Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary:  Rapidly rising interest rates present a challenge for credit to generate positive total returns. Unfortunately, the upward sloping sawtooth pattern of rising US interest rates ended the month on an upswing. Credit spreads needed to compress by as much to generate positive total returns. Only a small handful of Asia’s US$-denominated bank bonds (x-Japan) managed to generate positive total returns during the month of March. This was concentrated in a select sweet spot.Long duration, low investment grade rated, and high BB rated bonds led tightening over the month. Lower risk tolerance, as evidenced by the rating preferences, combined with duration desires to drive performance in March, as in February. One differentiating factor between March and February is the concentration amongst Thai- and South Korean-headquartered banks during March; however, these institutions are also the largest issuers of longer duration bank paper in Asia. As such, we see this as more of a duration, than a country story.From a pure credit spread perspective, ignoring movements in the risk-free rate, Asia’s bank bonds had an outstanding month with each of the +100 bonds that we track tightening during the month. Global monetary accommodation is in large part responsible for this spread compression. Credit fundamentals have yet to catch-up. Continued tightening, however, cannot be ruled out as credit tourists crowd-in and markets melt-up. Unfortunately for most, the recent tightening did not exceed the speed with which interest rates rose.Q1 2021 was a tough quarter for real money asset managers. We anticipate that US interest rates will continue to climb higher and may even accelerate their upward trajectory. If the trend is your friend and longer duration bonds continue to outperform, the risk is that of buying a bond which either has a higher level of volatility or is fully priced. With South Korean long-dated Senior Unsecured notes trading just north of 100 basis points (bps), it is hard to imagine these notes continuing to compress faster than interest rates. Asset managers may need to consider more subordinated, higher yielding notes to generate positive total returns over the near term. Investors will likely be pushed towards lower rated Additional Tier 1 (AT1) bonds in April / May to achieve positive total returns. Security selection may become more important.

Executive Summary:  Rapidly rising interest rates present a challenge for credit to generate positive total returns. Unfortunately, the upward sloping sawtooth pattern of rising US interest rates ended the month on an upswing. Credit spreads needed to compress by as much to generate positive total returns. Only a small handful of Asia’s US$-denominated bank bonds (x-Japan) managed to generate positive total returns during the month of March. This was concentrated in a select sweet spot.Long duration, low investment grade rated, and high BB rated bonds led tightening over the month. Lower risk tolerance, as evidenced by the rating preferences, combined with duration desires to drive performance in March, as in February. One differentiating factor between March and February is the concentration amongst Thai- and South Korean-headquartered banks during March; however, these institutions are also the largest issuers of longer duration bank paper in Asia. As such, we see this as more of a duration, than a country story.From a pure credit spread perspective, ignoring movements in the risk-free rate, Asia’s bank bonds had an outstanding month with each of the +100 bonds that we track tightening during the month. Global monetary accommodation is in large part responsible for this spread compression. Credit fundamentals have yet to catch-up. Continued tightening, however, cannot be ruled out as credit tourists crowd-in and markets melt-up. Unfortunately for most, the recent tightening did not exceed the speed with which interest rates rose.Q1 2021 was a tough quarter for real money asset managers. We anticipate that US interest rates will continue to climb higher and may even accelerate their upward trajectory. If the trend is your friend and longer duration bonds continue to outperform, the risk is that of buying a bond which either has a higher level of volatility or is fully priced. With South Korean long-dated Senior Unsecured notes trading just north of 100 basis points (bps), it is hard to imagine these notes continuing to compress faster than interest rates. Asset managers may need to consider more subordinated, higher yielding notes to generate positive total returns over the near term. Investors will likely be pushed towards lower rated Additional Tier 1 (AT1) bonds in April / May to achieve positive total returns. Security selection may become more important.

Bank Credit Compass: Positive Total Return Sweet Spot

Independent Asian Credit Research, Bondcritic

Warut Promboon

Independent Asian Credit Research

Asian Fixed Income/Frontier Market Research

Bondcritic

Bondcritic, established in 2009, is designed to be an independent credit research voice that helps investors gain insights and unbiased analyses on Asian fixed income market. Our mission is to discover deep-value Asian high-yield and distressed bonds with a bottom-up approach, together with the help of our proprietary ESG (Environmental, Social Development, and Governance) model. At the same time, we focus on bringing investment cases of unrated and unloved issuers to the general public.

