NORD/LB Fixed Income Research Page 1 of 14 Current market environment Issues and market volume in Q1 2016 Analyst: Jörg N. Kuypers Good start to 2016 Average number of tranches rises further – up to six maturity bands Based on the issuance volume observed on our database, following on from a record year in 2015, the primary market for German Schuldschein Darlehen (Corporate Schuldschein Darlehen - CSSD) has already recorded another successful first quarter in Q1 2016. According to the information on our database, the issuance volume generated from CSSD comes to EUR 5.7bn (Q1 2015: EUR 5.0bn) as at 31 March 2016, which equates to an increase of 13.9%. The volume is spread across 20 transactions in total. By way of comparison, there were 22 deals contributing to a total volume of EUR 5.0bn in the first quarter of 2015. The level is down by almost 26% on the last quarter of 2015; however, with 36 transactions or a placed nominal of EUR 7.2bn, the fourth quarter of the past year was the strongest issuance period and also made the biggest contribution to the success of the previous calendar year. The final quarter of the year is traditionally regarded as very strong in terms of new issues. Looking back, it is clear that Q4 2015 was also the strongest period in the primary market since Q2 2008 with an issuance volume of EUR 6.6bn. The average number of tranches rose to 4.6 in Q1 2016 (Q1 2015: 3.7), which is also attributable to a relatively large number of transactions with up to six different maturity bands as well as alternative coupons. Notably, an average issuance volume of EUR 283m per transaction was achieved in the last three months, which is another considerable rise on the figure in the previous quarter of EUR 211m, which itself clearly exceeded the historical average of a little over EUR 150m. In relation to the average issuance amount per CSSD, this is the highest volume on record by far, with the exception of the first quarter of 2008 (the top year for these averages) when the figure reached EUR 333m. Standardised to a single tranche, we estimate the issuance volume to be virtually unchanged on the first quarter of the previous year at EUR 62m (Q1 2015: EUR 61m). Fixed Income Research Newsletter Schuldscheindarlehen 1st Quarter 2016 • 26. April 2016
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Newsletter Schuldscheindarlehen 26. April 2016
NORD/LB Fixed Income Research
Page 1 of 14
Current market environment
Issues and market volume in Q1 2016
Analyst:
Jörg N. Kuypers
Good start to 2016
Average number of tranches
rises further – up to six
maturity bands
Based on the issuance volume observed on our database, following on
from a record year in 2015, the primary market for German Schuldschein
Darlehen (Corporate Schuldschein Darlehen - CSSD) has already
recorded another successful first quarter in Q1 2016. According to the
information on our database, the issuance volume generated from CSSD
comes to EUR 5.7bn (Q1 2015: EUR 5.0bn) as at 31 March 2016, which
equates to an increase of 13.9%. The volume is spread across 20
transactions in total. By way of comparison, there were 22 deals
contributing to a total volume of EUR 5.0bn in the first quarter of 2015. The
level is down by almost 26% on the last quarter of 2015; however, with 36
transactions or a placed nominal of EUR 7.2bn, the fourth quarter of the
past year was the strongest issuance period and also made the biggest
contribution to the success of the previous calendar year. The final quarter
of the year is traditionally regarded as very strong in terms of new issues.
Looking back, it is clear that Q4 2015 was also the strongest period in the
primary market since Q2 2008 with an issuance volume of EUR 6.6bn.
The average number of tranches rose to 4.6 in Q1 2016 (Q1 2015: 3.7),
which is also attributable to a relatively large number of transactions with
up to six different maturity bands as well as alternative coupons. Notably,
an average issuance volume of EUR 283m per transaction was achieved
in the last three months, which is another considerable rise on the figure in
the previous quarter of EUR 211m, which itself clearly exceeded the
historical average of a little over EUR 150m. In relation to the average
issuance amount per CSSD, this is the highest volume on record by far,
with the exception of the first quarter of 2008 (the top year for these
averages) when the figure reached EUR 333m. Standardised to a single
tranche, we estimate the issuance volume to be virtually unchanged on the
first quarter of the previous year at EUR 62m (Q1 2015: EUR 61m).
Fixed Income Research
Newsletter Schuldscheindarlehen 1st Quarter 2016 • 26. April 2016
Newsletter Schuldscheindarlehen 26. April 2016
NORD/LB Fixed Income Research
Page 2 of 14
Issuance volumes and number of transactions since 2008
0
5
10
15
20
25
30
35
40
0
1.000
2.000
3.000
4.000
5.000
6.000
7.000
8.000
Nu
mb
er
of
iss
ue
s
Iss
ua
nc
e V
olu
me
(in
EU
R m
)
Source: NORD/LB Fixed Income Research
Q1 2016 - market sentiment
Although there was no substantial improvement in (macro) economic
conditions in the first quarter of 2016, there were some tangible signs from
China at least of a recovery trend with the highest export figures for a year.
