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Ryan Daniel

Central banks were the market’s main focus this week — the Fed and ECB both delivered 25bps hikes that shouldn’t have really surprised anyone paying attention. 

The BOJ, seemingly keen to jolt everyone’s Friday morning into life (I thought I had finished my intro until I woke up to the yield curve control news), had different ideas.

Accommodative monetary policy: Anyone still here?

As well as hiking, the Fed placed an emphasis on upcoming data — especially pertinent as the next FOMC meeting isn’t until September 19-20 (central bankers need a holiday too!). 

Other things worth knowing: Powell mentioned that each meeting would be “live” (they’ve made no decisions about future moves), the committee does not see inflation reaching 2% until around 2025 and perhaps most notably for traders with selective hearing: The forecast of the Fed staff is no longer for a recession.

Lagarde sang from a similar hymn sheet — raising rates but also highlighting that the ECB would be data-dependent (”open mind as to what the decisions will be in September and in subsequent meetings”). She emphasised that if they did pause in September, it “would not necessarily be for an extended period.”

Adding to the evidence that hikes in Europe are having the desired effect, the quarterly bank lending survey from this week showed the sharpest decline in demand in loans by enterprises in the survey’s history since 2003.

Not to be forgotten, the BoJ, which just received a 14th consecutive month of CPI above its 2% target (+3.2% year-over-year in July vs +2.9% expected), made an important change to its accommodative policy of yield curve control.

The BoJ kept their target for 10yr JGBs at 0% but effectively widened the band to +1% — meaning that they will now tolerate yields as high as 1%, double the previous limit.

For many, this “flexible” announcement and a doubled target will probably be treated as the end of yield curve control. The reaction of the S&P 500 alone (+0.7% gain to a -0.6% loss at the close) last night showed that investors struggled to digest the news.

A first buysider said: “What matters more than absolute rates rising is rate volatility normalising.”

The latest from the BoJ serves as an important reminder that the market still has some way to go, coping with the uncomfortable reality of less central bank support globally.

Amongst all that, Iceland was the week’s main EHY deal — a name familiar to regular Blessed to be Stressed readers. The frozen food retailer targeted dual-currency funding across euros and sterling. The €250m 2027 floating leg priced at E+550bps with an OID of 97 — tightening from 96-97 IPTs. 

The £265m 2027 fixed leg priced at 10.875% and a 99.204 OID (11.125% YTM) — also tightening from yield IPTs of mid-to-high 11s. Despite some skepticism in the market around sterling exposure, the first buysider said that the double-digit yield proved there is “demand at the right price.” The deal was priced at a decent yield premium to its existing 2028s, which have a YTW in the mid-9s at the time of writing.

A second buysider who had played the Iceland trade for the last three years wasn’t a fan of the sub-£500m deal being split into two tranches, citing low liquidity which would cause them to “pass in primary but then keep an eye on it in secondary.”

The retailer’s competitive position and ability to keep prices low were praised by numerous buysiders — a third buysider pointing to the company’s “niche on frozen food” as it’s the 2nd largest frozen food retailer (after Tesco who is serving a non-discount segment of the market). The first buysider also added that the discount nature of the business would serve them well in a downturn.

Energy costs have been a headwind for the company (given the company’s reliance on freezers), which led to a “difficult 2022 as they were hit hard by electricity costs,” according to the first buysider. 

Its bonds sold off during 2022 as the company didn’t sufficiently hedge energy costs. The group’s cost base was significantly impacted by a £95.7m increase in energy costs in FY 23 from the energy price surge following the start of Russia/Ukraine conflict. As a result, adjusted EBITDA dropped by 15% YoY to £120.2m.

For FY 24, the company expects £50m of energy expense reductions as a result of lower contracted energy prices and energy usage reductions. You can find more details within our Iceland Credit QuickTake.

Despite the pricing being attractive to many — leading to accelerated timing — a fourth buysider said that the 97 OID on the euro leg was too high, preferring low-to-mid 90s. 

The deal’s success rounded off a good week for the company, following Moody’s upgrade to positive outlook — citing improving liquidity from the new issues, stable market share and ongoing cost reduction initiatives. 

Zooming out, the first buysider commented on the strength of the EHY market (iTraxx Crossover at this year’s tights as mentioned in this week’s Friday Workout), pointing to a “humongous amount of dispersion” between the upper and lower tails of credit quality. It’s also a topic touched upon within a recent Macro Prophet.

“It’s not a broad rally, it’s more of a low-conviction rally — BBs are trading exceptionally well. Whilst BBs are near their long-term average, CCCs are nearly 500bps away from their long-term average.”

Even as sentiment improves, it seems that a preference for quality is still prevalent. Definitely something to watch as the year progresses and Fed/ECB policy becomes less hawkish.

As we covered earlier this week, Zentiva saw strong demand for its upsized €1.825bn-equivalent TLB A&E, which aims to push out the maturity of its existing €1.275bn TLB and fully or partially refinance its £175m TLB. The upsize will entirely repay the company’s existing 2L.

Pricing for the Czechian company landed at margin of E+500bps and OID of 99 (tightening from IPTs of 97-97.5). 

A fifth buysider — in line with strong tightening — said that investors were positive on the pharma name (a well-loved sector), saying that Zentiva would be no “Marmite” credit: “More like Nutella that pleases everyone (unless you’re allergic to nuts).”

Moody’s didn’t have the sweetest tooth when they downgraded Zentiva's senior secured instrument ratings to B3, citing “the company's highly-leveraged capital structure with a Moody's-adjusted gross leverage of 6.5x for the last twelve months to March 2023, and an historic appetite for debt-funded acquisitions which could delay deleveraging.”

Nevertheless, they affirmed outlook as positive due to expectations of strong performance and its market-leading generics businesses across Europe.

Elsewhere, US raw materials company Rain Carbon dripped into European markets for a €390m TLB A&E (from 2025). Pricing is guiding towards a margin of E+475-500bps and an OID of 98. As mentioned in The A&E Waiting List, there will be a partial refinancing of its existing second lien via a new second lien issue.

Rounding off the major primary deals from European loan land, French nuclear medicine specialist Curium is launching a €300m TLB A&E (alongside its $1bn TLB A&E). Price talk for the euro tranche is guiding towards E+475bps and an OID of 98.5. 

Looking forward, the fourth buysider expects sponsors to reset their valuation expectations over the course of 2023 — a theme we explored in our recent pipeline piece — stemming from the need to return cash to investors.

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