21st February 2017

President’s (had his?) Day

FTSE 100
7,300, unchanged
11,828, +71
S&P 500
2,351, closed
iTraxx Main
74bp, unchanged
iTraxx X-Over Index
298bp, unchanged
10 Yr Bund
0.30%, unchanged
iBoxx Corp IG
B+135.6bp, unchanged
iBoxx Corp HY Index
B+375bp, unchanged
10 Yr US T-Bond
2.42%, closed

Quiet but much to consider…

Into the final few sessions of the month and little going on activity-wise as we kicked off the week, save for much comment around the Kraft Heinz failed effort to acquire Unilever. Government interference or not, few corporates now are taking them on.

It seems that the obstacles for big deals are now too large to attempt. Never say never, but $100bn+ deals (and smaller ones for that matter) are going to fall foul of more intense scrutiny from competition and regulatory authorities, consumer groups and politics. Good news, perhaps, for some bondholders as M&A event-risk driven on by massive leveraged deals look like being a thing of the past.

Le Pen: Making markets jittery

The Presidents Day holiday in the US had something to do with the lull in the session, although corporate bond markets managed to eke out a few deals across the financials and non-financials space. It was nothing spectacular. Markets otherwise moved in tight ranges amid little conviction.

The Bund/OAT spread was back up at 75bp (on OAT weakness), having seen a 6-handle last week following latest polls which suggested Le Pen would be a clear winner in the first round of elections come late April. We would still think, at this time, that enough of the other parties will gang up to make sure Madame Le Pen is not the eventual winner, but there’s plenty of water to run under the bridge before we get to that early May run-off. We’re still thinking in the context of 100bp in that spread as election jitters worsen (record high was 200bp back in 2012).

Corporate bond markets thus far are weathering the potential for much market-angst should Le Pen succeed as President, given that there would be the non-trivial probability that France re-denominates its euro-debt obligations to some sort of new “Franc”.

While the ECB has been lifting nigh-on an average of €2bn a week of corporate debt obligations, they have had little or no impact on tightening the IG non-financial market. We’d have thought that spreads would have crunched tighter amid that level of ECB demand (almost €65bn since the programme started, see below). Spreads as measured by the iBoxx index are unchanged year-to-date. There will be an almighty sell-off if the Front National succeed on re-denomination fears..

The good news was the Greece managed to repay a €2bn loan to the ESM ahead of the Eurogroup meeting which was due to start later in the day.

The joke’s on you

Back again: €1bn deal for the Swedish Telecommunications equipment company

Ericsson returned to the corporate bond markets with a €1bn combined 4-year and 7-year dual tranche deal. The triple-B company isn’t exactly on an upward trajectory as far as its business model, ratings and profitability are concerned (recently cut dividend to preserve cash), but it had absolutely no problem in raising the debt and lopping a stunning 35bp off the initial price guidance for their troubles.

We don’t think it is a case of “buy in haste and repent at leisure” but for the company to go out with cheap pricing indications and ratchet the final cost of funding tighter, the demand side of the equation is still very solid and receptive to any deal – it would seem. Oh yes, and great timing given the lack of competing supply. Mind, an 8x subscribed combined book fell to around 6x at final pricing. Still, that’s not enough drop-outs to force syndicates to cut the pricing by less. And we’re not sure that will happen because of the fragmented nature of the market where pricing advantage resides always with the issuer/syndicate (unlike the more tight-knit sterling market).

It should be a case of  “Get your funding in, quick, before the music stops”.

The €1bn from Ericsson takes the supply for the month so far to €11.5bn. We had nothing from the high yield sector, while senior financials had a deal from Svenska Handelsbanken (€1bn) and a 10NC5 Tier 2 issue from DNB Bank for €650m.

ECB still filling its boots

The ECB announced that it had purchased €2,047m of non-financial IG debt last week (see chart, below), taking their total purchases to date (after 37 weeks) to €64,971m.

Recent ECB weekly purchases

That’s 10% of the eligible market and implies an average weekly hoard of €1,756m of IG non-financial euro corporate debt since they began operations. Roughly 14% of the purchases have been in primary.

The average of the past six weeks, though, has been a mightily impressive €2.2bn and spreads have failed to move any tighter. It makes one wonder.

US closed, European risk assets edge better

European stocks were mixed, but mostly higher with the DAX index the big winner up 0.6% at 11,834. The FTSE closed flat. As for find income, Gilt yields in 10-years edged slightly higher to 1.22% (+2bp) while the equivalent maturity Bund was unchanged at 0.30% versus around 7bp of weakness for the OAT to 1.05%. That’s politics.

In the corporate bond market, we closed unchanged in IG cash with the broad measure for risk – the Markit iBoxx corporate bond index – at B+135.6bp. That was replicated in the sterling market with the index at G+152bp. High yield returns have edged up to 1.45% so far this year – even if spreads in that market also closed unchanged (B+375bp), supported by a better bid for the front end of the underlying.

Finally, the synthetic indices closed with Main at 74bp and X-Over at 298bp – both effectively unchanged.

Have a good day.

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.