Trevor Cooper FCISI
Naisbitt King Bond Market Commentary 29th October 2021
Successful Chinese sovereign bond issue
Mega aircraft leasing finance deal
More American ‘big six’ bank bond issuance
Hertz buys 100,000 Tesla’s
Carnival sails on
Unicredit and Monte Dei Paschi cease negotiations
It now looks likely that the U.S.Federal Reserve will start to taper its asset purchases next week. The Bank of Canada surprised investors with a sharply hawkish statement of its intent to tighten monetary policy. Firstly, it announced an outright end to its quantitative easing asset purchases when it had been expected to keep tapering them gradually. Secondly it brought forward the timing of its first rate rise, which will now be in the “middle quarters” of next year, and not the second half. The central bank also lifted its forecast for inflation next year to 3.4% from 2.4% — a clear admission that this cannot be dismissed as “transitory.”
Following this and other signposts there has been some significant yield curve flattening in the last couple of weeks. Yield curves are flattening in Canada, the EU the U.K. and, to some extent, the U.S. as investors anticipate central banks will tighten more aggressively and sooner than previously thought. It is now possible that the Fed could raise its rate as early as March next year. The yield on the 30-year Treasury has now fallen to 2.00% from 2.15% only 10 days ago and the 10-year down to 1.60% from 1.70% a week ago.
Once again we are seeing no let up for international companies’ ability to raise the money they need by using the bond markets. There continues to be a large weight of money chasing a home. With increasingly respectable corporate earnings giving investors comfort, companies have been able to use new issuances for all their needs. High yield investors are continuing to chase yield. Once again, all types of high yield borrowers have been accommodated, from American online games and entertainment company Roblox Corp to Indian technology company Hexaware raising over $2bn between them. We see no let up in borrowers and investors successfully using the bond market for all their capital funding needs.
Chinese sovereign bond sale
It might seem surprising that China itself was able easy to raise money in the U.S. dollar market considering the problems with Chinese property market dollar bonds. The People’s Republic of China Ministry of Finance launched a 4-tranche deal, with maturities from 3 to 30-years, which raised $4bn. International demand for these bonds came in at an impressive $24bn. China is rated A1/A+/A+, all stable, ratings that have been in place for years.
China Evergrande pulled back from the brink of default by paying a bond coupon before this weekend’s deadline, the latest twist in a months-long drama. Speculation about a default has been swirling the market for months, creating credit-market contagion among other cash-strapped developers and eroding confidence in a Chinese real estate market that by some measure’s accounts for more than a quarter of the economy.
AerCap’s debt deal to pay for GE’s jet-leasing unit purchase
In March, AerCap Holdings, the world’s largest aircraft leasing company, has reached an agreement to buy GE Capital Aviation Services for $31bn in cash. A week ago, AerCap Ireland sold $21bn worth of new bonds – the second largest offering this year - in a 9-part deal, with maturities ranging from 2 to 20-years. At senior level the bonds are rated Baa3/BBB/BBB-, negative/stable/negative. These senior unsecured bonds were very well received with investors creating a mega orderbook of at least $75bn. The 20-year tranche saw the most demand, collecting orders seven times its size at $11.4bn. All these bonds have a clause that, in the event the GE Aviation purchase doesn’t go through, the bonds will be mandatorily redeemed at 101.00 plus accrued. Since launch all the bonds have done well, especially the aforementioned 20-year tranche that is trading 3.5 points higher, a 20bps tightening.
Considering the problems of the travel industry during the pandemic, investors are still happy to put up a truly remarkable amount of cash for this company. Both equity and debt investors seem extremely positive on the industry, and this company in particular. AerCap Holdings NV shares are currently standing at their highest ever level and up 40% since the turn of the year.
More ballast for Carnival Cruises
We have talked about Carnival Corporation’s money raising exercises before in our Bond Commentary. The cruise ship company first raised emergency cash just after the start of the pandemic last year. In April 2020, Carnival launched a $2bn convertible. This was followed by dollar and euro denominated bonds in July 2020. At that time the cruise company had to pay coupons of 10.5% and 10.125% respectively for these bonds secured on its cruise ships. In July 2020, these Carnival bonds were rated, at senior level, an investment grade Baa3/BBB, now they stand at B2/B, both negative. But even at this sub-investment grade level, both those bonds only yield around 4%, with prices rising around 15 points. We saw more bond launches in August and November last year and February and July this year.
Last week, Carnival was back to raise even more cash with the company selling a $1.5bn bond to refinance debt and push its maturity profile longer. This new 7.5-year dollar senior unsecured bond has a coupon of 6%. The Miami-based company said it expects to return its full fleet to the seas by the spring of 2022 however it’s still burning through cash as voyages resume. Carnival’s long-term debt stood at $28bn as of the end of the third quarter, up from $9.7bn at the end of 2019. The new bond made Carnival the second biggest issuer of sub-investment grade bonds this year behind T-Mobile. Issued on a spread of +453bps, it is now trading at +445bps.
