Who's in the frame for Tom King's job?

Life is simple, the saying goes, but we insist on making it complicated. Executives at the International Swaps and Derivatives Association might reflect on those words as they consider the wreckage of their latest attempt to bring credit default swaps back into the investment mainstream. To the inglorious roll of CDS controversies – which includes Cemex, Bankia, Greece, Caesars Entertainment, SNS Reaal and Radioshack, to name just a few – must now be added Portugal’s Novo Banco, an entity created out of the failed Banco Espirito Santo in 2014. After ISDA deliberations running for a month and a half, an external panel last week decided that the Portuguese central bank’s December transfer of €2bn of bonds from Novo Banco to Banco Espirito Santo – which saw those bonds lose 90% of their face value – did not constitute a “government intervention”. Discussions as to whether the move constituted a succession event are ongoing. Only when ISDA is involved can a government intervention be determined not to be a government intervention. To be fair, the panel was no doubt correct in how it interpreted the key clause that determined whether a government intervention had taken place. But that doesn’t let ISDA off the hook. If anything, it makes the industry body look even more culpable. After all, the clause in question was introduced as part of an overhaul to ISDA’s Credit Derivatives Definitions as recently as 2014 as a direct response to the fact that post-crisis raids by regulators on European banks – most notably events surrounding SNS Reaal – had also failed to trigger CDS. This was, indeed, the first test of the new language. Not surprisingly, disappointed investors have been quick to point to ineffective drafting, and the bemusing failure of the standardised terms to anticipate the Bank of Portugal’s action, or anything of its ilk. Investors are now calling for ISDA’s draughtsmen to have another go, amending the amendment for the purposes of clarity. It remains to be seen whether a workable definition of government intervention can be reached. What is clear is that ISDA – and its lawyers – can’t afford to get it wrong again. What happens if a financial instrument doesn’t behave in a relatively predictable way? Simple: investors and traders stop using it. The Neel deal The newest Federal Reserve president, Neel Kashkari, put the issue of “too big to fail” banks back on centre stage last week. In a deeply political speech to the Brookings Institute, Kashkari, a former Goldman Sachs banker turned banking populist, argued that no one believes the US government would allow JP Morgan to collapse in a financial crisis (no more than Germany would let Deutsche Bank fail). And that big banks should therefore be broken up. The speech had as much to do with Kashkari’s political ambitions as with an honest critique of the state of play in the banking industry. But does he – and the many others who make similar arguments – have a point? Perhaps. And he might even have unlikely allies in bank shareholders. With many bank shares trading below book value – in some cases at just half – it is clear investors either do not believe what they are told by bank bosses, and/or they think banks are just too complex to manage and are inherently inefficient. So maybe it is time for shareholders – and those running banks – to start to listen to the logic of those market prices and begin to consider how and when certain banks should be broken down into more manageable pieces. Better that those running banks work with their owners to make such moves themselves, rather than have them imposed from above. Buy back, or else A little over a year ago, the Indian government set itself the manageable task of raising Rs410bn (US$6bn) from the sale of shares in state-owned companies in the fiscal year that ends this March. Markets were buoyant and India Inc was still basking in the warm glow of the Modi government’s ambitious reform agenda. The sales would inject some muc

Chicago-headquartered insurer CNA Financial got a lukewarm reception for its 10-year senior bond on Friday despite offering a hefty concession to its curve, according to a lead. Bookrunners Citigroup, JP Morgan and US Bancorp were unable to tighten guidance from IPTs of Treasuries plus 260bp, and had barely covered the US$500m trade by lunchtime. That was despite a banker on the trade saying the pricing offered a 28bp concession to the issuer’s existing 2024 bonds. An investor said the lukewarm reception was probably mostly down to Pepsi stealing the limelight with its benchmark deal. But some prospective buyers might also have been put off by CNA’s ownership – its parent Loews Corporation is a conglomerate with connections to oil and gas production and transport. “That’s got to be in people’s minds,” said the investor. The firm will use some of the proceeds to retire US$350m of 6.50% senior notes due this August. The week’s rally in bond and equity markets lost steam on Thursday afternoon. And while equities ended their three-day winning streak, bonds opened flat on Friday. “We liked the idea of having the runway to ourselves, as it’s going to be busy next week,” said the banker on the deal on Friday.

