Suki Mann

Author Archives: Suki Mann

3rd May 2020

🗞️ Looking Beyond the Sombrero

MARKET CLOSE:
iTraxx Main

80.7bp

iTraxx X-Over

491.4bp

🇩🇪 10 Yr Bund

-0.59%

iBoxx Corp IG

B+193bp

iBoxx Corp HY

B+646bp

🇺🇸 10 Yr US T-Bond

0.62%

🇬🇧 FTSE 100

6090.04, (-1.55%)
🇩🇪 DAX

12901.34, (-0.71%)
🇺🇸 S&P 500

3372.85, (+0.12%)

Glass half full…

March especially – and Q1 as a result, was awful. April’s final trading session ended on a sour note, leaving the month witnessing only a decent recovery for risk markets with the FTSE adding 4.1%, the Dax 9.3% but the S&P a not too shabby 12.7%. Concerted, aggressive and unprecedented stimulus packages did the trick. Investors were also mostly looking beyond the Q1/Q2 slump in macro – and trying to bag a bargain.

It might not be a V-shaped recovery, but we’re going to get some kind of a return to growth. The odds probably favour a ‘jagged swoosh’. Credit plays into it as well in primary, where demand for deals has been nothing short of insatiable. Unfortunately, the recovery in spread markets after the initial snap back – which was significant – is now becoming more laboured across the board.

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29th April 2020

⬆️ Corporate Bond Issuance Record Smashed

MARKET CLOSE:
iTraxx Main

78.2bp, -3.4bp

iTraxx X-Over

480.3bp, -14bp

🇩🇪 10 Yr Bund

-0.49%, -3bp

iBoxx Corp IG

B+193bp, unchanged

iBoxx Corp HY

B+649bp, unchanged

🇺🇸 10 Yr US T-Bond

0.60%, -1bp

🇬🇧 FTSE 100

6090.04, (-1.55%)
🇩🇪 DAX

12901.34, (-0.71%)
🇺🇸 S&P 500

3372.85, (+0.12%)

Issuance deluge feeds investor confidence…

In credit, we close April with it being a record month for IG non-financial issuance, seeing the record achieved during a flourishing penultimate session. The story, though, is that we smashed through the €50bn/month issuance barrier for the first time ever, as near to €55.7bn was printed. It’s an amazing feat given we are sitting in the middle of the most awful global macroeconomic environment since the Great Depression, but also in the middle of the poorest earnings season since the 2008 financial crisis.

It’s arguably because of that, that we find ourselves in record issuance territory. On the one hand, it’s desperation (and perhaps panic) as corporate treasury departments feel the need to get additional liquidity on board. And after a devastating performance in March, with a reset in spreads materially wider, it left investors looking at the credit market – with spreads/yields not seen for many years in IG – and compelled to hoover up the flow of deals.

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28th April 2020

💷 BOUGHT: Saga 3.375% May 2024

The credit market is recovering admirably. We look to have passed peak-virus, even if we are nowhere close to being in the clear. The stimulus packages are helping. But Q2’s earnings numbers are going to be awful in terms of earnings and macroeconomic activity continues to be depressed. But we look beyond that – and the potential for a V-recovery, at worst a shallow W-shaped return to health.

The tone is already improving. Playing into that, there is the rising tide of better equities lifting other markets. Credit spreads have already started their recovery trajectory and we see further potential for a high/low beta compression trade to continue. It’s laboured, admittedly, and will likely stay that way until we get a better handle on the recovery dynamics.

That brings us to the Saga 3.375% May 2024s. A punt? Given the devastation in the travel – and especially the cruise industry, yes. The headline risks are not to be understated. We have taken only a small position based on the view that (for the moment) the group still benefits from a good liquidity position, has suspended dividends with debt holiday/covenant waivers being negotiated for their cruise business (30% of EBITDA).

As a sophisticated investor, we have done this by adding the Saga sterling issue into our new investment portfolio through the WiseAlpha platform.

Also see: Our bond portfolio

These are the reasons why we’ve chosen Saga:

Business Description

Established in 1950, Saga (ticker: SAGALN) is a provider of insurance and travel products for the over-50s in the UK (100% of revenue is generated in the UK FY16). Insurance products include motor insurance and home insurance policies whilst the travel business offers cruises and package holidays – Saga owns two cruise ships: Saga Sapphire and Spirit of Discovery (delivered in June 2019 at a cost of €380m).

