4th March 2016

The curious case of missing primary

FTSE 100
6,130, -17
9,752, -25
S&P 500
1,993, +7
iTraxx Main
96bp, +0.5bp
iTraxx X-Over Index
389bp, -2bp
10 Yr Bund
0.59%, -3bp
iBoxx Corp IG
B+176.3bp, -1bp 
iBoxx Corp HY Index
B+609bp, -1bp
10 Yr US T-Bond
1.83%, -1bp

Shy in coming forward… There was a time, not so long ago, that we had over €120bn of IG non-financial supply in the first quarter of the year. At the peak of the financial crisis, in Q1 2009, issuers printed deals at record high funding levels just to get some cash on board. That record quarter for issuance led to a record year (€280bn). The crisis unfolded rapidly and had an almost immediate effect on sentiment, as a systemic financial event was potentially unfolding (Bear Stearns, Lehman, CDO leverage unwind). The banks were caught in the headlights and effectively refused lending despite committed facilities being in place. Thus the need for corporates to have back-up liquidity on their balance sheets saw them access the market in their droves. No word then about earnings-related blackout periods impacting issuance. It was seen as prudent to get the funding in, whatever the cost. Since then, anywhere upwards of €70bn of issuance has been “the norm” in the opening quarter. This time, and adding in today’s €6bn of issuance, we are at €37bn. That is a poor level in comparison, with admittedly three weeks of the quarter still to go, but if we manage to hit €55bn by the end of the quarter we will be surprised. Remember, almost half the supply has come from just four borrowers! This is all occurring at a time when the market’s growth has mushroomed while demand for corporate paper through primary is at extremely high levels. Funding levels are also still at historically very good levels for entities wishing to access the market. We had high hopes that €240bn per year of issuance (the average of the last 3-4 years) would be maintained – see the chart below. Taking seasonality into account, that now seems unlikely for 2016. Is the crisis really taking its toll? The penny has finally dropped that low rates, low yields and relatively tight spreads are with us for an extended period of time. One can pick and choose one’s moment to fund. The global outlook is not improving – in fact, judging by all the growth revisions of late, it is worsening. That leaves corporates as likely funding capex and investment out of recurring free cashflow and bank facilities. So why hoard “costly to invest” liquidity, even if it is still historically cheap to raise? We are reducing our non-financial IG supply forecast to €200bn, from around €240bn previously (see chart).

Where have all the borrowers gone?


2016 issuance YTD

Good day for primary… Having said all that, we were greeted with several deals today totalling some €6bn. BT was the first out with a €3.9bn, 3-tranche transaction split across 5, 7 and 10-year maturities on demand of €13bn. Coca-Cola HBC finally printed its long awaited €600m deal (books €3bn) in a long 8-year deal, while German material sciences group Covestro (Baa2) took €1.5bn, also in a 3-tranche offering. These were good, mid triple-B rated borrowers and just what the market likes. Days like this are too infrequent, unfortunately, and we do not expect much more from primary ahead of next week’s decision from the ECB. Senior, unsecured bank deals were missing although we had the usual spate of covered bond and SSA deals to contend with.

Non-farm report holds court… And while it does, the markets will sit back and wait. Service sector PMIs in the eurozone and UK were the latest batch of data to disappoint but other than that, we played out in a tight range and mainly in the red. It has overall though been a good week and a good start to the month for risk assets. We closed out with European equities around 0.25% lower, oil prices a little higher and government bond yields considerably lower. That is, the 2-year Bund yield fell to yet another record low at -0.59% (-3bp) and the 10-year dropped to 0.17% (-4bp) having risen off a 10-month low of 11bp seen a few sessions ago. BTP and Bono 10-year yields fell too, left at 1.42% and 1.53%, respectively. In corporate bonds, we had another day of tightening. The Markit iBoxx IG index was at 176.3bp (-1bp) and the index yield at 1.59% (-4bp) owing to the rally in the underlying. That is the lowest IG index yield since early December 2015. That tightening didn’t really follow through elsewhere, and the HY market as well as other high beta sectors all closed unchanged. The iTraxx indices also closed unchanged having played out in a narrow range through the session.

On to non-farm payrolls. Have a restful weekend.

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.