The Asian Development Bank had the SSA market to itself on Friday when it priced a US$1.15bn four-year Global floating-rate note. ADB set initial price thoughts on a February 2020 issue at three-month Libor plus 32bp area on Thursday. The trade priced in line with that level on Friday. ADB has three outstanding US dollar fixed-rate deals with 2020 maturities, according to Tradeweb. The development bank continued its short-dated run, after tapping investors in January for a US$1bn two-year FRN, which priced at three-month Libor plus 15bp. Bank of America Merrill Lynch, BNP Paribas and Morgan Stanley led the deal.

Obrascon Huarte Lain’s unwillingness to call a 2020 note has sent its bonds tumbling as investors grow nervous that the company is unable to summon sufficient liquidity to refinance the expensive debt. Price action was particularly savage on OHL’s €400m 4.75% 2022 and €317m 5.50% 2023 bonds, which dropped eight and 11 points to cash prices of 60 on Friday February 12, according to Tradeweb. The notes remained bid at 61.60 and 63.30, respectively, last Monday, although they had recovered by the end of the week to 68.90 and 69.40. The company’s failure to file a call notice on its €262m 7.625% 2020, which becomes callable for the first time on March 15 at a price of 103.813, is the reason behind the steep drop, two investors said. “The market is punishing them because they didn’t issue a call notice on the 2020s on Friday, which was the earliest opportunity they had to issue it,” said one of the investors on Monday. The 2020 bond fell from a 97 cash price the previous Thursday to 89.50 on Monday, according to Thomson Reuters data. The expectation of the call came as OHL raised €1bn of fresh equity in October, with €650m of the rights issue’s proceeds earmarked to repay debt. The company launched a bond tender the same month targeting up to €300m of paper, but only ended up repurchasing €38m of its 2020s and €8m of its 2023s. The two investors said the company had guided that it did not buy back more bonds as it was waiting for the costs of calling the 2020 bonds to step down. The second investor said the market would be monitoring the situation closely. “They should have enough cash to call this bond and they told equity investors they want to reduce gross debt and cash interest,” he said, noting that the 2020 note has the highest coupon of its outstanding bonds. “If they don’t call it, it’s a very negative signal. It’ll suggest that their liquidity is a lot lower than the market thinks.” The €1bn capital raising was launched to end concerns about OHL’s complex debt structure, which came under intense scrutiny from credit and equity markets last year. The company’s bond prices tumbled last summer following allegations of corruption at its Mexican unit, margin calls on several loans and concerns about the limited disclosure of a €1bn intercompany loan. A group of banks also had to price a €325m bond at a deep discount in April 2015, as they underwrote it at lower yields than the market would accept, costing them up to €20m. The police searched the property of OHL board member Javier Lopez the Thursday before last, but the investors said this was unlikely to have triggered the slide in bond prices.

The merger of Liberty Global’s Ziggo and Vodafone’s Dutch operations should result in billions of euros of new high-yield bonds or leveraged loans being issued, according to market participants. Liberty Global and Vodafone are forming a 50-50 joint venture, combining Netherlands broadband and cable TV company Ziggo with Vodafone’s Dutch mobile operations. Vodafone is making a €1bn cash payment to Liberty Global and contributing its Netherlands business to the JV on a debt-free and cash-free basis. The new joint venture will target leverage of 4.5x–5.0x covenant Ebitda – in line with Liberty’s other European business – and expects to raise new debt financing to reach this target, distributing the proceeds from the financing equally between Vodafone and Liberty Global. One investor said this should translate to around €2bn of new debt, with another saying the figure could be as large as €3bn. Barclays credit research analysts said that €2bn of new issuance would bring leverage in line with 4.75x. While Liberty has a history of executing new debt deals very quickly after announcing M&A trades, a leveraged finance banker said that he was not expecting a new deal imminently. “There’s still some antitrust risk in there and if they already had committed financing I think they would’ve announced it in the press release,” he said. The second investor noted that Ziggo is a regular issuer in the leveraged loan market and could turn to that market if conditions in high-yield are unappealing. The banker said that Ziggo traditionally raises around 80% secured financing and 20% unsecured. Market participants have long anticipated a deal between Liberty Global and Vodafone in some form, although talks about wider asset swaps across Europe broke down in September. “This deal is alright – although I’d argue that 5.0x leverage is less appropriate for their weaker Dutch business than it is for Unitymedia or Virgin,” said the first investor, referring to Liberty Global’s German and UK operations. “The reason this is interesting though, is whether it’ll be the hors-d’oeuvre before the main course arrives.” He said that the success of the deal could determine whether the two companies pursue similar strategies for Unitymedia and Virgin. The second investor said that the antitrust approval process for CK Hutchison’s US$14bn purchase of O2 from Spain’s Telefonica could determine what happens in the UK. “The fact that T-Mobile Netherlands was also up for sale gave Liberty a strong bargaining chip in negotiations with Vodafone here,” he said. “If the O2-Hutch deal falls through, then O2 would be back on the market and would give them similar leverage over Vodafone in the UK.” He noted that the terms of the deal allow either JV party to buy the other out after four years, which could potentially see Ziggo’s bonds return to investment-grade if Vodafone buys the whole business. Ziggo’s bonds traded up on news of the deal, with its €400m 4.625% 2025 note strengthening a point to 93.70 on Tuesday morning.

