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  • Writer's pictureTrevor Cooper FCISI

Naisbitt King Monthly Bond Commentary - August 2023

Updated: Oct 25, 2023

  • Fitch surprises with U.S. downgrade

  • Outlook for CoCo’s recovers after the Credit Suisse disaster

  • Smaller U.S. banks improve after failures

  • French supermarket chain collapse

  • Ford upgraded

  • Mixed views remain on Petroleos Mexicanos

Inflation and rising rates remain at the forefront of investors thoughts. Fixed income investors have faced the testing combination of multi-decade inflation highs and a hawkish policy shift from major central banks, which has led to a rising rates cycle. It seems that investors are now growing more confident that the Federal Reserve will soon be able to end its most-aggressive monetary tightening cycle in a generation as inflation ebbs a little and a soft landing scenario appears plausible. At 3% last month, US consumer-price inflation is now just one-third of the level it reached a year ago, which itself was the highest in four decades. If a soft landing does come to fruition, which believe it will, both government bonds and credit should do well.

The volatility in financial bonds, which was triggered by the American regional bank turmoil and the Credit Suisse disaster, which caused UBS Group to takeover of their Swiss banking competitor, has now largely dissipated. The Fed has proposed tougher capital rules which will require banks to hold an extra two percentage points of capital. Midsize lenders such as Citizens Financial, M&T Bank and KeyCorp could each face a potential $12bn to $14bn shortfall in their so-called TLAC requirements that will force them to issue more debt. Larger regional banks including US Bancorp, PNC Financial and Truist Financial have become more frequent issuers to meet potential shortfalls.

Fitch downgrades the U.S.

A few months after signalling it Fitch has joined S&P in downgrading their rating on the U.S. to AA+ from AAA. S&P dropped its rating to this level in 2011. The impact of Fitch’s move is likely to be minimal on Treasuries and the dollar, as was the case in 2011. Moody’s has maintained it’s Aaa rating.

Fitch said in its statement ‘there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,’ the rating agency said in a statement. ‘The repeated debt limit political stand-offs and last-minute resolutions have eroded confidence in fiscal management,’ it said. Maybe unsurprisingly, Treasury Secretary Janet Yellen quickly responded to the downgrade, calling it ‘arbitrary’ and ‘outdated.’ It is not thought that the move will cause much concern for investors.

We believe that the impact of Fitch’s move is likely to be minimal on Treasuries and the dollar, as was the case in 2011. Treasury bonds will continue to be sought out as risk-free safe-haven choice. Equities are more likely to see a negative effect from Fitch’s downgrade.

Outlook for CoCo’s recovers after the Credit Suisse disaster

In a further boost to the AT1 Contingent Convertible (CoCo) market, Spanish bank BBVA announced it will call their €1bn bond at its first call in September at a price of 100.00. The BB rated sub-investment grade bond has a coupon of 5.875% payable until 24th September. If BBVA had not called that coupon would have been increased to over 9%. After the Credit Suisse AT1 bond default the price of this note dropped to 90.00. This will add to further confidence to the AT1 market. We have seen further price increases across the sector in the last couple of months. We have also seen a number of new issues from in the AT1 market in recent weeks, including BBVA and Wells Fargo. We anticipate a further recovery in new issues as the year progresses.

Smaller U.S. banks improve after failures

After the American regional bank collapse, with SVB Bank, Signature Bank and others going bust it was pleasing to see that Cincinnati, Ohio based Fifth Third Bank Bancorp’s new $1.25bn bond deal was more than 12 times oversubscribed before the overwhelming investor demand spurred the issuer to relaunch a deal at a better funding level. The spread at the start was +255bps but ended at +210bps. In the end Fifth Third Bancorp was able to launch a $1.25bn 6 year senior unsecured deal with a coupon of 6.339%. Since launch the bond has tightened further to +175bps. The bank’s senior debt is rated Baa1/BBB+/A- all stable. Now it has been proven the market for new Regional bank debt is open it seems likely that deals from Truist, PNC, US Bancorp, Huntington Bancshares and others may follow.

French supermarket chain collapse

Seven years ago Casino Guichard-Perrachon, the French hypermarket chain, was an investment grade company with its shares standing at a price of over €50.00. Last month Moody’s downgraded its rating on Casino senior debt to single C, with a negative outlook, and its shares now stand at less than €3 - and Casino debt has collapsed. In March 2021, the company raised €525m with a 5.25% 6-year bond at 100.00. Now, with a defaulted coupon, that bond is just about worthless. Rallye SA, the parent company of struggling Casino said it could be forced to liquidate if a rescue deal for the French grocer goes through.

Two bids have now been put up for Casino one from Czech billionaire Daniel Kretinsky and another from French telecommunications entrepreneur Xavier Niel but both would leave existing shareholders and unsecured bondholders of Casino and Rallye with almost nothing.

Naisbitt King Asset Management has never held Casino Guichard-Perrachon nor Rallye SA debt in any portfolios.

Ford upgraded

Earlier last month Ford was upgraded by Moody’s to one notch below investment grade. Ford was last rated at an investment grade level in 2019. The automaker continues to hold sub-investment rating grades with S&P and Fitch after it lost its investment-grade status in 2019 and 2020 amid the coronavirus pandemic. It would need investment-grade levels from at least two credit agencies for its debt to move into blue-chip indexes. That could happen soon as both S&P and Fitch have positive outlooks on their BB+ ratings.

With Tesla upping its production numbers and reducing its prices other auto-manufactures have been slow to react to the Electric Vehicle market but things are changing. Other manufactures are starting to strongly compete with Tesla, particularly in the high-performance and off-road sectors. Forefront at the fight with Tesla is Ford.

Mixed views remain on Petroleos Mexicanos

Rating agencies occasionally have very different opinions about a company, this is true with Petroleos Mexicanos (Pemex). S&P has rated Pemex at an investment grade rating for over 20 years but both Fitch and Moody’s had a sub-investment level on the credit for a few years. Last month Moody’s cut its rating on the world’s most indebted petroleum company further down from BB- to B+ saying the company’s oil production won’t grow and that recent accidents have called into question its operational capacity as the debt load mounts. A couple of weeks later the rating agency also placed a negative outlook on the credit. Since the downgrade Pemex bonds have dropped by up to 3 points overall. Mexico’s state oil giant received $4.2bn worth from the Finance Ministry as the company seeks to pay off mounting debts. This is not the first time the Mexican government has given the oil company direct financial support. In 2021, it gave Pemex a $3.5bn cash injection, and in 2019 it transferred $5bn. In total, support under President Lopez Obrador has amounted to nearly $49bn in capitalisations, tax breaks and other assistance.


Trevor Cooper

CIO Naisbitt King Asset Management

Currency and Commodity Movements

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