Heinz: Beans, Buffett and the return of animal spirits

Posted on 22 March 2013 by Stefan Isaacs

After years of inactivity, the combination of strong corporate balance sheets and cheap funding has sparked demand for takeover deals. The largest and highest profile deal this year has been the acquisition of H.J.Heinz by 3G Capital and Berkshire Hathaway. It is exactly the type of business that Berkshire Hathaway’s Chairman and CEO Warren Buffett typically goes for: profitable growth; a very recognisable brand; and years of emerging market growth forecast in the future.

Berkshire Hathaway and 3G Capital are buying Heinz for $72.50 per share, a 19 percent premium to the company’s previous record high stock price at the time the deal was announced in mid-February. Including debt assumption, the transaction was valued at $28 billion. Berkshire and 3G will each put up $4.4bn in equity for the deal along with $12.2bn in debt financing. Berkshire is also buying $8bn of preferred equity that pays 9%.

Let’s not beat around the bush. It’s a great company. The business has seen thirty one consecutive quarters of organic growth, stable EBITDA margins, owns a number of globally recognised brands and should be well positioned for future emerging market led growth. Despite this, some are questioning whether Buffett is overpaying for Heinz. So is the price of the deal justified?

The answer, at least in part, lies with cost of debt. The pro-forma capital structure (per the offering memorandum) looks like this:

PF Capital Structure	Sources ($m)	Net Debt/PF EBITDA
Cash	-1,250
1^stLien	10,500	3.87 x
2^ndLien	2,100	4.75 x
Rollover Notes	868	5.11 x
Total debt	12,218	5.11 x

Preferred Equity	8,000	8.46 x
Common Equity	8,240

Total	28,458

Current price talk on the first lien debt sits at $ Libor + 2.75% (floored at 1%) with the second lien at 4.5%. If this is finalised, the company will see an approximate blended interest cost of 3.9% on its new debt securities. Prior to the transaction, Heinz was rated as a solid investment grade business attracting a Baa2/BBB+ rating. Assuming the deal goes through, its new second lien notes are expected to be rated B1/BB-, some five notches lower than Heinz’s current rating, reflecting the much higher financial leverage and structural subordination.

It’s worth noting that through last year Heinz’s 6.25% 2030 bonds traded in a range of 4–5%, despite the much higher rating and lower financial leverage at the time; albeit some term premium is warranted given the longer dated nature of the debt. The bonds have since sold off in recognition of the greater risk – as things stand they will remain in place.

Now let’s compare the price action of the proposed debt financing to the preferred equity to be owned by Berkshire Hathaway. Whilst the paper is structurally subordinate to all other debt, it still sits ahead of some $8,240bn of common equity and attracts a cash coupon (which can be deferred) of 9% vs the 3.9% weighted average above. It’s also worth bearing in mind that the transaction has been structured to encourage the preferred equity to be retired, at least in part, ahead of both the first and second lien debt, potentially leaving bondholders with significantly less subordination than at day one. I’d argue that this is by far the most attractive (quasi) debt to invest in within the structure, though that is hardly surprising given that unlike Buffett, few of us can write a cheque of this magnitude.

As animal spirits return and the leveraged finance community falls over itself to lend to well known companies, the likely winners in the space will be the private equity community. Whilst we are nowhere near the levels of the great private equity binge of 2004-07, the value of takeovers in 2013 is already running well ahead of 2012. After years of corporate deleveraging, we may now be entering into a period of increased M&A activity. Company managers may find that if they aren’t willing to start leveraging up given the environment of extremely low borrowing costs, then investors like Buffett will do it for them.

The Heinz deal has been another recent shot across the bows of the bond market. Rising leverage has a longer term implication for credit markets, in that it is bad for credit quality. Bigger and bigger companies are clearly in play and this is something we will be keeping a very close eye on.

Insane in the brain. Dangerous precedents being set in Cyprus

Posted on 18 March 2013 by Stefan Isaacs

Depositors in Cypriot banks awoke on Saturday morning to learn a harsh lesson. A guarantee is only as strong as your counterparty. With the Cypriot banking system requiring €10-12 billion of bailout funds – some 60% of GDP – the government has been forced to accept burden sharing with depositors. Depositors who went to bed Friday night believing their savings were safe awoke Saturday to find that it has been proposed that those with deposits below €100k in the bank will be “taxed” at 6.75%; those with deposits above €100k will be “taxed” at 9.9%, contributing approximately €6bn to the bank bailout in total. This is regardless of supposed depositor insurance schemes. Depositors will receive equity in their respective banks by way of compensation and potentially bonds entitling those who leave their money in the banks for 2 years to a share of Cyprus’ future gas revenues. The remaining €4-6 billion will likely come from the Troika.