The firm has ordered a third cruise ship – Spirit of Adventure – which is due for delivery in 2020. The entire business is focused on the over-50s and this a wealthy, growing demographic (ONS 2018 Wealth Report). Further, as part of its business involves insurance – the group is regulated by the Financial Conduct Authority (FCA).

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27th April 2020

🌸 Risk markets to keep flowering in May

MARKET CLOSE:
iTraxx Main

81.1bp, -3.6bp

iTraxx X-Over

494.5bp, -7.2bp

🇩🇪 10 Yr Bund

-0.45%, +2bp

iBoxx Corp IG

B+195bp, -7bp

iBoxx Corp HY

B+654bp, -8.5bp

🇺🇸 10 Yr US T-Bond

0.65%, +5bp

🇬🇧 FTSE 100

6090.04, (-1.55%)
🇩🇪 DAX

12901.34, (-0.71%)
🇺🇸 S&P 500

3372.85, (+0.12%)

Liquidity, lots of it… Magic

It’s been very bad. But the markets are telling us that we will avoid financial (system) Armageddon. Too many have looked into the opening black hole and jumped into it. But the brakes were engaged and the various stimulus packages (Japan being the latest) have seen a remarkable April recovery. Into a dire earnings season and amid the poorest macroeconomic environment seen in several generations, markets are fighting back.

The outlook appears to be brightening. We’re nowhere close to riding high to those record levels seeing February. But the equity markets have put on somewhere between 6% to 10% in April so far. Eurozone rates have been flat, with yield impacts neutral from the huge issuance to come offset by the ECB grabfest.

Despite protestations to the contrary, in credit, euro IG has added 2.8% in total returns (iBoxx index), the AT1 market 7.2% and high yield +5.2% this month so far. Supply in the non-financial IG market is running at a record pace, 90%+ of deals are tighter than re-offer.

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26th April 2020

🗞️ Risk markets yearning to rally

MARKET CLOSE:
iTraxx Main

84.7bp

iTraxx X-Over

501.7bp

🇩🇪 10 Yr Bund

-0.47%, -4bp

iBoxx Corp IG

B+202bp, -2.5bp

iBoxx Corp HY

B+662bp, +2bp

🇺🇸 10 Yr US T-Bond

0.60%, -1bp

🇬🇧 FTSE 100

6090.04, (-1.55%)
🇩🇪 DAX

12901.34, (-0.71%)
🇺🇸 S&P 500

3372.85, (+0.12%)

L, U, V, W or even a ‘swoosh’ – anything will do….

It might be a busy week on the data front, ending with the FOMC on Thursday – ahead of Friday’s May Day Holiday, but we will only get something different in markets if the Covid-19 headlines permit. News of a vaccine trial breakthrough would be most welcome in that sense. Otherwise, we think the markets want to rally – cognisant that we will come out the other side of this crisis, but left in a range while they wait.

And it might be a rocket-fuelled, turbo-like recovery dynamic reflecting the various substantial stimulus packages in place. We’d think it won’t be that aggressive a rally, as economies open up in a phased fashion. But if we are now at rock-bottom, there’s every chance markets will try to front-run a return to some kind of ‘good old days’ period.

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23rd April 2020

🗞️ So THAT’s where the smart money is!

MARKET CLOSE:
iTraxx Main

82bp, -3.2bp

iTraxx X-Over

489bp, -17bp

🇩🇪 10 Yr Bund

-0.43%, -1bp

iBoxx Corp IG

B+205bp, -5bp

iBoxx Corp HY

B+xxxbp, -+xbp

🇺🇸 10 Yr US T-Bond

0.61%, unchanged

🇬🇧 FTSE 100

6090.04, (-1.55%)
🇩🇪 DAX

12901.34, (-0.71%)
🇺🇸 S&P 500

3372.85, (+0.12%)

Finding ways to play it safe…

The smart money, or the money, in the European bond markets, has been trading the ECB bid. If the biggest buyer of euro-denominated IG corporate/Eurozone government bonds is involved, then so are investors. We’ve seen that clearly in corporate primary.

With so much uncertainty unleashed by the ongoing COVID-19 pandemic, it seems reasonable that any new positions at least have the comfort of a price-insensitive back-stop bid.

We’ve seen it in the huge demand registered for this week’s Spanish and Italian sovereign debt offerings. And we’ve seen it in anything ECB ‘eligible’ in the corporate bond market where books are unusually massively oversubscribed.