Debt Capital Markets

iShares MSCI EM ESG Optimized / Debt Capital Markets

We initiate our coverage of Asian social bonds with a thematic report on (1) the current stage in the Asian capital markets, (2) social bond compliance regime, and (3) recent issuance in Asia. In subsequent months, we aim to launch a request for comment for our framework we will use to analyze social bond compliance with the Social Bond Principles (SBP).
This report also includes the United Nations’ Sustainable Development Goals (SDG) and how SDG is linked to ESG (Environment, Social Development, and Governance) investments. SDG is not simply Environment, Social Development, and Governance but also Productivity which results in employment, economic growth, innovation, better infrastructure, and stronger industry.
Among ESG, Governance is what we have already accounted for when analyzing credit investments. That said, the key is how we can now design investments to improve environment (i.e. green bonds), social development (i.e. social bonds), and/or both green and social bonds (i.e. sustainability bonds). 
Green bonds were the first among fixed income instruments to take off. In a time of COVID-19, the most precarious elements of the planet is human life and, in our judgment, social development can take precedence over environment, productivity, and governance although all the four elements should be considered together. The emergence of COVID-19 has led to a drastic rise in social bond issuance and we expect this realization of a lack of social development to increase demand and supply of social bonds in the near term.

We initiate our coverage of Asian social bonds with a thematic report on (1) the current stage in the Asian capital markets, (2) social bond compliance regime, and (3) recent issuance in Asia. In subsequent months, we aim to launch a request for comment for our framework we will use to analyze social bond compliance with the Social Bond Principles (SBP).
This report also includes the United Nations’ Sustainable Development Goals (SDG) and how SDG is linked to ESG (Environment, Social Development, and Governance) investments. SDG is not simply Environment, Social Development, and Governance but also Productivity which results in employment, economic growth, innovation, better infrastructure, and stronger industry.
Among ESG, Governance is what we have already accounted for when analyzing credit investments. That said, the key is how we can now design investments to improve environment (i.e. green bonds), social development (i.e. social bonds), and/or both green and social bonds (i.e. sustainability bonds). 
Green bonds were the first among fixed income instruments to take off. In a time of COVID-19, the most precarious elements of the planet is human life and, in our judgment, social development can take precedence over environment, productivity, and governance although all the four elements should be considered together. The emergence of COVID-19 has led to a drastic rise in social bond issuance and we expect this realization of a lack of social development to increase demand and supply of social bonds in the near term.

Social Bonds: Here Come the Next Green Bonds

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Capital Markets

<div class="content-highlight">The <a href="https://www.smartkarma.com/entities/coupang" target="_blank" data-smartkarma-citation="entities:28425:1" rel="noopener">Coupang (CPNG US)</a> IPO has been one of the most successful IPOs for a company whose operations are mainly in Korea. There are likely to be a lot more Korean based companies (both public and private) that will consider listing their shares in the US market after a hugely successfully Coupang IPO. In this insight, we discuss 14 major Korean companies that may try to list their shares in the US exchanges in the next several years in order to reduce the infamous "Korea discount."</div>14 Korean Companies That May List Their Shares in the US Stock Exchange:<a href="https://www.smartkarma.com/entities/samsung-electronics-co-ltd" target="_blank" data-smartkarma-citation="entities:191:1" rel="noopener">1) Samsung Electronics (005930 KS)</a>2) Kurly (Private)3) SmartStudy (Private)4) Naver Webtoon (Private) 5) Krafton (Private) 6) LG Energy Solution (Private) 7) 11st (Private) 8) SSG.com (Private) 9) <a href="https://www.smartkarma.com/entities/ncsoft-corp" target="_blank" data-smartkarma-citation="entities:5169:1" rel="noopener">NCSOFT Corp (036570 KS)</a>10) <a href="https://www.smartkarma.com/entities/naver-corp" target="_blank" data-smartkarma-citation="entities:16029:1" rel="noopener">Naver Corp (035420 KS)</a>11) Kakao Entertainment (Private)  12) <a href="https://www.smartkarma.com/entities/kakao-corp" target="_blank" data-smartkarma-citation="entities:15002:1" rel="noopener">Kakao Corp (035720 KS)</a>13) Tmon (Private) 14) Non private equity firm that acquires Ebay Korea

The Coupang (CPNG US) IPO has been one of the most successful IPOs for a company whose operations are mainly in Korea. There are likely to be a lot more Korean based companies (both public and private) that will consider listing their shares in the US market after a hugely successfully Coupang IPO. In this insight, we discuss 14 major Korean companies that may try to list their shares in the US exchanges in the next several years in order to reduce the infamous "Korea discount."14 Korean Companies That May List Their Shares in the US Stock Exchange:1) Samsung Electronics (005930 KS)2) Kurly (Private)3) SmartStudy (Private)4) Naver Webtoon (Private) 5) Krafton (Private) 6) LG Energy Solution (Private) 7) 11st (Private) 8) SSG.com (Private) 9) NCSOFT Corp (036570 KS)10) Naver Corp (035420 KS)11) Kakao Entertainment (Private)  12) Kakao Corp (035720 KS)13) Tmon (Private) 14) Non private equity firm that acquires Ebay Korea 

