Suki Mann

Author Archives: Suki Mann

19th May 2020

📊 Landmark: IG Issuance at €200bn

MARKET CLOSE:
iTraxx Main

81.7bp, -2bp

iTraxx X-Over

489.2bp, -10bp

🇩🇪 10 Yr Bund

-0.46%, +2bp

iBoxx Corp IG

B+202bp, -4bp

iBoxx Corp HY

B+652bp, -15bp

🇺🇸 10 Yr US T-Bond

0.72%, -2bp

🇬🇧 FTSE 100

6090.04, (-1.55%)
🇩🇪 DAX

12901.34, (-0.71%)
🇺🇸 S&P 500

3372.85, (+0.12%)

And still lots to play for…

Equities’ performance for May to date is about flat. In credit, IG total returns (iBoxx) are at -1%, and the same in HY while the AT1 market is showing -2.2%. iBoxx index spreads are +10bp, -3bp and +40bp, respectively, in May so far.

Yet the corporate bond market is still being seen as the ‘go-to’ market – or, certainly, that’s what primary is telling us.

There is cash to invest, and investors need to get it to work. We still have 7 months to go in which to worry about performance for 2020. As long as the inflows are incoming, that’s good enough for now. And if we are looking at a recovery in macro sometime beginning in the second half of the year, credit spreads will be dragged tighter along with any rise in risk asset valuations.

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18th May 2020

🌅 And the outlook is bright(ening)

MARKET CLOSE:
iTraxx Main

83.8bp, -6.8bp

iTraxx X-Over

499.2bp, -41bp

🇩🇪 10 Yr Bund

-0.47%, +6bp

iBoxx Corp IG

B+206bp, -1bp

iBoxx Corp HY

B+666bp, -10bp

🇺🇸 10 Yr US T-Bond

0.71%, +7bp

🇬🇧 FTSE 100

6090.04, (-1.55%)
🇩🇪 DAX

12901.34, (-0.71%)
🇺🇸 S&P 500

3372.85, (+0.12%)

Economic engine revving up…

Markets are looking at that glass as half-full. As the world economy begins to re-open and we generate greater levels of activity, the hope is that we are picking ourselves up off the floor and moving on – in a sustainable upward trajectory. The data through May will be dire, but in a sense, it will be backward-looking. There will be the headline and other risks that markets will have to contend with for months to come, but there is a good chance we can mostly trend higher in risk valuations.

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17th May 2020

⚖️ Delicately poised

MARKET CLOSE:
iTraxx Main

90.2bp, +0.7bp

iTraxx X-Over

540bp, +4bp

🇩🇪 10 Yr Bund

-0.53%, unchanged

iBoxx Corp IG

B+207bp, +1bp

iBoxx Corp HY

B+676bp, +3bp

🇺🇸 10 Yr US T-Bond

0.65%, +3bp

🇬🇧 FTSE 100

6090.04, (-1.55%)
🇩🇪 DAX

12901.34, (-0.71%)
🇺🇸 S&P 500

3372.85, (+0.12%)

Credit market feeling some heat…

The Q1 data is out of the way. And as bad as that quarter was (ending with Eurozone GDP coming in at -3.8%), it was mostly all as expected. April’s numbers are worse (we had US industrial production and retail sales fall off a cliff on Friday), May’s data will barely be better but helped a little by the easing in the lockdowns, although we should stem much of the downward quarterly trend through June. But it will still be bad.

In the meantime, there is still much that can go wrong, even if the markets are looking at H2 with the glass half full. China’s economy is up and running. Each data point from there seems now to boost sentiment. Equities have settled in a new range significantly higher than their late March low levels. Rates seem to have found a floor, too, where benchmark yields have been in a narrow corridor for several weeks. Credit, though, is beginning to feel the pinch a bit.

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14th May 2020

HY Strategy: CMD Portfolio Performance Mid-May 2020

Market Overview

The corporate bond market has made a good comeback of late, mostly evident in the investment grade primary sector. The issuance pace is running at record levels and while April’s monthly deal flow was in itself a record (€57bn), May’s current total suggests it could even surpass that.

Importantly, the reopening of the investment grade market has provided somewhat of a boost to high yield primary. After having drawn a complete blank in the Feb 20 – 15 April period, we’ve since had around €5bn of issuance. Verisure reopened the market, but the likes of Netflix, Stada, Nokia and Synlab have followed.

