28 July 2010

Banks have been the primary area of focus for the market over the past 48 hours.  The bank stress tests have been followed by announcements of a relatively lenient transition to the Basel III regime and positive results from UBS and Deutsche Bank.  The market has rallied, albeit on thin summer volumes and the Markit iTraxx 5 year CDS index for European (senior) financials is now 30bp tighter than a week ago.  An important element in the change in sentiment is the relaxation of the Basel definition of banks' net stable funding ratio - a liquidity measure - which dramatically reduces the volume of bank refinancing required over the coming years.

Yesterday's new bond issues included opportunistic deals for AAA borrowers on favourable terms.  KfW raised €2bn at 20bp over swaps for 4 years and Rabobank raised 50 year sterling at 100bp over gilts.  L-Bank and BBVA are both raising 5 year Euros this morning, and a Tier I issue is being marketed for Credit Suisse.  There are no new European corporate deals to report, but spreads continue to be marked tighter.

The buoyant sentiment of the past few days has even swept up European sovereign names, so for example Portugal is 45bp tighter in the 5 year CDS market than a week ago.  For Greece, the tightening is 85bp.

The UK Debt Management Office built an order book approaching £10bn for its re-opening of the 2040 RPI-linked gilt and transacted a £6bn increase, a record amount for an issue of this type.  The government has recently changed pension rules so that uplifts are linked to CPI rather than RPI, but although some funds decided to stay away from the new issue as a result, the overall market appetite was strong.  It is anticipated that CPI-linked issuance may feature in the gilts schedule in the next year or two, but not imminently.  As and when that happens, it will create a new benchmark for corporates which issue inflation-linked debt, mainly in the utility sectors.

BP's credit spreads tightened in sharply after yesterday's results announcement.  The one year CDS finished the day 32bp tighter.

European Corporate Deals Priced:          

Issuer                                     Rating                   Size/Maturity Pricing

Pipeline:

Issuer                                     Rating                   Comments

KCA Deutag                            Caa2/CCC               roadshowing $500m 8yr NC4

Int'l Personal Finance                BB+                       €200m 5yr

27 July 2010

There was a very muted bond market reaction yesterday to the European bank stress tests, and the new issue flow included only one deal of benchmark size, a $600m 5 year issue for the Republic of Belarus.  Elsewhere, Bankinter is having to pay a notable spread of 240bp over swaps to attract investors into a €400m covered bond (Aaa/AAA) tap with a maturity of April 2013.  

There was no new corporate issuance yesterday in Europe, but two new deals are being marketed, both in the high yield sector.  A $500m bond issue is being roadshowed in Europe and the US for KCA Deutag (Caa2/CCC), a global drilling contractor headquartered in Aberdeen, owned by the US private equity fund, First Reserve Corporation.  The proposed issue is of 8 year non-call 4 bonds, issued through a subsidiary (Turbo-Beta PLC), and the proceeds are to be used primarily for debt refinancing.  International Personal Finance (BB+), a Leeds-based credit business, is indicating a 11.00-11.50% yield for 5 year bonds issued from its MTN programme.  

The UK's Debt Management Office has opened the books for a re-opening of the 2040 index-linked gilt, which is attracting a high volume of demand.

BP's second quarter results announcement this morning includes a $32bn charge relating to the Gulf of Mexico disaster, and we anticipate price action on its bonds and CDS during today, now that the scale of the financial impact has been quantified.

European Corporate Deals Priced:          

Issuer                                  Rating                   Size/Maturity Pricing

Pipeline:

Issuer                                   Rating                   Comments

KCA Deutag                          Caa2/CCC               roadshowing $500m 8yr NC4

Int'l Personal Finance              BB+                       €200m 5yr

26 July 2010

Announcement of the European banks' stress test results after the markets' close on Friday gave a weekend for reflection.  And so far, the considered reaction, in terms of price movements, is minimal.  There is a huge volume of market comment on the weaknesses of the tests, the capital shortfall of just €3.5bn for the seven banks that "failed", and the non-disclosure of sovereign exposures by six of the German banks.  But we are not seeing any significant volatility as a result, because the failures were in well-advertised categories:  five Spanish savings banks, a Greek bank and a previously bailed out German bank, Hypo Real.  The 10 year German Bund opened this morning a couple of basis points higher in yield than at Friday's close, traded back down to the previous close, and that's about the extent of it so far.  Bank share price movements have also been muted, with the French and UK banks favoured relative to some of their peers.  The longer term reaction of the markets to sovereign default risk remains entirely unpredictable and it is unlikely that the stress tests represent the end of the story, since they have little to say on this crucial point.

