Credit Market Daily #26

29-Sep-2022

Good Morning!

So the BoE Blinked.

After Puw’s speech, I thought they would stand firm despite the market trying to force action.

It looks as if the action was spurred by the threat of collateral calls for LDI providers which would have been left scrambling to find liquidity given the huge move in gilts.

I posted the excellent bond vigilantes article on our feed and recommend you read it if you want to know more about how the gilt move caused a squeeze.

The Main point of the BoE’s announcement are:

  • BoE to purchase up to £5bn of 20yr plus gilts daily, via auction over the next 13 days
  • £65bn total implied
  • Announced QT of £80bn delayed, the start is moved from next week to the end of October

The reaction was typically violent with a -100bps move tighter in the yield of 30-year and long-dated bonds. GBP/ USD was slightly softer at 1.07.

What has changed?

As with all big moves, there has been some giveback this morning and it is important to ask what has changed.

The BoE has averted a potential problem with collateral calls and a liquidity squeeze and it has shown it is willing to act, although to the detriment of its credibility.

I was trying to think of an analogy and I think the best is there is another spinning plate that investors need to be mindful of and the BoE must bring down without breaking.

Adding complexity is never good.

Indeed – in prep for today’s note I had a look at UK rates and the CDS.

CDS is now at pandemic highs – the BoE may have provided a partial solution but all of the concerns around the Mini Budget remain – Higher rate expectations, moderated but high inflation, likely a weaker pound and poor consumer confidence.

Additionally – Bloomberg’s Abhinav Ramnarayan has posted an article showing that UK corporate financing costs as measured by the difference between the index spread and coupon have hit the highest level ever since index’s inception in 2000.

It goes to show the loose financial conditions corporates were used to has disappeared.

If this is the new normal – revenue growth, margins and CAPEX will all need to reset over the medium term so businesses can thrive at a higher cost of capital.

UK CDS – not buying the BoE’s ride to the rescue
Source:Bloomberg
Relative cost of re-financing at all-time highs
Source: Bloomberg

Credit

High Yield

Xover tells the tale best – it opened at 670bps, and widened out to 697bps at around 10 a.m. before tightening to 653bps.

The initial gap tighter at 11 a.m. on the BoE’s announcement was a move to 671bps, then drift out to 688bps at midday before a straight line decline to 653bps supported by the US open.

Xover is opening 17bps wider at 667 in sympathy with stocks.

In terms of indices, European High Yield actually widened in spread terms – from Z+574 to Z+609. This translated into a -80bp return on the day.

Beta underperformed quality – which is what you would expect, but I would caveat that indices can lag and so we may see some give-back in the numbers tomorrow.

Single Bs returned -93bps, with beta underperforming quality CCCs returned -131bps on the day.

GBP High Yield returned -94bps on the day and USD High Yield returned 25bps benefitting from the move in treasuries with BBs outperforming.

Verisure a Success

Verisure’s new issue traded up on the break and ended the day at 101.375/102.125.

It is a real success in this market, demonstrating that the market is open to established high-yield names with ok operating histories and no aggressive docs. Vanilla wins the day.

In terms of relative value, the bond priced with a coupon of 9.25% to an October ’27 maturity.

The Existing 3.125% Feb ’27s traded at a yield of c.8.5% pre-announcement of the deal. This gives roughly a 75bp pick-up in the spread.

Initial price talk on the Verisure was 9.25-9.5% area and it priced at the tight end – but no tighter – suggesting syndicates did not want to push their luck.

At the offer price of 102, the bonds yield 8.93%, with performance in z spread terms coming in at a 50bp tightening from 621a to 571a.

House of HR is currently in the market and there are around 7 issuers waiting in the pipeline.

Hopefully, we see primary open up – how long the window for issuance lasts is anyone’s guess.

Leaders and Laggers

Looking at the single name performance within the indices the main takeaways are from the UK underperformers.

Morrisons reported Q3 numbers with a decline in like-for-like sales and lower EBITDA down 51% Q3 YoY. Impacted by cost inflation and poor consumer confidence. Bonds were down 2.5 points. Their outlook however was for some recovery (for reference 20/21 adj.EBITDA was £847m)

“Whilst mindful of the significant economic and political volatility over the last few weeks and the effect on consumer sentiment, commodity price increases and cost price pressures, with margins now improving we expect Adjusted EBITDA to be higher in Q4 (13 weeks ending 30 October 2022) than for the equivalent period last year (13 weeks ended 31 October 2021). For the 12 months ending 30 October 2022, we expect that Adjusted EBITDA will be in the range of £810m – £830m.”

Morrisons, Q3 trading statement

Away from Morrisons – Miller Homes -2.91pts and Bishopsgate -2.52pts, and Heathrow -2.64pts.

Miller Homes is being impacted by UK mortgage deals being pulled, Heathrow the weaker pound’s impact on travel plans.

In Euro HY EP infrastructure bonds look to be down significantly in the index – having had a look the bonds have declined over time and the moves per the index look to be a “catch-up” with reality which is something to be mindful of when looking at index data.

Heathrow bonds were down

Investment Grade

European Investment Grade returned +24bps on the day.

Duration outperformed given the rally in rates with High rated, low coupon and long-duration outperforming the rest of the index – the opposite of price action seen in the last few days prior.

In terms of spread performance, the index actually saw its spreads widen on the day at Z+220 from Z+207.

This is a huge move and I would expect some unwinding given indices can lag in moments of volatility.

Primary markets remained closed to corporates with issuance limited to agency and government-linked debt. The Smith and Nephew deal looks not to have been priced.

Potential new Investment Grade issuance as reported by Bloomberg includes Smith and Nephew, Anglian Water Ceske Drahy and Ubisoft.


Rates

Yesterday saw global rates tighter.

The 10yr Treasury, Gilt and Bund yield 384bps, 414bps and 222bps.

Gilts tightened in the long end with the 30year tightening -100bps on the back of the BoE’s announcement that it will buy back-up to £65bn of bonds via auction over 13 days.

There we no change in the short end with money markets pricing the base rate at c.5.9% at May 23.

Bunds were also tighter but to a lesser extent as the ECB’s Holzmann said that a 50bp hike from the ECB may be the minimum acceptable amount at their October meeting.

This morning yields in Europe are higher. Gilts look to be c.15bps wider across the curve.


Equities

Equities had a good day yesterday having started weak, but are now opening down c.-1% in Europe and the UK with US futures off a similar amount.


Today’s Events

Eco Data

Relatively US Centric day.

Reporting Today
Banijay
Hornbach
Next
Trevi


What Has Caught Our Eye


UK PLC’s Brand Value

The Kantar Most valuable brands survey is out – you can browse their presentation below.

Overall the most valuable UK brands are worth an estimated £283 bn up 1% YoY. For context, the top 100 global brands grew by +23% in comparison.

Vodafone is the only UK brand that sits in Kanta’s global 100 brands.

In terms of what companies can do to increase brand value in the UK in the face of an economic slowdown and low consumer confidence kantar recommends corporates:

  • shrink and simplify products to maintain margins and make consumer choices easier
  • value and pay staff
  • Focus on personalisation to drive engagement

Performance

High Yield


Investment Grade


Rates


Equities


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