IFR International - 28.07.2018

BONDS CORPORATES

The lead declined to comment on
whether the proceeds would be swapped
back into US dollars.
Bonds for reference come out around
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sharply this year compared with the
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from US borrowers redeeming this year.
“But there are still some US companies
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WERELDHAVE CHOOSES REVOLVER FOR
REFI INSTEAD OF HYBRID

WERELDHAVE may not go down the hybrid
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after recently signing a €350m short-term
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banks for a €300m–€400m inaugural hybrid

issue. But around the same time the Italian

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toll on markets.

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emerge.

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timing regarding the hybrid. In order to

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But it wants “to keep the option open

to make use of the hybrid market in the

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The Italian crisis also saw motorway

and airport infrastructure company

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May.

The company turned instead to the loan

market in early July to complete the

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(See Loans section for more on

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STERLING

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corporate issuer to date.

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130bp.

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some 13.3 years.

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premium built in because of its “more

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could widen by 80bp-90bp from the current
350bp over Treasuries in the event of a “trade
skirmish escalation” - and by about 200bp in the
event of a “full-fledged trade war”.
But on average, US junk bonds have been
trading within a 60bp range so far this year and
are currently 11bp tighter year-to-date, according
to BAML data. Investment-grade bond spreads,
on the other hand, have widened by 22bp so far
this year.
“The trade hit scenario isn’t being priced in at
all,” UBS analysts wrote in a note last week. They
argued, however, that investors should brace for
average US high-yield spreads to widen to 425bp
by the end of the year.
EARNINGS HIT
Many analysts feel that another escalation
is unlikely, pointing to the harm the limited
measures have already had on some companies.
“There’s lots of rhetoric around it, but it doesn’t
change the fact that these tariffs are going to
be damaging to the US economy directly,” said
Melentyev.
Generous tax cuts approved by the Trump
administration late last year and a strong
underlying economy had been expected to give
corporate earnings a boost this year, freeing up
cash for new investments and stock buybacks.
Recently announced tariffs and higher
commodity costs, however, have already led
some companies to make negative revisions to
their earnings outlooks.
Automaker GENERAL MOTORS said on
Wednesday it was lowering its full-year forecast,

citing higher steel and aluminium costs due to

tariffs imposed by the Trump administration.

GM’s 5.40% 2048s - among the most heavily

traded corporate bonds that day - widened 10bp on

Wednesday, according to data from MarketAxess.

General Motors buys most of its steel from US

producers, which have raised prices in reaction to

tariffs on imported steel.

“The companies who are giving us negative

outlooks are companies that are meant to be

helped by those tariffs,” Melentyev said. “Forget

about it if you are not an intended beneficiary.”

There could also be some knock-on effects for M&A.

Late on Wednesday, the world’s biggest

smartphone chipmaker QUALCOMM said it was

abandoning its US$44bn bid to buy rival NXP.

The company failed to secure Chinese approval

in what is being seen as retaliation for US tariffs -

real and threatened.

Qualcomm’s bond spreads reacted well on

Thursday, with some bonds quoted up to 13bp

tighter than levels the day prior, according to

MarketAxess data. But bankers say the collapse

of the deal is a bad sign.

“The trade war has gone from sabre-rattling

and posture to an actual economic result,” one

senior banker said.

“Enough of those kind of events over time will

change investment behaviour and change the

functioning of the markets.”

NOT SCARED

For the time being, many investors say it is

difficult to know the knock-on effects of Trump’s

tariffs - or know how serious his threats are.

“Everything is proposed or threatened at this

point,” one bond buyer said. “And as investors

you can’t say damn and sell everything, because

you would be hung up to dry if the market rallies.”

So, what happens if tariffs are levied on

hundreds of billions of Chinese imports in the

end?

For one, an all-out trade war could make the

probability of global recession more meaningful.

“(The) base case scenario could depress

profits, increase the volatility of asset prices and

potentially tighten credit conditions via stricter

lending standards and rising default rates in

affected industries,” UBS analysts wrote.

Around 15%-17% of US corporate debt could

be “disproportionately impacted” by direct tariff

exposure, according to the UBS report.

Sectors likely to be impacted include

telecommunications, industrial, hardware and

autos/parts, analysts said.

Investors and analysts say the high-yield

market is less likely to be impacted than

investment-grade, thanks to the lack of large

multinational issuers in the index.

Still, high-yield investors are not running

scared for now.

“The market is worrying about it to a certain

degree, but it’s not spooked by it yet,” Ken

Monaghan, co-director of high-yield at Amundi

Pioneer, said.

“It’s in my top 10 list of things to be concerned

about - but not my top three.”

Eleanor Duncan, Davide Scigliuzzo