Voice broking takes another blow

Steel company Aperam returned to the equity-linked market on Friday, nine months after its debut issue. The company raised US$300m through the issue of seven-year bonds, which include a put at 4.5 years in January 2019. In September 2013 the company issued bonds with a 2.625% coupon, but last week it had to pay just 0.625%. In the meantime the share price has more than doubled and the credit dropped sharply from 750bp to 400bp. The bonds issued in 2013 presently trade at 170. Last year’s debut saw only US$118.2m of bonds offered publicly (the rest went to the Mittal family). Last week’s launched at US$250m with a US$50m increase option that was fully utilised. Investors were quick to buy and outrights dominated about 70/30 versus hedge funds. The strength of outright demand was illustrated by a share price that was actually up 1.1% on the day. The bonds were offered with a 0.25%-1.00% coupon and 30%–35% premium before pricing at mid-terms. Using a 400bp credit, 50bp borrow and 35% vol input the implied was about 33.5 and the theoretical value just under 101, according to Deutsche Bank analysts. The company was more focused on the relative valuation than theoretical values. BNP Paribas and Citigroup were the active leads. Credit Agricole, Natixis and Societe Generale were added later as joint bookrunners. HSBC and ING also joined late as co-bookrunners.

“Triple A with a spread”. Now there’s a familiar phrase. And that is what Goldman Sachs is pitching with its €1bn Fixed Income Global Structured Collateral Obligation 2014-01 seven-year deal – the first under a potential €10bn programme. Is it a structured covered bond? That’s what Goldman wants investors to think. Is it a CDO? That’s what the cynics would suggest. Is it somewhere in between? Certainly, the triple-lock security package (with recourse to the assets, the SPV – via a total return swap – and the issuer) suggest a covered bond. But then the asset pool – a set of apparently disparate RMBS and ABS paper from different countries and different currencies, among other things – does more than hint at a CDO. Not that there is anything necessarily wrong with a CDO. If, that is, investors are going in with their eyes open. Unfortunately, it seems that Goldman is giving investors a description of the pool by asset class, but no line-by-line information on what is backing the deal. It is urging prospective buyers to look at the security that allows the deal to be rated Triple A – two full notches above the bank’s Single A rating – and not worry too much about the actual portfolio. That argument, too, is mightily familiar. And it was investors who took too much on faith in the run up to the financial crisis who got into most trouble. Once more we are in a world where the hunt for yield makes for a constant battle against temptation. But the one temptation to which investors should never again succumb is buying into something that offers a juicy return without doing the necessary credit work to make sure they know – precisely – what they’re getting. Oh, Vienna! At the start of the financial crisis in 2008, governments were tripping over themselves to reassure bank creditors they would be kept safe and entire. Ireland said all senior bondholders’ obligations would be honoured. The US bailed out banks with no-strings-attached equity. And sovereigns lent their backing indiscriminately to banks to ensure that investors would continue to buy their bonds. Even Greek banks were given lenient bailouts when their holdings of restructured sovereign bonds meant they had to be recapitalised. In retrospect, that policy of loose guarantees was rash. Most obviously, sovereign debts have escalated, bringing into question the solvency of several eurozone nations. And governments now say, correctly, that they can no longer bail out banks willy-nilly. That was the fundamental point of Europe’s financial reforms of the past four years. But that doesn’t mean that it should be acceptable for Austria, via retroactive legislation, to remove a guarantee provided by Austrian state Carinthia for certain bonds in Hypo Alpe-Adria that it now wants to bail in. The Austrian government says Hypo Alpe-Adria is a “unique case” – just as Greece’s restructuring and the bail-in of Cyprus’s bank depositors were dubbed unique as well. But what happens if German Landesbanken need to raise capital after the ECB’s stress tests later this year? Will they look over the border at the Austrian precedent and seek to follow suit? It is true that investors should always treat sovereign and particularly sub-sovereign promises with a pinch of salt (as those who came unstuck lending to Dubai’s state-backed enterprises, or China’s window companies, can testify). But solvent governments should be wary about back-tracking on their guarantees. At the very minimum, doing so risks undermining a very useful financing tool. Resurgent Reliance The same group that almost destroyed India’s equity capital markets may have just reopened them. Last week’s jumbo share placement from Anil Ambani’s Reliance Communications banishes the last ghosts of Reliance Power’s disastrous 2008 IPO, and shows just what is possible in Modi’s resurgent India. Not only was RComm’s placement the biggest primary follow-on in rupee terms from India’s private sector, but it also came from a highly leveraged company

