IFR International - 21.07.2018

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STABILITY

Liquidity a worry for Triple B

‘bad-boy bonds’

CORPORATES Concerns about more than just market volume

The record size of Triple B rated corporate debt

is a concern, but focusing entirely on the size

of the market oversimplifies the issue, Wells

Fargo credit analysts said in a report last week

entitled “BBBs - Bad Boy Bonds”.

The buyside also needs to consider liquidity

risk if some of that debt, which now amounts to

a record US$2.6trn according to Wells Fargo,

is downgraded to junk. To that end, maturity

profiles will impact how such bonds trade if

they become high-yield.

The junk bond market has already

absorbed a number of fallen angels -

credits that drop from investment-grade to

speculative-grade - with TEVA PHARMACEUTICAL

and MATTEL among the most notable in the

past couple of years.

But as chances of a recession grow and more

downgrades come, companies with more short-

term debt of less than five years - including

DEUTSCHE BANK (84%), AERCAP HOLDINGS (80%),

AIR LEASE (72%) and EBAY (70%) - could face

higher refinancing risks.

Companies with more longer-dated debt,

however, also pose a problem.

“While BBBs skewed toward longer-dated

debt should be well supported fundamentally,

technical challenges could exert outsized

pressure on prices if these bonds fell into the laps

of duration-shunning BB investors,” Wells Fargo

analysts said.

Double B bond investors tend to prefer short-

dated bonds. Overall duration in the high-yield

market is just four years, compared with 7.3 years

for investment-grade. Only 5% of high-yield

bonds have maturities of 10 years or longer, Wells

Fargo said.

“Illiquidity, combined with the amplified price

movements as spreads widen for longer-dated

bonds, can result in outsized mark-to-market

losses for long-end fallen angel bonds,” said

Wells Fargo.

ALL INVESTMENT-GRADE BONDS IN EUROS
BOOKRUNNERS: 1/1/2018 TO DATE
Managing No of Total Share
bank or group issues €(m) (%)

1 BNP Paribas 145 39,861.07 7.3
2 HSBC 169 36,215.11 6.7
3 SG 138 35,235.52 6.5
4 Credit Agricole 128 34,254.03 6.3
5 JP Morgan 112 33,774.85 6.2
6 Deutsche Bank 135 31,610.56 5.8
7 Barclays 97 30,807.61 5.7
8 UniCredit 123 25,962.20 4.8
9 Goldman Sachs 68 24,572.87 4.5
10 Citigroup 81 22,184.68 4.1
Total 713 543,871.48
Excluding ABS/MBS, equity-related debt.
Source: Thomson Reuters SDC code: N9

ALL CORPORATE BONDS IN STERLING

BOOKRUNNERS: 1/1/2018 TO DATE

Managing No of Total Share

bank or group issues £(m) (%)

1 Barclays 9 1,035.84 14.1

2 HSBC 9 1,032.75 14.1

3 Lloyds Bank 7 731.65 10.0

4 Morgan Stanley 4 538.57 7.3

5 RBC 3 496.43 6.8

6 BNP Paribas 6 467.04 6.4

7 MUFG 4 328.21 4.5

8 NatWest Markets 4 321.85 4.4

9 Santander Global  3 254.66 3.5

10 Credit Suisse 4 250.00 3.4

Total 26 7,336.70

Source: Thomson Reuters SDC code: N8a