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Going Out With A Bang

18 July 2019 by lberuti

Mario Draghi will leave the presidency of the ECB in a few months, and it appears he wants to go on a high. The ECB has apparently begun studying a potential revamp of its inflation goal, as Mr Draghi now favours a “symmetrical approach” which would give the central bank some flexibility to be either above or below its target (currently set at 2%). For instance, it would allow it to keep inflation elevated for a while after a period of weakness to ensure price growth is entrenched. When the report came out mid-morning, it pushed equity markets up and credit risk premia down. After some tentative weakness early on, credit indices gapped tighter. While iTraxx Main never recovered and ended the session within a whisker of its tightest level of the year, iTraxx Crossover rapidly found people interesting in buying protection. A number of its constituents have been trading poorly recently (Loxam, Casino, Thomas Cook, Boparan, Pizza Express were all wider on the day again) and the fact that the question of the default of Galapagos (a member of iTraxx Crossovere series 22 to 30 but not the current series 31) was officially asked to the ISDA Determination Committee yesterday probably did not help either. This set the scene for one of the biggest sessions of decompression we have experienced in a while. That phenomenon is often measured by comparing the risk premium of iTraxx Crossover to 4x the risk premium of iTraxx Main: it widened by 7bps on the day, and while it was trading at 25bps not long ago, it closed at 54bps tonight.

We Almost Forgot About It

16 July 2019 by lberuti

It had not grabbed any headline for quite a while, but today Brexit came back with a vengeance. The pound slipped almost 1% to 1.24 against the US Dollar. That is the weakest it has been since the end of Q3 2017. It effectively weakened against all major currencies as many investors fear Brexit negotiations could turn more hostile. Ursula von der Leyen, who was later in the day confirmed as the EU Commission President, said she was ready for a further extension of the Brexit deadline “should more time be required for a good reason”, but both contenders to the UK Prime Minister position toughened their rhetoric in a debate yesterday and said the so-called backstop plan to avoid a hard border in Ireland, considered essential by the European Union, would need to be scrapped. Many think it only leaves two options: no-deal Brexit or no Brexit. Caution was obvious in the credit market, and the risk premia of UK names were marked wider across the board. The most affected sector was financials, and, as you can see on the above grapple, there was not a single British bank that ended the session tighter. Their 5-year CDS were indicated 5% wider across the board, from Lloyds’ (+2bps @ 46bps) to Barclays’ and RBS’ (+6bps @ 93bps).

In The Can

15 July 2019 by lberuti

Usually when a private equity specialist is circling a company, it is rarely good news for its bondholders. But for once, despite the careful attention the Ontario Pension Fund paid to Ardagh, the bondholders of the latter ended better off at the end of the day. Actually, the fund was only really interested in Ardagh’s Food & Specialty Metal Packaging business. It will eventually merge it with Exal to form Trivium Packaging. The combined entity will operate 57 production facilities, principally across Europe and the United States, with roughly 7,800 employees. Upon completion of the transaction, Ardagh will hold a 43% in Trivium (the other 57% being in the hands of Ontario’s Teachers’) and also receive $2.5Bln. That windfall will be used primarily to pay down debt and bring down leverage. Ardagh’s 5-year risk premium, which had already gone down almost 90bps in June (it was worth 262bps on June 3rd), tightened 13bps to close at 168bps. It is now trading within touching distance of the tights reached 18 months ago.

Three Weeks Later

12 July 2019 by jbchevrel

German auto CDS started the session on the back foot today, with Daimler (DAIGR) CDS underperforming in EUR IG space, wider +5 vs Main31’s fair value -0.4, after the German automaker issued the second profit warning in just three weeks... That timeline (on its own) is worrying. And the downgrade sounds significant, DAIGR now guiding for FY-2019 EBIT “significantly lower” than last year. Strong word. The cut will filter through to cash flow as well, DAIGR now guiding FY-2019 industrial FCF no longer “slightly higher than 2018”. For reference, on June 23, DAIGR had moved EBIT guidance to “flat y/y” vs “slightly up y/y” on the back of higher provisions for various ongoing governmental proceedings and measures relating to diesel vehicles in Mercedes Vans. The structural causes for today’s guidance upward revision & provisions upward revion include: 1/ potential “extended recall in Europe and ROW in connection with Takata airbags”, provisions increased by +c€1B 2/ “ongoing governmental and court proceedings and measures relating to Mercedes-Benz Diesel vehicles”, expected expenses +€1.6B 3/ “earnings of Mercedes Vans in Q2-19” c+€0.5B 4/ “slower product ramp ups affecting product availability throughout 2019” esp. GLE model 5/ “lower growth than expected” in auto markets. The widening stopped, especially after the stronger-than-expected industrial production figures at the Eurozone aggregate level for the month of May (+0.9% MoM vs +0.2% MoM BBG consensus). Going forward, life cycle effects and model changes, which had been a headwind in Q1-19, could revert especially in Mercedes brand’s SUV segment, where the number of units sold went from 212k in Q1-18 to 179k in Q1-19. Daimler Trucks had shown solid numbers, but it is notable that the biggest growth region there was NAFTA (48k units sold in Q1-19 vs 41k in Q1-18), while Europe had stagnated, and Asia had declined... Going forward, however, it doesn’t bode well for DAIGR Trucks, as they had ‘just’ 101k incoming orders as of Q1-19 vs 184k as of Q1-18. This was driven mainly by NAFTA region (decline from 89k to 27k!), largely a reflection of the risk of tariffs on EU industrial products in North America. A risk that FOMC member Evans recalled this afternoon. DAIGR is currently As/A2s/A-s but the outlook for future margins might make rating agencies less generous. The 5y CDS remains in the low end of the post-GFC [30,200] range although the stock is near the lowest in 7y.