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Vaccine hopes clear path for riskier groups to tap capital markets

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Lowly rated companies have seized on recent Covid-19 vaccine breakthroughs to borrow in an ebullient market, as investors look towards the prospect of an effective jab boosting the financial outlook of riskier borrowers. 

Companies at the bottom of the ratings ladder and those whose earnings have been decimated by the pandemic have tapped into the buoyant mood to push debt deals over the line while offering juicy returns to investors with increased appetites for risk. 

The success of such deals reflects the hopes resting on a vaccine-induced economic rebound next year. Historic central bank actions and low interest rates offered by high-grade borrowers have also encouraged investors to hunt for returns in riskier corners of the market.

Boparan, the UK’s largest chicken producer which is run by so-called “chicken king” Ranjit Singh Boparan, issued high-yield bonds this week. Before the financing, the supplier of chicken to retailers including Aldi and Tesco had a triple C credit rating, in the lowest reaches of junk. It has been weighed down by high levels of borrowing, embarking on a turnround plan that involved the sale of assets including Fox’s Biscuits for £246m last month.

Just hours after Boparan’s £475m bond issue was launched on Monday, US biotech firm Moderna delighted markets by announcing that its coronavirus vaccine was nearly 95 per cent effective

It followed last week’s announcement by Pfizer and BioNTech of a vaccine with high efficacy, progress that boosted demand for junk bonds issued by UK exercise chain PureGym, whose sites were forced to shut again because of England’s second nationwide lockdown. Its banks had been holding the debt since January and the vaccine news gave PureGym’s bankers just the boost they needed to dodge steep losses.

“The bond market is definitely quite hot now and has taken the vaccine headlines from Pfizer and Moderna very positively at least in thinking about credit risk,” said James Durance, European high yield portfolio manager at Fidelity International, adding that it had become easier for low-rated issuers to come to market.

PureGym’s bankers won a reprieve from the Pfizer-BioNTech vaccine breakthrough. The news helped them shift a €445m bridge loan they had made in January to the junk bond market and avoid steep losses © Simon Dawson/Bloomberg
Chicken producer Boparan, led by Ranjit Singh Boparan, sold a £475m bond this week. Deals such as that one ‘would have been more challenging’ without the double vaccine boost, one banker said © Tim Scrivener/Shutterstock

For Boparan, the double vaccine breakthroughs were similarly helpful. Over the summer the company had sought to refinance its bonds that mature in 2021, but plans were put on ice after investors sought excessively high borrowing costs, according to two people familiar with the matter.

Dominic Ashcroft, co-head of Emea leveraged finance at Goldman Sachs, said that prior to the vaccine announcements, deals for companies including Boparan “would have been more challenging to get done or wouldn’t get to the pricing levels that we’ve seen . . . This week they got a better level than they would have got two weeks ago.”

Boparan’s £475m worth of five-year debt, £50m of which was bought by Mr Boparan and his wife, gave investors an interest rate of roughly 7.6 per cent, according to a pricing document seen by the Financial Times.

Boparan declined to comment on this week’s deal or its potential refinancing over the summer.

Line chart of Yield on ICE BofA CCC & Lower US High Yield index (%) showing Investors rush into lowest-rated debt after positive vaccine news

US companies at the bottom of the ratings scale have also benefited from the post-vaccine euphoria. The yield in a US index of triple-C rated bonds fell 0.72 percentage points on the day Pfizer made its announcement, to 10 per cent, the biggest one-day fall since May, as investors rushed into the debt.

Cruise line operator Carnival, a company whose earnings have been battered by the pandemic, has regularly tapped the bond market this year. This week it returned with its first unsecured deal, a riskier offering as the bonds are not backed by its ships or other collateral. 

“The vaccine news has been a game changer in the US,” said Ben Burton, head of US leveraged finance syndicate at Barclays, adding that there had been a “dramatic” increase in risk appetite.

In the loan market, Inspire Brands, which owns restaurant chains Buffalo Wild Wings and Arby’s, raised $2.6bn this week to buy coffee chain Dunkin Brands. Bankers pulled the completion date for the deal forward by two days and lowered the company’s borrowing cost to 3.25 percentage points over the benchmark rate, known as Libor, in a sign of demand for the deal. 

Falling borrowing costs and strong investor demand to either purchase bonds or make loans has made debt markets an appealing alternative to raising money by selling stock, said Sarang Gadkari, co-head of global capital markets at Bank of America.

Carnival has regularly tapped the bond market this year. This week the struggling travel group launched its first debt deal not backed by its cruise ships or assets as collateral © Tim Rue/Bloomberg
Uzbekistan raised the equivalent of $750m across dollars and Uzbek som from only its second bond issue following a market debut last year © Alamy

The vaccine news has also sparked a flurry of deals from riskier emerging market borrowers as investors bet that the sector will be among the biggest winners from a faster economic rebound.