If press reports are to be believed this was a ‘take it or leave it offer’ from the Troika with German and Finnish finance ministers unwilling to go to their respective parliaments without depositor burden sharing. This highlights the very real current challenges of domestic politics within the European Economic and Monetary Union and raises further issues.

Firstly, there are significant political challenges to be faced. Domestic opposition to this deal is likely to be significant, not least as it will be seen to be disproportionately harsh on domestic savers – who had believed their deposits were protected up to €100k, and favourable to wealthy non-Cypriot depositors who reportedly hold huge sums offshore in the banks. It can be argued that those with over €100k in deposits with the banks should bear the brunt of any proposed bail-in. With a small parliamentary majority, the Cypriot government may struggle to pass the necessary legislation. Approval will also need to be sought from Eurozone member states.

Secondly, alongside the recent expropriation of junior bond holders at SNS Reaal the attitude towards tax funded bailouts appears to be hardening. Whilst this crisis has already witnessed both equity and debt written down, the rubicon of depositor burden sharing has now been crossed. Precedent now exists for this approach over the socialisation of losses across the Eurozone as a whole. Whilst the Troika will endeavour to play its significance down, unintended consequences may still materialise.

Thirdly, the Cypriot situation serves as a reminder of the current fragmented approach of depositor guarantee schemes across Europe. Depositor guarantees are only as strong as the sovereigns providing them. In the case of Cyprus with a banking system seven times the size of its economy, clearly those guarantees were worth very little. With depositor rates currently paying very little across Europe it is unlikely to take much to prompt a change in investor behaviour.

Fourthly, it raises real questions about depositor preference. With only circa €2bn of Cypriot bank debt outstanding, policymakers have judged this too small in and of itself to recapitalise the banking system. That may be true. However by favouring senior debt over depositors it does beg the question whether the individual on the street is in theory better off owning higher yielding bank debt than depositing cash.

Fifthly, the ECB has apparently threatened that if the measures are not agreed, then it would withdraw European Liquidity Assistance (ELA) funding for Laiki Bank, Cyprus’ second largest bank, leaving the Cypriot sovereign with the bill for the entire banking sector and having to pay out on deposit insurance in full. This highlights the extent to which a number of banks in Europe remain reliant on ECB funding, and that if that funding is withdrawn then their collapse is inevitable.

Finally, we have yet another example of a country being forced to face a stark choice between ceding sovereignty to Brussels or facing financial ruin. The Eurozone project continues to ask a great deal of its citizens. Bailouts don’t – and won’t – come cheap.

The Cyprus deal will be in the headlines for the next few days. We can’t help but think that the markets will be listening to Cypress Hill – Insane In The Brain for the next week or so. Maybe the Troika should too.

European autos, stuck in reverse

Posted on 13 February 2013 by Stefan Isaacs

French auto manufacturers Peugeot and Renault report full year 2012 earnings this week. If Peugeot SA’s write down announced on Friday is anything to go by – when it took a €4.7bn non-cash charge – the outlook for the company and indeed other European focussed auto manufacturers continues to be a bleak one. European market conditions have been described by S&P as ‘dire’. Overcapacity and general economic uncertainty have resulted in utilisation rates below break-even profitability for a number of plants. Cash continues to be burnt and unsurprisingly, share prices don’t make for pleasant reading.

The need for an overhaul of the likes of Peugeot, Fiat and Renault remains acute. European light vehicle registrations are headed for a fifth consecutive year of declines (see chart below), Italian and Spanish registrations are at nearly half their pre-crisis levels, profit margins on compact vehicles are slim and Peugeot, Fiat and Renault are losing market share to investment grade rated manufacturers like BMW, VW and Daimler.

Struggling under a mountain of debt, Peugeot, Fiat and Renault find themselves in a non-too dissimilar position to that of the US auto manufacturers back in 2008/2009. Several years ago GM, Ford and Chrysler were able to successfully restructure, both inside and outside of bankruptcy, allowing them to close capacity, reduce over-indebtedness, renegotiate onerous union contracts and subsequently return to profitability even at levels of production significantly below those pre-crisis. That experience remains in stark contrast to European OEMs (Original Equipment Manufacturers) who continue to labour under many of those same pressures whilst facing ongoing weak domestic demand.

