Euro Credit Pilot Strategy - Economic rebound to strongly benefit credit markets December 2020 Strategy Research Credit Research - UniCredit Group
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This is a shortened version of the
Euro Credit Pilot, which we
deem to be an acceptable minor
non-monetary benefit under MiFID II.
Euro Credit
Pilot Strategy
December 2020
Strategy Research
Credit Research
“ Economic rebound to strongly benefit credit markets
”December 2020 Credit & Credit Strategy Research
Euro Credit Pilot Strategy
Contents
Summary
3 Economic backdrop
The COVID-19 pandemic has created unprecedented uncertainty in
5 Strategy - investment grade: we prefer lower tiers of the
capital structure and lower levels of the credit-rating ladder the global economic outlook, implying low visibility into the future. In
our base scenario, while the macro picture might be uncertain,
6 Sector allocation: we have raised our recommendation
on Automobiles & Parts to overweight particularly at the beginning of 2021, we expect, however, the credit
market to see another strong year, supported by an economic rebound
7 Strategy - high yield
from 2Q and technical factors.
11 Credit quality trend: there is still scope for more fallen
angels, but this is not necessarily a bad omen for investors
We expect the ECB to announce a 500bn expansion of the PEPP
13 Debt-equity linkage
envelope and project that purchases under both the APP and the PEPP
14 Market technicals will amount up to EUR 10bn monthly. With respect to new supply, we Published on 3 December 2020
14 We expect less new bond supply on balance across expect EUR 250bn of gross senior issuance from non-financials next Cover picture @ Prajukpunt - Fotolia.com
credit market segments year, implying EUR 80bn of net issuance, the lowest volume since 2014.
By the end of 2021, we expect iBoxx Senior NFI credit spreads to
tighten by 35bp, to 20bp (an all-time low), and credit spreads in the Holger Kapitza,
iBoxx Sub NFI to reach 170bp. Spreads of financials’ senior bonds are Credit & High Yield Strategist
expected to move tighter, to 30-35bp, while the hunt for yield and (UniCredit Bank, Munich)
+49 89 378 28745
banks’ improving credit metrics argue for tightening in AT1s’ risk holger.kapitza@unicredit.de
premiums by some 50-100bp. We have decided to leave our
recommendations on most sectors at marketweight. We raised our Dr. Stefan Kolek
EEMEA Corporate Credit Strategist
recommendation on Automobiles & Parts from marketweight to (UniCredit Bank, Munich)
overweight. We continue to have an overweight recommendation on +49 89 378-12495
stefan.kolek@unicredit.de
Construction & Materials. We have decided to lower our
recommendation on Utilities to marketweight. For the moment, we Christian Stocker, CEFA,
remain underweight on Travel & Leisure and on Chemicals. Lead Equity Sector Strategist
(UniCredit Bank, Munich)
+49 89 378 18603
As we think credit metrics of European HY bonds will improve during christian.stocker@unicredit.de
2021 (and in light of the hunt for yield), we see value in European HY
Franz Rudolf, CEFA,
markets. Our 2021 year-end target for the iBoxx HY NFI is 275bp (it is Head of Financials Credit Research,
currently trading at 335bp). Due to the expected-brighter economic Senior Credit Analyst Covered Bonds
(UniCredit Bank, Munich)
backdrop, we recommend cyclical sectors, but high-yield investors +49 89 378-12449
should remain selective in terms of quality. franz.rudolf@unicredit.de
UniCredit Research page 2 See last pages for disclaimerDecember 2020 Credit & Credit Strategy Research
Euro Credit Pilot Strategy
Economic backdrop
Challenges loom amid the second wave of COVID-19, but we expect an economic rebound in 2021
CHART 1: EXPECTED ECONOMIC GROWTH IN THE EUROZONE AND THE US
■ The COVID-19 pandemic has created unprecedented uncertainty in the global economic
GDP deviation from 4Q19 level (%) outlook, implying low visibility into the future. We predict that the contraction in GDP in
6.0 Europe and the US will persist through most of the winter, before warmer weather and
Baseline Positive Negative the expected roll-out of vaccines result in a normalization of economic activity. In the
4.0 eurozone, after a contraction of about 7.5% this year, we expect GDP to expand by 3%
in 2021 and by 4.5% in 2022. In our base scenario, while the macro picture might be
2.0 uncertain, particularly at the beginning of 2021, we expect that the credit market will see
another strong year.
0.0 ■ By the end of 2021, we expect iBoxx Senior NFI credit spreads to tighten by 35bp, to
20bp (an all-time low), and credit spreads in the iBoxx Sub NFI to reach 170bp (50bp
-2.0 tightening), which would translate into expected total returns of slightly above 1% and
around 3.2%, respectively. Spreads of financials’ senior bonds are expected to move
-4.0 tighter, to 30-35bp (generating around 0.5-0.7% of total return), while the hunt for yield
and banks’ improving credit metrics argue for tightening in AT1s’ risk premiums by some
50-100bp. This implies a total return of around 5.5-7% on an outright basis.
-6.0
2021 2022 2021 2022 ■ Our constructive base scenario on IG credit for 2021 could be challenged primarily by
US Eurozone unexpected developments in the pandemic causing the economic recovery to be bumpy.
Nonetheless, even in such an adverse scenario, we still expect positive economic growth
Source: UniCredit Research both in the eurozone and the US. Although vaccine news is encouraging, infection rates
could accelerate, leading to tightened restrictions. Thus, recovery may not be linear but
unsteady, depending on the roll-out of a vaccine. This would adversely affect
subordinated debt which does not benefit from ECB purchases.
