Sino-Ocean Cap, Agile, Ronshine Launch $
Bonds; Hilong Defaults; Lufthansa Deal Hits Roadblock
US Benchmark & Global Indices 23 Jun
Markets started this week on a positive
tone as investors look towards recovery as we get closer to quarter end.
Economic growth and data this quarter have been some of the worst but markets
have seen a record return primarily driven by central bank stimulus’ globally.
Investors are still looking at the new coronavirus outbreaks in the US, Brazil,
Germany, Australia, Beijing and are undecided whether this is a second wave or
a continuation of the first wave. Either way, the concerns are taking a
backseat as doubts over whether further economic lockdowns would be imposed.
White House economic advisor Larry Kudlow calmed investors who got nervous
after Apple’s decision to temporarily close stores by playing down the chances
of new economic lockdowns. Primary bond
market continue to see solid activity as issuers take advantage of the
positive sentiment, low treasury yields and low credit spreads and raise money
to prepare for their worst case scenario. Asian markets are opening higher,
supported by a similar start to the week by Wall Street. Markets could be
volatile towards the end of the quarter with investors keeping an eye on both
economic and coronavirus data.
Newsletter Banner for Masterclass
•
Sino-Ocean Capital $ 364-day @
6.125% area
•
Agile Group $ 4.5NC2.5 @ 6.125%
area
•
Ronshine China Holdings $ tap
2023 @ 7.3% area
•
China South City $ 125 mio tap
10.875% 2022
•
Sichuan Languang $ tap 11% 2022
@ 11% area
New Bond Issues 23 Jun
Indonesia’s Perusahaan Listrik Negara
(PLN) has raised $1.5bn from a dual-tranche deal. It raised $500mn via a 10Y
bond at a yield of 3.1% and $1bn via a 30Y bond to yield 4.1%. Both bonds were
priced 70bps inside initial guidance of 3.8% area and 4.8% area respectively.
The bonds, expected to be rated Baa2/BBB/BBB, received final orders exceeding
$4.35bn, almost 3x issue size. The new bonds were priced tighter compared to
its 5.375% bonds due Jan 2029, currently yielding 3.32% and its 4.375% bonds
due Feb 2050, currently yielding 4.21%.
CLP Power HK, raised $1bn via a
dual-tranche deal on Monday. It raised $750mn via a 10Y bond at a yield of
2.281%, 160bp over Treasuries and $250mn via a 15Y bond at a yield of 2.581%,
190bp over Treasuries. The bonds were priced 50bp and 0-5bp inside
initial/final guidance of T+210bp area and 190bp–195bp respectively. The 15Y
tranche was added at the time of final guidance for the 10Y. The bonds are
expected to be rated A+/A1.
Fosun International raised $600mn via 4Y
non-call 3Y (4NC3) bonds at a yield of 6.85%, 50bp inside initial guidance of
7.35% area. The bond, expected to be rated BB, received final orders exceeding
$2bn, 3.33x issue size. Fosun plans to use the proceeds to fund its tender
offer on 4 of its outstanding bonds as per the table below:
Fosun Intl Repurchase Table
Thailand’s Minor International raised
$300mn via perpetual NC3 bonds at a yield of 3.1%. The bonds were priced 70bps
inside initial guidance of 3.8%. The bonds, expected to be rated Baa2/BBB,
received final orders exceeding $2.3bn, 7.67x issue size. Minor last issued a
perpetual in Nov 2018, when it raised $300mn at a yield of 4.661% at the time
of issuance. The bonds are currently trading at a yield of 3.03% on the
secondary markets.
Fitch Downgrades BBVA to ‘BBB+’;
Outlook Stable
Fitch Revises Outlook on 9 Indian Banks’
IDRs to Negative; Affirms IDRs
Fitch Revises Indian GREs’ and HPCL’s
Outlook to Negative; Affirms IDRs at ‘BBB-‘
Fitch Revises Outlook on Three
India-Based Infrastructure Financing Companies; Ratings Affirmed
Fitch Revises Outlook on Adani
Transmission’s Foreign-Currency IDR to Negative; Affirms Ratings
Fitch Revises Outlook on Bharti Airtel to
Negative; Affirms at ‘BBB-‘
Fitch Revises Outlook on Namibia to
Negative; Affirms at ‘BB’
Moody’s assigns Ba3 rating to American
Airlines’ new senior secured term loan and senior secured notes
Moody’s assigns a Ba2 rating to DP
World’s proposed hybrid instruments
Fitch Rates Bank of China Hong Kong
Branch’s MTN Notes Final ‘A’
Chinese oil equipment and services
company Hilong Holdings Ltd defaulted on its $165mn 7.25% bonds due Monday
after it failed to complete an exchange offer on its bonds in time. According
to an exchange filing, this has triggred a cross default on its $200mn 8.25%
bonds due 2022. The company has extended the deadline for its exchange offer to
June 29 with hopes of receiving approval from the required 80% of bondholders
by then to “cure the payment default”. The filing stated that bondholders have
tendered 63.45% of total outstanding principal, short of the required 80%.
