24th May 2016

Broken with a week to spare

MARKET CLOSE:
FTSE 100
6,136, -20
DAX
9,842, -74
S&P 500
2,048, -4
iTraxx Main
78bp, unch
iTraxx X-Over Index
334bp, +-2p
10 Yr Bund
0.18%, +2bp
iBoxx Corp IG
B+149bp, +0.5bp 
iBoxx Corp HY Index
B+501bp, -1bp
10 Yr US T-Bond
1.84%, unch

M&A is back, but not to worry…

Bayer

$62bn bid: Bayer in for US GM seed giant

Bayer’s $62bn all cash bid for Monsanto is the first mega European (to US) transaction we have seen for a while. No, it does not herald a return to debt financed deleveraging of the industrial sector in Europe as seem in the early 1990s. Some will jump on that bandwagon and suggest the ECB’s impending corporate bond buying programme will drive funding costs lower and make such deals too tempting to refuse – and that there are more of them to come. We don’t think so, given that there is s till too much macro uncertainty for corporates to jump in at the deep end and it is easier and cheaper to stay sidelined.

However, this deal is yet another chem/pharma/agri sector transaction and we have seen plenty of these already over the past few years. As well as Bayer and Monsanto executives licking their lips, the bankers will be too. There will no doubt be a share placing, a loan facility put in place and eventually a mega debt deal to help refinance it all. Fees, fees, fees. And any eventual debt placing will be taken down easily as Bayer is a darling of the European industrial community and much appreciated by bond investors.

We were greeted with data continuing to highlight that there is still significant weakness in macro as eurozone PMIs came in lower than expected, while the overnight news from Japanese manufacturing suggested further contraction there. Equities initially opened in the red, briefly recovered very well, but the tone was such that they couldn’t hang on. Deeper into the red they went. Rates are staying lower whatever the Fed does in three weeks’ time. Into that we saw some recovery in government bonds and that helped push yields lower – having previously been pulled higher with those in the US – with the 10-year Bund back down at 0.13%. As we have often suggested, we still think that the 10-year will be close to zero soon enough and do not discount the potential for it to get into negative territory – whatever the US rate cycle might otherwise provoke.

Primary delivers enough for the record

The deals in yesterday’s session in IG non-financials were enough to see us through to this being the best May month ever for issuance (see chart below for the top 10 May months). The previous high of €38.7bn set in 2009 – as we emerged from the peak of the financial crisis – has been passed effortlessly, with still a week’s worth of business to get through. The €1.9bn of supply on Monday takes this month’s total issuance to €39.3bn. There are effectively 3 days of business left in this week (Fridays are usually very quiet) and with Monday a holiday in the UK next week, we have Tuesday to help in which to get €9bn or so of issuance required for this month to break another record to become the best ever. So, 4 days with the exception of Friday and Monday to hit €9bn – it is a big ask, but not impossible.

Record May for IG non-financial issuance


The deals came from 3M, Aurizon and Viesgo with 3M taking €1bn in a two-tranche raid, Arizona €500m and Viesgo a sub-benchmark €400m. Interestingly, there was no crazy ratchet tighter versus IPTs. There have been signs that this would be the case in some of last week’s offerings and against the current backdrop of nervous equity markets, US rate risk and weaker macro data in the Eurozone, lead banks and issuers are likely not wanting to see deals “fail” here. Aurizon and Viesgo managed to squeeze 7-10bp versus IPT, but 3M priced at the tighter end of initial guidance only.

And the rest played out fairly mixed

Stocks were under some pressure after some earlier upside, with most European bourses 0.5-0.7% lower while government bonds managed to end the session unchanged, having given up earlier gains, The 10-year bund yield was at 0.18% and some 5bp higher than lows seen earlier in the session. Don’t be surprised, but credit closed unchanged with the Markit iBoxx index at B+149bp and the HY index at B+501bp (-1bp). Basically, there was little going on as all eyes remain on primary.

That’s it. Our excitement will come from primary and this being a record month for supply in IG non-financials.

Have a good Tuesday.

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.