Management continues to struggle to right-size their businesses some 5+ years into the financial crisis in the face of strong political pressure and a determination to avoid job losses. Ironically, the very interference that has hampered change in Europe has now led to Peugeot having to rely on French state support. But these choices cannot be put off into perpetuity and unwelcome decisions are inevitable. Until that point in time, losses will continue to mount, cash will be burnt and creditors will likely favour US over European OEM risk.

Contingent capital notes – bank equity’s best friend?

Posted on 15 January 2013 by Stefan Isaacs

As investors, the majority of our time is spent pricing risk with an increasing amount of that spent trying to value optionality. We’ve always had to price the optionality inherent in owning certain bonds. For instance what’s the likelihood of a call option sold to a bond issuer being exercised? What’s the likelihood of an early refinancing, or perhaps a change of control? These and other options are both risks and opportunities that credit investors will regularly have to consider and reconsider.

Some of the more recent options that credit investors have been forced to consider are those embedded within contingent capital notes or CoCos. These aren’t entirely new securities with Lloyds having exchanged bonds for CoCos back in 2009. Simplistically these ‘first generation’ CoCos are designed to behave like a traditional bond until a pre-defined trigger is breached. When triggered, first generation CoCo holders are forcibly converted into equity at pre-determined pricing, aiding the bank with its recapitalisation efforts. These instruments have found favour with the regulator not least because traditional subordinate capital instruments proved themselves almost entirely ineffective in providing loss absorbing capital.

However, since the issuance in 2009 the market has moved on somewhat and a new breed of CoCo has since emerged. Many of these newer instruments (see chart above) are designed to be written off entirely in the event of a trigger without the conversion into equity discussed above. This optionality has two obvious implications. Firstly, given that investors are written down to zero without equity conversion, any prospect of participating in a future recovery becomes null and void. Secondly (with the caveat that the quantum of issuance remains small for now), the prospect of a bond essentially performing the role of a non dilutive emergency rights issue has to be positive for all other stakeholders in the bank, not least common shareholders. And don’t forget that the majority of these instruments will see their coupons paid before tax, further enhancing the relative value of said issuance.

Selling all this optionality does have its price, as do most things in life, but the current exuberance in credit markets may yet see CoCo investors fail to exact an adequate premium.

Peripheral corporate bonds and mass downgrade risk

Posted on 10 July 2012 by Stefan Isaacs

Staying with the Bon Jovi theme, ‘Ugly’ was a track released by Jon Bon Jovi on his second solo album in 1998. It isn’t well known, or any good for that matter, but it does aptly describe the price action of Spanish and Italian corporate paper of late.

Plenty of attention has been paid to the yield on Spanish and Italian govies – currently around 7% and 6% for 10-year bonds – but their bellwether non-financial corporate issuers have also seen their yields come under significant pressure. 5-year CDS levels for the likes of Iberdrola, Gas Natural, Repsol and Enel are trading near their all-time wides at 500, 525, 475 and 455 bps respectively. And it isn’t just the utilities that have come under pressure: Telefonica and Telecom Italia have also seen their risk premia balloon to over 500bps. (see chart 1)

Whilst the aforementioned companies are still rated investment grade – some by many notches – they are actually trading wide of the Merrill Lynch BB Euro High Yield Non Financial Index (current asset swap of +440). Put another way, the market does not believe that these businesses represent investment grade risks.

Such a view isn’t without logic. The current ratings for the largest Spanish and Italian non-financial issuers (see chart 2) suggest that the market is right to be nervous. On average, the four largest Spanish issuers are only two notches above high yield status; for Italy’s five largest issuers it’s about three notches. That may seem like a fair bit of runway until you think about the pace of downgrades suffered by their sovereigns of late. Keep in mind that as late as July 2011 Moody’s rated Spain at Aa2, seven notches higher than its current Baa3 rating. Italy has also seen its rating cut a full four notches between June 2011 and Feb 2012 by the agency. And S&P hasn’t been much kinder, slashing Spain’s rating from AA- to BBB+ in under a year and reducing Italy from A+ to BBB+.

