Markets climbed late in the overnight
session with Nasdaq hitting a fresh high. Despite a lack of fresh data,
recovery hopes are still outweighing coronavirus concerns. Apple and Microsoft
stocks led the tech sector gains. European shares declined and long dated
treasuries slipped slightly. Spreads on Asian dollar bonds tightened to their
lowest in nearly four months and deal momentum remained strong.
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New Bond Issues
•
Shandong Energy Group $ 3yr @
4.5% area
•
Yankuang Group $ 3yr @ 4.75%
area
•
PTT $ 50yr @ 4.15% area
•
Hangzhou Fin. & Inv. $ 5yr
@ 3.7% area
•
ZhongAn Online P&C
Insurance $ 5yr @ T+330bp area
ABC International Holdings, the
investment banking arm of Agricultural Bank of China, raised $450mn via 3Y bonds
at a yield of 1.59%, 140bp over Treasuries and 40bp initial guidance of T+180bp
area. The bond, expected to be rated A2, will be issued by wholly owned
subsidiary Inventive Global Investments and guaranteed by the parent company.
Studio City Finance, the funding vehicle
for Macau casino operator Studio City raised $1bn via a two-tranche offering.
It raised $500mn via 5Y non-call 2Y (5NC2) bonds at a yield of 6%, 25bp inside
initial guidance of 6.25% area. It also raised $500m via 7.5Y non-call 3Y (7.5NC3)
bonds at a yield of 6.5%, 25bp inside initial guidance of 6.75% area. Part of
the proceeds will be used to fund the redemption of its $850m 7.25% secured
bonds due 2021. Studio City said it would also raise up to $500m from a share
placement underwritten by ultimate parent Melco Resorts and Entertainment.
Hong Kong-listed Chinese real estate
company Kaisa Group Holdings raised a total of $700mn via a dual-tranche bond
issue. It raised $400mn via 3.2Y non-call 2.2Y (3.2NC2.2) bonds at a yield of
10%, 37.5bp inside initial guidance of 10.375% area. It also raised $300mn via
4.75Y non-call 2.75Y (4.75NC2.75) bonds at a yield of 11.5%, 25bp inside
initial guidance of 11.75% area. The bonds received final order exceeding a
total of $3.6bn, 5.14x issue size.
Overseas Chinese Town Enterprises raised
$500mn via a Perpetual NC3 bond at a yield of 4.5%, 45bp inside initial price
guidance of 4.95% area. If the bond is not called on the first call date of
July 15, 2023, the bond coupon will reset to the prevailing 3Y Treasury yield
plus a spread of 831.2bp. The bond will be issued by Hong Kong-listed unit
Overseas Chinese Town (Asia) Holdings and guaranteed by the parent company.
Chinese property developer Yango Group
raised $300mn via 3.75Y non-call non-put 2.25Y (3.75NPNC2.25Y) bond at a
yield-to-put of 7.85%, 50bp inside initial guidance of 8.35% area. The bond,
with an expected rating of B2, received final orders exceeding $2bn, 6.67x
issue size.
Fed Winds Down Repo Market Operations After 10 Months
The Fed’s unprecedented intervention
in the short-term has been wound down after the central bank successfully tamed
volatile funding costs that threatened the financial system.The Repo market is
where investors swap high quality collateral like US treasuries for cash. The
Fed stepped in last September when a cash crunch sent overnight borrowing costs
skyrocketing and then scaled up when the coronavirus disrupted markets. These
repo activities have been dwarfed more recently by the other measures such as
resumption of large scale QE and facilities for corporate bond markets. “The
fact that the Fed is willing to slowly and incrementally pull back indicates
both that funding markets have normalised substantially since March and that in
the long run the Fed wants to not have a larger footprint than they need to,”
said Jon Hill, an interest rates strategist at BMO Capital Markets.
BBVA Raises €1 Billion via First Ever Green CoCo
Spanish lender BBVA raised €1bn via
the world’s first ever green contingent convertible coco bond by a financial institution. While green
bonds (Term of the day, explained below) have been around for over a
decade now, a green bond that is also a contingent convertible or additional
tier 1 (AT1) bond is a new structure. The bonds received orders worth €2.75bn
with the UK accounting for 50% of the investors followed by France with 22%.
Strong investor demand allowed the bank to tighten final pricing to 6%, 50bp
inside initial guidance of 6.5%. As per the BBVA press release, the new green
CoCos are expected to be rated Ba2 and BB from Moody’s and Fitch respectively.
The bonds will pay quarterly coupons and have their first call date on January
15, 2026, after which the coupon will be reset to the prevailing 5Y Euro Swap
Index (EUSA5) plus a spread of 645.6bp. The funds will be allocated to eligible
green assets in BBVA’s portfolio. This portfolio totals €2.6 billion, around 70
percent of which originated between 2018 and 2020. The portfolio consists of
diversified assets from different green sectors: energy efficiency, renewable
energy, sustainable transportation, waste management and water management.
BBVA last issued a Euro CoCo in March
last year. The old €1b 6% perpetual
bonds are callable bond in
March 2024 and carry a coupon reset of the prevailing 5Y Euro Swap Index
(EUSA5) plus a spread of 603.9bp. The bonds are currently trading at 99.43
cents on the Euro, yielding 5.87% on the secondary market.
