24th March 2017

Return of the prodigal son

FTSE 100
7,341, +16
12,040, +136
S&P 500
2,346, -2.5
iTraxx Main
75.5bp, -1.5bp
iTraxx X-Over Index
293.5bp, -6bp
10 Yr Bund
0.43%, +2bp
iBoxx Corp IG
B+129.75bp, -0.7bp 
iBoxx Corp HY Index
B+366.8bp, -2bp
10 Yr US T-Bond
2.42%, +2bp

Ending with primary market gushing

Welcome return: Volkswagen

In financial market terms, the week will be remembered for weakness in equities and oil, a recovery in duration product, stable secondary credit and a fairly resilient primary sector which saw VW’s return to the corporate bond market after an 18-month scandal-induced absence.

Actually, the market was awash with a sea of issuance making for a super session on the primary front in yesterday’s session. Primary matters, because nothing is going on in secondary! Investors like to be busy. They might not necessarily be taking down value, but they’re searching for it. That sidelined cash needs a home.

So VW duly delivered with an €8bn deal spread over 4-tranches and all priced 15bp inside the initial guidance on books of over €25bn. The largest demand was for the 2-year floater and the 10-year fixed issue with books at over €6bn and €8.75bn, respectively. There’s reason for that demand structure and we would suppose that the 2-year floater gives investors a “safe-harbour” at the front-end, while investors looking for cheap duration would have been content with the 10-year.

Making up for lost time

The German auto giant made up for that 18-month absence to square its books – and partly refinance that huge €20bn syndicated loan facility which it took out last year. VW is always a top 10 capital markets borrower in any year. And we think they did really well, given the size of the deal to reduce pricing as much as they did. It highlights the blue chip nature of the company, the following it enjoys and the level of sidelined cash looking for investment – and all the while into an investor well aware that secondary market performance might be a little laboured. Investors just want their fill.

Westfield Corp: £800m in deals

The VW deal was the only one of the day for the euro-denominated IG non-financial corporate bond market, but we will forgive borrowers not wanting to get in the way of this blockbuster transaction. The €8bn of debt that the auto company took down takes the total issuance for the week to €10.3bn.

It also kind of masks the fact that up until this deal, we had only seen three IG borrowers this week, taking just €2.3bn between them. For the month so far, with a full week of activity still to come, we’re up at a sprightly €25.8bn of IG non-financial issuance.

The other non-financial deal of note came from Westfield Corp which visited the sterling market for a combined and increased £800m in 8-year and 12-year funding. It’s worth noting that – as is usual in an investor-controlled sterling market, the deal was only 3-7bp tighter versus the initial guidance. ABH Financial (part of the Alpha Group) issued yet another increased deal for €400m – single B rated, while the big deal of note in financials was the Caixa Geral €500m 5.125% AT1 which was priced to yield 10.75% (single-B rated).

Finally, the HY market chipped in with a dual tranche deal from Federal-Mogul for a combined €715m, taking the weekly issuance in the market to a super €2,045m. And for the month so far – with that week still left – we’re up at €7,627m.

Overall, that was as busy a session in primary for investors that they could have hoped for. The principal focus was on the VW transaction, and with much of the deal pre marketed in Wednesday’s session, there was little in the way to prevent a smooth transaction – and elicit massive demand.

Calmly playing out the week

The European equity markets recovered much of the midweek losses while government bond markets played out with little movement. There was some noise around Ford’s first quarter earnings outlook, but US stocks ploughed on higher nevertheless. For government bonds, Bund yields backed up a touch to 0.43% (+2bp), OATs closed unchanged at 1.05% while the 10-year Gilt yield moved to 1.22% (+4bp). Oil prices per barrel edged down but left in a $47-handle for WTI and trading off a $50 per barrel complex for Brent.

The Bank of England announced that its QE-related corporate bond purchases had reached £8.53bn in a little over 6-months since the programme began in late September. The target is up to £10bn over 18 months and at the current run rate, we would think that this QE effort will be completed inside 3-months from now. The sterling market has held relatively firm through Brexit, Trump and now Wednesday’s terrorist attack in London. We could probably ascribe some of this robustness to the central bank’s efforts. The IG corporate sterling Markit iBoxx index closed at G+150.4bp, unchanged in the day -and the year.

In the euro-denominated secondary corporate bond market: tighter – for choice! At B+129.75bp (-0.7bp), the Markit iBoxx index equalled the lowest level seen this year although there was little activity to justify it. The high yield market was similarly biased towards a tightening trend, the index at B+366.8bp (-2bp) also amid limited interest. The indices were left with iTraxx Main lower at 75.5bp (-1.5bp) and the X-Over index at 293.5bp (-6bp). US stocks have closed out small up/down overnight which means a rather directionless and limited session to close out the week.

In the US, they have the House of Representatives voting on whether to repeal Obamacare overnight. Depending on how that plays out, there could be an impact on the markets in terms of confidence in Trump’s ability to deliver on his policy pledges.

Have a good day, and weekend.

For the latest on corporate bonds from financial news sources, click here.

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.