Both Spanish and Italian corporates saw negative rating actions as a consequence of those sovereign downgrades. Moody’s allows non-financial corporates a maximum two-notch rating uplift versus the sovereign, whereas S&P permits a maximum of six in extremis, with a couple of notches uplift far more common. The impact on Greek and Portuguese corporate bonds – such as EDP, OTE and Portugal Telecom – after their sovereigns lost their investment grade status serves to reinforce the potentially significant relationship between sovereign and corporate credit ratings.

So, in a hypothetical mass downgrade scenario what quantum of debt could be downgraded to high yield? If all Italian and Spanish non-financial paper were eventually to lose its investment grade status, we calculate that €47bn nominal of Spanish paper and €59bn nominal of Italian paper could fall into high yield territory. That would be a massive €106bn worth of paper – or 80% of the existing non-financial Euro High Yield index – heading into the high yield market. That’s a lot of paper for it to swallow.

Of course, the actual amount of debt that would end up for sale is difficult to quantify. This would depend, among other things, on index rules and investors’ willingness and ability to hold high yield bonds. However, it seems reasonable to assume that over the coming months and even years a significant amount of paper will need to find a new home. Yields may well have to climb further, potentially a lot further, before traditional high yield investors see value in these names.

Deutsche Bank 2012 Default Study – Default bark far worse than the bite?

Posted on 19 April 2012 by Stefan Isaacs

This week saw Deutsche Bank publish their 2012 Default Study, aptly subtitled ‘5yrs of crisis – The default bark far worse than the bite..’ The annual piece is particularly interesting, especially because the market now has five years of data since the onset of the great recession.

At the risk of failing to do an in-depth report justice it drew out several significant points for credit investors. Firstly, defaults between 2007-2012 have come in significantly lower than most would have expected. Secondly, loss given default (the loss incurred if an obligor defaults) in the last couple of years has been trending higher. Finally, investment grade credit continues to overcompensate investors vis a vis historical default experiences. High yield credit less so.

Whilst default rates have been decidedly ‘average’ over the last five years by historic standards, the statement masks an interesting picture. The below chart demonstrates that lower rated credit, especially sub-investment grade, has ‘outperformed’ the historic experience. Conversely Aa and A rated credit saw a higher default rate of 1.1% and 2.1% compared with a long run average of 0.8% & 1.3% respectively. Much of that can be attributed to the aggressive behaviour of financials (traditionally Aa & A rated) in the run up to the financial crisis and more conservative behaviour on the part of industrials. As Deutsche Bank argue, had we not seen massive intervention on the part of the authorities over the last five years then defaults would undoubtedly have been much higher. Perversely, it’s likely that the sheer extent of excess in the financial system forced intervention on a scale which artificially lowered the ‘market- free’ default rate experience.

An examination of recovery rates shows that there has been an obvious weakening and worrying trend developing over the past eighteen months or so. The following chart demonstrates this is somewhat out of whack with previous experience. Low default rates should typically correspond to strong recovery rates, partly because they are normally accompanied by better economic times. The current ‘artificially’ low default rate has been accompanied by a broad lack of confidence and a challenging environment for capital raising. This has weighed down on recoveries. Whatever the reason, this is an important trend that requires monitoring. Whilst defaults and their numbers garner headlines the loss given default is more relevant for investors.

Given the weakening trend in recovery rates, it would seem appropriate to apply a conservative recovery assumption of 20%, half the 40% traditionally applied, when analysing whether credit is or isn’t overcompensating a buy and hold investor. On this basis, investment grade non-financial spreads continue to significantly over compensate for historic default risk. Based on current market corporate bond spreads, Sterling investment grade non-financial credit is pricing in a default rate of 12.7% over five years, and 12.0% for European non-financial investment grade credit. This compares to a worst case experience of 2.4% for both European and Sterling credit since 1970. Turning to high yield, and again assuming a conservative 20% recovery, the data is less convincing. Whilst broadly speaking investors are still being overcompensated for investing in the asset class with an implied 5 year default rate of 37.9% versus the long-term average of 31.6%, much of the value comes from BB rated credit. At current valuations B & CCC rated credit provides far less compensation for buy and hold investors and clearly support the need for in-depth credit analysis, especially because of the spread dispersion to be found in the lower rated areas of the high yield market.

As far as the outlook is concerned it seems a reasonable call to argue for continued low default rates amongst investment grade industrials in core European economies and the US. Liquidity remains ample, earnings remain broadly strong and financial discipline adequate. On the other hand, default experiences in the periphery and financial arenas are very much at the whim of the authorities. The adjustments needed will undoubtedly take time if they are to happen at all. Without the ongoing support of central banks and creditor nations it is unlikely that default rates will go anywhere but up.

