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Monthly Archives: January 2019

12th January 2019

Subscribe to creditmarketdaily.com – Here’s why

In these post-MiFID II times, it’s more important than ever to source your suppliers carefully.

For less than the cost a cup of coffee per day, creditmarketdaily.com subscribers enjoy regular credit market views in order to get a snapshot of what to expect and how to position their portfolios. Truly independent in every sense, including our analytical approach, we take a market focus approach to our ideas and views and make conclusions that are action-oriented.

In addition, creditmarketdaily.com:

  • takes a totally unbiased approach to ideas, as we are not involved in fixed income business in any form – underwriting, market making, capital market advisory services and/or debt financing
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  • takes both a top/down and bottom/up approach & tie macro events to microanalysis and combine fundamental research with market technicals
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11th January 2019

Bank Capital is going Premium

Hopefully you have had the opportunity to enjoy reading the Bank Capital notes over the past few months.

We are delighted to launch a new premium product that we hope will be of immense use to you.  Authored and produced by our in-house expert GJ Prasad, Bank Capital Insights (BCI) will provide regular expert commentary on European bank capital asset class.

The commentary and analysis will focus on the specifics of the asset class, the state of play of the European banks and include linkages to macro-economic events, single name issues, regulatory changes and ever-changing industry landscape.

In particular, the publication will also focus on the interplay between equity and sub-debt instruments and highlight actionable ideas/thoughts that incorporate news headline to price action.  We believe that BCI is the first publication focusing cross-asset investing and to that extent, unique.

BCI will be published twice a week, usually on Monday and Wednesdays.  In addition to the regular BCI commentary, a trade idea in the Friday publication will also be published, reflecting ongoing market themes and state of play of the large European banks.  The trade idea will eventually form part of a separate, additional subscription, but for the first few weeks will be included in the standard creditmarketdaily.com subscription.

You can purchase a membership here to gain access.

 

If you already have a membership, simply log in to view it.

11th January 2019

High Yield Analyst? Join the Credit Market Daily Team

We’re seeking a high yield analyst writer for creditmarketdaily.com.   If you are experienced in writing high-quality articles and information specifically aimed at the credit community, we’d love to hear from you.

Benefits to you:

  • Exposure to the CreditMarketDaily.com community
  • Attract new consulting opportunities
  • Sell your niche reports via our website and network
  • Be a truly independent researcher

For more details, contact us here.

10th January 2019

Window wide open, no sign of a draft yet

MARKET CLOSE:
iTraxx Main

82.5bp, -0.4bp

iTraxx X-Over

337.3bp, +1.9bp

🇩🇪 10 Yr Bund

0.20%, -2bp

iBoxx Corp IG

B+179.7bp, -+xbp

iBoxx Corp HY

B+517.7bp, +2bp

🇺🇸 10 Yr US T-Bond

2.71%, -2bp

🇬🇧 FTSE 100

6144.25, (+1.26%)
🇩🇪 DAX

11657.69, (+1.33%)
🇺🇸 S&P 500

3036.13, (+0.74%)

Hype springs eternal…

Just when we thought it was safe, the old issues came back to remind us of the dangers being too presumptuous – and not get sucked into rallying markets. It is the facts that matter. The US shutdown drags on and Trump’s wall-tantrum continues and the optimism around those US-China trade talks has faded. The latter was the driver for much of this week’s upbeat tone.

The gamut of economic data from the Eurozone continues to highlight that the economy’s manufacturing activity faded badly in the final quarter – this time French industrial output for November showing a 1.3% monthly slide versus expectations of no change. The markets reacted, but actually in quite measured fashion for equities, as rates were much better bid for the most part.

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9th January 2019

Happy New Year?.. Oh yes!

