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Credit Has Best Rally in Europe Since 2009 With Central Bank Aid

Credit Has Best Rally in Europe Since 2009 With Central Bank Aid
Commodities trader Glencore International Plc’s five-year credit-default swaps are the best-performing of the 125 investment-grade companies in Markit’s iTraxx Europe Index, tightening 281 basis points this year to 199, data compiled by Bloomberg show. Photographer: Gianluca Colla/Bloomberg

Corporate credit markets had their best year since 2009 in Europe as confidence was boosted by unlimited central bank funding allied with pledges to do whatever it takes to save the common currency.

The cost of insuring against default tumbled, with the Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings declining 273 basis points this year to 482, according to prices compiled by Bloomberg. That’s the biggest rally since a 58 percent tightening three years ago and was led by Turin, Italy-based Fiat Industrial SpA and German travel operator TUI AG..

The European Central Bank’s decision to hold benchmark borrowing costs close to zero and pump as much as 1 trillion euros ($1.3 trillion) into the region’s financial system helped fend off a credit crunch. ECB President Mario Draghi’s announcement in July that the euro wouldn’t be allowed to crumble allayed concerns the crises in Greece, Spain, Ireland and Portugal would trigger financial meltdown.

“The man of the year for the bond market has to be Mario Draghi,” Chris Iggo, the London-based chief investment officer for fixed income at AXA Investment Managers Ltd. said in a note to clients. “He reduced the risk of the single currency breaking up and put in place a potential mechanism for dealing with the debt crisis.”

Financial Debt

The cost of insuring financial debt is heading for the biggest-ever annual decline and earlier this month traded at the lowest levels since May 2011. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers was little changed today at 143 basis points after falling from 279 at the start of the year. The subordinated index was 1 basis point lower at 237, down from 512 at the beginning of 2012.

London-based Lloyds Banking Group Plc has the best performing derivative contracts in the Markit Financial index with the cost of swaps on the lender’s senior debt dropping about 61 percent.

Commodities trader Glencore International Plc’s five-year credit-default swaps are the best-performing of the 125 investment-grade companies in Markit’s iTraxx Europe Index, tightening 272 basis points this year to 198, data compiled by Bloomberg show. The company is due to complete its $33 billion takeover of Switzerland-based Xstrata Plc by the end of January.

The gauge of investment-grade debt fell about 56 basis points this year, the first decline in three years.

‘Potential Stigma’

A basis point on a credit-default swap contract protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

“Anything in Europe carried the potential stigma of a euro breakup and re-denomination but clearly the market is much more relaxed on this tail risk after the policy reactions and promises,” said Arif Husain, the London-based director of European fixed-income at AllianceBernstein Ltd., which oversees $407 billion.

Reassured by the central bank backstop, corporate treasurers seized on record-low borrowing costs by issuing almost 294 billion euros of debt this year, the most since 2009 when a record 383.5 billion euros of non-financial securities in euros and pounds were issued, data compiled by Bloomberg show.

Bond yields plunged to a record 1.91 percent on average from 4.4 percent at the start of the year, Bank of America Merrill Lynch’s Euro Corporate Index shows.

Volkswagen Bonds

Volkswagen AG, Europe’s biggest carmaker, and utility Electricite de France SA led issuance, with VW pricing eight benchmark-sized euro-denominated bonds in the second half of the year, data compiled by Bloomberg show.

While company debt investors earned 13 percent on their holdings this year, according to Bank of America Merrill Lynch’s Euro Corporate Index, pickings are forecast to be slimmer next year as sales slow.

Issuance may fall by as much as 37 percent in 2013, according to Credit Agricole SA, with returns on investment-grade debt predicted to slump by a third at Societe Generale SA and Royal Bank of Scotland Group Plc.

“We believe around 4 percent returns will be possible,” SocGen credit strategists led by Suki Mann told clients in a note. “To beat that, investors will have to look closely at the higher beta names and sectors, particularly the subordinated financials sectors.”

As investors sought out higher-yielding assets, relative yields on European securitizations and typically safer covered bonds plunged. Buyers demand 72 basis points more than interbank rates to buy senior notes backed by U.K. prime residential mortgages, approaching the lowest since January 2008, and a drop from 165 basis points a year earlier, according to JPMorgan Chase & Co. data.

Covered Bonds

Sales of covered bonds from European banks dropped to about 198 billion euros from 294 billion euros a year ago, according to JPMorgan. Covered bonds, known in Germany as pfandbriefe, are backed by mortgages or public-sector loans and differ from other forms of asset-backed securities in that the notes are guaranteed by the issuer.

Investors demand 126 basis points above the asset swap spread to buy European covered bonds compared 203 basis points a year ago, Bank of America Merrill Lynch’s Euro Jumbo Covered Bonds Index shows.

Spreads on European commercial mortgage-backed securities fell more than 50 percent to 275 basis points, the lowest since July 2008, according to JPMorgan data.

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