relative value in leveraged finance monetizing opportunities · relative value in leveraged finance...

Relative Value in Leveraged Finance – Monetizing Opportunities

THIS IS NOT INDEPENDENT RESEARCH AND IS INTENDED FOR INSTITUTIONAL CLIENTS ONLY

PLEASE REFER TO THE IMPORTANT INFORMATION AND DISCLOSURES SECTION FOR IMPORTANT DISCLOSURES AND CONTACT YOUR CREDIT SUISSE REPRESENTATIVE FOR MORE INFORMATION.

7 June 2019, 16:00 UKT

Josh Farber +44 20 7888 7319 [email protected]

European Credit Strategy

Data to 31 May unless stated

Monetizing Opportunities

Intro - Trading a choppy range - Flows momentum - Issuance dynamics What’s the trade? - Alpha trades - Beta trades - Cash vs. derivatives Conclusion - Active trading - Be global - Asset rotation Source: Credit Suisse

6 June, 2019 2 THIS IS NOT INDEPENDENT RESEARCH AND IS INTENDED FOR INSTITUTIONAL CLIENTS ONLY

A very strong year indeed

Source: Credit Suisse

6 June, 2019 3

2.93.7

5.1 5.2 5.4 5.7 6.06.6 6.6

7.9 8.1

0.0

2.0

4.0

6.0

8.0

10.0

WE

Loans

€IG

Cash

€H

Y

$ L

oans

€LT

2

£ IG

Cash

Hyb

rids

£ H

Y

€AT1

$ IG

$ H

Y

YTD Tot Ret % (local ccy)


Fundamentally we are in a range-bound environment


6 June, 2019 4

-7.0%

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

Jan-1

8

Mar-

18

May-

18

Aug-1

8

Oct

-18

Jan-1

9

Mar-

19

Jun-1

9

Total Returns from 2018

€ AT1

€ HY

Corp Hybrids

WE Loans


From one of the weakest periods seasonally to one of the strongest

Source: Credit Suisse, Bloomberg

6 June, 2019 5

-0.3

0.0

0.3

0.6

0.9

1.2

1.5

1.8

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Median Excess Ret by Month (%)

€ HY $ HY


HY flows momentum has been bearish

Source: Credit Suisse, EPFR

6 June, 2019 6

-175

-125

-75

-25

25

75200

300

400

500

600Jun-1

6

Oct

-16

Feb-1

7

May-

17

Sep-1

7

Jan-1

8

Apr-

18

Aug-1

8

Dec-

18

Apr-

19

EUR HY Spreads

HY Flow 50D MovAvg ($mn inverted rhs)


IG flows are still very constructive – off benchmark buyers will be key

Source: Credit Suisse, EPFR

6 June, 2019 7

-500

-400

-300

-200

-100

0

100

200

30060

80

100

120

140

160

180Jun-1

6

Oct

-16

Feb-1

7

Jun-1

7

Oct

-17

Jan-1

8

May-

18

Sep-1

8

Jan-1

9

May-

19

EUR IG Spreads

IG Flow 50D MovAvg ($mn inverted rhs)


HY gross issuance is down materially

Source: Credit Suisse, Dealogic

6 June, 2019 8

21

3734

27

0

5

10

15

20

25

30

35

40Jan

Feb

Mar

Apr

May

€/£ Core HY Issuance YTD (€bn)

2016

2017

2018

2019


Loan issuance is down very materially

Source: Credit Suisse, LCD

6 June, 2019 9

42

27

0

10

20

30

40

50

Jan

Feb

Mar

Apr

May

Gross Leveraged Loan Issuance

2017 YTD (€bn)

2018 YTD (€bn)

2019 YTD (€bn)


What’s the trade?


