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Tension and Relaxation

15 August 2017 by pdonnat

Last Tuesday, New Look Retail Group Ltd. released its quarterly results. The EBIDTA was much weaker than expected by credit investors, down 40% y/y. The cost of credit protection jumped by 10% from 38% upfront plus 5% per annum to 48% upfront plus 5% per annum. The initial move was due to many forced risk sellers like the CLO managers. The CDS stabilized at 50% upfront despite the market sell-off at the end of last week. Some distressed investors started to look at the risk reward in selling such a high premium. The other UK retailers traded better today with indication on progress on the Brexit negotiation. The attached grapple displays the 5Y forward implied probability of default of the last 3 years. The pattern is quite impressive with spikes followed by recoveries. The trend for New Look is not positive. However, with an 80%-90% probability of default over the new five years, the risk is on the short side. Cycles of tension and relaxation could succeed one to another again in the coming months.
Meanwhile, the credit index market was better bid. The European investment grade index is closing wider while other risky assets withstood better the lack of activity due to the Assumption public holidays in many continental European countries.