Although games are being played – they are now expected to continue – by investors and issuers alike (oversubscription, 20-60bp of tightening versus IPT, price discovery dynamics out of the window), everyone knows which side their bread is buttered.

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21st April 2020

🛢️ Oil tanks, Risk off

MARKET CLOSE:
iTraxx Main

91.3bp, +6bp

iTraxx X-Over

554.3bp, +45bp

🇩🇪 10 Yr Bund

-0.49%, -4bp

iBoxx Corp IG

B+212.3bp, +2.5bp

iBoxx Corp HY

B+671bp, +17bp

🇺🇸 10 Yr US T-Bond

0.55%, -7bp

🇬🇧 FTSE 100

6090.04, (-1.55%)
🇩🇪 DAX

12901.34, (-0.71%)
🇺🇸 S&P 500

3372.85, (+0.12%)

Oil and trouble…

The high yield market had been outperforming. Who would have believed it? Admittedly it was only for a couple of weeks. We were always going to need some luck to keep it going. It’s likely now that the Verisure deal of last week will be it for a while – akin to a pop-up shop, testing the market and closing up quickly. Hit and miss.

The oil glut and subsequent price carnage have understandably hammered the mood, taken in many casualties, and along with it hopes of a V-recovery. We are probably having to contemplate a U-shaped one – at the very best.

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19th April 2020

↕️ More high/low beta compression

MARKET CLOSE:
iTraxx Main

82.3bp, -2.3bp

iTraxx X-Over

486.9bp, -6.2bp

🇩🇪 10 Yr Bund

-0.47%, unchanged

iBoxx Corp IG

B+209bp, unchanged

iBoxx Corp HY

B+652bp, -2bp

🇺🇸 10 Yr US T-Bond

0.64%, +1bp

🇬🇧 FTSE 100

6090.04, (-1.55%)
🇩🇪 DAX

12901.34, (-0.71%)
🇺🇸 S&P 500

3372.85, (+0.12%)

The lesser spotted HY deal..

Gosh! We had a high yield deal following a 7-week absence. Another 5.2m Americans lost their jobs last week, and although it was lower than the week before, it’s still over 22m losses since the pandemic was declared some four weeks ago. The data is poor on both the Q1 earnings front and in macro (Chinese GDP -6.8% in Q1). That bit was to be expected.

The markets are, however, looking to the bright side and way beyond that peak. There is a lack of permanency about the job numbers, with a macro bounce back anticipated perhaps during the summer months. As has been the case this past financial crisis (and now health crisis-ravaged decade) the doomsayers are being wrong-footed. The Gilead coronavirus drug trial, thought to be going well, has given markets another push amid hopes that we’re at the beginning of the end of this pandemic.

There is a feeling of a tentative recovery in the works. W or V-shaped recovery notwithstanding, the liquidity injections are looking like they will mask the underlying ills of the global economy a little longer yet. Risk is back on a roll, and we’re seeing further compression between high and low beta assets.

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16th April 2020

BOUGHT: Iceland 6.75% July 2024: YTM 9.5%

The high yield market will likely see a re-opening in primary through Verisure, suggesting that investors are ready to re-enter the market, initially on a cautious and selective basis. That deal is for just €150m and a 5NC1 structure. Nevertheless, it’s the first throw of the dice for a sector otherwise bereft a new deal since 20 February.

The news flow around the sector has been difficult and the market has been in defensive fashion since the coronavirus pandemic hammered risk assets. The recent equity market revival and the Fed stimulus package which has boosted US high yield has had a positive impact on the market in Europe.

Spreads, as measured by the index have recovered almost 30% of their weakness, leaving the iBoxx index at B+646bp (-270bp). The market remains very illiquid, the ability to transact at a reasonable price on the way up or down is poor, but there are pockets of liquidity emerging and opportunities presented as a result.

We have taken a look at the UK retail/food sector and, while high yield rated entities in this sector have come under pressure as a result of the weaker sentiment towards high yield per se, the food sector has had a better time of it as the population has hoarded ahead of – and into – the lockdown.

As a retail investor looking for sub-par paper which should be ‘money good’ (in our view) offering a very good yield, at creditmarketdaily.com we have decided to take a position.  We have done this by adding the Iceland sterling issue into our new investment portfolio through the WiseAlpha platform.

Also see: Our bond portfolio

These are the reasons why we’ve chosen Iceland:

Business Description

A UK-based food retailer, with 1,013 stores (976 UK ‘Iceland’ Stores and 119 ‘Food Warehouse’ stores). The business positions itself at the value-end of the retail market and currently holds 2.2% of the UK grocery market. Competition comes from established grocery supermarkets such as Tesco, Asda and Morrisons and value-end discounter retailers such as Aldi and Lidl.

