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Geopolitics Driving: RUSSIA Update

18 January 2021 by jbchevrel

While the recent rally in energy prices and metals bodes well for Russia’s current account dynamics in 2021, geopolitics reasserted itself as a bearish factor today. Russia 5y CDS widened by +2.5bp on the day to 92.5bp [while comparable South Africa and Saudi 5y CDS were unchanged]. The curve steepened by that amount. Adding to that, the RUB lost more than half a percent vs USD. This is as some focus built up on the come-back of the controversial Putin opponent named Alexei Navalny into Russia today. A Russian court [set up at a local police station in the suburbs of Moscow] ordered the so-called ‘opposition leader’ Navalny jailed for 30 days, despite verbal efforts by US/UK/Europe politicians to free him. Navalny faces 3.5 years [maximum] in prison on charges he breached the terms of a suspended sentence. The European voices including Mrs Von der Leyen’s had the market give some probability to additional sanctions on Russia, as Russian officials including Minister Lavrov made it clear that Navalny had broken Russian law and could not just be freed. Later this month, the fate of Navalny in his trial, may indeed add more risk premium into instruments reflecting Russian risk. Elsewhere, it was a quiet session, with the US out on Martin Luther King day.

Soft Friday: AF-KLM Update

15 January 2021 by jbchevrel

Air France KLM-SA [AFKLM] is an airline company, whose activities include Passenger transport, Cargo transport and Maintenance. AFKLM is organized around hubs in Paris and Amsterdam and is at the core of the -70% drop in traffic seen in Europe. Today AFKLM CDS turned wider +40bp, after a relatively firm week. The appetite for airliner risk was notable, as seen on the occasion of the Wizz Air [BBB-n] deal earlier this week, which priced at 1.35% on their €500m 3y bond [order book was €2b]. However, Wizz Air has the highest cash reserves as a share of annual revenue compared to any airline in Europe. Their cash holdings seem enough to cover fixed costs for two years. This Friday’s price action contrasts with the current ‘rotation to value’ which has seen the compression of wider CDS spreads vs tighter ones. A bad news today for European air traffic is that European countries [including the UK] are set to receive fewer vaccines than expected from Pfizer starting next week, further delaying the point at which airliners will ramp up operations. In equity space, this week was marked by some short cutting. According to Bloomberg, Sandbar Asset Management LLP reduced its net short position in Air France-KLM by 20.63% to 2.14 million shares, or 0.50% of the company's stock as of Jan 14, 2021. POINT72 cut its short position in the company. Helikon Investments has the largest short position, with 11.6 million shares, or 2.70%.

Flow with the Fed: KBH CDS

14 January 2021 by jbchevrel

KB Home [KBH] engages in selling and building a variety of new homes. It builds various types of homes [attached, detached single-family homes, townhomes and condominiums]. It operates in 4 regions: West Coast, Southwest, Central and Southeast. It is headquartered in LA. The CDS of KBH is a constituent of the CDX HY index since series 12. This week was a good one for KBH longs, the company reported stronger-than-expected quarterly orders. This is as buyers rushed to take advantage of historically low mortgage rates in the US. The 5-year CDS of KBH has tightened close to 25bp in two days in the aftermath of the results, and the shares rose. For the three months through November, signed purchase contracts rose a steep +42% from a year earlier to 3,937 to be compared with a BBG consensus of analysts at 3,401. The order total was at the highest Q4 since 2005. The value of orders increased in all of the four regions covered, led by the Southeast [+69%]. KBH gross margin was 21%, a level the CEO said should sustain this year. The pandemic rally, driven by low mortgage rates, is lifting markets that were previously showing some weakness, including California, where KBH has a strong focus.

Telefonica CDS Update

13 January 2021 by jbchevrel

Telefonica S.A. (TELEFO) is an integrated and diversified telecommunications group operating in Europe and Latin America. Their services include Mobile, Fixed-line, cable, TV. They are mainly present in Spain, LatAm , UK, Germany. As of Q3-2020, TELEFO had €37B net financial debt, down from €38B at the end of 2019. Their EBITDA had averaged a tad above €16B per year over the 2016-19 period and is expected slightly below €14B for 2020. The issuer is rated BBB-/BBB/Baa3. TELEFO had been relatively conservative, piling up cash from €5.7B in 2015 to €9.2B in 2019, while their market cap got divided by 2 over the 2016-19 period. They had about that amount [€9.2B] of cash reported on their balance sheet at the end of Q3-2020. Today it was announced that TELEFO’s subsidiary Telxius Telecom signed a deal with American Tower to sell telecommunications towers division in Europe and Latin America for about €7.7B. The deal, which provides for a commitment to employment by ATC, is meant to include about 30k tower sites. TELEFO’s net financial debt will be reduced by about -€4.6B and net leverage by about -0.3x. As a result, TELEFO 5y CDS tightened by -10bp on the day, at 73bp, thus compressing -8bp vs benchmark iTraxx Main s34. TELEFO shares rose +11%, as today’s announcement shows the Spanish phone company is moving faster to cut its debt pile of €37B, one of the biggest in the industry. Elsewhere, it was a solid session in European credit synthetics [Main -1 XO -11]. The Europcar auction resulted in a 100% recovery driving compression in indices.