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All Eyes On Oil: update

03 April 2020 by jbchevrel

Oil price movements have driven to a decent extent the relative moves in EM sovereign CDS space, over the past week. Looking back at this week, we have had a clear outperformance of oil-dependent names, like Russia and Saudi Arabia, tighter on the week. while some other sovereign risks, facing other drivers, performed poorly. It is the case of Turkey and South Africa. So how have we been from $19/bbl to $28/bbl on WTI? How did the focus shift from ‘there isn’t gonna be enough space to store all crude’ and negative price talk to talks of $40+ prices if Trump’s tweet is true. Some upside was first seen after China was said to look to strategically buy oil to fill reserves, estimated by some around 500mb (came $20 to $22). More importantly, after that, President Trump said he had brokered a deal that could result in Russia and Saudi Arabia cutting output by 10MB/D to 15MB/D (came $22 to $27). For reference, this is huge, this is rouglhy representing 10-15% of global supply. But here is the thing. OPEC said they would want US Canada and Mexico to take part in cuts. Trump said he made no offer to cut US output. I haven’t head from Canada (world’s 4th-largest oil producing nation) directly, but Trudeau said his government is in talks with US and OPEC about resolving the price war. The recent crash threatens the very survival of some Canadian producers. Landlocked and lacking enough pipeline capacity to ship its crude to US refineries, Canada’s oil sands in northern Alberta have seen local prices plummet to record lows of less than $5/bbl. From now on, all eyes are now on the outcome of a meeting between POTUS and the oil companies later today, because the sense is that the final figure on cuts will depend on participation by all oil producing nations. On top of that, yesterday, Saudi Arabia called for an emergency meeting of OPEC and non-OPEC oil producers, saying it aimed to reach a fair agreement to stabilize oil markets. Kuwait’s oil minister supported that, and we learnt by Azeri energy ministry (non-OPEC) that the OPEC+ meeting was planned for April 6 and will be held as a video conference. This was first reported by Russia’s RIA news agency. Higher oil prices are in the interest of all sovereigns mentioned earlier, however as we could see, Russia was playing tough. Because their budget is less dependent on crude prices than some others like Saudi. A headline yesterday mentioned them working budget with $20/bbl. And they mean to sound resilient to the threat of further US sanctions. This morning it appeared that Russia hadn’t confirmed their participation to Monday meeting. But then Putin said oil producers should combine efforts. Then Novak said cuts should last a few months. So WTI is now north $28/bbl. We closed Russia 5y CDS at 180 and Saudi at 160. These are tighter by -25bp and -15bp respectively on the week.

Mega Deals

02 April 2020 by jbchevrel

The headline *T-MOBILE SETS SIZE OF FIVE-PART BOND SALE AT $19 BILLION hit the wires, after our European London close. This is huuuge. For context, TMUS had already received strong investor interest for their bond offering. Investors had placed more than $30 billion of orders for this highly-anticipated bond sale, which TMUS had started marketing nearly a year ago. The reason for the delay was that TMUS and S had to clear several regulatory hurdles in order to close this mega deal, then further complicated by the Covid-19 thing. Earlier today, BBG had reported that it may total $10 billion. This deal is of course to help finance its acquisition of Sprint Corp (S). The merger was formally completed just yesterday morning. The proceeds will help refinance a $19 billion bridge loan, while the remainder may be funded through bonds denominated in other currencies including euros. Before that news we had closed (on our European London close) TMUS 5y CDS unchanged on the day at 210bp mid and 195bp on S (was already -30 on day). Now the mid seems closer to 205bp on TMUS and 182bp on S (tighter -43 on day).

