21st July 2016

RIP The short dated floater

MARKET CLOSE:
FTSE 100
6,723, +32
DAX
10,142, +161
S&P 500
2,173, +9
iTraxx Main
69.5bp, -2bp
iTraxx X-Over Index
321.5bp, -2.5bp
10 Yr Bund
-0.01%%, +2bp
iBoxx Corp IG
B+128.5bp, -1.5bp 
iBoxx Corp HY Index
B+466bp, -2bp
10 Yr US T-Bond
1.58%, +3bp

Death of the short dated floater…

teva

Deal: Teva leads the way

Finally, a deal to get excited about. Or rather, just a deal! Some would have forgotten how it feels to get caught up in the clamour for allocation in new issue. That deal came courtesy of Teva Pharmaceutical as it looked to continue with its capital markets funding of the $40bn Allergen acquisition. Having taken $15bn a few days ago in the US, it came with a 3-tranche deal for a lower than expected €4bn.

The fourth tranche, which was meant to be a 2-year floater, was done away with. Floaters are floored at 0%, so this triple-B rated borrower – and for that matter others too, could have gone for a 2-year fixed and done the swap allowing for negative payments (the spread permitting).

It begs the question, that with front-end yield in such deep negative territory, whether the 2-3 year (maybe longer in due course) non-financial corporate floater market has had its day, especially for borrowers who can swap and generate a negative yield? We would think that Teva would probably have been on the cusp of doing so based on IPT for the 4-year tranche) but other better known, blue chip entities in the triple-B rated category will be able to benefit from this technicality. There was nothing else in IG non-financials, while Goldman and BoFA did senior deals (for almost €7bn plus sterling for the latter) and Gamenet took €200m for the HY market.

bye tombstoneIn the event, Teva finally printed its 4, 8 and 12-year three-tranche deal some 35-45bp inside the initial price talk, taking down €4bn in the process on a €30bn book. When the final price of any transaction is tightened so much, and especially so for a deal that had been clearly flagged as coming to the market & where interest was very high, something doesn’t quite sit right. Investor homework on the borrower was done in advance, and we all would have known that this deal would fly, so to say. That includes the bankers pricing it. So there has to be a monumental lack of understanding as to how the market is right now. It is parched of paper, the ECB buying, spreads are tight but going tighter and demand generally for new issues would be high. It’s not that difficult to get. This sort of tightening dynamic takes a good amount of the juice out of a deal, frustrates investors massively but they dare not pull out. Basically they are trapped, hostage to the fun and games being played out by the syndicate desks.

The rest of the news saw the FTSE 250 at around its post-referendum high, UK unemployment fall below 5% for the first time in 11-years, VW beat on quarterly earnings while US oil inventories rose in the last week. Turkey was downgraded to double-B/outlook negative by S&P.

Good midweek session, but who’s next up?

There’s enough for the headline makers in the Teva deal, and the deal broke better despite the ratcheting in the pricing. But we need more. The pipeline isn’t exactly bursting at the seams. Unfortunately, that sort of blockbuster deal might have to wait until after the summer. The deal takes the total month-to-date issuance level to €10.5bn and something of the order of €13-14bn is possible should we get a few prints between now and month-end. The senior financial deals were also much welcomed and the banks didn’t hang around to lift a hefty chunk of cash.

So the session played out with stocks in the ascendancy again. The DAX closed up 1.6% and most other indices by over 1%. The Bund gave up some and the yield on the 10-year fell back to -0.01% (+2bp), while the equivalent Gilt yield was up at 0.83% (+3bp). Those rising US oil inventories failed to dent the rise in Brent, which was up over 1% and trading off a $47-handle.

Corporate bond spreads, as is usually the case now, continued their relentless ECB-inspired grind better. We’re inching towards those targets we have set for the Markit iBoxx IG corporate bond index of B+100bp and an index yield of 0.70%. The index closed 1.5bp lower at B+128.5bp and theyield set a new record closing low of 0.94%. Incredibly, returns YTD are now up at 5.25%.

In the HY market, we closed a little better for choice with the index left at B+466bp, but in another lacklustre session. The iTraxx indices were better offered (lower) with Main at 69.5bp at the close and X-Over at 321.5bp.

Have a good day. Back tomorrow.

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.