Intel reduced its stake in Imagination Technologies on Thursday night selling 9% from a stake of 14%. The 25m shares were offered without guidance shortly after the close and priced the same evening at 205p, an 8.8% discount, to raise £51.25m. Intel is left with about 15m shares. The speed of execution was helped by some wall-crossing of accounts in advance. Credit Suisse, Jefferies and JP Morgan were joint bookrunners.

Barclays has provided the backing for the London Stock Exchange’s acquisition of index provider and investment manager Frank Russell by initially underwriting the LSE’s £942m rights issue alone. The UK exchange operator will supplement the rights issue proceeds with loans of £648m to cover the purchase. In a year in which UK equity capital markets volumes have surged, rights issues have been overshadowed by IPO activity. Just six rights issues have completed in the UK so far in 2014 to raise US$4.5bn, with the £55m Acal fundraising currently in progress. RSA and Babcock account for over 70%. The sole global co-ordinator position is significant, as the bank is joint corporate broker to the LSE alongside Morgan Stanley. In 2012 Morgan Stanley was involved in the LSE’s purchase of a majority stake in LCH.Clearnet and Barclays was not, but it did not include any equity financing. The underwriting is certain to be shared among further banks when subscription terms are set. Shareholders will vote on the rights issue at the exchange’s AGM on July 16, but the rights issue will not take place until September once shareholders have voted to approve the acquisition at a specially convened general meeting. Investors reacted positively to the acquisition of indices that are tracked by an estimated US$5.2trn of assets. About US$4trn of assets are believed to be benchmarked against FTSE indices. The total is significant considering the sharp increase in allocation of assets to passive strategies, especially through ETFs, versus active money management. Shares were up 6.1% on Thursday on the back of the news to close at £19.84, adding around £300m to the company’s market capitalisation.

Dividend strategies are playing an important role in the ongoing search for yield, but as BNP Paribas has become the latest to highlight, the biggest payouts are not always the most sustainable – something that is casting light on more defensive income strategies across equity markets. The latest dividend debacle is likely to see the French bank axe its 2015 distribution to shareholders as part of a package of measures to plug a gap left by a US$9bn–$10bn fine for violation of US sanctions. The news has knocked more than three points off Eurex-listed dividend futures expiring in December 2015 since talk of the magnitude of the fine started to circulate in late May. Those contracts are currently an anomaly in the dividend curve, trading at 109 points, while first-term futures trade at 112.7 and December 2016 expiries are around 113. “A lot of people think that the dividend yield strategy is a value strategy but it can be very risky as some of the most solid high dividend names have made big cuts in payouts,” said Francesco Curto, global head of Croci at Deutsche Asset and Wealth Management. Two years ago it was telecoms operators wreaking havoc in dividend derivatives as Telefonica and KPN – two of the largest dividend payers – slashed planned payouts, wiping 10% off the near-dated dividend futures contract (see “Dividends break equity correlation”) It has been a stark reminder that many top dividend payers have a chequered history when it comes to stability of payments and that income strategies based purely on dividend yield can be risky. As part of Deutsche Bank’s Croci (Cash Return on Capital Invested) index products that were recently incorporated into DeAWM, the firm added a Global Dividends fund in 2012, which incorporates 50 of the top yielding and sustainable paying firms that achieve an attractive Croci valuation from the pool of 800 companies. The Croci approach aims to identify mis-pricing between true value and market value of corporate assets and cashflows using the bank’s own methodology to calculate economic price/earnings ratios. Between the global and US versions, the dividend funds have garnered around US$400m in inflows so far this year, taking total assets to more than US$850m. The appeal to investors is a yield that compares favourably with traditional high yielding dividend funds, but with lower risk metrics. Trailing 12-month yield on the Croci Global Dividends fund is currently 4.4% compared with 3.7% on the MSCI World High Dividend Yield index. “We want to provide a good coupon but also increase the overlap between dividends and real value. You can still get a 4.4% coupon, but with much less risk,” said Curto. Analysis by the group showed that high dividend yielding companies tended to have low levels of profitability and high financial leverage and low free cashflow. “When you look at typical high dividend strategies, you’re basically looking at a bond in disguise. The yield is good, but it comes with massive financial leverage and lower profitability,” said Curto. Societe Generale took a similar approach with its Quality Index that launched in 2012. The firm built the systematic strategy around a company’s ability to sustain payouts in the long term, using cashflow and other financial indicators. Both strategies have benefited in recent weeks from the fact that they exclude financials from the mix so have managed to avoid the latest fallout from the BNP Paribas situation. MSCI took similar steps last year by adding a filter to its High Dividend Yield Indices to exclude certain stocks based on various “quality” characteristics such as return on equity, earnings variability and debt to equity ratios.

