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Emerging Markets, Asia

Karen Tian, Fiona Lau

IFR 2341 - 11 Jul 2020 - 17 Jul 2020

ESG credit derivatives make slow start

Trading in ESG-friendly credit derivatives has got off to a slow start, with only a handful of contracts of the iTraxx MSCI ESG Screened Europe index changing hands since its launch in late June. There is no volume or position data on the new index in the Depository Trust & Clearing Corp’s Trade Information Warehouse, a central repository that collects data on the credit-default swap market. That indicates there were fewer than 10 contracts outstanding across the entire market after the first two weeks of trading. Funds focused on investing in companies that meet certain environmental, social and governance standards have grown markedly in recent years to almost US$790bn, according to Morningstar. Bond traders believe IHS Markit’s ESG-friendly CDS index, the first widely available sustainable CDS product, can serve as a useful tool for such investors. But the muted take-up so far underlines the challenges facing new products in gaining traction – even in this increasingly popular corner of finance. “The overall market interest has been lower than we thought it would be,” said Jasdeep Singh Aneja, head of European macro credit trading at Goldman Sachs. “From what we understand clients are keen to see liquidity develop before they commit to it." Europe accounts for 80% of the assets in ESG funds globally, according to Morningstar, with about US$170bn of those focused on fixed income. The iTraxx MSCI ESG Screened Europe index began trading on June 22 after its planned launch date in March was delayed amid wider market turmoil. It is an adapted version of the iTraxx Europe Main index – the CDS benchmark for European investment-grade corporate debt – referencing the CDS of 81 of the 125 companies in that index. The original iTraxx Main index is one of the most frequently traded products in credit markets, with average weekly volumes of US$40bn in the first half of the year. By contrast, only about US$30m to US$50m of the ESG version of the index had traded about 10 days after its launch, according to one source. Six banks are currently quoting prices: Bank of America, Barclays, BNP Paribas, Deutsche Bank, Goldman Sachs and JP Morgan. Citigroup and Credit Suisse are applying to become market-makers, while Morgan Stanley is supportive of the initiative and is monitoring it closely, according to sources familiar with the matter. “We are confident activity could grow – it's extremely early days,” said Olivier Renart, global head of credit trading at BNP Paribas, who said his firm had done a few client trades. "The main interest is coming from institutional clients with ESG mandates. I believe they will use it just as they use normal CDS indices: to hedge, to quickly ramp up risk when they have inflows or to manage leverage." SELECTION PROCESS There are three separate screens used to exclude companies from the original iTraxx Europe Main based on MSCI’s research to create the new ESG index. The first is to remove companies prominent in certain sectors, such as tobacco and armaments. Others are more subjective, such as using MSCI’s ratings to judge how ESG-friendly a company is. Credit spreads on the ESG index trades about 10bp tighter than the Main index, outperforming in particular during times of market stress, according to analysis from JP Morgan's credit research. Overall, the ESG index has a higher exposure to telecoms companies and a lower one to banks than its forebear. But there are notable differences even within sectors: BBVA, BMW and BT all make the ESG cut; Banco Santander, Daimler and Deutsche Telekom don’t. This selection process is one potential stumbling block for investors given many have their own ESG selection criteria. “It is a challenge. There is not one universally accepted gold standard of what an ESG methodology should look like. It varies from investor to investor,” said Wolfgang Bauer, a fund manager at M&G I

