Weekly Credit Update – 28 November, 2014
Investment Research — General Market Conditions 28 November 2014 Weekly Credit Update Headlines Debt issued by European corporates heads for post-crisis high ‘Smoke signals’ from the ECB to extend asset purchase programme Lower-for-longer scenario for both interest rates and credit spreads on the cards S&P´s proposes new rating criteria regarding senior bank ratings OPEC decision not expected to negatively affect the broader credit market (for now) ISS successfully launched a 5Y and 10Y dual tranche EUR Benchmark Contents Market commentary 1 Selected charts 4 Recently published research 6 Official and shadow ratings 7 Market commentary Over the past week, the Itraxx main index (investment grade) more or less stayed flat at 59bp while the Itraxx crossover index (high yield) tightened by 14bp w/w. This week started with several articles illustrating the temperature of the European credit markets. First, Fitch reported that the amount of new debt – bonds and loans – issued by European companies is heading for a post-crisis high in 2014. Lower funding costs are driving continued refinancing and M&A activity is heating up. The value of M&A activity was up 25% to USD1tn in the first three quarters of 2014, boosting demand for corporate funding. Syndicated loans in Europe are up 23% YTD and corporate bond issuance is down 5% y/y. A strong Q4 bond pipeline could still put 2014 close to the EUR500bn annual record of 2009. According to Fitch, corporate bond funding now accounts for some 83% of the total new debt of European corporates in developed markets. Interestingly, corporates in the eurozone periphery have also continued to issue bonds at a brisk pace, maintaining the bond ratio at some 40% of total funding on par with corporate bond ratios seen in Germany, France and the UK. Given the continued deleveraging of banks in Italy and Spain, importantly the bond market seems to be closing the corporations funding gap. Another interesting point of the week was the ‘smoke signals’ that the ECB sent to the market. They indicated a will to possibly broaden the scope of the current asset purchase program (is QE4 underway?). If executed, the ECB stands with the grand challenge of selecting which assets to buy. The ECB is already loading up on European covered bonds and recently started buying asset-backed securities. Covered bond issuance in the EU is negative by EUR22bn so far in 2014, which is why further purchase possibilities within this asset class by the ECB will be significantly more challenging going forward. According to the smoke signals, the ECB is considering including the purchase of other assets such as government bonds (highly controversial and legally complex) and/or the direct purchase of corporate bonds (which carry more credit risk and are disliked by Bundesbank for valuation reasons). In the week, it seemed as though the market started to speculate that corporate bonds would be included under a possible new asset purchase programme. Important disclosures and certifications are contained from page 10 of this report. iTraxx Europe (investment grade) Source: Bloomberg, Danske Bank Markets iTraxx Crossover (high yield) Source: Bloomberg, Danske Bank Markets Senior Analyst Niklas Ripa +45 4512 8047 niklas.ripa@danskebank.com www.danskeresearch.com Weekly Credit Update We saw tightening in HY indices and investors trading out of tightly trading high quality IG issuers (for example, some of the Scandi names) and into higher yielding issuers from the periphery countries. Time will show whether the ECB will release