Financial Times Europe - 26.03.2020

10 ★ FINANCIAL TIMES Thursday 26 March 2020

MARKETS & INVESTING

A N N A G R O S S A N D L AU R E N C E F L E TC H E R
LO N D O N

Investors are turning their back on
high-dividend stocks, worried that a
growing list of companies postponing
their annual general meetings is adding
to the risks posed to payouts by the
coronavirus outbreak.

AGMs and corporate reports are being
delayed across the business world as
countries enter shutdown. As a result,
dividend payouts — which typically
require a confirmatory vote by share-
holders — are being pushed back.
As anxiety about the virus began to
weigh on markets a few weeks ago, the
FTSE High Dividend Yield index held
up slightly better than the broader FTSE
All World index. But last week the high-
dividend index dropped 14.6 per cent,
compared with the broader measure’s
11.3 per cent fall, as fears grew that divi-
dends would be postponed or cut.
German legislation, for example, stip-
ulates that attendees must be physically
present for an AGM. This has left com-
panies such as car sector manufacturers
Daimler and Continental, as well as
Deutsche Telekom, with no choice but

to postpone until later in the year. Else-

where, Swedish financial services com-

pany Storebrand and UK commodities

group Glencore have both pushed back

their AGMs, without setting a new date.

“Can companies actually pay the divi-

dend if there’s not been a shareholder

vote?” said Edmund Shing, global head

of equity derivatives strategy at BNP

Paribas. He said the question was add-

ing to the uncertainty surrounding pay-

outs, with investors expecting more to

be scrapped as companies hoard cash.

Europe has a concentrated dividend

season, with the majority of ex-dividend

dates — the deadline for shareholders to

be eligible — falling in April, May and

June, when lockdowns are to persist.

The prospect of delays and cuts has

hammered the prices of related deriva-

tives. The 2020 dividend futures con-

tract on the Euro Stoxx 50 index, which

rewards investors according to the pay-

out on those stocks, slumped from €

on March 6 to €67 on Wednesday,

implying a 45 per cent cut. “If you’re

trading dividend swaps, the AGM being

moved is the difference between them

being worth something or nothing,” said

an analyst covering German stocks.

Last week, Goldman Sachs said on a

call to clients that many income stocks

were now being sold because investors

feared companies would not be able to

have a quorum for an annual meeting,

according to a person familiar with the

details of the briefing.

D o z e n s o f c o m p a n i e s h a v e

announced they will reduce their divi-

dends, including car manufacturer

Ford, while several including Airbus

and IT group Amadeus have cancelled

them altogether for 2020.

Equities

Cancelled annual meetings trigger

flight from high-dividend stocks

E R I C P L AT T, R O B E RT A R M ST R O N G ,

R O B E RT S M I T H A N D J O E R E N N I S O N

Upheaval in the US mortgage

market ricocheted through the

investment world with two more real

estate investment trusts warning they

could not meet margin calls from their

lenders.

Shares of some of the largest funds

invested in the residential mortgage-

backed securities market tumbled on

Tuesday after two companies — Invesco

Mortgage Capital and M FA Financial —

said they had been unable to meet cash

calls from their lenders as the price of

mortgage bonds slid.

MFA lost an eye-watering 87 per cent

of its value with its shares closing at 36

cents on Tuesday while Invesco

Mortgage Capital declined almost 53 per

cent to $2.52.

AG Mortgage and N ew York Mortgage

Trust, both of which said on Monday

they had notified their counterparties

that they would be unable to fund future

margin calls, have more than halved in

value this week.

Broker dealer ED&F Man was also hit

with a flurry of requests to post addi-

tional collateral due to its exposure to

mortgage-backed securities on Tues-

day. A spokesman for the firm said it

had received “margin calls in greater

frequency and amounts from the cen-

tral clearinghouses and exchanges” but

that it had “met all calls”.

The outbreak of the coronavirus has

weighed heavily on companies across

the US with fears mounting that home-

owners will be unable to make mortgage

payments.

“There is going to be unprecedented

economic disruption from the measures

taken to combat the pandemic and that

will... challenge the ability of some

homeowners to service their debt,” said

Michael Knott, the US head of Reit

research at Green Street Advisors.

While the Federal Reserve moved to

shore up the residential mortgage mar-

ket, agreeing to buy any of the securities

guaranteed by Fannie Mae and Freddie

Mac, it did not go so far as to backstop

the entire asset class.

