10th November 2015

Moody blues

FTSE 100
6,295, -59
10,815, -173
S&P 500
2,079, -21
iTraxx Main
72.5bp, +1bp
iTraxx X-Over Index
301bp, +5bp
10 Yr Bund
iBoxx Corp IG
B+150bp, unch 
iBoxx Corp HY Index
B+464.5bp, -4bp
10 Yr US T-Bond

Primary provides the interest… New deals kept the corporate bond market focused in an otherwise limited session activity-wise. There was plenty of news to chew on, though. Some attention was on the Financial Stability Board (FSB)’s release of the Total Loss Absorbing Capacity (TLAC) impact study on “too big too fail” banks, suggesting they need to raise up to $1.1trn in debt – under the worst case scenario – by 2022 (or 2028 for EM banks). It wasn’t big news for developed market banks, with most suggesting they will meet the requirements comfortably. We had the OECD’s latest report on global growth, in which the organisation reduced its global growth forecast for 2015 to 2.9% versus expectations of 3.6% just a couple of months ago. Quelle surprise! Brazil’s outlook was particularly bleak (debt up, currency weaker, inflation higher) – and they added Russia and other oil-producing nations to that, while China looks like it is heading for a major readjustment phase, with fixed asset investment and industrial output on the wane. And the Fed wants to raise rates! 2016 is going to be a very challenging year. The ECB increased the upper limit of individual bond issues that it can buy from 25% to 33% in a sign of giving itself some flexibility, no doubt with which to manipulate the market further. New deals came from Sky, Simon Properties and a HoldCo transaction from UBS.

Deals keep the market ticking over… Sky Plc (Baa2/BBB) lifted Eur500m in a barely 2x oversubscribed deal at midswaps+130bp in 10-year, and Simon International Finance (A2/A) – a US real estate investment trust – made a rare visit with a Eur750m issue at midswaps+90bp in a 7-year deal (around 2x oversubscribed). The new issue premiums were around 15bp for the former and 5-10bp for the latter. Notice that the oversubscription levels were lower than the deals last week. We would think the Sky deal was a little too long for a triple-B communications company, while the Simon deal was too rich for a relatively unknown borrower, even though it does have a good rating. FCA (a Fiat company financing arm) closed us out with a Eur500m, 2.5-year maturity issue . For the banks, UBS printed a Eur1.25bn holding company (intended TLAC compliant) deal at B+165.4bp.

Secondary credit better in the face of lower equities… The OECD’s lower global growth prediction and the weak trade data from China over the weekend put a dampener on stocks, and this in turn had an impact on the secondary corporate bond markets. Mondays are usually fairly limited in terms of activity anyway. European stocks were down 1.5% across the board, with the drop accelerating as the US markets moved down (S&P -1%). Single-name newsflow saw Fitch downgrade VW to BBB+ and, in line with Moody’s and S&P, retaining a negative outlook. Better late than never. They suggested the fallout could be substantial. Really? the action left us all underwhelmed. There will be more downgrades for the beleaguered group and a junk rating is more likely than not; it’s just a matter of time. The Markit iBoxx IG corporate index was a smidgeon better at B+150bp with the only obvious weakness coming from CoCos. HY was better generally too and this was shown in the Markit iBoxx HY index which closed lower at B+464.5bp (-4bp). Credit’s recovery after the August/September ructions ought to continue through to year-end. The iTraxx indices followed stocks though (weaker) and underperformed cash. Main was up at 72.5bp and X-Over at 301bp.

Have a good day, won’t you…

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.