IC Market Espresso 19 Oct 2020

 
From Slovenia with Love – What Have We Learned from the Most Recent SLOREP Placement?

About six months ago a good way to build up EGB position was to wait for primary market, place a bid, get allocation and collect the new issuance premium in size of 15bps-40bps. If you were trading less liquid sovereign paper, this premium could have exceeded 50bps. So on the start you were a couple of big figures in plus, depending upon the duration of paper. What a way to start the day! Well, eventually all good things come to and end. Take a look how this premium evaporated on the most recent Slovenian bond placement.

Yes, they did it again. And for the fourth time this year. Slovenian Treasury Directorate reported on Tuesday that they successfully ended 30Y bond placement worth 1bn EUR at 0.493% YTM (MS+50bps). The placement itself was followed by a tender offer to buy back January 2021 and April 2021 paper and Slovenian Treasury Directorate accepted about 173mm EUR of offers (netting some 827mm EUR of proceeds).  

The placement of currently the longest Slovenian paper (maturing in October 2050) began with IPTs of MS+65bps, which was considered quite generous at a time. As the orderbook swelled, the spread was gradually getting tighter and in hindsight it seems that a substantial amount of orders was placed at MS+55bps. With revised guidance at exactly that level (MS+55bps) the orderbook reached its maximum seize of 7.5bn EUR, meaning that tightening even further would imply a decreasing orderbook size. With book as big as it was, nobody really cared, so the arrangers tightened the premium by further 5bps to MS+50bps, which trimmed about 2.3bn EUR of orders and ended the orderbook at 5.2bn EUR. The final spread actually meant that new SLOREP 0.4875 10/20/2050 was placed inside the existing yield curve, which caused a bit of consternation among some of the investors. By glancing at chart submitted below, one can see that this doesn’t leave much of the term premium on the ultra-long end, however investors such as life insurances are quite satisfied to add this duration to their balance sheets.

Source: Bloomberg

It’s worth mentioning that MS+50bps valuation implied a negative value of the so-called new issuance premium (NIP) in size of some -10bps. Seasoned traders with a good memory would remember that on the bond placement in March, when Slovenia placed a dual 3Y/10Y tranche, the NIP was as generous as 35bps/15bps, respectively. It was similar just two weeks later when inconclusiveness over EU aid motivated Slovenian fiscal authorities to place a triple tranche on the market, handing over NIPs in size of +16bps/+5bps/+12bps (3Y/10Y/25Y paper, respectively). But those were different times and although the ECB announced that it will not let markets collapse/spreads explode, the investors were still worried about a potential disbalance of bond supply and central bank demand. This could explain the premiums required in order for the placement to go on smoothly. We’re obviously in a different environment now and with all that ECB support it’s no wonder that investors are now prepared to put EGB bonds on their B/S that are already issued below the outstanding yield curve. This means that if you were expecting to make a quick buck on flipping the newly issued EGBs before the settlement date on the upcoming primary markets, be mindful that the bonds you buy are already too expensive and only a positive momentum on the benchmark instruments can save you from incurring losses. It seems that money cannot simply be picked up from the Street the way it was just six months ago.

But more on Slovenia. As we mentioned before, this is the fourth bond placement conducted by Slovenia in 2020 and with these corporate events Slovenian Treasury Department managed to collect 5.85bn EUR of gross proceeds, a minority of which was used to refinance the pre-existing debt, while the lion’s share went on to support the dwindling economy.

Speaking about the Slovenian economy, in it’s October update the IMF ameliorated Slovenian GDP drop this year, which is now expected at -6.7% YoY (versus -8.0% YoY expected in April). At the same time a rebound is expected in size of +5.2% YoY in 2021 and this forecast hasn’t been trimmed down significantly compared to the April figure. When you think about Slovenian economy, don’t forget the fact that the Alpine country has a gross domestic product heavily oriented towards manufacturing, which is the economic activity most likely to go through a V-shaped recovery. As a matter of fact, added value of manufacturing in Slovenia made up 23.2% of overall GDP figure and by this metric the Alpine country is trailing only Ireland (33.5% GDP) and Czech Republic (24.8% GDP) in EU-27 class. Out of the total 8.9bn EUR of added value in 2019 delivered by Slovenian manufacturing, chemicals (2.2bn EUR) and machine manufacturing (1.7bn EUR) contributed with a significant share. This reliance on manufacturing is an additional insurance that when EU economies start to recover, Slovenian economy might be a bellwether. And this perspective makes Slovenian bonds even more attractive.

AM Best Affirms the Credit Rating of Triglav at A; Stable Medium-term Outlook

Following its regular annual revision, the AM Best credit rating agency re-affirmed the Financial Strength Rating of “A” (Excellent) and the Long-Term Issuer Credit Ratings of “a” of both Zavarovalnica Triglav and Pozavarovalnica Triglav Re.