Hilong was downgraded by Moody’s and Fitch on June 9 to B3 (from B2) and CC
(from B) on the back of heightened refinancing risks. According to Bloomberg,
Hilong’s failure to pay has brought the total value of offshore bond defaults
from China to $4bn this year. Its 8.25% bonds due 2022 are currently trading at
36.75 cents on the dollar.
Indonesian conglomerate MNC Investama is
planning to buyback its $231mn 9% bonds due in May 2021. Its founder, Hary
Tanoesoedibjo said in an interview on Monday that it will hold talks with
bondholders and plans to complete the partial buyback by October this year. He
added, “With the pandemic happening, the prices of so many dollar bonds are
falling. We have not officially proposed anything to our bondholders, but maybe
we can buy back the bonds at an agreed price. Maybe not all because it’s almost
impossible to buy back 100%”. The 9% bonds due 2021 are currently trading at 77
cents on the dollar on the secondary markets. MNC Investama has a connection to
the US President in that it is the developer of Trump-branded luxury resorts in
Indonesia.
As pointed out by Daniel Stanton, the
editor for Asian Credit at IFR, in his op-ed piece on LinkedIn, this is a
welcome surprise for bond investors of Indonesian credit. MNC is planning to
hold talks with bondholders almost a year before its bonds are due to mature,
indicating its efforts at avoiding a default. This is a far cry from
Indonesia’s Asia Pulp and Paper default on $12bn of debt in 2001. Another
Indonesian developer Lippo Malls recently announced that it will honor all its
debt payments this year, offering comfort to its bondholders. This indicates
that Indonesian corporates are taking their commitments to international
investors seriously as they may need to keep that avenue of funding open amid
the pandemic.
For the full story, click here
Lufthansa airlines has been in the
news for running into liquidity problems after the disruption in flights due to
the ongoing pandemic. The airline has more than €3.7bn ($4.2bn)
outstanding in instruments including bonds, loans and Schuldschein notes.
The stoppage of flights has directly hit its top line, which has put the
airline under severe liquidity pressure. On May 26, The Guardian had
reported that Lufthansa had reached an agreement with the government for a €9bn
($10.14bn) bailout package in return for a 20% stake in the airline. While this
was seen as a lifeline by many, it has not gone down well with some
shareholders, especially billionaire Heinz-Hermann Thiele, who owns 15.5% in
the beleaguered airline. While the government stands firm with the deal, Thiele
is looking to block the deal, which would result in dilution of his share in
the airline. The next shareholder meeting would decide the course for the
airlines. As per Citibank analysts, there are three possible scenarios that
could emerge out of the shareholders meet on Thursday.
•
The vote passes with Thiele’s
support
•
The deal fails and the government
withdraws its offer
•
Thiele expands his holdings as
the share prices fall
With the uncertainty looming over the
deal, Lufthansa bonds fell to a three month low on Monday and the shares traded
3.2% lower. The bond prices of the
company have seen a steep fall in the month of June. The 0.25% Euro bonds
maturing in 2024 traded at their lowest price since March end.
Lufthansa Bonds Witness Volatility Amid
Bailout Talks
Yes Bank is set to default on its
upper Tier II Indian rupee denominated bonds after the RBI declined permission
to the bank to make interest payments on the 10.25% upper Tier II bonds due on
June 29. In an exchange filing, the bank reported that the central bank had
declined the bank’s request as the bank’s capital fell below the minimum
requirements. However, the bank informed investors that the accumulated
interest would be paid as per the terms of the 2012 Information Memorandum
according to which the interest due and remaining unpaid shall be paid by the
bank later subject to the bank complying with the relevant regulatory
requirements. Earlier, the Indian government had rescued the bank through an
RBI drafted revival plan led by State Bank of India, the country’s
largest public sector bank. The bank had also announced in March that two
series of its AT1 bonds worth ₹8,415 crore (~$1.1bn) would be written off
permanently. Yes Bank’s 3.75% dollar bonds due 2023 were largely unchanged on
the secondary markets at $91.625.