Shares of real estate investment trusts

heavily exposed to “non-agency” mort-

gages — assets the Fed has not agreed to

buy — have been among the hardest hit.

Reits have been at the heart of the

mortgage market turmoil. The trusts

finance themselves in short-term fund-

ing markets where they lend their bonds

for cash. But as the price of those bonds

has fallen, lenders have demanded

extra collateral.

Mortgage bond traders have said

investment vehicles rushing to meet

margin calls or investor redemptions

have fuelled a fire sale of bonds linked to

home loans for borrowers with lower

credit scores.

A mutual fund that specialises in buy-

ing subprime mortgage bonds flooded

the market at the weekend, putting

more than $1bn of potential assets for

sale on the block.

While the $1.7bn AlphaCentric

Income Opportunities fund did not

dump all of these higher risk mortgages,

it did sell a smaller portion to meet

redemptions from nervous investors.

Equities

Share prices of Reits tumble after more

warn they are unable to meet cash calls

‘There is going to be

unprecedented disruption

from the measures taken

to combat the pandemic’

Continental is among businesses that

have postponed annual meetings

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C O L BY S M I T H A N D
PAT R I C K T E M P L E- W E ST— N E W YO R K

Bargain hunters are circling the $4tn US
municipal bond market after a selling
frenzy pushed prices to record lows
and prompted emergency intervention
from the US Federal Reserve.
As the coronavirus crisis has spread
fear through markets, investors have
dumped all manner of assets in a
desperate grab for cash.
Typical havens such as the muni bond
market, where US states and cities go to
raise money, have not been immune.
Muni bond funds saw a record
$12.2bn in withdrawals for the week
ending March 18, according to data from
Lipper.
Yields on debt maturing in 10 years
soared roughly 1 percentage point in a
week to 2.6 per cent. Yields rise when
prices fall.
The selling pressure was so severe
that the Fed stepped in last Friday,
promising to expand a new money-mar-
ket support facility to allow loans
secured by munis.
This marked quite a reversal for a
market that had enjoyed extraordinary
gains over the past year as investors
sought to generate largely tax-free
income from a corner of the debt mar-
kets that tends to produce few defaults.
Now, though, investors say they see
opportunities in parts of the muni
market that have been oversold.
Highly rated bonds maturing in less
than 10 years from large states are
popular, portfolio managers said.
The same is true for bonds issued by

utilities and other organisations with

solid revenue streams such as water-

and-sewer systems.

Investors have also taken a liking to

bonds backed by settlements with

tobacco companies.

“There are absolutely screaming

values in the municipal space at this

point provided one has the intestinal

fortitude to ride out the volatility,” said

Tom McLoughlin at UBS. “You are not

reaching for yield any more. It is being

offered to you.”

On Tuesday this week, yields spiked

above 7 per cent for Texas bonds matur-

ing in August, according to data col-

lected by the Municipal Securities Rule-

making Board.

The bonds had not yielded more than

4 per cent until this month. And for the

first time, yields on certain California

bonds maturing in 2035 jumped above

4.5 per cent.

“Gutsy” investors who “can withstand

volatility and who [are] not scared by

extreme price action” are now putting

cash to work, said Vikram Rai, head of

municipal strategy at Citigroup.

Highly rated bonds from California

and New York, in particular, have

piqued investors’ interest, said Glenn

McGowan, director of municipal under-

writing at RBC Capital Markets.

BlackRock was among the buyers of

these securities in recent days.

“The muni market is arguably the

cheapest of all when all is said and

done,” said Rick Rieder, BlackRock’s

chief investment officer of global fixed

income, who oversees the group’s $2.3tn

bond portfolio.

Dan Scholl, head of municipal fixed

income at Wilmington Trust, said his

firm has snapped up debt issued by

Wisconsin, Pennsylvania and Mary-

land, as well as the city of Dallas.

“These are high-quality states that

have significant cash reserves and the

financial flexibility to withstand a

decrease in revenue,” he said.

Because returns are largely tax-free,

municipal bonds have historically

yielded less than US Treasuries. But that

dynamic has broken down as the coro-

navirus pandemic has shaken markets.

Now that the benchmark 10-year Treas-

ury note yields just 0.86 per cent, a new

breed of buyers is jumping in to munis.

“While many mutual funds and trad-

ing accounts continue to face selling

pressure, other money managers, banks

and insurance accounts have been buy-

ers at these new yields,” Mr McGowan

said.

Still, some muni debt investors are

cautious given the unprecedented

nature of the economic shocks associ-

ated with the viral outbreak.

