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  • Trevor Cooper FCISI

Naisbitt King Bond Market Commentary 10th December 2021



Happy Christmas and New Year to all



  • Bank of England rate rise?

  • Italy upgraded by Fitch – the first rise in four years

  • El Salvador’s Bitcoin bond issue ambition

  • China Evergrande defaults?

  • Dell Tech launches new bonds to pay for old

  • Morrison’s new issue deal pulled

  • Is CEMEX headed back to investment grade after Fitch upgrade?

  • T-Mobile’s bond deal attains $21bn orderbook


Welcome to the last Nasibitt King Bond Commentary before Christmas and the New Year.


I am pleased to report that all the portfolios we manage have beaten our various benchmarks this year, including the Pimco Total Return Fund, in what has been a most unusual and difficult period for fixed interest fund managers. Unlike the benchmarks, our portfolios have given positive total returns. This is even more creditable as the rise in yields and corporate spreads leaving bonds across the board nursing losses this year. Our successful approach of combining investment grade and high yield bonds proved a sound tactic for our clients’ portfolios. The comparatively short duration of our portfolios has also given protection from ever flattening curves in the later part of the year.


Looking ahead to 2022, we expect bond yields to continue to track higher but believe rises will be contained well allowing us to alter our approach in good time. Inflation and Covid-19 still remain the main risks to global bond markets with possible rate rises from the Fed and the BOE. We remain wary of China, Turkey, Iran and some LATAM countries which are likely to continue to cause challenges to the market.


Will the Bank of England deliver a Christmas present of keeping its rate unchanged next week? The Bank is now waiting for more data on how the Omicron variant will impact on the economy. Since our last Bond Commentary, the yield on the 10-year gilt has dropped by 24bps to a yield today of 0.77%. Once again, we see the gilt yield curve flattening further to a multi-year low.


Fitch pushed Italy a further step away from a sub-investment rating as they upgraded the country to BBB from BBB- last week. This upgrade comes after S&P raised Italy’s outlook from stable to positive in October, confirming its BBB rating - this had been the last major rating agency to raise Italy’s assessment in 2017. Last week’s upgrade reflects confidence in the unity government led by MarioDraghi and its ability to spend over €200bn of cash from the European Union recovery fund to create growth. Economic output is expected to grow 6.3% this year, with a 4.7% expansion in 2022. That’s after the country suffered a crushing decline of almost 9% in GDP last year due to a series of harsh pandemic lockdowns on people and businesses. It is thought that the Italy–German 10-year bond spread will narrow to +100bps next year from its current +134bps.


China Evergrande fails to pay its coupons


We have talked for months about the question that has loomed over China Evergrande and Kaisa Group. Evergrande is the world’s most indebted developer with debt of $300bn but is it too big to fail? Investors finally have their answer this week. Announcements that sent the bonds of both companies crashing to record lows as the company is headed for one of China’s largest-ever debt restructurings. After a month long grace period bondholders have still not received their overdue coupon payments. The 8.25% secured bond due for repayment in March 2022 is now trading at 23.00. S&P expects a default rating to be applied. China Evergrande shares have fallen to their lowest ever level and Kaisa Group shares have been suspended. Naisbitt King Asset Management has never held China Evergrande or Kaisa Group bonds.


Evergrande's next test is set for Monday, when a 30-day grace period ends on two dollar bond interest payments that were initially due 6th November. $41.9m is due on a bond maturing in 2022 and $40.6m for a 2023 security. Evergrande said it plans to "actively engage" with offshore creditors on a restructuring plan.


El Salvador’s big Bitcoin experiment


A few months ago, El Salvador announced it would make Bitcoin a legal tender, the first country in the world. Now El Salvador has said it intends to issue the world’s first sovereign Bitcoin bonds and build Bitcoin City*, which will be free of income, property, and capital gains taxes. The Central American country plans to issue $1bn in tokenised U.S. dollar denominated 10-year bonds paying a coupon of 6.5% via the Liquid Network, according to Samson Mow, chief strategy officer of Blockstream. Half of the funds of the so-called “volcano bond” will be converted to Bitcoin and the other half will be used for infrastructure and Bitcoin mining powered by geothermal energy.


The suggested terms of the bond indicate that after a five-year lockup period, the government will begin to sell its Bitcoins and pay an additional dividend to investors. Blockstream models show that at the end of the 10th year of the bond, the annual percentage yield will be 146% due to Bitcoin’s projected value will hit the $1m mark within five years.


El Salvador’s conventional senior bonds are rated Caa1/B-/B- all negative. Unfortunately, when the plans for the new Bitcoin bond were announced the countries dollar-denominated bonds hit an all-time low. The country’s $800m 7.75% senior unsecured bond, with a January 2023 maturity, now yields 28%.


The last month has seen the Bitcoin price crash nearly 30% making it undoubtedly more difficult for El Salvador to progress its Bitcoin City ambitions.


China and India have both banned crypto and U.S. Federal Reserve Chairman Jerome Powell has expressed concern saying ‘It isn’t a suitable medium of exchange, and it isn’t a good store of value…’


*El Salvador plans to build Bitcoin City at the base of a volcano, with the cryptocurrency used to fund the project. The city will be circular to represent the shape of a large coin and will be built in the south-eastern region of La Unión.