Christopher Whittall

IFR 2341 - 11 Jul 2020 - 17 Jul 2020

After record debt binge, investors take stock of corporate America

US corporates have issued record-breaking amounts of debt in recent months to help weather the financial impact of the coronavirus pandemic, but investors remain largely upbeat on the long-term outlook for credit quality as the market heads into what is expected to be a bleak second-quarter earnings season. Investment-grade companies have taken on a record-setting US$1.22trn of debt in the first half of this year, but credit analysts and bankers believe borrowers have a sufficient number of levers to pull to begin paying it off next year. For example, companies are putting off acquisitions and cutting buyback programmes in a sign they will use the cash for debt reduction, according to asset management firm Columbia Threadneedle's analysis of 170 US-based companies. The firm estimates that group of companies will spend US$180bn on buyback programmes this year, down from expectations of US$270bn at the start of the year. Additionally, those companies are expected to raise just US$100bn for acquisitions down from earlier estimates of US$250bn. Buyback, dividend and acquisition spending all have room to be cut further, which would add to a US$1trn cash stockpile and US$600bn in available credit lines among such companies. "It's not like these companies borrowed all this money and it disappeared; most of it is just sitting in cash," said Tom Murphy, Columbia Threadneedle's head of investment grade credit. "Some of it will be used for higher operating costs and personal protective equipment, but it's there to be paid back when management teams and everyone feels better about the Covid-19 situation." Additionally, about one third of issuance in the year to-date was driven by a need to address upcoming maturities in late 2020 or into 2021, said Meghan Graper, head of US investment grade syndicate at Barclays. Some issuers are tendering debt early, some are just keeping cash on hand to pay off bonds at maturity, and others are terming out their commercial paper borrowings, she said. "The short-dated nature of commercial paper means you are in constant refinancing mode, so terming out to long-dated bond maturities has proven to be an effective strategy to mitigate that more imminent funding need," Graper said. HIGH-YIELD In the high-yield market, there are bigger pockets of concern in certain sectors such as the energy and leisure industries. But a similar wave of new debt issuance – US$224.4bn in the year to-date, a 68% increase on the same period last year, according to IFR data – has been broadly met with positivity by most investors. "Right now, we view it as prudent liquidity enhancement," said Adam Spielman, head of leveraged credit at PPM America. "I think the borrowers are doing the right thing and we're comfortable funding some of that. But it has to be a business model that we think can operate with that higher debt load through 2021." Like their investment-grade counterparts, junk borrowers are also seen to be using new bond issuance to pay down near-term debt maturities and put some cash on the balance sheet. "The market is not accepting pure leveraging events such as holdco dividend deals," said Leland Hart, co-CIO at asset manager Alcentra. UNCERTAIN TIMES The big uncertainty is how consumer habits may change as economies emerge from lockdown measures and what impact this will have on company revenues across different sectors – and ultimately their ability to service their debt loads. Lodging, hospitality, leisure and gaming companies are broadly seen as the most vulnerable to changes in consumer habits. Receptive capital markets have helped many of these companies bridge liquidity needs for the next 12–18 months – but with high-cost debt. And if consumer behaviour is changed for the long term – less eating out, fewer flights, and fewer cruises, for example – investors expect debt restructurings and defaults to climb. Fitch said in a June 30 report that while recent debt issuance i

