Ukraine has won some breathing space for its battered fiscal accounts after creditors approved the sovereign's request to suspend debt payments for two years on Wednesday, although the risk of state-owned Naftogaz potentially failing with a similar proposal of its own means the prospect of a messy debt situation in the country still looms. War-torn Ukraine had sought to defer payments on nearly US$20bn in face value of foreign-currency bonds for 24 months from August 1. Separately, it had also wanted to delay payments on its US$3.2bn GDP-linked warrants due on May 31 2023 to August 1 2024 and lower the amount of GDP-related repayments. It had already secured crucial support from key official creditors, leading private bondholders, and the US Treasury for the offer before it was made public last month. Still, the outcome was far from certain. “We did a lot of work with investors beforehand and micro-managed the process," said Stefan Weiler, head of CEEMEA debt capital markets at JP Morgan, which acted as consent solicitation agent. "Therefore, we were confident it would be a success, albeit we were still nervous. We were targeting a huge amount of bonds and the significance of the project was obviously immense." Holders of around 75% of the outstanding principal amount of Ukraine’s 13 Eurobonds agreed to the sovereign's proposal, while investors accounting for more than 90% of the notional amount outstanding of the GDP-linked warrants also gave their backing. “In the very early stages some investors were trying to test the waters to see if a better deal could be achieved," said Weiler. "But as time passed, they realised they wouldn’t find enough like-minded accounts, and even they ended up voting in favour.” Constructive feedback Yuriy Butsa, government commissioner for Ukraine's public debt management, said in a statement that the sovereign's creditors were very supportive. "All the feedback was very constructive and I'm not aware of any holdouts from our key institutional investors," he said. "Hopefully, sooner rather than later we will recover from the economic shock caused by war started by Russia and we’ll come back to the market as always as a responsible and reliable issuer." But despite the sovereign's successful outcome – and for similar debt standstill requests for two other state-owned companies, public road agency Ukravtodor and utility Ukrenergo, which both have government-guaranteed bonds – the outlook still looks tough for Ukraine. Immediate worry A potential failure by Naftogaz to win approval to suspend coupon and maturity payments for two years across its three Eurobonds is one immediate concern. Naftogaz's bonds aren't government-guaranteed. But the company is a vital cog in Ukraine's economy, especially given current circumstances, and having had one offer already rejected by its noteholders, a second failed attempt would be far from ideal for itself or the government. A group of Naftogaz's bondholders represented by law firm Dechert had already said after the latest offer was announced that, while it was "sympathetic to the difficulties that Ukraine currently faces", it urged investors to vote against it. "The company remains a sustainable business operating on a sound financial footing and does not face the same types of challenges confronting Ukraine at the sovereign level," said the bondholders. The vote closed on Friday, with the outcome expected to be made public on August 17. Underlying dynamics Even if Naftogaz's offer passes – or any failure is resolved reasonably quickly without compromising the treatment of bondholders of the sovereign, Ukravtodor or Ukrenergo – all of these debt deferrals just buy Ukraine time rather than change the underlying dynamics. The sovereign's debt standstill, for example, only saves Ukraine about US$6bn over the next two years, according to Evghenia Sleptsova, a senior EM economist at Oxford Economics. In th
SoftBank Group slashed its stake in Alibaba Group Holding last week as it targeted ways to raise cash, following a massive ¥3.1627trn (US$23bn) loss in the past quarter. Founder Masayoshi Son, the man sometimes dubbed "Mr 10 Times", told reporters on Monday that he had invested in too many companies and paid too much for them, conceding valuations had formed a bubble. The loss, Son said, was largely due to the global stock market turmoil and rapid fall in the yen. The former resulted in ¥2.33trn of losses in Softbank's Vision Funds, while the latter led to a ¥820bn loss on foreign currency debts. "With the loss likely to expand further, defending its balance sheet is the priority," said Citigroup analyst Mitsunobu Tsuruo. He said the loss in the past quarter was much larger than expected. The Japanese investment conglomerate is in monetisation mode, as Son flagged six months ago. On Wednesday, SoftBank said it would settle early a derivative transaction based on shares it holds in Alibaba to give it a ¥4.6trn accounting gain before