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Higher rates and inflation spark corporate bond cancellations – Industry roundup: 19 July

Corporate bond deals pulled as cheap money ends

Planned corporate bond deals are increasingly being called off as the end of central bank stimulus leaves companies starved of cheap funds, reports the Financial Times.

The FT notes that companies rarely pull the plug on bond deals once bankers are actively trying to sell the debt to investors, but Bloomberg data for June 2022 reveals that pulled or postponed deals in the Europe, Middle East and Africa (EMEA) region more than tripled compared to May.

Although records of cancellations are scarce “there have probably been more transactions withdrawn from the market in the last three months than the last three years”, the paper was told by Mark Lynagh, co-head of debt markets for Europe at BNP Paribas.

With benchmark interest rates being raised by central banks around the world and the war in Ukraine adding further impetus to higher inflation, fund managers are demanding much higher returns in exchange for their investments. With the risk of recession growing, companies are resisting the higher price tag after years of largesse but bankers believe that companies will ultimately have to learn to live with pricier debt.

“It used to be a child’s play: you would put a deal out there, the European Central Bank (ECB) would come in with a massive order and everyone else would pile in,” said one banker.

“Now, it’s much more difficult. The market’s already contending with inflation and interest rates. Then there’s the Ukrainian war, the Bank of England wanting to sell down its corporate bond portfolio and the ECB asset purchase program finishing. It’s the worst possible time for all these things to be happening together.”

Central banks cut interest rates close to, or even below zero in response to the financial crisis of 2008, with support increasing when Covid-19 struck in 2020. Through its asset purchase schemes, the ECB owned €345 billion of companies’ debt at the end of June, against €195 billion early on in the pandemic, often buying debt in the so-called primary market when it was first issued. Companies snapped up the opportunity to issue cheap debt, with US$1.2 trillion hitting the European market in 2021, according to Refinitiv data.

While the ECB is now reinvesting maturing assets it has stopped buying fresh debt. If enough private sector investors step up to buy a bond anyway, attracted by good interest payments or a reliable issuer, the lack of ECB support does not matter. But in tricky market conditions, or for shakier borrowers, the ECB provided essential support.

The value of new corporate bonds reaching the global market fell by 17% in the first half of 2022 from a year earlier, according to data from Refinitiv. Riskier so-called high yield issuance dropped 78% reaching its lowest level in the first half since 2009.

This slowdown is bad news for banks handling the fundraisings. In high yield deals, banks underwrite companies’ debt and then sell it to specialist investors. But banks can take losses on these deals if investors demand higher borrowing costs than expected.

One banker described conditions as “horrendous” in speculative debt. “Most bankers are losing money in high-yield issuance. There’s no liquidity,” he added. Several bankers report that it has become a “buyers’ market”, allowing investors to be more selective and making life difficult for less mainstream borrowers.

Analysts at rating agency Moody’s warn that companies with low cash flow and high amounts of floating-rate debt, where interest payments rise in line with benchmark rates, risk not having enough cash to service or refinance their debt. Floating rate debt makes up 18% of high-yield bonds in Europe.

For issuers, the end of cheap money means the fear of missing out on good financial conditions in 2021 has given way to a fear of making mistakes in a volatile market.

“Companies do not want to take the risks,” said one of the bankers. “If you’re a chief financial officer or a treasurer and you get board approval but then you pull the bond, it does not look good for you or the company.”

South Korea invites 10 banks to join CBDC testing

South Korea is progressing to the next phase of its central bank digital currency (CBDC) development, which is real-world testing, according to a report by Ajo Economy News. In this phase, the central bank intends to onboard commercial banks to test interoperability between the CBDC and their IT systems.

The Bank of Korea has invited at least 10 commercial banks, including Shinhan Bank and NH Nonghyup Bank, to take part in the testing, states the report. Participants will test the CBDC for making remittances and payments between individual users. 

The phase is expected to conclude later this year, as the Bank of Korea says it plans to publish an updated report on the CBDC project by the end of 2022, which will be its final one before a decision on whether to release a CBDC. The Bank is said to be still undecided about whether to push ahead with a CBDC despite having completed two phases of research into the subject.

“Even if the CBDC research is completed, it will take a long time to actually introduce it,” an official from the Bank of Korea said. In May, the central bank indicated that it would review the pros and cons of launching a CBDC along with ongoing efforts to study regulations being proposed to regulate the digital assets industry.

South Korea accelerated the pace of its CBDC initiative last year. The first phase saw the central bank select Ground X, the ConsenSys-backed creators of the Ethereum-based Klayton permissioned blockchain, to build the CBDC platform. It concluded once the platform became able to create, issue, and redeem digital assets, as well as allow end users to create wallets. 

The second stage followed in early 2022 and focused on introducing more advanced capabilities to the CBDC platform. It explored smart contracts, Layer 2 scaling possibilities such as zero-knowledge (zk) proof technology, offline payments, tokenisation and cross-border settlements. 