Americas

David Bell, William Hoffman

IFR 2341 - 11 Jul 2020 - 17 Jul 2020

After record debt binge, investors take stock of corporate America

Americas

David Bell, William Hoffman

IFR 2341 - 11 Jul 2020 - 17 Jul 2020

Rocket rides mortgage refi boom to US$3bn-plus IPO

Rocket Companies, the parent of Rocket Mortgage and Quicken Loans, the largest underwriter of residential mortgages in the US, has filed for what is expected to be a US$3bn-plus IPO, making it the largest float in the US this year. Sizing of the all-secondary offering is still tentative, with US$3bn viewed as a starting point to a larger deal that would value the company at roughly US$50bn, bankers involved in the offering process told IFR. The plan is to launch the deal late this month or early next pushing pricing into the traditional summer holidays, according to the bankers. "[Rocket] operates in a volatile corner of the market and the buyside is not going to be blind to that," said one banker. "They are always going to make money. In some years, it's going to be a ton of money and in others less than a ton. "Investors are going to have to decide whether they want to be along for the ride and how much they are willing to pay." SETTING RECORDS Rocket, founded in 1985 by Daniel Gilbert, who remains chairman and majority owner, is looking to go public amid a boom in refinancing as homeowners lock in mortgages at historically low rates. In the first three months of 2020, the company churned out a record US$919.6m of adjusted Ebitda on adjusted revenue of US$2.1bn. Momentum has continued with record origination volumes in April, May and June, the company said in the offering prospectus without providing specific numbers. Amid massive stimulus programmes to sustain the US economy through Covid-19, the average rate on a 30-year mortgage has declined from 3.74% entering the year to 3.07% currently, according to Fed data. Rocket, already the largest originator of home mortgages in the US with a 9.2% share as of March 31, should continue to grow market share in what is a US$2trn-plus market. "They've grown from low-single digits to, call it, 10% market share in the past decade," said a second banker. "Some of the [syndicate bank] analysts are projecting that share to grow to 15% or 20%. "They are putting the valuation at US$50bn-ish." Goldman Sachs, Morgan Stanley, Credit Suisse, JP Morgan, RBC Capital Markets and Siebert Williams Shank will act as joint bookrunners. YIELD OR GROWTH? The offering is all-secondary, topping up the significant dividends paid in recent years. The 58-year-old Gilbert, who also owns the Cleveland Cavaliers basketball team, suffered a stroke last year, probably contributing to the decision to take the company public. Gilbert, who will retain 79% voting control, has harvested US$2.1bn through dividends over the past three years alone. In addition to US$212.8m distributed in the March quarter, Rocket expects to pay a special distribution ahead of the public offering. "I don't know how specific the company wants to get about it," said the second banker. "But it would not be the first time you have a founder that had a major life event that crystallised their thoughts and feelings to ensuring the long-term stability of the organisation." As currently structured, Rocket will not pay a dividend as a public company, though that could change, the bankers said. "There are still a number of things we have to decide in terms of size, valuation and the dividend," the first banker said. "We are already getting a ton of reverse inquiry, which will help inform our thinking." Underlying Rocket's explosive growth is an online platform that has engendered high customer loyalty, with a 75% retention rate this year compared with 20% for competitors. In the first three months of 2020, Rocket originated US$51.7bn of mortgages, versus US$145bn in all of 2019. Rocket funds that lending through nine bank loan facilities totalling US$16.25bn, seven of which are with large global institutions and two with government-sponsored enterprises, before selling off exposure into the market. So far in 2020, it has retained mortgage loans on its balance sheet for an average of eight days and 92% are conforming loans that can be readily sold i