So far bond investors have taken a dim view of El Salvador's plans to borrow US$1bn to fund their volcano-powered "Bitcoin City," saying the scheme could push the country further from access to traditional debt markets. We will continue to watch events with interest.


Dell buys back high coupon bonds launching new debt


Dell Technologies bonds rallied after the U.S. computer company said it will buy back existing, high coupon, bonds. Dell announced a $2.5bn tender offer for 6 high coupon bonds issued many years ago, in a move that will cut the company’s future interest rate expenses. The longest bond being bought back is their 8.35% senior unsecured bond due in 2046. This $2bn bond, first launched in 2016, is being tendered on a spread of +190bps equalling a price of around 174.25. This bond was trading at 168.00 prior to the tender offer therefore bondholders would achieve a useful increase in return.


To pay for the tender offer Dell International launched a 2-part long dated dollar deal raising a total of $2.25bn. The offer consisted of a $1bn 3.375% senior bond due in 2041 and a $1.25bn 3.45% senior bond due in 2051. Investors liked what they saw and created orderbooks of $4.1bn and $3.1bn respectively. These senior bonds are rated Baa3/BBB/BBB


Fitch upgrades CEMEX


Mexican building products company CEMEX senior debt was upgraded to BB from BB- by Fitch last week, putting its outlook on positive. Fitch said that the upgrade reflected CEMEX's strong operating performance during the last 18 months, which along with the proceeds from the sale of carbon credits for $550m has allowed the company to reduce net debt by about $1.5bn to $8.1bn. S&P raised its outlook to positive in September following the rating agency taking its BB rating off negative watch in August. CEMEX was last rated at investment grade level in 2008 – it now seems to be headed back there. CEMEX bonds reacted positively to the upgrade bouncing substantially off recent lows.


Ecolab finances $3.7bn Purolite purchase


American water treatment and cleaning chemistry company Ecolab has agreed to pay $3.7bn for Purolite, a privately held company that makes ion exchange resins for separation applications. Ecolab says the purchase will take it further into the healthcare market while bringing new technology it can offer core customers in cleaning and water treatment. To help finance the purchase Ecolab issued a 4-part $2.5bn bond offering with maturities ranging from 5 to 30 years. The deal had a peak orderbook of $10bn. All the new bonds have been treading water since issue.


Merck buys Acceleron Pharma


Yet another company to raise money for a takeover through the international bond market was Merck & Co. The global health care company recently bought Acceleron Pharma Inc. for $11.5bn. Earlier this week Merck launched a $8bn 5-tranche deal. The longest tranche of the offering, a 40-year security, has a coupon of 2.9%. The shortest part is a 6-year with a coupon of 1.7%. The order book for the deal peaked at $33bn in the early Tuesday afternoon. Merck is well rated at A1/A+/A+ negative/stable/stable. All tranches have tightened since launch.


Wm. Morrisons bond deal postponed


The launch of the debt package to finance American private equity firm Clayton Dubilier & Rice’s purchase of Wm Morrison Supermarkets, the UK’s biggest take-private deal in more than a decade, has been postponed due to volatile market conditions. Lenders including Goldman Sachs and BNP Paribas were due to start marketing a £6.4bn syndicated bond and loan financing in November, but that has now been pushed back to next year. Moody’s rates Morrison at an investment grade Baa2, watch negative.


Morrison’s financing package is set to include a £2.4bn bond sale which is expected to become one of the biggest in sterling after Asda Group issued the largest on record at £2.7bn in February to help fund its departure from Walmart. Yields on junk-rated sterling bonds are at one-year highs as investors begin to demand more compensation for risks associated with the currency.


T-Mobile new issue success


T-Mobile US subsidiary T-Mobile USA gathered a massive 7 times plus, $21bn in orders, last week when the telecoms company launched a $3bn 3-tranche secured deal. The company is offered $500m of 2.4% senior secured notes due 2029, $1bn 2.7% senior secured notes due 2032, and $1.5bn 3.400% senior secured notes due 2052. T-Mobile, at the senior secured level of these notes, is rated Baa3/BBB-/BBB- positive/stable/stable.


As with other mobile phone companies, T-Mobile will use the proceeds to help build their 5G network.


Daimler spinoff launches debut bonds


Daimler Trucks AG was due to be spun off, or ‘realigned’, from Daimler AG by the end of this year. Part of this process was to launch a multi-tranche dollar deal last week. The money raising exercise was in the name of Daimler Trucks Finance North America. The first ever deal for the company was an 8-parter raising a total of $6bn. With an orderbook of $15bn and a cover of around 2 times, it cannot quite match the success of T-Mobile’s launch. Unusually for multi-tranche deals recently, the longest part only came with a 10 year maturity. With 3 floating and 5 fixed tranches all are at the senior unsecured level rated A3/BBB+. The secondary market has seen all tranche tighten. Daimler Trucks also raised money with a C$2bn in a Canadian dollar 3-tranche deal. Another successful new deal that has continued to perform in the secondary market.


Daimler AG will be renamed Mercedes-Benz Group AG from 1st February next year. Daimler AG senior debt is rated A3/A-/A- all stable. Earlier this month Fitch upgraded its rating from BBB+ to A- with a stable outlook.



Trevor Cooper FCISI

Chief Executive Officer

Chief Investment Officer

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