Financial Times Europe - 20.02.2020

Thursday20 February 2020 ★ FINANCIAL TIMES 19

MARKETS & INVESTING

J O E R E N N I S O N

Macy’s owngrade to junk status byd
S&P Global has taken the total number
of US “fallen angels” — companies that
have lost their coveted top-quality
ratings — to six so far this year, almost
halfofthetotalforthewholeof2019.

Policymakers have longraised concerns
about the growing mass of bonds rated
triple B, one notch above junk, as com-
panies have loaded up on cheap debt in
recentyears.
Market-watchers warn that a rush of
downgrades into junk territory could
triggersalesbyinvestorsboundbystrict
requirements to own only higher rated
debt. Such selling pressure could
ricochet through the market, sending
pricestumbling.
The six fallen angels of 2020 compare
with13fortheentiretyof2019.
Kraft Heinz, with $32.5bn of total
debt, was also downgraded this week in
thewakeofApollo nvestmentCorpora-I
tion,Spirit AeroSystems a supplier— ot
theBoeing 37 Max — and energy 7
companiesEQT orporation andC EQM
Midstream Partners, according to S&P
GlobalRatings.

The total debt affected by the own-d grades comes to $41.9bn, not far off the $52.8bntotaloflastyear. The trajectory is “concerning,” said Matt Mish, a credit analyst at UBS in Chicago, while noting that the market had been expecting most of the downgrades. Many big companies on the bottom rung of the so-called investment grade spectrum, including AT&T nda Anheuser-Busch InBev, have embarked on deleveraging xercises to cut theire debt loads and to preserve their pre- miumratings. As a result, analysts do not expect the

number of fallen angels to rise materi- ally from last year. S&P Global Ratings has 44 potential fallers on a watchlist, upfrom41ayearagobutbelowthefive- yearaverageof51. “There are clearly some risks and uncertainties out there but the broad picture is fairly steady,” said Alex Her- bert,asenioranalystatthefirm. Corporate bond markets ontinue toc trade strongly. Borrowing costs for top- quality companies dropped yesterday to a record low of 2.62 per cent, according to an investment grade bond index run by Ice Data Services, which has data goingback20years. Junk bond markets have also suffered little impact. The yield on a widely watched high-yield bond index run by Ice stood at 5.22 per cent yesterday, close to a five-year low set earlier in 2020of5.14percent. That came a day after S&P lowered its rating for Macy’s, the department store chain, to BB+ — one notch below investment grade — from BBB. The agency said it approved of the urnround plant but judged its “competitive advantage” hadfalleninthefaceofconsumers’pref- erenceforshoppingonline.

Fixed income

Wall Street’s ‘fallen angels’ rise after

Macy’s joins Kraft in junk bond parade

O RT E N C A A L I A J— N E W YO R K

David Tepper’sAppaloosa Manage- ment as taken a 7 per cent equityh stake inIntelsat, becoming the latest hedge fund tojoin the high-stakes bat- tle over the satellite operator’s valuablewirelessspectrum.

Mr Tepper on Tuesday urged Intelsat to reject a plan put forward by US regulators to auction off its airwaves for use by phone companies for new 5G mobilenetworks. If it cannot be renegotiated, Mr Tep- per said, the company should seek bankruptcy protection and launch a legalchallenge. Under the plan put forward by the Federal Communications Commission, Intelsat stands to make as much as $4.85bn for giving up airwaves that can be sold to cellular operators such as Verizon nda T-Mobile. Butmanyinvestorslastyearexpected it could make much more and numer- ous hedge funds had taken positions in thecompany’ssharesandbondsandare sittingonsignificantlosses. “The token compensation offered to Intelsat is an affront when compared to

the values achieved in auctions of comparable spectrum across the globe over the past decade,” Mr Tepper wrote in a letter to the company’s board on Tuesday. Appaloosa disclosed a 7.4 per cent stake in Intelsat in a securities filing, making it the company’s third-largest shareholder. Luxembourg-based Intelsat asw

among a consortium of satellite compa- niesthat had pushed for permission to sell parts of their spectrum privately to wireless operators but the plan was opposedbymembersoftheUSCongress who said a public auction would allow a fairerdistributionofassets. Ajit Pai, FCC chairman, announced in November that the government would auction off a portion of the “C-band” spectrumusedbythesatelliteoperators forvideoandradiotransmission.

