October | Bond market wrap

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A market update from Rezaah Ahmad, Founder and Executive Director, WiseAlpha.

The month of October has seen Sterling bond markets maintain their risk appetite despite the continued back and forth around Brexit. We expect confidence in the markets to continue as a no-deal scenario becomes ever more remote. The upcoming December general election will now determine whether we leave the EU with a deal or have a second referendum.

On the new issue front, Just Groups’ unsecured bonds offering an 8.125% coupon and Metro Bank 9.5% coupon bonds hit the market. Both have traded up from initial issuance at par (100). Just Group bonds were well received from investors, helping to refinance a previous bond issue. Metro Bank’s 9.5% issue was touch and go after the bank, still dealing with the fallout of a loan accounting error, had to pull the initially proposed 7.5% issue and then come back to the bond market with an abnormally high rate. In the end, the 9.5% bond was 1.5x over-subscribed with smart money participating. The original 5.5% unsecured bonds also rallied from a low of 67 to 79 context. While concerns still remain around the cost of the company’s physical store strategy versus the strategy employed by pure-play digital challenger banks, Metro has now received an additional £375m in equity funding and £350m in debt funding alleviating some investor concerns.

Recent bonds added to WiseAlpha from the London retail bond market include Burford 6.5%, Alpha Plus 5.0% and Eros 6.5% and EnQuest 7.0% PIK toggles. All having traded below par and offering higher yields than when initially issued, we felt it was time to start providing coverage of these names now that their risk was better priced.

In other interesting corporate news, Aston Martin issued new senior secured bonds at a coupon of 12% (6%PIK and 6% cash) to help it with funding the launch of additional models following recent disappointing earnings.

Pizza Express also saw some over-excited press speculation about the health of the company to which the company tweeted they were, “Still making dough” and that “95% of their stores were profitable”. The company continues to grow revenues given its powerful brand, however, cost pressures from minimum wage legislation, raw materials price increases and business tax rates increases have put pressure on margins and cash flow. The main issue bondholders are focused on is the upcoming 2021 and 2022 bond maturities and whether the company has a plan to repay/refinance their bonds. With opportunistic buyers circling, the company will need a clear plan in place to win over bondholders if they need their support.

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