the fireworks in the corporate bond universe and the eventual effects of such actions. For now, it seems that more compression of spreads has been the recent outcome. Whether the ECB finally decides to enact a new QE programme or not will depend on whether positive inflation and growth expectations can be ignited shortly. In our view, the continued ECB easing mode should support a lower-for-longer scenario for both European interest rates and credit spreads going into the New Year. On a final note on this theme, German 10-year interest rates hit a record bottom this week with a yield of 0.70%. Following the recent weeks’ regulatory proposals to include significant additional lossabsorbing capital to avoid future tax payer ‘bailouts’, S&P´s published a request for comment with regard to new bank rating criteria. S&P´s criteria would be applicable to banking groups that are headed either by an operating company or by a non-operating holding company (read: all regulatory, important banks). Specifically, S&P´s proposes to notch up the rating on banks with additional bail-in capital in case of a restructuring event. S&P´s specifically proposes to raise the issuer credit rating to one-notch above the stand-alone credit profile if such additional loss absorption cushion consistently remains in the range of 5-6% of S&P´s calculated RWA and a two-notch uplift if such cushion is in the range of 8-10%. S&P´s expects the new criteria to lead to a limited amount of rating changes directly. However, over time, any additional loss absorption capacity could replace any rating uplift granted to the banks ratings due to the inclusion of possible extraordinary government support. In turn, this may imply the risk of a downgrade of senior debt issued out of holding company structures, as no extraordinary government support would be likely to be included in such ratings over time. So far, the European senior financials have been almost unscathed by any of the new regulatory loss-absorption proposals presented over the past weeks, while the Tier-2 sub debt market has suffered and has stayed rather illiquid. However, the discount between senior operating bank bonds and holdco bank bonds seems to have widened by up to some 40bp over the past month, which is why the market now realises that there will be ‘regulatory’ subordination risk in the bank holdco senior bonds as no extraordinary government support may be forthcoming in case of a ‘non-viability event’ in the future. This week we saw strong US GDP figures and an interesting outcome of the gathering of the 12 nations that are members of the OPEC group. The OPEC group decided to maintain its collective production ceiling of 30 million barrels a day despite an oil price drop so far this year of some 35%. We doubt that the decision taken by the OPEC nations (for now) will significantly affect the credit spreads of the broader euro corporate bond market. However, it seems obvious that if the oil price declines are persistent for years to come, many oil/drilling companies and related subsector companies (for example, oil field services) and banks exposed to such credits may be severely affected. The primary market was fairly active with new issues across the corporate space, cf. table enclosed below. Following a 10-year issuance break, we saw the Danish global facility service company ISS (BBB-/Baa3) return to the EUR corporate bond market and successfully issue a dual-tranche EUR benchmark structure. The purpose of the transaction was to refinance the existing banking debt and diversify the funding structure. The transaction