Category Archives: Weekly Credit Wrap

Get Lucky

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The news in credit this week was dominated by the merger announcement between Comcast and Time Warner Cable – just in time for Valentine’s Day. Time Warner Cable bonds took a big hit last June, with spreads widening by about 150 basis points in response to romantic overtures from John Malone at Charter communications. Prices of TWC’s long bonds dropped by about 15-20 points, and have been languishing ever since on fears that Malone would prevail, and the company would lose its investment grade ratings. Comcast was an on-again, off-again suitor in this ménage a trois, and we wondered if they would ever take the relationship seriously. For credit investors who held onto, or took positions in TWC bonds during this drawn-out courtship, they finally got lucky. Immediately following the announcement of the all-stock deal, TWC bond spreads gapped about 125 basis points tighter, and the long bonds soared about 15 points. Not a bad one-day return for investment grade credit. One of the factors driving the deal seemed to be the desire on the part of management to pursue an all stock transaction, as it would help bondholders as well as stockholders. As creditors, we just aren’t used to seeing that kind of love.

Credit investors who held on during the January-end Emerging Market anxiety attack also got lucky, as spreads have tightened over the past week almost to the levels we saw before the mini-risk flare. Month-to-date excess returns are positive, and the long end is once again leading the way. We think part of the spread movement in secondary paper has been driven by a relatively light calendar, as the weather (and New York City weather in particular) continues to play an outsized role in our market. Taking out the Sovereign issuers, we were left with just $14 billion in supply, dominated by the bank sector with $4.25 of 3 year fixed and floaters out of JPMorgan, $2.75 billion 3 year floaters and 5 year fixed from Barclays, $1.75 billion 3 year fixed and floaters from Bank of America, and $2 billion from Cap One across 3 shorter duration tranches. If you did not want to buy short bank paper, you were definitely out of luck in new issue this week. Next week is looking better though – at this point there may be some pent-up supply, so we’re counting on at least $20 billion. If you’re willing to wait, you could get lucky.

Wild Horses

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Emerging markets have taken center stage in the credit world over the past week, just in time to usher in the year of the Horse in China.  Here’s what we’ve learned about Horses: they are active and energetic and full of ambition. They are also hot-headed and impatient, and this sure felt like a week where the hot-headed prevailed. Fears about the potential impact of higher rates in Turkey, Brazil, South Africa, and other emerging economies had an obviously negative impact on equities, but also helped to push Treasury bonds higher and credit spreads wider. Total returns in corporate bonds this month are positive on an absolute basis, but excess returns are slightly negative. It has not been a very big move in credit, to be sure. While equities are down about 3%, broadly speaking, credit spreads are just 5 basis points wider. Some sectors, like banks and mining, have seen a little more volatility, but it’s been a modest move so far.

The spread volatility did keep a lid on new issue this week – the market saw just $13 billion in supply, heavily skewed towards the banks. Given the weak tone to the market, deals actually performed reasonably well, and look like they are generally trading a basis points or two tighter – though not without some noise. We expect that the calendar will pick up a little bit next week, as more companies get through earnings season. But if we see further volatility coming from emerging markets, all bets are off. Many high quality issuers were active in tapping the markets in 2013, so there is not a lot of pent-up supply, and you could see a sharp drop in new issue if volatility continues.

To say it has been a wild start to the New Year might be an overstatement. Let’s just hope they aren’t dragging us away before its over…

One Hundred Years of Solitude

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We have all heard complaints about how lonely it is being a portfolio manager. Good decisions are celebrated by the team, but bad decisions seem to be made alone. Not that it was a bad week in credit – everything was just fine. Spreads were perhaps a touch weaker, but excess returns are still positive for the month, interest rates are cooperating, and market tone feels pretty good.

This is probably what paved the way for about $45 billion in investment grade supply, and investment grade sovereign issuers added another $8 billion. One of the notable issuers last week was EDF (Electricité de France), which globally brought over $12 billion in supply, of which about $6 billion was in US Dollars. Among the bonds issued was a new 100 year bond – the 7% of 2114. Now that is credit risk worth thinking about.