Banca Monte dei Paschi di Siena has reported take-up of 99.85% for its €5bn rights issue. The shares were offered on a 214-for-five basis at €1. The remaining 178,555 unexercised rights will be offered in the market this week on the same terms. The shares closed today at €1.47. UBS was global co-ordinator and joint bookrunner, with Citigroup, Goldman Sachs and Mediobanca as co-global co-ordinators and joint bookrunners. Barclays, Bank of America Merrill Lynch, Commerzbank, JP Morgan, Morgan Stanley and Societe Generale are joint books. Deutsche Bank, HSBC and Santander were co-bookrunners, with Banca Aletti, Banca Akros, Gruppo Bipiemme Banca Popolare di Milano, BBVA, Gruppo Banca Popolare di Vicenza, Credit Agricole, Credit Suisse, Equita, ING, Intermonte and KBW as co-lead managers.

The borrower behind the European Union’s first “Europe 2020 Project Bond Initiative” infrastructure transaction is seeking to pull the plug on the deal, leaving investors with a nervous wait to see how badly their investment will be affected. The €1.4bn deal, called Watercraft Capital, was launched in July 2013 to refinance the debt incurred by construction firm ACS (through its Escal entity) and Dundee Energy, as majority investors, to build the Castor underwater gas storage facility off the coast of Spain. The plan was to sell the facility to Enagas once operational, allowing it to generate regulated returns by being part of the Spanish regulatory system. The operators had hoped for the project to be operational by the November 30 2014 “start-up” deadline, but the project has been left in limbo after seismic activity was detected in October 2013 and no further progress has been made. On June 24 the Watercraft borrower said it wanted to relinquish the project. The next course of action will determine how bondholders will be hit. As it stands, there is €200m of EIB money in the deal in the form of a liquidity facility, while ACS has around €130m involved. This can cover the next coupon payment, due on June 30, but the deal documents state that if the project is not operational by November the deal will have to be repaid. The current sum of money, therefore, is woefully short. The uncertainty about the project’s future has already resulted in downgrades, as Fitch cut the bond to BB+ from BBB+ on June 20. The EIB’s facility had boosted the underlying project rating by two notches to BBB/BBB+ (S&P/Fitch), but the benefit has now been lost. It warned that the relinquishment would be a test for the compensation regime. And it said that while the bond credit enhancement (PBCE) facility to support compensation payments was favourable, it was “not a guarantee that the bondholders would be kept whole”. This depends on the amount and timing of the compensation payment and the availability of support from ACS. Michael Ridley, credit strategist at Mizuho, wrote a prescient note on June 6 predicting that Fitch would cut its credit rating on Watercraft to junk by the end of June, which it did. He also argued that if this project passed its “project start-up deadline” in November without commencing operation, this bond can default. He said this “could be avoided if the project sponsors came to bondholders beforehand for permission to change the terms and conditions of the bonds. However, we think bondholders would only accept this if the project sponsors had a clear plan about how they think they can make the project operational, and when this might be achieved.” You have three choices In the meantime, the EIB, as PBCE provider, has to determine how to direct the issuer security trustee. There are three options, according to the investor notice. One is to refuse the request for permission to relinquish and waive any related event of default. Another is to consent to the request, and a third option is to consent to the request subject to a condition that a relinquishment refusal request is put to bondholders as a resolution to vote on, but that resolution is not passed. The EIB said it “is currently examining the implications of this request and will take a decision that reflects its rights and obligations under applicable finance contracts and the regulatory framework relating to the relinquishment process”. It has €500m at stake in this deal, as it also invested €300m in the bonds on top of providing the liquidity facility.  The bonds had peaked around 106 cash price after pricing at par last July, but dropped to the mid 90s on the October testing suspension. There has been a steady decline since, to around 90, according to Tradeweb. And there could be much more downside to come. Ridley in his note undertook a scenario analysis for Watercraft, outlining three possible outcomes. One alternative, to which Ridley assigned a 30% probability

