Credit Market Daily #50 %author %

8th-Nov-2022

Good Afternoon!

A few things I wanted to focus on this morning.

The first being the success of Faurecia’s HY issuance – perhaps we will see more bonds come to the market.

Although this looks to be a case of banks wanting to reduce exposure into year end – so an Issuer having to come to market rather than choosing to come to the market.

There will be much less of the latter type of issuer IMHO.

The sustainability linked deal was issued to partially repay its bridge loan to finance its acquisition of car lighting company Hella with €400m its initial size.

Initial Price talk was 7.5%a – this compares to Faurecia’s existing € outstanding High Yield Bond debt’s weighted average coupon of 2.5%.

The nearest maturity bond was trading at a yield of c. 6.2-6.4% the day before issue and had a coupon of 3.125% and a cash price of c. 89.80.

So you get a clear idea of the cost of issuance in this current market.

But – everything has a price – and the bond’s short term structure – 3.5 Year maturity with a 2 Year Non Call period linked to sustainability targets enabled the company to issue €700mm at a yield of 7.25%.

Bonds are trading up this morning 100.75/101 – both investors and syndicate must be pleased with themselves this morning.

Faurecia’s relatively conservative BB rating and the low risk structure helped significantly, so we won’t likely see CCC rated issuance anytime soon, but appetite exists.

Issuance is also going to be at the forefront of the Gilt market with 4 new Gilt issues from the DMO through to Nov 15th coming on the back of yesterday’s sale of 750m gilts by the BoE.

The Bank managed to sell its longer dated Gilts (7-20 year) at a bid to cover ratio of 1.35, well below the 3+ seen for the short dated Gilts.

The DMO will sell £2.75bn of 2033 green Gilts tomorrow and £3.5bn of 2027 Gilts tomorrow on tha beck of £6bn issuance today. Overall the market was softer.

ING’s Excellent Antione Bouvet’s reaction is below and I also include an article of his in “What Caught My Eye” below as I came across a number of headlines around signs of reduced liquidity in a number of markets.

As an aside, ING’s research is public and a great resource

Understandably, gilts are selling off the result (6bp, and counting) but the good news is the 2s10s curve is actually flattening (~3bp) as a result which is slightly surprising as the long-end has proved a persistent weak spot in recent sessions

3/ pic.twitter.com/iV3PFwCkLw
— Antoine Bouvet (@AntoineBouvet2) November 7, 2022

“Back to Basis” – lastly – given the Itraxx Crossover’s heroic run I wanted to revisit the basis – the difference between the Xover spread and the cash index spread.

Xover has outperformed – the basis now sits at -51.5bps much closer to the 10yr average of -70bps and down from +32bps in the October sell off.

Overall the out-performance makes sense in a historical context – if credit spreads go wider – the question is will Xover go back to being the hedging instrument of choice?

On the cash side of the equation – supply remains low and cash balances are high so the technical their is for a higher more positive basis.

So all in all perhaps the meat of the move in Xover’s outperformance is done?

Credit

High Yield

High Yield had a positive day continuing to outperform IG and underperfroming equities.

In terms of spread moves the EUR, GBP and USD indices moved -10bps (Z+573), -46bps (Z+762) and -9bps (z+483).

GBP high yield’s out performance was a catch up on the previous day’s spread under performance so I think best to see where we end up by the end of the week if we are to judge performance.

Xover was -13bps tighter on the day yesterday and is -3bps this morning despite equities being mixed.

Investment Grade

IG continues – as you would expect to be driven by rates.

Given the general move higher in yields yesterday GBP and USD underperfromed their European peers. As ever – duration, low coupon, long dated and highly rated issues under-performed.

In spread terms EUR, GBP and USD Investment Grade moved -2bps (Z+213bps), +2bps (Z+229bps) and -3bps (Z+150bps) respectively.

In terms of new issuance there was a wide array of IG names in the market.

Non financials included Nestle, Volkswagen with €1.5bn and €3bn respectively. Books were 1.8 to 2x for high rated Nestle and 2-3x done for VW.

Financials saw HSBC, Deutsche, ING, Caxiabank, Swedbank, Mediabank to name a few – markets were well and truly open.

Rates

As mentioned – rates were generally weaker yesterday posting higher yields.

This is the case today with the front end of the Gilt curve giving back recent gains, the Bund curve is generally a couple of bps higher and Treasuries are flat.

The 10-Year Treasury, Gilt and Bund yield 422 bps, 364 bps and 236 bps respectively

Equities

Equities were broadly higher yesterday and look to be flat to small up currently in Europe.

Today’s Events

Eco Data

UK BRC retail sales YoY

Today’s Reporting

AMC

Ashland

CNH Industrial

Coty

Grifols

IGT

Schaeffler

Smile Direct Club

What Has Caught Our Eye

Liquidity

This is something that we have seen reported as happening in the US/Europe (albeit different instruments) but the effect is the same – illiquidity or short dated risk free assets trading “special” meaning that the monetary tightening is not being transmitted through the system efficiently.

This article by Antoine Bouvet of ING looks at what is happening in the UK gilt market and the impact scarcity of paper is having.

I recommend having a read especially given Dave Ramsden of the BoE’s comments on the markets being Febrile.

“It is becoming increasingly difficult to buy short-dated gilts, or to borrow them via repurchase agreements (repo). The crisis has been brewing for some time due to increased market volatility and investors’ risk aversion, but it worsened when pension funds and other market participants decided to increase their liquidity holdings in anticipation of the September/October gilt crisis.”
Antoine Bouvet, ING

Loan Officers Survey

The loan officer’s survey is another indicator how access to money is moving in the broader US economy, as you would expect credit is becoming more expensive.

Fed Loan Officer Survey just released…

Banks are tightening credit criteria

And raising the cost of business loans pic.twitter.com/8IJY90E7aj
— Callum Thomas (@Callum_Thomas) November 7, 2022

Year End Funding Squeeze

Lastly Bloomberg report that not all companies are born equal when it comes to accessing short term funding. This article points to less credit worthy companies in the US “Tier 2” borrowers have only 9% of their funding covered for year end with banks looking to protect their balance sheets over year end.

Again – another signpost pointing to lower liquidity and tighter financial conditions.

“JPMorgan Chase & Co. estimates companies that have a lower short-term credit rating — known as tier 2 issuers- secured only 9% of their funding for the year as of Nov. 2, compared to 12% at the same time of last year and 20% in 2020. With more issuers tapping the market over coming weeks, buyers may have the upper hand in deciding the level of borrowing costs.”
Bloomberg

Credit Market Daily #50