This week, Uzbekistan raised the equivalent of $750m across dollars and Uzbek som from only its second bond issue, following a market debut last year.

“Before the second wave of Covid, markets were open for EM borrowers, but not en masse,” said Sergey Goncharov, a fund manager at Vontobel Asset Management.

The vaccine developments have made investors “way more comfortable buying into these riskier names,” he added. “Portfolio managers have accumulated so much cash, and they are looking for places to put it to work.”



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How traders might exploit quantum computing

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If you had a sports almanac from the future as did Biff Tannen, the brutish bully of the time-travelling Back to the Future movie trilogy, how might you be inclined to take advantage of the foresight buried within it?

The obvious temptation would be to place sure bets in the market that make you rich. In Biff’s case, the wealth is then used to change the world into a dystopian reality in which he himself exists as “America’s greatest living hero”.

That sort of thing used to be considered fiction. But the dawn of so-called “supremacy” of quantum computing over conventional technology raises the possibility that one day soon someone might be able to effectively see into the future.

This is because quantum computers, when they become fully capable, are likely to be uniquely good at crunching probability scenarios. They are based on the mysterious world of quantum physics. Quantum bits or qubits are the basic units of information in quantum computers. Unlike the binary bits of traditional computing, which must be either zero or one, qubits can be both at the same time.

This gives quantum computers super powers that will allow them to solve probability-based tasks that would previously have been impossibly hard for conventional counterparts in realistic timeframes. If the problem at hand was a game of football, adding quantum computers to the mix is like allowing footballers to use their hands to get the ball into the net, say quantum experts.

It’s a prospect that poses an entire new set of challenges for market regulators and participants. If super quantum computers really can help institutions see into the future, the information advantage will be unprecedented.

It might also represent an entirely new type of front-running and market manipulation risk, one that regulators can’t necessarily even identify unless they too have a quantum computer at hand.

In Back to the Future, the almanac gave Biff a 60-year insight advantage over everyone else in his home 1955 timeline. With quantum computers, the edge might only be nanoseconds. But in the fast and furious world of high-frequency trading, that could be enough to sweep up.

The reassuring news — at least for now — is that we’re still at least five years away from quantum computers being powerful enough to compete with existing supercomputers on much simpler problems. Prediction might not even be their initial forte.

Goldman Sachs research recently noted, as and when quantum computers are rolled out, they are far more likely to be deployed on crunching options pricing conundrums or running Monte Carlo simulations that value existing portfolios than they are on predicting future movements of asset classes.

According to Tristan Fletcher, of artificial intelligence-forecasting start-up ChAI, that’s because prediction is ultimately about solving a very specific, deep problem by understanding the nuances of the data that matters.

“We are already at the limits of what any system that isn’t actually listening to Opec meetings and five-year plans is capable of,” he said. It’s not the complexity of the calculation that is the issue as much as the breadth of the data sample at hand. That means prediction wouldn’t necessarily get more accurate with quantum power.

The appeal to focus on “brute-force” problems such as optimising portfolio analysis or cracking cryptographic problems such as those that underpin bitcoin, the cryptocurrency, is far greater.

But this poses its own problems. If cryptographic systems can be broken, exceptionally sensitive data held across the financial system could be exposed and taken advantage of in unfair and market manipulative ways.

Rather than being able to better predict the market, the true pay off in the arms race might lie in achieving quantum-level encryption-breaking capability and using it subtly to seize the information that can get a trader ahead. Experts say the chances someone is already up to this, however, are low. If quantum supremacy had been achieved, the news of it would leak pretty quickly.

“We don’t know what we don’t know,” said Jan Goetz, chief executive of IQM, a quantum computing builder. “But generally the community is very small so everyone knows what’s going on. The status quo is clear.”

Nonetheless, the financial sector seems to be waking up to this quantum computing issue. Many banks and institutions are introducing teams to think exclusively about how quantum computing will affect their business. How far ahead they are on making their systems quantum secure is harder to say. It’s a secretive issue. For now, most agree, the threat level is low, not least because — as the hacking of the Colonial pipeline shows — system security is low enough to ensure far cheaper and simpler ways to hijack digital systems.

izabella.kaminska@ft.com



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Martin Gilbert returns to dealmaking fray with Saracen acquisition

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Martin Gilbert, the acquisitive founder of Aberdeen Asset Management, has returned to the dealmaking fray and scooped up Edinburgh-based boutique Saracen Fund Managers through his new venture. 

AssetCo, the Aim-listed company of which Gilbert became chair in April, said on Friday it had agreed to buy Saracen for £2.75m. The deal marks the first step in its strategy to use its platform to make acquisitions in the asset and wealth management industries.

