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Can Two Weaks Make A Strong?

16 January 2019 by lberuti

A few months ago, German officials said that they would view favourably a tie-up between DB (Deutsche Bank AG) and CMZB ( Commerzbank AG), as the idea of a banking national champion appealed to them. But today, the European Central Bank said that it favours cross-border combinations to drive integration in the region’s financial markets. An analysis by BaFin, the German regulator, suggested a preference for European deals because the two domestic banks are currently too weak to benefit sufficiently from a merger. That analysis seems in line with what DB’s management think. Indeed, towards the end of last year, they apparently came to the conclusion that a merger with UBSGRP ( UBS Group AG ) would be the most favourable option, but that the timing was not right given the German bank’s share price. Investors expressed relief at the thought the two ailing institutions could not merge after all and find more robust partners instead. DB’s 5-year risk premium closed 12bps tighter at 189bps and CMZB’s closed 8bps tighter at 112bps.

Are They Listening?

15 January 2019 by lberuti

Banks kickstarted the US earning season. Today was JPM’s ( JPMorgan Chase & Co ) turn. During a call with analysts, Jamie Dimon, the CEO, warned that a prolonged government shutdown could completely stop economic growth in the US. That part did not really register with market participants who sent all risky assets roaring higher – credit was no exception with iTraxx Main and CDX IG both closing 1bp tighter -. Rather, they first focused on a rare miss in earnings - $1.98 per share against the $2.20 people were expecting – which were dragged down by a 16% decrease in bond trading to roughly $1.8Bln, the lowest since the financial crisis. It came right after C ( Citigroup Inc ) reported yesterday a steep decline in fixed income trading as the Fed raised rates and volatility spooked credit investors, which could be a worry for banks that rely more heavily on their investment banking division. It weighted on JPM’s risk premium that was indicated a few bps wider, but it was eventually caught by the general sentiment and finished 2bps tighter at 68bps. That said, since early October, it has almost doubled, and the widening trajectory has not been interrupted yet.

As Good As Gone

14 January 2019 by lberuti

NEWLOK’s (New Look Senior Issuer Plc) bonds fell roughly 15pts after the U.K. apparel chain said it had reached an agreement with its bond holders to restructure the £1.5Bln its owes its creditors. They will forfeit their claims in return for new bonds and a majority stake of the restructured business. The current owners, private equity group Brait SE, will hold 30% of the company once the transaction goes through. Eventually, NEWLOK will have £350mln in long term debt and a £150mln in new bonds which will be issued. After the operation, the company’s debt will pay 12% in annual interests which will be partly payable in kind (NEWLOK will have the possibility to skip cash payments by adding more debt to the principal amount). Investors were not expecting the restructuration of the debt to happen that soon, but the retailer cited weak business conditions over the Christmas as the catalyst after it was left with less cash than expected to service its debt. The probability of default over the next 5 years was already very close to 100%. Today’s price action on NEWLOK’s CDS pushed the 1-year probability at 79%. Nobody is betting on the company seeing another Christmas in its current form.

More Horsepower Under The Hood

11 January 2019 by jbchevrel

General Motors (GM) CDS has gone tighter by 15bp on surprise earnings forecasts. That move makes the CDS tighter c50bp since Jan 3 peak. Cash was also 10-15bp tighter, and stocks jumped up to 9%, which was about half their ’18 loss. That follows the cost cuts announced in November. According to the CFO, those cuts should boost ‘19 earnings by $2.0-2.5B and ’20 earnings by another $3-3.5B. This development came as a surprise in a challenging context for the auto industry. The sector was one of the favourite shorts of late 2018. Despite the volatility on the name, ICE-reported open interest has been relatively stable in late ’18 / early ’19, at around $2B. In parallel, Ford Co (F) spreads improved by c6bp following yesterday’s c15bp rally after the news they would cut their European staff. Elsewhere, US IG credit was globally little moved. Based on London close, US IG single names are ranging -5/+3 while the CDX IG index is flat.