MARKET CLOSE:
iTraxx Main

82.9bp, -2.9bp

iTraxx X-Over

335.4bp, -10.2bp

🇩🇪 10 Yr Bund

0.22%, -1bp

iBoxx Corp IG

B+179.8bp, -1bp

iBoxx Corp HY

B+516bp, -10bp

🇺🇸 10 Yr US T-Bond

2.73%, +1.5bp

🇬🇧 FTSE 100

6144.25, (+1.26%)
🇩🇪 DAX

11657.69, (+1.33%)
🇺🇸 S&P 500

3036.13, (+0.74%)

Ain’t no stopping them…

Another solidly positive session, leaving risk assets continuing with their rally. Who would have believed the Dax being up 3% already this year, especially given all the fears we have of a mounting slowdown in macro? The US/China trade talks reaching some kind of an agreement is the sole driver, because all the data suggests Germany and the Eurozone overall is slowing – and heading potentially for recession. The FTSE likewise is close on 3% higher in these early bulled-up sessions, but the hopes here are for one of a Brexit trade deal, no Brexit or a delays to Brexit which might lead to no-deal. Better the devil you know keeps the market buzzing along.

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9th January 2019

Food for Thought Idea in USD AT1 Land | Bank Capital

HSBC 6% Perp 27 AT1 looks very attractive relative to STANLN 6.5 Perp 20 AT1

Macro background:

  • USD swap rates continue to widen especially in the front end and we continue to see the curve flattening
  • Global growth is slowing down but with potential sticky inflation (oil/commodities driven). Trade wars, protectionism and increasing geopolitical risks are going to create volatile moves in markets
  • EM currency and hard currency debt is coming into focus given the record level of issuance in recent years
  • Repricing risks in new issues and new issue markets being shut
  • Potential end of global easing and accommodation
  • Diminishing appetite for risky assets

Continue reading

8th January 2019

Be good if it lasts…

MARKET CLOSE:
iTraxx Main

85.8bp, -2.7bp

iTraxx X-Over

345.2bp, -12.1bp

🇩🇪 10 Yr Bund

0.23%, +1bp

iBoxx Corp IG

B+180.6bp, +1bp

iBoxx Corp HY

B+526bp, -10bp

🇺🇸 10 Yr US T-Bond

2.71%, +3bp

🇬🇧 FTSE 100

6144.25, (+1.26%)
🇩🇪 DAX

11657.69, (+1.33%)
🇺🇸 S&P 500

3036.13, (+0.74%)

Market feeling replete…

Few will find reason to argue, but Tuesday’s session was a bullish one for the most part. And just as it needed to be, as it allowed the high yield primary market to reopen with a blue chip (offshoot) entity of a peripheral company. Just as we called it – and Telecom Italia Mobile was the borrower. Primary was raining deals again, with IG non-financials seeing a multi-tranche, dual currency effort from Orange SA, a dual tranche from Emerson Electric and then several senior financial offerings. All being told, primary is delivering but we are not sure it is being necessarily helpful.

The deals are cheap but there is a repricing impact and what’s more, the deals are not nailed certainties to tighten on the break. The market is a little dysfunctional at the moment and needs little more time to play out. So, there is not much – if any – performance in the new deals, while existing holdings are marked much wider thus hammering net asset values.

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7th January 2019

Bringin’ It Back

MARKET CLOSE:
iTraxx Main

88.5bp, -1.1bp

iTraxx X-Over

357.3bp, -8.1bp

🇩🇪 10 Yr Bund

0.22%, +1bp

iBoxx Corp IG

B+179.9bp, +2.1bp

iBoxx Corp HY

B+451bp, -5bp

🇺🇸 10 Yr US T-Bond

2.68%, +2bp

🇬🇧 FTSE 100

6144.25, (+1.26%)
🇩🇪 DAX

11657.69, (+1.33%)
🇺🇸 S&P 500

3036.13, (+0.74%)

Taking care of business…

There was no shortage of borrowers looking to get deals away just as the going seemed to have improved following the huge rally in equities at the end off last week. They came out the gates gushing, with senior bank deals, IG non-financial corporates and a slew of covered bond and SSA transactions. The deals went up on the screens just as data for German factory orders showed a drop of 1% in November versus October (expectations was for -0.6%) and a Sentix survey suggested that investor expectations for Germany in 2019 were the gloomiest since 2012. Tuesday primary market activity will likely be a different story.

