Oman to Lift Subsidies to Narrow Fiscal Deficit; Fed Allows US Banks to Resume Buybacks; GE Buys Back Bonds Worth $2.2bn; China ex Fin Min Criticizes Regulators
S&P ended 0.4% lower on Friday while Nasdaq was 0.1% lower. European equities also showed a similar picture, with the DAX, CAC and FTSE down 0.3%-0.4%. China threatened to impose countermeasures after US decided to blacklist more than 60 Chinese companies. “Such moves have seriously damaged the international economic and trade order and free trade rules, as well as the security of the global supply chain” said China’s commerce ministry. Over the weekend, US lawmakers reached a deal on a $900bn stimulus package. Meanwhile the UK went into an emergency lockdown and noted that a new strain of coronavirus is spreading rapidly. US IG CDS spreads were 0.6bp wider and HY was 2bp wider. EU main and crossover CDS spreads widened 0.4bp and 4.6bp respectively. Asia ex-Japan CDS spreads were 0.5bp tighter. Asian equities have followed Wall Street, opening lower ~0.2%.
New Bond Issues
Powerlong Real Estate raised $100mn via a tap of their 5.95% 2025s at a yield of 5.69%. The bonds have expected ratings of B2/B. The tap trades at a new issue premium of 14bp over the initially issued bonds, which are currently trading at a yield of 5.55%.
Cash Strapped Oman Targets Fiscal Deficit by Cutting Subsidies
Battered by the effects of the pandemic and low oil prices, Oman has started a reform process to contain its fiscal deficit. The nation is embarking on spending cuts, privatization, new taxation law to add 5% value-added tax as well as lifting of subsidies as its fiscal deficit is forecasted to reach 10% by IMF. Oman’s Ministry of Finance had announced a Fiscal Balance Plan 2020-2024 on October 22 to achieve sustainable levels of fiscal balance. In keeping with its initiatives of the Fiscal Balance Plan (2020-2024), the Chairman of the Board of Directors of Authority for Public Services Regulation (APSR) announced reorienting electricity and water subsidy on December 20. Under the plan, the government plans to phase out utility subsidies in a phased manner from January 2021 to 2025. The Sultanate has not charged residential electricity tariff since 1987 under a subsidy that covers all citizens and non-residential categories including industrial, government and electricity segments. The burden of the subsidies has progressively mounted and has increased from OMR 650mn ($1.68bn) in 2016 to OMR 750mn ($1.94bn) in 2020. This subsidy alone constitutes 5% of the State Budget and about 20% of the expected deficit in 2021. The release said that “If the government does not undertake any action about the subsidy, it may grow to OMR 900mn ($2.33bn) by 2025.” The reduction in subsidies along with the other measures including increase in the tax will help contain the rising fiscal deficit.
S&P’s downgraded the Sultanate to B+ with a stable outlook on October 16 on rising net debt levels. Fitch had downgraded it to BB- from BB with a negative outlook on August 17. It was also downgraded by Moody’s to Ba3 with a negative outlook on June 23. Oman had also raised $2bn via dual-tranche bonds in the second half of October to shore up capital. Its bonds were stable with the 7.375% 2032s and 6% 2029 sukuk up 0.17 and 0.24 to trade at 110.75 and 103.755 respectively.
Fed Allows US Banks to Resume Buybacks
The US Federal Reserve in a statement on Friday said that banks can start buying back stock and paying dividends albeit with some restrictions. The statement came alongside the results of their regular stress tests, which mentioned that large banks have built strong levels of capital, despite setting aside about $100bn in loan loss reserves. The statement on buybacks and dividends read “For the first quarter of 2021, both dividends and share repurchases will be limited to an amount based on income over the past year. If a firm does not earn income, it will not be able to pay a dividend or make repurchases.”
Soon after the Fed’s announcement on Friday, banks began disclosing plans to resume buybacks as soon as the first quarter – JPMorgan said its board approved $30bn in buybacks subject to various considerations; Citi’s CEO stated their intentions of buybacks subject to financial conditions, board approval and any of Fed’s changes to capital requirements; BofA‘s CEO mentioned last week that they would continue buybacks as soon as they are allowed to; Morgan Stanley said that its board authorized up to $10bn of buybacks next year, starting in Q1.