represents both the largest Nordic BBB- rated corporate issue and the lowest achieved benchmark coupons on a five- and 10-year dual tranche transaction by any Nordic corporate ever. 2| 28 November 2014 www.danskeresearch.com Weekly Credit Update In addition, we can highlight that the Danish capital goods company Danfoss (BBB/NR) is currently on a roadshow meeting European corporate bond investors. Danfoss is a significant global capital goods company and a leader within technical and mechanical components towards various industries. Selected issues Name ISS Global ISS Global Victoria Park Telefonica Europe Repsol Int. Glaxosmithkline Glaxosmithkline Scania Scania Rating BBB- /Baa3 BBB- /Baa3 NR BB+ BBB A+/A2 A+/A2 AA- Coupon 1.125% 2.125% FRN 4.200% 2.250% 1,375% 0.625% 0.875% FRN Cur. Tenor Size EUR 5Y 700 EUR 10Y 500 SEK 3Y 400m EUR Perp 850m EUR 12Y 500 EUR 5Y 1000 EUR 10Y 1500 SEK 4Y 650m SEK 4Y 1350 Spread* MS + 75 MS + 118 Sti + 500 MS +380 MS +113 MS +33 MS +55 Sti +40 Source: Bloomberg, Danske Bank Markets. Size in million, ratings are issue ratings from S&P/Moody’s/Fitch Trade recommendations See the table below for our current trading ideas. We acknowledge that the credit market in general and the Nordic in particular is not as liquid as other markets, which may affect the possibility to, for example, short a specific bond. Thus, please see our strategies below as ideas and input into your own investment process. New strategies for this week are detailed on page five of this report. Last week, we added the Nynas and Volvo trade ideas, cf. table enclosed below. Past strategies Type Outright Trade VLVY' 17 or VLVY'19 Idea Outright NYNAAB '18 Outright COMHSS '19 Curve spread Switch from SKFBSS '19 to SKFBSS '18 or '20 Outright SAABAB '19 COMHSS '19 looks cheap compared to other rated and unrated issues in SEK. Trades like a B+, but is officially rated BBSKF’s 2020s and 2018s offer attractive value relative to the rating (‘BBB+’ NO and ‘Baa1’ S) Downgrade seems priced in already Trading wider than the ‘BBB+’ shadow rating would imply Curve spread Swith from STENA '19 to STENA '20 Stena 2020 cheap compared with overall Stena credit curve and the Stena 2019 bond. Sector spread Switch from VLVY '19 to METSO '19 Outright EWOSAS '20 Metso trading wider than ‘BBB’ rating suggests. Metso 19s offer substantial pick-up to Volvo’s 19s (neg outlook). Mispriced due to lack of understanding of business model We see the VLVY cash curve at attractively valued and an (uncertain) downgrade is more than priced in to spreads NYNAAB '18's, which we see as 'B+' indicatively trade way too cheap relative to the industrial 'B+' curve Opened 27 nov 2014 Start spread Opened 73 25 nov 2014 Start spread Opened 668 19 nov 2014 Start spread Opened 450 18 nov 2014 Start spread Opened 2 13 nov 2014 Start spread Opened 115 24 okt 2014 Start spread Opened 126 20 okt 2014 Start spread Opened -5 20 okt 2014 Start spread Source: Danske Bank Markets 3| 28 November 2014 www.danskeresearch.com 647 Weekly Credit Update Selected charts iTraxx (Europe) vs CDX (US) Investment grade corporate yields Source: Bloomberg, Danske Bank Markets Source: Bloomberg, Danske Bank Markets Nordic corporates vs iTraxx Nordic banks 5Y CDS spreads Source: Bloomberg, Danske Bank Markets Source: Bloomberg, Danske Bank Markets Corporate BBB bond yield vs EuroSTOXX dividend yield 3M Libor OIS spreads Source: Bloomberg, Danske Bank Markets Source: Bloomberg, Danske Bank Markets Financials spread vs non-financials (Industrials), A-rated Source: Bloomberg, Danske Bank Markets 4| 28 November 2014 www.danskeresearch.com