Weely Credit Update: Heavy issuance taking toll on credit markets

What’s on our mind

- General credit market news

The last week has been rather bleak for the credit markets with the iTraxx Main widening around 7bp and the iTraxx Crossover by 14bps. While most fundamentals and technicals are in favour of credit, we believe the heavy issuance is taking its toll on the markets.
In terms of issuance, net supply in 2015 YTD is already in line with all of 2014 (and much higher than the three previous years) driven by subordinated debt from financials and high yield. This is making it difficult for investors to digest the new issue pipeline.
As we approach the next reporting season, which will see more modest supply, we expect credit to perform again. Our view is driven by the US economy being on track, the EU recovering and China not coming off the rails. Furthermore, ECB’s asset purchase programme will underpin the hunt for yield.
Under its new bank rating methodology, Moody’s placed Danske, SEB, SHB, DNB and the three Norwegian savings banks Sparebank 1 SR-Bank, SMN and Nord-Norge under review for upgrade of their senior unsecured ratings. Swedbank, Nykredit (unsolicited), Sydbank, Jyske (unsolicited) and Pohjola stayed unchanged while Nordea was put on review for a potential two-notch downgrade. We haven’t received the rationale for the individual ratings. Overall, the changes were mainly due to a lowering of potential government support following BRRD and on the other hand the improved capitalisation and bail-inable liabilities at many banks following new regulation which creates a loss-absorbing cushion for senior unsecured debt.

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