First, and with thanks (?) to BofAML for the header:
HY returns to net outflows for 2015 US high yield funds reported -$3.4bn (-1.6%) net outflows this week, the largest outflow recorded since August 2014’s -$6.75bn, after the Malaysian Airlines plane was shot down over eastern Ukraine.
From Deutsche, there are worse ways to sum up this year in credit…
Late stages of every credit cycle, by definition, are built on a theory as to why this time is different.
This type of attitude was prevalent going into 2015, when credit markets largely dismissed the oil sector distress, choosing to believe that this was an isolated issue and will stay that way. Historical evidence pointed to the contrary, where no earlier precedents existed of the largest sector being in distress and the rest of the market remaining firm. Today, two out of three sectors in US HY have more than 10% of debt trading at distressed levels.
Or, charted: Read more
For the latest on the ECB’s liquidity position on Greece, see our post here.
Meanwhile, here’s some instant analysis by way of the FT Alphaville collective inbox:
UPDATE: Capital controls and a bank holiday now confirmed; full research pack from Buiter, Barr and others available in the usual place. Read more
Alternatively: SOE, do we have credit pricing in China?
Click for the (Mandarin) notice sent by Baoding Tianwei on Tuesday, informing bondholders that it would be missing a $14m interest payment and thus making it a rare Chinese corporate default. Like Kaisa. But not like Kaisa. Because Baoding’s also part of a state-owned company, China South Industries. Read more
Deutsche Bank’s annual study of defaults has landed. Thoughts on how the next cycle for corporate borrowers might be affected by flatter yields curves below, but first a reminder of just how little money has been lost to bad debts since 2009.
We can’t overstate how low overall defaults are. The 2010- 2014 cohort is the lowest 5-year period for HY defaults in modern history (quality adjusted). To protect for default risk in BB and Single-B rated bonds over this period, investors would have only required 27bps and 94bps respectively. Current EUR/USD BB spreads are 301/350bps and Single-Bs 598/527bps. Indeed in CDS, Crossover now has 10 full years of default history. The peak 5 year default period was the 12% seen in Series 8-10 (late 2007 to late 2013). Relative to its ratings, average default risk for this index should now be around 20%. So this reiterates that recent history and average history in default terms remain remarkably far apart.
Or, how far is market pricing of credit risk catching on in China, after all?
Here’s your default-risk adjusted corporate bond yields in China from Nomura (our emphasis):
Liquidity injections and targeted easing so far this year has had a material impact on corporate bond yields. Corporate bond yields have dropped across the rating spectrum, while a similar narrowing of spreads can be seen relative to Chinese government bonds. Data provided by the China Government Securities Depository Trust & Clearing Co Ltd (chinabond.com.cn) shows that both 1yr and 5yr AA-rated bond yields have fallen, from highs of 7.22% and 7.63%, respectively, at the start of the year to 5.38% and 6.53% today.
Paging Bruno Iksil.
It’s well known that JPMorgan lost $6bn in its ill-fated “London Whale” investment. What is less known is that shortly before the bank’s unwieldy multi-legged play on corporate credit ballooned to unsustainable proportions, the positions taken on by JPMorgan produced almost half a billion dollars worth of profits thanks to the bankruptcy of a single company — American Airlines. In fact, one could easily make the case (as the US Senate did) that the easy money reaped by JPMorgan from the AMR filing helped catalyse the CIO’s doomed love-affair with low-cost default protection. Read more
The prospect of a US technical default is unfortunately becoming an ever greater reality.
That said, there’s no reason to panic just yet.
If there is a D-day it isn’t until November 15.
What’s more, there’s an ever louder chorus of voices suggesting that a technical default may not matter at all.
How can that be? Read more
This piece of comparative calm is very definitely to be read in conjunction with Cardiff’s post on how the Treasury’s payment system (might) work.
It’s to do with the fact that there is no cross-default clause in US Treasuries. That means a missed payment on one bond would leave the other bonds unfazed, and equally usefully, if needed bonds can be split up into a ‘delayed component’ and a ‘normal component’ .
Pity the EM sovereign with such sloppy protections, eh? Read more
China Everbright Bank placed itself directly in the firing line of terrible puns last week when reports it had defaulted started to circle.
Thankfully, Anne Stevenson-Yang from J Capital read into the news a bit further than most:
The interbank defaults last Thursday provided definitive, if indirect, proof that the cash coming into China is for financial investment and interest arbitrage. It masquerades as a trade surplus but is not. With the tightening of the domestic central bank credit window, Chinese banks are heavily dependent on these inflows for the cash they need to roll over loans. That is why the banks immediately went into distress when regulators decided to clamp down on fraud on the trade account.
