FT : Companies rush to take advantage of sharp drop in borrowing costs

Companies rush to take advantage of sharp drop in borrowing costs
Bond issuance by US and European firms surges as market becomes more confident of interest rate cuts next year

Companies on both sides of the Atlantic are rushing to issue debt, taking advantage of the cheapest borrowing costs available in months following the sharp global bond market rally.

Corporate borrowers in the US and Europe issued $246bn worth of investment-grade and junk bonds in November alone — 57 per cent more than October’s total, and $16bn higher than the average figure for the first 10 months of the year, according to data from LSEG.

The flurry of issuance has continued this week, with highly rated borrowers including General Motors Financial, phosphate producer Mosaic and telecoms tower owner Crown Castle announcing fresh deals.

Further down the credit quality ladder, low-grade borrowers including Kinetic Holdings, automobile financing firm Credit Acceptance and residential mortgage company PennyMac Financial Services are among those joining the ranks of issuers in recent days.

“You don’t see that level of activity the week after Thanksgiving or into December” in a normal year, said Teddy Hodgson, co-head of Morgan Stanley’s investment-grade syndicate.

The acceleration in issuance follows a rapid shift in investor sentiment over the past few weeks, in which markets have begun to price in US and European interest rate cuts in the first half of next year. As recently as October, fears over “higher for longer” interest rates had pushed many companies to press pause on borrowing plans.

“There is definitely a wave of supply trying to get in before year-end,” said Maureen O’Connor, global head of Wells Fargo’s high-grade debt syndicate.

“All the stuff that is trickier throughout a more choppy market environment is finding a welcome reception,” she added. “[Conditions] are so vastly improved from where we were in October that you are seeing some of the more truly opportunistic stuff coming to the market.”

US bonds recorded their best monthly performance in nearly four decades in November, as softer-than-forecast inflation and jobs reports fuelled expectations that the Federal Reserve and the European Central Bank will begin cutting rates as soon as spring 2024.

Treasury yields, which move inversely to prices, have dropped sharply and translated into lower borrowing costs for companies across the credit spectrum.

The average yield for high-grade US bond issuers now stands at 5.52 per cent, its lowest level since July, according to data from Ice BofA. Junk bond yields, meanwhile, are now less than 8.4 per cent, also their lowest level since July.

“It does not feel like a market that’s hanging its boots up for the year. This is one of the most positive backdrops of the year,” said Mark Lynagh, head of global investment-grade finance at BNP Paribas. “[For companies] it’s a great time to go.”

As yields have fallen, the premium over Treasuries paid by corporate borrowers to issue debt has also dropped rapidly, as investors’ appetite for risk has increased. The so-called “spread” on investment grade bonds has fallen to 1.12 percentage points, around its tightest level since February 2022.

Part of the pick-up in issuance reflects “pent-up volume” from deals that had been expected in October and early November, said Richard Zogheb, global head of debt capital markets at Citi. However, there is also “absolutely a component of folks who are seeing [companies] coming to market and what they’re able to achieve, and saying ‘wow, this looks kind of attractive’”.

Pointing to the conflicts in the Middle East and Ukraine, he noted that “there’s still a lot of uncertainty in the world”.

“[Borrowers are saying], ‘if I can move quickly, maybe I should think about accessing this market’,” he added.

So far, overall volumes for the fourth quarter are not expected to be significantly higher than average because of October’s weak volumes, say bankers.

However, the decline in debt costs means that “a number of issuers [are] making a conscientious decision to get ahead of funding next year”, said Morgan Stanley’s Hodgson.

“The investment-grade market rarely holds for considerable periods of time at spreads [at these levels] other than extreme stimulus environments like we saw during Covid,” he added.

Many companies have looming refinancing needs. Investment-grade US companies, for instance, have a record $1.26tn of bonds coming due in the next five years, up 12 per cent from the previous year, according to an October report from rating agency Moody’s. Speculative, or junk-rated, maturities over the same period stood at $1.87tn across bonds and loans — also a new record.

Some said the rush to borrow could also reflect concerns that unexpected data or other developments — for example, a hotter than forecast inflation report — could trigger a reversal in bond yields.

“There is a sense that [the market] might continue to feel good, but it very well might not,” said Wells Fargo’s O’Connor. “So some companies are saying — ‘why not go now, and at least de-risk a portion of my funding needs — if not all of them?’”.

Citi’s Zogheb said the market was likely to remain solid until Christmas. “Ourselves and our competitors are out there encouraging people and saying ‘it feels really good’,” he said.

