7th June 2017

Anything you can do

MARKET CLOSE:
iTraxx Main

61.6bp, -0.6bp

iTraxx X-Over

248.6bp, unchanged

10 Yr Bund

0.26%, unchanged

iBoxx Corp IG

B+119bp, unchanged

iBoxx Corp HY

B+318.8bp, –1.5bp

10 Yr US T-Bond

2.17%, +2bp

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We tried to do better…

LVMH and GE might have raised €4.5bn and €8bn, respectively, in May via 4-tranche transactions. But they were bettered by AT&T in Wednesday’s session by a 5-tranche offering. The US telecoms giant came in with another blockbuster debt offering for €x7n, and was joined by Volkswagen which took €3.5bn in a dual tranche hybrid deal. Testy stuff! There is no better way to end the week.

The ECB and UK elections will dominate proceedings now and we can sit back, watch and listen. Friday might be a day for strategising on the next move and potential positioning depending on how the latter plays out. That’s because we don’t think that the ECB will provoke anyone to make any changes to their current positioning/strategy.

The big story of the day though was the takeover of the busted Banco Popular by Santander – and its CoCo debt wiped out as capital notes were ‘bailed-in’. The deal costs Santander a symbolic euro but €7bn in a capital raising exercise to cover Popular’s losses and recapitalisation. And so we have the first AT1/CoCo to incur losses for investors since the market first opened several years ago.

Popular had two deals outstanding for a combined €1.25bn and one of them was paying 11.5%, clearly highlighting the risky nature of the issue/borrower. After all, there’s a reason why a bond pays such a high coupon in a negative rate environment. These deals are not for the faint-hearted.

A positive was that contagion into the rest of the AT1 market was limited – as the likelihood of this event occurring for Popular was high anyway and investors/markets positioned for it. That said, it is bound to have an impact on this type of fund-raising by other weaker ‘potentially at risk’ banking institutions.

The markets otherwise spent the day drifting in small ranges with little impetus by anyone to get involved in any major way. That ought to be a different situation next week, although we do have the FOMC meeting to contend with. With a US rate hike priced in, we would think that it ought not derail activity in European corporate bond markets – primary, that is.

The supply for June already looks good, having been fairly anaemic in the opening week of the month, now boosted by those deals from AT&T and VW. That will also absorb some of those investor cash balances but the VW deals in particular will go someway in satiating the need investors have for a bit of incremental yield.


Primary belongs to AT&T and VW

Volkswagen’s deals were ‘dwarfed’ by AT&T’s

Volkswagen was back after a 2-year hybrid absence and printed €3.5bn from two deals in PNC5 and PNC10 structures to yield 2.75% and 3.875%, respectively. And that was 25bp and 37.5bp lower than the initial guidance, respectively. Remember, the issuer raised €8bn in senior unsecured notes back in March having returned to the capital markets after that enforced diesel emission related absence.

The VW deal was extremely well-received, and it doesn’t escape our attention that the longer maturity deal was the larger sized one (€2bn).

However, AT&T stole the limelight for its sheer size/tranches. Five tranches spread across 6, 9, 12 and 19-year maturities (including a 6-year floater) had the borrower raise €7bn combined, which goes someway in helping to finance that $85bn Time Warner deal. For their efforts, AT&T managed to lop 10-25bp off the opening price talk. Mercedes Financial Services Italia was the other IG borrower in the market with a 3-year FRN for €300m.

And after just €1bn being raised since the beginning of the month in IG non-financial debt, we have seen that total issuance catapult to €11.8bn so far this month, and leaves us on course for somewhere of the order of €25-30bn for June as a whole.

In the high yield market, we had a €635m long 10-year issue from UPC to yield 3.875% – and €2bn therefore in total supply from this market for the month so far. The SSA space had deals from Italy (for €6.5bn and €24bn of orders), Ontario, Turkey and an ESM tap amongst others to contend with.


Markets better but focused on events

It wasn’t quite the rip-roaring effort we had in credit primary that left the markets mixed into Wednesday’s close, and ahead of Thursay’s numerous events – the ECB press conference, the UK election and Comey’s testimony. Equities had tried to push higher and record a moderate up day but managed to end the session a small down in Europe.

Government bonds were not giving much up, either, and managed to close the session around unchanged. That lack of movement highlighted that there are enough nerves out there in the market but once we get through Thursday, any clarity ought to see equities edge higher, government bonds prices lower and credit spreads tighter. Well, that’s what we hope, anyway.

So we were left with Gilts yielding 0.98% in the 10-year maturity and unchanged on the day, US Treasuries 2.17% (+2bp) and Bunds 0.26% – unchanged.

Synthetic credit protection costs moved lower in Main which was down at 61.6bp (-0.6bp) while the X-Over index was left closing out unchanged at 248.6bp.

In the cash corporate bond market, we closed flat with focus on that welter of primary issuance, which meant that the Markit iBoxx IG index was left at B+119bp and the same went for the sterling market, left at G+138bp.

Finally and obviously, UPC was occupying the high yield market investor base but the market was still better bid for choice, even if stocks had an off day. Just for good measure, the high yield corporate bond index yield hit a new record low of 2.90%.

Have a good day.


For the latest on corporate bonds from financial news sources, click here.

Suki Mann

A 25-year veteran of the European corporate bond markets and in his role as Credit Strategist, Dr Mann has been ranked number one in the Euromoney Investor Survey eight times in ten years. Previously with Societe Generale and UBS, he now shares views of events in the corporate bond market exclusively here on Credit Market Daily.