Coca-Cola HBC has appointed Credit Suisse, Deutsche Bank and Societe Generale to arrange a series of fixed income investor meetings in Europe from this Wednesday. A euro-denominated capital markets transaction may follow, it said in a statement. The issuer is rated Baa1 (stable) by Moody’s and BBB (stable) by S&P.

European CLO spreads widened last week, fuelling worries that deepening risk aversion among investors will stump a pipeline of deals that issuers are looking to bring to market. As investors remained cautious, levels in the lower part of the capital structure were pushed out even beyond the eye-watering spreads seen on BlackRock’s debut trade. Triple Bs widened out to near 600bp, while Double Bs were spotted in the low 900s before dropping to the high 800s as a small number of investors trickled back to the market in search of bargains. “I’m not sure it makes any sense to bring a deal at the moment,” said one CLO manager. “Whoever decides to do anything right now, it’s likely to get very ugly.” BlackRock saw its Triple Bs placed at a discount margin of 550bp and Double Bs at 820bp, according to sources. The CLO manager had to drop the deal’s Single Bs, after whispering the tranche at 850bp–870bp last month. The further widening seen last week raised questions about what lies ahead for a growing pipeline of deals, some of which have been struggling to come to market since last year. Leveraged loan spreads have dropped off in the past two weeks, which has added to the pressure to print. “Things are going wider and it’s a very difficult market to get things done,” said a second CLO manager. “And right now, you want to print a deal because the asset side is so damn good.” Seven CLO managers are hoping to place deals at the moment. Among them is BlueMountain, which is looking to bring its debut European deal via JP Morgan. The group first began shopping the deal around last year, but opted to hold off as thin investor interest pushed out senior spreads across the CLO space. But deepening market woes and competing supply could dampen BlueMountain’s debut print. “It’s a manager with a very limited track record in loans and the current market doesn’t help,” said one investor. “They should have probably printed in December – they would have had an easier time.” One market source said he believed BlueMountain was exploring a potential originator-style structure, which allows issuers to meet risk retention requirements by holding the capital remotely in an SPV. Others understood to be in the market are CVC Capital Partners via Credit Suisse, CSAM via Morgan Stanley and 3i via RBC. ICG is reportedly shopping around a deal, as is Pramerica through JP Morgan. Rothschild also recently began pre-marketing a trade via Deutsche Bank, two sources said. The investor noted the market would likely absorb about two of these, but buyers would likely pick and choose carefully. “If you have limited cash to spend, you’ll pick the managers you like,” he said. “That’s where we are in the market.”

