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  • Writer's pictureTrevor Cooper FCISI

Naisbitt King Monthly Bond Commentary December 2023


  • AT1 Junior debt market rebounds aggressively

  • CPI Property Group bonds fall to a record low

  • Property Firm Signa Files for Insolvency

  • Luxury upgraded

  • Portugal upgraded after solid economic growth prospects

  • Barclays joins the AT1 Coco party

  • Bayer issues debt days before its shares saw their biggest drop to their lowest level in 17 years

  • Carrier Global Corp issues debt to help pay for takeover.

  • EG Group buys Tesla charging units

  • Intesa Sanpaolo raises $3bn in senior preferred bonds

  • RTX funds share buyback with $6bn debt offerings

  • UBS launches new AT1 Coco bonds


December 2023


November saw a considerable rebound in bond markets. Since the 10-year Treasury bond hit a 17 year high of over 5% in October its yield has fallen to 4.49% by month end. Last month’s fall in the 30-year bond yield was even more dramatic. Strong CPI figures from both the U.S. and UK in mid-November helped the yield drop. Continued thoughts that rate setters getting to grips with inflation, particularly in the U.S., have certainly helped this turnaround. Thoughts of how much the Fed cuts rates next year vary greatly, but cuts there will certainly be.


Markets are now pricing in a 50 basis points of rate cut by the Fed by July, twice the amount anticipated only a month ago. There now appears to be disconnect between the Bank of England and the Fed with the former more cautious of cutting rates.


We are now even more bullish of U.S. corporate bond markets going into next year. The oft used phase ‘higher for longer’ used by Fed officials and others now looks overstated with views shifting to a bond friendly environment. We believe that 2024 will prove to be a prime investment time for fixed income markets as inflation further abates and central banks end their policy tightening.


There has been much speculation about the next Fed call on rates at its next meeting on the 13th December. It now looks that the pause of the last two Fed meetings will be maintained.


CPI Property Group bonds fall to a record low


As happened with Adani Group in January, when American short seller Hindenberg wrote a bearish piece causing the company’s shares and bonds to dramatically crash, another U.S. short seller Muddy Waters Research dished the dirt on CPI Property Group. This caused its bonds to crash in Mid-November after it was accused of overstating its assets. The company’s debt slumped to their lowest ever levels. One of the Czech and Eastern European property company’s most traded bonds, a €627m 3-year senior unsecured bond fell 5 points in the space of 1 day. Another well traded bond, a €525m subordinated bond, with a call after 3 years, fell 10 points to a price of just 24.50. "We believe that Muddy Waters is categorically wrong about CPIPG," said CPI in a statement in response to the report. It also said CPI it was considering "legal steps" against the hedge fund. So far, the rating agencies haven’t announced any movements to their investment grade levels for the company’s senior bonds



Property Firm Signa Files for Insolvency


November also saw the debt of another company collapse. Problems at property tycoon René Benko's empire is rippling through the debt markets, where bonds issued by one of his units have crashed to just a fraction of their face value. The tycoon’s main investment vehicle, Signa Holdings is filing for insolvency in Austria, a move similar to seeking bankruptcy protection in America. A €300m bond issued by Signa Development Finance was priced at less than 8 cents. A month ago the bond's price was above 65 cents.


Naisbitt King Asset Management has never invested in Signa Development


RATING CHANGES


Luxury upgraded


Moody’s upgraded LVMH Moet Hennessy Louis Vuitton by one notch to Aa3 from A1 with its outlook moved from position to stable. Moody’s said “The upgrade reflects LVMH's longstanding position as the global leader in personal luxury goods, its track record of steadily strong operating performance, which has resulted in increased scale and profitability, and its resilience during more difficult times”. They added the “Upgrade also considers robust credit metrics and Moody's expectations that LVMH will maintain conservative financial policy and an acquisition strategy mainly targeting bolt-on transactions” Elsewhere, S&P rates the company at AA-, also stable outlook.


Portugal upgraded after solid economic growth prospects


Portugal was upgraded by Moody’s to A3 from Baa2 with its outlook changed to stable from positive. Moody’s said ‘The upgrade reflects sustained positive credit effects from economic and fiscal reforms, private sector deleveraging and a stronger banking sector’ The agency said it expects Portugal to have GDP growth of 1.6% next year, lower than the 2.1% growth rate in 2023. However, the country's medium-term growth prospects are solid, with economic growth of around 2% annually over the next five years. "Moody's estimates that Portugal's growth potential has increased materially over the past decade, through a range of economic and labor market reforms that have raised competitiveness and employment".


After the government bond upgraded, Moody’s also updated its ratings on seven Portuguese banking groups. The banking group upgraded were; Caixa Gerl de Depositos SA, Banco Comoercial Portugues SA, Banco Santander Totta SA, Novo Banco SA, Banco BPI SA, Caixa Central de Credito Agricola Mutuo, Caixa Econoica Montepio Geral, CEB SA


NEW ISSUES


Rumours of the death of the AT1 market have been greatly exaggerated. Last month saw the dramatic return to the market by many banks after a decision to wipe out $17.3bn of Credit Suisse junior Coco debt by Switzerland, potentially wrecked the sector earlier in the year. Highlighting the turnaround, Switzerland was once again at the centre of attention with a turnaround after Credit Suisse’s new owner UBS was able to sells $3.5bn of AT1 Coco bonds early last month that received over $36bn in orders.

Last month the new issue market featured many multi-tranche offerings. Bayer, Carrier Global, Roche and RTX all issued very successful 5 part deals.


