2020-04-04 IFR Magazine

International Financing Review April 4 2020 53

STRUCTURED FINANCE

two sectors battered by measures to curb

virus transmission.

/VERALLû#-"3ûTRADINGûANDûLIQUIDITYû

remains spotty, keeping spreads of the

lower-rated paper at levels similar to those

for junk bonds.

For example, spreads on BBB– rated

CONDUITû#-"3ûTRANCHESûWEREûQUOTEDûATû

BPûWHICHûWEREûBPûWIDERûTHANûAû

week ago and 498bp wider than a month

earlier, Deutsche Bank analysts said.

Markets players are hoping the Fed

would open up its emergency lending

programme, the Term Asset-Backed

3ECURITIESû,OANû&ACILITYûTOû#-"3ûLIKEûITûDIDû

DURINGûTHEûlNANCIALûCRISIS

“The lending market remains frozen

pending some information on TALF

EXPANSIONûTOûNEW

ISSUEû#-"3vû$EUTSCHEû

Bank analysts said on Wednesday. “Near

TERMûTHEû&EDûMUSTûMAKEûSUREûTHATû#2%û

lending avoids a credit crunch.”

US ABS

US ABS MARKET LEFT BEHIND AS

BORROWING GOES ELSEWHERE

4HEû53ûASSET

BACKEDûSECURITIESûMARKETûWASû

LEFTûINûTHEûDUSTûINûTHEûlRSTûQUARTERûASû

primary activity ground to a halt while

companies rushed to borrow at a record

pace from the corporate bond sector amid

the coronavirus pandemic.

!"3ûBANKERSûINVESTORSûANDû

analysts cited a variety of factors for

THEû53TRNûSECTORSûISSUANCEûLAGGINGû

behind its unsecured, investment-grade

counterpart.

Corporates have largely rushed to the

unsecured bond market to raise cash

quickly, with no clarity on when the virus

WILLûBEûBROUGHTûUNDERûCONTROLûINûTHEû53

“Companies are just trying to be smart

with their balance sheets. They want to

build up their liquidity buffer,” said Eric

3OUZAûSENIORûPORTFOLIOûMANAGERûATû36"û

Asset Management.

For bankers, corporate bonds tend to be

faster to assemble for sale than securitised

debt, market participants said.

!"3ûISSUANCEûTOTALLEDû53BNûINû

THEûlRSTûTHREEûMONTHSûOFûûDOWNûFROMû

53BNûFORûTHEûSAMEûQUARTERûAûYEARû

EARLIERû)&2ûDATAûSHOWED

On the other hand, companies raised a

RECORDû53BNûFROMûTHEûINVESTMENT

GRADEûBONDûMARKETûINûTHEûlRSTûQUARTERû

COMPAREDûWITHû53BNûFROMûAûYEARû

ago.

Companies are also responding to

demand for long-dated corporate bonds,

RATHERûTHANûOFFERINGû!"3ûWHICHûTENDSûTOû

carry shorter maturities.

Investors also remain worried about

bond funds dumping more securitised

paper especially those backed by riskier,

less liquid assets, to meet redemptions and

margin calls.

FED BACKSTOP

4HEûBIGGESTûHURDLEûFORû!"3ûISSUANCEûTOû

resume may be the Fed itself.

The central bank is in the process of

relaunching its Term Asset-Backed

3ECURITIESû,OANû&ACILITYûTHATûCOULDûFUNDû

53BNûINû!"3

Market players are awaiting details on

the latest version of this programme,

which was originally created during the

nûGLOBALûlNANCIALûCRISIS

h3INCEû4!,&ûWASûANNOUNCEDûTHATû

HASûACTUALLYûPUTûAûPAUSEûONû!"3û

PRIMARYûACTIVITYvûAûSENIORû!"3ûBANKERû

SAIDûh4HEû&EDûHASûTOûRELEASEûITSûlNALû

details.”

3OMEûPLAYERSûSAIDû4!,&ûMIGHTûNOTû

be operational until mid-April at the

earliest.

4HEûSENIORû!"3ûBANKERûSAIDûPLAYERSû

would pore over TALF’s latest details after

they are released before committing to

selling and buying paper backed by the

programme.