Weekly Credit Update Europe fund flows Sweden fund flows Norway fund flows Source: Macrobond Source: Macrobond Source: Macrobond 5| 28 November 2014 www.danskeresearch.com Weekly Credit Update Recently published research Akelius Q4 14 - Credit Update, 27 November 2014 Akelius Residential Property presented a good set of results, with continued growth in rental income and earnings. We maintain our credit view of Akelius and its bonds at ‘BB+/BB’, respectively, with a positive outlook. Volvo (EUR) - Relative value idea, 27 November 2014 The Volvo curve trades wide, in our view. A downgrade to 'BBB-' seems to be fully priced in, limiting the downside from a potential downgrade. We recommend investors buy the EUR-denominated VLVY 17 or 19 bonds. Alternatively, investors can sell 5Y protection on VLVY for an even greater pick-up relative to the cash curve. Nynas 2018s (SEK) – Relative value idea, 25 November 2014 Nynas has just released strong Q3 14 numbers, taking adjusted credit metrics to strong levels for the current 'B+' indicative rating. The Nynas FRN 2018s in SEK trade very attractively compared with other 'B+' rated industrials. Cyclicality, illiquidity and unrated premiums in bonds cannot justify the current spread level of DM+666bp. DFDS Q3 14 - Credit Update, 21 November 2014 DFDS reported a solid Q3 14 result. We continue to view DFDS’s credit profile as commensurate with a 'BBB-' indicative rating despite our expectation of increased shareholder remuneration going forward. The FRN bonds issued in NOK are currently priced fairly at 25-30bp above a 'BBB-' credit curve. Given the 'missing official rating discount' in the pricing of the DKK FRN 2019 bond, we regard this bond as tightly priced. We recommend investors able to hold NOK to consider switching from the DKK FRN 2019 bond and into the NOK FRN 2018 bond. Com Hem (SEK) - Relative value idea, 19 November 2014 Compared with other rated and unrated issues in the SEK universe, COMHSS looks cheap and trades in line with or somewhat wider than names in the B+ area. SKF switch idea, 18 November 2014 The SKF 2019s trade too tight, in our view. We see more value in the SKF 2020s and 2018s. SKF is rated 'BBB+' and 'Baa1' by Moody's. S&P's recently put SKF on negative outlook citing an unexpectedly slow recovery in credit metrics following the acquisition of Kaydon. SKF 2020 and SKF 2018 trade at fair value for a 'BBB' indicating limited downside should SKF be downgraded one notch and potential upside if SKF avoids the downgrade. We recommend investors switch out of the SKF2019s and into either SKF2018s or SKF2020s depending on risk tolerance. 6| 28 November 2014 www.danskeresearch.com Weekly Credit Update Ratings from Standard & Poor’s, Moody’s and Fitch and Danske Bank markets shadow ratings Danske Bank Company Rating Outlook Sr. Unsec Ahlstrom Oyj B+ Stable Akelius Residential Ab BB+ Pos BB Ambu A/S BBBStable Ap Moeller - Maersk A/S Arla Foods Amba BBB+ Stable Atlas Copco Ab Avinor As Bank 1 Oslo Akershus As BBB+ Stable Bank Norwegian As BBB Stable Beerenberg Holdco Ii As B+ Stable Bw Offshore BB+ Stable Cargotec Oyj BBBStable Carlsberg Breweries A/S Cermaq Asa BB Stable Citycon Oyj Color Group As BBStable B+ Com Hem Holding Ab Danske Bank A/S Dfds A/S BB+ Stable Dlg Finance As BBStable Dna Ltd BBBStable Dnb Bank Asa Dong Energy A/S Dsv A/S BBB Stable Eg Holding B Stable Eika Boligkreditt As AStable Eika Gruppen As BBB Stable Electrolux Ab Elisa Oyj Entra Eiendom As AStable Farstad Shipping Asa BB Neg BBFingrid Oyj Finnair Oyj BB Stable Fortum Oyj Fortum Varme Holding Samagt Med Stockholms