January 10, 2014 / 5:02 PM / in 4 years

Frantic first week for credit

(This story originally appeared on IFR, a Thomson Reuters publication)

By Philip Wright

LONDON, Jan 10 (IFR) - From Asia to Europe, to the US and Latin America and all points in between, the bond markets started 2014 with an almighty bang. Globally, across all asset classes, USD158bn of paper had been priced through 199 transactions last week as of 4pm London time on Friday, according to Thomson Reuters data.

While no one doubted that the first full week of the year would be busy, it soon seemed to turn into a relentless procession of new issues, most notably in the middle of the week.

The Epiphany holiday celebrated in Roman Catholic countries on Monday only added to the perception of a frenetic pace. Syndicate desks were itching to get started and came out all guns blazing as soon as the opportunity presented itself. Add to this the central bank announcements and US payroll data on Thursday and Friday and the reasons for the hectic mid-week period become plainer.

A bursting pipeline that is in effect time-constrained makes the periods of activity seem all the more hectic. Viewed from a historical perspective, however, the supply volume was nothing out of the ordinary.

The first full week of 2013 produced USD191bn of bonds from 421 transactions, almost exactly repeated in the second week with USD193bn from 425 trades. The previous year saw USD179bn (404) and in 2011 the total was USD166bn (335).

“The first couple of weeks are always busy,” said Miles Millard, head of capital markets and treasury solutions at Deutsche Bank. “After a busy year last year, with credit fundamentals sound, the first couple of weeks as usual have been busy, with frequent issuers and sovereigns keen to get in early.”

What has set this year apart, however, is the make-up of the borrower base that has been welcomed by the investor community, the breadth of which has been truly impressive.

“It’s been across every sector, perhaps with the exception of high-yield and ABS, which traditionally take a bit longer to get going,” said Bryan Pascoe, global head of DCM at HSBC.


But even within the various asset classes, a clear theme is in evidence as investors seek to put their money to work. For the most part, it has been the higher-beta transactions that have enjoyed the greatest oversubscription levels and have been welcomed by accounts looking to maximise returns.

In Asia, several high-yield Chinese property companies were first out of the blocks, although the greater surprise was among sovereigns, where Single B rated Sri Lanka kicked off supply with a tightly priced USD1bn five-year deal.

EM favourite Indonesia - itself no stranger to the headlines over recent times - followed with a blow-out USD4bn offering (split evenly between 10s and 30s) that attracted a book of around USD18bn, while the Philippines also chose the first week to issue.

The sovereign baton was picked up in Europe and Latin America. In the former, erstwhile outcasts Ireland and Portugal sold 10-year paper, again to great acclaim and equally large order books, with Ireland getting close to the 3% coupon achieved by Poland later in the week, at 3.40%.

Peripheral sovereign paper has been on a remarkable tightening journey in recent weeks and credit names have been dragged in too. But they still offer investors much of what they are after.


Conditions have contrived to create something of a perfect storm, as cash-rich investors look for a home for their money with a decent return, banks begin to rebuild inventories and issuers endeavour to take advantage while rates are still low and spreads tight.

“The market clearly has a very favourable view on Europe, which is reflected in the appetite for a broader spread of names, particularly banks. Spreads are generally still tight and you get a bit extra for peripheral European names,” said Millard.

This was underlined by the appearance of a number of borrowers that it would have been fanciful until recently to imagine could access the market.

Bailed-out Spanish duo Banco Mare Nostrum and Bankia, for example, both made appearances, the former in covered bond format, while the latter was able to jump straight into senior and still command a EUR3.5bn book for a EUR1bn five-year deal.

Meanwhile, Bank of Ireland jumped on its sovereign’s coat-tails to sell EUR750m of five-year senior debt. Added to this was a plethora of supply from across the periphery (with the exception of Greece), in both senior and covered format, all of which attracted strong demand.


On the other side of the coin, however, transactions from higher-rated, low-beta core European issuers did not for the main part achieve quite the same degree of success. That is not to say they were stymied in their issuance initiatives, just that there was a clear preference for peripheral and lower-rated credits and the returns they offered.

This was the case for corporates as much as financials. BMW and Volkswagen, for example, only attracted twice covered books on their respective deals - a perfectly respectable result but not quite the nine and 10 times cover achieved by Triple B rated French duo Valeo and APRR, or Italian utility Enel on its multi-tranche, multi-currency hybrid (rated Ba1/BB+/BBB-).

“Deals from German autos are very frequent and offer little in terms of spread. Instead, we prefer to seek exposure to Triple B names and certain subordinated transactions with attractive pick-ups,” said a London-based investor.


The situation in the US was similar in one regard. Here too, appetite was keen for peripheral Yankee paper, such as from Italy’s Intesa Sanpaolo or, more notably, Portugal’s EDP, where, not so long ago, demand for European paper was difficult to come by.

“There is a much greater degree of comfort with macro risks globally. Valuations are at a point where risks are fairly reflected,” said Jonny Fine, head of US investment-grade debt syndicate at Goldman Sachs.

But there was also more than adequate interest to accommodate France’s Double A rated Total with no problem, as well as similarly rated Rabobank from the Netherlands and SMBC from Japan. And there was still room for an extremely tightly priced blow-out from domestic credit GE Capital.

“The current bid for credit in the US extends across the ratings spectrum. Rather than a typical search-for-yield environment, where lower-beta credit is out of favour and higher yielding product is the most keenly sought-after, the current environment is indicative of strong demand for all. This is probably a function of the more limited ability that US money managers have to rotate from low-beta to high-beta investments, given many portfolios have specific ratings constraints,” said Fine. (Reporting by Philip Wright, editing by Matthew Davies)

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