tax. The contracts are a type of derivative that allows SoftBank to raise cash immediately while retaining the possibility of holding on to the shares. SoftBank can settle the contract in cash or by delivering shares, and has opted to hand over up to 242m ADRs, representing up to 1.936bn shares and worth over US$22bn. It said this would "eliminate concerns about future cash outflows", reduce costs associated with the contracts and help it weather the current tough market environment. This will cut its shareholding in Alibaba to 14.6% from 23.7%. The financial institutions involved had already hedged their transactions, so SoftBank's decision will not require the shares to be offered in the market. SoftBank did not disclose the full terms of the contract. SoftBank will record a gain of ¥2.4trn on the revaluation of its Alibaba shares, as well as ¥1.5trn from settling the derivative transaction early, and a ¥0.7trn derivative gain. Settlement is expected to be completed by the end of September. SoftBank will lose its seat on Alibaba's board, and will no longer be required to vote in line with Alibaba executives, as it had been under a previous agreement. According to SoftBank's earnings report, for the April to June quarter, US$10.5bn was raised through pre-paid forward contracts using Alibaba shares. In the January to March quarter, it raised US$13.2bn from such contracts. Asked on Monday whether SoftBank was planning to raise more cash through the Alibaba-related derivatives, Son said the company was discussing various options and would disclose once decided. The sale of Alibaba shares was as expected and "will likely continue", wrote SMBC Nikko analyst Satoru Kikuchi in a report on Wednesday. He thinks the sale was to avoid big losses for a second fiscal year which may have violated loan or bond covenants. SoftBank also raised US$2.4bn from the sale of T-Mobile shares to Deutsche Telekom. Vision Fund 2 also sold all its shares in KE Holdings, which SoftBank took public in 2020, for US$570m. Son did not say much about the IPO plan for chip unit Arm, saying he wanted to use the press conference to "repent" the loss. Son said he had to speak in "low key terms" about the IPO, but he did say "things are going well" for Arm's listing, pointing to the unit’s US$719m in revenue during the period, up from US$675m in the same period last year. Arm is preparing for a Nasdaq IPO late this year or early next year, but the British government has been lobbying for a UK listing of the company. SoftBank this year agreed a US$10bn margin loan backed by shares in Arm. Son also said SoftBank "may want to consider" selling Fortress Investment Group, the US-based alternative asset manager it bought for US$3bn in 2017 (a sale has been long-rumoured), and that it is ready to have talks with potential buyers. SoftBank could go private in the future, after it exits from Arm and Fortress
Mexico priced its first US dollar sustainable bond on Monday, a US$2.2bn deal that allowed the Latin American sovereign to manage its liabilities and burnish its ESG credentials. Proceeds from the offering are earmarked for refinancing, including concurrent bond tender offers. However, Mexico said it would invest a sum equal to the proceeds on programmes included in its fiscal 2022 budget that combat climate change and decrease social inequities in the country. The financing was the inaugural US dollar bond under Mexico's Sustainable Development Goals Sovereign Bond Framework. Its first in any currency was an SDG offering in euros in September 2020. This time around, the ESG format helped Mexico attract an order book that was more than three times subscribed, market participants said. "The SDG feature was obviously an addition to the transaction," said a banker familiar with the deal. "It helped anchor the trade because all accounts these days have an ESG angle, so they have pockets of ESG money." The 4.875% global notes due 2033 printed at 98.123 to yield 5.105% or 235bp over Treasuries. Bookrunners BBVA, Goldman Sachs, JP Morgan and Natixis opened price talk at 265bp area over, set guidance at 235bp–240bp and launched at the tight end. The pricing momentum benefited from the unexpectedly good US payroll number on August 5 and from the year's longest rally in emerging markets bonds – one that also encouraged Guatemala to price a deal on August 3. The JP Morgan Global Emerging Market Bond Index has risen about 6.9% since July 14, the date it hit its lowest point in 2022 following an 18% decline. Deal window "We took advantage of a window in which the market had not experienced an increase in volatility after an FOMC decision and prior to the release of inflation data [on Wednesday]," Mexico's deputy minister of finance Gabriel Yorio told IFR in an email. Adding the sustainability feature to the mix helped support the deal in an already good market – so much so that one money manager said that after putting in an order for the bonds he pulled