Despite the Greek situation, European credit indices have tightened

What’s on our mind

- General credit market news

Despite the uncertainties in the Greek situation, European credit indices have tightened during the week, both in the high-yield and the investment-grade segment.
Weekend meetings between the Greek prime minister and Germany’s finance minister have not led to any breakthrough. We expect that news/interpretations regarding Greece will continue to contribute to volatility.
Reporting season continued and our feeling is that reports have been fairly neutral or tilted towards the positive side. On a cumulative basis, earnings have been fairly stable while net debt/EBITDA has decreased slightly over the last quarter. Notably, dividends/share increased significantly (STOXX Europe 600 index).
European primary activity picked up last week, with about EUR11.5bn issued, which was nearly a double in volume compared to the week before, and Bloomberg reported the biggest weekly inflow into European high-yield bond funds for 15 weeks. The hunt for yield continues.
The Nordic banks have embraced the trend and hybrids have been the name of the game with Danske Bank, Swedbank and DNB all issuing AT1 coco bonds. Handelsbanken is currently in the market. In corporate, TDC has also proposed issuing a hybrid bond.

Buy SSAB EUR 2019s against SSAB SEK 2019s

From a credit perspective, SSAB showed steady progress in its Q4 results despite a slight underperformance versus consensus earnings. Cash flow was not enough to reduce the overall net debt but credit metrics still managed to improve due to a larger LTM adjusted EBITDA.
Credit metrics are, in our view, a little on the weak side for the group’s ‘BB-’ rating but S&P has built in an improvement in its base-case scenario and, as such, the rating should not be in danger given the strong momentum SSAB is currently seeing.
We expect 2015 to be positive from a credit point of view with improved earnings and further improvements in credit metrics.
The SEK bond trades at bid 97.26 (ASW EUR6m 322bp) and the EUR bond at ask 100.75 (ASW EUR6m 341bp).
The trade provides a pick-up of 19bps with 1.5 months extension, which in our view seems attractive.

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