87% of Iceland’s customers are C1, C2 and DE demographic (clerical, junior administrative jobs, skilled manual workers, semi-skilled and unskilled manual occupations and unemployed) – the most of any other food retailer – therefore it occupies a unique space in the grocery market.

Business Segments

Generally, the business revenues are split into three (LTM-June-2017) equal segments:

In the frozen food segment – ICELTD holds a 15.4% market share. This is the second-largest in the UK and is a key in the company’s strategy to position itself as a differentiated value offering – in essence, in between established supermarkets and discount retailers.

Ownership

63.1% owned by Brait (first stake acquired in March 2012). 36.9% owned by management.

Capital Structure

  • £30 RCF
  • £760m existing notes
  • £62m finance leases
  • £85m cash on balance sheet

Net Leverage 5.5x (up from 4.9x y-on-y) as of January 2020.

Latest Financials – FY2020 (40 weeks ended 3 Jan 2020)

Revenue increased +2.5%, but it was a challenging quarter as a result of the UK general election. Gross profit was -14% lower at £99m (from £113m in Q3 FY19).

EBITDA declined by 8% for the same period, to £81m. Net leverage increased to 5.5x from 4.9x at Q3 FY19 (last year) to Jan 2020.

There was a large working capital outflow of £33m and this was attributed to trade payments going forward. The company said that will increase going forward as the Swindon Warehouse (which will cost an additional £6m in working capital next year) is opened, but this does add additional capacity for increased sales.

FY2020 will be less than that last year at around £50m (FY19 £63.5m). Please note these results were pre-COVID19 lockdown.

Credit Negatives

  • Extremely competitive market with new entrants Aldi and Lidl already having a larger UK Grocery market share (8.2% and 6.1% respectively).
  • Deleveraging tough as costs are driven by inflationary increases (National Living Wage).

Credit Positives

  • Uniquely positioned in the frozen food market (2nd in the UK).
  • Solid footfall as highlighted in the figures from Kantar data (ICELTD till roll was up +33.8% last month, where March was the biggest month on record for UK grocery sales) resulting from the COVID-19 lockdown.
  • Recent 4-week sales have stated ICELTD sales +11.7% year on year which is a significant increase.
  • The company appears to be well-positioned as a value brand in a recessionary/depression environment.

Iceland Corporate Structure


Links/References

  1. Our bond portfolio
  2. Iceland Prospectus
  3. Iceland website
15th April 2020

🗞️ Credit markets getting ahead of themselves

MARKET CLOSE:
iTraxx Main

84.9bp, +7.7bp

iTraxx X-Over

490.4bp, +40bp

🇩🇪 10 Yr Bund

-0.47%, -9bp

iBoxx Corp IG

B+207bp, unchanged

iBoxx Corp HY

B+646bp, +2bp

🇺🇸 10 Yr US T-Bond

0.67%, -8bp

🇬🇧 FTSE 100

6090.04, (-1.55%)
🇩🇪 DAX

12901.34, (-0.71%)
🇺🇸 S&P 500

3372.85, (+0.12%)

Caution is thrown to the wind…

Advanced economies are set to shrink by over 6% this year, so says the IMF. The global economy is expected to take in a decline of 3%. The UK economy will plummet by up to 35% in Q2 alone if the lockdown persists, according to the OBR. Other forecasters have suggested a 10%+ drop in Eurozone growth for 2020.

The earnings season has kicked off on Tuesday with JPM’s net income down by 69% for Q1 as Wells Fargo ‘made’ 1c per share. On Wednesday, BofA (-40% YoY) reported as did Goldmans (-46% ) and Citigroup (-46%) and they all missed. Quelle. Amid much confusion, WTI has dropped through $20 per barrel and close to its lowest level so far this side of the millennium, on fears that the collapse in demand will persist amid a massive glut. US shale has had its day, even if US HY has staged a remarkable recovery on the back of Fed assistance.

These are big headlines. Yet, global equities had broadly been rising. Up until Wednesday’s weaker session the S&P, for example, had clawed back 655 points since hitting those lows and was just 384 points from being flat for the year, or 547 points from its record close, also seen this year. Even the Vix had dropped back at around 40%. The S&P was 70 points lower again at the time of writing.

Credit markets have bounced back, too.

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