“We need to acquire a regulated entity,” said Gilbert, who established Aberdeen four decades ago and helped orchestrate the £11bn all-share merger between Standard Life Investments and Aberdeen Asset Management in 2017. “Saracen was typical of a good asset manager that had struggled to grow. That’s where we think we can help.” 

Saracen was founded in the late 1990s and has five full-time employees and three funds, which together manage about £120m in assets. In the financial year ended March 31, the group recorded turnover of £985,364 and a post-tax loss of £15,146.

David McCann, an analyst at Numis Securities, described Saracen as “a nice little business but obviously it’s very small”. He added: “It doesn’t move the needle for AssetCo, but it’s about what they do next. The expectation is that this is used as a building block for something much bigger.” 

Dealmaking is sweeping across the fragmented asset management industry. Gilbert, who stepped down from the board of Standard Life Aberdeen in December 2019 and is also chair of fintech Revolut, said AssetCo was “pretty ambitious, we’re looking at lots of opportunities”. 

“There are lots of opportunities for consolidation at all levels because of headwinds like the move to passive, fee compression, ESG and the move from public to private markets.

“We grew Aberdeen largely by organic growth and acquisitions,” he added. “That is our current strategy but at the boutique end of the market. I’ve told [Standard Life Aberdeen chief executive] Steve Bird ‘you’ve nothing to fear from us’.” 

AssetCo also owns a small stake in UK investment group River and Mercantile. Gilbert and Peter McKellar, who is also a director of AssetCo, will join the board of Saracen once the deal is completed.

Standard Life Aberdeen’s share price has tumbled about a third since the merger was struck.

The group last month cut its dividend by a third after full-year pre-tax profit fell almost 17 per cent and investors yanked money from its funds. It was also widely mocked online after announcing it would change its name to Abrdn.

Gilbert said: “The merger was obviously going to be difficult but the business is not alone in having to look at overheads because of the headwinds the industry is facing. It has the strongest balance sheet in the sector.” 

He added he was “supportive” of the rebrand: “That’s me being diplomatic.”



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Wall Street stocks bounce back after inflation scare

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Wall Street stocks went into recovery mode on Thursday, after being pushed lower for three consecutive sessions by fears that central banks will withdraw crisis-era support following a surge in inflation.

The S&P 500 index was up 1 per cent at lunchtime in New York, after falling 2.1 per cent on Wednesday in its worst one-day performance since February. The technology-focused Nasdaq Composite rose 0.6 per cent, having neared correction territory on Wednesday when it closed almost 8 per cent below its record high in April.

US government debt rallied, with the yield on the benchmark 10-year Treasury sliding 0.03 percentage points to 1.67 per cent.

The S&P 500 hit an all-time high on Friday, fuelled by optimism about a global recovery supported by central banks keeping monetary policies loose. The blue-chip benchmark then lost 4 per cent over three sessions as worries about inflation rippled through markets.

Data released on Wednesday showed US inflation rose 4.2 per cent year on year in April, with prices rising at a faster pace than economists had forecast. This increased speculation about the Federal Reserve reducing its $120bn of monthly bond purchases has helped lower borrowing costs and prop up equity valuations.

Fed vice-chair Richard Clarida said this week, however, that “transitory” factors related to industry shutdowns last year had pushed price rises above the central bank’s 2 per cent target but the economy remained “a long way from our goals”.

Analysts warned that market volatility would continue as investors swung from believing the Fed to fretting that its policymakers would act too late to combat inflation and then tighten financial conditions rapidly.

Line chart of S&P 500 index showing Wall Street benchmark on track to snap three-session losing streak

“We are at such an inflection point that volatility in markets is likely to be quite persistent,” said Sonja Laud, chief investment officer at Legal & General Investment Management. “Any chance of a change from the story of constantly low interest rates is going to be unsettling.”

The Vix, an index of expected volatility on the S&P 500 known as Wall Street’s “fear gauge”, is running at around its highest level since early March.

“Markets are volatile because they’re not sure which sort of inflation we have at present, or what, if anything, the Federal Reserve may do to bring inflation down,” said Nicholas Colas of research house DataTrek.

Mark Haefele, chief investment officer at UBS wealth management, said the market jitters also presented an opening for traders.

“Given our view that the spike in inflation will prove transitory, and that the equity rally has further to run, investors can use elevated volatility to build long-term exposure,” he said.

In Europe, the Stoxx 600 index ended the session 0.1 per cent lower, paring a loss of 1.7 per cent earlier in the session.

International oil benchmark Brent crude dropped 3.8 per cent to $66.68 a barrel as the Colonial pipeline in the US resumed operations after being shut down last Friday by a cyber attack.

The dollar index, which measures the greenback against major currencies, rose 0.1 per cent.



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