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18 September 2019 by jbchevrel

Telenor ASA (TELNO) is an international TMT (~70% revenue is from mobile operations) present in 13 European/Asian markets but the dominant historic player in Norway (formerly ‘Telegrafverket’). TELNO came to the bond market (€1.5b debt across 3 bonds: 4y 8y 12y €500m each) for the 2nd time in 4 months (they had sold €2.5b debt in May already), to finance the acquisition of its Finnish rival DNA Oyj (54% of it for €1.5b, but then triggering a mandatory tender offer for the remaining 46% expiring Sept 26). The purpose of this issuance therefore seems mainly to finance this mandatory tender offer but not only, as TELNO will also repay the €750m 4 1/8 Mar20s. The CDS notably underperformed the € IG CDS universe today. Indeed, the 5y spread came wider +6bp vs Main s31 index slightly tighter -0.2bp and Main s31 NAV slightly wider +0.6bp. The TELNO 5y mid went from 15.5bp to 21.5bp so quite a big relative move (+38%). And indeed, the pricing came +40bp above € swaps for the shorter bond issued today (4y or Sep23s), guidance had been +40/45bp. In April Moody’s IS had affirmed A3 post offer on DNA, but last week (Sept 8) S&P GR downgraded TELNO to A- from A on that debt-financed DNA deal and on the back of weaker than expected performance in Asia. On that last point. It is worth recalling that indeed the last results (Q2 – reported in July) were soft. The revenue miss was mainly driven by Pakistan and Norway at both revenue and EBITDA levels. In brief, the weakness is Pakistan was due to the new data tax there, which had been dropped previously but was reintroduced even worse than before... Now that S&P GR made the move, all eyes are on Moody’s, looking for a potential change of stance.

Italia Viva

17 September 2019 by jbchevrel

Today Italian banks underperformed in not just the iTraxx Senior but also in the Main. UCGIM, ISPIM and BACRED saw their 5y CDS widen by ~+4bp in senior and +7/+8bp in sub. That echoed a notable underperformance of BTPs, wider ~+10bp vs Bund on the 10y, after former Italian PM Matteo Renzi declared in an interview with La Repubblica that he is leaving the democratic party (PD) to create his own one ‘Italia Viva’ (ironically enough meaning ‘Italy is alive’). The market assessed a higher probability of the current coalition collapsing, which sounds fair, especially going from tight absolute levels (yday close -- BTP/Bund ~130 Italy $14 ~117). It seems like an early comeback for Renzi, less than 3 years after the constitutional reform debacle. According to the local press, ~30MPs will follow him and he should be starting at ~5% in the polls. Renzi said that in the short term he would continue to support the recently built PD-Five Star Movement coalition. But. To be honest. I struggle to see where in the Italian political landscape Renzi could build enough support to play it alone, here. Because it looks like the main place (to not say the only place) where Renzi can gain support from is the PD he just left. Forza Italia is closer to the right end of the spectrum than to the center-left, and almost all its voters seem to have gone for Lega or Fratelli d’Italia (FDI) anyway... Forza Italia is polling ~6% compared to Lega ~35% and FDI ~8%. Lega/FDI voters are highly unlikely to switch to Renzi, and Five Star Movement (5SM) voters are less likely to shift to Renzi than to an ex-Renzi PD, the latter being (rightly) perceived as more left and undoubtedly less in a rush for constructive structural reforms. Renzi probably hopes to achieve what Macron achieved back in 2017, but a key difference here is that the sum of the poll-derived supports for ‘populist’ parties is much higher than it was in France, back then: Lega + 5SM + FDI totaling ~55% while in France in 2017, populist parties were totaling ~40%. Adding to that, the perception that Renzi has already been in charge. Bottom line, if the polls remain around here, it should not make sense for Renzi to break away from the PD-5SM coalition. Adding to this, the upcoming CDS roll and the fresh net purchases from the ECB side (€20B/month total APP – so ~€2B/month Italy), I would be tempted to think that any relative widening of the Italian complex (sovereign, fins) is poised to remain contained. Elsewhere in Italy, the other respective departures of CEO Castellucci (from Atlantia – ATLIM) and De Rossi (from AS Roma) have been dominating the local headlines. As far as the former, ATLIM 5y CDS has been trading sideways since last March roll, in a 100-150bp range, and it closed right in the middle today, at 125bp.

