13th October 2015

Super Tuesday?

FTSE 100
6,371, -45
10,120, +23
S&P 500
2,017, +2
iTraxx Main
78bp, -2bp
iTraxx X-Over Index
322bp, -5bp
10 Yr Bund
iBoxx Corp IG
B+158bp, -1bp 
iBoxx Corp HY Index
B+506bp, -2.5bp
10 Yr US T-Bond

It was another Monday in October… and they do not usually come as lively as this one too often. Facetiousness aside, the Columbus Day holiday in the US ought to have put paid to there being much of a follow-through from last week’s upbeat tone. Well, it didn’t. Admittedly, primary was mostly about covered bonds, but secondary cash was very strong amid little activity because liquidity is so poor, the iTraxx indices were slightly better offered (lower) for choice and stocks plus or minus a little bit around zero. The news flow was again about Glencore and asset disposals, with the vultures circling, and that big deal in the US with Dell buying EMC for $67bn. The German nuclear decommissioning report suggesting enough funds were set aside helped German utilities take a leg higher. There is still no panic among investors in Europe regarding M&A activity this side of the pond. It will remain idiosyncratic, usually take in a defensive structure so as to not obliterate hard- fought and hard-won credit metrics and likely continue with the current trend of asset divestments which are non-core. M&A has had a good year globally, but few deals – in Europe anyway – have caused much concern. And they won’t in the sense that the uncertain economic outlook will prevent a wholesale M&A debt binge for a good while yet.

Rating agencies starting to get a grip on VW… S&P downgraded Volkswagen to A-, and the negative outlook reflects the continued uncertainty around the group. This is no ‘slashing’, but a moderate first step by the rating agency to quantify the risks involved. VW’s debt has already moved sharply lower, with some of its subordinated paper in junk territory from a valuation perspective. The next step might see some more severe price action should the borrower’s ratings fall into the triple-B category, whence we might see a little forced selling, with a poor bid on the other side exacerbating downside price action. That said, it’s pretty much certain further downgrades are coming, so we would think that much of it ought to already be in the price.

Another deal pulled, but it’s not a harbinger of things to come… SRV Group, a Finnish developer, became the second company to pull a deal in two days after Technip last week. For Technip we can understand investors’ hesitation to get involved given the oil industry dynamic of the group’s operations. For SRV, well, an unknown, small Finnish company would need to offer some fairly juicy and easy upside given the group’s highly indebted balance sheet. Given the almost captive, local audience of the investor base, for them to refuse this deal makes it unlikely we will see this borrower again (or not for a good while).

Strong secondary market starts the week in upbeat fashion… The tone in credit was firm across the board with low beta generally 3-4bp better, although there were some gappy moves taking in 8-10bp. German autos in particular took up some good upside (BMW and Daimler) and are pretty much back at pre-VW crisis levels. The likes of EON and RWE amongst other German utilities were anything up to 25bp in senior and 4 points higher for their hybrids. These were big moves in any sense of the word. Headline event risk aside, the lack of liquidity is going to keep this market well bid. The lack of supply is going to have the same effect, and we would question whether moderate supply levels would even check the tightening trend. This helped the iBoxx close better at B+158bp and returns for IG credit are up at 0.5% for the month. In HY, we edged be better to B+506bp, with returns for the month up at 1.6%. The iTraxx indices closed slightly better at 78bp and 322bp for Main and X-Over, respectively.

The primary window is open, we just need a deal or two… 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.