UniCredit Research page 3 See last pages for disclaimerDecember 2020 Credit & Credit Strategy Research
Euro Credit Pilot Strategy
Technical factors to provide key support
We expect a significant scale up of asset purchases by the ECB
CHART 2: DISPERSION OF MONTHLY IBOXX NON-FINANCIAL IG SECTOR TOTAL RETURNS
VS. NET CSPP PURCHASES
Expected average net corporate purchases within APP and PEPP
■ Regarding demand, we expect the ECB to announce a 500bn expansion of the PEPP
12 PEPP 4.0% envelope on top of the EUR 600bn remaining in its current envelope. We project that
Net CSPP purchases under both the APP and the PEPP will amount up to EUR 10bn monthly (on
10 3.5% average, EUR 5.8bn of bonds under the CSPP and EUR 3bn of bonds under the
Standard deviation of monthly iBoxx NFI IG sector returns
3.0% PEPP were bought this year).
8
2.5%
■ This will provide IG non-financial senior bonds with technical support. The ECB’s
6 presence in the market should support spread tightening and should also keep sector
EUR bn
2.0% correlation high, as Chart 2 shows. Dispersion in cross-sector performance of the
4 iBoxx IG NFI’s total return has declined since the CSPP’s implementation, and
1.5% although it surged amid the pandemic, it has since returned to historical lows.
2 However, in our base scenario, the ECB’s purchases do not include non-financials’
1.0%
subordinated debt or financials’ HY debt. Consequently, these are set to receive less
0 0.5% technical support in terms of demand.
-2 0.0% ■ Currently, the ECB is holding EUR 206.5bn of senior non-financial bonds, or 21.5% of
the total volume of EUR 959.3bn of iBoxx Senior NFI paper eligible for the CSPP
Sep-07
May-08
Sep-09
May-10
Sep-11
May-12
Sep-13
May-14
Sep-15
May-16
Sep-17
May-18
Sep-19
May-20
Sep-21
Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
Jan-17
Jan-19
Jan-21
program. The ECB’s non-financial corporate senior portfolio might end up amounting
to EUR 336bn by the end of 2021, or 33% of the eligible non-financial universe, an
increase of almost 12pp from its current share of the market.
Source: ECB, IHS Markit, UniCredit Research ■ Besides leading to a spread compression, this will have other market ramifications: 1.
Liquidity in the secondary market is likely to decline, leading investors to stick with
focusing on bigger medium-term trends rather than on short-term relative-value
opportunities. 2. Lower liquidity is expected to make the investment-grade credit
market more vulnerable to an increase in volatility, leading the market to potentially
overreact to events. 3. In terms of credit-risk pricing, CSPP/PEPP-eligible bonds are
likely to outperform non-eligible bonds.
UniCredit Research page 4 See last pages for disclaimerDecember 2020 Credit & Credit Strategy Research
Euro Credit Pilot Strategy
Strategy - investment grade: we prefer lower tiers of the capital structure
and lower levels of the credit-rating ladder
IG subordinated and HY debt should benefit from stronger equities amid their resilience to higher Bund yields
CHART 3: IBOXX NFI CORPORATE SECTORS’ CORRELATION WITH STOXX EUROPE 600
AND BUNDS* CHART 4: STOXX EUROPE 600 BANKS VS. EUR AT1 ASW SPREAD
0.80 1 June 2019 - 20 February 2020 Since 21 February 2020
1,800
0.75
Correlation with STOXX Europe 600
HY NFI 1,600
Ins Sub
0.70 1,400
NFI Sub
0.65 1,200
AT1 spread (bp)
Banks Sub
0.60 1,000
0.55 Banks Sen 800
Ins Sen 600
y = -7.406x + 1380.6
0.50 R² = 0.6991
NFI Sen
400
0.45
latest value
200
0.40
0.20 0.30 0.40 0.50 0.60 0
Correlation with Bunds 70 80 90 100 110 120 130 140 150 160
STOXX Europe 600 Banks
Source: UniCredit Research Source: UniCredit Research
■ We see scope for tighter European credit spreads in 2021, although given the ■ Nonetheless, we think that this is broadly priced in and that bank AT1s offer value at
expected increase in risk appetite after infection rates abate, investors are likely to current spreads. EUR-denominated AT1s are trading roughly fairly versus the
focus on lower tiers of the capital structure. These also have the lowest correlation with STOXX Europe 600 Banks index, and given our positive view on European stocks,
Bunds (offering protection against higher Bund yields) and the highest correlation with the spread offers value. We expect AT1 spread to tighten by 50-100bp by the end of
European equities and are likely to benefit from our positive view on equities (Chart 3). 2021. At the start of 2021, while macro uncertainty remains, we see AT1s as safer
Although banks still need to digest higher NPLs, we expect most moratorium-affected than bank equity, also because banks have been asked not to pay dividends until at
loans to continue to perform. Any increase in NPLs should be manageable. least end-2020. AT1 coupon payments have not, in general, been blocked by
regulators. We also see limited coupon-cancellation risk in the wider market.