A couple of months back, the Fed announced extension of limits it had set in June for the biggest US banks till the end of the year. “The Fed’s tests show banks have a substantial capital cushion… But for some lenders, the extent of payouts allowed “could lead to a significant decline in capitalization, a clear credit negative”, said David Fanger, SVP in Moody’s financial institutions group.
GE Buys Back Bonds Worth $2.2 Billion, Bonds Trade Up
American conglomerate General Electric (GE) bought back $2.2bn in bonds, thereby slashing its debt load. GE said it cut debt by ~$16.6bn this year and ~$30bn since the beginning of 2019. This follows CVS Health’s buyback of $4bn of debt maturing through 2028 using cash and proceeds from a $2bn new issue and AT&T, the world’s most indebted company as per Bloomberg, has also been on the path of reducing debt. Bloomberg reports that GE joins other blue-chip borrowers in paring over $350bn in incremental debt taken this year. “The tender is one step in its multi-year journey to lower net leverage towards 2.5x” said Bloomberg Intelligence analyst Joel Levington. “We think this will be much the theme for 2021…A lot of that incremental debt issuance we saw this year is now just cash sitting on the balance sheet. The question is, what will they do with that excess cash?” said George Bailey, an investment-grade portfolio manager at Aviva Investors.
GE’s bonds were trading slightly higher. Their 5% Perps callable on January 21, 2021 at 100 were up 0.2 to 93.54, with a yield to call of 94% and yield to maturity of 3.86%.
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US Treasury Yields - BondEvalue
US Treasury yields refer to the yield or the return on US government bonds, which are commonly referred to as Treasuries. US Treasury yields are one of the most important metrics that investors across the globe track closely. The reason for this is because the US Treasury yields are the benchmark for the risk-free interest rate on all US dollar denominated borrowings, given that Treasuries are backed by a guarantee from the US government, which carries the highest credit rating of AAA.
Before we get into why US Treasury yields are important, it is critical to understand how US Treasury yields move. Since they are considered a risk-free security, investors tend to buy US Treasury bonds in times of uncertainty. In contrast, if the economic environment is strong, investors would sell US Treasury bonds and buy riskier assets such as equities, corporate bonds or commodities. Demand for US Treasury bonds drives its prices – strong demand drives prices higher and vice versa. Since prices and yields move in opposite directions, higher Treasury prices lead to lower yields and vice versa.
Why are US Treasury yields important?
- Benchmark for USD borrowing
The interest for all US dollar borrowings, whether by individuals or corporations, is determined based on US Treasury yields. For example, if a BBB-rated corporate would like to issue a 10-year US dollar bond, it would have to offer a yield of 10 year Treasury yield plus a credit spread. The credit spread is the incremental interest that it would have to offer to incentivize investors for holding its bonds, given the credit risk associated with its bonds. As one may expect, the credit spread is inversely related to the corporate’s credit rating – higher the credit rating, lower the credit spread and vice versa.
- Indication of investor sentiment
The change or movement in the US Treasury yield gives a sense of investor sentiment. If the US is witnessing strong economic growth, it is reasonable to expect its equity and bond markets to rise, all else remaining equal. In such a scenario, investors would want to move out of US Treasuries and move into equities and bonds. Selling Treasuries would lead to a fall in its prices and a rise in its yields. On the other hand, if investors expect the economy to contract, it is reasonable to expect its equity and bond markets to fall, all else remaining equal. To avoid a depletion of their capital, investors would switch out of equities and bonds and switch into US Treasuries. This is why Treasuries are commonly known as a “safe haven” asset as it offers safety and security against economic uncertainty. Buying Treasuries would lead to a rise in its prices and a fall in its yields. Thus, investors can predict whether the market is pricing in strong or weak economic growth based on the direction of US Treasury yields.
