20 January 2015 by lberuti
One of the trades people are currently looking at is decompression. It should work in a bearish scenario. And even if the widely anticipated ECB quantitative easing triggers some further spread tightening, there are mitigating factors. Although it is not clear whether the ECB will end up buying corporate bonds, if it does, it will center on the better quality credits and this aspect should benefit investment grade considerably more than high yield. But in the meantime, the nerves of investors who have implemented this strategy through indices in Europe have been tested by the recent news flow. There were some orphaning stories in iTraxx Crossover, and a few moves that took place on the back of M&A stories, particularly companies being IPOed. The telco industry has been the most fertile sector in that respect with the recent example of SUNCOM (Sunrise Communications), but today was all about SHAEFF (Schaeffler). An article in the press suggested the company could IPO its ball bearing division (more likely part of it), which is valued at €13-15bln. They do not really need the cash given their positive FCF, but it could be used as a currency for M&A. So there is a decent probability that the proceeds might not be used towards deleveraging the company, but the market sent SHAEF’s risk premium 30bps tighter to 144bps nevertheless.