Summary
- Following a strong period the credit market is currently taking a breather
- LT2 primary market reopened by Rabobank
- In the primary market the high yield name Stora Enso came to the market
Headlines from the credit market this week
The strong rally we have witnessed lately came to a stop this week and currently it seems that the credit market is taking a breather. The investment grade index, iTraxx Europe, has widened by some 13bp since Friday and is currently trading around 133bp, while the high yield index, iTraxx Crossover, has widened by 80bp to 790bp. The cash market continues to do well as a result of the continued improvements in the liquidity situation in the money market and the funds allocated to credit.
To our surprise the LT2 market was reopened this week as Rabobank came to the market with a EUR1.0bn issue. We are somewhat puzzled by this deal. First of all, at 240bp, we consider it quite expensive relative to senior paper – albeit from names of lower quality. Furthermore, we think the interest in Tier 2 capital from both investors and issuers is quite low. A consequence of the financial crisis is that attention is more or less solely on the loss-absorbing Tier 1 capital – or actually core Tier 1 capital (Tier 1 capital less hybrid instruments). Furthermore, the uncertainties concerning calling or not calling at first call date (initiated by Deutsche Bank last year) have made valuation of the bonds quite complicated for investors. Going forward, we therefore believe that Tier 2 will more or less die out as an asset class.
