Financial Times UK - 18.09.2019

W e d n e s d a y 1 8 S e p t e m b e r 2 0 1 9 A FINANCIAL TIMES 2 5

M A R K E T S & I N V E ST I N G

R O B E RT S M I T H A N D M I C H A E L P O O L E R
LONDON

Sanjeev Guptais making deep conces-
sions to debt investors to salvage his
first attempt at a high-yield bond deal,
which missed its planned pricing date
afteratepidresponse.

The UK metals mogul hiredJPMorgan
this month to raise $475m in debt for
InfraBuild, an Australian steel and recy-
cling business, after plans for a flotation
of the unit were shelved.
The five-year unsecured bond was
scheduled to price last Friday, following
a week of investor meetings, but missed
this target date after low demand,
according to several people familiar
with the matter.
JPMorgan yesterday added a new col-
lateral package to the deal, giving bond-
holders a stronger claim on InfraBuild’s
assets, in a bid to generate more
demand.
The bank indicated that the deal
could price at about the 10 per cent yield
mark, according to four high-yield bond
fund managers. This would be an unu-
sually high rate given the bond’s Ba3 and
BB- ratings from Moody’s and Fitch. The
average yield on Ice’s BB Global High
Yield index is less than 4 per cent.

The investors said the deal struggled

because of concerns about the opaque

nature of theGFG Alliancegroup, a

loose association of mostly private busi-

ness controlled by Mr Gupta and his

father. “There is a real business here and

the assets are good,” said one fund man-

ager. “The issue is with [the owner].”

JPMorgan and GFG Alliance declined

to comment.

The high interest rates InfraBuild is

having to offer add to questions about

the strategy of GFG Alliance, which has

expanded in the past few years through

a string of acquisitions. GFG is not a legal

entity itself and so does not publish con-

solidated accounts, but consists of inde-

pendent businesses in sectors from met-

als and manufacturing to banking.

Mr Gupta, a former commodities

trader, has snapped up smelters, mines,

power stations and banks to build a con-

glomerate with $20bn in annual reve-

nues.

Until now, GFG has largely relied on

funding linked to invoices and supplier

payments, rather than traditional capi-

tal markets.

InfraBuild’s high-yield bond is

intended to repay A$745m ($509m)

of such asset-backed debt, from

private finance firmsWhite Oakand

Greensill Capital.

White Oak’s A$200m facility carried

a double-digit annual interest rate,

according to people familiar with the

matter, which pushed some investors to

demand a similar coupon on the new

high-yield bond.

If JPMorgan is unable to sell the bond,

InfraBuild will not receive a new

A$250m asset-backed lending facility

from the US investment bank. JPMor-

gan used a similar structure on Sirius

Minerals’ abortive $500m bond sale.

GFG’s difficulty in selling the InfraBuild

bond comes as the group faces problems

on other fronts.

One of its flagship investments, the

Dunkirk aluminium smelter in France,

has breached several terms of a $350m

loan, according to people aware of the

matter. While Dunkirk has not missed

any scheduled payments, some of these

breaches relate to issues such as delayed

filing of audited accounts for the smelter

business, the people added.

InfraBuild is made up of the recycling,

distribution and construction products

divisions of the former Arrium, an Aus-

tralian steel and mining group that GFG

bought out of administration in 2017.

Fixed income

Metals magnate Gupta hopes collateral will lure investors

M A M TA BA D K A R , M Y L E S M C C O R M I C K

A N D DA N I E L S H A N E

Oilretreatedsharplyyesterdayfromits

biggest one-day jump in a decade as

investors weighed a positive report on

the outlook for bringing Saudi Arabia’s

output back online after an air strike

onthecountry’sproductioninfrastruc-

tureattheweekend.

Brent crude, the international oil

marker, was down 5 per cent at $65.61 a

barrel, while West Texas Intermediate,

the US benchmark, slipped 4.6 per cent

to $59.99 as they appeared to reverse

some of the previous session’s gains.

The moves followed an unconfirmed

report from Reuters that Saudi oil out-

put would be back online fully in the

next two to three weeks.

Estimates have varied wildly for how

soon Saudi production will return after

the attacks at the weekend. Four people

briefed on the damage assessments told

the Financial Times on Monday that

production could take months to return

to normal.

Brent had surged as much as 20 per

cent on Monday before trimming those

gains to clock its biggest one-day rise

since 2009 after a drone strike on Saudi

Arabia’s largest oil processing centre,

which accounts for about 5 per cent of

global crude supply.

Yemeni rebels claimed responsibility

for the attack on the Abqaiq facility, but

the US has said that it was orchestrated

by Iran.