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13th May 2020

🇩🇪 Germany Inc. steps up the pace

MARKET CLOSE:
iTraxx Main

87.7bp, +3.8bp

iTraxx X-Over

518.9bp, +16.1bp

🇩🇪 10 Yr Bund

-0.53%, unchanged

iBoxx Corp IG

B+201.3bp, +2.5bp

iBoxx Corp HY

B+xxxbp, -+xbp

🇺🇸 10 Yr US T-Bond

0.64%, -5bp

🇬🇧 FTSE 100

6090.04, (-1.55%)
🇩🇪 DAX

12901.34, (-0.71%)
🇺🇸 S&P 500

3372.85, (+0.12%)

Indigestion and too rich, but still gluttonous…

Primary credit markets continue to burst at the seams. It’s not often, in crisis conditions, that we get a HY borrower rated in the mid-single-B area manage to print an upsized deal (from €400m) of €850m! In the IG non-financial market, corporate treasury department suspicions lurk as to the macro outlook, because the deal flow continues at a record run rate.

The IG non-financial market has already seen €190bn issued this year, €37bn of it this month so far. The record month was April, when €57bn got away. The record year was 2019, with €318bn printed. It has to be fear of the post-June/maybe post-summer period. Get the cash on board, worry about holding it at negative rates another time. There’s nothing particularly smart in the process; It’s just fear and following of the herd.

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11th May 2020

No let up in primary splurge

MARKET CLOSE:
iTraxx Main

84.4bp, -1.6bp

iTraxx X-Over

507bp, -8bp

🇩🇪 10 Yr Bund

-0.52%, -1bp

iBoxx Corp IG

B+198bp, +1.5bp

iBoxx Corp HY

B+657bp, -5bp

🇺🇸 10 Yr US T-Bond

0.70%, +2bp

🇬🇧 FTSE 100

6090.04, (-1.55%)
🇩🇪 DAX

12901.34, (-0.71%)
🇺🇸 S&P 500

3372.85, (+0.12%)

Low hanging fruit being picked off…

It’s like the charge of the light brigade. Another day, another plethora of borrowers looking for money. And markets trying to trade through the May/June macro weakness. We even have the high yield borrower becoming less of an oddity on the screens.

We have failed to witness a spectacular, confidence-sapping blow-up. It helps that the wall of funding has been pushed out beyond 2021. The post-financial crisis disintermediation in the corporate funding dynamic has had the desired effect.

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10th May 2020

🗞️ Looking beyond the first half

MARKET CLOSE:
iTraxx Main

86bp, unchanged

iTraxx X-Over

515bp, unchanged

🇩🇪 10 Yr Bund

-0.53%, -1bp

iBoxx Corp IG

B+196.7bp, -0.5bp

iBoxx Corp HY

B+662bp, unchanged

🇺🇸 10 Yr US T-Bond

0.68%, +5bp

🇬🇧 FTSE 100

6090.04, (-1.55%)
🇩🇪 DAX

12901.34, (-0.71%)
🇺🇸 S&P 500

3372.85, (+0.12%)

Data and markets diverge…

There was no shock but certainly a bit of awe. And plenty of headlines about the post-war high 14.7% US unemployment rate and the record loss of over 20 million non-farm jobs in April. Markets, though, are looking beyond it – because that was all well-telegraphed. The numbers in Europe through last week, for April, were just as unedifying. May’s data will be poor too but with lockdowns easing, we have some recovery in activity and there is a path to some sort of recovery being established.

The dynamic of that recovery, though, remains uncertain. Nevertheless, equities are already trading the second half of 2020. In credit, things move slower. That’s the nature of the fixed income markets. Highly indebted corporates are busy trying to remain solvent. Their ability to service their obligation is paramount. Otherwise, default beckons.

The primary markets though are open for IG corporates and they are printing at a record pace, in order to defend and bolster balance sheet integrity.

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7th May 2020

💷 BOUGHT: NewDay 7.375% February 2024

The BoE has forecast a 14% contraction in the UK economy for 2020 and as much as a 30% in Q2 before roaring back into life in 2021 with a 15% bounce back. So, a painful, temporary collapse but a V-shaped recovery. Across the Eurozone and US, we are witnessing similar patterns with manufacturing and services activity at record lows.

Risk markets have already started to look beyond the economic malaise which will be inflicted in Q2. Equities are holding relatively firm, taking on the incoming macro and corporate earnings data on the chin somewhat. The credit markets have seen record levels of monthly issuance IG and we are seeing the beginning of a thaw in the high yield primary markets.

