Big capex spenders get the spoils

19 January

Big capex spenders get the spoils

Companies backed by high yield bonds that will be bigger capex spenders in the coming year are likely to receive a sentiment boost. In particular, energy and metals and mining are set to be sought-after sectors by funds hungry for yield but keen to minimise any potential risks of default.

Indeed, cost-cutting needs last year led many companies to slash capex to preserve cash flow levels—European IG capex in 2020 dropped by a massive 17% year-on-year, with capex plunging furthest in capital goods and energy sectors, according to a Bank of America report. However, industries such as utilities and telecoms kept the faith, and such capex spenders are expected to reap the rewards. Likewise, other companies that embrace capex this year will likely be perceived as better investments by the market. 

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Sector-wise, both energy and metals and mining look enticing to investors on the back of supportive commodity price fundamentals. Leisure and auto names could also recover, while fortunes for airlines depend on lockdowns coming to an end.

Within the energy space, oil and gas credits should offer pockets of value, provided they can survive in a US$45/bbl environment without burning cash. The oil price could also shoot up further after gaining in early January 2021 following Saudi Arabia's surprise decision to cut production. The massive underinvestment in the past five years and a potential pick-up in sector M&A activity, with the new US administration possibly bringing positive policy changes, could be an additional catalyst for an improvement in the commodity prices.

Debutants in demand

The high yield primary market—despite shutting off in March—had a fast revival later in the year. While 2021 new issuance volumes might not be as high as in 2020, when they were favoured by very cheap money, debut issuers are likely to offer more upside than existing names, which should continue to price tighter as macro conditions gradually improve.

High yield issuance kicked-off in the first week of January with German real estate firm Adler Group, which successfully priced a five-year €700 million senior unsecured note at 98.826 to yield 2.125% and an eight-year €800 million senior unsecured note at 98.207 to yield 2.5%.

There could be some heavy weeks of primary upcoming with as much as €10 billion of supply by early February. The expected volume would be inferior to the €15.8 billion printed in January 2020 but above the €9.2 billion average for the past 11 years.