11th May 2020

No let up in primary splurge

iTraxx Main

84.4bp, -1.6bp

iTraxx X-Over

507bp, -8bp

🇩🇪 10 Yr Bund

-0.52%, -1bp

iBoxx Corp IG

B+198bp, +1.5bp

iBoxx Corp HY

B+657bp, -5bp

🇺🇸 10 Yr US T-Bond

0.70%, +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″]

Low hanging fruit being picked off…

It’s like the charge of the light brigade. Another day, another plethora of borrowers looking for money. And markets trying to trade through the May/June macro weakness. We even have the high yield borrower becoming less of an oddity on the screens.

We have failed to witness a spectacular, confidence-sapping blow-up. It helps that the wall of funding has been pushed out beyond 2021. The post-financial crisis disintermediation in the corporate funding dynamic has had the desired effect.

And emergency cash can always be found to pay coupons if need be. So it’s likely default in slow motion, as a worst-case. But that could change, such that a V-recovery or anything close to it, and even that much expected 10% default rate for 2020 is unlikely. With lockdowns easing, if the worst can be avoided in terms of renewed material virus outbreaks, then the stimulus packages and easier liquidity conditions will have done their job.

Small wonder that HY spreads have recovered 50% of their last March weakness – and held firm ever since. And it is no mystery, therefore, that borrowers are chancing their arm in the market. IG primary markets are working fine, and if confidence continues to rise, those lower down the totem pole will start to benefit.

Credit primary effusive, of course

The deal flow is beginning to look like we might be heading for yet another record monthly amount of issuance in the IG non-financial market (€57bn record April 2020). Books were smaller than we have been used to and final pricing versus the initial guidance not rammed tighter as before either.

Still, the monthly total is almost at the €20bn mark (€19,250bn to be precise) and we’re not even at the halfway stage. €8.1bn of IG non-financial debt was printed in the day. Bertelsmann lifted €750m in 10-year at midswaps+170bp. The book was at only €1.9bn but that didn’t stop a 35bp in tightening of the final level versus the initial price talk.

Next up was Italy’s Eni, they took €2bn in an equally split dual-tranche offering. They priced a 6-year at midswaps+165bp and an 11-year at midswaps+210bp, final pricing tighter by 40-45bp across the tranches on combined books of over €9bn. Germany’s Evonik issued €500m in along 5-year at midswaps+100bp (-25bp versus IPT, books €1.4bn) and Wuerth visited for €750m in a 7.5-year offering at midswaps+100bp as well, which was 35bp inside the initial talk off a €1.9bn book.

There was little time for a breather. Spain’s Ferrovial issuing an increased €650m in a 6-year at midswaps+165bp, with books at €1.8bn and priced 35bp inside the initial chatter. SAP AG took funds in 3-tranches for a total €2bn. A 3-year for €600m was priced at midswaps+35bp, €600m in a 6-year priced at midswaps+50bp and finally, €800m in a 9-year cost midswaps+65bp. Final books were up at €6.1bn and final pricing was 30-35bp inside the opening guidance levels across the tranches.

We finished up with Total SA revisiting, having printed at the beginning of April. This time they issued €500m in an 11-year at midswaps+105bp and €1bn in a 20-year at midswaps+155bp. Final pricing came 30-35bp inside the initial talk across the two tranches.

In financials, SEB printed €1bn in a 3-year senior preferred at midswaps+68bp and Credit Suisse London issued €500m in a 5-year green issue at midswaps+80bp and €1.5bn in a 2-year floater at Euribor+95bp.

In the subordinated space, Deutsche Bank issued €1.25bn in a 11NC6 Tier 2 at an enticing midswaps+600bp, with books at €1.5bn. Serbia printed €2bn in a 7-year priced to yield 3.375%, rounding off the session.

Markets having a think

The big macro news in the session was the collapse in Italian industrial production in March. The call was for a decline both YoY and MoM of a drop of 20%, but the final numbers came in at around -29% for both. Government bonds were better offered for choice through the session. 10-year BTP yields rose to 1.88% (+9bp), the Bund was left to yield -0.52% (+1bp) and the Gilt was yielding 0.26% (+3bp) at the close.

Equities were higher at the open but faded the gains and were left to reside in the red for much of the session. The FTSE ended flat, the Dax was off by 0.7% and the S&P was 0.25% lower, as at the time of writing. Credit index didn’t do too much but was better offered (higher) leaving iTraxx main at 84.4bp (-1.6bp) and X-Over at 507bp (-8bp).

In cash, clearly there wasn’t anything happening in secondary with the focus squarely on that welter of primary activity. Nevertheless, moderate equity market weakness but more so the swathe of deals had a bearing. IG was better offered, and the index (iBoxx) edged 1.5bp wider to B+198bp. That’s the widest level in 3-weeks.

In the higher beta markets, the AT1 market was slightly better bid, the index at B+884bp (-10bp) and the same in HY, the index at B+657bp (-5bp).

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.