FT Alphaville’s analysis of the study can be found here.

Debunking myths in the financial system- an annual review

Posted on 8 December 2011 by Stefan Isaacs

Last week saw Citigroup’s credit conference & an opportunity for investors to catch up with a number of European high yield issuers. For a number of companies the message continues to be one of uncertainty, not least with regard to their banking relationships.

Back in 2008 Richard & I blogged about companies drawing down on bank lines (see here). Companies like CIT were doing so as they were finding it increasingly difficult to fund, whilst the likes of Porsche saw an opportunity borrow cheaply and then deposit the funds at a higher rate.

It seems once again companies are looking to draw down committed facilities. However, rather than being born out of an individual company’s distress, the catalyst seems to be the waning confidence in the banking system. At the very point in time when banks are finding it more difficult to fund their balance sheets and to deleverage, they risk seeing companies call on committed lines, which by their nature are not fully funded.

Which leads nicely into the Tuesday’s annual Sovereign and Financial System Review conducted by our financials team. The meeting focussed on the debunking of myths we feel broadly remain common place amongst investors.

Whilst the substance of the meeting is outside the scope of any one blog, and merely listing the myths taken out of context, I figured it was a worthwhile exercise anyhow to list those myths that have been debunked over the last 12 months or so, as well as those that continue to circulate:

The myths that are being debunked:

No more banks will be allowed to go bust
Banks have deleveraged already
Banks have already restructured
National champion banks will be fine
Covered bonds are bullet proof
Supra and agency bonds are ‘guaranteed’
It’s ok, there’s a bail out fund
Germany’s fine- they’ll bail us out
Governments will abide by EU treaties
Insurance Sector is a ’safe haven’
You don’t need to do sovereign analysis
Credit analysts can’t do sovereign analysis

The myths that are still believed to varying degrees in the market, or that have appeared recently, and give rise to the most discussion around here at the moment, :

It’s easy, just look at the debt/GDP ratio (for sovereigns)
It’s ok if you have commodity exports
It’s ok if most debt held domestically
Just look at net external debt
Just look at current account deficit
Sovereign debt doesn’t need documentation
Eurozone breakup is unthinkable
Docs or English law prevents redenomination
Foreign bonds are in some way better
You can work out impact of Eurozone break up
Bond lawyers can tell you what you need to know
As long as the bank is profitable, it’s ok
XYZ bank is highly profitable based on its net interest margin
Capital ratios or non-performing loan ratios are an indicator of solvency
Leverage ratio (equity/assets) will be the most useful
The yield curve determines how banks do
Household leverage is an indicator of problems or a lack thereof
Some banking sectors are ‘safe havens’
Banks have improved their funding profile
Banks have increased their deposit bases
Banks have lots of collateral available
Banks can always raise secured funding or repo
Banks have successfully prefunded maturities
National champion banks will be fine
Government bad bank structures are working
Central counterparties eliminate risk of financial defaults
Repo market can value corporate bond collateral
Repo market increases transparency
Collateralisation has reduced counterparty risk
“Too big to fail banks” will still get some sort of support
Secured debt will be fine
Agencies/supranationals are implicitly guaranteed
It’s ok, the banks can just go to the ECB for repo
National central banks can’t create credit
A crisis is a buying opportunity
We’re at the bottom, things will rally now
Export/investment will recover quickly
Asia/rest of the world will bail us all out
Countries with own currencies recover quicker

Congratulations to those of you who made it to the end of that list. I imagine you are an elite few!

Eurozone mess – time for inflation protection

Posted on 26 October 2011 by Stefan Isaacs

Travelling through Switzerland I can’t help but think that politicians both here and in the UK have a lot to thank their predecessors/electorates for. The relative safe-haven status enjoyed by both economies reflects, at least in part, the arm’s length relationship with the euro. (Swiss readers may not take kindly to being compared with us Brits, but you take my point.)

The eurozone policy makers who are currently trying to thrash out some sort of ‘deal’ have an almost impossible task on their hands. Despite a belated recognition that some leadership is much required, the reality is that a comprehensive solution won’t be reached. We’ve talked before (see here) about the inherent dangers in any monetary union absent fiscal union. Are the French, Italians, the Spanish, even the Greeks ready to be governed by Berlin? Or indeed, if Greece et al are willing to give up all sovereignty, are the Germans willing to take responsibility for the deficit countries of Southern Europe? Fiscal union requires both the debtors and creditors to be compliant. The foundations of the building are unsafe; replacing the roof may help keep the rain out but it won’t ultimately stop the house collapsing.

