Trevor Cooper FCISI
Naisbitt King Bond Market Commentary 1st March 2022
Bond markets are only pricing in a quarter point rate rise this month
BP and Shell abandons Russia
Rating agencies get their red pencils out
‘Sanctions apply to this security’. New issue slowdown
Allianz settles suits over massive fund failure
Facebook parent Meta collapse 35%
Possible huge Aramco sukuk issue
It sounds pretty obvious to say that Russia’s invasion of Ukraine has added yet another layer of volatility to global markets that have already been hammered by the Covid pandemic, rising energy prices, skyrocketing inflation and higher central bank interest rates. Equity markets have bounced around since the invasion but overall, they have all tracked lower. Russia halted trading of shares in Moscow and London-listed shares of Russian companies cratered. However, U.S. Treasury bonds moved higher with the yield on the 10-year bellwether having falling back to 1.75% after toying with the 2% yield just after the attack. The yield on UK gilts also fell with the 10-year now at 1.28% from 1.50% at the end of last week. The risk environment indexes ballooned though; we now see investment grade spreads pushing up to a multi-year high. Besides the time of the March 2020 pandemic shock, U.S. dollar bond spreads are now at their highest level since the start of 2016, putting pressure on credit markets globally. Overall, it seems that bond markets are only pricing in a quarter point rate rise this month.
It’s not only Russia and Ukraine that have seen their debt prices collapse, but in the very fast moving market, Belarus, Lithuania, Latvia, Estonia have seen their international bonds plummet and their ratings put on negative watch. Naisbitt King Asset Management has little or no exposure to any of these countries.
There is now great concern that many international bond funds have significant exposure to Russia debt. Data from industry tracker Morningstar Direct shows large money managers such as BlackRock, PIMCO and Invesco all had exposure to Russian bonds as of the end of last year, while others were increasing positions even as rumours of war rose. Citigroup said it had $9.8bn in domestic and international exposure to Russia. We don’t know how much money will have to be written off so far but markets certainly haven’t finished selling Russian assets. Norway has asked its sovereign fund, the world’s largest wealth fund with $1.3trn in assets, to remove all Russian assets by 15th March. The European Union is discussing the exclusion of seven Russian banks from the SWIFT messaging system, including VTB Bank PJSC and Bank Rossiya, according to a draft list of the proposal.
On the 17th February we saw Russia’s Gazprom announce its best ever results and a record dividend pay-out. At that time, we had a modest position in Gazprom bonds as we have always thought the gas company strong as these figures attested, underlining our original investment thesis. However, we took a quick the decision to sell all client holdings of Gazprom bonds and instructed custody banks to transact sales. Gazprom is the only Russian exposure Naisbitt King Asset Management had in any client portfolios. The very next day the prices of Gazprom debt, and any other Russian and Ukrainian bonds, collapsed. The true effect of the Russian invasion and the sanctions imposed is difficult to predict going forward but we will maintain close surveillance and scrutiny in this fast moving market.
BP Plc and Shell ditch their stake in Russia energy groups
The total knock-on on-going effect of Russia’s aggression is hard to judge but the moves by BP Plc and Shell is certainly a major one. BP acted quickly to exit its 20% shareholding in Russia’s largest oil company Rosneft PJSC which is thought could cost BP as much as a $25bn write-down. BP surprised the market, but it indicates the pressures that Western powers are willing to go to punish Vladimir Putin and Russia. What is not known is who the buyer is, or could be or even if BP will give away its stake. How much damage this will cause BP is unknown of course, but its debt is likely to increase, causing ratings downgrades which in turn pushes its borrowing costs higher. Shell didn’t give any information about the size of its financial hit but said its non-current Russian assets in the ventures amounted to $3bn.
The rating agencies have been burning the midnight oil and have their red pens at the ready. Unsurprisingly Russia’s aggression has sent ratings lower on Russian and Ukrainian debt and those companies domiciled in those countries. In some cases, the agencies just withdrew their ratings. In justifying its own downgrades, Fitch said, ‘there is high uncertainty over the extent of Russia's ultimate objectives, the length, breadth and intensity of the conflict, and its aftermath.’