EQY

5 min read

Americas

Stephen Lacey

IFR 2341 - 11 Jul 2020 - 17 Jul 2020

BBVA ushers in green AT1 under investors' sceptical gaze

BBVA put a new spin on Additional Tier 1 debt last week, bringing the first such bank deal with a green label, although the groundbreaking €1bn perpetual non-call 5.5 year transaction met with considerable scepticism from investors. Since the inception of the green asset class, financial issuers in Europe have been pushing the boundaries of the product by issuing debt instruments such as senior non-preferred or even Tier 2. BBVA took the green concept a step further by assigning the label to the riskiest type of debt a bank can sell. The move was met with raised eyebrows among traditional AT1 buyers, some deeming it a marketing ploy on the part of the Spanish lender. "It feels like a bit of a gimmick to me. Why use relatively expensive AT1 to fund a sustainable investment portfolio when you could do it with senior," said one investor, adding that the deal may nonetheless attract "tourist" ESG investors to the AT1 market. Gildas Surry, a partner at investment management firm Axiom, agreed with this view. "I am sceptical on the green aspect and the fungibility of capital. People are talking about green; it's more light-green to me," he said. "A number of issues can arise in the ring-fencing of the proceeds for the financing of green projects. For us, the green format doesn't really make a difference at this stage, we're looking at the deal on its own fundamentals." He said that the green label also sent a conflicting message relating to upcoming calls of other AT1 instruments, referring to the fact that the bank has said that the bond's proceeds may be used to refinance the potential early redemption in April 2021 of AT1 notes issued in 2016. "They can't really say it's to refinance a non-green AT1 and then tell investors it will be deployed to finance green projects," Surry said. A bank spokesman said that tenor of green transactions do not currently need to match the maturity of underlying assets that the proceeds are invested in. "We can combine an AT1 host instrument with our commitment and capability to reinvest in eligible green projects," he said. "We have to dissociate the nature of the instrument." 'LOOSELY WRITTEN' BBVA has €2.9bn of eligible green assets in a portfolio earmarked for the AT1 proceeds. But this too raised questions. "The prospectus is a bit loosely written," said Filippo Alloatti, a senior credit analyst at Federated Hermes. "For example, it says 80% of the proceeds will be used to finance green projects or to finance companies involved in the green economy. Only time will tell and the proof of the pudding will be in the eating." Bankers also expressed doubts around how green the bond could be. "One of the questions is, if they don't have green projects to finance and the deal comes up for call, is this perceived as an incentive to redeem?" one banker asked. "I think that's definitely something of a greyer area." Another banker went further. "This opens up a whole new set of risks," he said. "Some borrowers are worried this could backfire and think it could take the green market back years and makes a bit of a mockery of the concept. A lot of issuers have been reluctant to do anything more subordinated than senior non-preferred for fear of alienating investors." He added that there was also a risk of the bonds ending up in the "wrong" hands, such as investors not equipped to analyse the complexities and risks inherent in such deeply subordinated bank capital products, That view was echoed by Alloatti. "Investors need to understand the subordination – the fact that they can lose a coupon – and those who buy it need to be aware of the features," he said. "I don't think financing green assets will be an issue, as green is here to stay – that's the least of our worries." REBUFFED For BBVA, which in 2018 became the first Spanish bank to bring a green senior non-preferred, the transaction aims to reinforce its commitment to the green bond market. The bank has committed to mobilise

EMEA

Helene Durand

IFR 2341 - 11 Jul 2020 - 17 Jul 2020

Rocket rides mortgage refi boom to US$3bn-plus IPO

EQY

5 min read

Americas

Stephen Lacey

IFR 2341 - 11 Jul 2020 - 17 Jul 2020

US-China tensions hang over banks in Hong Kong

Banks are scrambling to assess the implications of a US law that would impose sanctions on parties closely involved with the imposition of China's national security legislation in Hong Kong. The Hong Kong Autonomy Act was passed by Congress on July 2 and may be signed into law by President Donald Trump this week. It is widely expected to target a limited number of senior government officials in China and Hong Kong, but could be used to apply wide-ranging sanctions and penalties. Bankers and lawyers were busy evaluating possible scenarios last week, including the worst case in which they would be forced to sever ties with numerous clients, three sources familiar with the deliberations told IFR. Several banks are drawing up contingency plans, which include reviewing existing client relationships to determine how difficult it would be to sever those and what impact it would have on their bottom lines. "When examining how their operations might be impacted, financial institutions should take into consideration the broadest possible range of potential sanctions," said Nick Turner, a lawyer specialising in sanctions and anti-money laundering at Steptoe and Johnson in Hong Kong. "The way the law is written, the State and Treasury Departments do have discretion in how they apply the sanctions, the specific transactions that might be covered by them, whether there might be thresholds, etc.”EXPANSIVE INTERPRETATION The HKAA states that, within 90 days of the bill being enacted, the Secretary of State must draw up a list of foreign entities and individuals that have contributed to what the US deems the erosion of Hong Kong's autonomy. Between 30 and 60 days after the initial report is delivered to Congress, the Treasury Secretary has to draw up a similar list of foreign financial institutions that continue to carry out any "significant transaction" with those singled out in the first report. The potential sanctions for those in the first report range from freezing assets to revoking visas, while those for foreign financial institutions are more extensive. They include a ban on carrying out foreign exchange transactions in the US and acting as primary dealers in US government debt. US banks, though only mentioned once explicitly in the act regarding loans to sanctioned foreign financial institutions, would be barred from dealing with any sanctioned individuals or entities. Several sources expressed concern that banks applying US sanctions could also breach Hong Kong's new national security legislation, which refers to sanctions in a clause outlawing collusion with foreign forces against China or Hong Kong. Banks might effectively be forced to choose between obeying the US law on sanctioned individuals and Hong Kong law on not cooperating with US sanctions. As the Hong Kong law has an extra-territorial aspect, it will only partially relieve the dilemma if decisions are made by those working for banks outside Hong Kong or China. Bankers said it was far from fanciful to suggest that banks might have to choose between being barred from the US dollar system, on the one hand, or having their licence to operate in Hong Kong revoked, on the other. "Banks and other financial institutions are understandably concerned about whether they will be able to comply with the foreign sanctions that apply to them," said Turner. "As with the US sanctions, everybody is waiting for clarification from the relevant Chinese and Hong Kong enforcement authorities to understand whether complying with those sanctions risks violating the national security law.” The impact of the sanctions will likely hinge on how narrow a view the US government takes of the persons responsible for what it construes as undermining Hong Kong's autonomy and what constitutes a "significant transaction" carried out by any foreign banks they deal with. Market observers expressed concerns about what the implications would be if the government took a more expansive interpretation o