Both credit ratings have a stable medium-term outlook, which reflects the agency’s expectations that Triglav Group will maintain strong operating performance in the medium term, a very strong financial position and its dominant market position in Slovenia and the region where the Group operates.

AM Best assesses Triglav Group’s balance sheet strength as very strong and its operating performance as strong, the impact of both the business profile and the majority holding on the credit rating as neutral, and its risk management as appropriate given the complexity and scope of its operations. By affirming the high credit rating of the subsidiary Pozavarovalnica Triglav Re, AM Best highlighted its strategic importance as the reinsurer of all Triglav Group members and its strong integration into the Group.

The Group’s very strong balance sheet is underpinned by its risk-adjusted capitalization at the strongest level. In the life insurance portfolio, the Group is reducing its exposure to products with a guaranteed return and has further improved its asset and liability management. Furthermore, the Group has a prudent reserving approach and good financial flexibility with access to equity and bond markets.   

The Group’s strong operating performance over the recent years has been driven by the excellent non-life insurance technical earnings in the domestic market and healthy investment income. In highly competitive markets outside Slovenia, the Group is constantly increasing its volume and improving its operations, also by actively seeking alternative, cost-effective distribution channels. AM Best pointed out the benefits of the Group’s dominant position both in the Slovene market and the region. Through its various companies, the Group is a global provider of insurance and reinsurance services, leading to a well-diversified portfolio by product/service and geography.

Is there a Correlation Between Covid-19 Cases and Daily Changes of CROBEX & SBITOP?

For today we decided to look if there is any correlation of daily reported cases and daily performance of CROBEX & SBITOP.

On Friday, Croatia reported a 4-digit number for the first time since the beginning of the pandemic in new daily Covid-19 cases. To be specific, 1,131 Covid-19 cases were recorded, which represents 20% of daily tested population. So far, Croatia has borne the pandemic quite well, as the number of cases have until now been tamed.  Given that less than a month ago Croatia was recording only low triple digit number of daily cases this could be seen as quite a high increase in a short period of time. Therefore, for today we decided to look if there is any correlation of daily reported cases and daily performance of CROBEX.

Number of Daily Covid-19 Cases vs Daily Changes of CROBEX

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Source: Bloomberg, InterCapital Research

In the graph above you can see the daily movement of CROBEX and daily number of new Covid-19 cases. If we were to look at their correlation since the first Covid-19 case in Croatia (25 February), we reach a coefficient of correlation of 0.052. Note that for simplicity reasons, weekends and non-working days were disregarded.  Such a coefficient of correlation indicates no correlation between the two. If we were to look at the correlation between the daily difference of new cases, we reach an even lower coefficient of correlation.

Further, if we were to look at Slovenia, we reach the same conclusion. There is no correlation between the number of cases in Slovenia and the daily performance of SBITOP.

Such finding does not surprise us given that equities are anticipative in their nature. Therefore, an increase in number of cases should not necessarily lead to a daily decrease of the main index as such increases tend to be priced in. However, we note that a high increase in cases could lead to a higher uncertainty (risk) of further restrictions which in turn would mean lower than expected future cashflows and therefore a drop in equities.  

Number of Daily Covid-19 Cases vs Daily Changes of SBITOP

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Source: Bloomberg, InterCapital Research

Croatia’s September 2020 CPI flat YoY

The prices of goods and services for personal consumption measured by the CPI index remained flat YoY, while observing an increase of 0.8% MoM.

The Croatian Bureau of Statistics published the September 2020 CPI index, which increased by 0.8% MoM on average. Meanwhile, on a YoY basis the prices of goods and services for personal consumption remained unchanged on average, while on the annual average they increased by 0.4%.

MoM

When looking at the main groups by purpose of consumption, in September 2020, the highest increase was recorded in the prices of Clothing and footwear, by 19.6% MoM on average. This can mostly be attributed to the new collection of clothing and footwear. The prices of Clothing and footwear (by 1.25%) contributed the most to the increase in the CPI.

Prices in Communication segment, are up by 0.9% on average, prices in Health segment are by 0.5% on average, while the prices of Furnishings, household equipment and routine household maintenance as well as in the prices of Education are by 0.4% (in each group) on average.

On the contrary, the prices of Restaurants and hotels are down by 1.8%, while Recreation and culture on average witnessed a decease in prices of 0.7% each.

YoY

On a YoY basis, alcoholic beverages and tobacco noted the highest increase of 5%. Health recorded and increase of 1.3% YoY, with other medical products observing the highest increase of 6.9%. On the flip side, transport prices decreased by 4.3% on average, the highest decrease among all segments.

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