UniCredit Research page 5 See last pages for disclaimerDecember 2020 Credit & Credit Strategy Research
Euro Credit Pilot Strategy
Sector allocation: we have raised our recommendation on Automobiles & Parts to overweight
■ We have decided to leave our recommendations on most non-financial sectors at TABLE 1: SECTOR ALLOCATION
marketweight. As mentioned, the dominance of technical factors reduces the case for Current iBoxx YTD spread Current
sectoral differentiation. As of 1 December 2020 recommendation weight change spread level
Macro allocation
■ However, expected improvement in the growth backdrop makes us more constructive
Sovereigns
Sub-sovereigns MW
59.3%
13.4%
-1.9
+3.8
14.4
6.9
with regard to our recommendation on Automobiles & Parts, which we have decided to Covered bonds MW 6.7% -1.0 4.2
raise from marketweight to overweight. Besides improving credit metrics, the sector’s Financials MW 8.1% +11.5 70.0
performance should benefit from issuers’ high cash deposits (which reduces new-bond- Non-financials OW 12.5% +8.3 62.2
supply risk); the sector’s (on average) short duration, which protects its performance Sector allocation NFI
against rising yields (the sector also has the lowest correlation with Bunds among the Telecommunications TEL MW 10.9% +4.9 62.0
iBoxx NFI’s sectors); and the highest spread among the iBoxx NFI’s sectors. Media MDI MW 2.4% +6.4 68.1
Technology THE MW 4.9% +14.6 47.7
Automobiles & Parts ATO OW 10.2% +7.7 81.2
■ We continue to have an overweight recommendation on Construction & Materials, as
Utilities UTI MW 16.5% +5.0 60.0
this sector should benefit from fiscal stimulus (infrastructure, housing construction) and Oil & Gas OIG MW 8.9% +33.6 75.9
the low-for-longer interest-rate outlook. We have decided to lower our recommendation Industrial Goods & Services IGS MW 12.3% -1.7 59.7
on Utilities to marketweight, as we see the sector’s spread levels as fair, while issuers Basic Resources BAS MW 1.0% -8.2 67.4
face capex pressure on the back of environmental, social and governance (ESG) Chemicals CHE UW 3.5% +18.1 57.4
requirements. Construction & Materials CNS OW 2.4% +4.6 57.0
Health Care HCA MW 10.7% +10.1 58.7
Personal & Household Goods PHG MW 4.6% +2.5 57.5
■ For the moment, we remain underweight on Travel & Leisure, while we await more
Food & Beverage FOB MW 7.8% +14.4 50.2
clarity with regard to the ramifications of the development of a potential vaccine on the Travel & Leisure TAL UW 2.4% +16.7 60.0
sector, which has suffered disproportionately from the effects of the COVID-19 Retail RET MW 1.4% +6.0 62.6
pandemic. Moreover, we remain underweight on Chemicals, given the sector’s tight Quality allocation NFI
spread levels relative to most other cyclical sectors. AAA UW 0.6% +9.5 27.6
AA UW 8.0% +13.5 29.5
A MW 34.3% +8.6 44.5
BBB OW 57.2% +7.7 77.8
Sector other
Banks BAK MW
Insurance INN MW
Real Estate RES MW
Source: UniCredit Research
UniCredit Research page 6 See last pages for disclaimerDecember 2020 Credit & Credit Strategy Research
Euro Credit Pilot Strategy
Strategy - high yield
Hunt for yield and economic growth are likely to drive HY markets in 2021
CHART 5: PERCENTAGE OF IBOXX UNIVERSE TRADING AT NEGATIVE YIELDS CHART 6: EUROPEAN HY NON-FINANCIAL BONDS VS. STOXX EUROPE 600
NFI bonds FIN bonds Covered bonds SSA bonds Govies STOXX Europe 600 iBoxx EUR HY NFI (rs, inv.)
100%
450 200
300
80% 400
400
500
60% 350
credit spreads
600
points
300 700
40%
800
250
900
20%
1000
200
1100
0%
150 1200
Apr-16
Oct-18
Nov-15
Jul-17
Dec-17
Nov-20
Sep-16
May-18
Aug-19
Jan-15
Jun-15
Mar-19
Feb-17
Jan-20
Jun-20
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Source: IHS Markit, UniCredit Research
Source: Bloomberg, IHS Markit, UniCredit Research
■ The percentage of the iBoxx universe that is trading at negative yields has significantly
increased due to the COVID-19 crisis, and about 50% of non-financial and financial bonds ■ However, the road to recovery could be bumpy, and the short-term growth picture
have a negative yield now. Central banks remaining accommodative (we expect net remains uncertain given developments with respect to the pandemic and because of
purchases of up to EUR 120bn by the ECB’s CSPP/PEPP in 2021) and real rates the strong correlation between HY and equity markets.
remaining negative should fuel risk appetite, and the hunt for yield should continue to
drive strong investor inflows into HY next year. With yield hunting a key driver of ■ We think fiscal and monetary policy remain important circuit breakers mitigating
performance, along with improving economic conditions, we see further HY credit- downside risks, allowing investors to use potential setbacks to add HY exposure
spread-tightening potential in 2021 (to 275bp at year-end).
UniCredit Research page 7 See last pages for disclaimerDecember 2020 Credit & Credit Strategy Research
Euro Credit Pilot Strategy
Strategy - high yield
Our YE 2021 HY spread forecast is 275bp.
CHART 7: THE EXPECTED ECONOMIC REBOUND SUGGESTS SPREAD TIGHTENING IN HY
NON-FINANCIAL BONDS
■ The iBoxx HY is currently trading at 335bp compared to this year’s peak of 725bp. We
800 iBoxx NFI HY (ls) -2.0% see further tightening potential for HY credit in 2021 as the macroeconomic picture
UniCredit forecast (rs, 12M fwd growth, annualized qoq)
brightens, with HY bonds remaining highly sought after given the low-yield environment.
700 ■
Growth expectations (12M fwd.)
0.0% It should be noted that we expect net purchases of corporate bonds by the ECB in 2021
iBoxx NFI HY cum XO (bp)
to amount to a volume of about EUR 120bn, which should ensure that the hunt for yield
600 continues next year. In 2017, when the ECB bought about EUR 72bn of corporate
2.0% bonds under the CSPP, credit spreads of the iBoxx HY NFI narrowed steadily over the
course of 2017, reaching a historical low of 210bp in November (see Chart).
