Bankers even believe corporate issuers may return to the market fairly quickly, convinced that the credit bull run is over and they will need to jump at issuing opportunities when they arise, in case spreads deteriorate further.
Credit markets in the US and Europe were sharply volatile in the first half of this week. Investors refused to leave themselves exposed to risk ahead of the first quarter results announcements from GM and Ford, which are both teetering on the edge of junk status. Bond spreads swung wildly as the market struggled to find direction.
However, once investors and traders had digested GM's results on Tuesday and Ford's on Wednesday, as well as US March inflation and economic figures on Wednesday and Thursday, spreads tightened, fuelling hopes that the market could now return to stability.
"There will be very little news on autos now that the profit warnings from GM and Ford and first quarter results are out of the way," said Gary Jenkins, head of European credit research and fundamental credit strategy at Deutsche Bank in London. "The news on the two car companies was not as bad as we thought it would be and while the problems haven't gone away, they are likely to be ignored in the coming weeks. The economy is still supportive for the credit markets and we could see some spread tightening in the next months."
US equities jumped on Thursday, when the Dow Jones Industrial Average climbed more than 200 points — its biggest one day rally since June 2003.
The index was buoyed by a regional Federal Reserve survey that eased fears of a slowdown in economic activity and companies including Motorola and Volkswagen announcing strong first quarter earnings.
Stronger US equities lent further fuel to the rally in corporate bond spreads — but Treasury prices fell heavily on the same figures, a reminder of the continuing fragility of the market.
A thin week for deals
The choppy market conditions kept investment grade corporate issuers away. The only such deal to emerge was a $350m 10 year bond from Lennar Corp, the Miami-based homebuilder which is rated Baa3/BBB-.
The only sizeable deal in the US was Citigroup's $2bn three year self-led floating rate note. The defensive trade played to the mood of the market, enabling an increase from $1bn to $2bn. The bond was priced at par to yield 5bp over Libor.
But the outlook for next week and beyond is brighter. Lanxess, the German chemicals, rubber and plastics company, has awarded a mandate to Citigroup, JP Morgan and HVB for a benchmark bond in euros of intermediate maturity, with launch expected in early May.
BASF, the world's largest chemicals maker, is expected to bring a Eu1bn seven year through ABN Amro, Citigroup and Deutsche Bank. BASF is rated Aa3/AA-/AA-.
And luxury goods group Louis Vuitton Möet Hennessy is hoping to raise seven year debt but has yet to award a mandate.
Frazer Ross, director of bond syndicate at Deutsche Bank in London, said there was a growing pipeline of new issues, tenders and exchanges.
"Corporate syndicate managers have been travelling around the world trying to get borrowers to issue in December through February but they either did not need the money or even if they did, preferred to wait for levels to improve," said Ross. "However, with the recent volatility and spread widening, issuers that may need funds only before year end, are getting concerned about higher yields and widening spreads. As a result, the phone is starting to ring again.
"It is now more difficult to bring new issues but corporates are thinking that is better to do them now than wait until the third and fourth quarter."
Autos drive rally
The rally that followed the two US auto giants' results lasted through Wednesday's and Thursday's trading sessions and pulled the whole credit market tighter.
It was one of the corporate bond market's typical paradoxical reactions — the results were dreadful, but the market was relieved they were no worse.
General Motors reported its worst quarterly result since 1992, a loss of $1.1bn, and gave no guidance on its 2005 earnings — but market participants were relieved that it was not downgraded to junk.
Ford reported first quarter profits down 38% on the first quarter of 2004, but that still put it $1.21bn in the black and it was better than analysts had expected. The company warned, however, that it would disappoint investors in the second quarter, and would at best break even before exceptionals.
In the US, the GMAC 2014 bonds tightened 28bp to 512bp over Treasuries while Ford's 2031s came in by 32bp to 443bp over. The GM 2033s snapped in 56bp to 578bp over Treasuries.
In euroland, DaimlerChrysler, which had suffered from GM and Ford contagion, saw its five year credit default swaps (CDS) tighten from 210bp/220bp on Monday to close at 130bp/135bp on Wednesday.
Its 2011 bonds tightened 23bp on Wednesday to close at Bunds plus 117bp/112bp, having been at 190bp/165bp on Monday.
The tightening continued into Thursday with Ford's five year CDS 100bp tighter at 430bp/450bp and GMAC's in by 70bp at 590bp/610bp. The Daimler 2011s came in 15bp while VW's CDS closed at 63/67bp — a 10bp tightening.
Marcus Schüler, managing director of integrated credit marketing at Deutsche, said the market had effectively repriced credit risk over the last five or six days, with new wides in the credit index spreads on Monday.
"We seem to have found a new equilibrium now, which is significantly tighter than Monday's wides but wider than the tight levels we traded at in early March," he said. "Current spreads more fully price in the risks, in the shape of growth, inflation or a GM downgrade.
"It has been the contagion effect from GM on DCX and VW which caused the widening," Schüler added. "Over the last two days however, investors realised that spreads were too wide given their credit quality and buyers have started to appear."
Too late for Rheinmetall, Fidis
However, the relief rally did not come soon enough for automotive and defence firm Rheinmetall of Germany and car financing company Fidis. Both companies postponed bond issues, deeming the market too volatile after Friday's meltdown.
As late as last Thursday evening (April 15), Commerzbank and Dresdner Kleinwort Wasserstein had been planning to price Rheinmetall's Eu300m five year bond at mid-swaps plus 60bp area.
However, credit spreads blew out on Friday, investors became nervous and some pulled their orders. The company backed off.
Fidis, the Fiat car finance firm, roadshowed its Eu500m three year floating rate deal, with leads Banca IMI, Caboto and Merrill Lynch talking the price at 80bp-85bp over Euribor, before delaying it.
However, both companies are hoping to come back to the market when it becomes more stable and could appear as early as next week if volatility keeps receding.
The roadshow for the planned Eurobond from Sixt, Germany's leading car rental company, ends today (Friday). The company is expected to issue Eu250m with a likely maturity of seven years — but only if the market is in better shape.
Event risk remains a threat
Jenkins at Deutsche said that while fears on GM and Ford have receded for now, GM's second quarter results will bring volatility back.
"GM did not give earnings guidance for 2005, but if you take Ford's guidance as outlook for the overall sector, while bearing in mind GM is the weaker of the two, then GM's outlook is tough," said Jenkins. "Companies very rarely pull guidance when it is good. GM is going to have a tough second quarter and the likely outcome is that the company will be downgraded around the time of its half year results. The most likely scenario is that Ford will also be downgraded this year, but later than GM."
Volker Marnet-Islinger, head of credit at Cominvest in Frankfurt, expects Fitch to be the first agency to downgrade GM on negative news about its sales and market share, and the other agencies to react in the next three to six months.
The other threat to stability is event risk. The spreads of Danish telecom company TDC's bonds shot out this week on talk of a potential LBO, which is at the forefront of investors' minds.
The threat of takeovers undermining credit quality was reinforced this week by UK drinks company Allied Domecq's announcement that it plans to accept Pernod Ricard's £7.4bn offer.
Fitch slashed Allied Domecq's ratings yesterday (Thursday) two notches from BBB to BB+, on concerns that Eu2.5bn of the company's bonds may be subordinated to Pernod's bank loans after the takeover.
Standard & Poor's has placed its BBB+ rating on CreditWatch negative, on the belief that the increased leverage of the combined entity will be too high for its current rating bracket.
Moody's also put its Baa1 rating on review for downgrade, citing the possibility that the takeover weakens Allied Domecq's credit.