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US lawmakers urge Trump to protect Citgo from creditors

Seven lawmakers have asked the Trump administration on Thursday to take action to protect US refinery Citgo from creditors ahead of a looming debt payment due on a bond issued by its Venezuelan parent.Senators and representative from Texas, Louisiana and Florida outlined the impact of letting creditors seize Citgo shares, which back a 8.5% 2020 bond issued by Venezuela state-owned oil company, PDVSA. "We urge the Administration to take all necessary steps to protect Citgo employees and retirees from any exposure that may result from a default," they said. The document is signed by Louisiana Senators Bill Cassidy and John Kennedy, Texas Senator Ted Cruz and Representative Lizzie Fletcher, Florida Senator Marco Rubio, as well as Louisiana Representatives Clay Higgins and Ralph Abraham.The largest bondholder of the PDVSA 2020 is already expecting the company to default on a US$913m payment due October 27, and is prepared to take action. nL2N26U1NVShould PDVSA default on its debt obligation, creditors would have a claim to 50.1% of shares of the prized US Citgo asset, which PDVSA fully acquired in 1990.The US Treasury has acknowledged holders' right to seize the underlying collateral on the PDVSA 2020 in lieu of payment as way to pressure the government of Venezuela's President Nicolas Maduro to stay current on the bond.But in the letter, lawmakers argue that Maduro no longer has an incentive to make payments now that control of Citgo has been transferred to the US backed opposition leader Juan Guaido.The Guaido government made a coupon payment earlier in the year, but may not have enough money to make the much larger amortization payment in October. The Maduro government also used Citgo shares as collateral on a loan extended by Russian oil firm Rosneft, complicating matters as failure to pay the 2020 would result in a cross default on that loan. "The potential for Rosneft to have any control of a US company poses a major threat and exposes critical infrastructure to national security threats," the lawmakers wrote. The legal challenges stemming from a default would threaten thousands of jobs and could leave Citgo without the means to pay pension obligations should an asset sale occur, they said. "Legitimate claimants against the Maduro regime should be made whole, but the burden of the claims should be entirely carried by the Maduro regime or by a democratically elected successor in Venezuela," they wrote.

2 min read

Americas, Emerging Markets

Miluska Berrospi

People & Markets

MOVES-Hong Kong's top securities regulator steps down

Ashley Alder, chief executive of Hong Kong's Securities and Futures Commission, will leave his post in September next year at the end of his third three-year term. The securities regulator has increased its enforcement action against investment banks during his tenure, most notably stripping UBS of its IPO sponsorship licence in March this year over its shoddy due diligence on the listings of three Chinese companies - China Forestry Holdings, Tianhe Chemicals Group and China Metal Recycling.Alder's tougher approach has led to the SFC issuing more fines against the global banks. It collected a total of HK$786.7m (US$100m) from four investment banks for IPO sponsor failings in March, including HK$375m from UBS, just shy of the record HK$400m penalty imposed on HSBC's private bank in 2017 over the sale of Lehman Brothers-linked structured products.Alder made no secret of his ambitions for the SFC to take a firmer stance in overseeing the city's capital markets, which at times saw the SFC intervene on approving IPOs, a role traditionally reserved for the local exchange, the city's frontline regulator.In one notable speech in 2017, he said that the SFC was “no longer acting behind the scenes” and had started using its powers under the existing Stock Market Listing Rules in the Securities and Futures Ordinance to object to certain IPOs on legal grounds.However, the SFC under his watch did eventually yield to pressure from the Hong Kong government and Hong Kong Exchanges and Clearing in allowing companies with dual-class shares to list, a move widely criticised by investors and corporate governance experts.The SFC had rejected a similar proposal in 2015, shortly after Alibaba Group completed its US$25bn IPO in New York. The regulator eventually relented on HKEx's proposals, which came into force last year."Mr Alder has been at the helm of the SFC for eight years, during which the organisation has pursued a set of intensive policy and operational reforms to tackle market risks as well as setting itself as a tough, competent and effective market regulator," a SFC spokesman said."The changes which have been put in place are now embedded and institutionalised and Mr Alder believed it is the right time to hand over to new leadership."Alder, who began his career as a lawyer in London and practiced in Hong Kong for more than 20 years, initially worked at the SFC between 2001 and 2004 as executive director in the corporate finance division. He left to join law firm Herbert Smith as head of Asia before returning in 2011.The SFC has not yet named a replacement.