THERE’S AN OLD saying that if you can remember the 1960s, you weren’t there. One day there will be an equivalent to the effect that if you knew what was going on in markets during February 2016, you weren’t there either. To be fair, levels of economic uncertainty are significant and the outlook for sustainable growth is questionable. But while that might justify the occasional outbreak of fear and greed, I can’t quite see how it can cause such a relentless onslaught on investors. The two most powerful central bankers in the world – Janet Yellen and Mario Draghi – have been quite clear that the market turmoil will not drive their policy, although they both acknowledge that growth will not pick up at quite the rate they had expected just six months ago. It is nonetheless hard not to wonder what is going on behind their calm exteriors. Do they truly believe what they are telling us, or do they, like the rest of us, sit at home at night wondering what the hell happens next? AT THE TIME of writing, I am sitting on a Caribbean beach, largely surrounded by friends in their late 60s and early 70s who have either sold up and retired or who have passed the family business on to the next generation but who are still involved in some way, albeit at arms’ length. Barely a day goes by when one of them does not pop in, ask me what the markets are doing and why. For those living on their investments, the volatility in equity markets is pretty scary. For those whose wealth is still tied up in the family business it is no better. The Yellens and the Draghis of this world don’t have that problem as they can look forward to their taxpayer funded, inflation-proofed pensions. So when push comes to shove, the level of the S&P, the FTSE or the Eurostoxx is of no more than academic interest to them. That might, to some extent at least, explain how sanguine they appear in the face of indices that can sell-off one day and rally back again the next – by what should be a year’s total return performance. And then, to put the cherry on the top, we are told that the authorities are pleased with the way the reforms they imposed upon markets after the crisis of 2008 are working and that they are comfortable that markets are coping well with the uncertainty. I don’t know what these people are smoking but, whatever it is, I want some of it too. THE STOCK OF outstanding tradable assets – that being stocks, bonds, funds reflecting the value of everything from currency baskets to palm oil farms and all stations in between – increases year on year, while the markets’ ability to trade them efficiently decreases. The Street always acted as something of an equalisation basin which absorbed an excess of selling and fed an excess of buying at its own risk. High frequency trading aside – I’d happily ban the practice, as it provides no value-added to the price-finding process for which markets exist – I’d be surprised if more than a very small percentage of portfolio stock is ever turned over in a day’s trading. Ideally, the Street’s gross aggregate absorption capacity should be more or less equal to two or three days’ worth of one-way portfolio traffic. That’s quite a lot, trust me. Without it, however, current levels of daily price volatility will continue. How can the powers that regulate us be serious when they declare themselves to be satisfied when bond prices are moving by points on fractional turnover? Such statements show them to be either, pardon the thought, ignorant of the markets they regulate or, even worse, lying to us through their front teeth. TRADING – ANY KIND of trading – whether of second-hand cars or options on futures, has always been a bit of a game of pass-the-parcel, but it’s only really since the newly imposed (rather than organically evolved) market practices have taken root that the parcel always seems to be ticking … and if it’s not ticking, all the worse. The ludicrous price action in contingent capital notes should be a warning that ther

Vodafone has been forced to include investor protection for the first time ever with regard to a planned €3bn–€4bn bond issue, after push-back over a lack of covenants forced the telecoms company to shelve a multi-billion dollar deal in November. Vodafone hired Bank of America Merrill Lynch, Commerzbank, Deutsche Bank and ING to arrange investor calls on Friday ahead of a four-tranche euro deal, which could come as early as this Monday, a lead bank confirmed. But Vodafone is taking no risks this time around and is offering a change of control put option for the new bonds.    “Vodafone are suddenly having to change their tactics after having to pull their US deal: they’re also running through around €6.5bn of commercial paper, so they need access to the capital markets again,” one investor said. Investors said the change of control language is imperative to the deal’s success, but some still have concerns that future M&A deals could ratchet up leverage.   Last Monday, Liberty Global and Vodafone announced a new 50-50 joint venture that will combine their Dutch businesses, which some credit analysts think could be a prelude to a wider combination of the two companies. Liberty targets up to five times leverage on its European businesses, all of which have high-yield credit ratings. In addition, some say that the provisions could prompt investors to demand the same covenants for Vodafone’s existing bonds. “The CoC will divide opinion. It’s against Vodafone’s style to do this but they had little choice after the last deal being pulled,” said a banker away from the deal. “It also gives the buyside more leverage to change the language of the bonds they already hold.” The change of control option is triggered if more than 50% of Vodafone is acquired and the company loses its investment-grade rating as a result, according to documents seen by IFR. Talk is cheap Despite the change of control options being added, investors are still banking on receiving a premium for the new bonds while market conditions remain volatile. “We’ve been underweight due to the acquisition risk and general market volatility, but now they’ve included the CoC, we could go overweight if it comes cheap enough. The premium is likely to be chunky and their outstandings have widened a fair bit,” one investor said. “We’ll buy and then sell it back down again,” said another. Vodafone’s outstanding curve widened around 15bp after the news of the potential new supply was announced on Friday morning, with its 1.875% June 2025s bid 16bp wider to 133bp over mid-swaps, according to Tradeweb prices. “To announce a mandate for a deal on Monday at the earliest on a weak Friday is a foolish move, you should never take weekend risk,” a syndicate banker away from the deal said. Vodafone also attracted attention on Thursday when it began marketing a £2.88bn convertible bond, although the deal did not price until the following day due to a dispute about the convertibility terms. As part of their own hedging effort, lead managers JP Morgan and Morgan Stanley bought 45% of the bonds. Vodafone is rated Baa1/BBB+/BBB+ (all stable) and will be using funds from the convertible and the upcoming bond issue for general corporate purposes, according to a lead. (See “Vodafone brings first sterling mandatory” for comment on Vodafone’s convertible.)

