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  • Writer's pictureTrevor Cooper FCISI

Naisbitt King Bond Market Commentary 1st June 2023

Updated: Oct 25, 2023

  • Italy nearly loses its investment grade status for the first time in history

  • Florida bans green ESG bonds

  • Credit Suisse saga continues in the courts

  • The U.S. investment grade primary market remains strong

1st June 2023

In breaking news, the House of Representatives passed debt-limit legislation forged by President Joe Biden and Speaker Kevin McCarthy that would impose restraints on government spending through the 2024 election and averting a destabilizing U.S. default.

Lawmakers from both parties joined to approve the bill by 314-117 last evening, sending the measure to the Senate for consideration as a default deadline draws near. The vote cements Biden’s reputation for pragmatism and working across party lines as he seeks a second term and allows McCarthy to claim success in his first major test as speaker.

The debt-ceiling standoff that could have pushed America to a position of being unable to pay its bills hopefully seems to have been adverted. Equity markets didn’t seem to believe a default would actually happen, so investors didn’t react before an agreement by Congress to raise the debt limit. Unlike equity investors, bond investors were more jittery, seeing government yields rise along the curve. For example, at the beginning of May, the yield on the 2-year Treasury bond was 4.15% but by the end of the month it was 4.45%. Not quite so volatile was the 10-year which started the month at 3.57% and ended at 3.67%. The cost of credit-default swaps insuring U.S. Treasuries against a default went higher than contracts on similar bonds of countries like Greece and Brazil.

Inflation remains a key feature around the world but the latest figures from Germany CPI YOY number showed its prices rising +6.1%, down from +7.6% in April and +8.8% at its height last November. Reports earlier this week have already shown inflation rates dropping more than anticipated in France and Spain, with prices in the latter rising by just 2.9% — the weakest in almost two years. While easing too in Italy, the extent of their retreat was smaller than analysts expected. The inflation data are a key input into the ECB’s next policy decision in two weeks, when another quarter-point increase in the deposit rate, to 3.5%, is likely amid what’s already an unprecedented barrage of monetary tightening since last July. It certainly appears that price pressures are easing and we see global central bank rate hikes nearing the top.

Italy nearly looses its investment grade status for the first time in its history

It was thought that Italy could lose its investment grade status for the first time in its history, but in mid-May Moody’s chose not to issue a new assessment on one of Europe’s most indebted countries. Moody’s currently assesses Italy at Baa3, just one notch above sub-investment grade, with a negative outlook. While the country remains in perilous territory, it’s good news for Premier Giorgia Meloni’s right-wing coalition, avoiding a shock to the fractious alliance that includes former Premier Silvio Berlusconi’s Forza Italia party and Matteo Salvini’s League. Elsewhere the country’s ratings are BBB/BBB both stable.

Florida bans green bonds

Considering the global attention to environmental matters it is surprising that Florida’s new law restricts municipalities from issuing debt to financial projects with an environmental, social and governance (ESG) purpose. In 2022 total bond issuance reached $4bn, with $2.8bn in green bonds, $824m in social bonds and $327m in sustainable bonds. Current green bonds will not be affected by the anti-ESG law, that was signed by Governor Ron DeSantis earlier this month, but Florida will lose any further financing earmarked for ESG in the State. Incredibly Florida will be even less prepared to the weather impacts of climate change. Climate financing is desperately needed as the State continues to get hit with ever more costly, climate-intensified disasters. For example, Hurricane Ian – which hit Florida in September 2022 – caused $100bn in damages.

Credit Suisse saga continues in the courts

Stories about the Credit Suisse bank collapse are bound to continue for years, the latest is that about 50 Credit Suisse bankers are suing Switzerland’s financial regulator for rendering their bond-based bonuses worthless as part of the stricken lender’s state-brokered takeover by UBS Group AG. The staff are suing over the write-down of so-called contingent convertible (CoCo), Additional Tier-1 bonds.

The fate of the bond-linked bonuses has been one of the many legal contentions since the emergency rescue and the UBS takeover in March. Credit Suisse last week withdrew an appeal over the write-down of the awards. Before backing down, the Zurich-based bank had argued that the wipeout of the AT1 bonds shouldn’t apply to the contingent capital awards (CCA’s) because they were not issued by the lender but awarded by other companies in the banking group. The Swiss federal court has received at least 230 appeals representing about 2,500 claimants who saw the value of their bonds written down to zero. They argue the write down of $17bn worth of these bonds was an unfair and disproportionate move that put shareholders before bondholders, contrary to the conventions of insolvency proceedings.

The U.S. primary market remains strong

Once again, we see that the dollar bond market is fully open for companies in all sectors to fund their businesses. A vivid demonstration of this was when American pharmaceutical company Pfizer Inc. raised $31bn to help pay for its $43bn acquisition of Seagen Inc. Seagen is a U.S. based global biotechnology company. As can be seen from the list of the largest ever primary issues below, this 8-part Pfizer deal is the fourth biggest transaction in history. Investors for the $31bn A1/A+/A rated deal created an incredibly large orderbook of over $84bn.

At the end of the month another American healthcare company tapped the dollar market. CVS Health Corp. raised $5bn with a 5-part deal with maturities ranging from 5 to 40 years. Despite CVS shares down over 28% investors steamed in for its bonds creating an orderbook for the deal of over $27bn at its peak. CVS will use proceeds from the sale to repay borrowings under a term loan used to fund a portion of its acquisition of U.S. health care services company, Oak Street Health. This CVS Health senior debt deal is rated Baa2/BBB which have been in place for many years.

Largest dollar investment grade bond deals

Date Issuer Size

Sept 2013 Verizon $49bn

Jan 2016 AB Inv $46bn

March 2018 CVS Health $40bn

May 2023 Pfizer $31bn

March 2022 Warner Media $30bn

Nov 2019 AbbVie $30bn

Trevor Cooper FCISI Chief Executive Officer Chief Investment Officer

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