Credit spreads generally recovered hard following the initial pandemic-driven lockdown weakness, but even in the high yield market, the weakness was nowhere close to the levels seen at the height of the 2008 financial crisis. So we appear to have found a floor reflecting the expectation that markets will recover into H2 as lockdowns are relaxed and we hopefully avoid a second-wave virus shock. High yield spreads/prices have barely moved for several weeks.

Trading into that narrative, we took a look at the NewDay bonds and added a position to our holdings of HY debt, for the reasons listed below. The 18% yield to maturity was also a driver for our investment.

Also see: Our bond portfolio

Business Overview

NewDay (ticker: NEMEAN) is a leading UK credit card issuer – specialising in ‘near-prime’ and prime customers. ‘Near-Prime’ is defined as those who may find it difficult to access credit from mainstream lenders, and it is estimated that between 10-14m UK adults are ‘near-prime’ which is approx. 20-25% of the UK adult population.

100% of the company’s revenues are generated in the UK. Competition for the ‘near-prime’ segment comes from Capital One and Vanquis Bank. NewDay is regulated by the Financial Conduct Authority (FCA).

Business Segments

The group operates ‘own-brand’ credit cards – issued from NewDay’s brands ‘Aqua’ and ‘Marbles’ and ‘co-brands’ credit cards – which are cards issued via corporate partners.

These ‘co-brands’ are often issued by retail stores and online retailers (House of Fraser, Debenhams and Arcadia Group: which includes Topman, Topshop, Miss Selfridge, Burton, Dorothy Perkins and Amazon).

Historically, revenues between ‘own brand’ and ‘co-brand’ have been slightly skewed towards ‘own brand’ but over the past 3 years, its share of FY revenue has been decreasing: FY17 (61% of revenues attributed to ‘own brand’), FY18 (60%) and FY19 (58%).

Source: NewDay FY 19

Ownership

NewDay is owned by private equity firms: CVC (45%) Cinven (45%) with management owning the rest of the company (10%). It was acquired by CVC and Cinven in October 2016 from Varde Partners for £1bn.

Capital Structure and Liquidity

  • £2,103m Asset-Backed Bonds due in 2020
  • £608m Variable Funding Notes due in 2026
  • £30m Super Senior RCF due in 2022
  • £150m Senior FRN due 2023
  • £275m Senior Notes due 2024Net leverage is 1.9x (down from 2.6x from Q319).

Latest Financials – March 2020

NewDay FY19 results: +15% growth year-on-year on receivables to £3,026m from £2,623m in FY18. Adjusted EBITDA increased to £144m for FY19 from £82m in FY18. Income increased 14% year-on-year, mainly driven by own-brand cards (£676m in FY19 from £591m in FY18.

Net leverage decreased to 1.9x from 2.6x in Q3’19. Provisions also decreased to £20.9m for FY19 from £35.7m in FY18.

Credit Positives

  • Into 4th year of a 9-year agreement with Amazon which diversifies the co-brand business away from troubled retailers
  • NewDay is a leader in the ‘near-prime’ market and provides an important part in the lending mechanism
  • Low leverage with strong year-on-year receivables growth
  • Cash generative business model

Credit Negatives

  • Negative headlines regarding near-prime/sub-prime lenders mean that NewDay is the focus of FCA consumer action and regulation
  • Impairments could rise as economic conditions worsen for consumers (FY19 impairment 11.6% down from 13.0% in FY18)
  • The company has impending ABS maturities and other obligations due in 2020 (£719m) and 2021 (£886m)
  • Recession and unemployment will affect consumer spending and could lead to less customer credit transactions

Corporate Structure

Links/References

6th May 2020

⚡ The Power of the Dark Side

It can dominate your destiny… The screens were awash with deals. Surely we’re not looking at breaking the monthly record for IG non-financial deals, which stands at €57bn, again? The deal flow smacks of desperation. But it could be, that CEOs and the like have looked at the outlook (order books, forward orders) – added […]
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5th May 2020

✈️ Flying blind

Markets looking past the gloom… Monday was catch-up day following the May Day holiday across much of Europe. Tuesday was more like it. We are back to looking past the poor earnings and economic data expectations for Q1/Q2 and trying to position for some kind of recovery through June onwards. As those lockdowns ease. Recriminations. […]
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