Back from the brink

Back from the brink

Richard Conway Weekly bulletin October 2018
Following a brief flirtation with junk status, Italian government bonds have managed to cling onto their investment grade rating with Moody’s. Just. It looks to have been a pretty close-run thing. The credit rating agency downgraded BTPS to Baa3 (stable), the last rung of the investment grade ladder, on concerns around rising debt levels and weak promises of fiscal and structural reform.

Many had expected worse, and European equities were given some relief at the start of this week as a result of the news. On the face of it, this makes sense. As one analyst put it, “Uncertainty has been removed. This deserves to be rewarded with a good rally.”

A fine line for sellers

One would have to feel for the shorts who find themselves on the wrong side of the trade here though. The fiscal and political outlook would suggest that the decision by Moody’s was at the more lenient end of the scale, and that a deeper cut would have been justified. Indeed, their neighbours across the Ionian Sea might be feeling hard done by in comparison.

It’s awfully hard to get this kind of downside bet correct, especially when fundamentally bad news can be viewed as a compelling reason to buy. It is a very, very fine line.

Keener pricing from the banks

In the world of corporate credit, Tritax’s new €200m RCF jumps out as particularly keenly priced. The unsecured facility carries a margin of just 155bps for its five year term, with the option to add another two should lenders HSBC and BNP Paribas play ball. Tritax’s £300m fundraising in the summer certainly caught investor interest, with a quick google bringing up plenty of awkward stock images of people banging on doors – presumably a metaphor for oversubscription – and it would seem this enthusiasm has been carried across to the banking market.

This also underlines the fact that there are a lot of lenders out there who find themselves reasonably well funded with cash to put to work. In the UK at least, this has played out against a backdrop of increasingly tricky conditions in the capital markets, making bank funding relatively more attractive for borrowers.

Secondary market spreads on long-dated GBP corporate credits have drifted out from c. 130bps at the beginning of the year to over 160bps at the time of writing, while spreads of bank borrowing have compressed by more than 15bps over the same period. Net-net, that’s a big shift, and one which treasurers and finance directors will certainly not have missed.

Upcoming data releases

After a reasonably quiet start to the week, things should pick up from Wednesday onwards. Central bank decisions will dominate the agenda with the ECB, Bank of Canada, Russia and Turkey all due for an update. The ECB and BoC are reasonably easy to read, the latter two less so. In terms of growth, flash PMIs will provide a welcome update of the picture at the start of Q4 while US GDP figures should round off the agenda this Friday.

For more information, please contact Richard Conway, Associate Director at JCRA, at Richard.Conway@jcrauk.com.

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