Secondary market activity quietened last week as a confluence of month, quarter and half-year end kept contacts focused on their book valuations. One trader said he expected a few BWICs to emerge to give funds the opportunity to mark their books with live prices but few emerged.  Other contacts reported some CMBS and peripheral bonds hitting the market, but generally in small size. Italian CMBS Imser was shown, as were Portuguese RMBS from the Magellan and Lusitano programmes.  New issues continue to be bid much tighter, eroding their new issue premiums, and the failure of a supply of bonds to re-stock the pipeline after the Global ABS conference keeps a tightening bias.  The new Berica ABS 3 from Banca Popolare di Vicenza tightened about 8bp after printing at 105bp last week, and is in line with comparables.  Other programmes are in the 100bp–120bp range, depending on the quality of the shelf. Some Portuguese paper has covered from BWICs inside 100bp too in recent sessions. The two new issues in the CMBS market will provide some fresh reference points given the lack of supply in this sector.  Deutsche Bank printed its Italian deal, Deco 2014-Gondola, with a 4.2-year Class A tranche at 145bp, at a slight discount to par at 99.85 and Taurus CMBS UK 2014-1 came at 150bp.  The Gallerie 2013 deal form Goldman Sachs, the only other Italian CMBS to be offered publicly since the crisis, is quoted around 170bp (priced at 225bp in November). However, a trader said accounts had been unwilling to chase this bond too much tighter in recent weeks because it is already well above par. It had dipped inside 170bp, but has now settled a few basis points wider.

The CFTC last week extended protection from enforcement for certain US swaps rules to LCH.Clearnet’s non-US swaps clearing hub just weeks after a key staff member said he was ‘tired’ of handing down relief to overseas clearers. The relief allows LCH.Clearnet to continue clearing listed derivatives executed under US rules without being registered as a clearing organisation in the US. Three weeks ago, Ananda Radhakrishnan, director of clearing and risk division at the CFTC, lamented repeated requests from market participants for the agency to provide enforcement relief to overseas clearers until discrepancies across borders could be resolved (see “CFTC ’tired’ of exemptions for cross-border conflicts”). Radhakrishnan singled out LCH and the InterContinental Exchange as two firms impacted by inconsistent regulatory frameworks for listed derivatives but encouraged either firm to engage in ‘some self-help’ that would remove the need for repeated CFTC relief. “To me, the first response cannot be: ‘CFTC, you’ve got to provide an exemption’,” Radhakrishnan told delegates at the International Derivatives Expo in London on June 10. “ICE and LCH have a choice. They both have clearing organisations in the United States. If they move the clearing of these futures contracts … back to a US-only DCO I believe this conflict doesn’t exist.” The provision of relief belies a mounting struggle between US and European regulators regarding agreement on global standards for the clearing of swaps across borders. The European Commission has yet to make decisions regarding the viability of US clearing rules in Europe, frustrating market participants as a year-end deadline approaches. Some industry participants have levied harsh words against the EU regulators with accusations that Europe is playing retribution politics in response to perceived CFTC aggression in instituting rules for the execution of swaps across borders last year (see “Cross-border criticism shifts to Europe”). The US House of Representatives last week voted through a bill that would largely scale back the CFTC’s cross-border powers and erase some previously written rules. The Senate and White House are expected to oppose. The CFTC handed down nearly identical relief to German-clearer Eurex in March. Both last until the end of the year.