500
4.0% ■ That said, recovery disruptions are to be expected this time around. We used our
400 macro-credit model to assess the spread tightening potential of HY bonds. As shown in
the Chart, the model assumes an inverse correlation of credit spreads with 12M forward
growth expectations and we show a projection of our own growth forecast (dotted line)
6.0%
300 for 2021. Our projection assumes a decent rebound of activity in the eurozone in 2021.
200 8.0%
■ In line with that, we set our end-2021 credit spread target for HY markets at 275bp.
Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Dec-20 Dec-21 Given expected yield-curve normalization, this translates into an expected total return
of just below 6% for the HY NFI at end-2021. If credit spreads were to drop closer to
Source: Bloomberg, IHS Markit, UniCredit Research historical lows (to 250bp), HY bonds would earn a total return of nearly 7%, all else
being equal.
UniCredit Research page 8 See last pages for disclaimerDecember 2020 Credit & Credit Strategy Research
Euro Credit Pilot Strategy
Strategy - high yield
Due to the expected-brighter economic backdrop, we recommend cyclical sectors for HY investors,
who should remain selective in terms of quality
CHART 7: RELATIVE VALUE AT RATING SPECTRUM (IBOXX NFI) CHART 8: VOLATILITY BY HY INDUSTRY SECTOR (ONE YEAR)
BB-BBB spread B-BB spread ▬ Current ASW █ Minimum-maximum range
Consumer Services
BB-BBB median spread 5Y B-BB median spread 5Y
Consumer Goods
Construction & Materials
400
950
Non-Financials
Telecommunications
350 850
Financials
Corporates
Oil & Gas
Industrials
Credit spreads (bp)
300 750
Health Care
Basic Materials
Credit spreads (bp)
Technology
250 650
Media
Utilities
550
200
450
150
350
100
250
May-16
Jul-16
Nov-16
Sep-16
May-17
Jul-17
Nov-17
Sep-17
May-18
Jul-18
Nov-18
Sep-18
May-19
Jul-19
Nov-19
Sep-19
May-20
Jul-20
Nov-20
Sep-20
Jan-16
Mar-16
Jan-17
Mar-17
Jan-18
Mar-18
Jan-19
Mar-19
Jan-20
Mar-20
150
Source: IHS Markit, UniCredit Research Source: IHS Markit, UniCredit Research
■ In line with sector rotation in equities, there are also strong arguments for cyclical HY
■ The latest rally in HY markets has benefited single-B rated bonds particularly (see B-BB industry sectors given that they benefit most from a reopening of the economy. As
spread in Chart). From a tactical perspective, BBs could tighten further as they have such, we see value in Consumer Services, Construction & Materials, Industrials and
lagged behind in the recent spread rally. The near-term effect in relation to BBs, Technology, particularly as these industry sectors have also lagged behind in the
however, should diminish as soon as the economic recovery begins, and this should recent spread rally compared to, for example, Basic Materials. We have a marketweight
translate in an overweight recommendation for single-B rated bonds. recommendation on the remaining sectors. We are underweight on Oil & Gas given the
subdued oil-price trend and the ongoing transformation of the energy sector to green
■ Take carry in BBs as they look fairly valued compared to BBBs.
energy weighing on cash generation.
UniCredit Research page 9 See last pages for disclaimerDecember 2020 Credit & Credit Strategy Research
Euro Credit Pilot Strategy
SPREAD FORECAST 2021 (forecast level, minimum and maximum level, in BP)
Non-financials senior Financials senior
iBoxx NFI sen. iTraxx NFI iBoxx FIN sen. iTraxx FinSen
200 200 220 220
actual forecast actual forecast
180 180 200 200
160 160 180 180
140 140 160 160
140 140
120 120
120 120
100 100
100 100
80 80
80 80
60 60
60 60
40 40 40 40
20 20 20 20
0 0 0 0
Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21
High yield Corporate hybrids and bank AT1s
AT1 (rs) iBoxx NFI Hybrids
iBoxx HY iTraxx Xover 600 1800
750 750
actual forecast actual forecast
1600
500
600 600 1400
iBoxx NFI Hybrids (in bp)
400 1200
AT1 (in bp)
450 450 1000
300
800
300 300
200 600
400
150 150 100
200
0 0 0 0
Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21
Source: Bloomberg, IHS Markit, UniCredit Research Source: Bloomberg, IHS Markit, UniCredit Research
UniCredit Research page 10December 2020 Credit & Credit Strategy Research
Euro Credit Pilot Strategy
Credit quality trend: there is still scope for more fallen angels,
but this is not necessarily a bad omen for investors
Fallen angels have outperformed ex-fallen-angels high-yield issues
CHART 9: FALLEN ANGELS IN IBOXX NFI CHART 10: PERFORMANCE OF FALLEN ANGELS VS. HY NFI EX. FALLEN ANGELS
HY ex-fallen-angels Fallen angels
105
50
100
45
40 95
35 90
30 85
EUR bn
25 80
20
75
15
70
10
5 65
0 60
2-Jul-20
9-Nov-20
1-Aug-20
10-Oct-20
20-Oct-20
30-Oct-20
12-Jul-20
22-Jul-20
11-Aug-20
21-Aug-20
31-Aug-20
10-Sep-20
20-Sep-20
30-Sep-20
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2021
2020 YTD
Source: IHS Markit, UniCredit Research Source: IHS Markit, UniCredit Research
■ Although a gradual improvement of credit metrics in 2021 is in the cards, we expect ■ However, despite being downgraded below IG, in terms of their market positioning,
negative rating momentum to continue in 1H, suggesting more fallen angels though size and corporate policies, fallen angels still resemble IG names and tend to
to a lesser extent than was the case this year. We expect there to be EUR 20bn of outperform classical HY credit. Fallen angels have outperformed HY non-financial
fallen angels in the iBoxx Corporate NFI in 2021, compared to the estimated EUR bonds over the past few months and we recommend that those IG investors that can
47bn worth seen YTD (Chart 9). hold fallen angels do so despite them having been downgraded (Chart 10).
