23rd June 2020

🗞️ A new cautious optimism is palpable

iTraxx Main

64.1bp, -3.5bp

iTraxx X-Over

376.3bp, -18.3bp

🇩🇪 10 Yr Bund

-0.40%, +3bp

iBoxx Corp IG

B+151bp, unchanged

iBoxx Corp HY

B+528bp, -4bp

🇺🇸 10 Yr US T-Bond

0.72%, +2bp

🇬🇧 FTSE 100 [wp_live_scraper id=”17″], [wp_live_scraper id=”24″] 🇩🇪 DAX [wp_live_scraper id=”19″], [wp_live_scraper id=”25″] 🇺🇸 S&P 500 [wp_live_scraper id=”21″], [wp_live_scraper id=”26″]

Timing. It’s all in the timing…

Credit markets, focused on issuance, were excited about the inaugural 4-tranche, €4.5bn offering that came from Exxon Mobil. Not us. It is the Profine issue, which breaks new ground for the high yield market in Europe given the timing of its high coupon deal, during what is still an uncertain period. So early into a ‘recovery’ and we have a junk borrower braving the market with a very high coupon – 9%+ in this case. It’s normal in the US, not in Europe.

That they might manage to get the deal away (pricing Thursday/Friday – we can add the potential AMS deal to that as well) augers well for the European high yield market, serving to highlight its rapid maturity over the past few years. We would have argued it is too soon, but there are a few drivers in favour of it.

One, as already mentioned, is market/investor maturity. Second, the borrower is prepared to bite the bullet and finance at these levels. Such has been the level of market manipulation by the central banks (QE/crowding out/low rate environment forever) that investors not normally looking to have a stab at these types of deals – just yet, find themselves almost having to get involved.

It just might help flush others out – and borrowers not necessarily rated as low as Profine. The high yield market has been firing a little in primary as spreads and sentiment has started to recover, but after printing at a record pace in January and February, its engine stalled dramatically.

We have had a resumption since but this deal might just be the one that gets us moving again with a bit more enthusiasm through the second half, all things being equal – macro, equities, geopolitics, low’ish volatility and tightening spreads.

Exxon dominates primary, €250bn for the year is up

After just three IG non-financial deals on Monday for €1.2bn taking the year to date total to €245bn at the close of business then, we had the big Exxon deal. The US oil giant added €4.5bn with Symrise and Iren supplementing it with another €1bn between them, and we were up past the €250bn mark for this incredible year.

At €41.2bn, it’s already the best June for IG non-financial issuance on record and another €8.8bn by the end of the month would see out the quarter with three consecutive €50bn+ months of deal volume.

So Exxon took €1.5bn in a 4-year at midswaps+50bp, and €1bn each in an 8-year at midswaps+75bp, in a 12-year at midswaps+90bp and a 19-year at midswaps+130bp. Books were at around €7.8bn and final pricing 20-25bp tighter versus IPT across the tranches.

The smaller deals came from Iren SpA which issued €500m in a no grow at midswaps+135bp for 10-years, which struggled to just 5bp inside the initial guidance. Implied crossover rated Symrise issued €500m as well, in a 7-year at midswaps+175bp, off a €3.2bn book (-50bp inside IPT). BAT went for sterling, the tobacco giant issuing £500m in an 8-year at G+227bp (-23bp versus IPT).

Senior preferred bank debt came from OP Corporate Bank which issued €1bn in a 4-year at midswaps+50bp. And Tier insurance issuance came from CNP Assurances for €750m in a 31NC11 at midswpas+265bp, as Helvetia printed €600m in a 21.25NC11.25 at midswaps+295bp (book €2.8bn, -35bp versus IPT).

Finally, payments processing group Worldline was in for acquisition financing as it issued a dual-tranche €1bn deal, split equally between 3-year and 7-year offerings at midswaps+90bp and midswaps+125bp, respectively.

Glimmers of hope emerge

It was a big day for June’s flash PMIs, allowing investors to gauge where the macro recovery sits as the lockdowns ease. And we were not disappointed. In Germany, the manufacturing activity index rose to 44.6 (41.5 forecast/33.6 in May), whereas in France we had expansion, with the PMI coming in at 51.1 for June (40.6 in May) and services activity showed moderate expansion too.

For the Eurozone, manufacturing contracted at a lesser pace, the PMI up at 46.9 (39.4 in May) and services activity came in at 47.3 (30.5 in May). In the UK, manufacturing was effectively flat at 50.1 (consensus 45, 40.7 in May) as services activity also beat expectations of 40 as the index came in at 47.

So overall, some surprises but also generally, better than expected across the board – as the downturn momentum eased up – which should help confidence and give risk asset prices a toe hold in orders to push higher.

It’s obviously still a long road back and the recovery looks like it might be laboured in some areas, but continued positive sets of data even as localised lockdowns are reported, and we have the makings of a decent summer ahead for risk markets.

The equity markets reacted as we might expect. Sharply higher initially anyway before they faded the gains a little, to close off the best levels for the day. The US PMIs showed similar levels of recovery, but services and manufacturing were still recording moderate levels of contraction in June.

The FTSE added 75 points or 1.2%, but that was outdone by the Dax which moved 2.1% higher as it added 261 points. In the US, stocks were around 1%, late into the session.

Rates recorded a moderate reversal with the 10-year benchmark Bund yield rising 3bp to -0.40%, the Gilt to yield 0.21% (+2bp) and the US Treasury to 0.72% (+2bp).

In credit, iTraxx Main was 3.5bp lower at 64.1bp and X-Over moved 18.3bp lower to 376.3bp, the ratio between them at stable at 5.87x.

The cash market moved tighter for choice, reversing some moderate weakness from the prior session. Actually, IG closed unchanged with the iBoxx index at B+151bp, the AT1 index edged tighter to B+692bp (-12bp) and the high yield index was at B+528bp at the close.

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.