29th April 2020

⬆️ Corporate Bond Issuance Record Smashed

iTraxx Main

78.2bp, -3.4bp

iTraxx X-Over

480.3bp, -14bp

🇩🇪 10 Yr Bund

-0.49%, -3bp

iBoxx Corp IG

B+193bp, unchanged

iBoxx Corp HY

B+649bp, unchanged

🇺🇸 10 Yr US T-Bond

0.60%, -1bp

🇬🇧 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″]

Issuance deluge feeds investor confidence…

In credit, we close April with it being a record month for IG non-financial issuance, seeing the record achieved during a flourishing penultimate session. The story, though, is that we smashed through the €50bn/month issuance barrier for the first time ever, as near to €55.7bn was printed. It’s an amazing feat given we are sitting in the middle of the most awful global macroeconomic environment since the Great Depression, but also in the middle of the poorest earnings season since the 2008 financial crisis.

It’s arguably because of that, that we find ourselves in record issuance territory. On the one hand, it’s desperation (and perhaps panic) as corporate treasury departments feel the need to get additional liquidity on board. And after a devastating performance in March, with a reset in spreads materially wider, it left investors looking at the credit market – with spreads/yields not seen for many years in IG – and compelled to hoover up the flow of deals.

It was all made possible because the financial market machinery (central banks) actioned one of the most prolific stimulus packages ever seen, pumping almost unlimited amounts of liquidity into the financial system and the promise of enough credit to make sure the largest players remained solvent.

Record issuance in IG, a crunch tighter in credit spreads from record wides (in several cases), still poor secondary market liquidity but comfort in that the ECB is the price-insensitive buyer of last resort for the IG non-financial market. In IG, what’s not to like? We’ve seen a 60bp tightening in spreads in the month after all (IG iBoxx index).

But there is a big orphaned group of players, left almost forgotten, dangling and hoping/needing for those lockdowns to start easing quickly and some sort of V-shaped economic recovery to follow. There’s little obvious assistance for these borrowers. The summer months are going to be crucial for the high yield market.

The news flow from them isn’t going to be pretty in terms of earnings, funding and balance sheet liquidity levels. Add HY debt wisely.

IG primary milestone bolsters April

Confidence is so crucial in primary markets. Greater levels of issuance flow from it. We need deals to perform when we have a swathe of corporate borrowing. It puts off indigestion. In fact, such has been the level of demand, the markets have developed a whole new dynamic – or rather, a different range.

Once 3 – 5x oversubscriptions for a deal were good. Then it was 3 – 7x. Now, we are seeing 5 – 10x, or more. Tightening of the initial price talk of 15 – 25bp for a new deal was expected, 20 – 30bp became the norm through the latter part of 2019 and into Q1 2020. Now? Not to miss out on ‘cheap’ backstopped IG debt, the game has shifted to 40 – 50bp of tightening between IPTs and final pricing.

And we have made history. The first-ever month for €50bn+ of IG non-financial debt in Europe (€55bn actually issued). What’s more, it comes after €45bn of deals in March. The run-rate now has us heading for a fresh annual record of issuance and completely turns on its head the notion that 2020 would see a significant drop in primary market activity after 2019’s record.

We are already at over €150bn for the year against that record €318bn for the whole of last year. We will slow, but the next 8 months of activity could see us up at €350bn for the full-year, adjusted for the effects of seasonality.

The same can’t be said of the high yield market. It’s been a tough couple of months. Since 20 Feb, we have had just 3 deals from Verisure, Netflix and Merlin Entertainments for a combined €1,170m which all came in the period mid-April. March’s euro-denominated market high yield primary drew a rare blank.

And it doesn’t look as if the oiling of the IG market is resulting in any noticeable transmission into the lower echelons of the corporate bond market. There is no obvious pattern to the deals we have seen – if you like – safe/lower high beta (Netflix) and risky/higher high beta (Merlin).

For the year to date, we are up at €23bn nonetheless and if the sluice gates opened – very, very unlikely – as much would need to change quickly, then we could be on for a €50bn+ year, easily. That doesn’t look possible at the moment.