UniCredit Research page 11December 2020 Credit & Credit Strategy Research
Euro Credit Pilot Strategy
Credit metrics should advance amid recovery of company earnings growth, defaults will likely normalize in 2021
CHART 11: IBOXX HY NFI: AVERAGE NET DEBT, EBITDA AND CORRESPONDING LEVERAGE CHART 12: EUROPEAN SPECULATIVE-GRADE DEFAULTS COMPARED TO HY SPREAD
RATIO (2012-2020)* DEVELOPMENT (MONTHLY DATA)
Net debt EBITDA Leverage ratio (rs) Europe UniCredit default forecast
80 12 iBoxx HY NFI (rs) UniCredit spread forecast (rs)
14% 1200
70
10
12-month trailing default rates
Net debt & EBITDA (EUR bn)
12%
60 1000
Net debt / EBITDA ratio
credit spreads (bp)
8 10%
50
800
8%
40 6
6%
30 600
4
20 4%
2 400
10 2%
0 0 0% 200
2012 2013 2014 2015 2016 2017 2018 2019 2020 2007 2009 2011 2013 2015 2017 2019 2021
*our sample of the iBoxx HY NFI Source: Bloomberg, UniCredit Source: IHS Markit, Moody’s, UniCredit Research
■ Driven by a plunge in EBITDA, leverage of HY issuers peaked at almost 11x earlier this ■ The liquidity crisis at the beginning of the pandemic did not turn into a serious solvency
year. Due to policy initiatives and cost savings, which strengthened liquidity positions, crisis. European defaults, however, have increased this year and the weaker economic
net debt has declined slightly, resulting in a leverage ratio of 7.4x as of end-September. outlook until 2Q21 suggests that there are likely to be more defaults in the near term.
■ Sustained policy actions will ensure that companies shore up liquidity and company ■ We think these could peak at 6% and then decline on the back on an improving growth
earnings will likely improve next year. This will help to improve the credit metrics of HY outlook to about 4% by end-2021. A normalization of defaults in 2021 will add additional
non-financial issuers (see Equity section in this report). 20% earnings growth and support to the spread-tightening trend we forecast next year. However, continued focus
almost stable average net debt could lead to leverage dropping to 6x next year. on issuers’ credit quality is still warranted.
UniCredit Research page 12December 2020 Credit & Credit Strategy Research
Euro Credit Pilot Strategy
Debt-equity linkage
2021 – a year of recovery with strong upside potential in equity markets
CHART 13: EUROZONE GDP GROWTH AND GROWTH OF EURO STOXX 50 EPS ESTIMATES CHART 14: IFO BUSINESS CLIMATE INDEX AND CYCLICALS-VERSUS-DEFENSIVES RATIO
15 30 110 1.2
10 20 1.1
100
5 10
1
0 0
90 0.9
-5 -10
0.8
-10 -20
80
Eurozone GDP growth, in % yoy 0.7
-15 -30 Ifo Business Climate Index, expectations component
UniCredit eurozone GDP growth est., in % yoy
UCG estimates STOXX Europe 600 cyclicals/defensives ratio (rs)
12M fwd. EPS estimates, in % yoy (rs)
-20 -40 70 0.6
2008 2010 2012 2014 2016 2018 2020 2022 2006 2008 2010 2012 2014 2016 2018 2020
Source: Bloomberg, UniCredit Research Source: Refinitiv Datastream, UniCredit Research
■ We anticipate increasing improvement in company earnings during 2021, and we expect ■ Cyclical sectors are increasingly gaining in terms of their attractiveness relative to
this positive trend to continue in 2022. For the Euro STOXX 50, we expect to see defensive sectors, in an environment of a broadening and deepening economic recovery.
earnings growth of about 20% in 2021 (after a decline of about 35% yoy in 2020) and
continued earnings growth of about 30% in 2022.
■ The chart above shows the correlation between the Ifo Business Climate Index’s
expectations component and the relative performance of the STOXX Europe 600’s
■ With respect to valuations, ongoing fiscal and monetary stimulus might provide support. optimized cyclicals-versus-defensives index. The correlation suggests an
In 2021, P/E valuation in the US and Europe is likely to ease from current peaks but outperformance of cyclicals over defensives in an environment of increasing leading
remain elevated historically. indicators, which is our medium-term baseline for 2021.
■ Taking our earnings estimates and P/E assumptions into account, we forecast an upward
potential of about 15% for equity markets until the end of 2021.
UniCredit Research page 13December 2020 Credit & Credit Strategy Research
Euro Credit Pilot Strategy
Market technicals
We expect less new bond supply on balance across credit market segments
CHART 15: DEPOSITS BY EUROZONE NON-FINANCIALS AT MONETARY FINANCIAL INSTITUTIONS CHART 16: BOXX NFI GROSS VS. NET ISSUANCE
Eurozone NFCs' deposits placed at MFIs (EUR bn) Gross issuance Net issuance
350
3500
300
3000
250
2500
200
EUR bn
2000
150
1500
100
1000
50
500
0
0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Jan-99 Jun-04 Nov-09 Apr-15 Sep-20
Source: UniCredit Research Source: UniCredit Research
We expect less new issuance in 2021 than this year amid 1. economic growth Sectors facing the highest amount of redemptions are Automobiles & Parts, Utilities,
uncertainty pointing to subdued corporate investment; 2. cash-preserving corporate Industrial Goods & Services and Telecoms. Upside supply risk also stems from ad hoc
policies, which boost corporates’ cash holdings; 3. M&A (debt-funded) activities being M&A activities and from US corporates, as odds are in favor of an extension of the
only ad hoc and 4. this year’s record-high new bond issuance, leaving non-financial currently attractive EUR-USD swap basis into next year. We expect non-financial
issuers with large cash deposits (see Chart 15) and implying less of a need to tap the corporates to use the current low-yield environment to strengthen their balance sheets
primary market than there was in 2020. We expect EUR 250bn of new senior issues by issuing hybrids, where we expect to see EUR 22bn in new issues, which
from non-financials next year, implying EUR 80bn of net issuance, the lowest such corresponds with this year’s issuance – given EUR 13.5bn in maturities/calls, this
volume since 2014 (Chart 16). Upside risk stems from potential prefunding activities implies up to EUR 8.5bn net issuance.
