at 8x. It again raised $8bn through a five tranche offshore bond issuance in November which witnessed a demand of 6x. James Reeve, chief economist at Samba Financial Group said that “They can adjust the dividend to government lower, but they are more likely to maintain or increase the $75 billion and borrow if needs be,”.
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Fitch Ratings said that the recent normalisation of Qatar’s relations with its neighbors was a credit positive. However, the rating agency added that Qatar’s high debt would remain a drag on the sovereign ratings, currently at AA-. The recent improvement in relations is likely to help boost the country’s non-oil economy over the medium turn as its travel industry as well as the real estate industry stand to gain. However, the nation’s debt-to-GDP is likely to rise to 76% this year, up from 60% in 2017. According to the rating agency, the nation’s “stated intention to repay debt using cash reserves built up through surplus bond issuance over the last three years” could help reduce the debt-to-GDP ratio to 64% in 2021. Its contingent liabilities, especially from local banks, remains high. Qatar’s banks have a record high net foreign liabilities of $130bn, or 70% of GDP, as of 2019 and also have high domestic exposure. The debt of non-bank government-related entities is also significant, at ~38% of GDP as of 2019.
On low oil prices, the rating agency said, “The government has offset the budgetary hit from low oil prices by postponing public capital spending, and expansion of liquefied natural gas (LNG) production stands to deliver substantial improvements to public finances in the long term. Nonetheless, weaker-than-expected energy markets or fiscal consolidation efforts could put upward pressure on deficits and debt, and pose risks to the sovereign rating.” Fitch had downgraded Qatar in August 2017 to AA- from AA after the news of a dispute with the quartet of UAE, Saudi Arabia, Bahrain and Egypt which led to a stagnation in the financial and diplomatic relations between the countries. Moody’s and S&P rate the country at Aa3 and AA- respectively. Qatar’s bonds were stable on the secondary market. Its 3.75% 2030s and 4.4% 2050s were trading at 117.4 and 131.6 respectively, up 0.36 and 0.12.
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French retailer Casino Group raised €400mn ($488mn) via long 5Y non-call 2Y (5NC2) bonds on Wednesday. Solid investor demand for the bonds led the deal’s lead managers to tighten pricing no less than four times since the deal was launched on Monday. The leads began marketing the deal at an initial guidance of mid 7% area; guidance was then revised, first to 7.25% area and later to 7% area, with final guidance coming in at 6.75-7%. The 5NC2s were finally priced at par to yield 6.625%, 12.6bp inside the lower end of final guidance and a massive 87.5bp inside initial guidance. The leads, which include BNP Paribas, JP Morgan, Credit Agricole and HSBC, managed to upsize the deal from the originally planned €300mn ($366mn) to €400mn ($488mn) on the back of strong demand. The bonds are expected to be rated Caa1/B and will be issued in denominations of €100k. The bonds are callable on and anytime after the following dates:
Yields on Casino’s older 4.048% euro bonds due August 2026 tightened as the new bond was getting priced from 6.96% on Monday to 6.62% currently, roughly at par with the pricing on the new bond. “The price was really driven by the secondary levels, in what is arguably one of the largest capital structures in Europe away from telecom names”, a source told IFR. Proceeds from the bond coupled with a new €225mn ($275.1mn) Term Loan B due January 2024 will be used to fund a €1.2bn ($1.47bn) tender offer on its outstanding bonds due 2021 through 2025, which have seen a strong rally over the past three months.
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Chinese chemical producer Hongda Xingye Group missed a payment on its local currency bonds due on Monday. While the private company failed to honor its CNY 950mn ($145mn) debt payment, it narrowly avoided a default by reaching a deal with 12 institutional holders a day before the debt maturity. An overwhelming 90% of the bond holders voted to cancel the registration of the bonds and accepted repayments at a later date. An off-market repayment or conversion of bonds into general debt is technically not a default. The company is still to apply to the Shanghai Clearing House for cancellation of the bonds and reveal the date for the payment to its shareholders.
