Euro Credit Supply: Supply slows amid volatile spreads

Corporate supply was low in February at just €15bn

There has been substantial spread widening on the back of the crisis, as EUR Corporate IG spreads have widened 19bp since 1 February. Currently, using a 10yr swap spread and a EUR non-financial BBB index, all-in funding cost is sitting at 162bp, up from 115bp at the beginning of February, and up from 100bp in early November. This increasing funding cost pressures supply, particularly as considerable pre-funding has been done and corporates are holding historically high levels of cash on their balance sheets. The market will need more stability in spreads before the primary market can reopen.

Already, YTD supply is running behind previous years at €52bn versus €65-70bn of the previous three years. We stand by our supply forecast of lower supply in 2022, totalling no more than €290bn, which is down from €345bn in 2021, and could even be on the high side given the current crisis. After expected redemptions of €223bn, net supply should be low for 2022 at just €67bn.

Redemptions in February were just €17bn, but after the low supply of €15bn, net supply is in negative territory. The TMT sector supplied a high level of February’s supply, at €5bn. The Energy sector volatility in spreads has resulted in very little supply, and the same can be said for corporate hybrids. Real Estate is still the largest supplier on a YTD basis, with €14bn, although the majority of this was from January, and just €1bn done in February due the high beta nature of the sector.

Financial supply in line with previous years, while covered bond supply increases  

Financial supply amounted to €22bn in February, decent compared to previous years. Supply YTD is now sitting at €57bn, largely in line with previous years. Most supply in February came at the beginning of month, as financials have been widening, and even underperforming corporates, as EUR Financial IG spreads have widened 22bp since 1 February.

Financial supply was driven by Bank senior debt, accounting for €17bn in February, and €42bn on a YTD basis. Covered bonds have also been actively coming to the market, with a substantial €16bn in February and now sitting at €45bn on a YTD basis, up on just €16bn last year YTD. Therefore, this year has seen one of strongest starts of the year in covered bond primary of the past decade – at 43% of our estimated €105bn EUR benchmark covered bond supply for the full year.