A Sea of Red; Wynn Macau Launches $ Bond; EU Proposes Relief Measures for Banks
A Sea of Red; Wynn Macau Launches $ Bond; EU Proposes Relief Measures for Banks
US Benchmark & Global Indices 12 Jun (1)
A sea of red. Markets saw a sharp sell-off yesterday as investors showed concerns after the gloomy Fed outlook and economic data, the pace of the recent rally and signs of a possible second wave of the coronavirus. S&P saw its fourth largest drop in the last 5 years (top three also being in this year), and pulled it back from the highs of 2020. The S&P, DJI and Nasdaq sank 5.9%, 6.9% and 5.3% respectively by the end of the session.The US dollar saw a bid along with long dated treasuries as a safe haven and also on speculation that the Fed will adopt yield control measures. Bonds were not spared as CDS spreads widened across the board, and 61% of bonds in our universe fell in price. Asian markets are opening lower by 2-3% this morning.
New Bond Issues
- Wynn Macau $ 750 mio 5.5NC2 @ 5.5% area
Bond New Issues 12 Jun
Thai Oil raised $1bn via a two-tranche deal on Thursday. It raised $400mn via 10Y bonds at a yield of 2.516%, 185bp over Treasuries and 60bp inside initial guidance of T+245bp area. It raised $600mn via 30Y bonds at a yield of 3.75%, 55bp inside initial guidance of 4.3% area. The bonds, expected to be rated BBB+/Baa2, will be issued by subsidiary Thaioil Treasury Centre and guaranteed by Thai Oil, which is indirectly partly-owned by the Thai government.
Macao-based casino hotel operator MGM China raised $500mn via 5Y non-call 2Y bonds at yield of 5.25%, 37.5bp inside initial guidance of 5.625% area. The bonds, expected to be rated BB-/Ba3, carry a change of control put (Term of the day, explained below) at 101 and a special put at 100 upon occurrence of certain events related to termination, rescission, revocation or modification of its gaming license. The pricing on the new bonds falls between its 5.375% bonds due 2024 and 5.875% bonds due 2026, which are yielding 4.84% and 5.57% on the secondary markets currently.
Chinese property developers continue to tap the dollar bond market with Sinic Holdings raising $210mn via 2Y bonds at 11.375%, 50bp inside initial guidance of 11.875% area. The bonds, expected to be rated B+, received orders worth $1.5bn, over 7x issue size.
Rating Changes
PT MNC Investama Downgraded To ‘CC’; On CreditWatch Negative; Ratings Then Withdrawn At The Company’s Request
JetBlue Airways Corp. Downgraded To ‘B+’ On Steep Travel Demand Drop; Off Watch; Outlook Negative; Term Loan Rated ‘BB-‘
Kerala Infrastructure Investment Fund Board Downgraded To ‘BB-/B’; Outlook Stable
European Banks Likely to Get Relief on Govt Bond Holdings
The European Union is set to sign off on a new legislation that would nullify the negative impact of mark-to-market losses on sovereign bond holdings on bank’s capital requirements, according to Bloomberg. The past few weeks have seen increased volatility in sovereign bonds’ prices, which is threatening to crimp banks’ capacity to lend. If passed, the legislation will temporarily free banks from taking a hit on their capital ratios on account of its holding of sovereign bonds. The legislation is on course to receive final agreement over the next few days. This is the latest measure that the European Union and the ECB is taking to support banks in the region to combat the impact of the pandemic. As per the ECB, the relief measures provided, which include a break to investment banks’ trading desk on capital rules for market risk, will be temporary in nature. The proposed relief measure with respect to sovereign bond holdings will be especially beneficial to Italian banks, given their large holdings of its government’s bonds. Intesa Sanpaolo has about €100bn of sovereign debt, including insurance and banking assets, making it the second-largest creditor of the state after the ECB, CEO Carlo Messina said earlier this month. Intesa’s Euro perpetuals traded lower yesterday, with its 3.75% and 7.75% perpetuals down about ~2-3 points to 80.8 and 109.2 respectively.
In our editorial view, this seems to be just the beginning. We expect governments and central banks world over to announce further tweaks on the calculation of capital ratios for the banking sector as banks’ bloated balance sheets need to be covered without raising massive amounts of fresh capital.