Short-End Steepening: CCL update

01 April 2020 by jbchevrel

Carnival Corp. (CCL) is a now-famous cruise line operator. Today we have seen a decent steepening (or more exactly, de-inversion) of the 1y-5y segment of the CDS curve. The 5y CDS is wider by +44bp on the day, closing at a context of 29%/34% (+100bp running) on our European close. The 1s5s 2s5s curves have steepened by +100bp and the 3s5s have steepened by +80bp. The news that came today is that CCL was boosting the size of its bond offering. They seek to raise $6.5 billion from debt and stock sales in order to boost liquidity. For context, CCL has $3B cash and they are burning in the area of $600-700M a month. Useless to say how devastating the COVID19 impact on that industry has been. Cruise operators cash burn rate ballooned with rising deposit returns on advanced ticket sales, although partially offset by deposits on new bookings and cash from secured financing. So people in these order books are betting that CCL will sail again after a series of virus outbreaks at sea. They will benefit from the fact that CCL bonds will be secured by a 1st-priority claim on the company’s assets such as its vessels and intellectual property. One positive aspect is that the mix of customers opting to take cruise vouchers in lieu of receiving cash on deposits has rebounded from a low ~10% about 2w ago. CCL is taking new bookings for 2021 sailings. Two potential positives: 1/ deposits on new bookings are ~ 10% of the ticket price, so a modest but incremental cash infusion 2/ dedicated cruise customers aren’t paying attention to ubiquitous media commentary that the industry is forever hobbled. Adding to the positive risks for this credit is the potential for US government support. Public comments of support for the industry are encouraging (Florida is a key swing state), but nothing concrete, atm. Potential low-interest loans would preserve industry jobs and, when the time comes, help kick-start operations at a lower cost of capital than having to borrow more, secured, against fleet as collat. For the time being. CCL has increased the bond sale to $4 billion after order books crossed $11 billion (!) A lot of cash looking for allocation, at this juncture. CCL coupon was also cut to about 12% from 12.5%, according to the anonymous sources quoted by BBG. CCL is still IG on the paper, but the bond sale is unsurprisingly being managed by HY syndicate desks, one of the highest coupons ever offered (even at the reduced ~12%), and most orders are from HY accounts. This theme is far from over, there is a lot of cash looking for allocation and which can flow into bond offerings such as CCL’s, in the short term, more of that can help steepen number of IG curves. Based on the 3s5s, CCL was the biggest mover today, but closely followed by some oil names (OXY DVN HES HAL), and other high-betas (ALLY JWN). Another observation is that what has been seen in IG has not been seen in HY in a comparable scale, so another consequence of this theme could be more decompression to come. As far as CCL is concerned, it still has ships at sea bearing sick passengers that are seeking to dock, so the focus will probably shift back to that once the deal is done.

Energy Story: CNQ update

31 March 2020 by jbchevrel

Canadian Natural Resources Ltd. (CNQCN) acquires, explores for, develops, and produces natgas and crude oil. CNQCN operates in the Canadian provinces of Alberta, British Columbia and Saskatchewan. In 2017 it agreed to buy Royal Dutch Shell's oil sands assets in Canada for a bit less than $10BN. It has become one of the country's largest natural gas producers. The company has large oil holdings (light, medium, and heavy crude assets). Mainly in Canada, but also in North Sea and offshore West Africa. CNQCN has reported proved reserves of 3.8BN barrels of oil, bitumen, and natural gas liquids (including 1.9BN barrels of synthetic crude oil), and 4.3TN cubic feet of natural gas. CNQCN produces on average 632KB/D. The CDS is closely linked to crude prices, in a non-linear way. In Jan-Feb, WTI came down -27% (from 62 to 45 with a peak at 66 on Iran/US tensions) and CNQCN CDS widened by just +35bp from 55 to 90. It was still <100bp in the first days of March. Then WTI lost an additional -40% (based on EOY19 level) and CNQCN CDS started diverging to close at a peak 425bp on Mar20. While WTI is still pretty close to the low end ($20), CNQCN CDS has retraced some of the weakness. We close almost 100bp off the close-to-close wide, here at 335bp. WTI had averaged ~$54/bbl over the first 2 months of the year, some analysts see further downside from here, in case this planet runs out of places to store oil. The continuity of such a price environment will probably spur further reductions to capital budgets, and expanding credit lines, for CNQCN. Credit ratings are surely at risk. Based on press releases from the rating agencies, it appears that S&P has taken the most pessimistic view with respect to near-term ratings risk (‘next few weeks’), while Moody’s appear to be exercising a bit more patience. Moody’s also noted that the magnitude of the current price decline is less severe than the drop in 2014-16 and it does not view this as a “structural shift”. As such, Moody’s views a wave of ratings actions as an unlikely scenario. CNQCN ended 2019 with quite strong liquidity position, available liquidity of $4.4B. It is fair to expect share buybacks at CNQCN to be stopped as a 1st order move to preserve liquidity. At the 2nd order, dividend cut is also possible. Aggressive reductions to capital spending budgets are also anticipated. Its peer Husky has already announced (on March 12, 2020) a 27% reduction to its 2020 capital budget. We may well see a capital budget reduction of c20% a minima at CNQCN.