Continue reading

7th January 2019

The Contrarian View in Bank Capital Investing | Bank Capital

Poor equity – Same old pain…

It is not even a full working week into 2019 and we are seeing large volatility across asset classes – yet some of the themes that are likely to persist throughout the year are already getting confirmed:

  • Global growth slowdown, especially in China and Europe;
  • Disinflation or inflation staying well below target;
  • Tightening financial conditions and slower credit creation;
  • Strained liquidity conditions;
  • Large and sudden bouts of market volatility; and
  • Populist measures getting traction

This potentially means that the main central banks in the developed countries – Fed, ECB, BOE and BOJ resort to the old playbook of slowing/reversing rate hikes; become more dovish in forward guidance and decrease the speed of balance sheet reduction. And the Chinese central bank may go one step further and add further monetary stimulus to tide over a credit contraction.

Whilst this may help risk markets to bump along, the implication for the European banks is more downbeat as it would impact profitability.  Lower loan growth (due to credit impulse slowing down) and margin compression (both due to competition and lack of profitable lending opportunities) may see banks struggling to improve top-line revenue growth.  Add to this the high cost base and a potential increase in loan losses, one can see earnings trajectory to reverse or at best stay flat.  In this environment, most banks likely to struggle to generate ROE close to COE.

Earnings recession is likely to lead to lower shareholder distributions in the form of dividends and/or buybacks.  And this lack of earnings visibility is what has caused equity valuations of the major banks to drop 30% or more in the last 3 to 6 months.  And in many cases, they trade at P/TNAV of 0.6 times or lower.

Some of the European banks have leverage issues and may yet need to either restructure their operations or reduce their risk assets.   Plus, home bias should see some of them retrench and reduce global footprint and /or get out of non-profitable operations or businesses.


Credit may yet become an unintended beneficiary

Although the above backdrop is not hugely optimistic, in a perverse way, credit investors may be the biggest beneficiaries, especially given the reluctance of European governments to let banks fail.

Looking at the situation differently:

  • Lower loan growth and/or asset de-leveraging may lead to higher capital ratios and better solvency metrics;
  • Ample central bank accommodation and alternative funding arrangements may result in limited issuance in capital markets;
  • Poor or low dividend yield results in investors chasing higher yields in sub-debt; and
  • Coupon suspension risk is eliminated as capital buffers improve

Barring a full blown deep economic recession and/or unexpected tail risks due to political risks, most of the national champion banks in Europe have more than adequate capital to continue as going concern entities and don’t need re-capitalisation.  The other area of market concern in terms of liquidity may get addressed through the renewal of the TLTRO program for another 3 years and hence eliminating the need for primary markets to be open for debt rollover.

Suddenly, this low growth, low inflation, asset de-risking set up is creating a situation where bank credit is starting to become attractive given current spread level. Current yields on many of the LT2s and Holdco Senior paper issued by national champion banks in Core European countries are more than compensating for the tail risks out there.  And AT1s issued by the large cap banks getting close to fair value and attractive to buy and hold.


Conclusion

The contrarian view is that AT1s issued by banks that meet the following criteria are very attractive and likely to see significant price appreciation on a 6-9 month view:

  • Yield to Perp is close to 80% of the bank’s COE;
  • AT1 yield is double the bank’s dividend yield;
  • No more issuance to meet regulatory capital thresholds;
  • Significant headroom on both coupon paying ability test and conversion trigger test;
  • The bank’s equity is trading at or above 0.6 P/TNAV;
  • Issue level rating likely to move to IG at all 3 agencies

Ask yourself this question – would you want to own AT1s issued by systematically important banks (yielding 7% or more) or HY bonds issued by firms in highly cyclical industries and with low visibility/transparency?   I believe the answer is the former.