The fight to win the Indian customer
intensifies as Reliance seeks to buy a stake in Future Retail. On Jun 19, Asia
Nikkei reported that the debt laden Future Group was in talks with Amazon and
Reliance among other potential investors to raise between $1bn to $2bn. As per
the Economic Times, Reliance was close to finalizing a deal. The news is
significant since Amazon already already holds a stake in Future Group and also
because Mukesh Ambani’s Reliance Industries is looking at increasing its
footprint in the Indian retail sector. Reliance recently secured ~$14bn from
various investors including Facebook for its e-commerce venture Jio Platforms
and looks to aggressively expand in the e-commerce space. Amazon already holds
a 1.3% stake in Future Retail after it purchased 49% of Future Coupons Ltd and
it may also be looking at expanding its investment in the group. The holding
firm of Future Group has a debt of ~ ₹100bn ($1.3bn) which it is looking to
offload through strategic deals. Future Retail’s dollar 5.6% bonds due 2025
have been rallying on the news and are currently trading at 67.645.
Future Retails Dollar Bonds Rise on Talks
of a Stake Sale
The Sri Lankan central bank had
prohibited the country’s banks from buying its international sovereign
bonds (ISBs) for three months starting March 19 on the back of a foreign exchange
shortage in the country. The central bank announced last week that the banks
can now purchase ISBs, albeit only with new foreign currency inflows to the
banks. Sri Lanka‘s sovereign dollar bonds, which have been trading at steep
discounts on the secondary markets, have traded up by ~10-15 points over the
last month.
Another dollar bond issuer from Sri
Lanka, SriLankan Airlines Ltd is in talks to raise $75mn in new debt,
restructure $400mn worth of bank debt and reduce staff in a bid to survive amid
the ongoing pandemic. The airline’s chairman Ashok Pathirage said, “We started
the process of [restructuring] before the crisis. If anything it accelerated
it. We have to make hard decisions. The airline does not want to be a burden.”
Its $175mn 7% bonds due 2024 are currently trading at 58.5 cents on the dollar,
yielding 23.6% on the secondary markets.
Sri Lankan Dollar Bonds Trend Up
Tier 2 bonds are debt instruments
issued by banks to meet their regulatory tier 2 capital requirements. Tier 2
capital (and thus tier 2 bonds) rank senior to tier 1 capital, which consists
of common equity tier 1 (CET1) and additional tier 1 (AT1) capital. CET1
consists of a bank’s common shareholders’ equity while AT1 consists of
preferred shares and hybrid securities or perpetual
bonds. Tier 2 capital consists of upper tier 2 and lower tier 2 wherein the
former is considered riskier to the latter. We have summarized banks’ liability
structure in the table below.
Bank Liability Structure
From a bond investor’s perspective, tier
2 bonds are senior, and therefore less risky, compared to AT1 bonds as AT1s
would be the first to absorb losses in the event of a deterioration in bank
capital.
On the UK Government possibly running
out of money in March – Andrew Bailey, Bank of England’s governor
Andrew Bailey said that if the BoE had
not intervened in March, the UK Government would have run out of money. “I
think we would have [had] a situation where, in the worst element, the
government would have struggled to fund itself in the short run,” Mr Bailey
said. Mr Bailey also said that monetary stimulus “mustn’t become a permanent
feature” of the economy. Instead he said he would prefer to reverse some of the
£300bn of quantitative easing rather than raise interest rates.
On Hong Kong’s future as the global
financial hub – Fan Xinghai, Vice Chairman of the China Securities Regulatory
Commission (CSRC)
China is confident of Hong Kong’s future
as an international financial center, and they believe there should not be a
whiff of pessimism about it. Fang Xinghai told a forum that China should also
accelerate yuan internationalization given the massive dollar assets that they
hold overseas and the risk of possible restrictions on global payments by
Chinese companies. “Such a thing has happened to many Russian companies and
financial institutions. So, China has to save for the rainy days,” Fang said.
On EU issuing perpetual bonds during
COVID-19 crisis – George Soros, Soros Fund Management
Soros criticizes the fact that the
“frugal four” are limiting themselves to past methods and not using fiscal
tools such as perpetual bonds (or consols) ideally suited to the current
circumstances. “Perpetual bonds are often confused with Corona bonds, which
have been rejected by member states because they carried burden sharing too
far. But in reality, they work in opposite directions. Corona bonds increase
burden, perpetual bonds reduce it.The distinguishing feature of perpetual bonds
is that the principal never has to be repaid, only the annual interest is due.
They have a cost-benefit ratio that is almost 10 times greater than that of the
long-term bonds the EU is proposing. They can be issued as soon as member
states authorise sufficient “own resources”, i.e. new taxes that would maintain
the triple A rating of the EU. It would hence take several years to raise the
money and up to 30 years to repay it and keep expenditures to a minimum.”
On unlikely winners in emerging markets
– Dan Shaykevich, Vanguard’s co-head of emerging-market and sovereign debt
“We were adding exposure when we saw some
of these names trade at levels that were beyond what we thought were consistent
for even some of the more distressed scenarios,” said Dan Shaykevich.
