Daily Credit Summary: May 17 - Anything But Unch

Commentary courtesy of www.creditresearch.com

Spreads closed modestly wider today with HY underperforming IG and both underperforming stocks as an afternoon rally helped the indices but left single-names decidedly less sanguine. Intraday swings remain somewhat volatile in US and EUR credit and activity in the US definitely tailed off as Europe closed and the afternoon began. M&A/LBO deals dominated much of the idiosyncratic action today but breadth remained negative and not supportive of any aggressive rerisking sentiment for now. Importantly there was widespread credit underperformance and equity outperformance today as the Pactiv and UHS deal suggest relevering being priced into the capital structure and seemed to spread some contagion across other deal-worthy names.

The swings in overnight futures and European credit weakness were not immediately evident as stocks and credit opened pretty much unch from Friday's close in th US. IG was slightly ahead of HY as it seemed the renewed weakness being seen in European Sovereigns and FINLs saw a flight-to-quality trade that benefited TSYs and US IG credit only. Somewhat magically, EUR and EURJPY managed to storm higher in the pre-open, helping us avoid a nasty scene but between Lowe's outlook and the considerably weaker than expected Empire Manufacturing data, we slipped lower after some initial excitement. Credit felt very much in sync with stocks for most of the day and stocks perfectly in sync with EURJPY and we note for clarity that overnight we saw all the major carry pairs getting crushed (making the recovery pre-open even more interesting) suggesting one should be increasingly questioning liquidity expectations.

US FINLs were leading the underperformance in US credit as HY was also underperforming IG quite well but a few notable items jumped out at us again today as we traded up and down in a decent range but ended with nothing truly memorable. IG managed to close the gap to the 113bps tights of 5/6 and HY traded down below 5/7 highs (in price) managing to get back above 600bps again. HY traded up to around 610bps today which is poretty much exactly at its 200-day average. IG sold off out of the gate and then screamed from 109 to around 113 (suggesting some more of that magical gamma that has been so disruptive recently). IG traded around its MEDIAN level since Jan 2009 - we have closed 50% of says wider and 50% of the days tighter than the 111bps level that we clung to much of the afternoon.

Fitting with the relevering discussions we've had recently, we noted that across rating cohorts, there was underperformance in the better-rated names. While HY names also underperformed, we do not see this as a reach-for-yield move but more of the systemic increase in risk premia we discussed as one of the key reasons for believing IG credit had turned the corner in this cycle (which we called 3-4 weeks ago now).

Paper & Packaging (obviously affected by LBO deals) was among the worst performing industries today along with Monolines, Autos, and Apparel. There were more than a few Basic Materials names at the top of the wideners list today but as we discuss below, the worst performers of the day were dominated by LBO/deal speculation putting premia into the 3s5s curve. Leisure (thanks to a decent performance by all the Lodging names) outperformed as Energy also outperformed (even as oil fell below $70 intraday) managing to beat Utes in general. Insurers, homebuilders, and consumer finance names never really saw any strong bid today even as we rallied back in the afternoon and the insurers (along with UHS) helped lower beta names underperform higher beta today for a change on a 'weak' day.

IG and HY pretty much made it back to unch from the open (though wider close-to-close) as did stocks (which managed as small gain). This leaves IG notably tighter than Main (which after this morning's performance is considerably cheap to intrinsics) which suggests perhaps some of the late day rally was Main delta hedging. HY 3Y underperformed 5Y today (though notably less liquid as the day wore on) and HY-XOver is now within 55bps again. The index underperformance theme was very clear in Europe (with Main, XOver, and FINLs all following this path and making indices notably cheap) but SovX leaked back as PORTUG and GREECE underperformed (led relatively speaking by the former). The velocity of the swings in the indices once again reinforces much of the short gamma exposure that seems to be driving these intraday moves and we wonder which end the break comes next. Main ExFINLs widened 6bps to 106bps today while IG ExFINLs widened 2bps to 100.5bps today as breadth in the US was around 3 wideners to 1 tightener - hardly supportive of the big pullback rally we saw.