Barclays joins the AT1 Coco party


Barclays launched a dollar $1.75bn junior subordinated ‘Coco’ bond. At the start of its marketing Barclays suggested a coupon of 10.5% but by the time of launch, after a very popular bookbuild, with over $5bn offered, the bank was able to give a 9.25% coupon. The new bond has a call in December 2029 with a refix at the 5-year U.S. swap rate +5.775%. This bond has ratings of Ba1/BB-/BBB-, all stable.

Bayer issues debt days before its shares saw their biggest drop to their lowest level in 17 years


Bayer AG’s shares dropped 21% to its lowest level since 2009 just days after the company launched a new dollar bond deal raising $5.75bn. Within days of the issue Bayer suffered its biggest drop ever, losing about €7.6bn in market value, after major legal and drug-development setbacks that raise pressure on its new leader to outline a turnaround plan. The German pharma and agriculture company stopped the main study of its top experimental medicine due to a lack of efficacy and lost a key US trial against its weed killer Roundup. It was also announced that late-stage testing of a drug called asundexian, used to treat heart disease, would be stopped as it didn’t appear to be effective. It is thought that Bayer’s $1.5bn Roundup loss will probably be reduced, but could be followed by another unfavourable trial verdict.


In mid-November Bayer AG launched a 5-tranche senior unsecured deal with maturities from 3 years to 30 years. All the tranche proved popular and were very oversubscribed. Seeking only $4bn originally, the company was able to raise $5.75bn after a book of over $26bn was created with the most popular being the longest 30-year tranche with $6.9bn put up for its $750m at its height. Bayer is rated Baa2/BBB/BBB+. Perhaps surprisingly since launch all the company’s tranches have done well since issued considering its shares have continued to fall.


Naisbitt King Asset Management has never invested in Bayer AG


Carrier Global Corp issues debt to help pay for takeover


One of the most successful new debt operations last month was for Carrier Global Corp. The heating and air-conditioning company launched both dollar and euro senior unsecured bonds raising $3bn and €2.35bn respectively. The dollar offering consisted of 2, 10 and 30-year parts with the 3 euro denominated bonds with maturities of 1.5, 4.5 and 9-years.


Carrier Global is raising money to support its $13.2bn purchase of Viessmann Climate Solutions Business


EG Group buys Tesla charging units


British petrol station operator EG Group had to pay a high price to raise money to pay for its purchase of Tesla’s latest ultra-fast charging units to speed up the rollout of evpoint charging network across the UK and Europe. EG Group launch 2 bonds a €468m bond and a $1.1bn. Both securities are 5 year maturities with a call after 2.5 years. The euro denominated bond has a coupon of 11% with the dollar bond a 12%. The senior secured bonds are rated B3/B-/B+


Intesa Sanpaolo raises $3bn in senior preferred bonds


Italian bank Intesa Sanpaolo SPA chose a different path to raise cash in the U.S. bond market. Instead of the junior subordinated perpetual route the bank launched a 2-part senior preferred deal raising a total of $3bn. The 10 and 30-year tranche had high coupons of 7.2% and 7.8% respectively, with ratings of Baa1/BBB/BBB, all stable. Recently we have seen stronger demand for longer dated tranches but in this case the 10-year was more popular. At its peak the 10-year tranche attracted $6bn for the $1.5bn required whereas the 30-year attracted $4.6bn.


RTX funds share buyback with $6bn debt offerings


After RTX Corp, the aerospace and defence company, announced a $10bn share buyback. To help pay for their buyback the company tapped the U.S. investment-grade bond market to help repay a short-term loan to cover costs of the buyback. The aerospace and defence manufacturer sold $6bn worth of senior unsecured bonds in five parts after gathering a highly successful $28bn book. The most successful tranche was the longest part of the offering, which was launched at a spread of +160bps, now trades at +124bps. The 30-year senior bond came with a coupon of 6.4% but now yields 5.8%. A $9.3bn orderbook was created for this $1.75bn issue. These RTX senior bonds are rated Baa1/BBB+. Both Moody’s and S&P placed RTX on negative outlook after the share buyback announcement.


Raytheon Technologies Corporation changed it’s name to RTX Corporation in July this year. Perhaps the best known and largest subsidiary is Pratt & Whitney, the American Jet engine manufacture.


UBS launches new AT1 Coco bonds


In November UBS re-entered the AT1 market with its first issue since the write down of the Credit Suisse equivalent. UBS successfully launched $3.5bn in two tranches: $1.75bn callable in 5-years and $1.75bn callable in 10-years, both have 9.25% coupons. UBS received an order book in excess of $36bn for the bonds, approximately 10% of the total USD AT1 universe.

The new bonds came to market with updated language. Bonds will be converted into equity instead of facing a total write-down, as occurred to Credit Suisse notes in March. However, the new language is not as protective for bondholders as other European issuers and still allows for a total write-down in certain cases when an equity conversion has not already happened. Suggesting, if the state were to step in and orchestrate a fire sale of UBS (to who we don't know!) or nationalise the bank, AT1 bonds would again be zeroed. An additional concern is the updates are not yet legally binding and won't be until a ratification at UBS's AGM in April 2024. We can't imagine shareholders will vote against the changes, but is it a risk investors do not need to take when Barclays and Santander both issued at 9.625%.


The two new bonds have traded extremely well since launch with the yields on both dropping to around just 8%. (ZH)


ZH – contributor: Zinzan Hunter – Naisbitt King Asset Management Investment Analyst


Regards


Trevor Cooper FCISI

CIO Naisbitt King Asset Management

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