Credit Market Daily #18 %author %

15-Sep-2022

Good Morning!

Credit Outperformed yesterday on what was a relatively quiet day.

UK CPI came in better than expected helped by lower fuel costs.

Investment Grade primary issuance continued and in Europe High Yield Lottomatica is in the market for a €350m deal.

In the US the Citrix deal which is being held out as a litmus test for primary also continued to be marketed.

As for catalysts for today, we have Initial Jobless Claims, Empire Manufacturing and Retail sales in the US.

Credit

High Yield

Orderly. Quiet. That was yesterday.

There was no spillover from the prior day’s rout in US equities. The Xover index ended the day 5bps tighter.

Cash was a little softer judging by the indices and prices on screens but there was no real selling pressure.

The Bloomberg European High Yield Index returned -34bps on the day. Unlike Tuesday, spreads did widen +12bps on the day to 545bps.

USD High Yield returned -31bps on the day, with spreads widening +5bps to 462bps.

Finally, Stirling High Yield returned +4bps on the day despite its credit spreads widening the most by +14bps, aided by a positive move in UK rates post the supportive CPI print.

In terms of single names, Monte De Paschi’s subordinated bonds continued to find support.

Distressed Fosun’s € bonds were down 5 points on the back of concerns around Chinese real estate with Chinese regulatory bodies asking lenders and state-owned enterprises to check their exposure to the issuer.

No real moves to the upside in GBP High yield.

Virgin Media bonds were c1.4-1.625 points lower on no newsflow.

Iceland bonds were also under pressure down 1.5pts with the 28s slipping below 70 again with YTD lows being 65.

Again no specific newsflow, but we suspect that headlines around the UK’s Energy relief for businesses not arriving until November, as well as a piece from the FT highlighting stressed names in the High Yield Market (bonds trading with a yield above 10%) did not help.

The FT piece is here and worth a read.

Finally, the High Yield Primary market is open. Bloomberg reports that Italian Lottery company Lottomatica is marketing a €350m bond to fund future acquisitions.

The company’s owner Apollo is considered one of the more aggressive dealmakers in the high yield market, deals usually have less creditor-friendly documentation.

The deal is rumoured to come at 10%. The bond would be single B rated and this compares to the Euro Single B index yield of 8.6% to give you a sense of the premium.

The FT reports that the Citrix deal is struggling in the US despite premiums on offer:

‘One creditor called the $16.5bn LBO a “bull-market deal” that made little sense now’
FT, “Investors on edge before $15bn debt sale to fund Citrix buyout”

Despite the reported low enthusiasm and aggressive documentation, the deal is expected to go ahead. So it appears banks are motivated to get risk off their books and syndicated away.

Here is the debt stack as per the FT:

Leaders and Laggers

Investment Grade

Investment grade continues to outperform High Yield and the primary market in Europe displayed none of the investor tentativeness seen in High Yield.

We count 7 benchmark deals totalling over €4.35bn yesterday – predominantly financials.

Non-financials tended to be BBB with issuance from Anglo American and Amprion.

For reference, the Anglo American 10-year was priced at mid-swaps +223, with initial price talk MS+250 area, guided to come at 230a.

With a duration of 7.8, the 27bps tightening from initial price talk to pricing is equivalent to a c.2ppt give up in terms of price appreciation by investors. Clearly, risk appetite in Investment Grade is real.

In terms of performance the Pan European Corporate Agg returned +9bps on the day and the US Corporate Agg returned +8bps on the day.

In terms of spread performance, the Euro index was +2bps wider on the day to 198bps and the US index was flat with a spread of 139bps.

Rates

It was a tail of two 2 years. 2yr Gilts declined on the back of the UK CPI numbers.

In Europe, 2 Year Schatz widened as markets priced in a more hawkish ECB.

10-Year Treasuries, Gilts and Bunds yield 343bps, 313bps and 171bps respectively.

Equities

Equities in Europe were lower yesterday in sympathy with the US but did not decline to anywhere the same level experienced in the US markets.

US markets were up marginally on the day. Initial jobless claims and Empire manufacturing may give direction this afternoon with initial jobless claims likely to be the focus.

At the time of writing, futures are currently flat to small down.

Today’s Events

Eco

Reporting

Paprec

What Has Caught Our Eye

Bond Yields vs. Div Yields

John Auther’s in his Bloomberg Daily flagged the relative value between the dividend yield on the S&P500 and that of 10-year treasuries as being the most attractive since 2011.

For comparison, the FTSE 250 dividend yield is 306bps vs the 10-year Gilt at 313. In Europe, the Euro Stoxx 600 has a dividend yield of 365bps vs the 10year bund at 171bps.

‘Luca Paolini of Pictet & Cie. put the logic this way: “Basically the Fed needs to overtighten and trigger a recession, and yields will eventually end up in a 2.5% to 3% range.” Rates will have to rise more in the near term (rendering the short end of the bond market a speculative play), but are more likely to fall in the longer term because the Fed will have to do more economic damage to squeeze out inflation. With sentiment on the Fed so bearish for now, and bond yields back almost to their highs for this year, he suggests the next 12 months or so should provide a great opportunity to buy Treasury bonds. It doesn’t feel like that at present, but he might well be right.’
John Authers, Bloomberg, 15-Sep-22

Rents Roll-Over?

Rents were the largest upside surprise in the US CPI. I mentioned yesterday that the US housing market is showing signs of softening.

Patrick Zweifel gives some context of the time frames involved for this component to rollover – 9 to 12 months -which won’t help the case for easing.

2/2
√ Rent inflation is likely to continue over the next 9 to 12 months (traditional lag on house prices which has just turned around), keeping inflation still too high for the Fed

√ Dilemma will then be to tighten further while the economy will no longer be overheating pic.twitter.com/RZE6v74B7M
— Patrick Zweifel (@PkZweifel) September 14, 2022

Bailouts 2.0

Reuters reported yesterday that Uniper – Germans biggest gas importer despite its earlier €19bn bailout package with the government rumoured to inject additional capital with Berstein saying the government could take an 88% stake.

The German Government was already in discussions to take a 30% stake on the back of its early bail-out package.

No decisions have so far been made beyond what was agreed in July, Uniper said on Wednesday. Its shares fell as much as 20.5% to an all-time low and closed down 18.3%. European ratings agency Scope also downgraded Uniper’s credit rating to BBB- from BBB+.
Reuters

Credit Market Daily #18