New issues highlight value opportunities in fixed income

After a period of robust performance in credit spreads over the summer, we expected that syndicate teams would be in close discussions with companies encouraging them back to the new issue markets, and indeed, after an usually quiet summer, the primary market has certainly reopened quickly and with reasonable volume.

One deal that caught our eye last week was Volkswagen, which brought two hybrid bonds. Volkswagen is the largest car manufacturer globally, with c. Euro280bn of revenue and is strongly Investment Grade rated, at A3 / BBB+/ A-. At the hybrid debt level, Volkswagen is also rated Investment Grade, and so the coupon of 7.5% in Euros, or ~9% when hedged to £ or $, for the five year call, made the hybrids looks attractive value for a highly rated credit. As a result, it wasn’t a surprise that final books were Euro9bn, for the combined hybrid issuance (Euro1.7bn), and the bonds are currently trading more than a point above their issue price.

Another interesting issuance came from Intesa Sanpaolo, the largest banking group in Italy, rated Baa1 / BBB /BBB. It announced a tender of its existing AT1, accompanied by a new issue, which printed with a 9.125% coupon in Euros, giving investors double digit income when converted to £ or $ - and once again the bonds have trading positively on the break.

As always, with high volumes of issuance there is always a chance of market indigestion, particularly as rates markets continue to be uncertain, and so we think it is prudent to be highly selective on these primary transactions. It’s also important to be disciplined on price in our view, as some deals can be tightened significantly from initial price talk, meaning that secondary markets can sometimes offer better value.

However, we believe there can be no doubt that this vintage of primary issues are offering very attractive current coupons, which of course, as well as offering attractive medium/long term income, also helps to provide a buffer against any volatility, and ultimately the potential for longer term capital gains should rates normalise at a lower level. Over the 5 years to its call date, the Volkswagen hybrid bonds will eventually return 37.5% of income to investors, while Intesa Sanpaolo will return investors ~55% in coupon payments to its 2029 call date. At a time when short term government bonds are seemingly providing an attractive home for cash, we think there are much more compelling options available for investors with slightly longer time horizons or risk appetites.