What’s the trade? Alpha trades: Euro HY single-B Beta trades: AT1 and loans Cash vs. derivatives: basis and TRS



Huge dispersion in HY. Much less in AT1 / Hybrids


6 June, 2019 12

-60

-45

-30

-15

0

15

30

45

60

0 25 50 75 100 125

YTD

To

t R

et

(%)

Bond Price

€/£ HY

-45

-30

-15

0

15

30

45

60

0 25 50 75 100 125

YTD

To

t R

et

(%)

Loan Price

European Loans

-45

-30

-15

0

15

30

45

60

0 25 50 75 100 125

YTD

To

t R

et

(%)

Bond Price

€ AT1

-45

-30

-15

0

15

30

45

60

0 25 50 75 100 125

YTD

To

t R

et

(%)

Bond Price

€ Corp Hybrid


Alpha trades: Euro HY single-B



Euro single-B looks cheap to BB and is starting to move


6 June, 2019 14

301

100

150

200

250

300

350Jan-1

7

Apr-

17

Jul-

17

Oct

-17

Jan-1

8

May-

18

Aug-1

8

Nov-

18

Feb-1

9

Jun-1

9

B - BB Spreads


Euro single-B still cheap to dollar single-B, in contrast to BB


6 June, 2019 15

-100

0

100

200

300

Jan-1

7

Jun-1

7

Dec-

17

Jun-1

8

Dec-

18

Jun-1

9

€Single B - $Single B (bp)

€BB - $BB Spread Diff (bp)


Single-B landmine risk is real – credit selection is key!


6 June, 2019 16

-60

-45

-30

-15

0

15

30

45

60

25 35 45 55 65 75 85 95 105 115

YTD

To

t R

et

(%)

Bond Price

€ HY Single-B Bucket

€ HY BB Bucket


Beta trades: European leveraged loans



Loans lagged the new year rally, but outperformed HY in the May correction


6 June, 2019 18

114

173

232

35

129

-150

-50

50

150

250

350Jun-1

7

Dec-

17

Jun-1

8

Dec-

18

Jun-1

9

Single-B Bond Spreads - Single-B Loan Spreads (bp)


Much lower landmine risk in loans compared to HY


6 June, 2019 19

5.0%

1.0%

0%

1%

2%

3%

4%

5%

6%

7%Jan-1

7

Mar-

17

Jun-1

7

Sep-1

7

Dec-

17

Mar-

18

May-

18

Aug-1

8

Nov-

18

Feb-1

9

May-

19

Broad EUR HY

WE Loans


Robust CLO demand supports loans as an asset class


6 June, 2019 20

7

14 14

17

21

27

10.9 12.0

0

5

10

15

20

25

30

2013 2014 2015 2016 2017 2018 2018

YTD

2019

YTD

CLO Issuance (€bn)


Beta trades: lightly hedged AT1 & CoCos



After a long lag vs. seniors, CoCos are starting to compress


6 June, 2019 22

4.1

5.2

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0M

ay-

17

Aug-1

7

Nov-

17

Feb-1

8

May-

18

Aug-1

8

Nov-

18

Feb-1

9

May-

19

€ CoCos / Snr Cash


AT1 has still lagged the move in synthetics


6 June, 2019 23

7.5

5.5

6.5

7.5

8.5Jan-1

8

Apr-

18

Jul-

18

Oct

-18

Feb-1

9

May-

19

€ AT1 / Main Ratio


Systemic risk is real but hedge-able


6 June, 2019 24

5

6

7

8

9

10Jan-1

8

Apr-

18

Jul-

18

Oct

-18

Feb-1

9

May-

19

€ AT1 / Spain 5Y CDS Italian

Coalition


Cash vs. Derivatives



Why pay bid offer when you can receive it?


6 June, 2019 26

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6M

ay-

18

Jul-

18

Aug-1

8

Oct

-18

Nov-

18

Jan-1

9

Mar-

19

Apr-

19

Jun-1

9

$ Loan TRS Premium/Discount to NAV


Frequently negative and very dispersed basis


6 June, 2019 27

-250

-200

-150

-100

-50

0

50

100

0 200 400 600 800 1,000

Basis

le

vel (b

p)

Bond z-spread level (bp)

CDS - Cash Basis EUR

USD


Conclusion Range-bound market requires active trading Mandate flexibility is key Dislocations between markets are almost as volatile as risk on / risk off moves



Important Information and Disclosures

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These materials are only intended for institutional investors and in the US only for Qualified Institutional Buyers (QIBs) and are not intended for retail distribution.

These materials have been prepared by a Credit Sector Strategist ("Strategists") identified in these materials against each section as the author(s). Strategists are

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with information previously provided to you. CS does not undertake a duty to update these materials or to notify you when or whether the Strategist's analysis has

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6 June, 2019 29










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