Many are concerned about the rising

likelihood of defaults in the months

ahead.

Credit rating agencies have warned

that city transit agencies from San Fran-

cisco to Washington DC will lose signifi-

cant revenues due to coronavirus lock-

downs, putting their ability to repay

bonds in jeopardy.

Late last week, Fitch downgraded

about $2.2bn of debt issued by Suffolk

county — an area just outside of New

York City, which includes the upmarket

Hamptons beaches — as the municipal-

ity cannot collect taxes with malls and

restaurants shuttered.

“We’ve never gone through a full-stop

in the economy so fast,” said Matt

Buscone, co-head of portfolio manage-

ment at Breckinridge Capital Advisors.

“No one knows if this will be for 30, 60 or

90 days or longer, so it is hard to deter-

mine a price if you don’t know what rev-

enue will be.”

For Mr Rai, who believes the Fed

should go a step further and include

muni debt as part of its asset-purchase

programme, volatility is likely to persist

so long as Covid-19 spreads.

“As long as we keep getting news of the

increasing number of infected people in

the US, there will be pessimism about

the overall financial sector in general,”

he warned. “It will enhance the reti-

cence on the part of investors to step in

and put cash to work.”

Additional reporting by Jennifer Ablan

Debt issued by cities and

states craters but funds see

opportunity in oversold assets

‘You are

not

reaching

for yield

any more.

It is being

offered

to you’

The upmarket

Hamptons

beaches are

part of Suffolk

county, which

has been hit by a

debt downgrade

Mark Lennihan/AP

Fixed income.Cheap valuations

Investors hunt for bargains

in $4tn US muni trade

ST E V E J O H N S O N

South Africa has become the latest

emerging market to launch a bond-

buying programme to ease effects of the

coronavirus outbreak as radical mone-

tary easing measures spread from the

mature to the developing world.

The announcement yesterday from

the South African Reserve Bank, which

comes in the wake of similar steps by

Colombia and Poland last week, mirrors

the quantitative easing programmes

rebooted in the US, Europe, the UK and

Japan in the grip of the pandemic crisis.

The Philippines has also announced

plans to buy government bonds.

The SARB said the bond purchases

were aimed in part at “providing liquid-

ity and promoting the smooth function-

ing of domestic financial markets” — a

reference to how badly fears of recession

have shaken stocks and bonds around

the world.

Peter Attard Montalto, head of capital

markets research at Intellidex,

described the move as a “major, very

much necessary, crossing of the Rubi-

con... in response to the breakdown of

local liquidity conditions and dysfunc-

tion in recent days in the bond market”.

The coronavirus shock has ripped

through almost every global market,

including South African bonds. The

country’s 10-year bond yields swept up

from 9 per cent at the start of this month

to 12.35 per cent this week, reflecting a

drop in prices.

The rand has also fallen by 12 per cent

against the dollar as foreign investors

have beaten a retreat from risky assets.

But the announcement that the SARB

will buy government bonds across a

range of maturities, in undisclosed

quantities, immediately sent the mar-

ket rallying — 10-year yields sank back

below 12 per cent and the rand picked

up slightly to R17.40 per dollar.

Some analysts warned that the bene-

fits of calming nerves in the bond mar-

ket in the short term may be outweighed

by new risks over the longer term.

“A country in a challenging financial

situation [such as South Africa]

wouldn’t be advised to do much of this

because it is a form of the central bank

financing the government, which if you

go very far with, will destroy confidence

in your currency and lead to a poten-

tially hyperinflationary scenario,” said

Gary Greenberg, head of emerging mar-

kets at Hermes Investment Manage-

ment. “In limited quantities, it may be

OK but one is playing with fire.”

Similar QE announcements in other

emerging markets appear to have had

positive effects. Colombia, which saw its

10-year bond yield jump from 5.7 per

cent in early March to 9 per cent last

week, has since brought this back to 8.

per cent while the peso has also stabi-

lised. Poland has brought its 10-year

bond yield back under 2 per cent.

Fixed income

Outbreak

prompts

South Africa

to buy bonds

‘A country in a challenging

financial situation [such as

South Africa] wouldn’t be

advised to do much of this’

US muni bonds have sold o heavily

-year municipal debt yields ()

Source: Bloomberg













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MARCH 26 2020 Section:Markets Time: 25/3/2020 - 17: 59 User: stephen.smith Page Name: MARKETS1, Part,Page,Edition: USA, 10, 1