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  • Writer's pictureTrevor Cooper FCISI

Naisbitt King Bond Commentary 1st March 2023

Updated: Oct 25, 2023

  • Adani’s problems continue

  • Environmental, Social and Governance (ESG) - a rising market

  • Primary markets continue to see record issuance levels

  • Banca Monte dei Paschi di Siena Spa upgraded – then issued new debt

  • Kraft Heinz ratings rise

  • Petroleos Mexicanos figures show increasing losses

The question for many investors is just how sticky inflation will prove to be this year. The latest figures certainly showed a slight slowing of inflation rates in the U.S. and UK but how long will it take to persistently reduce to a level central banks are relaxed with? The last consumer price index print serves as a sign that the inflation battle still continues.

Last month U.S. Treasury yields moved steadily higher with the 10-year yield ending 55 basis points (bps) higher, while 2-year yields rose 75bps. That sent the 2-year/10-year curve -25bps flatter at -90bps, after it touched a new an incredible 42-year low of -92 bps during the month. The main catalyst for the bear flattening was a U.S. CPI report showing higher-than-expected inflation numbers. Although the headline numbers were in-line with consensus, the underlying details were adverse. The headline numbers were only held down by further deflation in core goods prices, which is likely to reverse in the coming months. The idea of higher rates for longer is now reflected in market pricing, with rate hikes of 25bps pencilled in for each of the U.S. the Fed meetings in March, May and June. The possibility of rate cuts in later 2023 has now diminished.

It now looks that the UK may have turned the corner on the worst bout of inflation since 1981, raising the prospect that the Bank of England may soon complete its unprecedented interest-rate hiking cycle. Investors are now betting the central bank’s key rate peaks at 4.5% this summer, which suggests one or two more increases from the current 4% level. As recently as October a peak above 5% had been priced in.

We expect the corporate credit market to maintain the strong performance of the last 5 months until the end of the year. We believe the performance has been fully justified given the economic backdrop and that Putin’s war has not created a deeper energy crisis.

Adani’s problems continue

Adani saga still rumbles but behind it all are real businesses with real assets and real returns. But how much is fact and how much is the story fiction.

Adani Group will have as much as $10bn of debt maturing by March 2025 which increases refinancing risk, especially at its renewable and cement units. Of Adani Group, Adani Ports and Adani Power are probably the strongest and most well-capitalised subsidiaries. Their assets are backed by long-term government contracts. Most of the loans taken by these companies are against these revenue and profit-accruing assets.Both continue to have strong cash flows.

Adani bonds have rebounded from the their lows seen at the end of January when the disapproving Hindenburg report was published. For example, an 8 year Adani Ports bond hit a low of 63.00 at the beginning of February from 78.00 just a couple of days earlier. Now the price has risen to 66.00 while investors continue to study the company. For the moment we will maintain a ‘hold’ rating on Adani Ports credit.

An immediate casualty from Hindenburg’s assault was Adani Electricity’s $847m acquisition of a coal-fired power station in India in a sign that the billionaire’s business empire is slowing down its spending.

Naisbitt King Asset Management does hold Adani Ports debt in its portfolios

Environmental, Social and Governance (ESG) - a rising market

In 2021, over $1 trillion of new sustainable bonds were successfully placed but only $850bn was launched in 2022. Much of the decline last year can be put down to the general lower level of primary activity in debt markets generally, amid tightening financial conditions and the associated volatility. This year between $900bn and $1trn is expected to be issued. Research suggests that issuance could reach an annual amount of $4.5trn per year by 2025.

There is concern however that there is a measure of window dressing or ‘greenwashing’, allowing companies to polish their green credentials without actually doing so, but there are efforts to regulate these instruments. This might lead to a ‘two-tier’ market with further differentials of red and green frameworks.

We are aware that green sustainable investing is becoming an ever greater force in fixed income markets. Our clients have always been able to define their preferred investment areas and sectors that they wish to invest in, or not. Client’s mandates can describe, to a greater or lesser extent, their likes and dislikes. In all cases we can accommodate and adhere to a client’s wishes.

Primary markets continue to see record issuance levels

The sterling primary market has been tardy in recent years as borrowers have chosen alternative currencies to raise cash. However, this seems to be changing as sterling saw its first sub-investment grade new issue when Ford launched it’s first bond in the currency in 10 months, perhaps showing an improved sentiment in the UK economy. In fact, UK banks TSB, Lloyds and Barclays all sold sterling bonds last month.

The dollar investment grade new issue market saw the largest ever start when a record $274bn+ was launched in just the first two months. February itself saw more than $140bn of new issues priced against the previous record of $113bn priced, in February 2021.

