Tuesday 26th July 2016
NEWS TICKER: JULY 25TH 2016: Moody's says that Vedanta Ltd's (unrated) revised merger terms with Cairn India Ltd. (unrated) have no immediate impact on Vedanta Resources plc's B2 corporate family rating (CFR), Caa1 senior unsecured notes rating and negative outlook. While the revised terms entail a rise in debt/cash out flow of an estimated $447m -- compared to $120munder the original terms -- they will give Vedanta Ltd. complete access to Cairn India's large cash holdings, as well as provide the flexibility to reduce debt, thereby lowering leverage and reducing subordination within the group. As such, the successful execution of the merger, to the extent that it leads to de-leveraging, will be credit positive. Positive rating implications could emerge if adjusted leverage improved to less than 4.5x on a sustained basis. Should the merger proceed as announced -- subject to approval, in some cashless, all-stock transaction -- minority shareholders will receive one equity share and four 7.5% preference shares in Vedanta Ltd. for every share held in Cairn India. Shareholders will have the option of redeeming the preference shares within 30 days, or holding until maturity for 18 months. Following completion of the transaction, Vedanta Resources' shareholding in its subsidiary Vedanta Ltd will fall to 50.1% from 62.9%. At the end of June this year, Cairn India had $3.5 billion in cash and no external debt outstanding." Although delayed from the initial announcement in June 2015, the revised terms are a step forward in the merger proceedings -- the merger will provide Vedanta Ltd. better access to Cairn India's large cash balances of $3.5 billion, as previous access was only possible through the up-streaming of dividends," says Kaustubh Chaubal a Moody's Vice President and Senior Analyst. - The World Bank is beginning work on a new project, aimed at supporting the poorer regions of Poland by better utilising European Union funds made available to the country through the European Union Financial Framework 2014-2020. Representatives from Podkarpackie and Świętokrzyskie, the two regions selected for this work, will cooperate with experts from the World Bank, the Ministry of Development, and the European Commission during this project. The project - part of a European Commission initiative - will also include two regions in Romania. Poland and Romania are the first to implement this pilot project, whose objective is to increase the absorption of European Union funds and support socioeconomic development at the local level. “We are happy that we will be able to use our global experience, as well as our knowledge of the conditions in Poland, to support the Polish authorities in developing the country’s lagging regions,” says Arup Banerji, World Bank regional director for European Union countries - The Straits Times Index (STI) ended 4.87 points or 0.17% higher to 2945.35, taking the year-to-date performance to +2.17%. The top active stocks today were Singtel, which gained 1.66%, DBS, which declined 0.06%, Wilmar Intl, which declined 0.97%, UOB, which gained0.26% and ComfortDelGro, with a1.73% fall. The FTSE ST Mid Cap Index declined 0.84%, while the FTSE ST Small Cap Index declined0.24%. Elsewhere in Asia, Taiwan stocks retreat from over 1-year high; TSMC down. Taiwan stocks retreated from more-than-one-year highs on Monday as investors took profits on recent winners such as Taiwan Semiconductor Manufacturing Co (TSMC). The main index fell 0.6 percent at 8,954.58 points. It reached as high as 9,085.91 earlier in the session, an intraday level not seen since July 2015. The electronics subindex and the financial sub-index were both down about 0.7%. TSMC, the world's top contract chip maker, was off nearly 1%. The yen traded weaker with trade data showing better than expected figures though exports and imports declined notably ahead of a week that will see the Fed and the Bank of Japan comment on monetary policy. The adjusted trade balance came in at a surplus of ¥33bn while and imports eased 18.8%, less than the 19.7% drop expected and exports fell 7.4%, less than the 11.6% decline anticipated. The overall trade balance came in at a surplus of ¥693bn, better than the ¥495bn expected. USD/JPY changed hands at 106.32, up 0.18%, while AUD/USD traded at 0.7478, up 0.17%. GBP/USD traded at 1.3135, up 0.19%. -- Rangold Resources will be announcing its Q2 results at the London Stock Exchange on Thursday, August 4th – Most equity markets kicked off higher today, buoyed by the firm tone of the G-20 Finance Ministers meeting which promised “to use all policy tools –monetary, fiscal and structural- individually and collectively” to achieve the goal of “sustainable, balanced and inclusive growth” in view of lingering concerns over spillover effects from Brexit. Central bank meetings will be the focus of market attention this week. The Fed is widely expected to leave its monetary policy unchanged this week. However, a recent string of better than expected U.S. data reignited speculation that the Federal Reserve will raise interest rates before the end of the year. Interest rate futures are currently pricing in a 45% chance of a rate hike by December, compared with less than 20% a week ago and up from 9% at the start of this month. The Fed monetary oversight committee starts its two-day meeting tomorrow. However, the story this week will focus on the Bank of Japan: will it, won’t it expand its monetary policy, without ‘helicopter money’? According to Russell Matthews, a portfolio manager at Russell Matthews, “Core government bond markets have largely moved sideways and very short dated US rates have repriced the probability of a Federal Reserve interest rate hike in 2016 meaningfully higher. Corporate bonds have continued to perform well as the insatiable demand for yield is unabated, with spreads compressing in all sectors… Rate and sovereign credit have had a good run of late but the question we are asking ourselves is are we at the point where policy makers and investors have become complacent? Our mantra has always been that policy makers are likely to be lazy and under deliver if there is no pressure from markets. We have been through two major risk events in the last six weeks (Brexit, Turkey) and risk assets have continued to perform. We expected and anticipated this outcome, but that does not prevent us from becoming uneasy at the level of calm that we are witnessing, and the growing confidence that the market has with policy makers.” The other trend on investors’ minds will be the EU’s stance on Italy’s growing banking crisis: will the EU stick its ostrich like head in the sand? Elsewhere in Europe, Greek Minister of Finance Euclid Tsakalotos stated in an interview on Saturday that the primary surplus targets until 2018 are attainable and the government will not have to activate the automatic spending cuts mechanism. Beyond 2018 and in the medium term, however, the Greek government will pursue through negotiations primary surplus targets below 3.5% of GDP -

