22nd September 2015

Who’s been a naughty boy?

FTSE 100
6,102, +5
9,949, +32
S&P 500
1,967, +9
iTraxx Main
iTraxx X-Over Index
10 Yr Bund
iBoxx Corp IG
B+151bp, +2bp 
iBoxx Corp HY Index
B+486bp, +5bp
10 Yr US T-Bond

Keep it clean, especially in the US… The US offers great opportunity and reward, but it is an unforgiving place for those in the corporate world who have done wrong. We can argue about proportionality, but like BP with its oil spill several years ago, Volkswagen is now going to feel the full force of the US’s way of punishing big business. Years of fiddling emissions tests will most likely see the company not only fined very heavily, but the financial hit is most likely going to lead to ratings downgrades and higher funding costs, perhaps a hit on sales, severe ongoing multi-year losses/earnings downgrades and some serious reputational damage (in the US anyway). More on this below. The eventual near 20% drop in VW’s share price was enough to see the DAX in the red (it recovered into the afternoon), while other bourses managed to regain some of Friday’s very heavy losses. This type of big corporate event risk is most unwelcome, to say the least. It’s already a damaged world, with the disjointed macro environment a big challenge for policy makers and investors alike. We’re nearing the end of the third quarter and it’s turning out to have been not just a difficult one, but a difficult year generally. And that after it all looked so good after Q1.

Softer again as iBoxx hits B+151bp… That IG corporate index spread level is newsworthy in itself for being a big figure, almost 60bp off the lows we saw in Q1 and a mark not seen for 20 months. Yet there’s hardly been a default this year to write home about, the corporate sector generally is plodding along and can finance itself easily, the demand for risk is clearly there, ratings have been steady – and yet we have edged wider most sessions over the past 6 months. It’s been like a form of Chinese water torture. If there’s any good news, IG returns have been consistently in the +/-1.5% area and have exhibited none of the big ups and downs of equities or the govie market (the DAX, +25.5% from January to mid-April 2015, is now down around 20% from that peak and just +1.5% YTD). If only we could get the timing right! Spread markets have nevertheless been victims of the contagion impact from other asset classes, hit hard by headline and macro risks. Still, it is fair to say, the corporate sector’s ability to service its obligations into the medium term remains intact.

Autos see to it that secondary markets feel the heat… VW cash moved 30-50bp wider, it’s CDS to 133bp/mid (+50bp) in a fairly frantic session, as traders looked to find a new level for it to settle at, and investors tried to hedge their risks. Some follow-through saw BMW and Daimler wider too, BMW’s 5-year CDS at 72bp and DAIGR at 65bp. VW’s corporate hybrids were lower too in cash-price terms, wider in spread by 75bp. The senior cash 2030s, issued in January at midswaps+65bp as we head into the peak of the market, were wider at Euribor+130bp for the 1.625% Eur1bn issue, or, in cash price terms, trading down at Eur88 versus a reoffer level of Eur99. Oops. VW paper isn’t yet a buy into this weakness given we are likely going to see much more volatility around the name as the US investigation goes on. Be patient, they will be. For those who hold it already, it’s a case of bearing the pain of the losses (lower marks) for now, and running the position unless eventually forced to sell if the ratings downgrade gets too severe for the portfolio holding (from single-A to triple-B, for example). That’s a more technical move, and seems unlikely given VW’s huge financial flexibility.

Primary not quite closed…. All that should have been enough to see off the primary market, but no. And it was high beta ‘stuff’ which dominated. The sole, unopposed non-financial borrower was Belgacom, now known as Proximus (A1/A), which managed to print a Eur500m deal at midswaps+97bp, halving the initial new issue premium to 12bp in the process on a decently covered (4.4x) book. Danish insurer Danica was in for T2 Solvency 2-compliant funding, with a 30nc10 transaction of Eur500m generating a book in excess of Eur1bn. Campari’s deal is this week’s business, with roadshows over and a 5-7 year maturity deal possible. HSBC was in with a high-trigger PNC8 AT1/CoCo.

Elsewhere, Greece has a new government – rather the previous one is back in. The iTraxx contracts rolled from Series 23 to Series 24, the new S24 index wider at 77bp for Main and 310bp for X-over.

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.