“Investors believe that inflation is under control and that we are heading for a soft landing . . . but no one knows for sure and things can change quickly.”

FT : Italy’s veto on French deal shows EU defence consolidation is a distant dre

Italy’s veto on French deal shows EU defence consolidation is a distant dream
Rome’s decision to block Safran’s acquisition of Microtecnica is latest shot in an often strained security relationship

Three guesses on the nationality of the company that the Italian government has deemed to be “an exceptional threat” to national security owing to its interest in buying a small Turin-based aerospace supplier? 

If you guessed a Chinese or Russian company, you would be wrong. It is, in fact, Safran of France, the aerospace and defence company that supplies to critical European military programmes such as Eurofighter.

Safran has made a $1.8bn offer to buy the flight controls and actuation business of Collins Aerospace, which owns Italy’s Microtecnica. The Italian company specialises in making flight control actuators, systems that make things such as wing flaps move on an aircraft.

Rome’s decision to block Safran’s acquisition of Microtecnica — which accounts for just 15 per cent of the wider business’s revenue — was remarkable not just for the virulence of the language. It was surprising because for almost 40 years Microtecnica has been owned by a series of US companies. At the very time when Europe is calling for greater consolidation of its fragmented defence sector, Rome has deemed a company part-owned by an EU ally — the French government, which has an 11 per cent stake in Safran — to be a threat.

This is just the latest shot in an often strained Franco-Italian defence relationship. Certainly, relations have been frosty since France and Germany opted to launch a future fighter aircraft programme in 2017 without involving Italy. “Italians saw themselves as a major player on combat aircraft and they were not even consulted,” said an executive who worked with the Italian defence sector at the time. Soon after, Italy ended up joining the rival fighter programme put together by the UK, which had also been excluded.

Then there was the failed attempt by Italy’s Fincantieri to buy French shipyard Chantiers de l’Atlantique from South Korea’s STX also in 2017. Paris briefly nationalised the shipyard in order to scupper the purchase. In 2019, it referred the deal to the Competition Commission in Brussels. Two years later it collapsed before the commission’s investigation had finished. 

It is hard to avoid the feeling that there might be an element of payback in the Microtecnica decision. But Italy has been careful not to assume sole responsibility for the veto. It sought the opinion of the German government, which voiced concerns about continuity of supplies to the Eurofighter and Tornado fighter jet programmes. As Safran supplies a major competitor — Dassault’s Rafale combat aircraft — this could be a risk, it was suggested. Italy went further. Rome warned that Safran might pursue “business logics not aligned with the needs of . . . Italian defence”.

But it makes no sense for Safran to buy a business only to sabotage it. Yes, one of the three Italian production lines may be vulnerable when job guarantees expire, according to insiders. But Safran has to supply competing customers without prejudice in all parts of its business and this is no different.

There is another possible explanation for German and Italian reservations — and it has nothing to do with the Eurofighter or Tornado fighters. Instead, it may be tied up with their respective roles in Europe’s competing combat aircraft programmes.

Since the war in Ukraine, governments are keen to ensure sovereignty in critical defence capabilities. There are few systems as critical as flight control and actuation, which manage the manoeuvrability of an aircraft. If Safran succeeds in acquiring the Collins unit, much of the EU’s capability in flight controls and actuation will be in French hands, says a person with knowledge of the Italian position. “The Germans weren’t happy about that or the Italians either,” he added. 

The Franco-German combat aircraft programme was stalled for a year as the two countries fought over how to share intellectual property arising from flight control system development. Although Microtecnica’s is not the same technology, it is equally critical.

Italy may also be looking at the consequences for its involvement in the UK-Japanese-Italian Global Combat Aircraft Programme. If Safran acquires Microtecnica it could arguably weaken Italy’s chances for influence in this sphere, say insiders. 

A compromise may still be reached. That seems to be the pattern of many of these Franco-Italian spats. If not, Safran could explore buying everything but Microtecnica. Whatever the outcome though, the Microtecnica saga is proof of just how difficult it will be to achieve those European ambitions for a less fragmented defence industry.

FT : Chinese exports edge higher for first time in 6 months

Chinese exports edge higher for first time in 6 months
Uptick seen as boost to policymakers eager to stimulate recovery in world’s second-biggest economy

China’s exports rose slightly in November, breaking a six-month run of consecutive declines and giving a boost to policymakers looking to revive a flagging recovery in the world’s second-largest economy.

