CityWire – Euro BB Autos: Crossover Conundrum

EXECUTIVE SUMMARY

• In this report, we highlight the key risks for the Automotive sector over the next 12-24 months, including lingering component shortages, mounting inflationary pressures and the softening outlook for consumer demand. We also provide our updated views on relative value across the European crossover/BB space.
• Investor sentiment towards the broader Automotive sector has waned in 2022. While the EUR BB index (EUR ICE BofAML BB index) has posted negative total returns of -8.5% YTD, the BB Automotive index has underperformed in posting negative total returns of -9.6% over the same period.
• We are taking the opportunity to shift to an Outperform recommendation on Volvo Car (from Market perform), a Market perform on ZF (from Outperform) and Underperform recommendation on Renault (from Market perform) and Schaeffler (from Market perform) bonds, respectively.

RELATIVE VALUE

YTD TOTAL RETURN PERFORMANCE

Investor sentiment towards the broader Automotive sector has waned in 2022 as lingering supply chain constraints and mounting inflationary headwinds have been compounded by concerns around the resilience of consumer demand as inflation begins to feed through to real household incomes. The European IG Automotive space is primarily comprised of large, bellwether OEMs that have been able to leverage strong pricing and mix to combat the lower volume environment. However, the European Automotive crossover/BB space consists of a larger number of automotive suppliers. As a result, operating performance within the crossover/BB automotive space is more closely tied to volume evolution, with suppliers boasting significantly less pricing power than OEM counterparts.

While the EUR BB index (EUR ICE BofAML BB index) has posted negative total returns of -9.2% YTD, the BB Automotive index has underperformed in posting negative total returns of -10.8% over the same period. As a consequence, having started the year trading ~45 bp inside the BB Index (OAS of 213 vs 258 bp), the BB Automotive Index now trades ~36 bp wide to the BB Index (OAS of 411 bp vs 375 bp). Furthermore, the BB Automotive index has seen curve steepening YTD. For context, entering 2022 the BB Automotive index was offering a spread pickup of ~134 bp for moving from the 1-3Y duration bucket to 7-10Y bucket, compared with ~107 bp for the BB index. However, this spread pickup has now increased to ~205 bp for the BB Automotive index, while the BB index comes in at 119 bp.