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%.

For more info visit us - http://bondevalue.com/