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  • Writer's pictureTrevor Cooper FCISI

Naisbitt King Bond Commentary 1st September 2022

  • Mega deal for Meta

  • HSBC bond exchange

  • Bausch Health downgraded – again

  • Credit Suisse downgraded but still launched $2.5bn of senior debt

  • Amgen funds its purchase of ChemoCentryx

  • Carnival Corp sinking?

  • Investors rush for Ashtead Group’s latest bond offering

  • Siemans gets a bumper orderbook

  • Sino-Ocean Group bond crash

The Bank of England raised its rate by 50bps to 1.75% at the beginning of August, the largest raise since 1997. The Bank said it expects UK inflation to hit 13% this year, pushing the UK to enter into a recession by the end of the year, which could last five consecutive quarters, it believes. During August the yield on the 10-year gilt rose from 1.90% to finish at 2.86%. The strength of the dollar didn’t help. Cable, which started the month 1.22 was quoted at 1.16 by the end of the month. Despite the strong dollar the U.S 10-year sovereign yield which started the month at 2.58% ended at 3.19%.

The UK is near obtaining a new Prime Minister. Liz Truss looks to be the likely winner of the month long race with Rishi Sunak. Truss, currently foreign secretary and a former trade minister, has ideas that include altering the Bank of England’s remit, breaking up regulators and scrapping many more European Union rules to attract companies to London. And she’s spent recent weeks attempting to patch up relations between Downing Street and the City of London, which have taken a knock during Boris Johnson’s leadership. The City is a “jewel in the crown of the UK economy but for too long its potential has been held back by onerous EU regulation, which have stifled growth and stunted investment,” Liz Truss said in an interview with financial newspaper City AM this week.

The global fixed income bond markets are still showing healthy growth in the primary market. The U.S. new issue market typically stalls in the last days of August, ahead of the Labor Day holiday. Having said that it seems that investors weren’t shy of coming forward to fund the needs of companies wishing to raise money. The monthly summer sales surge reached $115.9bn, against an expected $79bn, only the third time issuance in August has reached triple digits. Companies sold $115 billion in 2016 and $136 billion in 2016 and 2020. September expectations revolve around $130bn investment grade bond being launched.

The tech heavy Nasdaq index has fallen 25% this year having risen consistently by over 230% over the previous 5 years. Tech companies’ credit has also fallen, in some cases quite dramatically. We have considered for a long time that, although we like the sector, tech bonds have been far too expensive on a value basis. A year ago, Apple (Aaa/AA+) was able to borrow 30-year dollar money at just 2.70%, however by this August they had to pay very nearly 4%, even that wasn’t enough for investors as that bond now yields 4.30%. And again, Google parent Alphabet (Aa2/AA+) was able to raise $2.5bn via a 30-year bond at just 2.05%, but as with Apple, investors have now pushed the yield on this bond upwards to over 4% now. Now Meta has launched its first ever bond borrowing with its 30-year yielding 4.45%. We are monitoring the performance of this bond, and the sector, carefully.

In mid-August, a week after reporting its first ever drop in revenue in history, Facebook and Instagram owner Meta Platforms launched a debut debt deal which raised a mega $10bn. With an over $30bn orderbook for the 4-tranche deal Meta was able to tighten its spreads on the 5, 10, 30 and 40-year deal by an average of 15bps. Moody’s and S&P have rated Meta at A1/AA- respectively, both with stable outlook. Meta shares have fallen 53% this year but it didn’t stop the company launching a large successful bond deal proving that investors still have plenty of confidence in the company. Since launch and despite the massive orderbook, none of these bonds have fared too well with all tranches seeing their spreads widen, prices reduce, and yields rise. For example, the $3bn 10-year, launched on a spread of +115bps and a price of 99.975 and a coupon of 3.85% is now trading on a spread of +145bps – a price of 94.20, and a yield of 4.58%.

The U.S. primary market typically stalls in the last weeks of August ahead of the Labor Day holiday. Having said that it seems that investors weren’t shy of coming forward to fund the needs of companies wishing to raise money. The monthly summer sales surge has reached $109bn, only the third time issuance in August has reached triple digits. Companies sold $115 billion in 2016 and $136 billion in 2016 and 2020.

HSBC bond exchange

HSBC has launched an exchange offer for some of its subordinated bonds, worth a combined total of $6.7bn, to introduce a clause regarding a contractual recognition of the UK bail-in power, which is not present in the existing bonds. The offer is for HSBC's 7.35% bonds due in 2032, 7.625% bonds maturing in 2032, 6.5% bonds due 2036, 6.5% bonds maturing in 2037 and 6.8% bonds due 2038. To help the bank pay for this HSBC raised $4.75bn from a 2-tranche senior deal. The senior 6 and 11-year bonds each have calls one year earlier from their final maturities. At their peak investors put up a massive $15bn for the 2 bonds. These HSBC senior unsecured bonds are well rated at A3/A-/A+ stable/stable/negative. Both bonds have tightened by over 20bps since launch.