related to 2022 maturities, which amount to much the same as 2021’s redemptions.
UniCredit Research page 14December 2020 Credit & Credit Strategy Research
Euro Credit Pilot Strategy
Banks’ supply-side-related technicals are spread neutral
CHART 17: SENIOR SUPPLY FORECAST 2021 (BENCHMARK FORMAT, EUR BN)
■ Banks’ issuance volumes in 2021 will be driven by the following key items: 1.
Redemptions Gross supply Net supply Macroeconomic developments, lending standards and related loan growth; 2. inflation
25 of risk-weighted assets; 3. 2022 TLAC and MREL requirements, with intermediate
targets due to be fulfilled by 2022; and 4. monetary stimulus including an potential
20 extension of favorable TLTRO-III conditions.
■ Senior funding: Our gross 2021 issuance forecast is EUR 123bn in bank senior
15
benchmark debt denominated in euros. As EUR 117bn worth will be maturing in
2021, this represents EUR 6bn of net supply. Banks can make early repayments of
10 TLTRO-III drawings from June and September 2020 in September 2021. We see it
as likely that the ECB will extend favorable TLTRO pricing beyond June 2021, which
5 makes early repayment less likely. We expect the split between senior non-preferred
(SNP)/HoldCo debt and senior preferred/OpCo debt to be 52% to 48%.
0
■ Tier-2 funding: We expect gross supply of benchmark Tier-2s denominated in
-5 euros to amount to EUR 20bn next year. We believe that Tier-2 bonds will play a
slightly smaller role in 2021, mainly limited to refinancing and occasional issuance,
as the outstanding Tier-2 stock is already high and banks will be primarily focused
on issuing cheaper SNP or HoldCo debt to fulfill MREL subordination requirements.
Source: Bloomberg, UniCredit Research ■ AT1 funding: We expect gross supply of AT1s to amount to the euro equivalent of
EUR 28bn, including all AT1s that are larger than the equivalent of USD 500mn and
denominated in USD, EUR, CHF or GBP. We expect the majority of calls to be
exercised, because of the expected more favorable pricing to issue new AT1s and to
support investor sentiment.
UniCredit Research page 15December 2020 Credit & Credit Strategy Research
Euro Credit Pilot Strategy
Covered bonds: spread-supportive environment but negative net supply
CHART 18: GROSS AND NET SUPPLY IN COVERED BOND MARKETS
■ We expect banks from 23 countries to issue covered bonds with a total volume of EUR
30 15
Redemptions 2021 95.0bn in 2021, while we expect that banks from 7 countries will not be active (yet).
Gross supply 2021E According to our forecast, the three countries with the largest gross issuance volumes of
Net supply 2021E
covered bonds are Germany (EUR 12bn), France (EUR 24bn) and Canada (EUR 10bn).
20
We expect issuance from the Nordic region to remain strong and estimate that EUR
13bn of gross supply in covered bonds will come from Denmark, Finland, Norway and
10 5 Sweden. We expect only EUR 2bn in issuance to come from Spain, and we expect EUR
3bn of new supply to come from Italy. In the UK, EUR-denominated issuance activity by
Net supply (EUR bn)
banks will be impacted by Brexit and decisions by banks regarding whether to issue
EUR bn
0 bonds in GBP or EUR. Momentum in the Asia-Pacific region is likely to continue in 2021,
and we expect gross supply from Singapore, Korea, Japan, Australia and New Zealand
to total EUR 10bn. Expected gross supply in 2021 of EUR 95bn compares with EUR
-10 -5
133bn of redemptions, indicating negative net supply.
■ The key drivers of covered bond supply in 2021 will be the further development of the
-20
COVID-19 pandemic and measures taken by central banks to counteract negative
economic consequences. The ECB’s ongoing third covered bond purchasing program
-30 -15
(CBPP3) and, even more so, the impact of TLTRO-III on covered bond supply will be key
FR DE CA GB NO AT NL AU FI IT SE SG BE ES JP KR DK NZ PL SK CZ EE GR drivers next year. We regard the implementation of the EU’s Covered Bond Directive
(harmonization) as a driver of only minor importance in terms of how it is expected to
Source: issuers, Bloomberg, UniCredit Research
affect supply volume, but we consider it relevant to the overall covered bond market.
■ We predict that the COVID-19 pandemic will have only a limited negative impact on cover
pools due to 1. the dynamic nature of cover pools; 2. that measures to buffer potential risk
(e.g. low loan-to-value ratios, overcollateralization, liquidity buffers, etc.) are considered
sufficient; 3. the high quality of residential mortgages (as well as the limited amount, and
diversified risk profiles, of commercial mortgages); 4. the sound credit quality of issuing
banks and 5. supporting measures from the fiscal, regulatory and monetary-policy side.
