Asian stocks are opening lower by 2-2.5%, following a fall in the US equity markets on Friday. The S&P 500 closed 3.7% lower on Friday, while its futures continue to trade lower by 1.2% on Monday morning. This was driven by unemployment claims of 3.84mn taking the 5-week total to over 30mn, a 7.5% drop in US consumer spending in March and heightened tensions between US and China. US Secretary of State Michael Pompeo said “enormous evidence” shows that the coronavirus outbreak began in a laboratory in Wuhan, China, but he didn’t provide any proof for his claims. This comes after President Donald Trump and his aides sharpened their criticism of Beijing, demanding answers about the virus’s origin and hinting at possible retaliation. Oil prices traded lower with the US West Texas Intermediate (WTI) crude futures falling 7.6% to $18.27/barrel. Risk off sentiment seems to have kicked in as the 10-year Treasury yield fell by 1bp to 0.61%. CDS spreads widened for US, Europe and Asia-ex Japan by 3.5bp, 5.7bp and 3.2bp respectively.

New issuance remains strong with Boeing raising $25bn in the 6th largest investment grade deal ever. Since the WHO declared the coronavirus a pandemic on 11 March through 27 March, corporates have raised $265bn in new debt, which is 2.45x the amount raised during the same period last year. This excludes the new Boeing deal.


New Bond Issues

  • Hutama Karya $ 10yr @ 4.25% area

Boeing Raises $25 Billion via 2020’s Largest Bond Sale Yet

Chicago-based US planemaker Boeing successfully raised $25bn via a seven tranche bond deal with maturities ranging from 2023 to 2060. The company had planned to raise between $10-$15bn via a bond sale but upsized the offering on the back of strong investor demand. $75bn worth of orders poured in for the new bonds due to a number of reasons: (a) Government support for Boeing on grounds of it being vital to national security, (b) $17bn stimulus announced by the Fed for companies critical to national security, (c) Premium offered on the new bonds, and (d) Concessions in the form of higher interest in case of downgrades into junk category. Boeing offered to raise interest payments by 25bp each time the two largest credit rating agencies downgrade its rating by one level to junk. The concessions are capped at 100bp per rating agency and 200bp in total. The table below shows details of each tranche.

As can be seen, Boeing paid handsomely on all seven tranches. It last raised 5Y and 10Y bonds in February 2019, when it offered a spread of 47bp and 85bp over Treasuries at the time of issuance, respectively. In comparison, the recent issue offers a spread of 450bp over Treasuries on both the 5Y and 10Y bonds. It last raised 30Y bonds in May 2019, when it offered a spread of 107bp over Treasuries at the time of issuance. The recent 30Y tranche offers a spread of 450bp over Treasuries. The premium on the new 5Y, 10Y and 30Y bonds stand at a whopping 403bp, 365bp and 343bp respectively, compared to its last issue..

Prior to this issuance, Boeing’s debt stood at $39bn as of end of March. The large capital raise will help the company to avoid taking government-aid, which came with its set of strings including a possible equity stake in the company that would result in dilution for its existing shareholders.

For the full story, click here


Bond Markets Recover in April Following a Dreadful March

The month of April saw a rally in bonds across the board as 69.2% of bonds in our universe delivered a positive price return (ex-coupon). This follows a dreadful month for the bond markets as 92.2% of bonds in our universe fell in price terms in March. The rally in April was led by lower rated bonds, which took the most beating in March, as stimulus measures pushed junk bond prices higher. The below chart shows the monthly change in bond prices for February, March and April – by credit rating, and the median change for each rating and month in the table below the chart.


JLR Downgraded to B by Fitch

Fitch has downgraded Jaguar Land Rover Automotive Plc’s long term IDR rating to B with a negative outlook from a rating of B+ with a stable output. It has also downgraded the long term unsecured debt rating to B from B+. JLR manufactures premium cars and competes with the likes of Mercedes, BMW and Audi. Unlike the German car manufacturers, JLR is much smaller with a limited product portfolio which does not allow it the advantages of economies of scale at the same level as its competitors. Fitch expects that the current low profitability and weak free cashflows would further weaken due to the negative impact of the novel coronavirus. This is despite the fact that JLR has taken actions like suspending production at its factories and sending staff on furlough to limit the affects of the pandemic. Fitch’s methodology for rating links the Parent and Subsidiary and the lower rating of JLR is aligned with Tata Motors Limited rating of B-.

For the full story, click here


China South City & Fufeng Group Buys Back Bonds

China South City Holdings, which develops and runs logistics and trade centers, repurchased 3 of its dollar bonds to improve its debt structure. The B-/B rated company bought back $39.9mn of its 10.875% bonds due August 2020, $9.6mn of its 7.25% bonds due January 2021 and $8.5mn of its 11.875% bonds due March 2021, according to IFR data.

Hong Kong listed maker of food additives, Fufeng Group bough back $13.53mn worth of its 5.875% bonds due August 2021. The BBB-/BB+ rated issuer has repurchased a total of $94.654mn worth of these bonds, which represent 27% of the $350mn it raised August 2018.


Saudi Arabia Outlook Cut to Negative by Moody’s

Moody’s cut Saudi Arabia’s outlook from stable to negative on the back of declining reserves amid the crash in oil prices and the pandemic. The rating agency kept its rating unchanged at A1. “The negative outlook reflects increased downside risks to Saudi Arabia’s fiscal strength stemming from the severe shock to global oil demand and prices triggered by the coronavirus pandemic,” Moody’s analysts led by Lucie Villa wrote. “A sharp slowdown in GDP growth will also depress revenue from the non-oil sector.” The country’s central bank’s net foreign assets fell by over 5% (~$27bn) in March alone.

For the full story, click here


India’s Stimulus Package vs Sovereign Credit Rating

The world’s fifth-largest economy has had probably one of the strictest lockdowns in the world. However, these lockdowns come with a price to the economy. The economy has slowed down and the 40-day lockdown has adversely effected corporates, which has resulted in increase in the unemployment numbers. The tax collection is likely to reduce, privatization plan could be delayed and the pandemic calls for a stimulus package from the government. This would result in India missing out on the fiscal deficit target of 3.5% of GDP for the current year. Similar is the situation faced by many other countries and thus all economies are under the scanner of the rating agencies. Any fiscal deterioration could put India’s rating under pressure.

The government actions during this pandemic stand to scrutiny by the credit rating agencies. Thus, the Indian government seems to be taking active measures to find a balance between the size of the stimulus package and the length of the lockdown. Keeping macro-economic interests of the country in mind, the Government of India is likely to cap its overall spending towards the stimulus package at around $60 Billion with an aim to keep the spending within limits and avoid any sovereign rating downgrade. India is rated one notch above junk by S&P and Fitch and two notches above junk by Moody’s.

For the full story, click here


Top Gainers & Losers – 4-May-20*


Bonds Beat Stocks in Terms of Returns Over the Last 20 Years – New York Times

The New York Times reported that over the last 20 years, investments in bonds including long-term treasuries, long-term corporate bonds and high-yield bonds have outperformed the stock market on a risk-adjusted basis. This analysis was based on the Bloomberg indexes from the beginning of 2000 through April 29. Here are the annualized returns:

  • S&P 500: 5.4%
  • LT Treasury Bonds (duration ≥ 10 years): 8.3%
  • LT Investment Grade Corporate Bonds: 7.7%
  • Junk Bonds: 6.5%
  • Broad Investment Grade Bond Index: 5.2%

These bond performances, however, are not likely to continue as bond yields have been on a decline. Also, such a trend is not healthy as it indicates unreliability of the assumptions about the financial markets.

For the full story, click here

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