Mining giant Anglo American is looking to buy back up to US$1.3bn-equivalent of its outstanding bonds, as it seeks to tackle short-term maturities and demonstrate its strength despite losing its investment-grade rating. Anglo is targeting a total basket of US$5.4bn-equivalent of euro, sterling and US dollar bonds, with maturities ranging from December 2016 to September 2018. The tender was announced hours after S&P downgraded the company by two notches to BB, becoming the third ratings agency to strip Anglo of an investment-grade rating last week. The global miner also announced further details of its restructuring plan on Tuesday, laying out a series of potential asset sales to reduce debt. One high-yield bond investor said that while he thought a bond tender was a possibility, he did not expect a buyback to emerge so soon. A banker close to the deal said that the tender had been planned “for a while”, however. “We thought it was worth waiting for            the company’s announcement this week and then the ratings actions before launching,” he said. The company is funding the purchases from its available cash, which stood at US$6.9bn at the end of 2015. But the banker said that Anglo had also signed a two-year revolving credit facility that will be equivalent to the amount of 2017 and 2018 bonds purchased, to make the exercise liquidity-neutral. CEO Mark Cutifani said on Tuesday that the company aims to reduce net debt to less than US$10bn by year-end, from US$12.9bn at the end of 2015. More than cosmetic While buying back bonds with cash will not improve Anglo’s net debt, it has other benefits. The banker said that the lower interest expense would bolster free cashflow, while buying back bonds below par offers one-off gains, although he added that Anglo would have to incur some costs by cancelling interest rate swaps. “I think they’re really making a bit of a point around reducing short-term debt and short-term refinancing needs,” he said. Anglo American’s bond prices have plummeted in recent weeks, particularly at the long end, with its €750m 3.25% 2023 note plunging as low as 60.50 after the Moody’s downgrade earlier last week. But bond prices had recovered even before the buyback was announced on Thursday, with the same note bid at 69.50 before the tender was publicised. It rallied more than a point to a 70.80 cash price after the tender’s announcement, before trading back down to 69.40 according to Tradeweb. Nearer-term maturities, such as its 2020 notes, rallied even more during the week, up more than 10 points over three days to 74 on Thursday. A second investor said there were a lot of factors contributing to the price movements. “Some of it is macro with improving markets and commodity prices. But it’s also to do with short-covering and repositioning after the downgrades, as high-yield guys are more constructive on the name,” he said. “The Glencore refinancing also shows that banks have confidence in commodities, particularly as it was oversubscribed with no maintenance covenants.” Mining and trade house Glencore announced that it had raised US$8.4bn in commitments as part of an early refinancing of its short-term debt on Wednesday. While Glencore has not announced a large-scale formal bond tender since the commodities downturn, the banker noted that it has bought back small amounts of bonds on the open market. Lazy shorts The three downgrades to Anglo American’s credit rating will push it into high-yield bond indices for the first time. Bank of America Merrill Lynch analysts said in a note last month on potential “fallen angels” that Anglo would make up 2.1% of the Merrill Lynch Euro High Yield Index. Moody’s hit the company with the toughest downgrade, taking its rating down three notches to Ba3 and retaining a negative outlook. The agency announced the cut on Monday, the day before Anglo American announced plans to sell its iron ore, coal and nickel units in order to cut debt. Moody’s negative outlook on the