Exports rose 0.5 per cent year on year in dollar terms, official data showed on Thursday, compared with a forecast 1.1 per cent decline in a Reuters poll of analysts. In October exports dropped 6.4 per cent compared with the same period a year earlier.

Imports, however, fell 0.6 per cent, compared with a forecast 3.3 per cent increase and a 3 per cent bump in October, raising concerns that domestic demand remains weak.

In China’s markets, the uptick in exports was overshadowed by rating agency Moody’s decision to lower the country’s credit rating outlook to negative. Mainland- and Hong Kong-listed shares hit a near-five-year low as the negative outlook weakened investor confidence in China’s prospects for stronger economic growth.

China’s tepid international trade is one of the main sources of pressure for policymakers in Beijing, who are also grappling with a liquidity crisis in the property sector and low domestic consumption since it relaxed Covid-19 restrictions at the end of last year.

Beijing has embarked on a charm offensive since the middle of this year, seeking to mend ties with its principal markets in the US and European Union after foreign investors turned sour on the country.


On Thursday, EU leaders including Ursula von der Leyen, president of the European Commission, met President Xi Jinping in an attempt to smooth out growing differences over China’s huge trade surplus with the bloc and European opposition to its tacit support for Russia in the war in Ukraine.

The stronger than expected export figures follow mixed signals from other data, including the official purchasing managers’ index, which pointed to a decline in manufacturing activity last month.

The lower than expected imports indicated weaker domestic demand, with the economy hit by a property slowdown, while the pick-up in exports pointed to improved global demand for Chinese goods, economists said.

Nomura’s chief China economist Ting Lu said in a research note that next year would be slightly better for China’s exports, which he forecast would fall 1.5 per cent year on year, compared with a 5 per cent decline this year.

“Exports of consumer electronics and mobile phones may benefit from a potential global tech upswing,” he said.

China’s low inflation and weaker currency could also help its exports maintain a competitive edge, while electric vehicles, lithium batteries and solar modules may also continue to grow.

China’s exports helped prop up its economy during the three pandemic years when it was shut to the world, but they have struggled in 2023 as high global inflation and rising interest rates damp demand for its goods.

China’s customs administration said the EU was its second-largest trading partner in the first 11 months of the year after the Association of Southeast Asian Nations trading bloc.

Exports measured in the local currency renminbi to the EU fell 5.8 per cent during the period against a year earlier, while exports to the US, the third-largest trading partner, declined 8.5 per cent.

>>> US Close Dow -0.19% S&P -0.39% Nasdaq -0.58% Russell -0.22%

Closing Stock Market Summary

Today's session started on a mostly positive note. Relative weakness in the mega cap space limited index performance throughout the session, but buying activity was more robust under the surface in the early going. The market-cap weighted S&P 500 was up 0.5% at its high today, but closed with a 0.4% loss. The Invesco S&P 500 Equal Weight ETF (RSP) was up 0.9% at its best level of the day, but closed the session nearly unchanged from yesterday. 

Many stocks rolled over in the afternoon trade with no specific catalyst to account for the price action. Still, the market held up okay when considering how far stocks climbed in a relatively short period of time. At its high today, the equal-weighted S&P 500 was up 13% from its October 27 low. The Russell 2000 had been up as much as 1.8% at its high today before closing with a 0.2% decline. 

Shortly after the open, advancers had a better than 3-to-1 lead over decliners at the NYSE. By the close, decliners had an 11-to-10 lead over advancers at the NYSE. Only three of the S&P 500 sectors registered a gain -- utilities (+1.4%), industrials (+0.5%), and health care (+0.1%) -- while the energy sector (-1.6%) saw the largest decline by a wide margin.

The energy sector was responding to the sharp drop in oil prices. WTI crude oil futures settled below $70.00/bbl at $69.37/bbl. 

The early upside moves were the result of an inclination to buy on weakness after yesterday's losses, which was supported by another drop in the 10-yr yield in response to this morning's economic data. The 10-yr note yield fell five basis points today to 4.12%, but the 2-yr note yield climbed five basis points to 4.61%.

Briefly, the ADP Employment Change Report for November showed 103,000 jobs were added to private-sector payrolls following a downwardly revised 106,000 (from 113,000) in October. The other reports featured an upwardly revised 5.2% increase in Q3 Productivity (from 4.7%), a downwardly revised 1.2% decline (from -0.8%) in unit labor costs, and a widening in the October trade deficit to $64.3 billion from an upwardly revised -$61.2 billion (from -$61.5 billion) in September that was the result of exports being $2.6 billion less than September exports and imports being $0.5 billion more than September imports.