In related news, Yongcheng Coal also received a nod from creditors on its local currency bond repayment, as per Bloomberg. Holders of the one-year CNY 1bn bond ($150mn), which is due on December 18, approved a plan for the company to pay 50% of the principal first and extend the remainder, and thereby avoiding default on the bond, according to a statement on Shanghai Clearing House’s website. China’s distressed state-owned coal miner Yongcheng Coal had got a breather in November from its creditors when they unanimously approved a restructuring plan.
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An Expression of Interest (EOI) is one of the initial documents in a merger/acquisition process that a potential buyer shares with the seller. As the name suggests, it is a serious indication of interest by the buyer and covers aspects like the purchase price, valuation basis, due diligence, structure of the transaction including expenses, transition support, management retention plans and other aspects.
Last month, mining conglomerate Vedanta Resources submitted an EOI to buy a 52.98% stake in India state-owned oil major BPCL.
Jerome Powell, Federal Reserve Chairman
“We can kind of see the light at the end of the tunnel.. We’re thinking that this could be another long expansion…We’re going to keep policy highly accommodative until the expansion is well down the tracks…If you look at P/Es they’re historically high, but in a world where the risk-free rate is going to be low for a sustained period, the equity premium, which is really the reward you get for taking equity risk, would be what you’d look at”
Kathy Bostjancic, chief U.S. financial economist at Oxford Economics
“We had expected perhaps an extension of the maturities of the asset purchases. They didn’t do that…but this guidance, forward guidance on QE (quantitative easing) is pretty powerful…that gives some clarity, which is good.”
Collin Martin, fixed income strategist at the Schwab Center for Financial Research
“This was a very boring statement. For us, that’s not too much of a surprise because we didn’t really see the need for them to do too much more”
Thomas Costerg, senior U.S. economist at Pictet Wealth Management
“Powell was pretty upbeat about the outlook especially for the second half of next year with a rather-bullish assumption of herd immunity by mid-year with the vaccines…But the monetary-policy communication remains still very dovish — and even more dovish when juxtaposed to this rather upbeat macro outlook.”
Neil Dutta, head of U.S. economic research at Renaissance Macro Research
“The Fed marked up growth in each of the next two years, marked down unemployment, and marked up core inflation. Despite this, they don’t expect to move rates. Good for risk appetite. Buy stocks”
“The data hint at the economy close to stabilizing after having plunged back into a severe decline in November amid renewed COVID-19 lockdown measures..The fourth-quarter downturn consequently looks far less steep than the hit from the pandemic seen earlier in the year, though the picture is very mixed by sector.”
Karen Ward, chief market strategist for Europe at JPMorgan Asset Management
“Inflation staying low and well-behaved is the foundation on which everything in markets is currently priced…Investors’ assumption is that central banks will be able to stay accommodative well into the economic recovery. If inflation picks up in a way that’s not expected, that would challenge the market’s entire view.”
Bob Miller, head of fundamental fixed income at Blackrock
“The market is a little bit hung up on the last decade’s experience,” he said, adding that investors should buy assets that protect against inflation on a two to four-year time horizon”
James Reeve, chief economist at banking firm Samba Financial Group
“They can adjust the dividend to government lower, but they are more likely to maintain or increase the US$75 billion and borrow if needs be.”
Dmitry Marinchenko, senior director at Fitch
“With oil prices at US$50 per barrel or above, Aramco should be able to fund the US$75 billion dividend and capex from operating cash flows. However if oil prices are lower the committed dividend level becomes unsustainable, and Aramco would need to attract additional external debt or sell assets to fund it.”
Alberto Bigolin, head of MENA fixed income at StoneX Group
“If oil prices range around US$50 per barrel, Aramco will probably need to tap the market again even if they manage to sell some of their assets. But I think it will be able to do so quite nimbly given how tight the credit markets are.”
“While there were no immediate market implications, the BoJ’s move was pre-emptive so that in the event of another dollar liquidity crisis, the central bank would not need to be as reliant on the Fed as it was in March and April as the pandemic emerged. The BoJ’s holdings of US dollars are not so large, so it is a good idea to increase them. Also, the government needs yen for its supplemental budget . . . so it’s good for both sides. If the BoJ has enough liquidity in dollars it doesn’t need to rely on the Fed.”