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  • Writer's pictureTrevor Cooper FCISI

Naisbitt King Bond Commentary 1st December 2022

  • Roaring November

  • Broadcom - VMware $61bn takeover

  • November upgrades

  • Not all companies saw their debt upgraded

  • Aroundtown hybrid bonds

  • El Salvador gets help from China

  • Bitcoin – our no-go area

  • New bond issuance

  • Amazon raises cash for the second time this year

First the Fed, then the BOE, then the ECB all pushed their interest rates higher at the beginning of November. The Fed Funds rate was raised by 75bps to 3.75-4%. This was the fourth 75bps hike in as many meetings. The BOE also raised its rate by 75bps to 3%, the biggest rise in 33 years. This move sent gilt yields higher and the pound lower. The Bundesbank raised its rate to 2.19% compared to 1.89% last month and -0.21% a year ago. The Fed’s next meeting is now scheduled for 14th December and seems that they could reduce the amount of the increase, which could mean a 50bps rise rather than the 75bps predicted earlier.

The new issue dollar credit market had a stunning November with over $100bn being raised for investment grade companies. This meant that the total for the year so far is $1.176bn, just 13% down from last year’s amount at the same point. Issuance in the High Yield market is another story and is still lagging, for example 2021 saw total issuance of $458bn, so far with only one month to go the total just under $100bn, for the entire year. It wasn’t only the new issue market that did well last month. The dollar investment grade credit market gained, on average, between 4% to 5%.

Broadcom Inc.’s proposed $61bn takeover of cloud-computing company VMware is being reviewed by the UK’s antitrust watchdog ahead of a decision over whether to fully investigate the deal. The transaction marks the biggest-ever takeover for a semiconductor maker and extends an acquisition spree for Broadcom chief executive officer Hock Tan, who has built one of the largest and most diversified companies in industry. As both companies have corporate debt we will be watching events.

November saw a considerable number of companies being upgraded. We saw:

  • AbbVie Inc. – Moody’s upgrade to Baa1 from Baa2 (Positive)

  • Anglo American - S&P upgrade to BBB+ from BBB (Stable)

  • AstraZeneca PLC - S&P upgrade to A from A- (Stable)

  • BAE Systems - Fitch upgrade to BBB+ from BBB (Stable)

  • Heineken NV - Moody’s upgrade to A3 from BAA1 (Stable)

  • Kraft Heinz Foods Co -Fitch upgrade to BBB from BBB- (Stable) (Fitch upgraded the company to the investment level from BB+ in May this year.)

  • Morgan Stanley Fitch upgrade to A+ from A (Stable)

  • Pfizer Inc – Moody’s upgrade to A1 from A2 (Stable)

  • Qatar Government - S&P upgrade to AA from AA- (Stable)

The ratings of Credit Suisse took another step down at the beginning of last month when Moody’s, S&P and DBRS all took their red pens to the banks’ credit. Moody’s knocked the rating on the bank’s subordinated debt off its investment grade position to Ba1 from Baa3. S&P cut the Swiss bank’s long-term senior debt rating to just one notch above sub-investment grade at BBB- from BBB, with a stable outlook. S&P’s move followed the thoughts of several analysts after the bank’s restructuring was announced at the end of October, saying it sees ‘material execution risks amid a deteriorating and volatile economic and market environment.’ It also signalled that some details around asset sales remained ‘unclear.’ Credit Suisse’s new strategy triggered the biggest single-day decline on record on the day, with shares tumbling 18%, as investors weighed the high costs of the plan, the modest return predictions, and the significant dilution. The banks shares have continued their downward slope with a 66% drop this year to the lowest price ever. The strategic review came as the bank posted a quarterly loss of 4.03bn Swiss francs, including a large impairment of deferred tax assets related to the revamp. The restructuring will see the investment bank broken up and will cost about 2.9bn Swiss francs ($2.9bn) through to 2024.

Fears over Credit Suisse’s stability have been spreading in the past quarter as the bank makes attempts to turn itself around after a string of scandals, including the ousting of chief Tidjane Thiam over a corporate espionage scandal in early 2020. The bank was then rocked by the twin collapses of Archegos Capital and Greensill Capital in 2021 which left it holding billions of dollars of losses. Whilst we don’t have Credit Suisse bonds in any of our portfolios, we will continue to monitor the Swiss banks position carefully.

Last week we heard that Credit Suisse’s clients pulled as much as $88.3bn of their money from the bank during the first few weeks of the quarter, underlining ongoing concerns over the bank’s restructuring efforts after years of scandals. UBS Group said it has seen significant inflows into its Asia Pacific wealth management over the past three months from clients escaping Credit Suisse.

