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  • Trevor Cooper FCISI

Naisbitt King Bond Market Commentary 23rd July 2021




  • Mixed views remain on Covid and inflation forecasts

  • ECB revised guidance

  • Raising stars increase

  • Credit Suisse AG downgraded

  • Carnival slashes borrowing costs to remain afloat

  • Recent trade - Softbank


Global equity markets crashed heavily in the early part of this week, the largest this year. The resurgence of Covid-19 around the world caused equity investor jitters as further lockdowns and restrictions are slowing global economic recoveries. As investors increase their ‘risk-off’ mentality, sovereign yields declined as bond buyers seek safety. Yields on Treasury, gilt and bund 10-year bonds all fell back to the lowest yields seen since the middle of February. The second half of the week saw some reversals with equity markets resuming their climb toward all-time highs and sovereign debt increased their yield. Possible rising inflation is also still causing market concern. Last week we saw that the prices paid by U.S. consumers surged in June by the most since 2008, topping all forecasts and testing the Federal Reserve’s commitment to sticking with ultra-easy monetary support for the economy. The consumer price index jumped to 5.4% in June from a previous 5%. Excluding the volatile food and energy components, the so-called core CPI index, leapt to 4.5% from 3.8%. This is the largest rise since November 1991! Despite these dramatically higher figures the Treasury 10-year fell to 1.18% from1.42% before the figures. Currently it stands at 1.28% Yesterday the European Central Bank revised its guidance on when interest rates might rise to convince investors it will not withdraw support too hastily and derail the economic recovery. They are aiming to strengthen its long-standing efforts to push up inflation. The major change to this guidance means that even if inflation is at the target at the end of the ECB’s three-year forecast horizon, officials will not be forced to respond with tighter policy. The ECB currently foresees price growth averaging just 1.4% in 2023, which suggests any rate hike is years away. European sovereign markets strengthened after announcement, with the 10-year bund now yielding minus 0.41%, a yield last seen in February. Further to our last Bond Commentary’s observation on the U.S. high yield (HY) market, some investors now believe that there could be as much as $200bn of ‘rising stars’ to the end of 2022. A rising star is a credit that gets upgraded from HY to investment grade (IG). Historically, bonds of rising stars have experienced impressive spread compression in the months leading to the transition back to IG level. With the often-cited investors global search for yield, valuations are improving as credit risk in the market is on the decline with low default rates. In the 12-15 months prior to an upgrade, the average post-crisis rising star tightened roughly 100bp compared to other comparable bonds in BBB category. U.S dollar HY debt issuance is still proving very popular with investors. It is running at 130% ahead of last year which compares with IG issuance which is 30% down on last year.


Credit Suisse ratings – Archegos Capital and Greensill challenge

In December last year Moody’s upgraded the senior unsecured ratings of Credit Suisse Group AG to Baa1 from Baa2 and the long-term senior unsecured debt and deposit ratings of its principal bank subsidiary, Credit Suisse AG, to Aa3 from A1. The outlook on these ratings had been changed to stable from positive. Last week the agency cut its ratings on Credit Suisse AG, which houses the banks main investment banking and wealth management businesses, due to the challenges from the collapse of Archegos Capital Management and Greensill Capital. Moody’s lowered their rating back to A1 from the Aa3 that it was upgraded to last December. The rating agency left Credit Suisse Group AG’s rating where they were. Credit Suisse bond levels remain unchanged. S&P upgraded AstraZeneca (AZN) earlier this week after it completed its huge $40bn purchase of AlexionPharmaceuticals, the biopharmaceutical company based in Boston. S&P believes the acquisition will improve AZNprofitability as well its penetration in the growing rare disease market with two drugs, Soliris and Ultomiris, and a new drugs in the pipeline. The company is also expected to continue its deleveraging on the back of over $3bn of free cash flow generation in 2021 and $5bn in 2022.The rating agency upgraded AstraZeneca’s senior rating to A- from BBB+, stable. In May AZN raised $7bn with the successful sale of a 6-part deal to help pay for Alexion. Moody’s rates the company A3 negative. The upgrade has had no effect on the company’s bonds, with its 10-year tranche yielding 1.88%. Its shares are trading 16% higher this year.


New issue – Carnival Cruises

One of the most severely affected sectors from the pandemic has been the travel industry. Of that sector, perhaps the cruise lines have been some of the worst hit. Raising money at the start of pandemic last April, Carnival Cruisesraised $4bn with a 1st lien bond – secured on its boats - but had to pay a massive 11.5% for just 3-years money, even though the company was rated Baa3/BBB-. Now, the Carnival wants to reduce its borrowing costs by repaying around half of that $4bn 11.5% 2023 bond. Holders of $2.4bn of the bond have accepted the company’s tender offer to buy back $2bn of securities. Investors who accepted the early deadline and agreed to a change in the contract for the existing notes will receive 114.25 cents on the dollar. Holders that say yes by the final deadline of 2nd August will receive 112.5 cents. The new $2.405bn 1st lien 7-year bond is paying a coupon of just 4%. This reduction in yield was obtained even though the company has been downgraded to sub-investment grade ratings, with the new 1st lien bond rated at just Ba2/BB-, both negative. Now the old 11.5% 2023 bond, with its reduced $1.996bn issue size, is trading around 113.5. The new bond, having been launched at 100.0, is now trading at 102.00 – a yield of 3.66%


Recent trade

I wrote in our last Bond Commentary that SoftBank, the Japanese technology investor, raised $7.35bn with a new dual currency 8-part deal in euro and dollars. The successful deal had investors offering the equivalent of $16bn for the nearly $7.5bn for new bonds. With an annual revenue of $82bn Softbank is the 7th largest company in Japan and the 72nd largest in the world. We believe that given the nature of this massive company’s wide ranging technology investment profile we do expect to see challenges and mixed headlines occasionally. Last week we purchased the new 5-year tranche which offered a decent return for its maturity. The $800m senior unsecured bond we bought is rated Ba3/BB+ stable and with a coupon of 4% offed a good return for its short maturity in July 2026.

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