Bausch Health, formerly known as Valeant Pharmaceuticals, is having a torrid time, causing its shares to fall over 80% this year. Bausch is losing a patent dispute against Norwich Pharma who may soon be able to release a generic version of Bausch's Xifaxan antibiotic, although in mid-August a New Jersey court sided with Bausch. The company has been selling off and spinning out its businesses, but its debt has still reached almost unmanageable levels. Commentators have said that the company was ‘built on sand’ after acquiring pharmaceutical companies and then hiking prices of their commercial drugs. The rating agencies are taking a dim view of all these problems. At the beginning of August S&P and Fitch both downgraded Bausch Health senior debt to CCC+/B-. S&P left its outlook on negative outlook with Moody’s on negative watch. This followed Moody’s moving their rate down to Caa2 at the very end of July. Bausch last launched a bond in January this year. It was a 1st lien bond with a coupon of 6.125% and a 5-year maturity. Trading at a price of 70.00 the bond now yields 12% Naisbitt King Asset Management has never held any Bausch (Valeant) bonds in any of its portfolios.

Credit Suisse downgraded but still launched $2.5bn of senior debt

At the beginning of August Credit Suisse was downgraded by Moody’s and Fitch. Moody’s dropped the bank one notch to Baa2 and Fitch to BBB both with negative outlook. S&P moved to negative outlook from stable having downgraded the bank to BBB in May.

In May S&P said about Credit Suisse, ‘We see increasing risks to the stability of the bank’s franchise, uncertainty around the reshuffling of top executives, and a lack of a clear strategy, and we think the group’s risk-adjusted and absolute profitability is likely to remain weak over the medium term,’. Credit Suisse had posted a larger than expected $1.65bn second quarter loss, highlighting the bank’s challenges in coming out of its worst slump since the financial crisis. The banks shares have dropped 45% this year. Despite the downgrade Credit Suisse still went ahead with a 3-part new issue deal raising $6.25bn, this was swiftly followed by a 2-tranche deal for $2.5bn. Yesterday Credit Suisse even launched a 2-part sterling deal rising a further £1.5bn.

Amgen Inc., the American biotechnology medicines company, raised $3bn, upped from $2.5bn, via a 3-part offering which saw the investors orderbook reach over $12bn. The 7, 10 and 30-year deal was to fund Amgen’s $3.7bn purchase of biopharma company ChemoCentryx. All three tranches have continued the successful launch and are trading tighter. These new senior unsecured bonds are rated Baa1/A-/BBB+ stable/negative/stable.

Carnival Corp’s debt sank after Moody’s cut the cruise operator’s rating to its lowest ever level of B3, retaining a negative outlook. Carnival is world’s largest cruise line, in terms of revenue, fleet size and number of passengers. The pandemic hit Carnival very hard with a total of 23 ships, with an average age of 25 years, leaving the fleet. This leaves 23 ships left in the fleet with only 6 currently operating.

To save the company it raised money in euros and dollars soon after the outbreak of Covid-19 in 2020 and discontinued paying an equity dividend. In May this year Carnival sold a $1bn 8-year senior bond with a 10.5% coupon. Carnival will use the cash raised to repay debt due in 2023. Unfortunately, since launch the price has fallen further and now the bond yields 12%. Carnival shares have lost over half their value this year. The company had more success with a $338m convertible bond launched a few weeks ago so its not totally out of investor friends

Investors rush for Ashtead Group’s latest bond offering

Ashtead Group launched a highly successful dollar offering raising $750m for the UK based industrial rental company. So popular was the senior deal that around $4.5bn, a cover of 5.7 times, was put up by investors for the deal. The new bond has a coupon of 5.5% and a maturity of 10-years, with a call a few months earlier. Ashtead is rated at the investment grade level of Baa3/BBB-/BBB. Since launch on a spread of +295bps, the bond has done very well and is now trading at 248bps. Interestingly, Ashtead has a history of repaying its existing bonds at their early call price premium terms. For example, a $600m Ashtead August 2026 bond was repaid early at its first call date in August 2021 at 103.94.

It wasn’t only the dollar market that saw successful issues in August. Siemans AG saw investors rushing for its latest euro offering yesterday. The German engineer launched a €3bn 4-tranche 3, 5, 8 and 11-year euro deal which gathered an orderbook of €10.2bn. These Siemen’s senior bonds are well rated at A1/A+ both stable. This was a particularly satisfying result as the energy crisis has left German industry particularly vulnerable due to the vagaries of Russian gas supply, pushing up production costs and threatening margins. Industrial heavyweights are bracing for possible power shortages later this year amid higher inflation, with some companies even considering rationing supplies to ensure essential demand can be met.

In April this year, Sino-Ocean Group was able to launch a $200m 3-year senior dollar green bond with a coupon of just 3.8%. At the time of issue, the Chinese real estate company was rated at an investment grade level, but August saw the company’s ratings fall into sub-investment grade territory taking the price of the bond down with it. Since issue, just 4 months ago, this new bond has lost a third of its value and is now yielding over 20% - or nothing. How times have changed for the company as the new bond was issued to help fund a repayment of a $500m bond that matured in April at a price of 100.00. Now the company’s debt is all priced around the 30.00 to 40.00 level.

Naisbitt King Asset Management does not have any bond holdings in Chinese companies.

Trevor Cooper FCISI

Chief Executive Officer

Chief Investment Officer

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