The senior market has seen more issuance than we might have anticipated at €17.5bn, especially given that banks have access to very cheap ECB funding. But, save for a flurry of deals from French borrowers during the middle of the month, almost €5bn of the deal flow has come from two US banks (Citigroup and Wells Fargo). For the year to date, we are up at over €70bn and we shouldn’t be looking at too much getting done over the next few months while the official funding windows are open.

GDP craters, but Gilead saves the day

Ahead of the Fed, we had deals in the corporate market. They were probably opportunistic as well. Heineken and PepsiCo both went for dual-tranche funding, adding €3.5bn to the already hefty monthly total for IG non-financial issuance.

Heineken went long (having issued 5,10-year debt in March), issuing €650m in a 13-year at midswaps+125bp and €850m in a 20-year at midswaps+165bp. The books were up at €5bn and the final pricing 30 -35bp tighter versus IPTs across the tranches.

Pepsico might have issued a profit warning earlier this week, but they also issued €1bn in a 4-year at midswaps+58bp and €1bn in an 8-year at midswaps+68bp which were 37bp and 42bp tighter versus the initial chatter, respectively. There’s no stopping investor interest in corporate debt deals at the moment.

In senior financials, Banco Santander issued €1.5bn in a long 5-year SNP at midswaps+170bp (-30bp versus IPT). Although Friday is a holiday across most of Europe, there’s probably life in the primary market yet and we wouldn’t be surprised if a deal gets away in Thursday’s final trading session of the week. Even if the ECB rate decision/press conference is due.

Away from credit primary, economic indicators suggested that activity was picking up (as we would anticipate) in countries where lockdowns were easing. However, auto industry supplier Bosch reported that global auto production would drop 20% this year but we had a decent set of results from Standard Chartered and AstraZeneca/Glaxo.

The DIW economic institute pitched a 10% decline for German GDP in Q2 and a 6% drop in economic activity for the full year. Anything more than 5% would be the worst in German post-war history.

Italy had to contend with a surprise downgrade to BBB-/stable by Fitch, with BTPs mostly better offered for choice against a government debt market which was better bid in the session. It must now be just a matter of time before the sovereign is engulfed in an even bigger debt crisis, junk ratings and a whole new ball game for the EU/Eurozone/debt markets.

In the US, the first-quarter GDP came in at a lower than expected -4.8% QoQ recording the biggest drop since 2008 (Eurozone Q1 GDP due on Thursday). It promises to be much, much worse for Q2 with forecasts suggesting a decline of up to 40%. That’s super bad news for, amongst others, an already beleaguered Trump. Boeing posted another loss for the quarter ($641m) as it announced production and job cuts, as Gilead shares were halted on news of ‘positive data’ from its Remdesivir coronavirus treatment drug.

Equities took everything in their stride and ratcheted higher taking the FTSE back above 6,000 for the first time in 7 weeks, as the index added 2.6%. Other markets were also sharply in the black after some earlier dithering, the Dax adding 2.9% for example.

The S&P was around 3% higher, as at the time of writing, and at 2,950 (+87 points). No doubt Trump will probably try and feed off the remarkable US equity market recovery of late. Even oil rebounded as WTI added 25% to the price of a barrel of liquid gold, while Bitcoin was back up at $8,600. The driver it seems, for much of it, was that Gilead drug trial result.

Rates were slightly better bid for most of the session before they ended mixed. The 10-year Gilt yield was at 0.29% (unchanged), the Bund yield in the same maturity dropping to -0.49% (-3bp) and the US Treasury, as at the time of writing at 0.60% (-1bp).

And the FOMC left everything unchanged, obviously believing it has done enough already and needing to let the situation play out a bit longer, given the previous aggressive and unprecedented policy response. We should not have expected anything different.

In credit, the synthetic indices traded into the better tone seen in equities and protection costs moved lower, with iTraxx Main 3.4bp lower at 78.2bp and X-Over at 480.3, or 14bp lower in the day.

The secondary cash market was quieter – as always – but still managed a bit of a squeeze as we would have expected given that significant equity market rally and vaccine drug hopes. That came in the higher beta markets. The AT1 iBoxx index closed at B+873bp (-16bp) but the lower beta IG corporate market was unchanged at B+193bp. As for high yield, unchanged leaving the index at B+649bp.

Next up, the ECB. Don’t expect much, if anything from them.

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.