On Fire

16 September 2019 by jbchevrel

Today the energy sector outperformed US CDS, thanks to soaring crude prices. Over the weekend, Iranian drones launched from Southern Irak (despite first claimed by Yemen Houthis) hit key Saudi oil facilities after flying over Kuweit. Those strikes triggered the biggest one-day rise in crude prices since 1991 Gulf War (it came +c20% before paring ~half, now +14% on Brent and WTI), as they removed c5% global supplies. In the US/Canada IG space, HES -11.5 APA -11 ECACN -9.5 led outperformance and the 14/125 best performing names in the index are energy-focused. In HY space too, WLL CHK RIG NBR led gains. The move in crude prices didn’t really impact positively the CDX EM s31 constituents that rely on oil exports. SAUDI logically underperformed, the 5y CDS is wider +5.5bp, followed by Qatar +3.5. In CDS index space, it is worth noting that the CDX HY outperformed CDX IG (on a 1:4 basis) by 4.5bp and the CDX IG outperformed the Main (on a 1:1 basis) by 0.7bp. This is based on our London close. The initial jump in crude futures had first reverted, but the prospects or prolonged disrupted supply has propelled prices up, after our close. For now, roughly half of the Abqaiq output is cut, and it may take months before Aramco operates Abqaiq again at its full capacity.

Deutsche Banken

13 September 2019 by jbchevrel

Today the sentiment toward German banks was boiled by the € core rates bear steepening move (DBR 2y +1.5 5y +4 10y +7 30y +10.5 and there is no 50y *yet*), adding itself to the prospects of saving costs from the ECB-announced tiering thing. Commerzbank (CMZB) saw its stock rise about +6% and Deutsche Bank (DB) rose more than +3.5%. In our space, DB SLAC 5y CDS is back to 140bp area from ~210bp at the beginning of this summer. DB SUB is back from 440bp area to 300bp area over the same period. CMZB SLAC 5y CDS is back to ~60bp from ~100bp and CMZB SUB is back from ~210bp to ~130bp. A JPM note cited by BBG highlighted that DB will save c€200m per year thanks to tiering (~10% of future expected PBT, for the year 2020..) and CMZB will save c€100m (~6% of expected 2020 PBT). Those figures look high, so what is the full piece of cake size? So far, recourse to €CB depo facility (~€600B) and current account holdings (~€1,300B) were charged -0.40% if not part of required reserves (~€130B), i.e. excess reserves are c€1,800B. ECB-announced ‘six-time’ means c€800B will be at 0% instead of new depo rate (-0.5%) from Oct 30th this year. The remaining ~€1000B will be charged -0.50%. So the annual cost of the ‘Draghi tax’ came from ~€7B per year to ~€5B per year. The full piece of cake (for the whole €system banks) is therefore ~€2B per year. The two German lenders are (optically) getting the biggest benefit having relatively higher ECB deposits subject to new rule and among the weakest profitability, if measure by ROTE. It is worth noting that the outlook does not look great, although the pricing for further cuts and the tiering thing help price action in the short term. It is also worth mentioning that the amount ‘saved’ by €system banks per year will inevitably erode as excess liquidity grows further (mainly due to APP2 announced yesterday – basically €240B/year and to a lesser extent due to TLTRO). Going into next week, all eyes will shift to the US, where the Fed gathers next Tuesday/Wednesday, after the 10-year US Treasury rates have soared 20bp over the past 24 hours or so (!). The priced in Sep 18th hike is pretty much intact but what a bear steepening in the H1-2020 part of the curve. June-2020 came from 110bp a week ago to 145bp. Leading indicators having been weak, the consensus around the probability to see an US recession in the next 12 months is still not great: 35% (BBG tracker) 38% (NY Fed) 44% (Cleveland Fed).