4HISûMAYûMEANû!"3ûISSUANCEûWOULDûNOTû

resume in a meaningful way until late

April to early May, he noted.

GRADUAL IMPROVEMENT

3INCEûLASTûWEEKûCONDITIONSûINûTHEû!"3û

sector have improved as investor demand

has returned in the secondary market,

tightening spreads from their widest levels

SINCEûTHEûlNANCIALûCRISIS

h3PREADSûAREûSTILLûIMPROVINGûFORûTHEûMOSTû

liquid asset classes,” said John Kerschner,

HEADûOFû53ûSECURITISEDûPRODUCTSûATû*ANUSû

Henderson.

3PREADSûONû4RIPLEû!ûAUTOû!"3ûWEREû

QUOTEDûATûSWAPSûPLUSûBPnBPû

which were sharply tighter than a

range of 300bp–400bp just more than a

week earlier, a couple of market sources

said.

3IGNSûOFûSTABILISATIONûHOWEVERûHAVEûNOTû

BEENûENOUGHûTOûJUMP

STARTû!"3ûISSUANCEû

which came to a halt two weeks ago.

3OMEûPLAYERSûSAIDûTHEREûWASûSTILLûLITTLEû

investor appetite for riskier tranches of

!"3ûDEALSûHAMPERINGûSUPPLYûTOûCOMEûTOû

market.

Concerns persist about a severe

recession from the virus crisis.

If businesses stay shut and consumers

stay home into the summer, loan defaults

may soar once the government’s

forbearance measures go away and its

cash assistance to workers stops, analysts

said.

“The federal government’s support

for unemployed workers and

seemingly broad-based and generous

payment relief programmes should help

keep defaults from spiking,” Bank of

America analysts wrote in a recent

research note.

“Even so, the sector has never seen such

AûSIGNIlCANTûSPIKEûINûUNEMPLOYMENTûSOûWEû

are reluctant to say the sector will not

revisit the default levels seen during the

great recession,” they added.

&IRST

TIMEûlLINGSûFORûJOBLESSû

BENElTSûJUMPEDûTOûAûRECORDûMûINûTHEû

WEEKûENDEDû-ARCHûû4HATûlGUREûISû

expect to climb further in the coming

weeks.

The reluctance to hold riskier debt is

underscored by the dearth of issuance in

high-yield and dollar-denominated

emerging market bonds.

Moreover, dealers’ balance sheets

remain constrained, reducing their

capability to hold lower-rated portions of

!"3ûTRANSACTIONSûUNTILûMARKETûCONDITIONSû

improve, investors said.

“We are still hearing constraints on

BROKER

DEALERûBALANCEûSHEETSvû36!Sû3OUZAû

said.

FITCH MAY DOWNGRADE 35 CLASSES

OF AVIATION ABS

Fitch said last Wednesday it might

DOWNGRADEûûCLASSESûOFûNOTESûINûû

asset-backed securities deals backed by

aircraft and plane engine leases as the

coronavirus pandemic has hammered

global air travel.

The ratings agency said it revised the

OUTLOOKûONûûTRANCHESûINûTHESEû!"3û

transactions to negative from stable.

The 27 aircraft and four engine lease

SECURITISATIONSûTOTALLEDû53BNûANDû

WEREûISSUEDûBYûûLESSORSûITûSAID

h4HISûREmECTEDûMATERIALûDOWNSIDEûRISKSû

from this global pandemic driving

unknown and unique risks for aviation

!"3ûTHATûISûHITTINGûGLOBALûAIRLINESûHEAD

ONvû

Fitch said in a statement.

It said it was reviewing these deals

further, which “could result in further

negative ratings actions in the weeks

ahead”.

Amid worries about a protracted slump

in air travel, investors have shunned

AVIATIONû!"3ûASûTRAVELûRESTRICTIONSûHAVEû

increased around the world.

3PREADSûONûAVIATIONû!"3ûHAVEûWIDENEDû

to historic wide levels, according to several

market sources.

4HEYûWEREûQUOTEDûATûABOUTûBPûONû

senior aviation tranches, compared with

200bp more than a month ago before the

virus breakout surged.

6 IFR Bonds 2327 p 25 - 65 .indd 53 03 / 04 / 2020 20 : 29 : 01