Emerging Markets, Asia

People & Markets

MOVES-Hong Kong's top securities regulator steps down

Emerging Markets, Asia

IFR Asia 1111 - October 19, 2019

Australia orders fresh bank inquiry

(Reuters) The Australian government has ordered the competition watchdog to investigate why banks failed to fully pass on three official interest rate cuts this year, but investors shrugged off the new probe after a series of inquiries into the sector.The Australian Competition and Consumer Commission has been asked to investigate prices charged for residential mortgages by all lenders and how they make pricing decisions, including passing on changes in the official cash rate by the central bank.The inquiry will also look at differences in prices paid by new and existing customers and barriers that may deter customers from switching lenders.Shares in Australia and New Zealand Banking Group, Westpac Banking Corporation, National Australia Bank and Commonwealth Bank of Australia traded higher on Monday in line with the market, underscoring a lack of concern by investors over a new probe.“Some of these topics have already been looked at,” analysts at JP Morgan said.Australia’s big four lenders dominate about 80% of the country’s A$1.7trn (US$1.15trn) residential mortgage market. They remain some of the most profitable banks in the world, but their earnings fell last year after facing low credit growth and billions of dollars in remediation costs from wrongdoings to customers exposed by the wide-ranging Royal Commission inquiry last year.The ACCC is due to deliver its preliminary report by March 30 2020 and a final report by September 30 2020.The Reserve Bank of Australia has cut the official cash rate by 0.25% three times so far this year to a record low of 0.75% in a bid to stimulate consumption and investment.In response, the big four lenders have cut mortgage rates by about 0.57%, on average.“The Australian people are sick of this merry dance where the RBA reduces rates, political leaders and the RBA themselves call on the banks to pass them on in full and the banks ignore that advice," Treasurer Josh Frydenberg said in parliament.“We believe that this will put more pressure on the banks to pass through a larger proportion of ... any further RBA movements,” UBS analysts wrote in a note to clients.“This would further exacerbate the net interest margin, return on equity and dividend pressure the banks are facing in an ultra-low rate environment.”In separate statements, the big four banks said the inquiry was an opportunity to explain the challenges Australian banks are experiencing in a historically low interest rate environment.Westpac, the second largest lender, also defended the pricing decisions of the banks, saying they needed to manage their net interest margin.“Banks also need to make a reasonable level of return. This not only supports shareholder investment; it also underpins prudential stability and our debt rating,” Westpac chief executive officer Brian Hartzer, said in an emailed statement.

Sonali Paul, Paulina Duran

Asia

IFR Asia 1111

Bonds

Deutsche Bahn pushes hybrid pricing into new territory

Deutsche Bahn was poised to become the first European corporate issuer to sell a hybrid inside 1%, with not even a recent sell-off in rates able to derail the tight pricing ambitions of its debut deal in the format.The state-owned rail operator's €1bn perpetual non-call 5.5-year bond was coming at 0.95%, and was accompanied by a €1bn perp non-call 10-year at 1.60%. The deal drummed up more than €8bn of demand at launch, though that dropped to €6.4bn at allocation.The deal "looks very impressive to me," said a banker away. "Everyone knows of their quality, but to price at such tight levels is great for them." The slowdown in issuance in the corporate market over the past couple of weeks after a record-breaking September, with the prospect of a further drop off because of forthcoming earnings blackouts, helped pricing tension to a degree.But, as another banker away said, the credit itself is highly sought after. "It's super-high grade and it's state owned," he said. The company is rated Aa1(neg)/AA(st) in senior format, while the hybrids are expected to be rated A2 by Moody's, though BBB with S&P.After a two-day roadshow in the second half of last week, Deutsche Bahn opened books at 1.25%-1.375% and 2% area, respectively. Those levels already suggested the perp non-call 5.5-year was likely to break the record for the lowest yield on a newly-priced European corporate hybrid.That record was previously held by German utility EnBW, albeit that was achieved by dated hybrids. In August, the company sold a €500m Nov 2079 non-call Nov 2024 at 1.125% and a €500m Aug 2079 non-call Aug 2027 at 1.625%.The previous record for a European perpetual was set by French utility Engie in January 2018, when it priced a €1bn 1.375% non-call Apr 2023 at 1.50%. That was also a green bond.In spite of the record low yield, what attracted investors was the relative value over Deutsche Bahn's senior paper. A 1.25% Oct 2025 note was bid at -0.05% at Friday's close, according to Refinitiv, while a 2.75% Mar 2029 was at 0.24%.But even these pick-ups were tight, especially for the shorter-dated tranche. Total, which has hybrid instruments rated A2/A-, has a similar spread between its 1.75% perp non-call Apr 2024, bid at 0.95%, and its senior 0.625% Oct 2024s, quoted at -0.04.In line with the sell-off in rates over the past week, the yield on Total's non-call Apr 2024 has risen a touch in recent days, though in spread terms has stayed relatively stable.The second banker away described the rates sell-off as a "positive sell-off", as he said the reason behind it is encouraging noises between the US and China in their trade dispute.FUNDING GROWTHThe issuance by Deutsche Bahn will fund what its chief executive is calling the biggest growth spurt in its 180-year history, with the company expected to be a beneficiary of the German government's recently announced €50bn climate change package."Deutsche Bahn is issuing hybrids in order to strengthen its overall credit profile, given the importance of its growth plans," a lead banker said after the mandate was announced.Part of Deutsche Bahn's growth plan includes the purchase of 30 new high-speed trains by 2023 to help cater for the expected growth in passenger numbers.Europe's railway companies are expected to be major beneficiaries of a shift away from car and air transport towards public transport that emits proportionally less carbon.Financially strained Deutsche Bahn, which has been under fire over delays and for having insufficient capacity, said it will invest €11bn of the government's cash in recapitalising. Despite running at a profit, the company has had to take on extra debt to finance investment.Goldman Sachs and JP Morgan were structuring agents and bookrunners. They were joined on the books by Barclays and Commerzbank.

