C.M.O. 3.2.2009
Credit Market Overview
March 2, 2009
March 2, 2009
There seems to be one thing that still has value on Wall St. and that is scarcity. Chevron (CVX) and Abbott Labs (ABT) took advantage of the infrequency with which they issue debt to tap the capital markets for a combined $8BN last Thursday issuing $5BN and $3BN respectively. Total issuance in the investment grade space was $10BN on that day.
Jim Merli, head of U.S. Syndicate at Barclays Capital said “Right now, I do think the investment grade asset class is enjoying the spotlight.” Jon Duensing, a principal at Smith Breeden Associates thought one of the reasons the debt sold well was that “new or less-frequent high-quality issuers have generally met with strong demand as investors seek to add new issuers to their portfolios.”
The CVX offering was actually made up of three issues: a 3.45% note maturing in 2012, a 3.95% note maturing in 2014 and a 4.95% note maturing in 2019. All three pieces came at 195bps over their respective T-note maturity so there was no credit premium across the issuance curve for CVX. Looking at the CDS market for last Thursday mid-market spreads were 97bps, 102bps and 108bps for the 3, 5 and 10 year tenors which shows that investors required a premium of 97bps on the 2012 piece and 93bps and 87bps on the 2014 and 2019 pieces to tie up hard earned cash over where the bonds could be synthetically created.
ABT was the other big issuer last Thursday. Here too there were multiple maturities involved as $2BN of a 5 1/8 note came at 220bps over the T 2 ¾’s of 2019 and $1BN of a 6% bond maturing in 2039 was issued at 235bps over the T 4 ½’s of 2038. There was a 15bp credit premium for the longer dated ABT issue but since all of CVX’s issues were in the “intermediate” tenor and the 2039 ABT issue is definitely in the “long maturity” camp it is a bit like comparing apples and oranges.
With this in mind we can still look at the physical/synthetic premium on the two ABT pieces. We will, however, have to use the 10yr CDS spread for both since there is no readily available quote for 30yr CDS on ABT. Using a mid-market spread of 95bps for the 10yr CDS the note and bond required premiums of 125bps and 140bps respectively to attract buyers since of the physical paper over its synthetic equivalent.
Remember too, that as was stated earlier, there was strong demand for the CVX and ABT paper as they do not issue often. It is fairly safe to assume then that more frequent issuers will have to pay an even higher premium to their synthetic equivalents to raise capital.
That these two issuers were able to sell debt says that there is some thawing in the credit markets. That the spreads on the physical debt were reasonable says that people are willing to buy names that they don’t see that often. That the spread between the physical and the synthetic is as wide as it is shows that all is not quite right in the credit markets just yet.
There is scarcity and then there is scarcity. It was reported in the WSJ recently that a leather armchair once owned by Yves Saint Laurent fetched 21.9MM Euros or $28MM at a 3 day auction of the designer’s estate by Christies. Given his predilection for high ticket make-over’s it begs the question, was John Thain was the undisclosed telephone bidder?
Enjoy the week.
Jim Delaney
Jim Merli, head of U.S. Syndicate at Barclays Capital said “Right now, I do think the investment grade asset class is enjoying the spotlight.” Jon Duensing, a principal at Smith Breeden Associates thought one of the reasons the debt sold well was that “new or less-frequent high-quality issuers have generally met with strong demand as investors seek to add new issuers to their portfolios.”
The CVX offering was actually made up of three issues: a 3.45% note maturing in 2012, a 3.95% note maturing in 2014 and a 4.95% note maturing in 2019. All three pieces came at 195bps over their respective T-note maturity so there was no credit premium across the issuance curve for CVX. Looking at the CDS market for last Thursday mid-market spreads were 97bps, 102bps and 108bps for the 3, 5 and 10 year tenors which shows that investors required a premium of 97bps on the 2012 piece and 93bps and 87bps on the 2014 and 2019 pieces to tie up hard earned cash over where the bonds could be synthetically created.
ABT was the other big issuer last Thursday. Here too there were multiple maturities involved as $2BN of a 5 1/8 note came at 220bps over the T 2 ¾’s of 2019 and $1BN of a 6% bond maturing in 2039 was issued at 235bps over the T 4 ½’s of 2038. There was a 15bp credit premium for the longer dated ABT issue but since all of CVX’s issues were in the “intermediate” tenor and the 2039 ABT issue is definitely in the “long maturity” camp it is a bit like comparing apples and oranges.
With this in mind we can still look at the physical/synthetic premium on the two ABT pieces. We will, however, have to use the 10yr CDS spread for both since there is no readily available quote for 30yr CDS on ABT. Using a mid-market spread of 95bps for the 10yr CDS the note and bond required premiums of 125bps and 140bps respectively to attract buyers since of the physical paper over its synthetic equivalent.
Remember too, that as was stated earlier, there was strong demand for the CVX and ABT paper as they do not issue often. It is fairly safe to assume then that more frequent issuers will have to pay an even higher premium to their synthetic equivalents to raise capital.
That these two issuers were able to sell debt says that there is some thawing in the credit markets. That the spreads on the physical debt were reasonable says that people are willing to buy names that they don’t see that often. That the spread between the physical and the synthetic is as wide as it is shows that all is not quite right in the credit markets just yet.
There is scarcity and then there is scarcity. It was reported in the WSJ recently that a leather armchair once owned by Yves Saint Laurent fetched 21.9MM Euros or $28MM at a 3 day auction of the designer’s estate by Christies. Given his predilection for high ticket make-over’s it begs the question, was John Thain was the undisclosed telephone bidder?
Enjoy the week.
Jim Delaney
Labels: CDS, correlation, credit, equity
posted by Jim Delaney at
3:01 AM
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