  • Nasdaq Composite: +35.2%
  • S&P 500: +18.5%
  • Dow Jones industrial Average: +8.8%
  • S&P Midcap 400: +7.2%
  • Russell 2000: +5.2%

Reviewing today's economic data:

  • Weekly MBA Mortgage Applications Index 2.8%; Prior 0.3%
  • November ADP Employment Change 103K (consensus 127K); Prior was revised to 106K from 113K
  • Q3 Productivity-Rev. 5.2% (consensus 4.8%); Prior 4.7%; Q3 Unit Labor Costs-Rev. -1.2% (consensus -0.8%); Prior -0.8%
    • The key takeaway from the report is the connection between rising productivity and falling unit labor costs. Each is headed in the right direction for the Fed's purposes, which means interest rates should continue to move in the right direction for the market's purposes.
  • October Trade Balance -$64.3 bln (consensus -$64.4 bln); Prior was revised to -$61.2 bln from -$61.5 bln
    • The key takeaway from the report is the different paths taken by exports and imports, as that fits with a narrative that underscores weaker activity abroad versus what has been seen in the U.S.

Thursday's economic calendar features:

  • 8:30 ET: Weekly Initial Claims (Briefing.com consensus 223,000; prior 218,000) and Continuing Claims (prior 1.927 mln)
  • 10:00 ET: October Wholesale Inventories (consensus -0.2%; prior 0.2%)
  • 10:30 ET: Weekly natural gas inventories (prior +10 bcf)
  • 15:00 ET: October Consumer Credit (consensus $9.0 bln; prior $9.0 bln)

>>> AbbVie confirms it will acquire Cerevel Therapeutics

AbbVie confirms it will acquire Cerevel Therapeutics (CERE) for $45.00/share in cash; total equity value of approximately $8.7 bln; to be accretive to EPS in 2030

Under the terms of the transaction, AbbVie will acquire all outstanding shares of Cerevel (CERE 36.93 +1.34) for $45.00 per share in cash. The transaction values Cerevel at a total equity value of approximately $8.7 billion. The boards of directors of both companies have approved the transaction. This transaction is expected to close in the middle of 2024, subject to Cerevel shareholder approval, regulatory approvals, and other customary closing conditions.
Proposed acquisition adds robust pipeline of assets focused on best-in-class potential for psychiatric and neurological disorders where significant unmet needs remain.
Cerevel's clinical-stage pipeline complements AbbVie's current on-market portfolio and emerging neuroscience pipeline.
Emraclidine has the potential to transform the standard of care in schizophrenia and other psychiatric conditions.
The proposed transaction is expected to be accretive to ABBV's adjusted diluted earnings per share beginning in 2030

>>> US After Hours Summary

After Hours Summary: ABBV will acquire CERE +16.2%; BRZE +13%, VRNT +10.7%, SMTC +6.9% higher on earnings; SPWH -13.5%, AGX -9.8%, AI -9.5%, CHWY -9%, GEF -6.2% lower on earnings

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: BRZE +13%, VRNT +10.7%, SMTC +6.9%, BASE +0.2%, OXM +0.1%

Companies trading higher in after hours in reaction to news: CERE +16.2% (ABBV to acquire CERE for $45/sh), LIAN +3.7% (turns down buyout offer from Concentra Biosciences), ASR +2% (reports Nov traffic), FWRD +2% (provides mid-quarter update), FSR +1.8% (issues statement, says negative reports about co have been overblown), DNA +1.2% (signs MoU with Synplogen to accelerate the development of DNA manufacturing and gene therapy in Japan), PAX +1.1% (to acquire Credit Suisse's real estate business in Brazil for ~$130 mln), CMPS +0.9% (study results of psilocybin published in JAMA Psychiatry), DDD +0.7% (to repurchase $135 mln in convertible notes), OPCH +0.7% (increases share repurchase auth from $250 mln to $500 mln), CVX +0.2% (announces $16 bln 2024 capex budget), CNI +0.1% (acquires Iowa Northern Railway)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: SPWH -13.5%, AGX -9.8%, AI -9.5%, CHWY -9% (also names new CFO), GEF -6.2%, CXM -4.2%, NAPA -3.5%, GME -2.6%, VEEV -2.2%, CHPT -1.5%