Bonds issued by Intelsat, which has about $15bn in debt, hit record lows at the end of January and shares in the company are down about 85 per cent sinceMrPai’sannouncement. PointState nda Solus re among thea hedgefundstohavetakenpositions. Under the terms of the regulator’s proposal, the company would be required to front up its own cash to cover the costs of clearing the spectrum for auction, something Mr Tepper said couldrunintobillionsofdollars. Intelsat will be made to bear the “full weight of financial and execution risks” related to the auction while the FCC and US government reap the benefits, he wrote. “Forahighlyleveragedoperator,such as Intelsat in particular, the cash required to conduct that process imposes a hardship that could easily trigger an insolvency before relocation canbeaccomplished,”MrTeppersaid. Intelsat said in a statement that it would “assess all options to maximise value for the benefit of our stake- holders” and that its focus was on “successfully improving” the FCC’s plans.

Equities

Tepper joins throng of hedge fund

managers to take stake in Intelsat

‘The token compensation

offered to Intelsat is an affront when compared to

comparable spectrum’

Kraft Heinz was downgraded this weekwith a $32.5bn debt pile

FastFT Our global team gives you market-moving news and views, 24 hours a day ft.com/fastft

P H I L I P G E O R G I A D I S— LO N D O N
R O B I N W I G G L E S WO RT H— O S LO
H U D S O N LO C K E T T— H O N G KO N G

Investors scrambling to quantify the
impact of thecoronavirus utbreak ono
China are turning to a string of unusual
data points to measure disruption to the
world’s second-largest economy — from
food-delivery apps to the polluted air
waftingoverHongKong.
The humanitarian crisis has caused
factories to be shut and cities to be
closed off, prompting analysts to cut
first-quarter economic growth forecasts
forbothChinaandtherestoftheworld.
The crisis has also sparked a race
among investors to gain an edge by
finding esoteric sources of information
that can be used to measure just how
bad the economic pain is — and when
therecoveryisbeginning.
Chen Mu, founder of Beijing-based
research firmBigOne Lab, said the data
provider was expanding the trackers it
provides “because our clients, mainly
institutional investors and corporates,

are enquiring more about impact and recoveryspeedofdifferentsectors”. Mr Chen said there was a broad consensus about aslowdown n Chinai “but the bigger question is how the recoverygoes”. BigOne’s insights show slow progress in bringing businesses back online. In early February, for example, 83 per cent of about 1m restaurants tracked onMeituan-Dianping, China’s biggest deliveryplatform,remainedclosed. As of February 14, services were still suspended at 87 per cent ofroughly 5,500 outlets operated byLuckin Cof- fee,China’srivaltoStarbucks. Airline bookings, meanwhile, suggest that the viral outbreak has caused the biggest ever reduction in activity by a single event, including Sars and the 9/ attacks, according to Eagle Alpha, a Dublin-based provider of alternative data. The airline industry has lost 10m seatsto,fromandwithinChina. Analysts say normal economic activity should have resumed last week after anextendedLunarNewYearholiday. But indicators including traffic congestion rates, coal consumption and property sales are all still running well belowregularlevels.

“All of [the indicators] paint a very similar picture of an economy that just grinds to a halt every time around the new year but has barely picked up at all since then,” said Gareth Leather, Asia economistatCapitalEconomics. Investors have long tried to mine alternative data points for clues on the health of the Chinese economy as some set little store in the official numbers that emerge — often after a long lag — fromBeijing. Such reservations have been com- pounded by a near-total shutdown as the government tries to contain the spreadofthedisease. Min Dai, an Asia-Pacific strategist at Morgan Stanley, told clients this month that “probably the most asked question among investors these days” is how to track the resumption of production in China. Sitting in the bank’s offices in the 118- storey International Commerce Centre in Hong Kong, Mr Dai’s colleagues noticed that their views have been improving over the past month as mainlandfactoriespowereddown. Using airpollution evels as a proxyl to track the restart of industrial production, they suggested that activity could be running at 50 to

80 per cent below capacity. Goldman’s economists noted a modest rebound in some data points last week but concluded that, “in absolute levels, all indicators on the industrial and services sectors that we track remained relatively weak in the first half of February”. Official data will confirm the clues coming from the real-time numbers, said Matt Harris, head of investment strategy at wealth manager HighTower inNewYork. “We expect to start seeing weaker datainthecomingweeks,”hesaid. For now, said Tracy Chen, a portfolio manager at Brandywine Global Invest- ment Management, “it is like flying in thedark”. Sitting 7,000 miles away in Philadel- phia,MsChenislookingforsignalsfrom the vast amount of digital data that Chinaproduces. She has built her own dashboard using 20 reference points including traffic from search engineBaidu, and daily figures for how many drivers are on the roads via satellite navigation companyTomTom. The numbers are not encouraging, she said. “It will be very ugly in the first quarter,allthedataaretellingme.”