out because of the pricing pressure. "It was an SDG bond, so it found strong demand from big ESG/green pockets," said Laszlo Lueska, portfolio manager of Brazilian fund manager Octante. "It tightened a lot, and I did not want to buy at those levels." The offering, of course, had more than its ESG credentials to recommend it. The banker said investors liked that, at US$2.2bn, it was the first transaction of size in a long time from any issuer in the region. That Mexico is one of the strongest credits in LatAm also helped. "The mood shifted in the last weeks, and Mexico is at the top of the list in the region for investors," he said. Europe's Fideuram Asset Management was among money managers that liked the credit. "The new issue was about 25bp cheap to the secondary curve so we participated," said Scott Fleming, global emerging markets portfolio manager at Fideuram. Fleming said that Fideuram has an overweight position in Mexico, "given attractive valuations and solid credit fundamentals". Switch tender The transaction had two components. The first was a US$1.8bn offering placed through a regular bookbuilding process. Proceeds from this part will be used to redeem US$1.7bn of 3.60% Global notes due 2025, and repurchase or retire any other domestic or international debt. The second component was a so-called switch tender. In this part of the transaction, investors traded in bonds with a US$487m face value from 12 series maturing between 2034 and 2061 for US$404m in new 2033 notes. With the switch tender, Mexico gave investors the opportunity to trade in longer-term bonds for the shorter 2033s. The tender targeted US$31bn in outstanding securities, but only a very small percentage participated in this offer, showing that investors had little interest in reducing the duration of their Mexico sovereign risk, the banker said. "Only a handful of accounts took up Mexico on the
Mexico priced its first US dollar sustainable bond on Monday, a US$2.2bn deal that allowed the Latin American sovereign to manage its liabilities and burnish its ESG credentials. Proceeds from the offering are earmarked for refinancing, including concurrent bond tender offers. However, Mexico said it would invest a sum equal to the proceeds on programmes included in its fiscal 2022 budget that combat climate change and decrease social inequities in the country. The financing was the inaugural US dollar bond under Mexico's Sustainable Development Goals Sovereign Bond Framework. Its first in any currency was an SDG offering in euros in September 2020. This time around, the ESG format helped Mexico attract an order book that was more than three times subscribed, market participants said. "The SDG feature was obviously an addition to the transaction," said a banker familiar with the deal. "It helped anchor the trade because all accounts these days have an ESG angle, so they have pockets of ESG money." The 4.875% global notes due 2033 printed at 98.123 to yield 5.105% or 235bp over Treasuries. Bookrunners BBVA, Goldman Sachs, JP Morgan and Natixis opened price talk at 265bp area over, set guidance at 235bp–240bp and launched at the tight end. The pricing momentum benefited from the unexpectedly good US payroll number on August 5 and from the year's longest rally in emerging markets bonds – one that also encouraged Guatemala to price a deal on August 3. The JP Morgan Global Emerging Market Bond Index has risen about 6.9% since July 14, the date it hit its lowest point in 2022 following an 18% decline. Deal window "We took advantage of a window in which the market had not experienced an increase in volatility after an FOMC decision and prior to the release of inflation data [on Wednesday]," Mexico's deputy minister of finance Gabriel Yorio told IFR in an email. Adding the sustainability feature to the mix helped support the deal in an already good market – so much so that one money manager said that after putting in an order for the bonds he pulled out because of the pricing pressure. "It was an SDG bond, so it found strong demand from big ESG/green pockets," said Laszlo Lueska, portfolio manager of Brazilian fund manager Octante. "It tightened a lot, and I did not want to buy at those levels." The offering, of course, had more than its ESG credentials to recommend it. The banker said investors liked that, at US$2.2bn, it was the first transaction of size in a long time from any issuer in the region. That Mexico is one of the strongest credits in LatAm also helped. "The mood shifted in the last weeks, and Mexico is at the top of the list in the region for investors," he said. Europe's Fideuram Asset Management was among money managers that liked the credit. "The new issue was about 25bp cheap to the secondary curve so we participated," said Scott Fleming, global emerging markets portfolio manager at Fideuram. Fleming said that Fideuram has an overweight position in Mexico, "given attractive valuations and solid credit fundamentals". Switch