And I repeat my view from my 2019 outlook:

2019 is going to be a very interesting year for bank capital and, clearly, there is significant scope for generating substantial returns based on single name selection and dynamic portfolio risk management.


For information about our bespoke portfolio risk service, click here

6th January 2019

Corporate Bond Market Report: Year-End 2018

The corporate bond market endured its most torrid period since the crisis began. It delivered the worst performance since 2008 in total return terms, with the level of spread weakness not far behind. As measured by the Markit iBoxx index, IG widened by 76bp, high yield by almost 240bp and, for example, the AT1 index by 342bp. No sector was spared, and the weakness accelerated through the final quarter on heightened macro and geopolitical concerns. That is most likely going to continue and be a theme for 2019, but we can expect the weakness to be much more limited as the various events play out.

Full spreads charts/analysis: IG | HY | Senior & Sub Financials | Corporate Hybrids | GBP Corporates | CoCos


As suggested above, credit total returns were the worst since the crisis began. IG lost 1.2% and the high yield market delivered a -3.6% total return. In relative terms, other markets lost more. The Dax delivered -18.2%, the FTSE -12.5% and the S&P recovered late on to -6.2%. There was a positive result, that came courtesy of the Eurozone’s government bond market, where demand for safe-haven risk saw a +0.9% result.

Returns in 2018 


Primary market activity was affected by the broad volatility and weakness in most asset classes. The window to get a deal away was open all too infrequently, the hesitation by borrowers and push beckon pricing by investors leaving us with the lowest level of issuance in the IG non-financial sector since 2012, at just €221bn – against an average of €260bn per year in the 2014-2017 period. It will be a good result if we get close to the €220bn level in 2019. US borrowers were prevalent, but the 12% share of the overall market was the lowest since 2012 as well.

Senior financial deal flow was the lowest annual total since the beginning of the euro currency era. Just €130bn was printed versus the previous low of €136bn (in 2017). Given the weakening macro environment and continued high levels of volatility, we’re suggesting issuance declines again in 2019, to around €110bn.

HY Issuance: 2003 – 2019

High yield markets had a good year. In fact, it was the second-best year ever for deals in the HY capital markets, with some €62bn transacted. Most of that was issued in the first nine months of the year though, with wider concerns leaving the window shut for others through the final quarter. Spreads gapped, the index yield is up at 5% (both almost doubling) and we think issuance will decline in 2019 to around the €45bn level.

Full issuance data charts/analysis: IG | HY | Senior Financials

Every issuance deal: IG | HY


Funds performance

A particularly poor final quarter saw to it that corporate bond funds recorded a negative performance for the full year, pretty much across the board. Poor secondary market liquidity was a particular feature as well as frustration. That’s the nature of the beast. While we also had to contend with new issues launched with higher premiums than we might be used to, and whole sectors repriced as a result. The IG index lost around 1.2%, but most reasonably sized funds lost in excess of 2%.

In sterling, it was a similar picture, with the index off by just over 2%, but reasonably-sized funds (in excess of £1.5bn AUM) lost 3% or more.

>>See the full IG Euro Performance tables<<

>>See the full HY Euro Performance tables<<

>>See the full Sterling IG & Sterling HY Performance tables<<

Overall, we endured a torrid time of it in 2018. Others did worse, but it’s scant consolation. Given the severity of the equity markets’ volatility, it was always going to have a contagion impact on the corporate bond market. The corporate bond market held up quite well until the final quarter, where it then came under some greater levels of pressure and performance deteriorated more rapidly.

As we head into 2019, we should exercise caution, be wary of buying any dips and not chase any rallies. The macro environment is extremely challenging and geopolitical stresses remain elevated. The picture ought to become clearer over the next few weeks. Good luck.