Marketing Communication
Euro Corporate Watch Feels like February, or maybe not
Group Economics Macro & Financial Markets Research Hyung-Ja de Zeeuw +31 20 628 3551 Hyung-ja.de.zeeuw@nl.abnamro.com
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11 September 2015 Week of heavy issuance on primary market surpasses February levels Most transactions come with a concession, pushing secondary curves wider The market feels fragile and can’t handle another avalanche of new issues, which leaves the market vulnerable to further widening into year end However, we see ECB QE Plus as a catalyst and will support spreads. We therefore expect spreads to be range bound
It feels like February… This week reminded us of the start of the year when issuers
Top-10 busiest weeks in primary market since 2004
were falling over each other to get their deals done. At that
In EUR bn, includes all EUR IG deals
time, the heavy issuance schedule, was caused by ultra-low yields and a very constructive secondary environment. With the 10 year Bund nearing the zero mark and the 5 year Bund at sub-zero levels, corporates could lock in funding costs at extremely cheap funding levels. Also longer dated paper was printed with low coupons. British American Tobacco locked in 30 year funding with a coupon of 2%. But the absolute gimmick of the year so far is Gaz de France that printed a two year deal
18 17 16 15 14 13 12 11 10 9 8 17 19 3 37 5 9 9 13 11 12 2004 2009 2009 2015 2009 2009 2015 2014 2015 2009
with a coupon of 0%. …or maybe not
Source: Bond Radar, Bloomberg
Turning back to this week’s primary market, we have two deals on the screens today. ITV PLC is in the market with a EUR
Feels like February…
600mln 7-year transaction and Eni Spa with a EUR 750mln
In EUR bn, IG Non-financials
transaction. Together with the last four days, that brings this
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week’s tally on EUR 13.6bn. That makes this a top-5 record week. It is the fourth busiest week since 2004, leaving week 9
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of this year in February behind. 50
But there’s a world of difference between today and February. The Bund has made a U-turn and almost touched the 1% mark in June before dropping back to 0.68% as we write. Spreads have widened to the highest level this year, while the ECB has
0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Redemptions
expanded its QE programme by putting several utilities on the list of eligible assets. Our biggest worry today is not the Bund
Source: Bond Radar, Bloomberg
drought, but China’s hard landing and the soft commodity prices.
Insights.abnamro.nl/en
Bloomberg: ABNM
Issuance 2015
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Euro Corporate Watch –
Feels like February, or maybe not
Concessions push secondary curves wider…
widen, unless we see large inflows into the asset category as
Clearly, issuers have to make larger concessions to get their
the end of the year nears. We can only see one catalyst for
deals done. Not that deals don’t get placed. They do. There’s
this: if the ECB steps up its QE programme.
still enough cash to absorb the wall of supply as we’ve seen this week.
ECB QE Plus At the start of this month, we changed our ECB monetary
However, another record week could easily prove to be too
policy call, to include additional QE (see also our Global daily -
much for the current market. Investors will become more
ECB to step up to EUR 80bn). We think the ECB will most
selective about the deals and new issue premiums will need to
likely step up QE by increasing its monthly pace of asset
be beefed up to get the deals done. The transactions on
purchases. We think that a EUR 20bn monthly increase, taking
Thursday pushed issuer curves 5 to 10bps wider as soon as
the total to EUR 80bn is reasonable. It would be big enough to
they were announced. In February, we’ve seen what the
have an impact, while allowing the central bank to keep some
effects of an avalanche of new issues can be when the market
of its powder dry.
can’t absorb supply anymore. Credit spreads widened significantly.
ECB can delve into utility bonds if necessary, without announcing a change in the eligible universe
…or maybe not
We do not think the ECB will need to increase the eligible
asw-spread
universe of assets to facilitate this increase at this stage. Given
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the increase in the issuer limit at the last meeting (from 25% to
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33% on a case-by-case basis) we think the ECB should have
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greater scope to increase its sovereign bond purchases.
90 80 70
60 50 07/14 09/14 11/14 01/15 03/15 05/15 07/15 09/15 QE announcement QE start Non-fins sr. Non-fins
Moreover, it can also delve into utility bonds, if necessary. Indeed, this is an option it already took up with a few credit names earlier this year (SNAM, Enel and Terna). A small step for the ECB, a bigger step for credits Apparently, the ECB didn’t think that step to add a handful of credits to the list of eligible assets was noteworthy. It was
Source: Markit, Bloomberg
treated as a technical step. The list of eligible assets was simply published without any further announcement. However,
…while there are still many deals in the pipeline…
the credits involved tightened 10 to 15 bps on the same day.
Before the holiday season, there was a large pipeline building when the primary market abruptly got interrupted by Grexit-
Spreads will be supported by QE Plus, counterbalancing
related volatility in June, thereby closing the door for new
the heavy supply from the primary market
issues. After the holiday season, the market couldn’t reopen,
We think that although the ECB won’t make a “corporate”
this time because of China-related volatility in the market. This
announcement, increasing the programme on itself by EUR
could imply that the pipeline could be heavier than normal
20bn to EUR 80bn per month, will already have a positive
around this time.
impact on credit spreads for two reasons. First, it increases the chance that it will start buying more utility-like corporates. And
… there’s only EUR 24bn left in redemptions till the end of
second, it will push yields down thereby forcing investors to the
the year
riskier end of the fixed income spectrum, such as credit. We
Year to date, we’ve had EUR 93bn of redemptions and
therefore think that QE Plus will counterbalance the widening
coupons of non-financials. There’s still EUR 24bn left till the
effect of heavy supply and spreads will be range bound till the
end of the year. In current market conditions, the new issue
end of year.
pace and volume need to be trimmed. Another top-5 record week will be difficult to digest for the market and spreads will
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Euro Corporate Watch –
Feels like February, or maybe not
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Euro Corporate Watch –
Feels like February, or maybe not
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