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  • Writer's pictureTrevor Cooper FCISI

Naisbitt King Monthly Bond Commentary November 2023


  • Metro Bank problems continue

  • Chevron’s mega deal to buy Hess Corporation

  • More bad news from Country Garden

  • Rating changes:

Ford Motor Credit

Greece reaches investment grade with S&P

Jamaica – ratings upgrade and bond buy-back

International Consolidated Airlines Group returns to investment

grade


November 2023


With global central bank interest rates once again on hold the market is looking to see if rates have indeed reached their peaks. The ECB, in the last week of October, and the U.S. Fed, the BOE and the BOJ, in the first week of November, all leaving their rates on hold it seems that the rising interest rates could have peaked. In fact, the Fed’s decision caused the yield on Treasuries to bounce. The yield on the 10-year reversed the rising level seen since the start of the Covid Pandemic in March 2020, when the yield was a now hard to believe 0.60%. Whether the rate reversal can be maintained is of course unknown, but we think there is a good chance that we have seen the ceiling. More difficult to determine is how long it will take before we see rates coming down. The inflation demon hasn’t gone away so we will see if it causes more central bank tightening in the future.


October saw the 10-year Treasury bond toying with the 5% level, the highest since 2007. Many investors saw the 5% yield as a buying signal, so it quickly bounced from that level to end the month at 4.92%. Incredibly since the end of the month, and after the Fed’s rate pause, the yield has dropped to 4.65%.


We have been saying for some time that the past couple of years have been a most difficult period for bond investors. In fact, strategists at the Bank of America recently said they saw records of U.S. bond market data going all the way back to the founding of the nation showing that never before has there been such an extended period of losses like the past three years. Apparently it seems possibly that, as best as can be determined, it could have been the worst selloff of Treasuries since 1787!


Metro Bank problems continue

NKAML has never held bonds of Metro Bank PLC, the UK retail bank, but it has been interesting to see how the UK challenger bank has dealt with its dire situation. At its foundation in 2010 it was the first high street bank to launch for 150 years. Its publicly issues shares were first launched in March 2016. The bank has never paid a dividend to its shareholders. By 2018 its shares started to fall rapidly. By early 2019 it announced it had insufficient capital to meet regulatory requirements, as a result, it had to raise an additional £350m of new capital. Now, in a repeat of that situation, MetroBank has had to raise further capital. The new package consisted of a £325m capital raise and £600m of debt refinancing. The fresh capital is provided primarily by existing investors and involves £150m of new equity and £175m of new bail-in bonds due in 2028. Also, as part of the deal, the bank’s senior notes due in 2025 will be extended to 2028, with a step up in coupon to 12%, the statement said. The lender will also issue additional £175m of these new senior notes due in 2028, with the backing of existing investors. When the restructuring package was announced in early October the prices of their bonds bounced from their previously extremely depressed levels. Its senior bond, which had been trading around the late 50’s in price, have recovered to the high 80’s. We await further developments but will continue to avoid the credit.


Chevron Corporation surprises investors with a $53bn all-stock acquisition of Hess Corporation, strengthening its position in the fossil fuel market. The deal includes access to Guyana's oil resources and bolsters Chevron's position in the U.S. shale sector. Chevron's purchase of Hess is expected to generate synergies, increased cash flow, and a shareholder-focused financial strategy. The acquisition will give Chevron a significant foothold in Guyana, the South American country that is one of the world’s newest oil producers. It will enable faster production growth and more generous returns to investors, according to the statement. Chevron is extremely highly rated at Aa2/AA-, both stable, whereas Hess is rated Baa3/BBB- stable.


Chinese developer Country Garden has now been deemed to be in default on a dollar bond for the first time ever, underscoring its fall into distress amid a broader property debt crisis that’s shaken the world’s second-biggest economy. Country Garden’s failure to pay interest on the note within a grace period that ended a couple of weeks ago “constitutes an event of default,”. That means the trustee must declare principal and interest due immediately if holders of at least 25% in aggregate principal amount of the notes outstanding demand it. There is no indication that creditors have made any such demand yet. All of Country Garden’s bonds have crashed in price the last few months to almost worthless.


Shares and bonds in China’s other mega property developer Evergrande Group, that filed for bankruptcy in August this year, have defaulted and are now trading at next to worthless.


New issues

October saw a total of $81.75bn investment grade bonds issued, against previous estimates of around $85bn. The slower pace of issuance compared to past October’s came as companies entered earnings-blackout periods, as geopolitical tensions intensified around the Israel-Hamas conflict and the concerns about persistent inflation, shook the rates market. In early October, the average U.S. investment-grade yield surpassed last year’s high of 6.13%, a level last seen in 2009. We see higher yields remaining for some time but there seems to be there is a growing acceptance of the unknown, as much as there is a growing acknowledgment that higher rates are not just a temporary phenomenon. The forecast around $90bn of issuance for the month — higher than October, but still below the $108bn average for the month of November.

