Liquidity concerns remained paramount in markets broadly Wednesday after 17 Canadian issuers of short-term commercial paper said in the previous session that they were unable to raise funding and global money markets remained twitchy in spite of soothing words from the head of the European Central Bank.
Credit derivative and stock markets were hard hit overnight and into Wednesday with Asian markets following the US lead and so setting up Europe for further trouble.
The investment-grade credit derivative indices in the US and Europe have both been underperforming those that track higher-yielding and junk-rated debt mainly due to the high levels of fear surrounding the banking and financial sectors.
The problems in the asset-backed commercial paper markets have opened up another area of credit exposure for many banks that have committed to provide liquidity lines to the conduits and structured investment vehicles that rely on ABCP for their funding.
Add this exposure to hedge fund lending, underwriting of leveraged buy-out debt and direct mortgage lending and warehousing of mortgage bonds and other structured products and there is plenty to worry about for the biggest banks.
This has led them to pull in their horns drastically and – along with many other investors – sit on cash and credit lines just in case, which must remind many in the market place of the curse for the Ancient Mariner who finds “water, water everywhere, nor any drop to drink”.
In Europe, the main iTraxx investment grade index was up another roughly 2 basis points Wednesday morning to about 55bp, after rising more than 5bp on Tuesday. Overnight in the US, the CDX investment-grade index was about 2.77bp higher at 77.65bp, according to Markit Group.
Kaupthing, the Icelandic bank, saw its cost of protection leap as much as 40bp higher on Wednesday morning before settling back to be about 27bp at 109bp. The move followed its announcement that it would buy Dutch bank NIBC, which has been laid low since admitting it had subprime exposure of just less than €400m.
The deal, worth €3bn, will cost Kaupthing €1.6bn in cash with the rest being raised through new share and hybrid debt issues.
The move shows that some have cash to spend if they are willing to take the risk. This kind of vulture activity is expected by many to soon be on the increase across many of the financial sectors that have been hurt in the recent credit crunch.
In the US, the monoline insurers have been particularly hard hit in recent days. These companies provide guarantees, or “wraps” as they are callled, to mostly highly rated asset-backed bonds and CDOs, both of which areas have come under strong pressure as the sub-prime crisis has gathered pace.
Ambac, MBIA and MGIC are all names that have seen their cost of protection jump significantly, but none has been hammered as much as Radian, which leapt 154bp on Tuesday alone. This puts its cost of protection at 839bp, according to Markit, 347bp higher on the past week and 750bp higher over the past month.
The company had put out a statement late on Monday saying it had guaranteed $47bn worth of most of which were triple-A rated, although it declined to say whether or not they were exposed to subprime.