5th July 2017

Showing signs of life

iTraxx Main

55.25bp, +0.25bp

iTraxx X-Over

246.8bp, +1.2bp

10 Yr Bund

0.47%, unchanged

iBoxx Corp IG

B+111.3bp, -1.2bp

iBoxx Corp HY

B+296.6bp, -0.5bp

10 Yr US T-Bond

2.35%, +1bp

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And just about business as usual…

Judging by the flurry of deals in the market on Wednesday, it was tempting to think that it was ‘business as usual’ after bit of a lull. It wasn’t quite that, though. The 5-part multi-tranche offering from Annington fell into the REIT sector and so the sole IG non-financial corporate offering came from National Grid North America in a 7-year maturity for just €500m.

Being out there on its own in this class of borrower category allowed the issuer to reduce the initial guidance by 20bp off a €3.3bn book, into final pricing of just midswaps+55bp. There were plenty of other deals to look at, though, including that Annington one (mainly sterling), with an AT1 offering from Caixabank and a couple of small high yield corporate market transactions.

Otherwise, equities failed to generate any momentum in either direction, government bond markets followed suit not knowing if they should be in ‘safe-haven’ mode (on the back North Korean tensions) or trade into the potential for sustainable macro recovery dynamics. In the end, they did neither.

As for credit, one eye was on the Monte dei Paschi restructuring plan which was seen as a small positive for subordinated debt bondholders, the other being on the flurry of deals in primary.

Overall, the market spent the day treading water, not really knowing how this week or indeed next week might play out. We do think there is a willingness from investors to want to get more cash invested ahead of the summer break proper, but it seems that that core of IG non-financial borrowers are shy in coming forward – Or they’re full of cash and can wait until after the summer. That leaves the way open for odd/opportunistic deals to get done with little competition and allowing the borrowing entity to tighten pricing relatively aggressively given the level of demand.

Primary reopens with a higher yield flavour

Deals, deals and more deals. UK REIT Annington Funding was the stand out borrower as it was in the market with a 5-tranche sterling/euro offering aimed at overhauling its debt structure and improve ultimately its funding costs, debt and rating metrics. In sterling, we had 8m 12, 17 and 30-year tranches for a combined £2,475m garnering a book close on £8bn and reduced final pricing by 15-20bp across the various tranches.

For good measure, they issued €600m in a 7-year tranche and priced the deal eventually 20bp inside the opening talk. The book here was a very good €3bn. The key to these deals was yield – there was plenty of it for an expected to be rated triple-B deal flow. The National Grid deal was a more straightforward one!

In the high yield market, Kedrion raised a higher than expected €350m in 5-year funding costing 3.125% (€750m book), while DIC Asset raised an increased €130m. Wrapping up the high yielding nature of the day’s business, we had a €1bn from Caixabank in a 11NC6 Tier 2 structure, unaffected in its receptivity amid the losses encountered in some AT1 deals amongst other Spanish banks.

The investor base is clearly doing its work and differentiating between SIFI’s and otherwise. Nor is the interest in these types of capital structure deals some kind of last hurrah before an inevitable blowout. Most are (correctly in our view) not expecting a systemic financial crisis, but stability and recovery in bank credit quality.

Equities and rates flapping, credit tightening

The UK is feeling a little hot under the collar as service sector PMIs for June slipped some more, suggesting a slowdown in activity to come in the second half. On the other hand, Eurozone PMIs were better than expected at 56.3, albeit a little lower than the May recording. Stock and bond markets didn’t really react to the news, instead likely concerned with those US/North Korean tensions.

Still, we just managed to trade through another dull session with equities in the black by a very small amount and government bond markets barely moved. Gilt yields in the 10-year maturity were up at 1.28% (+3bp), Bunds were unchanged to yield 0.47% and OATs were also unchanged at 0.82%. Oil was notably lower, almost 3% for the Brent contract, trading at just above $48 per barrel.

In synthetic credit, the indices edged higher again, leaving iTraxx Main up at 55.25bp (+0.25bp) and X-Over at 246.8bp (+1.2bp). Synthetics underperformed the cash market.

The secondary cash market was firmer, but with the focus obviously on that plethora of deals and some relief on the Monte restructuring plan. Cash spreads, as measured by the broad Markit iBoxx IG corporate index, were marked a little tighter and enough for the index to record its lowest spread level this year at B+111.3bp (-1.2bp). The sterling cash market closed unchanged which was good going after absorbing that mega deal from Annington.

Finally, the high yield market also recovered some of the moderate weakness of the past few sessions. The iBoxx HY index was tighter at B+296.6bp, just 0.5bp tighter and noise really during a lacklustre session. The Fed minutes? They gave us no fresh insights.

Have a good day.

For the latest on corporate bonds from financial news sources, click here.

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.