Heungkuk Life Insurance - the South Korean insurer, first said it wouldn’t repay one of its perpetual bonds on its first call date but has now decided to repay their $500m bond after all. Their original decision to not repay sparked a bond rout in Far Eastern perpetual bonds. The surprise U-turn followed a selloff in Korean perpetual bonds that spread to several financial giants across Asia, in a wake-up call to investors that a wave of financial companies could follow suit as interest rates rise.

The idea of the bond call being missed but then enacted sent the price of a dollar perpetual bond for AIA, one of Asia’s largest insurers, to a loss, then a recovery of 13 points, leaving the price unchanged.

Aroundtown hybrid bonds

Earlier this week German property company Aroundtown SA announced their interim results and confirmed its annual outlook. The problem is the company also said it was not redeeming a euro denominated bond that has a call in January. While this no call option was suspected by investors with the company’s junior bonds trading at a large price discount, the problem is that the company has now said it would also consider a potential option to defer coupon payments closer to the interest payment dates. This not only sent its hybrid bonds lower but also its senior bonds, and even its shares lower. We will be researching the company in the coming days and will be sending our findings in the next week.

El Salvador gets help

Incredibly perhaps, China has offered to help El Salvador refinance its foreign debt by buying its foreign bonds, however the Central American country is not leaping at the offer. ‘China has offered to buy all our debt, but we need to tread carefully,’ Vice President Felix Ulloa said. ‘We are not going to sell to the first bidder, we need to see the conditions.’ In July one of El Salvador’s bonds, due to mature in January, was trading at 65.00 but later in that month it rocketed up to 90.00, and now looks on course to be repaid on time. Unfortunately, the same can’t be said of longer dated El Salavdor bonds, for example a 5-year bond is priced at only 40.00 and, so far anyway has not defaulted. We await more details but two days ago El Salvador announced a $74m buyback for its 2023 and 2025 notes.

New issues

In the closing days of the month Amazon, the worlds second largest company, sold $8.25bn bonds in a 5-part deal. The successful money raising exercise originally asked investors for $7bn but Amazon was able to borrow $8.25bn by the close of their orderbook, which saw $17bn put up by investors. This was the second mega deal for the company this year after raising $12.75bn in April. These Amazon senior unsecured bonds are rated ratedA1/AA/AA-, all stable. Since launch the 2, 3, 5 and 7-year tranches are all trading wider with only the 10-year moving tighter by 2 basis points.

Credit Suisse new issues

Despite Credit Suisse’s many trials and tribulations it still managed to launch two very successful new bonds, denominated in dollars and euros. The dollar deal, which was fixed at a maximum size of $2bn, saw investors putting up a solid $8bn. The senior unsecured bond, that has a coupon of 9.016%, has an 11-year maturity and a call in 10 years. The size of the 6-year euro bond was pegged at €3bn and had a coupon of 7.75%. Like the dollar issue the euro was also well oversubscribed getting an orderbook of over €7.4bn. These senior unsecured bonds have ratings of Baa2/BBB-/BBB, negative/stable/negative. The secondary market saw the spreads both bonds widened.

General Electric bond buy back

General Electric (GE) intends to buy back as much as $7bn of its bonds before the separation of its health-care division in January next year. The health-care business is likely to retain about $15.4bn of debt. GE will tender bonds maturing up until 2050. The tender and new issue is likely to support the company’s credit quality.

GE followed their bond buyback with a 6-tranche deal in the name of spin-off company, GE Healthcare, raising $8.25bn. Bonds with maturities from 2 years to 30 years were offered. All of the tranches have performed well especially the 30-year which has risen 10 points, travelling from a spread of +210bps to +176bps. The rating agencies have assigned Baa1/BBB+/BBB, negative/stable/stable, to these senior unsecured bonds.

Oracle new issue

Incredibly, technology company Oracle Corp. managed to get a massive $44bn of investor orders for its new 4-part $7bn deal. This was another deal that saw the strongest book for the longest, 30-year tranche, which received $16bn of orders for its $2.5bn issue size. Oracle senior bonds are rated Baa2/BBB/BBB, stable/stable/negative. Like the GE Healthcare deal above all tranches have done extremely well seen launch with the longest part also rising almost 14 points, tightening +30bps in spread.

The Oracle deal was to help fund the $28bn acquisition of medical-records systems provider Cerner Corp. The Cerner acquisition was originally funded with about $15.7bn of so-called bridge loan debt provided by a group of banks.

Philip Morris’s bond deal get $31bn order book

To help fund Philip Morris’s $16bn purchase of Swedish Match, the tobacco company launched a 5-part bond offering. The bonds, with matures of 2 to 10-years raised $6bn after building a large $31bn orderbook. The most successful tranche was the 1.25bn 7-year that had a cover of 5.8 times. Ratings on the senior unsecured bonds are A2/A-/A all stable. Since launch all tranches have performed well with all their spreads tightening.

Trevor Cooper FCISI

Chief Executive Officer

Chief Investment Officer

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