Corporate bond wrap: Supply eases as spread rally slows on overhead risk

European corporate credit markets edged wider on Monday, weighed by strong supply over the past weeks, investors’ fears of a messy Greek default and a heightened awareness that the recent spread rally may have been overdone.

Since the beginning of the year, the iTraxx Main index has tightened more than 26% and was bid at around 126.5bp – 0.5bp wider – on Monday at 12:00GMT. The Crossover was bid at around 557bp, around 2bp wider.

“Since the start of the year we’ve seen a huge leap and the reaction will be very sharp if there’s an event which knocks us off course,” one syndicate banker said, adding that negotiations over the Greek debt problem could easily provide such a trigger.

In a research note, Societe Generale strategists agreed that the tightening was an overreaction, but said that the environment for issuance was nonetheless favourable for corporates.

“Previously locked-out borrowers have taken their opportunity, and peripheral-based corporates are getting their funding in while the going is good. Technicals remain strong, fundamentals have been for a while, and the party is in full swing,” strategists Juan Valencia, Suki Mann and Raphael Dando wrote.

Last week saw new bonds hit the market from corporates including Italy’s Atlantia and Spain’s Gas Natural. Both offered a relatively slim new issue premium, of just 18bp–20bp, despite their peripheral exposure.

Atlantia, rated A3/A–/A–, returned to the primary market after almost a year and a half of absence on Thursday last week, attracting a chunky €8bn in demand for a €1bn seven-year issue.

On Monday, Gas Natural, rated Baa2/BBB/A-, attracted around €5bn in demand for a €750m six-year transaction. Both credits were bid tighter in secondary on Monday; Atlantia by around 20bp and Gas Natural by around 30bp.

Pipeline not capped by blackout

New issuance levels were also impeded on Monday by the blackout period, which is now in full swing ahead of the majority of quarterly corporate earnings reports, due for publication over the next two weeks.

This did not cloud several bankers’ convictions, however, that the pipeline was – and would remain – strong.

One head of corporate origination said that he expected supply to be constant this month, but slow from the frenetic levels seen over the past weeks. Last week about €4bn of non-financial investment-grade corporate bond were issued. This compares to a weekly average of around €3bn on 2011.

During the second week of 2012, roughly €7bn equivalent of sterling and euro non-financial investment-grade corporate bonds were sold.

Bankers said that telecoms and utilities would likely feature in the primary market in February, as they prepare to face steep redemptions later on in the year.

One source told IFR last month that Italian utility Enel was planning on issuing a large retail investor-targeted deal in February via the Italian banks.

A retail transaction is a cheaper way for Enel to raise funds and allows the company to target a different investor base from the one on which it focused last year when it issued a two-tranche €2.25bn bond in October 2011.

Polish oil and gas company PGNiG, rated Baa1/BBB+, on Monday announced that it had mandated BNP Paribas, Societe Generale and UniCredit to organise a general investor call to refresh investors’ memories on the information presented in a 2011 roadshow.

The company said it aimed to access the euro-denominated bond market in the near future.

Car markers, which have so far dominated corporate bond supply markets, are also tipped to keep issuing over the coming weeks, albeit not necessarily in euros.

Away from the euro-denominated market, Israel Electric, rated Baa3/BB+, last Wednesday mandated Barclays Capital and UBS to arrange a series of investor meetings in London, New York and Boston which kicked off on Thursday. A US dollar-denominated deal will likely follow, banks on the deal said.

In Asia, German specialty chemicals concern Lanxess recently hit the road with Bank of America Merrill Lynch, Deutsche Bank and Standard Chartered to market a potential offshore renminbi-denominated bond.