Details of how the Bank of Korea conducted these tests on the CBDC platform, including cross-border settlements, remain sketchy as it is yet to publish its results of the experiments. Reports from other international regulators such the Bank for International Settlements (BIS) and G20, which have been monitoring central banks doing work on CBDCs, do not cover South Korea.

ANZ acquires Suncorp Bank in US$3.35bn deal

Australia’s Suncorp, which last month announced plans to dispose of its banking division and refocus on insurance, has signed an agreement to sell the business to ANZ for A$4.9 billion (US$3.35bn).

The sale includes the Queensland based lender’s A$47 billion of home loans, A$45 billion of deposits and A$11 billion in commercial loans. ANZ thereby becomes Australia’s third largest banking operation after CBA and Westpac, pulling ahead of NAB and Macquarie.

The deal, subject to regulatory approval from the Federal Treasurer Jim Chalmers and the Australian Competition and Consumer Commission (ACCC), includes a cash sale of Suncorp Bank to ANZ for A$4.9 billion (A$1.3 billion of goodwill paid above net tangible assets). According to Bloomberg, ANZ will raise A$3.5 billion at a 12.7% discount for the Suncorp deal after the latter announced its divestiture plans.

It has also raised doubts over whether ANZ will still pursue its potential acquisition of software firm MYOB from private equity group KKR. Talks between the two were reported last week, with suggestions that ANZ might be seeking to win market share in small and medium enterprise (SME) lending through an integrated banking and accounting offering. According to a brief statement: “ANZ and KKR are yet to reach agreement in relation to the acquisition and there is no certainty it will proceed.”

Suncorp will continue to operate under the Suncorp Bank brand and ANZ intends to operate it as a separate business until 2025.

“As a dedicated insurance business, we will be singularly focused on meeting the needs of our customers and communities at a time when the value of insurance has never been greater” said Suncorp Group CEO Steve Johnson.

He said that the group would continue to be at the forefront of advocating for a more resilient Australia and for all levels of government to focus on mitigating the impacts of major weather events through “improved public infrastructure, subsidies to improve private dwellings and an overhaul of planning laws.”

ANZ CEO Shayne Elliott commented: “The acquisition of Suncorp Bank will be a cornerstone investment for ANZ and a vote of confidence in the future of Queensland. With much of the work to simplify and strengthen the bank completed, and our digital transformation well-progressed, we are now in a position to invest in and reshape our Australian business. This will result in a stronger more balanced bank for customers and shareholders.”

Egypt, Saudi Arabia and Turkey “ready to join BRICS”

The five major emerging economies of Brazil, Russia, India, China and South Africa – aka the BRICS – expect at least three new members to join them in the group, suggests a report.

In an interview with Russian newspaper Izvestia, Purnima Anand, president of the BRICS International Forum said that she expects Turkey, Egypt and Saudi Arabia to join the group “very soon” and that China, Russia and India had last month discussed the three countries’ membership applications at the 14th BRICS Summit, which was held online last month.

“All these countries have shown an interest in joining and are preparing to apply for membership. I think this is a good step, because expansion is always perceived positively; this will clearly increase the influence of BRICS in the world,” said Anand. "I hope that the accession of countries to BRICS will happen very quickly, because now all representatives of the core of the association are interested in expanding the organisation, so it will be very soon.”

Their membership bids could be discussed and potentially agreed at next year’s Brics summit in South Africa, with the trio “already engaged in the process,” she added. However, Egypt, Saudi Arabia and Turkey might not join BRICS simultaneously.

Li Kexin, Director-General of the Department of International Economic Affairs of the Chinese Foreign Ministry, said that the three applicants, along with Argentina and Indonesia, were among several countries “knocking on the doors” of the organisation.

The BRICS forum originally formed as BRIC in 2006 with four members and South Africa joining four years later. Each is characterised as an industrialised developing country with a major emerging economy, which collectively are home to half of the world's population. The combined gross domestic product (GDP) of US$13.6 trillion is equivalent to that of the US and their total foreign exchange reserves are US$4 trillion.

The first annual BRICS summit was held in 2009, At the 2017 gathering at Xiamen, China, an expansion plan was mooted, whereby new countries could be added to the BRICS group as permanent guests or participants in the dialogue. Late last month Russian state-run media claimed that Argentina and Iran had begun preparatory work for joining the alliance.

With many Russian banks evicted from the SWIFT payments network and sanctions imposed on his country following its invasion of Ukraine, Russian President Vladimir Putin has been promoting the concept of BRICS developing a new “basket-based” global reserve currency to challenge the dominance of the US dollar.

The basket is envisaged as containing the five present members’ currencies — the real, rouble, rupee, renminbi and rand — and would also create an alternative to the International Monetary Fund’s (IMF) Special Drawing Rights (SDR) international reserve asset.

Deutsche Bank agrees €100m loan for Naviera Armas

Deutsche Bank has agreed a loan of €100 to 150 million to Spanish shipping operator Naviera Armas Trasmediterránea after its request to the state-owned Sociedad Estatal de Participaciones Industriales (SEPI) for €125 million in funding was turned down.