P&M

8 min read

Emerging Markets, Asia

Matthew Davies, Thomas Blott

IFR 2341 - 11 Jul 2020 - 17 Jul 2020

BBVA ushers in green AT1 under investors' sceptical gaze

EMEA

Helene Durand

Bonds

UPDATE 1-PTT prints Asia's first 50yr US dollar corporate bond

Adds colour State-owned Thai oil and gas company PTT, rated Baa1/BBB+/BBB+, has raised US$700m from a 50-year bond that is Asia's first US dollar corporate bond offering at that tenor and the longest corporate bond from Asia ex-Japan since 1997. The 144A/Reg S/3(c)7 bond, with expected ratings of Baa1/BBB+ (Moody's/S&P), priced at par to yield 3.7%, inside initial guidance of 4.15% area, after receiving final orders of over US$1.9bn from 122 accounts. "The 50-year was not a natural tenor with some Taiwan life insurers saying it's too long and the sheer number of investors being smaller," said a banker on the deal. Despite the difficult tenor, the banker said there was a negative new issue concession of 15bp, after referencing PTT Exploration and Production's 2059s that were trading at a bid yield of around 3.7% on the day the new bonds were priced. The new issue came after Indonesia printed a US$1bn 50-year sovereign bond at a yield of 4.5% in April. In Thailand, PTT's 65%-owned subsidiary PTTEP priced a US$650m 40-year note in November last year, while in Malaysia state oil company Petroliam Nasional returned to the US dollar bond market in April for the first time since 2015 to extend its curve to 40 years. Some names outside South-East Asia also tapped the international bond market earlier this year, including Tencent, which priced a 40-year note in a multi-tranche jumbo deal. The long-end supply from investment grade borrowers has played a key role in reopening markets after the March lull due to the coronavirus pandemic, according to a banker away from the new deal. "It reflects how much the market has matured since the last crisis where most investors' interest was short-dated versus the long-end domestic real money investors we now see." RARE CREDIT The Thai oil borrower was able to go long for an opportunistic transaction, benefiting from historically low rates, on the back of its rarity and strong credit. The last time PTT visited the international bond market was in 2012 when it priced a two-tranche offering of 10 and 30 years. Its largest shareholder is the Thai Ministry of Finance, which owns 51.1% of the company, while the government-invested Vayupak Mutual Funds owns a further 12.2%, according to Moody's. Its Baa1 rating is on par with the Government of Thailand. The new senior unsecured note was trading slightly wider in secondary on its first trading day on Friday, in line with the overall market that saw share prices drop on concerns over a resurgence in coronavirus cases. Wholly owned subsidiary PTT Treasury Center is the issuer and PTT is the guarantor. There is a change of control put option at par. Proceeds will be used for general corporate purposes, including financing capital expenditure, working capital and loans to entities within PTT Group. Asia took 65%, EMEA 21% and the US 14%. Asset managers and fund managers booked 49%, insurers and pension funds 48% and banks, private banks and others 3%. BNP Paribas, Citigroup, HSBC and Standard Chartered Bank were joint lead managers and bookrunners.

