Largely positive single-name credit news in the European high-yield bond market has been overshadowed during the last couple of weeks by the latest bout of volatility and spread widening in global credit markets.
The sell-off, which began at the beginning of March, was further exacerbated by S&P’s downgrade of both Ford and GM to junk earlier this month. The volatility surge culminated last week as iTraxx spreads moved sharply wider following speculation of hedge fund unwinding of correlation trades. The index ballooned to 475bp before snapping back to below 400bp on the back of short-covering led in part by a fall in equities. By contrast only some parts of the cash market were tighter, and some high beta names were marginally wider. CCC rated names benefited the most, while Bs were unchanged and BBs around 20bp wider.
According to the JP Morgan Euro High Yield index, year-to-date Double B rated credits have outperformed Triple Cs by more than 5% on a total return basis, and by 180bp in spread. Mark-to-market accounts were worst hit because they were bigger buyers of lower-rated credits.
Despite two reasonably strong performances at the end of last week, the near-term direction of the market is difficult to gauge. While fundamentals remain positive, the technical picture is likely to dictate moves over the short term. The question is whether spreads are wide enough to tempt real money investors that have been lurking on the sidelines back into the market.
According to one fund manager, the market is looking more attractively priced, but there is a general unwillingness to become involved given the possibility of further volatility.
Another issue is the muddied technical picture. “We think that until GM is fully included in major high-yield indices (GM is included but the larger GMAC is not), real money investors will sit on the sidelines until the technical picture becomes clearer,” BNP Paribas said in a report.
In terms of primary, no deals have priced since Kloeckner launched its €260m LBO bond on May 4, and the forward calendar looks light, although underwriters continue to boast of “heavy” internal pipelines. The fear is that with the secondary market offering value at current levels, investors are likely to demand a heavy premium on new issues when the primary market re-opens.
And it could be worse. “If they can buy paper in secondary at attractive prices, investors are going to be more unlikely to look at new deals, however attractive the coupon,” said one syndicate banker.