TwentyFour Blog

At the end of Q1 we were surprised by the solid pace of supply in CLOs, especially considering the challenging arbitrage dynamics facing issuers.

Last Friday’s strong US GDP reading for the first quarter has sparked several days of debate between TwentyFour portfolio managers. The 3.2% reading was 100bp ahead of consensus, so a strong beat at the headline level, but the components accounting for it, such as inventory building, suggested the figure was an aberration and likely to reverse in Q2.

Emerging Market (EM) bonds have had a good year so far. While they are not at the very top of the performance table, the hard currency CEMBI (Corporate Emerging Markets Bond Index) is up 5.69% in $ since the start of the year, and the EMBI (Sovereigns) is up 6.32%; not bad at all.

The cycle of banks calling outstanding capital bonds continued this week and we’ll soon be bidding fond farewells to two of our long held and favourite positions; Nationwide’s 6.875% Additional Tier 1 (CoCo) and Barclays’ 14% hybrid Tier 1.

The Bank of England’s credit conditions survey for the first quarter of 2019 was released last Thursday, coinciding with an extended holiday period for many commentators, but certain sections made for interesting reading and are worth highlighting.

The end of 2018 and beginning of this year has been a tough time for credit, but it has also created an opportunity for CLO managers to invest in good companies at cheaper prices.

They have been dating for some time, and been the topic of discussion at numerous dinner parties, even its good friend Covered Bond got hitched, but now RMBS has taken the plunge and tied the knot with Sonia (the Sterling Overnight Index Average), having finally ditched long-term previous partner, Libor.

Since the start of the year credit markets have been very well supported, reversing much of the sharp period of spread widening we experienced in the final quarter of 2018.

The ECB published the result of its Supervisory Review and Evaluation Process (SREP) yesterday, which increased the average capital requirements for European banks, and overall, increased the average SREP requirement by approx. 100bps.

Deoleo is a Spanish olive oil company that people will know from its brands like Bertolli. It’s long been considered to be one of the “idiosyncratic” stories in the European leverage loan market. The deal has an 85m revolver, a 55m second lien tranche and widely traded 460m senior secured tranche.

One of the challenges that banks face when considering the re-financing of AT1 capital is market timing. Treasurers have to answer the question whether to issue when market conditions are supportive, which may result in a considerable period when they have two overlapping securities (adding to their interest overhead); or wait to refinance just before the call date, which of course increases the risk of having to issue in a market demanding more punitive terms.

The period following the full year results releases from the banks is typically followed by large volumes of subordinated bond supply from the banks. This year is no exception as the pace of new issues is ramping up, in particular in the higher beta Additional Tier 1 (AT1) securities; colloquially known as Coco bonds. Already this week there have been new benchmark issues from BBVA, Barclays and BNP, taking 2019 issuance to date in this sector to a total of €14 bn.