Trevor Cooper FCISI
Naisbitt King Bond Market Commentary 17th September 2021
New corporate bond issuance success affirms the markets strength
Indian JSW Steel new issue success
Woes continue in China credit as the government targets gaming
China Sands new bonds collapse after launch
Mexico shows its continued support for its oil major
We believe that the health of the new issue market is a good guide to the state of the wider corporate bond market. The quantity of companies raising money and the amount of money investors are willing to put up is a useful monitor. This year we have seen a deluge of U.S. investment grade and high yield bonds being launched and snapped up by willing investors. Despite the size of the primary market offering, the secondary market has thrived, with spreads tightening to levels last seen in 2018. The last few days companies ranging from single B rated Allegheny Technologies, double B rated Ball Corp., as well has investment grade, oil and gas company Cenovus, American infrastructure company Quanta Services and Bank of Montreal, amongst others, all successfully raising money. Average cover worked out around 3 times. Most new issues have continued to trade tighter, with a few exceptions, once again highlighting the strength of the market. Both investment and high yield grade indices have continued to fall towards the index lows last seen in 2018.
Indian new issuance
An example of this new issue success came with the launch of JSW Steel, an Indian multinational steel making company based in Mumbai. JSW Steel is a subsidiary of JSW Group. It is one of the fastest growing companies in India with a global footprint in over 140 countries. This week JSW Steel raised $1bn with the issuance of 5.5 and 10.5-year senior bonds, with coupons of 4.375% and 5.5%. Investors liked what they saw and put up a total of $4.7bn of orders for the two bonds. The longer $500m tranche is a Sustainability Linked Bond (SLB) where the company committed to achieving an ambitious target of less than or equal to 1.95 tonnes of CO2 per tonne of crude steel produced by March 2030. This will represent a 23% reduction from its 2020 level. The proceeds of the issue will be used by the company to fund capex plans as well as for refinancing debt. JSW Steel is rated Ba2/BB-, both positive. Since launch both bonds are trading higher.
Chinese bond market troubles continue
As I wrote in our last Bond Commentary, we are becoming increasingly wary of the next moves by Beijing. It is difficult to know the extent of any clampdown, but it seems that the Chinese government wants to redirect private capital to public ideas and strategies. Beijing has targeted sectors from tech to education, as they introduce draconian restrictions to strengthen government control. Our strategy therefore is to further reduce our, already fairly modest, exposures to Chinese debt. In June dollar bonds in real estate developer China Evergrande started to collapse, going all the way to a price of around 25.00. As this low price level indicates, the company may have to undergo one of China’s biggest debt restructurings. Moody’s, S&P and Fitch have all downgraded the company to single C, leaving it on negative outlook. In each case it is their third cut this year. This is not only a nightmare for investors but the construction of unfinished properties with enough floor space to cover three-fourths of Manhattan grinds to a halt, leaving more than a million homebuyers in limbo. Evergrande wasn’t alone as shares in China’s largest property developer, Country Garden, lost 14% in just 24 hours, dragging its bonds 5 points lower. In previous Bond Commentaries I have also talked about China Huarong Asset Management bonds crashing. Its $700m 9-year bond fell to a price of 60.00 in May - it has now recovered to 87.00 though. Highlighting the diverse opinions on the company, the rating agencies seem to be travelling in opposite directions. In August S&P and Moody’s cut their ratings on Huarong one notch to BBB/Baa3, with both leaving it on negative CreditWatch. At around the same time Fitch placed its own BBB rating on watch for upgrade. It now seems that a group of state-owned investors have agreed to restore its capital. A fresh injection of cash will give Huarong more time to sell off parts of its vast financial empire, though it was unclear whether the investment would be enough to stem the company’s still towering losses which amounted to $16bn in 2020. Wednesday saw Huarong redeem its $500m bond, first issued in 2016. Since April the company has redeemed $2.35bn of dollar bonds. Macau’s top gaming stocks lost a record $18.4bn in combined market value on Wednesday after officials said they would change casino regulations to tighten restrictions on operators, including appointing government representatives to “supervise” companies in the world’s biggest gaming hub. This is particularly unfortunate for investors who put up $6.9bn for a new $1.95bn 3-part bond deal for Sands China Ltd, the Macau based gaming company, last week. Since the new debt deal was launched Sands China shares have fallen 36% and its new bonds have already lost between 3 and 4 points.
Mexican state aid for its oil producer
Mexican President Andres Manuel Lopez Obrador announced his plans to aid its state-owned oil company Petroleos Mexicanos (Pemex) last week. He said he wants to use part of the $12bn in new funds from the IMF to reduce Pemex’s$115bn debt pile. This is good news for Pemex’s bonds which powered ahead after the comments, with its 10-year bond rising 1.5 points on the statement. We have been long of the view that the Mexican government would continue to support Pemex and have remained positive on its dollar denominated credit. We believe that Pemex bonds will continue to perform and could even see Moody’s and Fitch join S&P with an investment grade rating. The spread difference between lesser rated Petrobras, Brazil’s own state owned oil company, and Pemex has tightened this year, however the yield pick-up onto Pemex’s 8-year bonds is still 169bps.
The yield difference between Petrobras 5.999% 2028 (Ba2/BB-/BB-) and Pemex 5.35% 2028 (Ba3/BBB/BB-)
Early this month we bought a bond for Sirius XM Radio across several portfolios. As the name suggests the company operates as an audio entertainment business, the largest in North America. It is a New York based broadcaster that provides satellite and internet radio with around 34.9m subscribers, reaching 150m listeners. In September 2018, the company agreed to purchase the streaming music service Pandora for $3.5bn, and this transaction was completed in February 2019. The $2.5bn raised from its recent issue of 5 and 10-year bonds was used to repay a $1bn bond and to repay revolver borrowings. In the 2nd quarter this year Sirius also repurchased $334m worth of shares and paid out $60m in dividends. It has maintained its dividend payments throughout the pandemic. The bond we purchased was launched at the beginning of August and was the $1.5bn senior 10-year tranche with a 3.875% coupon. This bond has a series of company option calls starting in September 2026 at a price of 101.938, with further calls in subsequent years. Although Sirius XM shares are quoted on the NASDAQ exchange it is 78% owned by Liberty Media, a percentage that will move higher as the company buys back more shares of course. The company has maintained dividend payments throughout the pandemic. The company, and these senior unsecured bonds, are rated at the sub-investment grade rating of Ba3/BB, both stable. With a low Net Debt / EDITDA of 3.2x we believe Sirius XM could reach investment grade status in the not too distant future. We see the company as a solid performer over coming quarters.