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mashreq Fixed Income Trading Daily Bond Market Update Thursday, January 15, 2015 Market Update • DIB launches USD1 billion Tier1 Perpetual sukuk DIB raised USD1 billion from sale of Tier 1 perpetual sukuk at reoffer price of 100.00. The launch yield on the sukuk is 6.75%. • Reserve Bank of India surprisingly cuts interest rates Reserve Bank of India Governor Raghuram Rajan announced a surprise cut in interest rates to revive growth in Asia’s third-largest economy after inflation eased. Rajan lowered the benchmark repurchase rate to 7.75% from 8% today, the first reduction since May 2013. Consumer-price inflation will probably be below the central bank’s target of 6% by January 2016, he said. “Key to further easing are data that confirm continuing disinflationary pressures,” Rajan said in the statement. “Also critical would be sustained high quality fiscal consolidation as well as steps to overcome supply constraints and assure availability of key inputs such as power, land, minerals and infrastructure.” Rajan has focused on quelling inflation since taking office in September 2013, and today’s move signals confidence that price pressures will remain under control. The rate cut sets India on a different path from Brazil and Russia, which raised rates in December to tame inflation and support their currencies.(Bloomberg) • Qatar Petroleum and Shell scrap USD6.5 billion project on back of slide in oil prices Qatar Petroleum and Royal Dutch Shell called off plans to build a USD6.5 billion petrochemical plant in Qatar, saying the project is no longer commercially feasible amid the upheaval in global energy markets. The companies had formed a partnership for the al-Karaana project in 2011 and planned to operate it as a joint venture, with state-run QP owning 80% and Shell the remaining 20%. According to the companies, they decided not to proceed as the expected capital cost of the petrochemical complex planned in Ras Laffan industrial city “has rendered it commercially unfeasible, particularly in the current economic climate prevailing in the energy industry,”. Al-Karaana is the second petrochemical project in Qatar to be canceled in recent months due to unfavorable economics. Industries Qatar, the state-controlled petrochemical and steel producer, halted plans to build a USD6 billion plant in September.(Bloomberg) • Emaar planning IPO for Hotel unit in H2 2015 Emaar Properties PJSC, Dubai’s largest publicly-traded real estate developer, plans to sell shares in its hotels unit in the second half of the year and has reportedly hired Rothschild as an adviser. The offering is planned for later in the year because of conditions on the Dubai Financial Market, two of the people said, asking not to be identified as the information is private.(Bloomberg) • Tunisia appoints banks to conduct road shows for a bond issue Tunisia has appointed Citigroup, JPMorgan, Natixis as joint-lead managers to arrange series of fixed-income investor meetings across Europe and the US starting 16th January. A USD-denominated senior unsecured 144a/RegS offering under a stand-alone offering circular may follow, subject to market conditions. Road show schedule 16-19 January London 20 January Los Angeles 21-22 January New York 23 January Boston 26 January Frankfurt/Munich • China’s credit growth surged in December China’s shadow banking industry staged a comeback in December as equity investors and local governments contributed to a surge in credit, underscoring challenges for a central bank trying to revive growth without exacerbating risks. Aggregate financing was 1.69 trillion yuan (USD273 billion), the People’s Bank of China said in Beijing today, topping the 1.2 trillion yuan median estimate in a Bloomberg survey. While new yuan loans missed economists’ forecasts, shadow lending rose to the highest in monthly records that began in 2012. New yuan loans, which measure new lending minus loans repaid, were 697.3 billion yuan, missing the median estimate of 880 billion yuan. M2 money supply grew 12.2% from a year earlier compared with the median estimate of 12.5%. (Bloomberg) • US treasury yields fell further on weak retail sales data The yields on US treasuries came under further pressure yesterday a disappointing retail sales data for December. The fall in yields show investors are scaling back forecasts for the Fed to raise interest rates. The data to be released today and tomorrow will show inflation is slowing, as per the economists’ estimates. Two-year yields tumbled for eight days through yesterday, the longest run since 2010. Yield on 30 year treasuries fell to a never-before-seen 2.39% yesterday and that on benchmark 10 year notes slid to 1.85%, after reaching an intraday low of 1.782%. (Bloomberg) • Crash