Taking a deeper dive into the iBoxx, differences within the securities become apparent, showing clear distinctions between ‘resilient’ and ‘infected’ credits. Just over 40% of constituents of the European index are trading 50 to 100 basis points tighter than the headline index level, largely driven by utilities who make up over 80% of the index. On the other hand, transportation assets predictably drag up the index and are on average 100 basis points wide. As a result, we are starting to see the potential resurgence of activity in the infrastructure market. However, the new liquidity environment requires a different playbook for clients to ensure successful financings: it’s more vital than ever to quickly build momentum with key lenders and early in the process.
One of the first things mentioned on the majority of calls lately is centred around ‘how a respective lender is still open for business’. However, there is a clear divergence of those who are and who aren’t. For banks, the focus is increasingly on existing clients and sponsors where they have a relationship to protect or an opportunity to capitalise on. As suggested in a letter published by the FCA earlier this week, banks have been using debt relationships to win roles on equity transactions (and other ancillary business). The focus on core clients is especially true for a number of American banks where it has been well documented on their absence from a number of large European corporate financings over the last few weeks. This retrenchment is partially due to the wave of RCF drawings and loans to other corporate sectors, quickly utilising an entire divisions risk weighted asset budgets for the year, leaving new opportunities fighting for a piece of the smaller capital pie. As a result, capital allocation is being much closer scrutinised for adequate returns, and transactions need to be well structured.
The other issue some banks are facing is a retrenchment to domestic markets. Where banks have some level of government support or where they are conduits for government support, there is a clear focus on delivering these strategies over and above the delivery of international offerings. This is not just the case for new opportunities, and includes processes already underway where supportive appetite has already been indicated to sponsors. This is, however, not the rule for all banks in all geographies.
Once again, however, the institutional market can play a role in displacing banks. There is bifurcation within this liquidity pool, with more appetite from European infrastructure lenders than their US counterparts, who are still busy focusing on other sectors given they have always been more generic in their approach - one US investor said they were managing close to 50 waiver requests across the various industry groups that they provide capital to. Yet, on the other end of the spectrum, one of the largest European infrastructure debt investors said they are starting to be as busy as they were pre-COVID, and continuing to look for new opportunities.
A big question for issuers is where to price these. We are looking at a EUR opportunity at the moment where the investor is seeking approval for a fixed coupon which takes uncertainty out of the equation for both sides and much earlier in the process - negotiations still remain on how to set the coupon. More so than ever, correct credit positioning and relevant benchmarking is critical to ensure investors view credit in the correct frame, resulting in not only the best pricing but also optimal financing terms.
In the wider macro market, the Q1 GDP flash prints have confirmed the obvious news of lockdown recessions looming across the Eurozone (-3.8% Q1 annualised) and the US (-4.8% Q1 annualised). Most concerning is the extent of the decline, considering the strong start to the year and when lockdown periods begun, as well as the outlook this gives for Q2. The lockdown is also deflationary, with inflation expectations declining sharply across the EU and US, largely driven by Energy, but also wider consumer factors at play.
Whilst this week the Federal Reserve has remained unchanged, the ECB have taken action to introduce another alphabet soup of an acronym, this time PELTROs to ease financing conditions in the region. By effectively paying banks to borrow, it is designed to encourage lending into the real economy by banks and support liquidity.
Nonetheless, the majority of the economic data has been predicted, and with lockdown conditions soon to be easing, the green shoots are beginning to show.
DC Advisory is on hand to support our clients and contacts, and would be delighted to get in touch should you have any questions.