Traffic jams, food orders and

pollution are among signals

scoured by analytics groups

‘It will be very

ugly in the first

quarter, all the

data are telling me’

Cross asset. conomic impactE

Investors hunt for alternative

data to track virus shock

H U D S O N LO C K E T T— H O N G KO N G

A rally in China’s government bonds prompted by the deadly coronavirus outbreak has rewarded big US and European investors that have bet on a slowdown in the world’s second-biggest economy. Chinese bond yields have fallen to four-year lows as investors turn to the safety of sovereign debt due to the spreadofthedisease nownasCovid-19.k China’s 10-year Treasury yields, which fall as prices rise, have sunk more than 25 basis points to 2.87 per cent sincethestartoftheyear. Investors are banking on Beijing unleashing more stimulus as it seeks to cushion the economic blow from the epidemic. That rally accelerated in late January as Chinese authorities ordered businesses to shut, stoking fears of a sharp economic slowdown. Yields have not beenbelow3percentsince2016. “We’re... still very bullish on Chinese bonds across the board,” said Hayden Briscoe, Asia-Pacific head of fixedincomeatUBSAssetManagement. The Swiss bank had already forecast China would have to ramp up stimulus to support its slowing economy prior to the epidemic. “Before... the virus, we

had expected yields to drop with slower [economic]activity,”headded. Mr Briscoe said the People’s Bank of China would cut its key medium-term lending facility rate bya total of 50 basis pointsasitseekstoarresttheslowdown. The central bank reduced the MLF rate,abenchmarkforinterbanklending inthecountry,by10bponMonday. The Loan Prime Rate, a related benchmark for commercial lending, is also set to fall by 10bp today, accordingtoBloombergestimates. Benefiting from the bond surge is Switzerland-basedPictetAssetManage- ment, which increased holdings of long- dated Chinese government debt before thelunarnewyearattheendofJanuary. “The outbreak will inevitably [affect] China’s economic growth, prompting authorities to ease monetary conditions,” said Cary Yeung, head of greater Chinadebtatthefirm. He noted that yields on five-year Chi- nese government bonds aremore than 100 basis points higher than those on equivalent US debt. Yields on similar duration German and Japanese govern- mentbondsarezeroornegative. Julio Callegari, a portfolio manager at JPMorgan Asset Management in Hong Kong, said he expected a roughly 10 to 15 basis point move lower in Chinese bonds,pushingyieldstoaslowas2.7per cent — thanks in part to strong foreign inflows. Net foreign flows into China’s inter- bank bond market picked up last month, rebounding from a drop in December.

Fixed income

Chinese

government

bonds rally on

haven buying

‘The outbreak will affect

China’s economic growth, prompting authorities to

ease monetary conditions’

A food delivery rider rests in Beijing. About 83 per cent of 1m restaurants tracked by one research group remained closed at the beginning of the month— Wu Hong/EPA-EFE/Shutterstock

Road congestion across Chinese cities Ratio of peak to non-peak travel times, seven-day average

Source: Capital Economics

Chinese passenger traic volume Absolute number and change from previous Lunar New Years

Daily property sales in big cities -day average (’)

New YearLunar

Lunar New Year

Coal consumption at power plants Index (Lunar New Year)

Lunar New Year Jan Feb

-

Daily trips (m) change year-on-year

Weeks before Weeks after Weeks before Weeks after Weeks before Weeks after

FEBRUARY 20 2020 Section:Markets Time: 2/202019/ - 18:41 User:stephen.smith Page Name:MARKETS1, Part,Page,Edition:EUR , 19, 1

Financial Times Europe - 20.02.2020

Get our desktop app

Company

Features

Documentation

Resources