Bond Vigilantes Upend France’s Debt Market: Credit Weekly
Tasos Vossos
5 min read
(Bloomberg) -- Some of the biggest companies in France now have lower borrowing costs than the sovereign as credit traders fret about fiscal plans that risk toppling the government.
Bonds issued by heavyweights including luxury fashion group LVMH Moët Hennessy Louis Vuitton SE, plane maker Airbus SE and industrial gases firm Air Liquide SA were indicated at lower yields than government bonds, according to data compiled by Bloomberg.
The twist underscores how global companies, which can generate revenue worldwide, can slough off political risk concerns in their home countries. In France, Prime Minister Michel Barnier’s effort to tame widening budget deficits might result in his ouster, sending a measure of sovereign bond risk there to levels last seen during the euro-area debt crisis.
“On Europe, what’s been worrying us is certainly France,” Ella Hoxha, head of fixed income at Newton Investment Management said at a Bloomberg Intelligence conference on Thursday. “It’s rare in markets that you see dislocations of the spreads that we saw in the summer and we’ve now re-established at a higher level.” It “doesn’t feel like things will be better over the next year.”
Traders are more relaxed about the multinational groups because their reliance on exports means their borrowing costs haven’t been affected as badly as the state has been. Air Liquide, for example, only derived about 12% of its revenue last year domestically, data compiled by Bloomberg show. For LVMH, the maker of Fendi handbags and Krug champagne, it was about 8%.
“Rather than driving fear of contagion, the widening in OAT spreads appears to have been treated as an idiosyncratic and transitory issue,” Goldman Sachs credit strategists including Lotfi Karoui wrote in a note to clients this week, referring to French government debt. An escalation of fiscal concerns “is a bigger risk to sentiment than weak growth.”
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Political Risk
Blue chip debt trading at yields below sovereign levels usually arises during times of elevated political concern. Some Italian corporates similarly saw their yields fall below the country’s government bonds in 2018 when populist leaders set a budget target that threatened the nation’s financial stability. Government debt is also more liquid and therefore easier to sell short, pushing its yields higher.
This has practical implications for investors. The more government bonds lose ground, the more overvalued corporate bonds will appear. France still has a AA- credit score at S&P Global Ratings and Fitch Ratings, which is higher than around 95% of the €447 billion ($472 billion) French corporate bond market that’s rated, Bloomberg indexes show.
However, because of the euro currency bloc, France’s debt does not typically act as the safe reference for company borrowings. That role is instead typically played by German bunds, regardless of the borrower’s domicile in the region. Spreads over that benchmark remain positive, reducing the chances of a rotation out of corporate credit and into government debt.
French government bonds “are not bunds or US Treasuries. They are more of a soft rather than a hard valuation boundary for a corporate bond,” said Marco Stoeckle, head of credit strategy at Commerzbank AG.
Week in Review
European bond issuance this week topped €1.705 trillion ($1.8 trillion) for the year, passing the high-water mark previously set in 2020. The figure includes publicly syndicated issuance of euro, sterling and Reg S dollar-denominated offerings sold in Europe. In the US, high-grade corporate bond sales are on track this year to the be the second highest on record.
Mars Inc. is readying an investment-grade bond sale for early next year to help fund its planned $36 billion acquisition of foodmaker Kellanova.
Vedanta Resources Ltd. priced its third dollar-bond sale in two months, showcasing investor appetite for Indian offshore debt even after the US indictment of Adani Group founder Gautam Adani.
Dollar bonds of Adani Group’s ports business may be cut to speculative grade after US prosecutors brought charges of alleged bribery against executives of the conglomerate, Fitch Ratings said Tuesday.
Adani Green Energy Ltd., which scrapped a US dollar green bond sale earlier this month amid news of the US’s probe into Adani, will consider resurrecting the offering between April and June, Group Chief Financial Officer Jugeshinder Singh said Friday
An Adani Group entity said this week that the US Department of Justice’s indictment doesn’t mention Gautam Adani or his aides in any count related to conspiracy to violate the US Foreign Corrupt Practices Act.
Digicel Group, a Caribbean mobile phone network, told creditors it is cooperating with the US Justice Department over potential violations of the Foreign Corrupt Practices Act.
Tencent Holdings Ltd. is considering selling bonds denominated in dollars and offshore yuan as soon as the coming weeks.
US utilities are borrowing so heavily to fund projects like power plants for artificial intelligence data centers that investment-grade investors can no longer view the debt as a niche holding, according to strategists at JPMorgan.
Siemens AG has secured a $10.5 billion bridge loan facility to fund its largest-ever acquisition for software maker Altair Engineering Inc.
Blackstone Inc. has bought interests in a portfolio of infrastructure loans from Banco Santander SA worth $1 billion.
KKR & Co., the Canada Pension Plan Investment Board and German billionaire Mathias Döpfner are looking to raise around €4 billion ($4.2 billion) of debt to finance their bid to separate media conglomerate Axel Springer’s classified ads businesses from its news operations.
On the Move
Royal Bank of Canada has hired Stephen Gargiulo as head of US non-agency commercial mortgage backed securities trading.