Top 14 Korean Companies That May List in the US Stock Exchanges - Close The "Korea Discount Gap"

Asia headquartered banks fared well despite the global tantrum without taper in the Treasury markets. Asia headquartered bond prices fell by less than their benchmark Treasury market notes, resulting in a bout of credit outperformance. Almost all bonds tightened in credit spread terms as investors remained anchored to banks as an economic recovery play. Moderate duration, lower risk, bonds continued to outperform, although there were pockets of outperformance in China-headquartered Additional Tier 1 bonds.Bonds in the belly of the curve, that is those maturing or callable in five-years, outperformed longer dated notes. Moderate duration bonds led as investors lost faith in an inflation free economic recovery which would cap market rate rises. This is the opposite of last weeks’ performance, wherein even longer-duration note outperformed. That seemed odd given policymakers repeated statements that they would let the US economy run hot at the risk of stoking inflation. The rapid sell-off in US Treasuries during the week is evidence of market jitters regarding eventual inflation expectations.The pressure on U.S. Treasuries is largely in-line with what we have been cautioning on since the Senate run-off results in Georgia last month. Friday’s correction at the long end may be tested again.Admittedly, however, we are surprised by the credit strength of Asia-headquartered financials during the global rates rout. We attribute this to two items. First, China is further along the Covid-19 curve in recovery and will clearly benefit as the rest of the world catches-up. Second, financials are a leverage play on the global recovery. Taken together, Asia financials overall are well placed to continue outperforming other markets over the near term.Given the rate of change over the last two weeks, things are moving fast. We identify potential opportunities within. <a href="https://www.smartkarma.com/entities/state-bank-of-india" target="_blank" data-smartkarma-citation="entities:160:1" rel="noopener">State Bank of India (SBIN IN)</a> represents one credit curve where better opportunities exist in shorter duration bonds, however, <a href="https://www.smartkarma.com/entities/bank-mandiri-persero-tbk-pt" target="_blank" data-smartkarma-citation="entities:441:1" rel="noopener">Bank Mandiri (BMRI IJ)</a> may offer even better values, as we note within.Market Outlook: This week’s Treasury market tantrum was not induced by Fed tapering, but it is a reminder of what it may look like when the Fed does dial back its asset purchases. Combined with the strength of the risk-on moves, this makes us uneasy. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ.  There is limited price discover as the market is simply sentiment driven. Credit value should remain driven by larger market forces. However, we may be fast approaching a point where the market outpaces the rate of expected economic recovery, and / or the market outpaces the rate that can be achieved without incurring substantial financial stability concerns. Our preference is for lower duration bonds, preferably in the belly of the curve. Please see our recent <a href="https://www.smartkarma.com/insights/bank-macro-manifest-risk-rally-gathers-steam-as-bad-news-more-stimulus" target="_blank" rel="noopener">Bank Macro Manifest</a> and <a href="https://www.smartkarma.com/insights/bank-credit-strategy-melt-up-before-meltdown-where-to-position" target="_blank" rel="noopener">Bank Credit Strategy</a> notes for more details.