Brazil’s Braskem Downgraded to BB+, Joins The List of Fallen Angels
S&P downgraded Braskem, a
Brazilian petrochemical company, into junk territory with a rating of BB+ from
BBB- with a stable outlook on the back of lower demand and high leverage.
Earlier on July 2, Fitch had also downgraded the company to BB+ with a stable
outlook. The downgrades have led Braskem to join the list of Fallen Angels, a
title given to bonds that lose their investment grade rating by two of the
three major rating agencies. The cash flows of the company have been under
stress for a while. The overall demand for chemical products has fallen,
especially since the pandemic broke out. The company’s cracker utilization
dropped to 70-75% and volumes are expected to fall by 5-10% this year,
according to S&P. S&P forecasts the company’s leverage to be high with
a net debt to EBITDA ratio in the region of 3.5x – 4.5x in 2020 and in the
region of 3.0x-4.0x in 2021 compared to the previous 3.0-3.5x. Braskem’s dollar
bonds were largely unchanged on the secondary markets.
Green Bonds
Green bonds
are bonds whose proceeds are used towards financing projects that have a positive
environmental impact such as renewable energy. The first green bond was issued
by the European Investment Bank in 2007. Since then, the bond markets have seen
green bond issues from supranationals such as The World Bank, sovereigns and
corporates.
Talking Heads
On Softening US Data and Further
Stimulus – Raphael Bostic, Federal Reserve Bank of Atlanta President
“The Fed definitely needs to think about
whether more is necessary and really understand the nature and causes of the
shortfalls,” Bostic told reporters Wednesday. “Officials throughout the Federal
Reserve system have been pretty clear that even if there is weakness, it is not
always obvious that the Fed is the right body to be doing the response.” Bostic
said he is particularly concerned that U.S. small businesses, especially “the
smallest of the small” firms, are being left out of relief efforts because they
lack banking relationships that sped up funding as part of past relief
measures.
As for yield curve control, Bostic said,
“Before leaning in too much to that I want to have us all be clear on what we
are trying to accomplish.” It would also be important that, if such a move were
taken, the central bank could “facilitate an orderly and straightforward exit,”
he told reporters. “The energy in terms of reopening for businesses and for
just general activity is starting to level off,” he said. “This is something we
are definitely going to watch extremely closely.”
On Argentina’s Latest Restructuring
Proposal – Martin Guzman, Economy Minister of Argentina
“Negotiations were performed until the
moment in which we launched the offer. Now there is an offer, and creditors
will decide on that offer. As of today, all alternatives are possible within
the constraints that we have defined but the final decision is going to be made
once we have more clarity on the process, on the acceptance from creditors,”
Guzman said when questioned about a partial exchange. Referring to minimum
participation levels, he added, “the offer is designed to, first, make sure
that every creditor that decides to accept the offer is on the good side of
liquidity, so it’s designed in a way that protects creditors that accept.”
Argentina will seek a new program with
the IMF as soon as it wraps up talks with private creditors, he added, noting
that “we need to borrow from the IMF to pay the IMF. Argentina has very tight
constraints today– it doesn’t have any capacity to pay anything today,” Guzman
said. “The state will have to play a role through productive policies and
through active management of aggregate demand and credit policies in order to
create incentive for job creation,” Guzman added.
On Argentina’s Creditors Opinion on Debt
Restructuring
Argentina Creditor Groups, which combined
hold around $21 billion of the eligible debt
“While we do not accept Argentina’s
latest proposal, encouragingly it does provide a basis for constructive
engagement,” the groups said. This comes after the Economy Minister Martin
Guzman said that the latest proposal was the most the country could offer and
there was “clearly not” any room for amending it further ahead of an Aug. 4
deadline for a deal.
Siobhan Morden, from Amherst Pierpoint
“If they do remain united and reject the
offer then it’s hard to see how this deal goes forward,” said Siobhan, referring
to the two groups. “Without their 35% share then Argentina would not cure the
default. The rejection of the offer may discourage bondholder participation and
this last launch could fail.”
On France Selling an Inflation-Linked
Bond – Anthony Requin, chief executive officer at France’s debt management
agency
In the primary market, France raised 3
billion euros from an inflation-linked bond due 2036 via a syndicate of banks,
receiving over 16 billion euros of demand. Anthony Requin said that he had been
surprised by the amount of interest. “We have found the guys we see in our
nominal auctions showing up in this (order) book as well,” he said. Asked to
explain the demand, Requin said: “How inflation could evolve in 10-20 years’
time remains a very open question … I think it’s fair to say that if you are an
asset manager that tends to diversify its holdings, it’s not a bad idea to put
a few euros inside this bucket.”
On Israel Central Bank’s Decision to Buy
Corporate Bonds – Andrew Abir, Deputy Governor
The Bank of Israel’s decision to start
buying corporate bonds should enable companies to issue debt and prevent
further layoffs because of the coronavirus pandemic, deputy governor Andrew
Abir said. “It’s not that the corporate bond market was not functioning or
because spreads have widened dramatically, but rather the understanding that
over the next 6-12 months, there’s going to be a need for issuance in that
market,” Abir told Reuters.
“We want to prevent a situation where a
company is having question marks in its ability to fund themselves (and) lays
off another 1,000 workers. We still have more measures that we can do. QE can
be increased. We haven’t run out of our policy options,” Abir said.
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