The major story overnight is the move on the futures contract for West Texas Crude due to expire today (May delivery) that fell into negative territory hitting a low of negative $40.32 a barrel. This underlines the deepening crisis in the oil industry as physical demand dries up and available storage space shrinks. A 3.7% slump in energy stocks headed 2.4% and 1.80% declines in the Dow Jones and S&P 500 respectively, while the Nasdaq Composite held up better with a 1.03% slippage. Markets this morning are opening lower on this poor sentiment with Asian stocks down 0.5%-1% and US index futures lower by the same amount. Asia ex-Japan IG CDS spreads also widened 4bp to 117bp. The US investment-grade CDS spread rose 6bp to 93bp. Europe’s main and crossover CDS spreads widened 3bp and 21.5bp to 85bp and 507bp respectively.

New Bond Issues

HK Downgraded from AA to AA-; ICICI Bank Outlook Negative; Shriram Transport Fin Downgraded

Fitch Ratings has downgraded Hong Kong’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to AA- from AA. The Outlook is Stable. Government and society-wide social distancing efforts to contain the virus’s spread have led to a contraction in economic activity and rise in unemployment. These challenges have compounded the negative rating trends already in place from the reputational damage that anti-government protests were inflicting on international perceptions of Hong Kong’s business environment and political stability.

ICICI Bank share price fell almost 5% intraday on April 20 after global rating agency  S&P revised the private lender’s outlook to negative from stable on the potential impact of the coronavirus outbreak. ICICI Bank is rated BBB- by S&P. S&P said it would lower the rating on ICICI Bank if the economic headwinds increase sufficiently for the rating agency to lower their assessment of India’s Banking Industry Country Risk Assessment.

S&P lowered the rating on the non-banking finance company (NBFC) Shriram Transport Finance Company  to BB from BB+ with a negative outlook. “The rating actions reflect the increasing risks that the Indian NBFCs face due to the challenging operating conditions stemming from the COVID-19 outbreak. The economic risk for Indian financial institutions is rising. The drastic efforts to curtail the spread of the coronavirus have resulted in a sudden stoppage in economic activity,” S&P Global Rating said in a statement on April 17, 2020.


Indian NBFC Dollar Bonds Rally on RBI Relief Packages and Expectations

Dollar bonds of last-mile financiers such as IIFL Finance, Manappuram Finance, Muthoot Finance and Shriram Transport Finance rallied 11%-36% from record lows in the past two-three weeks, indicating increasing appetite overseas for debt sold by Indian NBFCs. “The RBI’s timely and well calibrated measures have thrown a lifeline and stemmed the sell-off in dollar bonds issued by Indian companies,” said Hemant Mishr, founder at Scube Fixed Income, a Singapore-based fund. “Against the backdrop of an impending global recession and lingering uncertainties we see investors seeking comfort in the relative safety of bonds.” India’s central bank announced a second set of measures to boost the financing economy on Friday. The Economic Times had reported earlier that these bonds had plunged as much as 50 percent at the end of March.

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Fund Managers Warming Up to Chinese Property Bonds

Some money managers are warming up to dollar-denominated bonds issued by Chinese property developers again, after a sell-off in March pushed corporate debt in Asia to the cheapest in about a decade. New home sales are recovering, while signs of domestic demand picking up from the depth of the coronavirus-led slump suggest a nascent upturn in the bond market this month has further room to go, according to Fidelity International, which oversees about US$480 billion of assets in Asia, Europe, Middle East and South America.

UBS’s wealth management unit is favouring investment grade developers while AXA Investment Management sees value among shorter maturity notes from Chinese builders. “Nationwide sales are expected to fall this year, but (we expect) disparity between cities and developers with higher-tier cities and companies with stronger financial fundamentals likely to outperform,” Charlotte Chan, portfolio strategist of intermediary business for North East Asia, said in a note last week.

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Rupee Corporate Bond Yields Lower, But Spreads Higher

Although corporate bond yields have dropped in recent times, led by a 70bp repo rate reduction and the introduction of the targeted long-term repo operations (TLTRO) by the RBI, spreads on some of the papers have widened compared to last year. Reliance Industries (RIL) is believed to have raised close to INR 85.1 billion via a two-part bond issue having a tenor of three years — one having a fixed-rate of 7.20% while the other being a floating rate bond with a spread of 280 basis points over the policy repo rate that currently stands at 4.40%, dealers said. The yield on RIL’s three-year bonds are lower compared to March 2019 when the firm had raised INR 70 billion via a similar tenor paper at a coupon of 8.3%. The spread over government security for RIL’s 3 year bond widened to 200 bps from 142 bps in March 2019. Nabard also raised INR 25 billion via a three-year paper at 6.50% on Thursday with the spread widening from 74 bps in November 2019 to 130 bps. Tata Steel is believed to have raised about INR 10.25 billion via its 3-year paper at 7.85%.

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Next RBI Relief Round Could Focus on Bond Market

Reserve Bank of India’s relief package-2 comes on the heels of earlier announced package-1, which was relatively broader based with measures such as aggressive policy rate cuts, widening the corridor, CRR cuts, TLTRO-1, providing moratorium and other regulatory measures. Package-2, while an extension of the package-1, is much more targeted with RBI aiming to incentivize banks to lend to the sectors strongly in need of liquidity after being impacted by COVID-19 related disruptions. Senior Economist at Kotak Mahindra Bank Upasna Bhardwaj says “We continue to expect the RBI to announce more measures in the coming weeks with the next round largely focusing on the bond markets as they continue to reel under supply pressure hindering transmission.”

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Top Gainers & Losers – 21-Apr-20*

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