S&P Skeptical about Softbank’s Creditworthiness
S&P raised questions on the creditworthiness of Softbank, which has been through a period of lows for some while now. In May, while Moody’s had downgraded the company to junk rating, S&P had stopped short and only lowered its outlook to Negative. Moody’s was dropped by Softbank after it downgraded the company and raised doubts over the portion of its portfolio that was not doing well. The credit rating agency now feels that the company’s creditworthiness is under pressure. Softbank has been through some tough times and has initiated steps to restructure its financing. The company intends to raise $41bn through asset sales and is likely to embark on a share buyback plan worth 2.5tn yen ($23.9bn). On May 18, CNBC had reported that Softbank incurred its first loss in 15 years and had further warned that out of its portfolio of 88 companies in the Vision Fund, there were at least 15 unicorns which could potentially go bankrupt due to the pandemic. For the year ending 2020, the company had reported an operating loss of $13bn and a loss of $17.7bn for the Vision Fund. The valuation of one of its holdings, WeWork had dropped to $2.9bn from a high of $47bn.
EM State-Owned Firms Need Bail Out on the Road to Recovery
India was downgraded to Baa3 with a negative outlook by Moody’s on June 1, Indonesia’s outlook was revised to negative with a rating BBB by S&P on April 17, and South Africa was downgraded to junk on March 27 by Moody’s and on April 3 by Fitch. The story for emerging markets has been of gloom and stress. While countries like South Korea and Taiwan have been more resilient, those including India, Indonesia, South Africa and Turkey are grappling with increasing fiscal deficits.
The slow re-opening of the economies in the emerging market has also come with a requirement of a bail out for State-Owned Enterprises (SoEs). SoEs hold an important position in these markets as they provide much required employment. While as per the IMF, SoEs make up 55% of the infrastructure investment, Institute International Finance estimates that these hold 60% of non-financial corporate debt. The high debt of these SoEs has potential to cause a significant dent to the government’s bailout. This is why Indonesia increased the deficit ceiling to 6.3% from the earlier 3%. India and South Africa could have a deficit of as much as 7% and 6.8% respectively. While power utility major Eskom Holding and South African Airways are among the SoEs requiring a bailout from the South African government, Krakatau Steel and two state insurers require intervention from the Indonesian government. In India, the pandemic has stressed the state-run banks, which have non-performing asset ratios of 9.3%, among the highest in the world. While the Indian government has already spent over ₹2.6tn ($34bn) on the public sector banks, there could be a need of another $13bn, according to Credit Suisse. Indonesia has also set aside $10bn for SoEs and South African Eskom could require upto $27bn to support it. The road to recovery for emerging markets would require to bailout these SoEs, not only because they represent the nation but also as they are a big source of employment. Pulling up these SoEs would adversely affect the GDP and potentially lower the positive slope of the recovery. The sovereign bonds of India(EXIM IN as proxy for the government), Indonesia and South Africa have been trotting back to recovery after a huge drop in March.
India, South Africa & Indonesia Sovereign Dollar Bonds
Casino Operators Rush to Issue Dollar Bonds
The gaming industry has been hit hard by travel restrictions imposed because of the pandemic, and this effect is expected to last until 2021, according to forecasts by Fitch. Liquidity is not a major concern as balance sheets were bolstered by new debt and equity issuance. Casino operators Wynn Macau announced yesterday a new 5Y bond worth $750mn, which is expected to be rated BB- by S&P.
This follows fellow casino operator MGM China, which raised $500mn of bonds 5Y non-call 2Y bonds yesterday as well. According to IFR, in the two months ended May 31, MGM China lost an average of $61.2mn per month, measured in property EBITDA terms, as compared to an average monthly profit of $107.6mn during the same period last year. As of end March, MGM had $265mn in cash and $676mn in undrawn loans. The new bonds are rated BB- by Fitch.
Sands China, which operates the Venetian Macao, sold US$1.5bn of bonds last week, split between $800m 3.8% bonds due 2026 and $700m 4.3% bonds due 2030. The bonds are rated Baa2 by Moody’s. Sands China reported a net loss of $180mn in April, on the back of monthly expenses of $200mn.
