Trevor Cooper FCISI
Naisbitt King Bond Market Commentary 26th November 2021
Strong issuance levels continue
Canadian Pacific – the world’s oldest bond
British Telecom changes clause – issues new hybrid bonds
Telecom Italia bonds trade lower on takeover talk
Baxter buys Hill-Rom Holdings – issues debt
Metro Bank bid talks ended – shares and bonds drop
As I write there is a growing sense that a new, more virulent, coronavirus variant identified in South Africa is spooking global equity markets. Moving the opposite way, sovereign bond yields are significantly lower with the 10-year Treasury bond now yielding 1.53% - down 10bps.. We are monitoring events carefully.
With strong corporate earnings investors are increasingly turning their thoughts to post-pandemic trades in sub-investment grade company bonds that could reclaim investment-grade rating territory. Moody’s believes that the economic recovery is offering fertile ground for companies to win promotions and believes that about $150bn of corporate debt could be in line for an upgrade. The rating agency forecasts that the rate of upgrades will return to the pre-pandemic level of 12% for non-financial corporations versus just 3.4% in the period to July 2020. This contrasts with the fastest pace of downgrades in a decade during the start of the pandemic in March 2020. These so-called rising stars, or bonds that are upgraded to investment grade, present buying opportunities because, apart from higher yields now, the debt becomes eligible for purchase by a wider pool of investors when upgraded.
Now racing towards the end of the year, borrowers are still raising money at a rate of knots. Companies raising significant sums of cash from multi-tranche deals in the last fortnight included Baxter International, British Telecoms, Canadian Pacific, Chubb INA, Hertz Corp., HSBC, JBS USA, NXP Semiconductors, Shell, and Valero Energy.
There is still no shortage of investors willing to fund these new issues. These new bonds, and more, are helping to repay existing debt, fund takeovers and strengthen balance sheets.
Canadian Pacific buys Kansas City Southern railway
Canadian Pacific Railway has the accolade of having the world’s oldest bonds in existence that are still paying their coupons. In 1880 Canadian Pacific – in the name of St Lawrence & Ottawa Railway – launched a 1000 year bond in sterling with a coupon of 4%. With a 2880 maturity date, the bond is still in existence and still paying its coupon!
Last week the Canadian Pacific launched a multi-tranche deal in U.S. and Canadian dollars. The U.S. dollar offering raised $6.7bn with C$2.2bn in the Canadian currency. Maturities were 3, 5, 10, 20 and 30 years in U.S. dollars and the 2 and 7 years in C$ bonds. At the senior unsecured level of all these bonds the ratings are Baa2/BBB+, both stable. The secondary market has seen all the tranches tightening, particularly and progressively, towards the longer bonds.
The proceeds of the new bonds will be used to help its $27bn purchase of Kansas City Southern railroad. A deal that was given the green light by American authorities this week.
British Telecom adds change-of-control clause – launches new bonds
British Telecommunications (BT) €500m 1,874% junior hybrid notes, which was first launched in February last year, surged almost 5 cents to 98.00 last week, their biggest daily rise since first issued in early 2020, as the U.K. telecom company adds a change-of-control clause with a coupon step-up. This change of deed was demanded by potential investors for the launch of new dollar denominated deeply subordinated bonds, which then also had this clause. The two new notes have coupons of 4.25% and 4.875% with 5.25 and 10-year first calls. Final maturity of both bonds, if not called earlier is in 2080. At senior level BT is rated Baa2/BBB/BBB negative/stable/stable. At the junior subordinated level of the new bonds the ratings are Ba1/BB+/BB+.
There is now speculation that Patrick Drahi, founder of Altice and BT’s biggest shareholder at 12.1%, could build his stake or even make a bid for the company. If there is a leveraged buyout it could hurt BT’s credit rating.
KKR and CVC considering bidding $12bn for Telecom Italia
Before announcing a $12bn offer for Telecom Italia, U.S. buyout firms KKR and CVC Capital needed to make sure one key stakeholder was on board: Italian Prime Minister Mario Draghi. Telecom Italia’s largest shareholder, Vivendi, has suggested the current offers are too low. At the moment the private equity giants are not sure if it has a green light for the purchase but it’s certainly had an affect on the prices of Telecom Italia bonds. Unlike BT, Telecom Italia euro and dollar bonds have fallen over 5% in the last month.
Naisbitt King Asset Management does not hold Telecom Italia debt.
Baxter International buys competitor Hill-Rom Holdings
Baxter International was another company to raise a significant sum of money via the dollar bond market. The American healthcare company launched a multi tranche deal raising $7.8bn. The 6-part fixed interest senior deal had maturities ranging from 2 to 30-years. There were also 2 and 3-year floating rate notes. Interestingly the most popular tranche with investors was the $750m 30-year tranche with a cover ratio of over 4 times. Total book size for all 8 tranches was over $22.5bn. Baxter is rated Baa2/A-/A- all were placed on negative watch in September after the $10.5bn bid for Hill-Rom Holdings, a medical equipment company, was announced. These new bonds will help fund this purchase.
Metro talks ended
In our last Bond Commentary, I wrote that the shares and debt of the UK’s Metro Bank leapt after a bid was received from U.S. private equity giant Caryle Group. Last week Carlyle backed away without giving a reason. Metro’s shares which had risen by 28% and its bonds 20% on news of the bid have now fallen back by the same percentage. We now hear that one of Metro Bank’s biggest shareholders, Legal & General, has sold is holding.
Naisbitt King Asset Management has never had any exposure to Metro Bank.
Hertz launch new bonds and initiates tender offer – ratings upgraded
Hertz Corporation car rental company was an early victim of the pandemic. The company went bankrupt last year but in June this year, due to a complete turnaround in car rental businesses, it emerged from its bankruptcy. This led to a remarkable turnaround, its bonds almost completely recovered. Its $800m 2024 bond fell to a price of just 6 cents in the dollar in May last year when it filed for bankruptcy. This bond has now recovered to a price of over 90.00, despite still being in default and not paying a coupon.
Hertz has offered to buy back almost $1.9bn in preferred stock as the company begins to replace expensive bankruptcy-era financing with cheaper debt.
This week Hertz launched a 2-part dollar deal raising $1.5bn. The bonds were a 4.625% 2026 and a 5% 2029 senior unsecured notes. Coinciding with the launch Moody’s upgraded its ‘Withdrawn Rating’ (WR) to Caa1 and S&P’s single B rating upgraded to BB-, both with stable outlooks. Unfortunately, neither bond has been able to maintain their prices nor spreads since issue.
Apollo Global Management is among other investors set for a $375m pay-out after Hertz sold these bonds on Wednesday when it repays its preferred equity provided by the private equity firm as the car rental company emerged from bankruptcy earlier this year. Apollo and other unnamed investors provided $1.5bn of preferred stock as part of Hertz’s emergence from bankruptcy.