Energy and telecoms cable maker Prysmian signed a €1bn five-year revolver with a group of domestic and international banks, including bookrunners Banca IMI, BNP Paribas, Citigroup, Credit Agricole CIB, ING Bank and UniCredit Bank. Proceeds are for general corporate and working capital purposes, including the refinancing of existing debt facilities. A limited number of relationship banks joined the financing in syndication. Prysmian said that it had achieved more competitive costs on the new loan than on the existing facilities. Before the refinancing, Prysmian’s compound average spread on used committed credit lines was equal to 2.1%.

Italcementi has reported take-up of 99.42% for its €500m rights issue, with acceptances for 103.025m of the 103.622m shares on offer on a 3-for-7 basis at €4.825, a 32.67% discount to TERP. The remaining unsubscribed shares will be offered in the market this week. The deal was underwritten by Mediobanca and UniCredit as joint global co-ordinators, and joint bookrunners along with Credit Agricole, Natixis and Societe Generale.

Sovereign credit default swaps are on the brink of a fresh controversy following claims by Argentina that it has met its obligations on restructured bonds by depositing US$1bn with trustees to cover a coupon payment due on June 30. But an exceptional clause included in the documentation for the so-called exchange bonds suggests that the sovereign’s actions are unlikely to avoid triggering a CDS auction if bondholders remain unpaid. An order from New York judge Thomas Griesa relating to litigation from holdout creditors that refused to take part in bond exchanges in 2005 and 2010 extends to all third parties involved in payment flow for the bonds, ensuring that funds cannot be passed down the chain unless holdout creditors are repaid in full. Typically, terms and conditions for debt issues ensure that payments to the trustee would discharge the issuer’s legal obligation with respect to any payment. As a result, Argentina’s actions would have blocked any attempt to call a Failure to Pay credit event that would trigger CDS and put the sovereign in technical default. However, a close reading of the prospectus for the exchange bonds reveals an unusual – possibly unique – clause that indicates that Argentina has not met its obligations until payment reaches the bondholders themselves. “Argentina’s obligations to make payments of principal and interest on the New Securities shall not have been satisfied until such payments are received by registered holders of the New Securities,” the clause reads. The unusual wording, which suggests that those writing the document anticipated exactly the events that have come to pass, could prove to be a lifeline for holders of the US$21.7bn of gross notional in CDS outstanding on the name as it opens the door for a Failure to Pay event to be called by ISDA’s Credit Determinations Committee if bondholders remain unpaid at the end of the 30-day grace period. ISDA’s definition of a such a credit event defers to the terms of the obligations within the bond documentation, referring to “the failure by a Reference Entity to make, when and where due, any payments in an aggregate amount … in accordance with the terms of such Obligations at the time of such failure”. Regardless of the final outcome – and it is still uncertain given the legal scrutiny surrounding the documentation – the uncertainty around when and whether the CDS will trigger could prove to be the market’s biggest test since the 2012 Greek restructuring, which ultimately forced a re-hash of the credit definitions to fix a variety of flaws. To add to the confusion, the deposit could soon find its way back to Argentina. As of Friday afternoon, Griesa was understood to be taking steps to force the trustee, BNY Mellon, to repay the cash to Argentina. Repudiation bid fails Meanwhile, one CDS holder last week failed in its bid to rule the sovereign’s public refusal to meet its debt obligations as a credit event. Lawyers working for the CDS holder claimed that statements made by economy minister Axel Kicillof – that it would be “impossible” for the sovereign to pay its obligations in accordance with the legal terms – constitute a potential repudiation/moratorium event. Although viewed as highly speculative, the latest attempt to game CDS definitions raises questions around the subjective nature of such events, something that has been untested since publication of ISDA’s 2003 credit derivatives definitions. “In history and in practice, to trigger CDS you need something clearly identifiable. Repudiation is the least black-and-white of all the credit events and very difficult to interpret,” said a credit analyst at a US house. ISDA’s Credit Determinations Committee rejected the request sent by law firm Schulte Roth & Zabel on behalf of a client after Tuesday’s deadline passed without the required support from the 10-dealer and five-non-dealer voting panel to convene a meeting. “Ruling a repudiation or moratorium event can be an extremely subjective