“While the ultimate impact will

depend on a combination of the extent

of damage, the US and Saudi response,

and whether further attacks occur, the

current production decline will exacer-

bate the tightening in the oil market that

was already under way and could add a

more lasting geopolitical risk premium

to prices,” said Greg Sharenow, a portfo-

lio manager at Pimco.

The Abqaiq plant is operated by Saudi

Arabia’s state-run oil companySaudi

Aramco, which has been planning an

initial public offering.

See Lex

Commodities

Oil price falls on report of

fast recovery in Saudi output

Sanjeev Gupta: tepid demand for bond caused it to miss target date

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R O B I N W I G G L E S WO RT H ,
K AT I E M A RT I N A N D C O L BY S M I T H

A $1tn fall in the value of bond markets
this month is rekindling one of the big-
gest debates in finance: is the bull run in
bonds finally coming to an end?
For decades, the only way for bond
prices has been up, reaching mind-
boggling records in recent months. By
the end of August, $17tn of bonds,
about a third of the total, were trading
at such high prices that buyers were
guaranteed a loss if they held them to
maturity, rewriting the rules of fund
management.
The rally, fuelled of late by nerves
over trade wars and runaway expecta-
tions for stimulus, has meant borrowers
have been able to bring new debt to mar-
ket at a tiny or negative cost, piggyback-
ing on investors’ hunt for safe assets.
Last week, however, this all-consum-
ing free money craze took a rare whack.
The yield on the Bloomberg Barclays
Multiverse — the broadest bond gauge
that tracks debt with a value of more
than $58tn — has risen sharply this
month, from a record low of 1.4 per cent
to 1.65 per cent as of the end of Friday.
In dollar terms, that translates into
the bond market losing over $1tn of
value in 10 trading sessions. It means
the stack of negative-yielding bonds has
shrunk by over $3tn. Bonds remain his-
torically highly priced even now, but the
pullback suggests some of the forces
pushing nervous investors into the pre-
mier safe assets have been overdone.
“There is no question that Europe
taught us that if we have a recession,

there really is no lower bound [in inter-

est rates],” said Gershon Distenfeld, co-

head of fixed income at asset manager

AllianceBernstein. “But if we avoid the

worst, rates are probably too low.”

The moves have been sharp. The 10-

year Treasury yield has risen from a low

of 1.46 per cent in August to 1.82 per

cent, the Bund yield has climbed from

minus 0.71 per cent to minus 0.49 per

cent, and the 10-year Gilt yield is up

from 0.41 per cent to 0.68 per cent.

Even benchmark borrowing costs in

Japan — caught in the vice of the central

bank’s “yield curve control” policy —

have risen from minus 0.29 per cent to

minus 0.15 per cent.

The Multiverse index has lost 1.4 per

cent already in September. If sustained,

this will be the worst monthly loss in

more than a year, and the 13th biggest

monthly decline of the past decade.

European markets have added to the

sense that the rally, while not about to

reverse, is running out of steam. Last

week the European Central Bank cut

deposit rates even deeper below zero

and restarted its bond-buying pro-

gramme in a fresh effort to drag up dour

inflation. Bond yields in the region,

however, have not declined further.

“Since the ECB meeting last week, the

market’s narrative seems to be chang-

ing, and we tend to agree with the shift,”

RBC analysts argued in a note. “We rec-

ommend not to fight the yield increase.”

Investors appear more open to believ-

ing that the global economy will dodge a

recession. Optimists can point to upbeat

US retail sales or a turn in German senti-

ment, and argue that the most extreme

bearish cases for the UK and Italy

appear somewhat less likely. That adds

up to a brightening outlook that hurts

the bond market, according to RBC.

The bank’s strategists said: “All these

arguments are falling on fertile ground

as the market had worked itself in a neg-

ative state of mind during August.

Hence there is likely to be a substantial

amount of position adjustment still to

come once asset allocation committees

have met.”

China’s announcement of a bevy of

policy changes at the start of the month

marked the turning point for the sum-

mer’s bond market narrative, which had

“overshot”, at least partly due to techni-

cal factors such as mortgage bond hedg-

ing, according to Ashish Shah, co-chief

investment officer for fixed income at

Goldman Sachs Asset Management.

Société Générale has advised clients

to lighten exposure to fixed income in

response to “overly aggressive” bets on

the scale of impending monetary easing

from central banks.

But analysts and investors are reluc-

tant to call the end of the bond market’s

long-term rally, given the forces that

power it. Inflation — the market’s kryp-

tonite — remains an unlikely danger,

and although a global recession might

be averted, there are disappointingly

few signs of a durable upswing.