Asia headquartered banks fared well despite the global tantrum without taper in the Treasury markets. Asia headquartered bond prices fell by less than their benchmark Treasury market notes, resulting in a bout of credit outperformance. Almost all bonds tightened in credit spread terms as investors remained anchored to banks as an economic recovery play. Moderate duration, lower risk, bonds continued to outperform, although there were pockets of outperformance in China-headquartered Additional Tier 1 bonds.Bonds in the belly of the curve, that is those maturing or callable in five-years, outperformed longer dated notes. Moderate duration bonds led as investors lost faith in an inflation free economic recovery which would cap market rate rises. This is the opposite of last weeks’ performance, wherein even longer-duration note outperformed. That seemed odd given policymakers repeated statements that they would let the US economy run hot at the risk of stoking inflation. The rapid sell-off in US Treasuries during the week is evidence of market jitters regarding eventual inflation expectations.The pressure on U.S. Treasuries is largely in-line with what we have been cautioning on since the Senate run-off results in Georgia last month. Friday’s correction at the long end may be tested again.Admittedly, however, we are surprised by the credit strength of Asia-headquartered financials during the global rates rout. We attribute this to two items. First, China is further along the Covid-19 curve in recovery and will clearly benefit as the rest of the world catches-up. Second, financials are a leverage play on the global recovery. Taken together, Asia financials overall are well placed to continue outperforming other markets over the near term.Given the rate of change over the last two weeks, things are moving fast. We identify potential opportunities within. State Bank of India (SBIN IN) represents one credit curve where better opportunities exist in shorter duration bonds, however, Bank Mandiri (BMRI IJ) may offer even better values, as we note within.Market Outlook: This week’s Treasury market tantrum was not induced by Fed tapering, but it is a reminder of what it may look like when the Fed does dial back its asset purchases. Combined with the strength of the risk-on moves, this makes us uneasy. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ.  There is limited price discover as the market is simply sentiment driven. Credit value should remain driven by larger market forces. However, we may be fast approaching a point where the market outpaces the rate of expected economic recovery, and / or the market outpaces the rate that can be achieved without incurring substantial financial stability concerns. Our preference is for lower duration bonds, preferably in the belly of the curve. Please see our recent Bank Macro Manifest and Bank Credit Strategy notes for more details.

Bank Credit Weekly: Asia Credit Outperforms Despite Treasury Tantrum

We progressed from melt-up to full risk-on duration admiration as the week progressed. The improved risk sentiment drove spreads tighter last week, with almost all bonds tightening  globally. China’s return from Lunar New Year holidays also pushed Asia’s financial spreads materially lower. Asia’s financial indexes outperformed European notes as Additional Tier 1 bonds in both regions continued to tighten.Debt investors continue to look to banks as a means to play the economic recovery trade. Every Asia bank headquartered Additional Tier 1 (AT1), Tier 2 and X-over rated bank bond compressed over the week. Almost all High Yield bank bonds tightened globally. <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">Yes Bank (YES IN)</a> and <a href="https://www.smartkarma.com/entities/indiabulls-housing-finance-ltd" target="_blank" data-smartkarma-citation="entities:13086:1" rel="noopener">Indiabulls Housing Finance (IHFL IN)</a> bonds were among the few bonds that did not strengthen during the week. Meanwhile <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC Holdings (HSBA LN)</a> and <a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered (STAN LN)</a> are expected to report results this week. These results may impact global bank investor sentiment.In addition, HSBC may entreat us to another strategic review. It is hard to not be cynical regarding these, given the lack of success with the last two. Nonetheless, the main risk for credit investors is that of a substantial geographic reorganization which negatively impacts holding company cash flows or attempts to push holding company bonds to less attractive subsidiary operations. While we think both outcomes are unlikely, we will be watching for any potential hints of this. Globally, <a href="https://www.smartkarma.com/entities/svenska-handelsbanken-ab" target="_blank" data-smartkarma-citation="entities:22480:1" rel="noopener">Svenska Handelsbanken's (SHBA SS)</a> 4¾% coupon 2031 callable note led Additional Tier 1 (AT1) and broader bank US$-bond performance. This bond also led global spread performance in the week prior. Other long-callable AT1 bonds also outperformed during the week, including Standard Chartered’s and UBS’s 2031 maturity bonds, as well as HSBC’s coupon 2030 maturity note. These each compressed by 13bps.Given the rate of change over the last two weeks, there are clear opportunities within the credit curves of some banks. These are potential buy or sell opportunities, depending on whether your expectations are for the current risk-on rally to continue.  We identify these by security type within.Market Outlook: Unlike 2019 when we experienced a rally that everyone loved to hate, everyone loves this rally. Combined with the strength of the risk-on moves, this makes us uneasy. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ. There is limited price discover as the market is simply sentiment driven. Credit value should remain driven by larger market forces. However, we may be fast approaching a point where the market outpaces the rate of expected economic recovery, and / or the market outpaces the rate that can be achieved without incurring substantial financial stability concerns. Our preference is for lower duration bonds, preferably in the belly of the curve, but the market has duration admiration. Please see our recent <a href="https://www.smartkarma.com/insights/bank-macro-manifest-risk-rally-gathers-steam-as-bad-news-more-stimulus" target="_blank" rel="noopener">Bank Macro Manifest</a> and <a href="https://www.smartkarma.com/insights/bank-credit-strategy-melt-up-before-meltdown-where-to-position" target="_blank" rel="noopener">Bank Credit Strategy</a> notes for more details.