Whether this can halt the economic slowdown in emerging countries
remains to be seen. This will not essentially change anything regarding the
notable recession in Russia and there has been no let up in the political
risks in the Eurozone. A potential Brexit and its repercussions, in
particular, are increasingly being perceived as a sword of Damocles,
posing risks not just for Europe, but also for the global economy. There
had already been profit revisions by companies in the last quarter and
these risks are certainly not having a positive influence on the first
revisions of earning figures this year, or on market sentiment in general.
Some prices on international commodity markets have experienced a
rebound, as can be seen for instance in the recent strong demand for iron
ore, copper and oil, which hit a 12-year low in January, but then rose by
30% within 2 months near to its high for the year. Nevertheless,
commodity indices remain low in parts, which means that primarily
companies from the "basic resources" sector in addition to other cyclical
sectors remain under heavy pressure.
In addition to these developments, the leverages at various European
corporates (large and mid-caps) have risen because of M&A activities,
albeit not to the same extent as at their US counterparts. On the iTraxx
Europe, spreads on 5Y-CDS, just like those on cash bonds had widened
significantly in such an increasingly risk averse market sentiment, are
meanwhile once again exactly in line with those at the start of 2016. The
same is true of the Crossover, which has tightened by a third in the space
of a month. With this positive momentum, due in part to the continuing
expansionary monetary policy of leading central banks, it remains to be
seen how the CSPP, which starts in June 2016, will affect credit spreads.
However, the market for CSSD will at most only be indirectly affected by
this programme through second round effects. Presently, we are of the
opinion that spread tightening for the cash bonds eligible for the CSPP will
be more pronounced than on synthetic credits.
Newsletter Schuldscheindarlehen 26. April 2016
NORD/LB Fixed Income Research
Page 3 of 14
Size distribution of CSSD in Q1/2016 (number-weighted by tranche)
Maturity distribution of CSSD in Q1/2016 (number-weighted by tranche)
Source: NORD/LB Fixed Income Research Source: NORD/LB Fixed Income Research
More than 4/5 of CSSD have
volumes over EUR 200m;
maturity bands between 6 and 8
years as well as 4 and 5 years
were most in demand
Trend towards longer maturities
confirmed
In number-weighted terms, at 42.4% the vast majority of transactions in Q1
2016 were above the EUR 200m threshold and around 27% were
attributable to the EUR 40m to 80m range, while approximately one sixth of
the issues were between EUR 80m and 200m, with the final seventh below
EUR 40m. Following the Schuldschein issue by Württemberg-based
automotive supplier Mann+Hummel in October 2015 and the preceding
issue from ZF Friedrichshafen (also automotive) in January 2015, the billion
threshold for a transaction was exceeded once again in Q1 2016 with a
Schuldschein from Hofer Financial Services GmbH in the amount of EUR
1.6bn and a EUR 1.1bn CSSD from Porsche AG. The CSSD from Porsche
was the largest the company has placed to date and is intended to serve as
funding for a bond that matured in February this year as well as an
investment plans, relating to e-mobility for instance. Often the funding of
acquisitions, as in the case of Mann+Hummel for example, is one of the key
factors behind the rapid growth in the CSSD market.
The other large issues in the first three months of the year are as follows:
Heidelberg Cement AG: EUR 625m for the part funding of the
acquisition of Italcementi,
Otto Bock Holding GmbH & Co. KG: EUR 600m,
freenet AG: EUR 560m to service a corporate bond that matures
this month and to create financial leeway for further growth.
Looking at maturities (comparative figures for Q4 2015 in brackets), the
statistical consolidation at maturity bands between 4 and 8 years is
strengthening. Among the CSSD issued, in number-weighted terms, a good
third (46%) of tranches fall into the 4 to 5 years maturity band and as much
as over 40% (30%) into the 6 to 8 years and 9.8% (6%) into the up to 3
years maturity band, with 12% (15%) in the 9 to 10 years band and finally
42,4%
27,2%
16,3%
14,1%
above € 200 mln € 40 - 80 mln
€ 80 - 200 mln up to € 40 mln
9,8%
35,9%
40,2%
12,0%
2,2%
up to 3 years 4 to 5 years 6 to 8 years
9 to 10 years longer than 10 years
Newsletter Schuldscheindarlehen 26. April 2016
NORD/LB Fixed Income Research
Page 4 of 14
2.2% (3%) into the longer than 10 years band. In our opinion, the trend
towards longer maturities is partly due to issuers' expectations that capital
market interest rates will rise in the medium term (when ECB's QE ends in
March 2017), as well as to rising credit spreads in the short term in light of
the volatile market environment (and thus higher funding costs overall). The
search for yield is also driving institutional investors in particular into longer
residual maturities.
Motives from issuers' and
investors' perspectives
Issuers' excellent credit quality
High sector granularity
For investors who pursue a buy-and-hold strategy, the CSSD has become a