Tag Archives: credit

Twenty-Four Little Hours

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Susanna Gibbons, CFA

September was, to be blunt, a terrible month for credit. Rates were higher, spreads were wider, banks were weak, and record-setting supply weighed on the market. The Merrill Lynch U.S. Corporate master was down about 2 points, a combination of rates that were double-digit higher in the belly of the curve, and spreads which were about 10 bps wider. That may be better than small cap equities, but it was the worst month for credit all year.

What seems most interesting is that supply continued to hit the market all month long, to the tune of about $150 billion. It seems that M&A activity has been driving a lot of the issuance. That represents a change in motivation from earlier this year, when borrowers were tapping the market opportunistically. Up until now, many borrowers could pull back in the face of a less-than-rosy market, but now they no longer seem to have that flexibility.

Case in point this week was the Bayer deal. Bayer issued $7 billion in a 6 part deal, sprinkled across the curve out to 10 years. The company was financing its $14 billion acquisition of Merck’s consumer care business. Bayer already had bridge financing from a $12 billion syndicate of banks, but needed to get permanent financing in place. Given the timing, this deal looked on the cheap side, and as a result it performed well through month end.

What a difference a day makes. The Bayer deal has lagged a little bit, but the rest of the market is notably improved. Rates are better, with the 10 year below 2.5%, and spreads have improved on higher secondary volumes. Bank paper snapped back on Thursday morning, and continues to trade well. It may not be all sun and flowers, but the market feels like it has come through an autumn rainstorm. I cannot say whether it will be all rainbows before us, but I think I will enjoy the moment of romance while it lasts.

Since it rarely does.

Love Me Tender

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Credit had a much better week, pushing month-to-date excess returns solidly into positive territory. Spreads held in even as Treasury bonds sold off following the release of Fed minutes on Wednesday. Supply has continued to be very heavy, with over $33 billion of new investment grade offerings. Deals also seem to be performing better this week than last. For example, Coca-cola Femsa (the largest Coke bottler globally) brought $2,150 million of a 3 part deal; the 10-year tranche priced at a spread of +135, and is trading 10 basis points tighter on the bid side.

The interesting question for us is why? After languishing for two weeks, in the midst of a week where taper fears were re-ignited, and when spreads are already trading at the tight end of their post-crisis range, what is pushing spreads tighter? While it is possible that regular readers of the weekly credit wrap noted that we called the end of the financial crisis a few weeks ago, and are responsible for driving spreads tighter, we think there is more at work here.First, volatility (as measured by VIX) has moved lower, and even with the move higher in rates, credit spreads generally respond favorably to a lower-vol environment.

Second, corporations have been active in tendering for outstanding debt, and this reduces net supply. There have been about $15 billion in tenders so far this quarter, and this provides a nice boost for the market. This week, Mondelez announced an offer to purchase up to $1.5 billion of outstanding high coupon debt, at spreads inside of where bonds were trading.  Companies will engage in tender activity in order to reduce high coupon debt, which will generate a loss in the current year, but reduces interest expense going forward. For total return investors, it is just a gift. You want to pay how much for my bonds? Ummm…okay. We love tenders. And we always will.

Credit had a much better week, pushing month-to-date excess returns solidly into positive territory. Spreads held in even as Treasury bonds sold off following the release of Fed minutes on Wednesday. Supply has continued to be very heavy, with over $33 billion of new investment grade offerings. Deals also seem to be performing better this week than last. For example, Coca-cola Femsa (the largest Coke bottler globally) brought $2,150 million of a 3 part deal; the 10-year tranche priced at a spread of +135, and is trading 10 basis points tighter on the bid side.

The interesting question for us is why? After languishing for two weeks, in the midst of a week where taper fears were re-ignited, and when spreads are already trading at the tight end of their post-crisis range, what is pushing spreads tighter? While it is possible that regular readers of the weekly credit wrap noted that we called the end of the financial crisis a few weeks ago, and are responsible for driving spreads tighter, we think there is more at work here.

First, volatility (as measured by VIX) has moved lower, and even with the move higher in rates, credit spreads generally respond favorably to a lower-vol environment.

Second, corporations have been active in tendering for outstanding debt, and this reduces net supply. There have been about $15 billion in tenders so far this quarter, and this provides a nice boost for the market. This week, Mondelez announced an offer to purchase up to $1.5 billion of outstanding high coupon debt, at spreads inside of where bonds were trading.  Companies will engage in tender activity in order to reduce high coupon debt, which will generate a loss in the current year, but reduces interest expense going forward. For total return investors, it is just a gift. You want to pay how much for my bonds? Ummm…okay. We love tenders. And we always will.