Credit Market Daily #42

27-Oct-2022

Good Morning!

It’s ECB day a 75bp hike is expected as well as the start of QT. All eyes will be glued to srceens at 13.15 for the announcement with Legarde, the self-cast fiscal owl, due to speak at 13.45.

Her speech will be parsed for all nuance or lack thereof and likely be the driver of price action today.

Yesterday saw a continuation weakness in Tech with Meta reporting another quarter of revenue declines which dragged US stocks low into the close.

Earnings continue to dominate the newsflow and this is fantastic as far as I am concerned.

We have another bumper day of Earnings today with the likes of Boparan, EDF, Ardagh, Ence, Cemex, Hertz, Casino, EDP and Tendam Brands to name a few of the 39+ names reporting today.

So plenty to digest, with representations from pretty much every sector, this should start feeding through to credit spreads and building up the collective corporate outlook for the next quarter.

There is also a fair amount of Economic data out today with German Gfk consumer confidence tentatively looking like it may be bottoming coming in at -41.9 vs. 42.3 expected and -42.8 prior.

Not a heroic rebound, but given we are at all-time lows any arrest in the fall has to be positive.

We also have US GDP, Durable Goods and the Core PCE Deflator which, being the Fed’s preferred measure of inflation could be the one thing on today’s order of play that could steal the limelight from the ECB.

Finally – I want to flag the latest piece by Florian Kronawitter – see “What Caught Our Eye” below.

The reason I want to flag it is that he lays out why he believes we could see Yield Curve Control in the US via Treasury buy backs and why this would be supportive of risk assets.

He looks at the eviedence so far that this could be in the offing – the bulk of this is Treasury Secretary Yellen’s recent discussions around the yield in the long end of the treasury curve.

This comes with the caveat that higher asset prices = looser financial conditions, which are inflationary, which is what the Fed doesn’t want to see, so now may not be the time.

BUT..it was a bit of a paradigm shift for me – what if there is a floor in markets driven by the level of the US long bond, and can it be used to engineer a soft landing?

By soft landing, I mean avoiding an unholy reckoning between equity valuations and reality, not the economic kind.

It certainly seems that this would at the very least delay any reckoning.

It would add another chapter to the Central Banks and Politicians Prop Markets Up With Their “Ingenuity” book which I had hoped was closed.

Worth the read.

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Credit

High Yield

Our third restructuring of Q4! French care home operator Orpea has announced that it will need to renegotiate its debt. h/t @credit_junk

Bond to equity swap is the most likely scenario.
Bond are seen -20pt today, trading between 20-30 cash price.
I remember yet the pushy sales on this name.@CavaggioniMario @KillinGswitCH98
you?

— ©️redit From Ⓜ️acro to Ⓜ️icro 🇺🇦 (@Credit_Junk) October 26, 2022

This has been in the making for some time, with the company being the centre of a scandal over the treatment of its residents, high inflation and stalling asset sales and further asset write-downs.

“How did you go bankrupt?”

Two ways. Gradually, then suddenly.”

Ernest Hemingway, The Sun Also Rises

The other 2 restructurings are Matalan and Stada’s announced amend and extend, where it is extending the duration of existing debt in exchange for higher coupons and a consent fee in lieu of a full refinance.

Some would argue this “amend and pretend” is not a “proper” restructuring, but those people aren’t writing this newsletter.

European High Yield Primary is alive.

Spanish Gaming company Cirsa got its 5yr Non-Call 2yr senior Secured deal away, priced to yield 10.875% with a coupon of 10.375% with enough investor appetite to see the deal upsized to €425m from €350m.

The new issue is to redeem a portion of its 2023 notes. For reference, its existing debt stack has a weighted average coupon of 5.34% and its existing 2027 bonds traded at 9.7% prior to the deal announcement giving you an idea of the refi cost.

The initial price talk was 11-11.25% area and the yield on the Euro single B index is 9.99%.

So – post ECB we could well see further issuance, but the number of names that have to refinance is relatively few so issuance will be limited to these names and any hung bank deals that need to be moved.

Talking of bank deals that need to be moved – Elon Musk’s $44bn Twitter Deal is expected to close this week adding an additional $13bn of debt to the new issue pipeline, with banks hoping they can time the market.

Turning to performance, High Yield outperformed Equity and Investment Grade on the day with EUR, GBP ad USD HY indices returning +40bps, +52bps and +52bps respectively.

In spread terms EUR, GBP and USD HY moved-3bps (Z+610), -6bps (Z+768) and -18bps (Z+496).