The only European corporate bond issue in the market on Friday was the completion of the 5 year offering by DSG International (Ba3/B+).  The £150m new issue was executed in conjunction with a £140m buyback of 2012 bonds.  (From the bank sector came the announcement that National Bank of Greece had privately placed €450m of Lower Tier II notes via its branch network.)  

In thin markets, corporate credit spreads have touched their lowest levels for almost ten weeks.   There are no new European corporate issues on the screens this morning.

European Corporate Deals Priced:          

Issuer                                          Rating                 Size/Maturity Pricing

DSG Int'l                                      Ba3/B+                 £150m 5yr                         8.75% coupon

Pipeline:

Issuer                                                    Rating                   Comments

23 July 2010

We expect a quiet day in European fixed income markets, ahead of the announcement this evening of the bank stress test results.  The potential outcomes for the market range from a non-event through to a re-pricing trigger for sub- categories of bank securities, with knock-on effects for corporate funding costs.  The merits of the stress tests are controversial, but there is no doubt that they represent a source of price risk until they are out of the way.  They may also unleash capital-raising transactions.  In the meantime, safe haven government bonds have been holding on to low yields, for example 2.65% on the 10 year Bund, just 14bp above its low point in early June.  The nitro-glycerine (gilts) market is within just 3bp of its low-point 10 year benchmark yield.

European corporate spreads have tightened during this week on low volumes, but there has been no new investment grade corporate issuance.  There is still life in the high yield sector.  In Euros, the Spanish gaming business Codere (B2) tapped an old €660m issue for a further €100m with a 5 year maturity.  In sterling, the DFS Furniture (B) issue was completed on a yield of 9.75%.  Today is the final date for the buyback tender by DSG International (Ba3/B+), and the new 5 year bonds are being marketed on an indicated 9.00-9.25% yield range.   Thereafter, the European corporate pipeline is empty.

There is a striking contrast with the activity level in the U.S. market.  Just yesterday, corporate bond issuance there was in excess of $3.5bn, spread across a wide range of domestic and international business sectors, from Brazilian meat to Indonesian telecommunications.

Against the background of a continuous news stream on BP, the one year CDS has settled into a range around 390bp to 440bp.  While the A2/A/BBB ratings remain on credit watch, the market is pricing the company as a BB risk.

European Corporate Deals Priced:          

Issuer                                               Rating                   Size/Maturity Pricing

DFS Furniture                                    B                           £240m 7yr NC3                  9.75% yield

Codere                                              B2                         €100m 5yr tap                    9.82% yield

Pipeline:

Issuer                                                    Rating                   Comments

DSG Int'l                                               Ba3/B+                 exchange offer for 2012 bonds

22 July 2010

Fixed income markets focused overnight on the Congressional testimony of the Federal Reserve's chairman on the US economic outlook, which he characterised as "unusually uncertain".  The possibility of further monetary easing is being kept open if the recovery falters, which serves to undercut any thoughts of a tightening of policy any time soon, and is supportive of bond markets.  Long-term Treasury yields moved down sharply on the day.

In a quiet European corporate new issues market, Crown Holdings (BB) completed its high yield issue yesterday, with an increase from the €350m initially indicated to a final size of €500m.  The high yield issue in sterling for DFS Furniture (B) is also progressing, with an indicative yield of 9.75% area.

National Grid (Baa1/BBB+) is tendering to buy back up to €450m of bonds in three issues maturing from 2011 to 2014.  This follows the group's £3.2bn rights issue in May.

Investment grade credit spreads have been relatively stable recently.  The 5 year CDS index (Markit iTraxx) has traded within a 5bp range over the past fortnight.  As a broader indicator of falling volatility, the VIX index is now around the levels seen at the beginning of May, before the European sovereign debt crisis intensified.

European Corporate Deals Priced:          

Issuer                                                    Rating                   Size/Maturity Pricing

Crown Holdings                                       BB                         €500m 8yr NC4                  7.25% yield

Pipeline:

Issuer                                                    Rating                   Comments

DFS Furniture                                         B                            £240m 7yr NC3

DSG Int'l                                                 Ba3/B+                   exchange offer for 2012 bonds