4 min read

EMEA

IFR Asia 1111 - October 19, 2019

Australia orders fresh bank inquiry

Sonali Paul, Paulina Duran

Asia

IFR Asia 1111

Bonds

Yield decisive as LBP restores covered confidence

A €1bn deal from La Banque Postale Home Loan SFH offered reassurance on Monday after a wobble in the covered primary market, and suggested 10-year tenors are still the way to go. The French bank's success was welcomed after the last two euro covereds struggled. Deutsche Pfandbriefbank and Hypo Tirol both priced €500m trades in line with guidance last week and there was speculation that both had failed to cross the line. "If you looked at the covered market at the end of last week you could arguably be a bit concerned with regards to execution," said a banker at one of La Banque Postale's leads."I think it was quite name-specific, and La Banque Postale has always been a name that travels extremely well in this market." That quickly proved to be the case, with demand surpassing €1bn an hour after books had opened. Leads DekaBank, LBBW, Natixis, NatWest Markets and Santander started marketing at guidance of swaps plus 11bp area. Talk was then revised to 9bp area (+/-1bp wpir) before a €1bn deal launched at 8bp. The final book stood above €1.3bn.A key difference, bankers said, was that PBB's and Hypo Tirol's shorter dated issues priced with negative yields, while La Banque Postale's 10-year came at 0.025%, helped by a back-up in yields last week. Ten-year Bund yields have jumped over 10bp since last Monday, bid on Tradeweb at -0.47%. "It's hard to ignore that anything coming further out the curve is working better and yields do seem to matter in primary even if, when you speak to investors, the consensus is people are spread buyers and can buy negative yields," said a syndicate banker. Bankers said bank treasuries - who have been the biggest buyers in the sector this year - are becoming more selective in the negative yielding segment of the market.Buyers are less compelled to partake in every covered bond at sub-zero yields because the introduction of deposit rate tiering means banks from October 30 can park part of their excess cash with the ECB at 0%.That means lesser-followed names such as PBB and Hypo Tirol may struggle in intermediate tenors, bankers said. While going long seems to generate the best results, fatigue could soon set in given 10-year supply has already been heavy. Out of the 30 euro covereds sold since the market reopened after the summer break, 13 have been 10-years. "If you want to do a trade you should probably go further out the curve but you should probably do it sooner rather than later, before that bid gets saturated," said the syndicate banker.Bankers said the new issue offered a concession of 1bp-2bp. La Banque Postale's 1% Oct 2028, its longest covered, was trading at a mid of 4.5bp.

EMEA

Tom Revell

Bonds

Deutsche Bahn pushes hybrid pricing into new territory

4 min read

EMEA

Bonds

Kantar becomes second European issuer to strike net short language

Language to curb the influence of CDS short-sellers has been struck off an upsized bond and loan offering backing Kantar's leveraged buyout, according to a banker familiar with the deal. Investors had pushed back against the language and the provision was not so important to sponsor Bain Capital, the banker said. Kantar is the second European borrower to try but fail to get net-short disenfranchisement language past the high-yield investor base. British satellite telecommunications company Inmarsat was thought to be the first deal from a European issuer to carry such language. That attempt also failed. nL5N26H6VZSimilar language has been used by US issuers and is largely designed to avoid a repeat of what happened to telecoms service provider Windstream.Windstream fell foul of activist hedge fund Aurelius Capital, which successfully argued that it had technically defaulted on its bonds - a move that pushed it into bankruptcy in February.Kantar has upsized the bond portion of the package and is now marketing a US$390m-equivalent (€350m) seven-year non-call three secured euro, up from the initially shown US$250m-equivalent. The US$525m (€475m) eight-year non-call three unsecured euro note is unchanged in size. The bonds are coming alongside a US$2.1bn secured loan in euros and US dollars.Proceeds are being used to back Bain Capital's US$4bn acquisition of WPP's data analytics division Kantar.At the AFME conference, held today in London, the mood of attendees was very much against issuers' attempts to include language curbing the influence of short sellers."It is a new layer of complexity and an arbitrary change of market mechanism," one attendee said. "Short positions create liquidity in the market that is really quite healthy. [Net short language] is like the regulatory overreach with MIFID II, and could really destroy the market."One lawyer said while the intention of the provision may have been a good one, the drafting he has seen in bond documents would have a "worrying impact on liquidity"."There are also worries about the enforceability [of these provisions] and how in practice one would calculate whether an investor was net short."Merlin's bond also includes a net-short covenant, but this language is more likely to get past the buyside, who see the deal as a much more attractive proposition, said the banker familiar. The UK tourist attraction company is in the market with £635m of dollar and euro 8NC3 senior notes that back its leveraged buyout.