Xover underperformed cash, 6bps wider on the day.

Leaders and Laggers

Investment Grade

Investment Grade ended the day up, EUR, GBP and USD returning +33bps, +44bps and +51bps respectively.

Looking at the moves in spreads the indices were -2bps (Z+225bps), -2bps( Z+231) and +0bps (Z+160bps).

Comparing asset classes over the month IG has generally outperformed High Yield as we have flagged. But nothing comes close to the performance US equity has put in.

We had 2 corporate bonds in the new issue market – ESB Finance (Utility, A3/A-) €550m and Suez (Environmental Services, Baa2) €1.7bn dual tranche. Both deals were priced tighter than guidance and were well subscribed. Given the ECB today issuance will likely take a pause.

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Rates

The ECB will dominate today, Euro and Dollar benchmarks ended the day with higher yields with Gilts continuing to outperform.

Jeremy Hunt has delayed his Financial Statement to the 17th of November.

Yesterday I said this could weigh on Gilts – Bloomberg reports that in delaying the budget, the OBR can use the new, post-Truss gilt yields in its calculations.

This could have the effect of creating paper “savings” of up to £15bn, which would significantly reduce the fiscal hole Hunt is tasked with plugging.

“At the last fiscal event on March 23, the OBR took the five day market average from 21 days before the fiscal event. Using the same convention for Oct. 31 would have had interest rates peaking 1 percentage points higher than where they are currently. Gilt yields would also have been 1 point higher. Sterling was about 2% weaker against the dollar”

Bloomberg, Oct-26

This kind of sizeable reduction in the UK’s deficit has to be taken positively, so my belief the delay would weigh on gilts is probably a very small consideration in this context.

10-Year Treasuries, Gilts and Bunds Yield 404bps, 360bps, and 216bps respectively.

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Equities

A green day in Europe and the UK yseterday with the US closing mixed on earnings.

This mornng Europe is opening down -50bps, playing catch up with the US. the FTSE is +20bps and US futures point a small gain on the open.

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Today’s Events

Eco Data

German GFK Consumer Confidence, Durable Goods, PCE Deflator and GDP.

Today’s Reporting

Ardagh

Ardagh Metal

Boparan

Bormioli

Casino

Cemex

EDF

EDP

ENCE

Eramet

Hertz

Ineos

Intrum Justitia

Inwit

Lagadere

LuftHansa

Metsa Board

MPT

Preem

Rexel

Tendam Brands

Valeo

Volvo Cars

What Has Caught Our Eye

Florian Kronawitter :”Treasury buybacks may be imminent, which could save markets for a while”

This is a great piece and opened my eyes to the positive risk that buybacks, YCC in the US could bring a (temporary) rise in asset prices.

All of this is in the context of the FED fighting inflation so the bar is high,but Yellen appears to be laying the groundwork for purchases.

“By conducting Treasury buybacks, the US Treasury – via the Fed – buys long-duration bonds (10 or 20-Year plus) and finances these purchases by selling short-term bills (<1 Year). That way, liquidity is provided to the now illiquid long end, which increases the capacity to absorb shocks and forced selling. On the other hand, there is plenty of demand for short-term T-bills, as these by definition don’t carry any duration risk (e.g. the path of inflation over the next 20 years)

From a political perspective, it’s an easy sell: The procedure is revenue and money-supply neutral. Everyone likes higher asset prices. The argument of fixing “financial stability” sounds plausible. Anti-inflation measures such as higher short-term rates can continue in parallel“

Florian Kronawitter, “The Last Inning”, Oct-26

US Home Sales

The Wall Street Journal reports that US home sales fell 10.9% in September as interest rates bite into consumers appetite and ability to purchase housing.

Given the bubble in real estate markets globally this is likely the first rumbling of further declines to come around the world.

Banks – Windfall Taxes

This article from the FT touches on Barclays’ and Deutsche Bank’s strong earnings and he likelihood that governments across Europe see banks as an easy source of public funding.

“In mainland Europe, Hungary has already introduced a windfall tax, while Spain has outlined proposals for a levy that, if passed in parliament, would come into force at the start of 2023 and last for two years. It would affect about 10 lenders, including its two largest banks, Santander and BBVA.

Madrid’s move has put it on a potential collision course with Brussels, which will decide shortly whether it clashes with EU banking rules.”

Darren Dodd, FT, 25-Oct

Performance

High Yield

Investment Grade

Rates

Equities