Stad Ab Fred Olsen Energy Asa BB+ Neg G4S Plc Getinge Ab BB+ Neg Heimstaden Ab BB Stable BBHemso Fastighets Ab BBB+ Stable BBB Hoist Kredit Ab BBStable B+ Husqvarna Ab BBBPos Ikano Bank Ab BBB Stable Investor Ab Iss A/S J Lauritzen A/S B Stable BJernhusen Ab AStable Jyske Bank A/S Kesko Oyj BBB Stable Klaveness Ship Holding As BBStable B+ Meda Ab BBStable Metsa Board Oyj Metso Oyj Ncc Ab BBBStable Neste Oil Oyj BBBStable Nokia Oyj Nokian Renkaat Oyj BBB+ Stable Nordea Bank Ab North Atlantic Drilling Ltd BB Stable BBNorwegian Air Shuttle Asa BBStable B+ Norwegian Property Asa BBBStable Nykredit Bank A/S Nynas Group B+ Stable B+ Odfjell Se B+ Stable B Olav Thon Eiendomsselskap Asa BBB+ Stable Olympic Shipping As B+ Stable B Orkla Asa BBB+ Pos Outokumpu Oyj BPos Pohjola Bank Oyj Posten Norge As AStable Postnord Ab BBB+ Stable S&P Rating Outlook Moody's Rating Outlook BBB+ Stable Baa1 Stable A AA- Stable Stable A2 A1 Stable Stable Baa2 Stable BBB Stable Baa2 Stable BBA Stable Neg Baa1 Pos Fitch Rating Outlook BBB Stable A Stable A+ BBB+ Stable Stable A1 Baa1 Neg Stable BBB BBB Stable Pos Wr Baa2 Stable A+ Stable A1 Stable A+ Stable ABBB+ Neg Stable A2 Neg A- Neg BBB- Stable AABBB- Stable Stable A1 Stable A- Stable Baa1 Neg B+ BBB Pos Stable B2 Baa2 Pos Stable BB Pos Ba2 Pos BB Stable AA- Neg Aa3 Neg AA- Stable A+ Neg Baa2U Stable A Stable AA- Neg Aa3 Neg A+ Stable BBB+ Stable WD Analyst(s) Mads Rosendal Louis Landeman Jakob Magnussen Brian Børsting Mads Rosendal Mads Rosendal Ola Heldal T. Hovard / L. Holm T. Hovard / L. Holm Øyvind Mossige Øyvind Mossige Mads Rosendal Brian Børsting Knut-Ivar Bakken Louis Landeman Niklas Ripa Ola Heldal Brian Børsting Mads Rosendal Ola Heldal T. Hovard / L. Holm Jakob Magnussen Brian Børsting Jakob Magnussen T. Hovard / L. Holm T. Hovard / L. Holm Brian Børsting Ola Heldal Ola Heldal Bjørn Kristian Røed Jakob Magnussen Brian Børsting Jakob Magnussen Jakob Magnussen Sondre Stormyr Brian Børsting Louis Landeman Louis Landeman Louis Landeman Gabriel Bergin Louis Landeman T. Hovard / L. Holm Brian Børsting Brian Børsting Bjørn Kristian Røed Gabriel Bergin Thomas M. Hovard Mads Rosendal Bjørn Kristian Røed Louis Landeman Mads Rosendal Mads Rosendal Louis Landeman Jakob Magnussen Ola Heldal Jakob Magnussen T. Hovard / L. Holm Sondre Stormyr Brian Børsting Ola Heldal T. Hovard / L. Holm Jakob Magnussen Bjørn Kristian Røed Ola Heldal Bjørn Kristian Røed Ola Heldal Mads Rosendal T. Hovard / L. Holm Ola Heldal Gabriel Bergin Source: Standard & Poor’s, Moody’s, Fitch, Danske Bank Markets 7| 28 November 2014 www.danskeresearch.com Recomm. BUY SELL HOLD SELL HOLD HOLD HOLD BUY BUY SELL BUY BUY HOLD BUY HOLD HOLD HOLD SELL HOLD SELL Weekly Credit Update Ratings from Standard & Poor’s, Moody’s and Fitch and Danske Bank markets shadow ratings Company Prosafe Se Ramirent Oyj Saab Ab Sampo Oyj Sandnes Sparebank Sandvik Ab Sas Ab Sbab Bank Ab Scania Ab Schibsted Asa Seadrill Ltd Securitas Ab Skandinaviska Enskilda Banken Ab Skanska Ab Skf Ab Solstad Offshore Asa Spar Nord Bank A/S Sparebank 1 Boligkreditt As Sparebank 1 Nord Norge Sparebank 1 Smn Sparebank 1 Sr-Bank Asa Sponda Oyj St1 Nordic Oy Statkraft Sf Statnett Sf Statoil Asa Steen & Strom As Stena Ab Stockmann Oyj Abp Stolt-Nielsen Ltd Stora Enso Oyj Storebrand Bank Asa Suomen Hypoteekkiyhdistys Swedavia Ab Swedbank Ab Swedish Match Ab Svensk Fastighetsfinansiering Ab Svenska Cellulosa Ab Sca Svenska Handelsbanken Ab Sydbank A/S Tallink Group As Tdc A/S Teekay Offshore Partners Lp Tele2 Ab Telefonaktiebolaget Lm Ericsson Telenor Asa Teliasonera Ab Teollisuuden Voima Oyj Thon