M&A/LBO Thoughts

For credit, the potentially more interesting stories were in M&A deals (and their contagious impact on other deal-worthy names today). Pactiv, a name that appears relatively high on many LBO screens, fulfilled expectations and announced an LBO (even though our IRR model did not see it as a slam-dunk - though much better-than-average). UHS, a name we have been very clearly tracking and noticing capital structure disturbances recently also announced a debt-fueled acquisition of PSYS. Our capital structure trade in the latter, closed at a modest loss this morning, moved back into the money as we rallied back this afternoon for those still in and the options leg was a great performer (interesting how stock, vol, and CDS were all moving quite considerably 'ahead' of this on Friday eh?). The UHS/PSYS was notable as they outbid PE on the deal.

The point is that while we were pretty downbeat (see our recent strategy article) on the likelihood of LBOs becoming a major issue once again (although recognizing the relative potential mispricings in debt/equity costs currently), we are perhaps under-estimating the burning pain that Private Equity is feeling in its pockets. The recent 'downturn' in risk demand, we suspect, is setting these guys scrambling to get deals done (to be able to lock in their 2 & 20 for a few more years) before the window shuts on funding (even with CLO chatter continuing (LCDX underperformed HY today by the way). For this reason, we will publish our internal LBO screens this week (apologies as we promised these last week but market volatility delayed the publication).

Most importantly we will start tracking an index of our Top 100 LBO names to get some idea of the market's relative distaste for the idea of relevering in credit. Today, most notably, the Top 100 LBO names widened over 3% on average, significantly underperforming the Top 100 CDO names (around 2% on average) and the broad market (around 1.7% on average) and as one would expect 3s5s steepened up in the Top 100 LBO names (around 1% on average).

Some names that stand out (aside from Pactiv which jumped 162bps to 305bps in 5Y (and 198 in 3Y) - giving us a target at least!) include Lubrizol, Packaging Corp of America, Sealed Air, Temple Inland, Ryder, and CA. BCE, RRD, and JNY all rallied modestly today (perhaps as PE $$$ are getting used up?).

Index/Intrinsics Changes
CDR LQD 50 NAIG +1.02bps to 96.38 (27 wider - 16 tighter <> 28 steeper - 21 flatter).

CDR Counterparty Risk Index fell 0.38bps (-0.27%) to 141.89bps (5 wider - 9 tighter).

CDR Government Risk Index rose 4.11bps (4.48%) to 95.75bps..

CDX14 IG +0.5bps to 109 ($-0.01 to $99.61) (FV +2.03bps to 108.89) (81 wider - 32 tighter <> 68 steeper - 56 flatter) - Trend Wider.

CDX14 HVOL -1bps to 159 (FV +2.25bps to 0) (20 wider - 9 tighter <> 19 steeper - 10 flatter) - Trend Wider.

CDX14 ExHVOL +0.97bps to 93.21 (FV +1.97bps to 92.35) (61 wider - 34 tighter <> 46 steeper - 49 flatter).

CDX14 HY (30% recovery) Px $-0.12 to $96.63 / +3.2bps to 587.5 (FV +7.88bps to 547.46) (70 wider - 23 tighter <> 41 steeper - 59 flatter) - Trend Wider.

LCDX14 (70% recovery) Px $-0.25 to $96.88 / +7.06bps to 334.69 - Trend Wider.

MCDX14 +2.5bps to 171bps. - Trend Wider.

ITRX13 Main +6.75bps to 116.13bps (FV+3.04bps to 106.71bps).

ITRX13 Xover +29bps to 532.5bps (FV+21.11bps to 505.6bps).

ITRX13 FINLs +9.5bps to 155.5bps (FV+1.48bps to 144.9bps).

DXY strengthened 0.07% to 86.16.

Oil fell $1.08 to $70.53.

Gold fell $11.28 to $1221.9.

VIX fell 0.4pts to 30.84%.

10Y US Treasury yields rose 3.4bps to 3.49%.

S&P500 Futures gained 0.18% to 1137.4.

Across the capital structure, only 41% of reference entities agreed today between credit and equity with 30% agreeing on deterioration and 11% agreeing on improvement. Much as we would perhaps expect, given our comments above on LBO/M&A risk, a large 41% of single-names saw credit widening and equity strength leaving 18% divergent with credit outperformance over equity weakness.