French banking giant BPCE, the country’s second largest bank, launched a $4bn 4-part senior non-preferred fixed to floating rate bond deal. All the tranches were subscribed by over two times and ranged from 3 to 10 years and are rated Baa1/BBB+ both stable outlook.


U.S. company Energy Transfer, which owns and operates a portfolio of energy assets. The Company engages in the operations such as transportation, storage, crude oil, refined products, and liquid natural gas. In Mid-October Energy Transfer launched a 4-tranche deal raising $4bn from a healthy $17.8bn orderbook. All the senior unsecured tranches, which ranged from 3 to 10 years, were rated at Baa3/BBB/BBB- positive/stable/positive.

One of the larger new bond deals during October was for American food and beverage packaging company JM Smucker Co. The orderbook for the $3.5bn 4-part issue reached a total of $18bn at its peak. The cash raised will be used, in part, for their $5.6bn purchase of Hostess Brands. The new 5, 10, 20 and 30-year fixed rate senior unsecured bonds were all well supported but the two longest tranches were the most popular covered 5.6 and 5.9 times respectively. Smucker is rated Baa2/BBB, stable/ negative.



Rating changes


Ford Motor Credit

Ford has now been upgraded to investment grade by a second ratings company. In September the car company was raised to BBB- from BB+ by Fitch but by the end of October S&P had also boosted its ratings to the same level. Both agencies have the outlook at stable. In a statement S&P highlighted the company's cash balance of about $29bn at the end of September, overall liquidity of about $51bn, and said that gives it ample leeway to compete in its end markets. Ford has "also addressed its overcapacity and higher costs in Europe and completed restructuring its loss-making South American operations by shifting the business toward a more profitable asset-light model," said S&P. Ford has about $72.4bn in outstanding bonds, with the bulk of that total, about $15.9bn worth, due to mature in 2026. Moody’s still rate Ford one notch below investment grade at Ba1 with a stable outlook. Given that Ford bonds now carry an investment grade rating from more than one rating agency it opens the credit to purchase to a wider range of investors.


Ford took the opportunity to raise more debt after the ratings upgrade. The motor company launched $1.5bn 5 and a $1.25bn 10-year senior unsecured bonds.


As one of our upgrade choices added to a number of portfolios earlier this year we are delighted to see the investment thesis play out as anticipated.

Greece reaches investment grade with S&P

Standard & Poor’s upgraded the Hellenic Republic into investment grade level. The last time Greece was rated at this level was in 2010. Raising it’s rating from BB+ to BBB- with a stable outlook the agency said that significant budgetary consolidation has placed Greece's fiscal trajectory onto a firmly improving track. S&P estimates the Greek net government debt stock will fall to about 146% of GDP by year-end, which would represent a marked improvement from the peak of 189% of GDP in 2020. Elsewhere the country is rated Ba1/BB+ both with a stable outlook.


Jamaica – ratings upgrade and bond buy-back

In the past couple of months, the ratings of Jamaica have been upgraded by both Moody’s and Standard & Poor’s. Moody’s lifted the Caribbean country by one notch to B1 raising its outlook to positive from stable. The highest in 20 years. Moody’s said “Given the improvements in institutions and governance strength, additional declines in Jamaica’s debt and interest burdens would support a higher rating,” according to Moody’s analyst David Rogovic. Already, “the reduction in government debt, along with progress on structural reforms, has increased the economy’s overall shock absorption capacity.” This was the nation’s second credit-rating upgrade from S&P in just over a month. In mid-September S&P raised Jamaica’s score by a notch to BB-, three levels into junk. Fitch Rates Jamaica a notch lower at B+, with a positive outlook.


Now Jamaica has hired banks to arrange investor calls for a new local currency bond, and for its offer to buy back its two 2025 and one 2028 dollar bond, with holders of $262m accepting the offer.


International Consolidated Airlines Group returns to investment grade

The owner of British Airways, Aer Lingus and Iberia, International Consolidated Airlines Group (IAG) was returned to an investment grade level when S&P raised its rating on the company to BBB- from BB+, with a stable outlook. S&P downgraded the company rating to a high yield level of BB soon after the start of the Covid pandemic in May 2020. Moody’s also pushed their rating to Ba2, then to B1, where it currently resides. It has however placed its outlook on the company to positive in July this year. In 2020 IAG also cancelled its dividend. This upgrade to its credit rating will allow IAG to raise future funds at lower cost, and provide a signal to the markets that its a safer investment. Many carriers saw their credit rating slashed during the pandemic, but 2023 has seen travel demand decisively return, particularly on long-haul routes.



Regards

Trevor Cooper FCISI

CIO Naisbitt King Asset Management

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