tender The transaction had two components. The first was a US$1.8bn offering placed through a regular bookbuilding process. Proceeds from this part will be used to redeem US$1.7bn of 3.60% Global notes due 2025, and repurchase or retire any other domestic or international debt. The second component was a so-called switch tender. In this part of the transaction, investors traded in bonds with a US$487m face value from 12 series maturing between 2034 and 2061 for US$404m in new 2033 notes. With the switch tender, Mexico gave investors the opportunity to trade in longer-term bonds for the shorter 2033s. The tender targeted US$31bn in outstanding securities, but only a very small percentage participated in this offer, showing that investors had little interest in reducing the duration of their Mexico sovereign risk, the banker said. "Only a handful of accounts took up Mexico on the
After companies built up commercial paper borrowings over the last few months amid choppy conditions in longer-term credit markets, many are looking to term out that debt in the US corporate bond market, a factor that could drive bond issuance in the second half of the year, market participants said. Since the end of March commercial paper balances have increased 13.9% to nearly US$1.18trn on August 10, according to the Federal Reserve. This rise comes in part from a growing number investment-grade issuers that have opted to tap this market for short-term debt – usually with maturities of one to 270 days – rather than issue bonds, as they wait for the longer-dated markets and interest rates to stabilize, people familiar with the trend said. “Commercial paper is an alternative that issuers could consider as they wait for better market conditions to issue bonds,” said Rich Testa, head of investment-grade finance at MUFG. Companies are already starting make the shift back to bonds as rallying credit spreads and a decline in long-term Treasury yields in August lifted the floodgate on issuance. Utility Duke Energy printed a US$3.2bn bond on Monday, and said it could deploy the proceeds to pay down the US$4bn of commercial paper it carried on its balance sheet as of July 29. On the same day, Sherwin-Williams printed a US$1bn two-part bond for a similar use. And if the trend continues, it could add to volume in the second half of the year, which many had expected to be subdued. Commercial paper is unsecured debt largely issued by highly rated companies and banks to cover temporary deficits in cash flows and meet working capital needs. As such, these investment-grade companies will continue to use it as part of their regular arsenal of financing options. Nonetheless, the use of commercial paper to fund more substantial capital expenditure is expected to wane, especially now that the yield curve is inverted, making borrowing on the short end more expensive. "They'll probably look to term that out because I think the optionality of issuing extremely short paper is running out as we get more Fed hikes," said Natalie Trevithick, head of investment-grade strategy at Payden & Rygel. The Treasury yield spread between two-year and 10-year benchmark notes was a negative 41bp on Thursday. None of this means, however, that the US$143.3bn increase in outstanding commercial paper since the end of March will completely or mostly be termed out in the bond market. Instead, much of it will be allowed to mature and roll off the balance sheet, market participants said. “It does not always equate to a one-for-one swap,” said Robert Danziger, managing director of US investment grade syndicated loans at MUFG.
JP Morgan's veteran global head of credit trading, Guy America, has resigned from the US bank after 28 years there. America's official title was global head of credit markets and public finance. The bank announced his departure on Thursday in a memo to staff, a copy of which was seen by IFR. A spokesman confirmed the contents of the memo. The memo said America has decided "to take some time out before pursuing external opportunities". It was sent by Troy Rohrbaugh, head of global markets, and Daniel Pinto, president and chief operating officer, and said America will be "sincerely missed". America began his career in London in 1994 as a bond options trader in JP Morgan's graduate programme. He then worked on emerging markets and credit desks, and held senior positions including head of credit trading, head of credit markets and syndicate, and co-head of spread markets. "Guy was a pioneer for our franchise and oversaw the introduction of early credit products. Recently, he adapted the business to incorporate the opportunities of algorithmic trading and private credit. A world-class risk manager, Guy grew the business to its market-leading position and helped navigate the firm and our clients through many difficult markets such as the financial crisis and the pandemic," the memo said. America was also head of JP Morgan's Brexit steering committee.