Holding As Tine Sa Upm-Kymmene Oyj Vasakronan Ab Vattenfall Ab Vestas Wind Systems A/S Wilh Wilhelmsen Asa Volvo Ab Yit Oyj Rating BB BB+ BBB+ BBB+ BBB BB+ Danske Bank Outlook Sr. Unsec Stable Stable Stable Stable Stable Stable BBBBB+ A- Stable Stable Stable Wr Baa2 Stable Fitch Rating Outlook BBB BA A- Neg Stable Neg Stable Wr A2 Pos Neg BBB A+ Stable Neg Wr A1 Neg BBB+ Neg Baa1 Stable A2 A2 A2 Neg Neg Neg BB A+ Pos B+ A AA- Stable Stable Stable Stable Stable BBB+ Stable B+ BB+ Stable Stable BBB+ AA- Stable Stable Stable BBB Moody's Rating Outlook Stable BBB+ BBBBB S&P Rating Outlook AA+ AA- Stable Stable Stable Aaa Wr Aa2 Stable Stable Stable BB Stable B2 Stable BB BBB+ Stable Neg Ba2 Baa1 Stable Neg WD A+ BBB Neg Stable A1 Baa2 Neg Stable A+ Pos AAA- Stable Neg Baa1 Aa3 Baa1 Stable Neg Neg AA- Stable BBB Neg Baa3 Stable BBB Stable BBB+ A ABBB Stable Stable Stable Neg Baa1 A3 A3 Wr Stable Stable Neg BBB+ Neg ABBB Stable Stable BB+ Stable Ba1 Stable WD A- Stable A3 Stable A- Neg BBB Neg Baa2 Neg BBB Stable BB Stable BB Stable BB- BBBBB Stable Stable B+ BBB+ BBB+ Stable Stable A- Stable BBBBBB- Pos Stable B Neg Analyst(s) Øyvind Mossige Brian Børsting Louis Landeman T. Hovard / L. Holm T. Hovard / L. Holm Mads Rosendal Brian Børsting T. Hovard / L. Holm Mads Rosendal Ola Heldal Sondre Stormyr Brian Børsting T. Hovard / L. Holm Louis Landeman Mads Rosendal Øyvind Mossige T. Hovard / L. Holm Lars Holm T. Hovard / L. Holm T. Hovard / L. Holm T. Hovard / L. Holm Louis Landeman Jakob Magnussen Jakob Magnussen Jakob Magnussen Jakob Magnussen Ola Heldal Brian Børsting Mads Rosendal Bjørn Kristian Røed Mads Rosendal T. Hovard / L. Holm T. Hovard / L. Holm Gabriel Bergin T. Hovard / L. Holm Brian Børsting Louis Landeman Mads Rosendal T. Hovard / L. Holm T. Hovard / L. Holm Jakob Magnussen Ola Heldal Bjørn Kristian Røed Ola Heldal Ola Heldal Ola Heldal Ola Heldal Jakob Magnussen Ola Heldal Ola Heldal Mads Rosendal Louis Landeman Jakob Magnussen Niklas Ripa Bjørn Kristian Røed Mads Rosendal Louis Landeman Source: Standard & Poor’s, Moody’s, Fitch, Danske Bank Markets 8| 28 November 2014 www.danskeresearch.com Recomm. HOLD HOLD HOLD HOLD HOLD BUY SELL HOLD HOLD HOLD BUY HOLD SELL BUY HOLD BUY HOLD BUY HOLD BUY HOLD HOLD HOLD SELL BUY HOLD HOLD BUY HOLD Weekly Credit Update Fixed Income Credit Research Thomas Hovard Head of Credit Research (+45) 45 12 85 05 hova@danskebank.com Louis Landeman TMT, Industrials (+46) 8 568 80524 llan@danskebank.com Henrik René Andresen Credit Portfolios (+45) 45 13 33 27 hena@danskebank.com Mads Rosendal Industrials, Pulp & Paper (+45) 45 14 88 79 madro@danskebank.com Jakob Magnussen Utilities, Energy (+45) 45 12 85 03 jakja@danskebank.com Brian Børsting Industrials (+45) 45 12 85 19 brbr@danskebank.com Gabriel Bergin Strategy, Industrials (+46) 8 568 80602 gabe@danskebank.com Niklas Ripa High Yield, Industrials (+45) 45 12 80 47 niri@danskebank.com Bjørn Kristian Røed Shipping (+47) 85 40 70 72 bred@danskebank.com Ola Heldal TMT (+47) 85408433 olh@danskebank.com Øyvind Mossige Oil services (+47) 85 40 54 91 omss@danskebank.com Sondre Dale Stormyr Offshore rigs (+47) 85 40 70 70 sost@danskebank.com Lars Holm Financials (+45) 45 12 80 41 laho@danskebank.dk Knut-Ivar Bakken Fish farming (+47) 85 40 70 74 knb@danskebank.com Find the latest Credit Research Danske Bank Markets: http://www.danskebank.com/danskemarketsresearch 9| 28 November 2014 Bloomberg: DNSK<GO> www.danskeresearch.com Weekly Credit Update Disclosures This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske Bank’). 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