24th March 2019

(Free Content) HY Strategy Weekly

Overview

Certainly, for the first quarter of 2019, plenty of buy and sell-side investors have been wrong-footed by the constructive tone in the European High Yield market. Many had been positioned for spread widening at the beginning of the year but a combination of dovish central bank policy (Fed pausing and ECB TLTRO’s), stable macro data, US and China trade talks and the benign inflation expectations have been catalysts for spread tightening.

Furthermore, technicals such as supply – which is lagging significantly from this time in 2018 – and HY fund inflows which have surprised to the upside YTD, have also exacerbated the rally in HY.

However, Friday’s (22/03) sell-off which was triggered in part by weak European Manufacturing PMIs and increased Brexit worries, with GBP-denominated UK focused HY credit underperforming the move lower, is revealing a renewed investor anxiety regarding global growth and lateness of credit cycle. 

It would appear under these assumptions that the market is not comfortable with current valuations and that re-pricing on the balance of risk is skewed towards more widening next week. In particular in cyclical sectors, and won’t be helped by a market which will have to deal with increased political Brexit volatility and US GDP 4Q (28/03) next week.


HY Movers and Shakers

DEBLN (CCC-) dropped -4pts on Friday (22/03) after the company announced that it seeks to put in place a £200m funding line ahead of a potential restructuring.

ENQLN (B3) gained +5pts on Friday (22/03) after a choppy week with bonds first dropping 5pts on Wednesday (20/03) after Cairn Energy announced a lower production output for the Kraken oilfield (Cairn own 29.5% of Kraken) – a number ENQLN disputed. ENQLN went on to report strong FY18 results on Thursday (strong growth in revenues and EBITDA).

TCGLN (B) closed +1pt on Friday (22/03) after the 2023 notes hit an all-time low of €65.875 on Thursday (21/03) on the news that the company will enter into a JV to buy a Russian operator for $155m. However, bonds rallied after TCGLN said it would only pay $3m for the 30% stake, a much lower cash consideration that first feared.


Ash Nadershahi

Ash completed two internships at Deutsche Bank and Credit Suisse after graduating from the University of Birmingham in 2008. In 2011 he joined BNP Paribas working on the investment grade credit desk before moving to Credit Agricole CIB focusing on European High Yield credit. In 2016 he was responsible for market-making high yield credit at CFE.