After companies built up commercial paper borrowings over the last few months amid choppy conditions in longer-term credit markets, many are looking to term out that debt in the US corporate bond market, a factor that could drive bond issuance in the second half of the year, market participants said. Since the end of March commercial paper balances have increased 13.9% to nearly US$1.18trn on August 10, according to the Federal Reserve. This rise comes in part from a growing number investment-grade issuers that have opted to tap this market for short-term debt – usually with maturities of one to 270 days – rather than issue bonds, as they wait for the longer-dated markets and interest rates to stabilize, people familiar with the trend said. “Commercial paper is an alternative that issuers could consider as they wait for better market conditions to issue bonds,” said Rich Testa, head of investment-grade finance at MUFG. Companies are already starting make the shift back to bonds as rallying credit spreads and a decline in long-term Treasury yields in August lifted the floodgate on issuance. Utility Duke Energy printed a US$3.2bn bond on Monday, and said it could deploy the proceeds to pay down the US$4bn of commercial paper it carried on its balance sheet as of July 29. On the same day, Sherwin-Williams printed a US$1bn two-part bond for a similar use. And if the trend continues, it could add to volume in the second half of the year, which many had expected to be subdued. Commercial paper is unsecured debt largely issued by highly rated companies and banks to cover temporary deficits in cash flows and meet working capital needs. As such, these investment-grade companies will continue to use it as part of their regular arsenal of financing options. Nonetheless, the use of commercial paper to fund more substantial capital expenditure is expected to wane, especially now that the yield curve is inverted, making borrowing on the short end more expensive. "They'll probably look to term that out because I think the optionality of issuing extremely short paper is running out as we get more Fed hikes," said Natalie Trevithick, head of investment-grade strategy at Payden & Rygel. The Treasury yield spread between two-year and 10-year benchmark notes was a negative 41bp on Thursday. None of this means, however, that the US$143.3bn increase in outstanding commercial paper since the end of March will completely or mostly be termed out in the bond market. Instead, much of it will be allowed to mature and roll off the balance sheet, market participants said. “It does not always equate to a one-for-one swap,” said Robert Danziger, managing director of US investment grade syndicated loans at MUFG.
The long end of the sterling market is expected to come under the most pressure, investors have told IFR, as quantitative easing comes to an end and some foreign demand retreats. Government bond markets globally have been under pressure for a vast part of 2022 as over a decade of cheap central bank liquidity comes to an end. However, the Bank of England will tighten monetary policy further next month as it becomes the first major central bank to sell down some of its holdings under an around £10bn a month sales programme. "The UK has become a test bed for global economic shocks this year, and now markets have an additional policy experiment to add to the list: Quantitative Tightening (QT)," Oxford Economics’ Javier Corominas wrote in a note this week. "The picture is set to become more challenging for Gilt demand given the MPC’s memo last week that it was “provisionally minded” to engage in Gilt sales following next month's MPC meeting." “With structural demand for Gilts more tenuous than at any point since 2019, and coupled with global rise in bond yields, we see further pressure on Gilts, with 2.25% in the 10-year yield as our target in the near term,” Corominas said. It was not far off that level on Thursday, quoted just above 2%, according to Tradeweb. "The Gilt market has been extremely reliant on the Bank of England and its quantitative easing programme to support bond markets and yields for some time," Ben Nicoll, fund manager at RLAM, said. "Now, not only must it stand on its own two feet but it must absorb the excess supply coming from the inevitable unwinding of the bank's balance sheet at the same time as the current government is under pressure to support consumers and businesses." He did add, however, that the area of the curve which he thought had least reflected the pressures that lie ahead was longer-dated bonds. "If inflation is more sticky than expected, as our internal economist is forecasting for the UK, then some sort of inflation premium will need to be built into markets, particularly at the longer end, something we haven’t seen for a long time.” Nicoll is also expecting fiscal support packages to have an outsized effect on long-end yields and QT to steepen the curve. The long end is also where Aegon’s head of rates, Sandra Holdsworth, is expecting the most pressure over the medium term, citing the “shape of the UK Gilt curve”.Pressure everywhere Other investors have a slightly different view and think other parts of the curve could also come under pressure. For Sanlam Investments’ Peter Doherty, pension and insurance buying, as well as “some international demand”, has supported 10-year-plus products. But those bonds “could experience very sharp mark-downs in price if any perception developed that the combination of BoE interest rate policy and government fiscal policy was increasing the risk of inflation running persistently in the mid to high single digits". The short end would sell off in the event of rising short-term interest rates, Doherty said. “Short-term UK interest rates may have to rise further than expected if inflation remains sticky and does not fall as expected in 2023 and 2024. This would put pressure on one to three-year Gilts, although yields would have to go up by an additional 200bp to 300bp above current expectations in order to create very material mark to market losses,” he said. The end of QE is not the only challenge faced by the Gilt market. For Oxford Economics’ Corominas, a decline in the overseas bid could add to the pressure. "Foreign demand for Gilts has been robust, but we expect this to moderate over coming quarters,” he wrote. Still, a sell-off does not necessarily paint a bleak picture for everyone. At least buyers are in for a reprieve from the persistently subdued yields of the last decade. “QE and low yields are not a costless panacea f
JP Morgan's veteran global head of credit trading, Guy America, has resigned from the US bank after 28 years there. America's official title was global head of credit markets and public finance. The bank announced his departure on Thursday in a memo to staff, a copy of which was seen by IFR. A spokesman confirmed the contents of the memo. The memo said America has decided "to take some time out before pursuing external opportunities". It was sent by Troy Rohrbaugh, head of global markets, and Daniel Pinto, president and chief operating officer, and said America will be "sincerely missed". America began his career in London in 1994 as a bond options trader in JP Morgan's graduate programme. He then worked on emerging markets and credit desks, and held senior positions including head of credit trading, head of credit markets and syndicate, and co-head of spread markets. "Guy was a pioneer for our franchise and oversaw the introduction of early credit products. Recently, he adapted the business to incorporate the opportunities of algorithmic trading and private credit. A world-class risk manager, Guy grew the business to its market-leading position and helped navigate the firm and our clients through many difficult markets such as the financial crisis and the pandemic," the memo said. America was also head of JP Morgan's Brexit steering committee.
Volvo showed that investors are keen to put cash to work in the euro investment-grade corporate market, despite the time of year, after making an opportunistic visit on Thursday. The Swedish manufacturer's €500m no-grow five-year note ended a six-session streak of no supply, since Saint-Gobain and SELP took advantage of a firmer credit backdrop to print deals on August 2. Both of those deals have performed well in the aftermarket, tightening by more than 10bp from reoffer, according to Tradeweb. With credit markets in as good shape as they have been for months, the timing made sense for Volvo (A2/A–). "It takes a bit of courage to come to the market this time of the year but the response tells you that it's the right decision - the deal priced at very competitive levels with an excellent order book," said a lead. The book was more than €3bn at guidance, which helped the leads, Citigroup, Societe Generale and Mizuho, to tighten pricing from an initial 85bp area over swaps to plus 53bp. A syndicate banker away from the deal saw fair value at 45bp, but said paying up by up to 10bp would be a "decent outcome". Comparables for the new issue included Volvo's 1.625% May 2025s and 0% May 2026s that were bid at i-spreads of 26bp and 40bp, respectively, according to leads. One lead put fair value at 50bp-55bp. The syndicate banker away said: "Spreads will not tighten from here, so it's not losing any upside by coming now. Cash positions are also good, with good demand seen in the secondary for better names." The average spread for euro corporate senior debt was 97bp on Wednesday, significantly down from this year's peak of over 130bp on July 1, according to iBoxx. Still, the level is wider than the 55bp mark at the start of the year. "It's an opportunistic trade – the issuer doesn't need the funding and appreciated the constructive market," said a second lead. Battle lines Despite Volvo's success, bankers are not expecting much supply until the final full week of August. "Would I send someone to battle next week? I'd like to think one or two issuers could come, but generally things unfold in the week afterwards," said the second lead. This year, the last week of August could be busier than usual, assuming conditions stay stable, given the paucity of supply in recent weeks. July sales in the euro investment-grade corporate market were the lowest ever for the month, based on IFR's records going back to 2013. Volvo's bonds were priced via wholly-owned subsidiary Volvo Treasury, which had already tapped the euro market twice this year, in May and February, to raise a combined €1bn from bonds that are both due in 2025.
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