In a vivid demonstration of just how healthily the credit market is working for those that want to borrow and those that want to invest, a massive orderbook of $90bn was created for Amgen Inc. The American pharmaceutical company Amgen Inc., which took over another U.S. company, Horizon Therapeutics for $28bn, launched a multi-tranche senior dollar deal to help pay for it. The orderbook quickly grew – and grew – so much indeed the book saw an incredible $90bn worth of orders flood in, the 6th largest orderbook on record. With the success of the book build the company’s total size of the offering was upped to $24bn, from their initial $20bn first planned, making it the 9th largest bond deal ever.

Amgen set about raising the money they needed by launching this 8-part deal, with maturity dates ranging from 2 years to 40 years. Amgen is rated Baa1/BBB+/BBB+ but with the higher debt levels after the takeover, Moody’s and S&P have assigned negative outlooks and Fitch a negative watch to the credit. Since launch all tranches have performed well.

Banca Monte dei Paschi di Siena Spa upgraded – then issued new debt

A decade ago, the world’s oldest bank Banca Monte dei Paschi di Siena Spa was rated at an investment grade level. Since then, the Italian bank’s ratings were progressively lowered to Caa1 by Moody’s. A week ago the agency upgraded to B1 with a stable outlook. This still low level of rating didn’t stop the bank issuing debt. Last week Monte dei Paschi sold a senior preferred bond with a 3 year maturity and a call after 2 years. The issue proved successful with the €750m 6.75% bond, upped in size from €500m after attracting orders for over €1.5bn. The new senior preferred bond has ratings of B1/B+ both with stable outlooks.

Monte dei Paschi, founded in 1472, has undergone years of painful efforts to turn its business around since it was first bailed out by the Italian government in 2009. Since then, it has struggled to return to profitability given the limited room for manoeuvre under terms the European Union set in exchange for approving the bank’s nationalisation in 2017. The boost to revenues gained from higher interest rates and its cost-cutting drive helped the bank to book its latest fourth-quarter profit. This week we learn that AXA SA is selling its 7.9% stake – worth €233m - in Monte dei Pasci causing a 12.5% fall in the share price. The price of the bank’s new bond has maintained at its issue level of 100.00, but with the level of the 2 year bund going down, it means the spread has tightened by +20bps.

Kraft Heinz ratings rise

Could it have been the extraordinary story of a man lost at sea in the Caribbean for 24 days who survived on only ketchup, garlic powder and Maggi seasoning cubes or maybe Ed Sheeran’s newly launched *Tingly Ted’s hot sauce that gave a boost to Kraft Heinz Foods ratings when both Moody’s and S&P raised their ratings on the company. Fitch had upped Kraft Heinz ratings on in November last year. Moody’s upgraded the company one notch to Baa2 with stable outlook saying, ‘The upgrades reflect the significant progress the company has made towards reducing financial leverage and improving its operating performance in recent years’. The last time Kraft Heinz launched a bond was in 2020, when the company was rated at sub-investment grade levels, so it will be interesting to see if the new ratings will prompt the company to issue new debt in the coming months.

*Last month Ed Sheeran teamed up with Heinz to launch a new hot sauce range called Tingly Ted’s, after he revealed his love for Heinz Tomato Ketchup and that he even had a Heinz bottle tattoo on his arm.

Petroleos Mexicanos figures show increasing losses

Once again we see the dollar debt market accommodating a mixture of credits. Highly indebted Mexican oil producer Petroleos Mexicanos (PEMEX) was still able to raise $2bn from the launch of a 10-year senior bond at the end of January. The beginning of the orderbook build started at a yield of 10.875%. By the book close, with a very credible $9bn put up for the issue, the yield fell to 10.375%. This senior unsecured PEMEX bond is rated B1/BBB/BB-, all stable. The launch spread was +652bps but has now widened to +662bps.

This week PEMEX reported an increasing net loss of $9.4bn in the final quarter of last year, more than 3.5 times the previous quarter, as the state oil giant fails to increase production and fund its huge debt pile. Also, its oil output fell to 1.62m barrels a day last year, marking the third year out of four years of President Obrador’s presidency in which crude production has declined. He had promised a turnaround by the oil giant by focusing on easier-to-reach shallow-water and onshore fields, but the strategy has failed to bear fruit so far. Pemex is still struggling to reduce debts, that have risen to the highest of any oil major in the world. It must find the means to pay for about $8bn in maturing debt this year. The Mexican government has provided about $45bn to support Pemex in capital injections, tax breaks and other schemes since 2019, and could step in if necessary.

PEMEX has faced increasing scrutiny on its ESG, track record and could have difficulty acquiring the loans it needs from banks that are raising their ESG requirements for financing. The company has indicated it will focus on reducing greenhouse gas emissions and methane from flaring excess gas yet this week the company increased gas flaring at its top field. Its safety record is also in question as three fires at separate facilities last week resulted in the death of four workers.

Trevor Cooper FCISI

Chief Executive Officer

Chief Investment Officer

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