3 min read

Global

Jihye Hwang

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"SUCCESSION" IS THE award-winning TV comedy-drama loosely based on the Murdoch media dynasty. It’s also a word that cannot be mentioned over at Barclays, which is on the look-out for its next CEO. The process is all very hush-hush, although the bank has appointed Spencer Stuart, a firm of executive headhunters. SS is not – repeat, not – looking to find a successor to Jes Staley. No – it is simply conducting a “market mapping exercise” – which presumably involves taking a map of Italy and sticking a pin in the UniCredit headquarters in Milan with Jean Pierre Mustier’s name on it. Easy. IT’S TOUGH TIMES for HSBC France, with the bank telling staff of plans to cut almost 40% of its Paris-based global banking and markets unit, which used to be called Credit Commercial de France. One of CCF’s most successful bankers was Samir Assaf, who stepped down as head of GBM at HSBC in February. Without Samir’s protection, it appears the unit is now fair game. Sources say the brunt of the pain in global banking will be felt in equity capital markets, which is run by Cyril Revenu, not a great surname to have when you’re running a struggling ECM franchise with falling, err, revenues. DEUTSCHE BANK IS also cracking on with job cuts – with customary German efficiency. CFO James von Moltke told the FT the “glide path is something like a thousand heads per quarter”, a rather clinical choice of words that is out of step with the more empathetic stance struck by rivals during the Covid crisis. Meanwhile, for Christian Sewing it’s a case of two steps forward, one step back. On July 7, Deutsche’s CEO saluted the progress made by the bank on the first anniversary of his big restructuring, but any plans to celebrate at the local branch of Pizza Express were put on hold as Deutsche announced it was paying US$150m in penalties for compliance failings in its dealings with late “financier” Jeffrey Epstein. Sewing was admirably frank in acknowledging Deutsche’s historical failings, and it seems churlish to criticise Germany’s biggest lender – not when its smaller rival Commerzbank is currently a far easier target. Dubbed “Comedy Bank” by unkind souls, no-one was seeing the funny side as the double act of CEO Martin Zielke and chairman Stefan Schmittmann said they were hanging up their clown shoes. The duo fell foul of Cerberus, which also owns a stake in Deutsche and had a sense of humour failure over Commerzbank’s plummeting share price. Cerberus accused the bank’s management of “negligence and arrogance” and wants a radical new strategy – or presumably it’s going to get even crosser. Now Deutsche is threatening to test its patience further after Sewing said the bank is “obligated” to find a way to help Wirecard Bank, the transaction banking wing of the collapsed German payments firm. Time for Cerberus to start breaking things – or book into anger management classes. UBS-BOUND RALPH Hamers is the closest thing European banking has to a rock star, so perhaps it was fitting that ING gave him a televised send-off on YouTube. The approach was in keeping with a comedy roast, although there was no sign of Ricky Gervais weighing in with bad-taste gags. Instead, Hamers was treated to a gentle grilling by broadcaster and executive coach Rene Carayol, interspersed with video messages from colleagues past and present. Former CFO Koos Timmermans recalled cycling the Tour de Benelux with Hamers, remarking that they let the boss win, but left him “more dead than alive”. Another former colleague warned UBS staff they are in for a shock when it comes to targets – Hamers likes to cut deadlines in half to challenge people to think differently. They shouldn’t worry – don’t forget, its investment bank used to be run by Andrea Orcel.

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IFR hosts a comprehensive programme of conferences, seminars and roundtables throughout the year, providing authoritative insight into the trends and outlooks for specific regions and asset classes.

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Access a digital replica of IFR's print magazine, updated each Friday. Plus regular Special Reports and Roundtables, covering industry themes and trends.

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