Bank issuance continues unabated
Goldman Sachs brought the largest U.S. high-grade bank sale since the big six American firms reported their last quarterly earnings. At $9bn, this transaction exceeded Morgan Stanley’s $5bn and Bank of America’s $3.25bn offerings, both of which priced last week. Banks have been capitalising on the more stable market sentiment, stellar earnings and funding levels where the average high-grade bond spread is five basis points away from a 16-year low. The $9bn issuance easily tops the $6bn it sold during a record selling spree back in April, and is the fourth-largest bank deal on record*. Goldman Sachs, which is rated A2/BBB+, did not have to give large concessions and at its peak the orderbook was around $20bn. Citigroup launched a $4bn 3-part deal this week which investors once again piled in, creating a $17bn orderbook.
Two thirds of the big six U.S. banks have now tapped the primary market with new bond offerings totalling $21.25bn. JPMorgan and Wells Fargo have yet to offer fresh bonds. These self-funding issues excludes the preferred deals sold over the last few days by Citigroup, Morgan Stanley, and Bank of America, which together totalled $3.6bn.
*The largest ever bank deals were in April last year when Bank of America launched a $15bn deal and JPM Chase a $13bn deal.
Monte Dei Paschi
Italian bank Banca Monte Dei Paschi di Siena was dealt a further blow last weekend when a deal for UniCredit SpA to rescue the bank failed. The two sides were unable to agree on how much new capital Monte Dei Paschi needed before the sale and the assets to be transferred. Italy will now seek an extension to the year-end deadline for divesting the lender, which was nationalised in 2017. All Monte Dei Paschi public debt is denominated in euros. In the last year its most traded bond – €750m 5.375% subordinated 2028 – has been priced at 75.00 rising to 94.50 but last week it was back to 75.00. This news however has knocked the level back to 72.00, a yield of over 36% to a call January 2023. During all this time the bank’s ratings haven’t changed, they are still at Caa1/B+ positive/negative. Naisbitt King Asset Management does not have any Monte Dei Paschi bonds in any portfolios.
Hertz re-emerges from bankruptcy – buys 100.000 Tesla’s
A year ago, a 2024 bond for Hertz was trading at 40.00. The $800m 5.5% senior bond, defaulted in May 2020 when the company filed for Chapter 11 bankruptcy. Hertz, which is now just four months out of its bankruptcy, has announced that it has ordered 100,000 Tesla Model 3’s by the end of 2022, in a deal worth $4.2bn. This is indeed very good news for the car-rental company as in June this year Hertz formally reappeared from bankruptcy however it was quickly sued by its bondholders demanding $272m in premium payments. The shares have traded over the counter since they were delisted by the New York Stock Exchange a year ago following the company’s bankruptcy. Hertz Global shares are now listed on Nasdaq. During this year Hertz bonds have progressively recovered and the 2024 bond is trading at a price of 90.00, despite still being in default.
Following the Hertz order, Telsa has become the first $1trn car manufacturer. For the record, Tesla does not have significant public fixed income bond debt and only has 2 convertible bonds.
Evergrande dodges default
There seem mixed messages concerning coupon payments from China Evergrande when some holders of a dollar bond have received their interest before the end of the grace period last Saturday. Evergrande’s next bond payment deadline is fast approaching as investors study the developer for clues on the severity of a cash crunch that’s eroding confidence in other highly indebted peers. The 30-day grace period on Evergrande’s $45.2m coupon payment that was initially due on 29th September is set to end today. Today, Evergrande bondholders received an overdue interest payment shortly before the expiry of a grace period, buying more time for the debt-stricken property developer as it tries to raise cash through asset sales. Despite this there hasn’t been an effect on where Evergrande dollar bonds are trading, which are currently at prices around 25.00.
This month, bonds of Chinese investment group Kaisa Group Holdings, another of the China’s property sector’s largest issuers of dollar debt, collapsed. Yesterday Kaisa ratings were cut further and now stand at B2/CCC+/CCC+. This is yet another demonstration of the contagion that Chinese issuers are continuing to suffer. A 3-year bond for the company, which was trading at 90.00 a month ago, is now priced at 29.00..
Netflix’s long-term credit rating was upgraded two notches to blue chip status by S&P this week. Netflix senior debt is now rated ‘BBB’ by S&P, with a stable outlook. S&P cited Netflix’s improving margins and cash flow expectations as reasons behind the upgrade. The company depend on debt to fund its initial investment into original programming, borrowing billions of dollars to produce new TV shows, movies, stand-up comedy specials and documentaries all over the world. At one time, sceptical analysts and investors were concerned that the company would be unable to pay its bills during an economic recession when the debt markets tightened up and customers cancelled their subscriptions. However, Netflix attracted more than 213 million subscribers so its need to borrow has decreased. Moody’s still rates the company at a sub-investment grade level of Ba1, albeit with a positive outlook.