BE Commentary: Bonds rally in November from better CPI print and policy support from China

• Bond markets rallied from better CPI print and Chinese government support for its property sector

• ESR announced the completion of ESR Langfang Chunhui Business Park in Northern China and a joint venture with STACK Infrastructure

• In 1H22, Olam reported positive free cash flow of SGD 465.7m and total available liquidity of SGD 24.3b

• FWD announced PCCW Wealth Limited is offering a tender offer to bondholders of the FWDGRP 5.750% 09Jul2024 Corp (USD)

• Rising interest rates had a positive impact on Commerzbank 

In the month of November, the bonds market rallied slightly due to better than expected inflation numbers for the month of October.  CPI increased by 0.4% in October and resulting in a year-over-year (“yoy”) increase of 7.7% (vs. consensus estimate of 8.0% yoy). The rise in inflation was contributed by shelter, gasoline and food. The 7.7% yoy increase in inflation was the lowest yoy increase since January 2022.

In China, The People’s Bank of China and the China Banking and Insurance Regulatory Commission jointly issued a notice to financial institutions to lay out plans to rescue its property sector.

The plan touched on 16 topics being: 1) property development loans for developers; 2) home buying requirements for individuals; 3) construction companies; 4) extension on developer borrowings; 5) bonds; 6) trust financing; 7) special loans for project completion; 8) additional support to ensure residential project completion; 9) property project acquisition; 10) market-based approaches including bankruptcy and restructuring; 11) homebuyers’ mortgages; 12) mortgage repayment; 13) easing major restriction on banks’ property lending; 14) fundraising for acquisitions; 15) lending on rental properties; and 16) diversify fundraising for rental properties.

This was the strongest signal from the Chinese government to address its ailing property sector. Asian bonds rallied as a result, with the Bloomberg Barclays Asia USD High Yield Index gaining 15.5% in the month of November.

Table 1: Top traded bonds on SG Bond Express in November

ESR Group Limited

ESR Group Limited (“ESR”) announced on 8 December 2022 that the company has completed construction of its manufacturing facility, ESR Langfang Chunhui Business Park in Northern China. The property has more than 48,600 sq.m. of planned gross floor area. It is located in Langfang Economic and Technological Development Zone which is between Beijing and Tianjin.

ESR also announced their joint venture with STACK Infrastructure (“STACK”) to develop a 72MW data centre campus in Osaka. STACK and ESR will jointly develop the data centre in Osaka’s eastern suburb of Keihanna. The construction will commence in 4Q23 and will be ready in 2Q25.

Olam Group Limited

For the half year ended 30 June 2022 (“1H22”), Olam reported SGD 28.4b in revenue, a 24.6% year-over-year (“yoy”) increase from the year prior. Volumes also increased by 0.5% to 22.5 million tons. Trade volume was contributed mainly by OGA (89.8%), followed by ofi (8%), while the remaining Olam group contributed 2.2%. EBIT also saw growth of 25% yoy to SGD 802.1m on the backdrop of inflationary pressures and supply chain disruptions.

In 1H22, Olam reported positive free cash flow of SGD 465.7m. Liquidity for Olam remains strong with total available liquidity of SGD 24.3b from cash and short-term fixed deposits as well as from unused banking lines. Available liquidity consists of cash and short-term fixed deposits of SGD 6.4b, SGD 6.6b of readily marketable inventories, SGD 1.3b of secured receivables and SGD 10.1b of unutilised banking lines. Total liquidity is enough to cover its borrowings of SGD 19.0b in 1H22. Short-term borrowings made up SGD 10.0b of total borrowings. Debt servicing ability from Olam is adequate with an interest coverage ratio of approximately 2.45x. Olam are in discussions to allocate various debt facilities between the three operating groups. This allows OGA to tap on debt facilities to repay debt obligations or for working capital needs.

Refer to our article – “Idea of the Week: Here’s a bond to take advantage of higher food prices” for further credit insights on Olam.

FWD Group Limited

FWD Group Holdings Limited (“FWDGRP”) announced that PCCW Wealth Limited (“PCCW”) is offering a tender offer to bondholders of the FWDGRP 5.750% 09Jul2024 Corp (USD). PCCW is offering a tender offer price of 94 and the maximum tender consideration is USD 30m.

The tender offer will commence on 25 November 2022 and will expire on 9 December 2022. PCCW Wealth Limited is a direct wholly owned subsidiary of PCCW Limited. PCCW Limited is a Hong Kong information and communications technology company listed on the Hong Kong Stock Exchange (HKEX: 0008). The company is founded by Richard Li, who also holds significant shareholding in FWDGRP. Richard Li holds approximately 30.89% equity interest in PCCW Limited and FWDGRP is indirectly majority owned and controlled by Richard Li. At a maximum tender amount of USD 30m, PCCW will hold below 4% of the outstanding amount of the notes after the tender offer is completed.

We do not find the tender offer attractive as the tender price is close to its current indicative price of 94.1. The fall in price for the FWDGRP 5.750% 09Jul2024 Corp (USD) is likely due to the rise in benchmark interest rates in the US which led to a negative impact on USD bonds. Considering that FWDGRP’s solvency ratios have a significant buffer over their regulatory requirements, we think FWDGRP is still very well capitalised. We think bondholders are better off to hold their FWDGRP 5.750% 09Jul2024 Corp (USD) which will mature in approximately 1.6 years and will be redeemed at par value of 100.

Commerzbank AG

For the nine months ended 30 September 2022 (“9M22”), Commerzbank reported operating profit of EUR 1,571m, a significant increase from EUR 1,042m in 9M21. The consolidated profit stood at EUR 963m in 9M22, as compared to only EUR 9m in 9M21.

The effect of the rising interest rates had a positive impact on Commerzbank. Despite the mandated credit holiday in Poland that resulted in a charge of EUR 270m in mBank’s statement, we see an overall rise in the profitability for 9M22 as compared to 9M21. The Polish government introduced the credit holiday in July 2022 to allow the temporary halt of instalments on borrowers’ mortgages for eight months, which has to be split across 2022 and 2023. While it resulted in a charge of EUR 270m, the total revenue of EUR 1,886m in third quarter of 2022 (“3Q22”) was able to sufficiently offset this impact.

For Commerzbank’s CET1 ratio, the current 13.79% as of 9M22 has a CET1 buffer of 435 basis points, to the required level of 9.44%, which is a slight increase from the CET1 ratio of 13.72% as of the second quarter of 2022.

The “Strategy 2024” intends to keep the CET1 ratio above 13.0% across 2022, followed by the target to hit 14.8% by 2024. While Commerzbank remains on track, there is still a significant difference for it to make. Regardless of the target, we believe Commerzbank has had managed its credit profile with prudence, and expect it to remain decent until we see the plans past “Strategy 2024”.

Refer to our article – “Idea of the Week: European banks have a high chance of calling their Tier 2 & this could be the next” for further credit insights on Commerzbank.

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Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in ESRCAY 5.650% Perpetual Corp (SGD), OLGPSP 5.375% Perpetual Corp (SGD), FWDGRP 5.750% 09Jul2024 Corp (USD), VW 4.250% 09Oct2025 Corp (GBP), CMZB 4.200% 18Sep2028 Corp (SGD) and the analyst who produced this report hold a NIL position in the abovementioned securities.

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