The article discusses the recent performance of SpaceX's financial assets following its $86 billion IPO and subsequent $25 billion bond sale. Despite a 30% drop in SpaceX's stock price from its peak, early investors remain profitable. Bond investors, traditionally cautious, showed significant interest with $89 billion in orders for the new bonds, indicating a strong demand despite the risks associated with the company's credit rating. The article emphasizes the difference in market behavior between equity and bond investors, noting that while equity investors embrace volatility, bond investors prioritize risk management and stable returns. The bond yields are closely monitored, suggesting that while SpaceX is rated comparatively with companies like General Motors, its bond performance has not yet met expectations, leading to rising spreads and disappointing returns.

Accessibility help Skip to navigation Skip to main content Skip to footer

Add to myFT

Get instant alerts for this topic

Manage your delivery channels here Remove from myFT

SpaceX hangover spreads

To the moon 🚀 🚀

Bond investors, Wednesday© Futurama/ YouTube

current progress 0%

Toby Nangle

Published4 hours ago

Jump to comments section Print this page

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Despite the SpaceX stock price being down around 30 per cent from its post-IPO peak, investors who were handed an allocation in the initial offering are still sitting on a handsome paper profit. Sure, it’s been a bit of a rollercoaster, but this is what equity investors sign up for.

Bond investors studiously avoid rollercoasters. They have a reputation for being a bit dull. Or as Allianz’s CIO, Ludovic Subran, put it to MainFT on Wednesday:

. . . bond investors are not the same as equity investors. Equity investors, you can take them to Mars. Bond investors are, like, ‘where is my coupon?’

Subran was speaking in the context of SpaceX’s decision to launch a $25bn bond sale shortly after their $86bn IPO. The deal, pricing that day, was, according to the insurance executive, a clear sign that markets were entering “bubble territory”.

And yet, according to Bloomberg, bond investors lined up to hand over their money. Total orders came to $89bn.

There was widespread suspicion of index gamesmanship being played ahead of the equity offering. Might there be some index gamesmanship afoot on the bond side? It’s possible but unlikely.

As far as we can work out from reading index methodology documents, there’s no reason the bonds won’t be included in Bloomberg indices when they rebalance this coming Wednesday.

And, judging by primary benchmarks of funds registered in the US and tracked by Morningstar, Bloomberg is the index provider whose rules you want to satisfy:

Some content could not load. Check your internet connection or browser settings.\ \

However, even passive index-tracking funds shy away from attempting the impractical feat of bond index replication, opting instead for a sampling approach that minimises tracking error. And $25bn is a pretty minuscule drop in the vast ocean of these fixed-income universes. So yes, it’s nice to be included. But it looks unlikely to force fund managers’ hands enough to prompt much demand.

The more likely answer behind the mahoosive order book was price. If SpaceX is really worthy of its investment-grade ratings, the bonds were issued stunningly cheaply.

Unlike equity valuations, bond valuations don’t need a leap of faith and aren’t generally the subject of disagreement. Spreads — the amount of additional yield you get paid each year compared to an equivalent maturity government bond — stare you straight in the face.

Yes, there are lots of reasons why a corporate bond’s spread might be higher or lower than others. A bond might be illiquid (generally pushing the spread higher). It might have weird structured optionality rinkydinks (that might increase its value, pulling the spread lower). But mostly it can be understood as some function of how much credit risk the bond has versus other bonds issued by peer firms.

Some content could not load. Check your internet connection or browser settings.\ \

In the chart above we’ve grabbed every US corporate bond with a triple-B rating that’s included in the Ice BofA index. We plot the additional yield each one offers its holders over and above US Treasury yields on the vertical axis, against the date the bond comes due on the horizontal axis.

Eyeballing the chart, it looks like bond investors reckon SpaceX credit is on a par with General Motors — the US automaker that successfully emerged from Chapter 11 bankruptcy in 2009. But not quite as doddery as Oracle.

In other words, SpaceX bond spreads are pretty wide for their rating category — meaning that bond types either aren’t sure that SpaceX will hang on to its investment-grade credit ratings, or will only get involved if they get paid a fat risk premium for doing so.

If wild and crazy equity types are sitting on a ca 10 per cent for buying into valuation widely seen as . . . punchy, how have their dreary old bond colleagues, relying not on dreams but cold hard basis points of observable risk premium fared so far?

Some content could not load. Check your internet connection or browser settings.\ \

Bonds in general have done fine over the past few days, and positive returns from government bonds have helped fixed-income holders everywhere. But despite coming with a fairly hefty risk premium, SpaceX bonds have not done so well — with spreads rising and excess returns dragging total returns down.

It’s early days. But so far boring basis point counters are in the red.

Reuse this content(opens in new window) CommentsJump to comments section

Follow the topics in this article

Corporate bonds

Add to myFT

SpaceX

Add to myFT

Alphaville

Add to myFT

Toby Nangle

Add to myFT

Comments

Close side navigation menu

Search the FTSearch

Subscribe for full access

Read Original at Financial Times →