Events are happening at lighting speed. Major Russian banks have had sanctions applied. Last Friday Russia’s VTB Bank, VEB and others had their London Stock Exchange membership suspended and can no longer trade on the market. Unsurprisingly their bond prices crumpled.
The complete knock-on effect of sanctions is difficult to predict
‘Sanctions apply to this security’ is a warning Bloomberg is giving to bonds affected by government restrictions. It is likely that the new issue market may take a pause going into March as borrowers rest their funding aspirations while the global backdrop tensions hopefully cool. March is normally a busy month for issuance in the U.S. high-grade primary market. So far this year primary issues have amounted to $223nm – just ahead of last years total. On Monday this week 10 companies postponed their borrowings. It’s difficult to judge when they will return but with events moving so fast issuance estimates could complete miss the target – either way. It is believed that the market could see issuance reaching $150bn for March. We shall see.
Allianz settles suits over massive fund failure
Even the largest fund managers have faced major problems in the most difficult of markets for years. Allianz SE was facing multiple lawsuits and regulatory probes tied to the collapse in 2020 of its Florida-based hedge funds. But yesterday a group of investors suing Allianz SE over losses tied to the collapse of its U.S.-based hedge funds asked a judge to dismiss the lawsuit after agreeing to settle with the insurance giant.
The German insurance and financial-services firm, which owns bond giant Pacific Investment Management Co. (PIMCO), said it reached settlements with major investors in its Structured Alpha Funds. Allianz said it can’t provide a total cost because it’s still in discussions with other plaintiffs as well as the U.S. Securities and Exchange Commission and Department of Justice.
Investors - including public pension funds, Blue Cross & Blue Shield and New York’s Metropolitan Transportation Authority - claimed they lost billions of dollars from the collapse of the hedge funds, which were designed to withstand a market crash yet incurred steep losses during the tumultuous early days of the pandemic. Allianz liquidated two of the vehicles in March 2020 and has been unwinding the others. Despite the problem none of the rating agencies have changed their strong Aa3/AA/AA- all stable rating levels for years.
Electricite de France cash injection
The French state will inject about €2.1bn into Electricite de France (EDF) as the combination of reactor shutdowns and a government power-price cap batters the utility’s finances. The value of EDF has already slumped this year, falling 37% since mid-December. Its atomic output is set to drop to the lowest in more than three decades due to repairs and maintenance at its reactors. The situation has been made even worse for the state-controlled company after France forced it to sell more power at a steep discount, to protect consumers and businesses from soaring energy prices. Last week Moody’s, S&P and Fitch downgraded EDF by one notch each to Baa1/BBB/BBB+ all leaving a negative outlook on the credit.
Shares of Facebook parent Meta collapse 35% on lower profits
February started with Mark Zuckerberg losing $31bn when his company Meta Platforms Inc. – owner of Facebook, Instagram and WhatsApp - saw a quarter of its value wiped out following disappointing results. By month end, we haven’t a recovery in its share price. Meta does not have any public debt in issue. In a further move with the Russian attack Nick Clegg, Meta’s president of global affairs, wrote in a tweet ‘We have received requests from a number of governments and the EU to take further steps in relation to Russian state controlled media,’. ‘Given the exceptional nature of the current situation, we will be restricting access to RT and Sputnik across the EU at this time. We will continue to work closely with governments on this issue.’
Possible Aramco sukuk issue
Saudi Aramco is preparing to return to global capital markets with a bond issue that would help fund a $75bn dividend commitment, according to people with knowledge of the plan.
The world’s biggest energy company has picked around 15 banks to manage a sale of Islamic debt, or sukuk, that could happen this month, according to people with knowledge of the matter. The state-controlled firm may seek to raise around $5bn. Aramco is considering a sale of both dollar and local-currency sukuk. No decision has been made and the firm may put off the deal if market conditions deteriorate. Aramco is rated A1/A both stable.
Trevor Cooper FCISI
Chief Executive Officer
Chief Investment Officer