in copper prices drives pushes Vedanta’s bond yields higher Prices of metal linked corporate bonds plummeted along with copper prices, causing risk premiums on junk-rated metal and mining debt to reach the most in almost a month. Investors are demanding 561 bps more than benchmark interest rates to buy the debt of the riskiest materials companies, a 14.5 bps increase from yesterday, according to data compiled by Bloomberg. Yield spreads on speculative-grade energy securities widened by 21.2 bps, the worst performance of any industry in the market. Metals companies such as Vedanta, a Mumbai-based copper miner, have suffered as declines in materials such as iron ore and oil have erased 26% from the Bloomberg Commodity Index since April 2014. Copper is the worst performing non-energy raw material this year on the index, which fell to the lowest since August 2002. Bid price on Vedanta’s USD1.2 billion of 6% notes due January 2019 fell to 82 cents on the dollar to yield 11.73% - this is the lowest price level since the securities were issued in May 2013.(Bloomberg) Page 1 mashreq Fixed Income Trading Daily Bond Market Update Thursday, January 15, 2015 • Moody’s cuts Venezuela’s rating as oil price plunges – sovereign bonds rally on hopes of avoiding a default Moody’s cut the credit rating of Venezuela yesterday Service to the world’s worst among countries not in default, as falling oil prices strain a government already confronting food shortages and 64% inflation. Moody’s downgraded the country two levels to Caa3, putting it on par with Ukraine, which is involved in a conflict with Russia-aligned rebels, and Jamaica, which has defaulted twice since 2010. Falling oil prices mean the Venezuelan government must rely on dwindling hard-currency income to pay for imports of food and medicine, which in turn could leave fewer resources to meet the country’s dollar-denominated debt obligations, according to Moody’s. “With oil declining, the default risk has increased substantially,” Jaime Reusche, a senior analyst in the sovereign group at Moody’s, said by telephone from New York. “It seems highly likely there will be a credit event in the next one to two years.” The new grade signifies “very high credit risk,” according to Moody’s. Only Argentina, which defaulted last year, has a lower grade. If Venezuela stopped making payments, bondholders would be likely to get less than 50 cents on the dollar in a restructuring, Moody’s said. Traders in the CDS market already are pricing in a 75% probability for the country to miss payments in the next 12 months and a 97% percent likelihood of default in the next five years. Interestingly, investors who are betting that Venezuela will default this year are missing out on some of the highest returns in emerging markets. Venezuelan bonds have performed the best in Bloomberg’s emerging-market corporates index in the past month. That outperformance is led by short- dated bonds such as notes of state-run PDVSA due in October 2105, which returned 16% during the last one month, as the price climbed to 84.33 cents on the dollar from 69.12 cents. Venezuela also has a 1 billion euro (USD1.2 billion) bond due in March, which trades at 92.25 cents on the dollar, up from 83.67 on 15th December. Overall, Venezuela dollar bonds have given investors a 46% loss in the past six months. The benchmark 9.25% bonds due in 2027 lost 6.3% in the past month and fell to 37 cents, the lowest since 1998, after the rating cut by Moody’s. The cheapest Venezuelan bonds are the 7% percent sovereign bonds due in 2038, which trade at 32 cents on the dollar. • Chinese real estate companies continue to face challenges Bank of China is suing a unit of Kaisa Group Holdings after the developer skipped a payment on its USD denominated bonds and as local creditors seek to recoup funds. The Shenzhen Intermediate People’s Court will hear the case brought by China’s third-largest lender by market value from 24th March. The court accepted the case against a unit of Kaisa and two other defendants on 7th January, according to the statement. Kaisa has moved closer to default after failing last week to pay a USD23 million coupon on USD500 million of 10.25% percent bonds due 2020. The Shenzhen Intermediate People’s Court website shows local banks and creditors have submitted more than 30 pre-litigation applications to seal Kaisa’s assets. The builder’s USD800 million of 8.875% 2018 notes fell to 35.2 cents on the dollar this morning, according to Bloomberg-compiled prices. They’ve plunged 55 cents in the past month. Moody’s downgraded Kaisa by one notch yesterday to Ca with a negative outlook and expects “substantial losses” for bondholders, saying the increased level of legal action will further disrupt its operations and will erode its asset values.