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Investors remain keen even as pfandbrief issue volumes fall

Friday, 09 December 2011
Investors remain keen even as pfandbrief issue volumes fall German covered bonds (pfandbriefe) largely maintained their safe-haven status with investors through the deteriorating financial environment in the second half of 2011, despite an inevitable dramatic slump in primary issuance as markets took fright at developments—or lack of them—in the eurozone. What now? Andrew Cavenagh reports. http://www.ftseglobalmarkets.com/

German covered bonds (pfandbriefe) largely maintained their safe-haven status with investors through the deteriorating financial environment in the second half of 2011, despite an inevitable dramatic slump in primary issuance as markets took fright at developments—or lack of them—in the eurozone. What now? Andrew Cavenagh reports.

With just €1.5bn of jumbo pfandbrief issues since the end of June, and none since Eurohypo’s €1bn deal at the end of August, the primary market this year will fall way short of the €87bn recorded in 2010. Verband Deutsche Pfandbriefbanken (VDP), the association of German pfandbrief banks, now reckons the final figure for this year will come out at around €65bn, against its earlier forecast of €90bn, on the back of the €47bn of bonds that were sold in the first six months, including €19.8bn of jumbo transactions.

Pfandbrief spreads have nevertheless remained relatively stable, compared with most other classes of capital market debt and covered bonds elsewhere. While the differential between pfandbriefe and German sovereign debt (bunds) may be approaching historical highs at around 120 basis points (bps), average spreads are still only about 30bps over the mid-swaps benchmark as those on most other covered bonds are well into three figures. “Flight to quality has prevailed, and the pfandbrief has confirmed its benchmark position in the covered-bond market,” maintains a VDP spokesman.



This spread stability looks set to endure through next year. For even if EU authorities take the measures necessary for the bond markets to resume normal functioning, the overall pfandbrief market will continue to shrink, which will tend to support the current spread levels. In the jumbo sector of the market, for instance, most banks are forecasting that primary issuance will be around €26bn while redemptions, although lower than the €44bn this year, will still total €38bn.

Investor confidence in the market received a further boost on November 23rd, when the Moody’s rating agency raised its base-case timely payment indicator for mortgage-backed (hypotheken) bonds issued under the Pfandbrief Act from  “probable high” to “high”. The agency cited the strong legislative and regulatory support for the pfandbrief regime as the reason for its decision, including recent amendments to the act. These require issuers to maintain a so-called liquidity buffer of at least 180 days in respect of their pfandbrief commitments and enhance the powers of a cover-pool administrator in the event of an issuer insolvency. The pfandbrief market is nevertheless facing significant challenges over the next 12 months and beyond, which could yet alter the historical perception—which German banks and financial authorities are keen to maintain—that the instruments trade almost as an homogenous asset class.  

The increasing emphasis that both the rating agencies and investors are placing on the link between issuers and their covered bonds is certainly threatening to create a great deal more discrimination in the market, particularly in the present environment where individual banks’ sovereign exposures are under the microscope.

Moody’s decision to place UniCredit’s covered bonds on review for downgrade a week after it announced it was reviewing the bank’s senior debt rating was a recent example of such linkage. Moreover, the trend could clearly see the spread spectrum in the asset class widen significantly from historical norms. Timo Böhm, portfolio manager and member of the covered bond team at Allianz Pimco in Munich, says the mounting concern over banks’ exposure to the sovereign debt crisis has led to a more pronounced linkage between the spreads on an institution’s covered bonds and those on its senior unsecured debt. “That link to the seniors and the sovereigns is much tighter now, and therefore everybody is looking at what could be the worst case here,” Böhm explained. “Even if the covered bond is rated triple-A, its spreads will widen on these concerns.”

“From our point of view, covered pools should be split,” says Böhm. He points out that banks now price their commercial property loans to reflect the different degrees of risk involved, and that it was not unreasonable for bond investors to require the same consideration. However, issuers continue to oppose the need for such a move. They say the pfandbrief legal framework offers investors adequate protection while the transparency of the cover pools allows them to choose the type of investment that most closely meets their requirements.

“They can decide themselves what kind of strategy suits them best,” says the VDP spokesman. He points to mortgage pfandbriefe backed 100% by residential mortgages: “If you like to take entirely residential mortgage risk, you find such bonds, too,” he says. While that is clearly the case, it is equally evident that issuing banks that have high concentrations of commercial loans in their cover pools are going to have to pay progressively more for the privilege.

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