ABN amro Corporate Bond Watch it could be a busy last six weeks

Marketing Communication

Euro Corporate Watch

Group Economics Macro & Financial Markets

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03 November 2015

It could be a busy last six weeks  October supply falls short of expectations

Hyung-Ja de Zeeuw

 Low supply level has been constructive for spreads

Senior Credit Strategist Tel: +31 20 628 3551 hyung-ja.de.zeeuw@nl.abnamro.com

 ECB QE Plus expectations boost investor risk appetite  We expect supply volumes to pick up in the last six weeks  This will slow down the tightening bias

October supply falls short of expectations October saw EUR 11.2bn of supply in the EUR IG Non-financial space. That was less than we expected given the very constructive market conditions. After the dovish language at the September FOMC meeting and Draghi’s clear signals of more QE to come in the near future, markets rallied. The iBoxx Corporates tightened 21 bps and Non-financials 17 bps vs asw. Sentiment was constructive and there was enough cash to put to work.

October supply falls short of expectations In EUR bn

Spreads rallied in October asw spread in bps

35

160

30

140

25

120

20

100

15

80

10

60

5

0

40 Jan Feb Mar Apr May Jun

Jul

Aug Sep Oct

Jan

IG EUR Non-financial issuance Source: Bond Radar, ABN AMRO Group Economics

Mar

May

Corporates

Jul

Sep

Nov

Non-fins

Source: Markit, ABN AMRO Group Economics

Insights.abnamro.nl/en

Bloomberg: ABNM

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Euro Corporate Watch - It could be a busy last six weeks - 03 November 2015

Markets expects Mr. Draghi to out-dove Mrs. Yellen We think that the constructive market conditions will last a little longer. Investors are anticipating on the ECB’s announcement to step up the magnitude of its buying programme and a possible cut in the deposit rate. In order to be effective, he will need to out-dove Yellen. Unfortunately for Mr. Draghi, the ECB’s meeting takes place on 3 December, 13 days ahead of the FOMC meeting on 16 December. This means that in its decision to step up the QE programme, it cannot take into account any of the Fed’s actions of the December FOMC meeting. So, the ECB will need to take the initiative.

Although Mr. Draghi’s latest comments in Italian paper Il sole 24 were aimed at downplaying expectations in the market, our base case scenario is still for further monetary easing next month. We think the ECB will step-up its programme with EUR 20bn per month and a deposit rate cut of 10bps. We also expect the ECB to add more utility-like corporates to the shopping list. This will be very supportive for credit spreads.

Expect supply volumes to pick up in the six weeks that are left We think supply will pick up in the last weeks of the year. Effectively, there are roughly six weeks left before the primary market closes. Given the low supply level in October, investors should be cash rich. Add to that the constructive backdrop in the secondary market due to QE Plus expectations and relatively attractive spread levels and a perfect environment for the primary market emerges.

From the issuer side, there are several reasons to visit the euro market in the coming weeks. We know that AB Inbev still needs to finance its EUR 96bn acquisition of SABMiller. It is estimated that they’ll need to finance EUR 50bn in the bond market. The largest chunk will be funded in the USD market but certainly, also the euromarket will be tapped. It could be very well that the issuer will tap the euromarket this year and a second round in Q1 2016.

For US issuers, the euromarket is still attractive. US 5 year swap trades around 1.54% and EUR 5 year swap at 0.29% and a spread differential of 100bps between US and EUR credit. Even if the proceeds are swapped back to USD, it is still attractive to fund in EUR.

It still attractive to issue in EUR despite X-ccy swap yield in %

Spread differential between US & EUR Non-financials asw spread in bps

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 01/14

250 200

150 100 50

05/14

EUR 5y swap

09/14

01/15

EUR NF sr. spread

05/15

09/15

EUR/USD XCCY

Source: Bloomberg, Markit, ABN AMRO Group Economics

0 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08 1/09 1/10 1/11 US Non-financials

EUR Non-financials

Source: Markit, ABN AMRO Group Economics

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Euro Corporate Watch - It could be a busy last six weeks - 03 November 2015

But also opportunistic European issuers might want to tap the market now that the conditions are good. A couple of weeks ago, transactions still had fat new issue premiums of 20 to 30 bps. In the last handful of transactions, new issue premiums have been squeezed to high single digit in some cases.

We expect another EUR 15-20bn of supply in the Non-financials market until year-end.

With EUR 10bn left of redemptions, this would mean a net supply of EUR 5-10bn. This would bring the tally for total supply in 2015 to EUR 175-180bn for benchmark Nonfinancial deals. This is roughly the level of supply we’ve seen since 2012, the year in which Mr. Draghi started his unconventional monetary policy with his famous words, “Whatever it takes”.

Benchmark redemptions and supply

High issuance level maintained in 2015

In EUR bn

In EUR bn

175

300

150

250

125

200

100

150

75 50

100

25

50

0

0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Redemptions

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*

Issuance 2015

Source: Bond Radar, ABN AMRO Group Economics

* ABN AMRO estimate Source: Bond radar, ABN AMRO Group Economics

Boost in supply will slow down the tightening bias Although we expect the risk appetite of October to persist in the coming weeks, the effect on spreads will most likely be limited to a muted move tighter. The market seems to be in a better shape to digest supply than in September but it’s still a far cry from the strong shape we witnessed in Q1 when QE was announced. We expect Non-financials to end the year around 100bps vs asw and Non-financials senior around asw+90.

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Euro Corporate Watch - It could be a busy last six weeks - 03 November 2015

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