23rd May 2019

When the chips are down

MARKET CLOSE:
iTraxx Main

69.2bp, +3bp

iTraxx X-Over

295.5bp, +12.7bp

🇩🇪 10 Yr Bund

-0.12%, -4bp

iBoxx Corp IG

B+140.6bp, +3.8bp

iBoxx Corp HY

B+445.5bp, +10bp

🇺🇸 10 Yr US T-Bond

2.31%, -8bp

🇬🇧 FTSE 100 6049.62, (+0.76%) 🇩🇪 DAX 12489.46, (+1.15%) 🇺🇸 S&P 500 3152.05, (+0.61%)

Now’s not the time to overreact…

If the reality of a (much needed) debt restructuring is going to take place in the Casino/Rallye complex, bondholders are going to take additional hits to already sharply written-down holdings. It should come as no surprise we’ve got to this point, though, as the clouds were darkening for a while and it is not as if we didn’t see it coming.

This grouping has stoked investors’ suspicions for the best part of the last decade, not least because of the complicated ownership structure and the lack of corporate transparency in the tie-up between the two. It’s going to sully performance in many cases, given the broad nature of the investor base involved, while adding to the names already in (or heading for) the debt restructuring mixer: Senvion, Thomas Cook, Solstad, Debenhams, Boparan and Suedzucker to name but a few.

There was a pull-back in secondary spreads but we don’t think too much was attributable to the Casino/Rallye situation during the session. It was much more down to the significant weakness in equities, amid a broad risk-off day.

Interestingly enough, it was business a usual elsewhere in the corporate bond market, and by that, we mean in primary. Telenor became the latest to offer a 3-tranche and Leaseplan braved the AT1 market as the two eye-catching deals.

Anyway, there was a broad risk-off dynamic in the session. Initially borne out of continued worst-case fears on the US/Sino trade situation, but then it accelerated as Eurozone factory PMIs pointed to continued contraction in activity although the region’s services sector recorded a slight uptick in growth. Further, the German Ifo institutes business climate indicator fell to 97.9 in May from 99.2 in April.

Add to all that expectations that the UK prime minister Theresa May is expected to leave office imminently and likely be replaced by a pro-Brexit – possibly happy to go with a no-deal Brexit – leader, then the jitters across markets were justified. European equities were up to 2% lower at their worst, we had credit spreads wider and government bonds better bid with the 10-year Bund yield dropping to as low as -0.12% and the Gilt yield in the same maturity to below 1% again, at 0.96% – the lowest level in the last 12 months.


Primary pulling them in

It’s been an excellent week in primary. Some €10.8bn has been issued with three corporates pulling the trigger on euro-denominated, 3-tranche offerings. For the month, we’re up at €28.65bn and we must surely exceed €30bn, maybe get closer to €35bn before the month is out – even with next week’s 4-day week.

We’re at around €125bn for the year to date and if the current pace continues, after adjusting for the seasonal slowdown in the summer months, we could be looking at €250bn+ for the full year. Last year dealt a lesser number of deals which came in a multi-year low of €220bn and we’re on course to pass that.

In the IG non-financial sector Telenor issued a combined €2.5bn in three tranches. They offered €1bn in a 7-year at midswaps+65bp (-20bp versus IPT), €1bn in a 10-year at midswaps+80bp (-15bp versus IPT) with €500m in a 15-year maturity priced at midswaps+100bp (-15bp versus IPT). The books for the deals came in at €5.25bn.

The other borrower was the unrated German group Symrise which lifted €500m in a 6.5-year maturity transaction, priced at midswaps+130bp which was 25bp inside the opening talk off books above €2.2bn.

Senior financials had NN Bank offer up €500m in a 4-year senior non-preferred structure at midswaps+57bp. Leaseplan went for AT1 funding, issuing €500m with a 7.375% coupon for the PerpNC5 structure with books at around €800m.


Markets pull in their horns

The minutes of the ECB’s monetary deliberations suggested concern that inflation remained comfortably below target (of just under 2%) and that any convergence has repeatedly been delayed. It looks like the penny might finally have dropped and more policy action is coming.

Equities in Europe closed up to 1.8% lower and, as at the time of writing, US markets were up to 2% in the red. Those trade fears are just lingering…. and lingering. The 10-year US Treasury yield dropped to 2.31% (-8bp) with the European 10-year benchmarks at their session lows at the close amid a bid for safe-haven assets.

Oil took a pummelling, too. Inventories are on the up, refining is in go-slow mode and there are fears as to what the trade war might bring to demand. Brent lost 5% to trade at $67.4 per barrel while WTI per barrel traded down at $57.9.

So credit wasn’t spared. Primary was the only bright spot and Telenor will be relieved that they got their deal away. The indices are usually the best indicator for spread direction and it would be no surprise to know they were higher, with some additional pressure on them from the Casino/Rallye situation.

Anyway, iTraxx Main closed at 69.2bp (+3bp) while X-Over rose by almost 13bp to 295.5bp.

In the cash market, most of the talk was around a Rallye debt restructuring, but we moved wider in spreads almost across the board with the market clearly in defensive mode and better offered. That left the iBoxx IG cash index at B+140.6bp (+3.8bp) and some 19bp wider this month – although returns have barely moved lower due to the rally in the underlying. Against, say the Dax, we’d think not too bad – as the German equity index is 3.1% lower this month so far.

The AT1 index moved 18bp wider (B+610bp). The sterling market was not spared and came under pressure, too, leaving the iBoxx index there at B+168bp (+4bp) and 16bp wider this month. And to cap off a dismal session, the HY index moved 10bp wider to B+455bp (+47bp this month).

Have a good day.

Suki Mann

A 30+ 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 CreditMarketDaily.com.