Europe primary bond markets recover as credit risk eases

London

EUROPEAN gauges of credit risk eased enough to tempt the first borrowers back to primary bond markets in nearly a week on Tuesday.

While Asian markets continued to reel, the cost to insure the debt of European investment-grade (IG) companies against default fell from the eight-year high seen a day earlier. The improving mood prompted a trio of borrowers to open sales of new top-rated covered bonds.

However, covered bonds are among the safest of debt securities because they are backed by ring-fenced assets, usually mortgages. That means the emergence of three deals in Europe is unlikely to signal an imminent rush back to market.

"A few days of stability and a heightened new-issue premium," is needed for more borrowers to return to the market, said Henrik Johnsson, global co-head of capital markets at Deutsche Bank AG, in a television interview with Bloomberg News. The impact of the coronavirus on markets "has much further to run".

Royal Bank of Canada is offering a euro benchmark-sized sale of covered bonds due in five years at 40 basis points (bps) above midswaps after failing to tighten pricing from an opening target. TD Bank and Canadian Imperial Bank of Commerce have both opened books on floating-rate sterling sales.

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The partial recovery in European credit stands at odds with an ongoing slump in Asia where US dollar bond spreads hit the highest in over eight years and new debt sales remain shuttered. Funding markets in Australia and elsewhere remain pressured despite steps to increase liquidity.

Separately, more corporations including Kraft Heinz Foods Co, Caesars Entertainment Corp and MGM Resorts International are starting to tap back-up loans as governments put entire countries into lockdown with far-reaching economic consequences.

Airlines are trying to line up billions of dollars in loans as an aviation consultant warns that most of the industry could be bankrupt by May. As part of its efforts to support companies hurt by the pandemic, Korea Development Bank extended funds to three low-cost carriers: Tway Air, Air Seoul and Air Busan. In the US, more than 30 power and energy companies are in talks with banks to discuss raising new financing or drawing down on their existing loan facilities.

Still, measures like enforced working from home and school closures pose "major operational challenges for all market participants", according to Commerzbank AG fixed income analyst Michael Weigerding.

Euro high-grade bond spreads closed 10 bps higher Monday at 191 and the highest since September 2012. Almost three-quarters of euro IG company bonds are indicated at their lowest level in a year, data compiled by Bloomberg show. Euro high-grade company bond yields have nearly quadrupled in three weeks and now stand at about 1.26 per cent and the most since January 2019.

Asia currency declines are exacerbating problems for lower-rated companies, with a 4 per cent drop in the Indian rupee versus the US dollar in the last month threatening to increase debt servicing costs for companies that face a record US$7.5 billion of overseas bonds and loan repayments from April-June.

Spreads on Asia dollar bonds were about 5-20 basis points wider on Tuesday morning, with wide bid-offer spreads, according to a trader. That leaves spreads set to reach their highest in more than eight years, according to a Bloomberg Barclays index Still, the Markit iTraxx Asia ex-Japan index of credit-default swaps fell about 6.5 bps to about 137, according to traders, easing from its highest level since 2016, according to data compiled by Bloomberg.

Australian funding markets remain stressed even as the country's central bank pours record amounts of liquidity into the system. The three-month bank bill-OIS spread is holding at levels last seen a year ago amid the trade war.

US investors are pricing in greater recession risk once again. The Federal Reserve's latest emergency cut added to what has been an "epic fail" in Washington to respond to the economic impact of the virus, according to Peter Tchir, head of macro strategy at Academy Securities.

While the Fed is buying more Treasuries and mortgage-backed securities, it failed to support the commercial paper market, which is already seizing up, as well as the front-end of corporate bonds, Mr Tchir said.

Companies including Berkshire Hathaway and Edison International are said to be discussing new financing with banks or drawing down existing loan facilities; Berkshire denied that it is in talks for a US$3 billion term loan in a reply to questions from Bloomberg News. BLOOMBERG