In the late 1990s, there was a spate of 100 year issuance, and some of the credits have fared better than others. Fox America (formerly NewsCorp) has improved somewhat since issuance in 1996. JCPenney, on the other hand, has sunk from being a solid, single-A rated company to a CCC company. From a credit standpoint, this underscores the perils of underwriting a bond for such extended periods. How, exactly, do you evaluate 100 years of credit risk?

The answer may be – you don’t. Beyond a certain period of time, we think insight into business fundamentals grows a bit foggy. Even so, these bonds can still make a lot of sense from a portfolio standpoint, particularly if you are hedging long duration liabilities. The duration of a 100 year bond is not much longer than that of a 30 year bond, but you generally get a lot more convexity, so you should outperform as interest rate volatility increases.

All that convexity should really make you feel better when credit quality tanks. There’s no way around it, buying a 100 year bond introduces loneliness that could be handed down from generation to generation.

Indecision Time

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In spite of the much-heralded cold snap over the past week, credit markets have not cooled off. Maybe market sentiment is just frozen in place along with everything else, but 2014 has started on a positive note.  Or did it? We find ourselves going back and forth between the good and the bad.

On the good side, the new issue calendar was active, which was expected after a holiday hiatus of several weeks. $50 billion priced this week, about $20 billion of which came from sovereign issuers, and the rest from corporate issuers. Bank and finance dominated, which is typical to start the year, including deals from GE, Toyota Motor Credit, and a number of Yankee banks. They were joined by industrial issuers Mondelez, American Tower, Union Pacific, and French oil producer Total. Demand was solid, with deals generally pricing inside of guidance, and performing well once they were free to trade. Spreads have also remained firm – intermediate bonds are a few basis points tighter, and longer duration corporate spreads unchanged so far this year. Not a bad start to the year for Credit.

On the other hand, we are starting to see some weakness in a few areas. Long duration industrials are a little wider, following an unusually strong performance in December. CDX spreads are a few basis points wider (CDX are indices based on Credit Default swaps of a set group of issuers), also following a generally strong December. Investors began selling bank/ finance and telecom paper after the first couple of trading days, and spreads there also moved a little wider. There haven’t been any big cracks yet, so maybe we can chalk up some of the movement to profit-taking.

There are a few worries still in the market, like the never-ending budget battles in Congress. But we have sailed through taper from the Fed, new rules from Dodd Frank, and we are no longer concerned about the collapse of any European Banks. It looks like we’re set up for a solid year with low volatility and good performance from credit.

My mind is going to keep me up at night. Crisis in credit just wasn’t that long ago.

Husker Du?

Who Spiked the Eggnog?

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Christmas arrived a little early in the credit markets. Spreads have been grinding in for most of the fourth quarter, but over the past week are tighter by a solid 7 or 8 basis points. That may not sound like a lot, but for the whole market to move that much tighter in such a short span of time is pretty extraordinary, and is the biggest weekly move tighter we’ve seen in the past couple of years. The market closed yesterday at a spread of 116, feels like it’s moving tighter again today, and all sectors are participating.

Long credit is having an especially good month. In fact, it’s had a great year. Excess returns in long corporate bonds are 128 basis points this month, and 377 for the year. It looks like the great rotation out of bonds into equities is not happening on the long end. If anything, it’s the other way around, driven by pension funds. They started the year underfunded, and given the move in rates and equities, we’re guessing many are now close to fully funded, which allows them to de-risk. That means selling equities, and buying long bonds, including investment grade credit.

There are also some good fundamentals underpinning the move in credit. Stronger economic growth, a rebound in housing, and a masterfully orchestrated taper announcement from the Fed all contributed to the positive sentiment.  We’ve had a modestly-more-benign-than-expected announcement regarding the Volcker rule, at least around dealer market-making. There was some concern that corporate bonds would face another decline in liquidity depending upon what restrictions were placed on dealers under Volcker, and so the market is breathing a sigh of relief on that front. Finally, with the new issue market shut down for the rest of the year, and virtually no supply this week, there has been little paper to buy if one did feel like going long credit all of a sudden.

All of these factors have contributed to a downright jolly party in credit. No one feels like playing Scrooge at this bash, everyone just wants to belly up to the eggnog punch bowl. So raise a glass to toast a great year in credit….and let’s hope we don’t all have a massive headache on January 2nd…