■ For 2021, we expect covered bond spreads to be well-supported due to negative net
supply, ongoing ECB purchases of covered bonds and continued-strong demand
from investors.
UniCredit Research page 16December 2020 Credit & Credit Strategy Research
Euro Credit Pilot Strategy
HY markets: refinancing activity will likely drive issuance with M&A as supply driver
CHART 19: IBOXX HY NFI: ISSUANCE, REDEMPTIONS (*2021 FORECAST)
■ After this year’s issuance rally (iBoxx HY NFI new supply at EUR 70bn YTD) and huge
Redemptions Issuance positive net supply delivered so far, the coming months are likely to see a slowdown in
80 new-issuance activity: among the factors pointing to this outcome are the slowdown in
investment flows and the significant frontloading in funding attained by many issuers
70 this year.
60
■ We expect a gross supply volume of about EUR 60bn in 2021, mainly driven by
Volume in EUR bn
50 refinancing needs, see Chart. We expect that another year of positive net supply will
likely have only limited implications for spread levels due to the hunt for yield.
40
■ M&A activity could pose an upside risk to our supply forecast as deal volumes have
30
been surprisingly high this year, and have in part been funded by HY bonds. Sectors,
20 such as Pharma, Telecoms, Technology, and Gaming might be prone to M&A activity
and we expect activity to increase next year.
10
■ HY investors will likely welcome another tally of fallen angels given that they represent
0 an attractive investment opportunity (we estimate a fallen-angel volume of EUR 20bn in
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
* 2021, down from EUR 47bn this year so far).
Source: IHS Markit, UniCredit Research
UniCredit Research page 17December 2020 Credit & Credit Strategy Research
Euro Credit Pilot Strategy
SSA: Tremendous increase in bond supply expected
GROSS AND NET FUNDING OF SELECTED AGENCIES AND SUPRAS
180
■ We expect total gross funding targets of selected European agencies and
160 2021F 2021 redemptions Net supply 2021 supranationals (see chart) to amount to EUR 527bn to EUR 577bn in 2021 (2020F:
160 EUR 418bn), up by 26-38% yoy. However, a lot depends on bond issuance by the
140 EU (expected gross funding EUR 160bn to EUR 210bn) and a potential increase of
ESM funding, if member states request loans under the ESM’s Pandemic Crisis
120
Support credit facility.
100
EUR bn
80 75 ■ Total redemptions in 2021 will decrease to EUR 326bn from EUR 396bn in 2020
65
60 (down by 18% yoy). However, due to increased gross fundings of some issuers, net
40 funding is expected to increase to EUR 200bn to EUR 250bn (2020: EUR 22bn).
40
17 1414 12
20 1111 10 9 8 8 8 8 7 7 7 6 6 5 4 3 3 3 3 3 2 1 ■ The EU is expected to issue the largest volume in the SSA space in 2021. However,
0 total bond issuance will depend on the progress of implementing the Next Generation
EU (NGEU) program, Besides the EU, other agencies and supras like French Cades
-20
(CADES) but potentially also the ESM will ramp-up bond issuance in 2021.
EIB
EFSF
NRWBK
OKB
EU
DEXGRP
KFW
CADES
BNG
KOMINS
WIBANK
AGFRNC
RENTEN
NIB
UNEDIC
OSEOFI
ICO
COE
CDCEPS
NEDWBK
LBANK
KUNTA
FMSWER
CDEP
ESM
KOMMUN
SFILFR
SEK
KBN
ERSTAA
■ PSPP and PEPP purchases: we estimate net purchases worth EUR 65-85bn to be
allocated to supranationals’ bonds in 2021. When comparing this to the large
amount of net supply, ECB’s purchases will be less supportive in 2021 compared to
Source: issuers, Bloomberg, UniCredit Research 2020. However, the increase in net supply is mainly driven by the EU and in our
view, the increased net supply will be absorbed by the large investor demand for
safe-haven securities.
UniCredit Research page 18December 2020 Credit & Credit Strategy Research
Euro Credit Pilot Strategy
ABS: issuance activity to increase slightly in most market segments
SUMMARY GROSS ISSUANCE EUR SECURITIZATION
■ Our top-level forecast for European securitization issuance in 2021 is EUR 47.1bn.
2016 2017 2018 2019 2020YTD 2021 exp.
The largest market segment should be auto ABS. We expect issuance activity to
Total European auto ABS 14,312 11,782 14,428 17,180 13,451 15,500
increase slightly in most markets, in particular in classic ABS (auto, consumer and
Total European 4,175 1,901 2,238 3,330 2,392 3,000
consumer ABS other) and RMBS, to above 2020 but still below 2019 levels. We expect CMBS to
Total European other 2,444 3,645 3,526 1,351 1,996 2,200 only appear in negligible amounts and CLOs to continue to shrink, albeit at a much
ABS slower pace than in 2020.
Total European RMBS 12,942 12,503 15,121 11,604 9,018 10,500
Total European CMBS 575 144 2,677 2,497 1,126 200
■ Although we present the issuance forecast in a top-down manner, the issuance
Total European CLO 21,525 31,936 34,461 34,914 16,150 14,000 expectations are effectively a product of a bottom-up approach. Since YTD issuance
Total EUR 61,909 66,123 75,770 75,130 48,298 47,100 is a moving target, we chose 27 November as the cut-off date. Deals priced after this
securitizations date are not included in the YTD figures.
