Some say the top of the last bull market was easy to pinpoint. It was the day when the smartest deal makers in the world, known for cashing in by taking businesses private and reselling them to the public, sat at the end of a long oak table and told you to buy their own firm. That was the time to get out.
Private equity merchants Blackstone listed in a $US4 billion IPO in June 2007. The rest is black history. This week, Blackstone was back, tapping the bond markets for $US600 million of 10 year bonds, taking advantage of an incredible surge in demand for corporate bonds. Blackstone received over $US3 billion of bids as corporate bond investors scrambled for paper, allowing it to price well inside of guidance.
Time will tell if Blackstone’s deal was as ‘impeccably timed’ as its share offer was, over two years ago. It does, however, raise the question as to sustainability of credit’s rally and the window of opportunity to raise funds through a resurgent corporate bond market.
While Blackstone’s issue was well supported, there were some signs that demand for corporate bonds is waning. A single basis point slide in Merrill’s corporate bond index brought an end to a 23 day rally in cash bonds, while high yield bonds widened for three straight days after 16 positive sessions.
Credit indices also trended wider this week. The US’s CDX index was 10bps wider for the week by Thursday’s close while the Euro Main index was steadier trading around the 90 mark.
For the time though, the sector remains resilient with bearish traders too reluctant to bet against a general tightening bias. While the summer lull is slowing the supply of paper, those that do print deals are welcomed emphatically.
"I expect this risk rally to continue into – and maybe through – a large part of August. What happens after that? The next ugly leg of the bear market begins as we get into the July through September 'tipping zone', driven by the failure of the data to validate the V (shaped recovery) that is now fully priced into markets," said Bob Janjuah, RBS’s chief credit strategist.
The performance of corporate bonds is attracting more widespread attention. Some equity analysts are watching for a slowdown in demand for corporate bonds, which has allowed companies to access funds at fair levels, for warning signs of a pullback in stocks. Plus credit markets have good brand as fortune tellers, having sold off sharply before equities came crashing down in 07.
The Bank of England has made a ‘mint’ from its corporate bond portfolio. As part of its quantitative easing initiative to boost liquidity, it piled into the sector in March and its portfolio is now up over 10 per cent prompting analysts at Evolution Securities to suggest it start operating as a hedge fund.
China however is perturbed by the rally which it says has made yields too low. It plans to set a minimum yield of 4.2 per cent for five year bonds to encourage investors to the market and wean companies off bank loans. There’s an idea.
Aussie credit still strong
The rally in Australian credit is showing few signs of weakness. While the Aussie iTraxx had snapped back to the 150 mark mid week, it recovered to trade back around 140bps. Corporate credits were helped by solid earnings from local market bellwethers CBA, BHP and Telstra who all reported multibillion dollar profits and strong capital positions.
New deals are continuing to come thick, fast and tight. This week saw two Kangaroo trades print well inside levels seen at the start of the year while Westpac raised a healthy $2 billion of five year senior debt at 35 basis points cheaper than they would have done a month ago.
The guaranteed space has also seen significant spread compression. Investors paid only seven basis points more for guaranteed bonds issued by 'BBB' rated Members Equity than they did for 'A' rated Citigroup. That premium is smaller than the 10bps investors demanded for bonds issued by Heritage Building Society versus like-rated regional Bank of Queensland. Both deals were printed in early July, and have since tightened by 20 to 25 basis points.
Domestically, the week ahead is another heavy one for corporate earnings but with corporate bond issuance all the range, we could start to see some of Australia’s top companies capitalise on credit’s incredible run.
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