Absent fiscal union and two outcomes spring to my mind; euro breakup (of some form) or the monetisation of deficits. The former would likely see a return to 1930s depression economics, the latter some would argue risks a rerun of the 1920s Weimar experience. While we’re certainly not predicting a rerun of 1920s hyperinflation, it will be the temptation to inflate that will win out. The structural adjustments required of many European economies will likely prove too big a pill to swallow. German led protests will fall on deaf ears, and German resignations from the ECB will make little difference. Inflating away liabilities will prove an easier sell for economies that have binged on debt and leverage for decades.

Time to visit some inflation protection? Given there is so little inflation priced into bond markets right now, I think so!

Sell off in high yield markets provides a buying opportunity

Posted on 16 August 2011 by Stefan Isaacs

The price action in the high yield market has been brutal over the last few weeks. A very respectable year-to-date return of 3.8% as at end of June currently stands at -1.3% (according to the Merrill Lynch European Currency HY Index as at 15/08/11). That’s a significant re-pricing of risk. To put it in context, look at the iTraxx Europe Xover Index (for an explanation, see here). The most liquid vehicle in European high yield has seen spreads almost double from 350 in May to 595 today, and around 650 late last week. In other words, investors now require almost double the compensation for investing in the same 40 high yield names from three months ago.

Concerns around a stalling economic recovery & sovereign fears have seen investors redeem money in record amounts, forcing unprepared investors to sell indiscriminately into a very nervous buyer base. We’ve seen this sort of price action before – back in 2009, and it created some superb buying opportunities. Around $3bn of outflows were recorded in the US during the week to Aug 10th 2011, with the figure estimated to be around €600m in Europe (see here). These are near record outflows respectively. Again taking the Xover Index as a proxy, the market is pricing in a default probability of some 42% (assuming a 40% recovery). Whilst this is some way shy of what the same index was pricing in at the nadir of the crisis, excluding CCC grade bonds, it is still pricing in a higher default rate than anything experienced in any five year period since 1970s.

Now I’d be a fool to call the bottom of the market here. If the global economy double dips, spreads will undoubtedly go wider again. Yet I am convinced that there are some bargains on offer. As James talked about in his recent blog, good old fashioned credit analysis is key. Where I can lend to sensibly capitalised businesses – with decent earnings prospects, strong liquidity, limited re-financing risk and good investor protection in the form of comprehensive covenants – I remain inclined to continue to do so. In a world where we expect interest rates to remain lower for longer, the 8-12% yields on offer from investing in senior secured paper issued by certain packaging and cable companies looks particularly attractive.

Portugal downgraded to junk – Portuguese corporates ejected from the credit indices

Posted on 6 July 2011 by Stefan Isaacs

As a direct consequence of Moody’s downgrade of Portugal to sub investment grade, now Ba2 to be precise, Portuguese corporate bonds will be removed at month end from Bank of America Merrill Lynch’s (BofAML) main investment grade and high yield indices. This is because the main BofAML indices require the sovereign to have an investment grade rating. (It also looks as if Portuguese corporates will be thrown out of the iBoxx indices, although we don’t have confirmation on this yet). This will affect bonds issued by the likes of Portugal Telecom (PT) and Energias de Portugal (EDP – the electric utility) despite their current investment grade ratings. Those bonds are set to enter the BofAML Global Emerging Markets Credit indices.

Whilst some index focussed investors will be permitted to hold off -index positions, many will be forced to sell out over time, putting further upward pressure on bond yields. Since the start of the year, yields on EDP and PT 8 & 9 year bonds have risen by almost 2% to 7.5% & 8.75% currently.

Given the size of the Portuguese economy its corporates have historically constituted a small portion of broader Euro corporate indices (the same can be said for Greece and Ireland). As of yesterday’s close, Portuguese corporates comprised only 1.1% of the BofAML EMU Corporate Index. However, given the larger size of the Spanish and Italian economies it isn’t surprising to see their corporate bonds form a significant 14% of the index. And whilst Spanish & Italian government bonds currently remain firmly in IG territory, further downward pressure on those sovereign ratings will undoubtedly leave investors in peripheral European credit increasingly nervous.

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