We progressed from melt-up to full risk-on duration admiration as the week progressed. The improved risk sentiment drove spreads tighter last week, with almost all bonds tightening  globally. China’s return from Lunar New Year holidays also pushed Asia’s financial spreads materially lower. Asia’s financial indexes outperformed European notes as Additional Tier 1 bonds in both regions continued to tighten.Debt investors continue to look to banks as a means to play the economic recovery trade. Every Asia bank headquartered Additional Tier 1 (AT1), Tier 2 and X-over rated bank bond compressed over the week. Almost all High Yield bank bonds tightened globally. Yes Bank (YES IN) and Indiabulls Housing Finance (IHFL IN) bonds were among the few bonds that did not strengthen during the week. Meanwhile HSBC Holdings (HSBA LN) and Standard Chartered (STAN LN) are expected to report results this week. These results may impact global bank investor sentiment.In addition, HSBC may entreat us to another strategic review. It is hard to not be cynical regarding these, given the lack of success with the last two. Nonetheless, the main risk for credit investors is that of a substantial geographic reorganization which negatively impacts holding company cash flows or attempts to push holding company bonds to less attractive subsidiary operations. While we think both outcomes are unlikely, we will be watching for any potential hints of this. Globally, Svenska Handelsbanken's (SHBA SS) 4¾% coupon 2031 callable note led Additional Tier 1 (AT1) and broader bank US$-bond performance. This bond also led global spread performance in the week prior. Other long-callable AT1 bonds also outperformed during the week, including Standard Chartered’s and UBS’s 2031 maturity bonds, as well as HSBC’s coupon 2030 maturity note. These each compressed by 13bps.Given the rate of change over the last two weeks, there are clear opportunities within the credit curves of some banks. These are potential buy or sell opportunities, depending on whether your expectations are for the current risk-on rally to continue.  We identify these by security type within.Market Outlook: Unlike 2019 when we experienced a rally that everyone loved to hate, everyone loves this rally. Combined with the strength of the risk-on moves, this makes us uneasy. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ. There is limited price discover as the market is simply sentiment driven. Credit value should remain driven by larger market forces. However, we may be fast approaching a point where the market outpaces the rate of expected economic recovery, and / or the market outpaces the rate that can be achieved without incurring substantial financial stability concerns. Our preference is for lower duration bonds, preferably in the belly of the curve, but the market has duration admiration. Please see our recent Bank Macro Manifest and Bank Credit Strategy notes for more details.

South Korea

Shinhan Financial Group Co., Ltd., a holding company, provides a full range of consumer and commercial banking-related financial services.  The company's main businesses include banking, securities brokerage, trust banking, and assets management to individuals, businesses, and other financial institutions.

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Shinhan Financial (055550 KS)

Bank Credit Compass: Positive Total Return Sweet Spot

The sweet spot for positive total returns seems to be in long duration, low investment grade, and high BB rated bonds. This was concentrated in...

Hank Calenti, CFA

Top 14 Korean Companies That May List in the US Stock Exchanges - Close The "Korea Discount Gap"

In this insight, we discuss 14 major Korean companies that may try to list their shares in the US exchanges in the next several years in order to...

Douglas Kim

Bank Credit Weekly: Asia Credit Outperforms Despite Treasury Tantrum

Global bank bond prices fell by less than their benchmark notes, resulting in a bout of credit outperformance. Given the rate of change, there are...

Hank Calenti, CFA

Bank Credit Weekly: Duration Admiration

We moved from melt-up to full risk-on duration admiration. Almost all bank bonds tightened globally. Given the rate of change, there are mispriced...

Hank Calenti, CFA

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Bank Credit Compass: Positive Total Return Sweet Spot

The sweet spot for positive total returns seems to be in long duration, low investment grade, and high BB rated bonds. This was concentrated in...

Hank Calenti, CFA

Social Bonds: Here Come the Next Green Bonds

Social bonds are the new green bonds as COVID-19 has made investors realize social development is as important as environment. Here is our...

Bondcritic

Top 14 Korean Companies That May List in the US Stock Exchanges - Close The "Korea Discount Gap"

In this insight, we discuss 14 major Korean companies that may try to list their shares in the US exchanges in the next several years in order to...

Douglas Kim

Bank Credit Weekly: Asia Credit Outperforms Despite Treasury Tantrum

Global bank bond prices fell by less than their benchmark notes, resulting in a bout of credit outperformance. Given the rate of change, there are...

Hank Calenti, CFA

Bank Credit Weekly: Duration Admiration

We moved from melt-up to full risk-on duration admiration. Almost all bank bonds tightened globally. Given the rate of change, there are mispriced...

Hank Calenti, CFA