Uncategorized

Consolidation not always embraced as positive

admin | October 19, 2018

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

Ratings agency assessments of the Invesco acquisition resulted in S&P dropping the company two notches to BBB+ while Fitch affirmed the rating at A-. The divergence in ratings could weaken Invesco debt spreads. Italian banks UniCredit and Intesa have favorable credit metrics, though ratings could come under pressure if the European Commission rejects the government’s proposed budget.

Invesco downgraded two notches by S&P

It appears that S&P was not keen on the terms of the Invesco (IVZ) acquisition announced on October 18^th. IVZ was downgraded 2-notches to BBB+/Stable from A/Neg following the announcement that IVZ is buying OppenheimerFunds from MassMututal. The key issue for S&P is the additional leverage for IVZ. The sources of proceeds will be a mix of perpetual preferred securities and common equity, with all but a small piece of the common equity to be issued directly to the seller. That perpetual security is being treated by S&P as debt with zero equity treatment, which elevates IVZ’s leverage a full turn to 2x EBITDA vs S&P’s expectations of 1x leverage. Reading between the lines, this statement effectively says that IVZ management did a poor job keeping S&P aware of the funding sources and structures. A two-notch rating action sends a very negative credit signal, though S&P left the outlook as stable indicating some expectation of reduced leverage in the future.

By contrast, Fitch affirmed the senior unsecured ratings of IVZ at A-/Stable, and left the IDR ratings at A-/Positive. The difference with S&P is difficult to explain, though perhaps management took more time and effort in conversations with Fitch.

Relative Value: The 2-notch downgrade by S&P puts IVZ on the same ratings level as the one-time high yield credit NEUBER, which we expect will hurt IVZ spreads. The IVZ 3.75% ’26 trade in light volume in the G+108 bp area, vs the NEUBER 4.50% ’27 that also trade in light volume, but nearly 50 bp back of IVZ.

Risk mounts for Italian sovereign bonds on budget concerns

The European Commission (EC) is taking a stand against the proposed budget by the Italian government, which is causing greater concern with Italian sovereign bonds. The risk premium for 10-year Italian sovereign bonds has risen to approximately 326 bp over the German 10-year Bund (see Exhibit 1). The question now is whether the EC will formally reject the Italian budget next week, setting a new precedence among EU nations. The perceived risk in the market has been augmented by the expectation that the new Five-Star government is not likely to back-down from its proposed budget, which could risk approval from the EC. The current form of the Italian budget is below the mandated 3% limit within the EU, but even at 2.1% draws concern from the EC as Italy already has the largest nominal debt in the EU and the second-highest as a proportion of GDP.

Exhibit 1: Spread of 10-year Italian versus German government bond yields

Source: Bloomberg

Impact on Italian banks

We continue to have a favorable credit view of the two primary Italian banks: UniCredit SpA (UCGIM: Baa1/BBB/BBB) WN/S/N and Intesa Sanpaolo (ISPIM: Baa1/BBB/BBB) WN/S/N. The primary constraint on earnings for these two banks continues to be the sovereign ratings and outlooks. However in the past year UCGIM and ISPIM have done well – reducing legacy non-performing assets without significantly impairing capital ratios. The dominant retail and commercial banking franchises for these two banks in Italy also help support the ratings for each. Intesa has the added advantage of a strong asset management business, solid efficiency ratios and management that are credited with steering the bank through difficult markets. UniCredit is more international than Intesa, and has good franchises in Germany, Austria and other central European markets. The CEO has been on a mission to find a merger partner for the firm, with a particular eye on one of the French banks. Given his prior work experience at SocGen, that name is a regular in the mix. Such a merger may not be well-received by the French, but UniCredit would almost certainly benefit. Deutsche Bank has also been mentioned as a potential merger candidate, but in our view that would benefit UniCredit very little, if at all.

As we go to press, Fitch published a note indicating that the Italian banks’ ratings are under pressure due to credit ratings risk at the sovereign level (as noted above). Fitch cites concerns with capital erosion due to weakening prices in Italian government bonds held, as well as potentially higher costs of funding for the banks in these challenging times.

admin
jkillian@apsec.com
john.killian@santander.us 1 (646) 776-7714

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.