Energen is the latest exploration and production company to cut debt through a stock sale, raising US$335m in a pre-open block trade early on Wednesday. Credit Suisse priced 15.8m shares at US$21.15, towards the lower end of a US$21.05–$22.05 marketing range but an increase from the 12m shares at the launch of the deal at 6am New York time. The bank concentrated allocations in the hands of large institutions that already held the stock but also placed a portion with new accounts. Energen shares closed the week at US$24.83, reflecting not only follow-through buying on the deal but short covering by investors that had bet against the company. Analysts have noted that investors have been shorting highly-leveraged companies and Energen was a target – Energen shares closed 2015 at US$40.99 and short interest in the name had grown from 6.1% to 7.2% from December 31 to January 29. Energen is undervalued relative to its Permian Basin peers by almost any measure. On the basis of price/book, the company trades at 0.67x, versus 0.9x and 1.9x for RSP Permian and Diamondback Energy respectively and at 8.7x EV/Ebitda, compared with 13.7x and 16.4x for RSP and Diamondback, based on consensus estimates. One reason, say analysts, is higher debt leverage – 2017 year-end net debt to trailing 12-month Ebitda falls from 2.7x to 1.6x pro forma the equity raise, said analysts at Cowen in a research note last week. Energen is using deal proceeds to fully repay US$225m drawn on an asset-based revolver as of December 31. The timing is not coincidental. Energen, rated B3 and BB by Moody’s and Standard & Poor’s, is readying for a semi-annual redetermination of the facility in April. The size of the facility, which carries a maximum incurrence of 4x net debt-to-Ebitda, was reduced from US$1.6bn to US$1.4bn on the autumn redetermination in October. In conjunction with the release of fourth-quarter earnings last week, Energen eliminated its quarterly stock dividend and said that it would slash development capex in 2016 to US$225m–$325m, from US$370m it spent last year. The company also said it hoped to fetch US$400m from asset sales. ”They wanted to get the revolver paid down,” said the syndicate source. “It gives them financial flexibility and allows them to be patient on asset sales.”

EQT, a fast-growing explorer focused on the Marcellus Shale, raised US$380m on a stock sale ahead of the market open on Friday that benefited from reverse investor inquiry. The offering fully offsets a cashflow shortfall this year as the company continues to expand production, though it already has ample liquidity. Goldman Sachs, sole bookrunner, placed 6.5m shares at US$58.50, the upper-half of a US$57.25–$59.50 range and a 4% discount to Thursday’s US$60.92 close. The bank concentrated allocations with existing, long-only institutions and energy-dedicated hedge funds that had previously shown interest in the name, according to a syndicate source close to the deal. EQT shares traded mid-morning on Friday at US$59.06, comfortably above the reoffer price. The shares are up 13.5% this year, easily outperforming the struggling broader energy sector. The financing was purely opportunistic. EQT finished the year with US$1.25bn of cash and a US$1.5bn asset-based revolver. The company unveiled plans in December to spend roughly US$1bn on capex this year, versus US$600m–$650m of expected operating cashflows it expects to bring in. “We were comfortable with a capex estimate that was moderately higher than our operating cashflow estimate for 2016,” EQT chief executive David Porges said on the fourth-quarter earnings call on February 4. “However, we do not have any plans to significantly erode that strong liquidity position, as we believe that our current conservative financial approach is appropriate for today’s environment.” EQT is the latest in a string of E&Ps to access the equity markets, following the US$1.5bn and US$334.2m raises by Devon Energy and Energen earlier in the week. However this financing clearly is more opportunistic and signals that a potential acquisition may be in the works. “We have been looking to add to our core acreage position for the past year but have not yet transacted, as sellers have not fully accepted the valuation impact of low commodity prices,” Porges said on the earnings call. “As market conditions continue to evolve, it seems reasonably likely that there will be some actual transactions in the first half of 2016,” added Porges, noting that any purchase would “more likely” be focused on smaller assets rather than larger a whole company.