Single-Name Movers

Today's biggest absolute movers in IG were Universal Health Services Inc (+43bps), Alcoa Inc. (+16bps), and Freeport-McMoRan Copper & Gold Inc. (+14.75bps) in the wideners, and Carnival Corp. (-8bps), Marriott International Inc. (-6bps), and Vornado Realty LP (-5bps) in the tighteners. Today's biggest percentage movers in IG were Universal Health Services Inc (+16.54%), Eastman Chemical Company (+9.79%), and TJX Companies, Inc./The (+9.15%) in the wideners, and Carnival Corp. (-6.67%), Quest Diagnostics Incorporated (-5.72%), and Marriott International Inc. (-4.76%) in the tighteners.

In Main, the biggest percentage movers were Rolls-Royce Group PLC (+15.92%), Hellenic Telecommunications Organization SA (+14.86%), and Gas Natural SDG SA (+11.88%) in the wideners, and Wolters Kluwer NV (-6.28%), Assicurazioni Generali SpA (-3.75%), and UBS AG (-3.73%) in the tighteners.The largest absolute movers in Main were Hellenic Telecommunications Organization SA (+27.5bps), Glencore International AG (+20bps), and Gas Natural SDG SA (+19bps) in the wideners, and UBS AG (-5.5bps), Assicurazioni Generali SpA (-4.5bps), and Wolters Kluwer NV (-3.75bps) in the tighteners.

The biggest percentage movers in XOver were ONO Finance, PLC (+11.73%), ThyssenKrupp AG (+10%), and Nordic Telephone Company Holding ApS (+8.33%) in the wideners, and BCM Ireland Finance Ltd (-1.75%), DSG International plc (+0.42%), and Stora Enso Oyj (+0.65%) in the tighteners.The largest absolute movers in XOver were ONO Finance, PLC (+148.01bps), NXP b.v. (+87.74bps), and Ineos Group Holdings plc (+73.72bps) in the wideners, and BCM Ireland Finance Ltd (-38.34bps), Stora Enso Oyj (+2bps), and Lafarge SA (+2.25bps) in the tighteners.

In the names of the HY index, today's biggest percentage movers were Temple-Inland Inc. (+11.67%), ArvinMeritor Inc (+9.92%), and Goodyear Tire & Rubber Co. (+8.17%) in the wideners, and RRI Energy, Inc. (-5%), Mirant North America LLC (-4.69%), and Starwood Hotels & Resorts Worldwide Inc. (-3.13%) in the tighteners. The largest absolute movers in HY were ArvinMeritor Inc (+65.94bps), American Axle & Manufacturing Inc (+49.22bps), and Goodyear Tire & Rubber Co. (+42.5bps) in the wideners, and RRI Energy, Inc. (-40.35bps), Realogy Corporation (-31.85bps), and iStar Financial Inc. (-25.84bps) in the tighteners.

The CDR Counterparty Risk Index Series 2 (of brokers and banks) fell -0.38bps (or -0.27%) to 141.89bps. Royal Bank of Scotland Group Plc (8bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Royal Bank of Scotland Group Plc (4.44%) is the worst (relative) performer. UBS AG (-5.5bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and UBS AG (-3.73%) is the best (relative) performer.

The CDR Aussie Index rose 7.1bps (or 8.2%) to 93.75bps. Macquarie Bank Limited (14.28bps) is the worst (absolute) performer, whilst Telecom Corporation of New Zealand Limited (15.3%) is the worst (relative) performer. SingTel Optus Pty Ltd (3.66bps) is the best (absolute) performer, and Qantas Airways Ltd (3.74%) is the best (relative) performer.

Comments

[Illya Kuryakin]

Just wanted to see if I could solve the math problem and reassure myself that I am not a machine...

[Grand Supercycle]

EURUSD / EURJPY continues to show buying support on intra day chart.

EURGBP daily chart gives mild bullish warnings.

http://stockmarket618.wordpress.com

http://www.zerohedge.com/forum/latest-market-outlook-1