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Same Old, Same Old…

20 October 2017 by lberuti

When you comment financial markets at the moment, the risk of sounding like a broken record is real. There is currently nothing stopping Stockzilla, and it is relentlessly dragging risky assets higher across the board. While the S&P reached a new record high today, credit indices closed at their tightest levels for the new series… again. Yesterday’s blip now seems a distant memory, and except lamenting on the lack of volatility, one could also be tempted to comment on NSANY ( Nissan Motor Co Ltd ) which was today in the news for all the wrong reasons, even if it sounded all too familiar. It is both another example of a scandal hitting a Japanese corporate – we have heard of the woes of KOBSTL ( Kobe Steel, Ltd ) a few weeks ago – and another example of a scandal hitting a car manufacturer – today we also heard that the office of BMW had been raided this week by EU watchdogs as part of a cartel investigation -. Uncertified technicians have conducted vehicle inspections, even after a previous disclosure of the practise led to a major recall. Production will be suspended at all the company’s Japanese factories until further notice. NSANY’s 5-year risk premium is still a meagre 43bps, but that is twice its level 3 weeks ago.

Heading Towards A Minsky Moment?

19 October 2017 by lberuti

After the option expiry that took place yesterday, credit indices were once again “free to trade”. After being pinned at 55bps during a couple of days, iTraxx Main was on the move today after some macro news weighted on investors’ sentiment. In the morning, the Spanish government announced that they will move forward with the process of suspending the powers of the Catalan administration after regional President Carlos Puigdemont refused to shelve his claim to independence. It has to be said that it was the base-case scenario of many investors, as evidenced by the resilience of Spanish government bonds which only widened a few basis points over bunds. So, even it contributed to credit indices widening, the main cause was probably to be found in the comment regarding leverage ratios and assets’valuation made by PBOC governor’s at an event on the side-lines of the 19th Communist Party Congress in Beijing. "If we’re too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a Minsky Moment. That’s what we should particularly defend against." It seems it was enough to dent investors’ confidence a little on the 30th anniversary of Black Monday.

Gone With Wind Tre

18 October 2017 by lberuti

The much-awaited refinancing of Wind is finally under way. The company began today the marketing of a jumbo transaction. Bonds issued will amount to €7.3Bln split between 5 different tranches consisting of USD and Euro notes, with maturities ranging from 5 to 8 years. It will be the biggest junk-bond sale by a European borrower since Numericable Group and Altice SA sold the equivalent of more than €10Bln in April 2014. The company should use the proceeds to repurchase existing outstanding notes. The operation will help Italy’s largest mobile-phone company to cut its debt expenses as borrowing costs are near record lows. Even though the deal is expected to be well received - Wind is a well-known name, and there will be demand by investors to replace their existing bonds holdings -, given the sheer size of the deal, you would expect some kind of pressure on Wind’s 5-year CDS. But there was a catch. The new debt will come out of Wind Tre Spa, and not WINDIM (Wind Acquisition Finance SA). There will be a guarantee, but market participants are of the opinion that the language does not satisfy the unconditionality and irrevocability that would make the new bonds deliverable into existing WINDIM CDS. WINDIM could therefore join the cohort of orphaned names referencing empty boxes. Its risk premium collapsed and finished the session 52bps tighter at 94bps.

Not Out Of The Wood Yet, But…

17 October 2017 by lberuti

PSON ( Pearson Plc ) gave a trading update this morning, which went down well with investors. Despite challenges (revenues fell 2% in the first nine months of the year), owing to the relative strength of the US higher education business as digital revenues increased 11% and the division rallied from last year’s unprecedented slump, the company was able to narrow its full year guidance towards the upper end of its previous estimates. 2017 cash flow and the bottom line will benefit from lower taxes (16% versus an initial 21% guidance) and from a reduction in financial expenses. Net debt at the end of the third quarter was a touch lower than it was at the end of 2016, even before taking into account the sale of PSON’s 22% stake in Penguin Random House finalised in October, thanks to good cash-flow generation and the off-loading of the Global Education Business. Also, a third of the publisher’s pension liabilities were off-loaded to Aviva and Legal & General through a bulk annuity deal. There is still some way to go improve the metrics to levels that are commensurate with the current BBB rating, but the commitment of the management to improve the balance sheet was rewarded with a further reduction of PSON’s 5-year risk premium to 88bps, almost 60bps off the peak reached at the very beginning of 2017.