Naviera Armas has experienced financial problems since 2018, when it grew via the €260.4 million acquisition from Acciona Group of a 92.7% stake in ferry operator Trasmediterránea. Losses increased following the outbreak of the Covid-19 pandemic and resulting restrictions on travel in 2020 and lengthy negotiations with SEPI on a debt restructuring plan ended without agreement.

According to local media reports, the largest shipping conglomerate in Spain will receive an ordinary loan at an interest rate of 5% to 6% from Deutsche Bank.

Naviera Armas Trasmediterránea has become the most important shipping company in the Canary Islands and a major operator in Europe’s maritime passenger and ro-ro transport sector. Its fleet of 40 ships normally transports more than five million passengers per year. These connect the main ports of four countries and more than 100 passenger and cargo locations on the routes of the Balearic Islands, the Canary Islands, Melilla, Ceuta, Morocco and Algeria.

Bank Indonesia sells government bonds to absorb excess liquidity

Indonesia's central bank has reduced its holding of government bonds, selling rupiah (IDR) 390 billion (US$26.03 million) of bonds in the secondary market, according to a Reuters report that cited a bank official.

The sale marks a stepping up of Bank Indonesia’s (BI) normalisation of monetary policy after it kept liquidity in Southeast Asia's largest economy very loose in response to the pandemic. BI is regarded as one of the world’s least hawkish central banks, with its key interest rate held at 3.50% at its most recent meeting last month as inflation has held within its 2%-4% target range, although central bank governor Perry Warjiyo has indicated that this week’s policy meeting on 20-21July could see a rate hike announced to contain inflationary pressures.

BI has already begun to tighten the financial system’s liquidity by making gradual increases in Indonesian banks’ reserve requirement ratio from March to September. “After raising the reserve requirement ratio ... BI has also strengthened rupiah monetary operations via the sale of government bonds in the secondary market," Edi Susianto, BI's head of monetary management department, told Reuters.

The sale was also intended to improve the supply and demand conditions in the money market and the bond market, he said, adding this was part of BI's efforts to maintain the stability of the rupiah currency. BI would continue selling, Edi said.

BI's liquidity normalisation efforts are underway while it continues to act as a standby buyer in government bond auctions, part of its agreement with fiscal policymakers to stabilise bond yields. Last August, the Bank announced that it would purchase up to IDR215 trillion of tradeable bonds in 2021 and IDR224 trillion in 2022 to help the government control its interest payments.

According to finance ministry data, as of 14 July BI held a total of IDR824.54 trillion worth of government bonds, excluding those used in monetary operations with banks, compared with IDR801.46 trillion at the end of 2021. Warjiyo has assured markets the net impact of BI's operations this year would be a reduction in banking liquidity to a level that would not disrupt lending.

US exempts Russian agri commodities from sanctions

The US government has confirmed that sanctions against Russia do not extend to trade in agricultural commodities or fertiliser, amid growing concerns that the war in Ukraine is causing a “global crisis of food insecurity”.

The US Department of the Treasury has clarified that businesses are permitted to import and export food for humans and animals, seeds for crops and fertiliser from or to Russia, as part of a general licence issued recently.

Providing insurance or reinsurance services in support of such trade activity is also permitted and financial institutions are authorised to process transactions without contravening sanctions, the department says in a separate fact sheet. 

The clarifications come in response to concerns that Russian trade restrictions are accelerating hikes in agricultural commodity prices, which have in turn triggered fears over the affordability of food for millions of people around the worldwide.

“Russia’s war against Ukraine has exacerbated acute and chronic food insecurity driven by conflict, climate change, and Covid-19,” the Treasury Department says in a press release. 

“Putin’s war has strangled food and agriculture production, and he has used food as a weapon of war by destroying agricultural storage, processing, and testing facilities; stealing grain and farm equipment; and effectively blockading Black Sea ports.”

US sanctions on Russia have generally avoided food-related products, instead targeting oil and gas, gold and other precious metals, and the movement of funds through state-affiliated businesses and financial institutions. 

However, many companies active in other sectors are reported to have switched to alternative suppliers outside Russia, seeking to avoid accidental exposure to restricted entities or reputational damage from continuing to trade with the country.

Digital DCM gets boost from DBS Bank

Singapore’s DBS Bank is encouraging corporate and financial borrowers to self-issue commercial paper direct to debt capital market (DCM) investors while longer-dated bonds will also soon be accessible.

Euromoney reports that DBS has taken the boldest step yet in digital DCM with its new platform FIX Marketplace, Asia’s first fully digital and automated fixed-income execution platform.

The platform creates a new primary issuance distribution channel by giving issuers an interface through which they can directly issue their own bonds into the marketplace, without direct intervention from a bank. Investor orders can be made directly, allocation is transparent and the documentation and trade confirmation is quick and digitalised. Many capital markets participants see blockchain as the future, but few want to go all-in on the new technology.

“FIX is the first of many steps in the ambition of the digitalisation of the capital markets,” said DBS Global Head of Fixed Income, Clifford Lee. “The first steps have been taken, the creation of a platform where issuers, lawyers, investors and other banks can work together directly. We were testing the pipes: short duration, low credit risk, high grade. Then this year we will take the next steps.”

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