Casino Companies Credit Ratings
BEV Term of the Day
Change of Control Put
Change of control put is a common covenant in bond offerings, mentioned in the bond’s prospectus. Bonds that carry a change of control put offer bondholders the option to sell the bonds back to the issuer at a pre-defined price upon the occurrence of a change of control event, which is typically a change in ownership of the issuer. The option to redeem the bonds in this case lies with the bondholder, as against a call option, which lies with the issuer, not the bondholder.
Talking Heads
On finance front-running the economy – Mohamed El-Erian, Allianz’s chief economic adviser and president-elect of Queens’ College, University of Cambridge
The scale of binge borrowing was once unthinkable, but it gradually became the norm post the 2008 financial crisis. So now when the COVID-19 shock hit the economy and markets, everyone is facing a new threat of depression. To overcome the risks of market malfunction and a credit freeze, the Fed is now underwriting not just liquidity risk and credit risk for high-quality companies, but also the risk of default in the junk-bond market. The immediate impact on financial markets is beneficial, but if growth disappoints, the economy and markets will have to cope with a massive debt overhang that results in even greater central bank distortions of markets and lower growth potential. There will be widespread debt restructurings too, and disorderly non-payments.
On bonds in Emerging Markets – Dan Shaykevich, co-head of emerging-market and sovereign bonds, Vanguard Group Inc.
The steep decline in developing-nation debt earlier this year has created an opening for investors to scoop up notes with low default risk on the cheap. “For an active manager, you cannot ask for a better market because there have been so many opportunities,” Shaykevich said.
While Shaykevich does not expect assets to recover to pre-Covid levels anytime soon, he said there’s room for some notes to rebound further. “The level of financing needs for emerging-market governments remains very high,” Shaykevich said. “That is going to ultimately benefit investors in emerging markets because countries will have to continue to offer concessions in order to access the markets to fund these gaps.”
On market growth in Greater China – Chantal Grinderslev, partner at Shanghai-based investment management consulting firm Z-Ben
Chinese government restrictions on cross-border capital flows have made it difficult for foreign funds to access domestic markets, making Hong Kong an attractive option. As U.S. political pressure accelerates, New York-listed Chinese companies are quickly turning to Hong Kong.
Recently, the Chinese government has increased efforts to open up the domestic financial industry further to foreign players. “The moves are part of a years-long trend…We’ve seen a lot of interest in the market,” Chantal Grinderslev said. “For those clients that are looking into China … they all realize: In the current global environment, there isn’t an alternative to China.” In one of the latest moves by a foreign firm, Fidelity International last month to set up a wholly owned mutual fund unit. In 2018, the company launched a five-year partnership with Ant Fortune, a subsidiary of Alibaba-affiliate Ant Financial, to study retirement preparedness among people in China.
British Columbia and Philippines Issues to Further Grow the Panda Bond Market
The Province of British Columbia (Aaa/AAA/AAA) successfully completed its second Panda bond offering yesterday with a RMB 1 billion 3-year issue priced at par to yield 4.8%. This compares with their debut transaction in January 2016 when RMB 3 billion in 3-years was priced at a 2.95% yield. The renminbi bonds were offered to both onshore and offshore institutional investors in China’s interbank bond market, and ultimately over 30% was said to have been placed to the latter via Bond Connect, the platform which gives offshore investors direct access to China’s interbank bond market Hong Kong
Separately, the Philippines is planning to issue its first panda bond in the size of RMB 1.4 billion, as witnessed by Chinese Premier Li Keqiang and Philippines President Rodrigo Duterte in a signing ceremony on 15 November where 14 agreements were signed, including the panda bonds underwriting agreement signed by Finance Secretary Carlos Dominguez III and BoC chairman Chen Siqing. The issuance of Panda bonds is a milestone for the two countries in terms of capital markets co-operation, and the Philippine government believes issuing in this market will diversify funding sources, provide benchmarks for other Philippine issuers in the China onshore market – particularly at this time that the Renminbi is a reserve currency, and complement financial support from China for the implementation of critical infrastructure projects.
