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Relative Value Opportunity?

23 June 2017 by lberuti

We discussed yesterday the move of the cost of insuring debt issued by operating companies of Swiss and UK banks, which collapsed after IHS Markit announced such Credit Default Swaps would not be included in future series of iTraxx indices. The move affected CDS referencing senior and subordinated debts, and investors were already baffled by its magnitude. But it was nothing compared to today’s bloodbath. People sold protection on senior and subordinated debt, as if there were no tomorrow. Swiss and UK names were the most affected, but no name escaped the rage, and every single risk premium in the financial sector, banks and insurers alike, was indicated tighter at the end of the day. What started with a purely technical situation – the risk of illiquidity of some CDS coupled with some orphaning worries – turned into broad-based capitulation for no obvious reason. iTraxx Financials Subordinated, which traded at 155bps a couple of days ago, closed at 124bps tonight, a move only seen in the recent past after the first round of the French presidential election, when investors celebrated the quasi certain win of the most euro friendly candidate. Next week should see plenty of relative value trade ideas put in front of investors by their favourite dealer.

Rules Are Changing

22 June 2017 by lberuti

“Following consultation with markets participants and the iTraxx Europe Advisory Committee, HIS Markit has decided that, subject to changes to market infrastructure (in particular clearing) being implemented in time, Itraxx Europe Series 28 will be issued in September 2017 under revised index rules. UK and Swiss banks will be included in the new index Series at HoldCo Level for the Senior and Subordinated Financial Indices.” The above press release by Markit triggered a massive reaction on UK and Swiss banks CDS which currently reference bank operating companies. Investors anticipated that the liquidity of OpCo contracts will be hampered going forward, and, despite that, except for CS ( Credit Suisse Group AG ) - an entity for which CDS already reference the HoldCo -, CDS referencing banks’ HoldCo are not commonly traded at the moment leaving them without any alternative hedge, they decided to dump protection aggressively. CDS referencing the OpCo of Barclays, HSBC, Lloyds, RBS, Standard Chartered and UBS were sent 14bps, 9bps, 10bps, 13bps, 14bps and 9bps tighter at 43bps, 30bps, 39bps, 52bps, 49bps and 27bps respectively. iTraxx Financials is now trading roughly flat to iTraxx Main – it was 13bps wider mid April – and iTraxx Main further outperformed CDXIG.

Mind The (Growing) Gap

21 June 2017 by lberuti

General market sentiment softened yesterday as oil prices took a leg lower, taking them into bear market territory : WTI is down more than 20% from its January high. Oversupply fears continue to linger. They stem from US shale, but also from rising production in Nigeria and Libya, two OPEC countries that are exempt from the production cut agreement. That weighted on the energy heavy US indices, which, after an indifferent start to the session, started to move wider as soon as oil proved unable to stabilise. CDX IG closed 1bp wider at 62bps. At the same time, European indices benefitted from the news that ISPIM ( Intesa Sanpaolo SpA ) came forward with an offer to take on the assets of the two troubled banks in Italy’s Veneto region on condition that it does not have to pay more than a token price and that the deal does not harm its own capital and dividends. The news gave a boost to the financial sector which outperformed the rest of the market and allowed iTraxx Main (ITXEB) to tighten on the day by 1bp to 55bps. The differential between ITXEB and CDXIG now stands at 7bps, the widest it has been since the last energy crisis at the beginning of 2016.

European Retailers Go Shopping

20 June 2017 by lberuti

Together with their new bond issue at the end of May, COFP ( Casino Guichard Perrachon SA ) announced they were redeeming some of their existing debt. Yesterday, TSCO ( Tesco Plc ) followed suit and surprised the market by announcing a tender offer of some of its outstanding GBP, EUR and USD bonds. The buyback will amount to a maximum of GBP500mln and cover bonds maturing between 2029 and 2057, even though the main targets are TSCO’s $300mln 6.15% bond due in 2037 and their €600mln 5.125% bond due in 2047. Combined with GBP1.7Bln of bonds maturing in 2017, the gross debt reduction could amount to more than GBP2Bln for the fiscal year 2017/2018, and would add to the GBP1.5Bln cut achieved in 2016/2015. Since the tender announcement, TSCO’s euro denominated 2047 bond has tightened by roughly 30bps. It mechanically compressed yields of other maturities, and TSCO’s 5-year risk premium tightened by 13bps to 148bps tonight. It benefitted the whole sector in Europe, which, far from suffering from the Amazon effect which has rocked US retailers, trades at its tightest level of the year