News in brief

Dispersion trades in play as transatlantic rift opens

The iTraxx Crossover five-year 0-10% equity tranche widened five points in the early part of October, to 52.75 points, before returning to 50.75 at time of press. By contrast, CDX HY five-year 0-15% ended the month flattish, around 47 points, despite an initial 2.5 point widening.

Market seeks new ways to find talent after hectic year

But sources say it’s becoming increasingly difficult to poach junior analysts from the sell-side with banks paying up for their junior credit staff. “This is a US trend that has crossed over into Europe,” says a London-based recruiter. “This had been a tried-and-tested way for the buy-side to expand, which they found attractive because of the rigorous training regimes that banks employed. But it’s becoming expensive to hire from the sell-side, so we’re seeing a lot of moves between fund managers.”

Fund managers have also targeted candidates from advisory firms, but again, it is becoming difficult to match wages in this sector.

The talent drain is exacerbated by the fact that several banks have outsourced analysis functions to other parts of the world, says the head-hunter.

To counter this, several large CLO managers are understood to have prioritised graduate recruitment schemes. This gives candidates an overview of the credit markets generally as they move across departments before settling on a defined role.

FCA draws up new fund structure for long-term assets

Dubbed Long-Term Asset Fund (LTAF), the FCA-regulated fund will restrict investor liquidity so that redemptions are permitted no more frequently than monthly, and there is at least a 90-day notice period. This should allow LTAFs to buy illiquid or long-dated assets, including private equity, infrastructure, private debt and real estate assets. LTAF funds will adopt an open-ended structure.

Energy crunch grows as differentiator for EM and western credit

WTI oil was $84.17 a barrel at time of press, more than double where it traded a year ago. While beneficial to producer countries and energy companies, the rise stems from supply squeezes and has exposed weaknesses in various countries’ preparedness to reopen economies after covid-19 lockdowns.

“We see persistent supply constraints and oil prices continuing to go higher, which is likely to hurt energy-dependent sectors as well as commodity importing countries,” says one portfolio manager in London.

China’s energy shortfall has drawn headlines due to the likelihood this will impact economic growth there. “We are not extremely worried about China, as we see dovish signs from the government,” says the PM. “We see China 2022 GDP growth closer to 5%, but not below.”

But the picture across emerging markets is becoming increasingly complicated. Even though Brazil is an oil producer, a drought in the Parana region has halved its hydroelectric power production, also spelling energy rationing problems for Argentina and Paraguay.

Developed markets are not spared either. EU gas prices have risen by 170% since the start of 2021 and ministers were called to emergency meetings on 26 October amid divisions on how to tackle the crunch.

“Inflation rates have once again been higher than the ECB’s projections, and higher energy prices and supply chain frictions are clearly complicating the ECB’s life,” wrote ING economists in a note.

Euro CLO triple As to tighten as new investors enter

Sinking Euribor floor brings CLO relative value into play

Five-year intrinsic Euribor floors have dropped 25 basis points from the end of August to around 13bp, sources say.

Stephane Michel, senior fixed income portfolio manager at Federated Hermes, says the contribution to the implied discount margin depends on the assumptions around the effective life of the deal. The decline in floor value at the shorter end of the curve, however, is subtler.

“For deals that get refied or reset at the first opportunity, this is still around 40bp — albeit a drop of 7bp versus the end of Q3,” he says. “But the impact of the rate curve change is more pronounced if we assume a longer average life on the transaction, with the floor now being worth only around 10bp, while it was worth around 40bp at the beginning of the year.”

He says, assuming curve changes are now done, shorter bonds provide more value from the floor on a carry basis. They are, however, more exposed to further increases in rate expectations. Longer duration bonds will benefit if the market decides the recent move is an overshoot and have less to lose in case of an uptick in the short end.

Another CLO investor tells us that the floor collapse also means that US CLO paper looks cheaper than Europe. “US triple As are pricing at 115bp, while European triple As are at 94bp plus around 10bp of floor.”

However, as Deutsche Bank’s CLO research team points out, five-year USD/EUR currency basis is around -7bp (from around -4bp in June), which should offset the rates move.