Companies trading lower in after hours in reaction to news: WVE -20.1% (commences $100 mln offering; subsequent 15% buyback), NKLA -15.6% (announces $100 mln stock offering; also $200 mln convertible notes offering), SEAT -10.3% (files for 18.5 mln share offering by selling shareholder), ETNB -6.8% (commences $125 mln public offering; subsequent buyback), HCI -6.3% (stock offering), PYCR -3% (selling shareholder commences 5 mln share offering), CNM -2.2% (selling shareholders commence 15 mln share offering; CNM to repurchase of 3.13 mln of these shares and 1.87 mln partnership interests), BECN -1.3% (selling shareholder commences 5 mln share offering), AORT -1% (CFO retires, names new CFO), MDT -0.7% (to terminate agreements to acquire EOFlow), ABBV -0.5% (ABBV to acquire CERE for $45/sh), MCD -0.2% (starts testing CosMc's, a new small-format)

WSJ : BAT Takes $31.5 Billion Charge on U.S. Cigarette Brands

BAT Takes $31.5 Billion Charge on U.S. Cigarette Brands
Maker of Camel, Newport and Pall Mall brands says U.S. sales hit by smokers switching to cheaper products

British American Tobacco BTI -8.61%decrease; red down pointing triangle is booking a $31.5 billion charge to slash the value of its U.S. cigarette business, one of the biggest corporate write-offs in recent history.

The accounting charge, largely stemming from its 2017 takeover of the U.S. maker of Newport and Camel cigarettes, approaches the value erased by the failed merger of AOL and Time Warner. The media company took a $45.5 billion charge in 2003 a few years after its deal.

BAT spent $49 billion six years ago to take full control of U.S. tobacco company Reynolds American. In the face of an accelerating decline in cigarette smoking, BAT and other tobacco giants have been trying in recent years to pivot to cigarette alternatives such as e-cigarettes and heated tobacco devices.

BAT also faces a planned U.S. ban on menthol-flavored cigarettes, which account for more than half of the tobacco giant’s U.S. cigarette sales. The Food and Drug Administration is expected to publish the new rule next year, though it wouldn’t take effect immediately and BAT and other tobacco companies are expected to challenge it in court.

BAT, whose portfolio includes Newport, the leading U.S. menthol brand, Kent, Dunhill and Lucky Strike, said its performance in the U.S. had been hindered by smokers switching to cheaper, nonpremium brands and a rise in illegal disposable vapes.

Citing macroeconomic pressures on its traditional cigarette business and its plan to invest more in its so-called noncombustibles business, the London-listed company said Wednesday that it would book an accounting charge of around £25 billion this year. BAT has a market value of around £50 billion.

The company said the charge mainly relates to U.S. brands it acquired, as it assesses their carrying value and economic usefulness in the years to come.

Shares of BAT dropped about 8% in Wednesday trading, putting it on course for its lowest close in more than a decade. Shares of rivals Altria and Philip Morris International also fell in Wednesday trading, by 3% and 2%, respectively.

Other big deals have resulted in big write-downs. In 2008, ConocoPhillips recorded a $25.4 billion charge connected to its 2005 acquisition of natural-gas producer Burlington Resources. In 2018, General Electric took a $22 billion charge on its 2015 acquisition of Alstom’s power business. Procter & Gamble took an $8 billion charge on Gillette in 2019 and a smaller write-down on the shaving business this week.

BAT, long one of the world’s largest cigarette companies, expanded in the U.S. in 2017 when it agreed to take full control of Reynolds American, a deal that at the time marked renewed interest among international players in the U.S. tobacco market.

BAT paid more than $49 billion in cash and stock that year for the nearly 58% of Reynolds it didn’t already own. BAT had been a Reynolds shareholder since 2004, when BAT’s U.S. unit Brown & Williamson merged with R.J. Reynolds to create Reynolds American.

In more recent years, BAT and rivals have sought to shift their focus to smoke-free products to reduce their reliance on traditional cigarettes. Altria paid $12.8 billion for a big stake in vaping startup Juul Labs, an investment it later wrote off almost entirely after a regulatory crackdown.

Global tobacco volumes are forecast to slump 3% in 2023, the company said Wednesday. It said its market share so far this year was flat, with a decline in the U.S. offset by growth elsewhere.

BAT did, though, report strong volume and revenue growth from its new products, which it expects to broadly break even this year, two years ahead of schedule.

The company said it plans to generate up to 50% of its revenue from noncombustibles by 2035, covering products such as vapes and tobacco-free nicotine pouches. The company is fighting in court a recent decision by the FDA ordering Reynolds’s top-selling Vuse Alto menthol e-cigarettes off the U.S. market.

Overall, BAT said it expects revenue growth for 2023 to be at the low end of its previous guided 3%-5% range, and low single-digit revenue growth next year.