International Financing Review March 21 2020 3For daily news stories
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point of where most of these
bonds trade in yield terms, but
these days its composite price
tends to be about 3bp off actual
trading levels.
In the high-yield space,
traders say there are examples
OFûBONDSûTRADINGûlVEûPRICEû
points – not basis points – lower
than the price at which they are
being quoted.“Liquidity is there but it has a
price ... [and it’s] different from
the screens. Whenever you
want to really trade, when you
want to sell, bids are far from
being what you have on the
screen,” said Philippe Berthelot,
CO
CHIEFûINVESTMENTûOFlCERûFORû
lXEDûINCOMEûATû/STRUMû!SSETû
Management.
Berthelot said his team had
tried to be as fair as possible on
valuations, using various
different pricing sources, such
as taking the lowest prices of
some received bids or using
index providers, and having a
daily calculation of funds’ net
asset value.
“When the market has
vanished, what is the fairness of
your mark?” said Berthelot. “In
dislocated markets it’s always
tricky to say ‘I’ve got a true price’.”ETF DISLOCATIONS
$ISLOCATIONSûINûlXED
INCOMEû
exchange-traded fundshighlight the discrepancies in
market valuations. When
markets are calm, an ETF’s
share price trades more or less
in line with its net asset value.
But credit ETFs have been
trading at steep discounts to
NAV during the recent volatility,
a sign of the uncertainty over
bond prices.
On March 17, for instance,
the iShares Euro High-Yield
Corporate Bond ETF traded at a
–12.4% discount at one point. On
Friday morning, the discount
momentarily disappeared
altogether and the ETF traded at
a small premium to NAV amid a
broad rally in credit markets.
The discrepancy “is being
REmECTEDûINûTHESEûBIGû%4&û
discounts to NAV. NAVs are
REmECTINGûWHEREûTHEYûAREû
marked and ETFs are telling you
where you can sell your bonds
and where you can execute”,
said one New York-based credit
analyst.Some are concerned that a re-
marking of bond positions to
REmECTûMOREûACCURATELYûWHEREû
they can be sold could be a
catalyst for a further sell-off.
&UNDûOUTmOWSûHAVEûACCELERATEDû
in recent weeks, with investors
pulling over US$35bn out of US
investment-grade credit funds
in the week ended March 18,
according to Lipper. That is
raising the prospect of investors
having to sell more bonds,
pushing market prices lower
still.
“If [investors] try and sell,
they hurt themselves
because they have to mark
positions lower - it’s more
painful than taking the
volatility,” said one senior
credit trader.
“If this were to persist then
you’ll get to clearing level marks
and below, and people get
forced to sell.”
Additional reporting by Eleanor
Duncan AMERICA proved they had market
access. But they had to pay up.
6ERIZONûWASûTHEûlRSTûTOû
announce and began by offering
nearly 60bp of new-issue
concession on the 10-year part
of a US$3.5bn triple-tranche
transaction. It was only able to
revise that tranche by 15bp.
The most active sector was
energy, led by ExxonMobil.
While Exxon’s Aaa/AA ratings
made it one of the best suited
energy names to tap funding, it
still had to offer the market 45bp
of new-issue concession to get an
53BNûlVE
PARTûDEALûDONE
On Monday, S&P downgraded
Exxon to AA with a negative
outlook (from AA+) due to lower
oil prices that will increase its
leverage.
“They’re probably coming
now because they were just
downgraded so they’re trying to
raise money as quick as they can,”
said one banker in New York.
The outcome of the deal,
though, raised questions about
other energy names and
battered sectors.“If you look at Exxon, they are
about as big as it gets,” said
Dominic Nolan, senior
MANAGINGûDIRECTORûATû0ACIlCû
Asset Management.
“That’s a bellwether energy
player, so when you get into
some other smaller energy
names and then airlines, retail,
hospitality and leisure, those
names are very weak and it’s
HARDûTOûlNDûAûDEEPûBIDûFORûTHOSEû
high-grade names.”
ENTERGY CORP, for one, fell victim
to deteriorating market sentiment
on Tuesday, when it pulled a two-
PARTûBONDûDEALûCOMPRISINGûlVEû
and 10-year tranches, citing
market conditions.
“I don’t think it’s anything to
DOûWITHûTHEûCREDITûSPECIlCALLY vû
said one syndicate banker close
to the deal.
h)TûGOTûLOSTûINûTHEûSHUFmE ûANDûTHEû
household names outperformed in
that environment.”BIG PREMIUM
It was not the only deal to get
pulled on Tuesday. In Europe,
TORONTO-DOMINION BANK failed to geta sterling-denominated covered
bond over the line, highlighting
THEûDIFlCULTIESûBANKSûFACEûEVENûINû
issuing their safest product.
Country peer RBC, meanwhile,
had to pay a big premium over
screen levels to secure a
successful euro print.
4$ûWASûTHEûlRSTûOFûTHREEû
issuers to emerge on Tuesday in
AûmURRYûOFûDEALS ûASûAûPOSITIVEû
European open presented an
opportunity for a pipeline of
circling issuers.
The Canadian bank offered a
THREE
YEARûmOATING
RATEûSTERLINGû
benchmark at initial price
thoughts of Sonia plus 80bp area.
But while the issuers that
followed got their trades done,
no updates emerged on TD’s
transaction and it was ultimately
pulled, with the issuer citing
adverse market conditions.
Some questioned the choice
of market, even as another
Canadian lender CANADIAN
IMPERIAL BANK OF COMMERCE just
about managed to tap its £500m
October 2022 covered for an
additional £125m.“The sterling market is not
the one to rely on. The euro
market is the one that gives you
more execution certainty,” said
one banker.
So it proved on Thursday,
when TD returned in the wake
of the ECB’s Pandemic
Emergency Purchase
Programme to print a €1bn
0.25% March 2024 bond.
It was one of three banks in the
euro covered market on Thursday- while more supply emerged on
Friday – after the ECB upped the
ante on Wednesday with a
temporary €750bn bond-buying
programme that will supplement
its existing QE efforts.
But even though markets
were in better shape on Friday
thanks to all the central bank
support it didn’t stop another
failed trade, this time from the
SSA sector. Germany’s L-BANK
pulled a two-year US dollar
benchmark aftere gaining
orders of only US$800mm for a
deal size of US$1bn.
Additional reporting by William
Hoffman and Tom Revell (^)
Source: Refinitiv
110
105
100
95
90
85
80
75
70
1/1/20 3/2/20 2/3/
NAV Market Price
€
PRICE DISCOUNT TO NET ASSET
VALUE OF ISHARES EURO HIGH
YIELD CORPORATE BOND ETF
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