The end of the three-decade bond

bull run has been spotted more often

than Elvis. However, given the length of

the post-crisis global expansion and

simmering Sino-US trade tensions,

many investors remain persuaded that

the all-time low in bond yields has yet to

be seen.

“We have to recognise that yields are a

function of a lot of things... There is

still a tremendous amount of uncer-

tainty when it comes to economic

growth, politics and trade policy,” Mr

Distenfeld said.

Technical factors still underpin the

fixed income market, such as nearly

indiscriminate appetite from long-term

institutional investors that are likely to

seize on any pick-up in yields.

“You have to look at who the buyers

are,” said Sophie Huynh, a cross-asset

strategist at Société Générale. “The pen-

sion funds, the insurers — they don’t

have a choice, and that is not going to

change tomorrow. You are still going to

have the flows.”

Before one could call the bottom in

global bond yields, investors needed to

see the economy weaken significantly,

markets sell off, and the Fed embrace a

full rate-cutting cycle, said Priya Misra,

head of global rates strategy at invest-

ment bank TD Securities. “We are

nowhere close to the bottom in rates.”

The negative-yielding debt

universe has diminished by

more than $3tn since August

Optimists

point to

favourable

US retail

sales or a

turn in

German

sentiment,

and say

extreme

bearish

cases for

the UK and

Italy appear

less likely

The yield on the

Multiverse has

risen sharply

this month,

from a record

low of 1.4% to

1.7% as of the

end of Friday

Brendan McDermid/Reuters

Fixed income.Pullback

Free money craze curbed but analysts

shrink from calling end to bond rally

H U D S O N LO C K E T T, G E O R G E H A M M O N D

A N D DA N I E L S H A N E— HONG KONG

Anheuser-Busch InBevhas scaled back

its ambitions for an initial public offer-

ing of its Asian business, with the

world’s largest brewer planning to raise

about half what it aimed for just two

months ago.

The Budweiser producer said yester-

day that it would raise up to HK$37.9bn

($4.8bn) selling shares in Hong Kong

next week in a move that would value its

Asian businessBudweiserAPAC at as

much as $50bn.

The second attempt to sell a minority

stake in the Asian business comes two

months after AB InBev abandoned

plans to raise almost $10bn as investors

balked at the price. Days after shelving

that plan, AB InBev sold its slower-

growing Australian beer business to

Japan’sAsahifor $11bn.

“We are even more a growth company

than we were two months ago,” saidJan

Craps, chief executive of Budweiser

APAC, pointing to the sale of the Aus-

tralian beer business. He said the

brewer would again be willing to drop

the Asian IPO if the price range of

HK$27 to HK$30 failed to appeal to

investors. “Of course it’s possible [that

we walk away], but we’re quite confi-

dent that the interest is there.”

In contrast to its first IPO effort in July,

AB InBev has secured a so-called cor-

nerstone investor — a shareholder that

subscribes for a large chunk of shares in

advance subject to a lock-up period.

This type of investor is common for

Hong Kong offerings.

GIC, the Singapore state fund, has

agreed to buy $1bn of shares and hold

the stock for at least six months, Bud-

weiser APAC said.

Bookbuilding for the sale will begin

today, with pricing expected on Mon-

day. Shares are due to begin trading on

the Hong Kong bourse, whose parent

company is trying to buy the London

Stock Exchange, on September 30.

Mr Craps said that the brewer was

keen to expand in Asia following the

IPO. Revenues at Budweiser APAC

climbed 7.4 per cent to $6.74bn last year.

“South-east Asia are the most inter-

esting markets in which to expand our

platform,” he said, pointing to Thailand,

Vietnam, the Philippines, Laos and

Myanmar. “These markets have not

been fully premiumised and the inter-

national brands are not really there yet.”

Mr Craps said that the south-east

Asian market was fragmented because

local brands did not have regional distri-

bution. “We can bring our scale to the

table and our best practice. When we

look at those markets we think that

value can be created,” he added.

Trevor Stirling, a beverages analyst at

Bernstein, said the price range was “sen-

sible” and offered investors a reasonable

upside.

Equities

AB InBev cuts

scope of fresh

float push for

Asia business

‘We are even more

a growth company than

we were two months ago’

Jan Craps, Budweiser APAC

Bonds bull run takes a turn

Market value of negative yielding debt (tn)



  

Source: Bloomberg

‘Production decline will

exacerbate tightening

in the oil market’

SEPTEMBER 18 2019 Section:Markets Time: 17/9/2019 - 19:04 User: jeremy.wright Page Name: MARKETS1, Part,Page,Edition: LON, 29 , 1