Source: UniCredit Research
UniCredit Research page 19 See last pages for disclaimerDecember 2020 Credit & Credit Strategy Research
Euro Credit Pilot Strategy
ESG bond issuance to be driven by sovereigns and SSA
GLOBAL ISSUANCE OF ESG BONDS TO HIT NEW RECORDS IN 2021
■ We expect the ESG bond market to continue along its growth path in 2021 and
Green bonds Social bonds expect global issuance of green, social, sustainability and sustainability-linked bonds
600 (SLBs) to amount to USD 570bn. Green bond supply is expected set a new record
Sustainability bonds Sustainability-linked bonds 570
20 and to amount to USD 260bn in 2021. We expect combined social and sustainability
500 70 bond issuance to amount to USD 290bn and expect to see a spike in the issuance of
SLBs (USD 20bn) in 2021.
Amount (USD bn)
400
366 220 ■ Alongside the increase in the amount of attention being paid to social topics by market
320
58 participants due to the COVID-19 pandemic, key drivers in 2021 are likely to be the
300 43 implementation of the EU Taxonomy, stricter climate targets proposed by the EU and
19 increased focus by issuers across all sectors on overall sustainability performance.
202 119
200 178
16
14 ■ Large ESG bond supply, especially from sovereign and SSA issuers, is expected to
254 260 lead to liquid curves in the green bond market but also in the social-bond market. In
100 172 184 our view, market participants are unlikely to differentiate between green or social
158
when it comes to pricing and performance. In our view, social bonds are also likely
0 to trade at lower yields that are comparable to that associated with green bonds, and
2017 2018 2019 10M20 2021F this is expected to be driven by high demand for ESG assets.
Source: Climate Bonds Initiative, Bloomberg, UniCredit Research
UniCredit Research page 20 See last pages for disclaimerDecember 2020 Credit & Credit Strategy Research
Euro Credit Pilot Strategy
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UniCredit Research page 21December 2020 Credit & Credit Strategy Research
Euro Credit Pilot Strategy
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E 20/1
UniCredit Research page 22December 2020 Credit & Credit Strategy Research
Euro Credit Pilot Strategy
UniCredit Research* Credit & Credit Strategy Research
Erik F. Nielsen Dr. Ingo Heimig
Group Chief Economist Head of Research Operations
Global Head of CIB Research & Regulatory Controls
+44 207 826-1765 +49 89 378-13952
erik.nielsen@unicredit.eu ingo.heimig@unicredit.de
Head of Credit Research Heads of Strategy Research Credit & Equity Sector Strategy Research
Dr. Luca Cazzulani Elia Lattuga
Dr. Sven Kreitmair, CFA Co-Head of Strategy Research Co-Head of Strategy Research Holger Kapitza
Christian Stocker, CEFA
Head of Credit Research FI Strategist Cross Asset Strategist Lead Equity Sector Strategist Credit & High Yield Strategy
+49 89 378-13246 +39 02 8862-0640 +44 207 826-1642 +49 89 378-28745
+49 89 378-18603
sven.kreitmair@unicredit.de luca.cazzulani@unicredit.eu elia.lattuga@unicredit.eu holger.kapitza@unicredit.de
christian.stocker@unicredit.de
Financials Credit Research
Franz Rudolf, CEFA Dr. Michael Teig Dr. Stefan Kolek
Head Deputy Head Matthias Dax EEMEA Corporate
Covered Bonds Banks Sub-Sovereigns & Agencies, ESG Credits & Strategy
+49 89 378-12449 +49 89 378-12429 +49 89 378-13946 +49 89 378-12495
franz.rudolf@unicredit.de michael.teig@unicredit.de matthias.dax@unicredit.de stefan.kolek@unicredit.de
Natalie Tehrani Monfared
Florian Hillenbrand, CFA Tobias Keller Julian Kreipl, CFA Regulatory & Accounting
Securitization Banks Covered Bonds Service, Insurance, Real Estate
+49 89 378-12004 +49 89 378-12960 +49 89 378-12961 +49 89 378-12242
florian.hillenbrand@unicredit.de tobias.keller@unicredit.de julian.kreipl@unicredit.de natalie.tehrani@unicredit.de
Corporate Credit Research
Christian Aust, CFA
Head Gianfranco Arcovito, CFA Sergey Bolshakov Dr. Sven Kreitmair, CFA Ulrich Scholz, CFA, FRM
Industrials, Oil & Gas Telecoms, Technology, Gaming EEMEA Corporates & Financials Automotive & Mobility Utilities, Hybrids
+49 89 378-17564 +49 89 378-15449 +44 207 826-1772 +49 89 378-13246 +49 89 378-41847
christian.aust@unicredit.eu gianfranco.arcovito@unicredit.de sergey.bolshakov@unicredit.eu sven.kreitmair@unicredit.de ulrich.scholz@unicredit.de
Jonathan Schroer, CFA Jana Schuler, CFA Dr. Silke Stegemann, CEFA
Telecoms, Media/Cable Industrials Health Care & Pharma, Consumer
+49 89 378-13212 +49 89 378-13211 +49 89 378-18202
jonathan.schroer@unicredit.de jana.schuler@unicredit.de silke.stegemann@unicredit.de
UniCredit Research, Corporate & Investment Banking, UniCredit Bank AG, Am Eisbach 4, D-80538 Munich, globalresearch@unicredit.de
Bloomberg: UCCR, Internet: www.unicreditresearch.eu
C/CS 20/3
*UniCredit Research is the joint research department of UniCredit Bank AG (UniCredit Bank, Munich or Frankfurt), UniCredit Bank AG London Branch (UniCredit Bank, London), UniCredit Bank AG Milan Branch (UniCredit Bank, Milan), UniCredit Bank AG Vienna Branch (UniCredit Bank, Vienna), UniCredit Bank Austria AG
(Bank Austria), UniCredit Bulbank, Zagrebačka banka d.d., UniCredit Bank Czech Republic and Slovakia, ZAO UniCredit Bank Russia (UniCredit Russia), UniCredit Bank Romania.
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