Take note of the following story from IFR. It could turn out to be very important:
Jan 4 (IFR) – The yield-to-worst in the high-yield market dipped to its lowest level ever this week, as risk markets rallied on the fiscal cliff agreement. Dropping below 6% for the first time in history, the yield to worst on the Barclays high-yield index fell to 5.96% on Wednesday and pushed even lower to 5.90% on Thursday. This compares to 6.13% on Monday and 8.14% at the start of 2012. Read more
From Bloomberg earlier on Monday:
*DANA ASKS HOLDERS TO CONFIRM WISH FOR SUKUK TRUST DISSOLUTION
*DANA GAS SAYS ‘DISSOLUTION EVENT HAS OCCURRED’ ON SUKUK
Nov. 5 (Bloomberg) — Co. asks certificate holders to confirm whether they wish for the trust to be dissolved, according to statement carried by the regulatory news service.
That notice, says Exotix’s Gus Chehayeb, officially confirms that a technical default has occurred on Dana’s $920m Islamic bond, and that there was no official standstill agreement in place.
The default could also be a first for UAE public bonds. Read more
It sounds almost pleasant if you ignore the gritted teeth and the fact we don’t know how much they actually paid (our emphasis): Read more
Who doesn’t like a good dataset?
As markets wade into the second quarter of 2012, reflect for a moment on the fact that the crisis sparked by subprime mortgages now has nearly five years’ worth of observational data. This is very exciting
for nerds, since the conclusions from studying the period will get progressively more meaningful and insightful — something not lost on the credit strategy team at Deutsche Bank when they published their 2012 Default Study on Monday. Read more
An initial roundup of the PSI commentary out this Friday morning.
First off Standard Chartered’s Sarah Hewin, who thinks Isda might call a credit event: Read more
It seems instructive to filter the direct quotes uttered by the various ‘officials briefed on preparations’ in this Reuters story on the promised second Greek bailout being delayed….
“There are proposals to delay the Greek package or to split it, so that an immediate default is avoided, but not everything is committed to…They’ll discuss the options…There is pressure from several countries to hold off until there is a concrete commitment from Greece, which may not come until after they’ve held elections…This would mean we have to pay the 14.5 billion euros on March 20, which would be a total waste…But there is still money left from the first program so we could do it…This would mean that the talks on the second program, including PSI, which is part of the package, would be moved until there is a new Greek government in place.”
On Wednesday it transpired that the Spanish region of Valencia had delayed repaying Deutsche Bank a €123m debt by as much as a week.
According to the WSJ, a payment was only achieved in the end because Spain’s central government convinced an unnamed bank to step in with a vital short-term bridging loan. Read more
Sino-Forest said on Sunday it has received notices of default from its noteholders, reports Reuters, due to the company’s failure to file its financial results in a timely manner. Last week, the embattled company warned that it would be unable to file its results on time as an internal probe of fraud allegations drags on longer than expected. The company said its board has established a special restructuring committee comprised of its independent directors. The committee will supervise, analyze and manage a review of the strategic options available to the company.
Lightning never strikes twice…unless you are a Kazakh bank.
Or more specifically, unless you are BTA Bank. Remember them? The largest bank in Kazakhstan before the credit crisis, which defaulted on $12bn of debt in 2009? Read more
Will the eurozone survive? If so, in what guise? If not, how will it be broken up and what might the consequences be?
These, among others, are some of the key questions currently occupying the minds of the financial great and good. Read more
In which FT Alphaville asks, should you really take CDS default probabilities at face value?
It will come as no surprise to readers that the clairvoyance of CDS is open to question. CDS spreads are more likely to be steered by frightened bond portfolio managers or CVA desks dealing with volatility than by the invisible hand. Read more
Eurozone finance ministers gave a clear indication they were preparing to paper over Greece’s failure to hit international lenders’ mandated budget targets for 2011, saying they would now evaluate Athens’ performance based on goals that combine both this year’s and next year’s finances, the FT reports. The decision came a day after Greek finance minister Evangelos Venizelos acknowledged Athens would miss the 2011 benchmarks, which the European Union and the International Monetary Fund had set as a prerequisite for disbursing an essential €8bn bail-out payment that is already past due. By combining 2011 with 2012 targets instead, the EU appeared to be preparing to fudge this year’s missed benchmarks, paving the way for the closely watched aid payment, which Athens says it needs in a matter of days or it will run out of cash. But senior eurozone officials warned they were likely to extract new concessions for 2013 and 2014 in the coming days before signing off on the new money.
The search for the elusive US-AAA alternative continues.
As Nomura’s Charles St-Arnaud and Lefteris Farmakis already pointed out on Wednesday, there’s not really all that many options left. Read more
It’s a question FT Alphaville has been pondering for some time.
Why do markets suddenly seem to ‘wake up’ to the problems of one particular country or market, while ignoring similar and even worse issues in other areas? It is, perhaps, a pattern that was first seen in the Asian crisis and the emerging market drama of the 1990s. The question then was “what’s the difference between Russia and Brazil?” To which the only half-joking answer was “about nine months.” Read more
Presenting, courtesy of Bloomberg, le chart du jour — an eye opening inversion of the US credit default swap curve:
Private creditor participation in Greece’s latest rescue programme will be very strictly limited to the Greek crisis and will be specifically excluded as a model for any other eurozone country in financial difficulties, the FT reports. A proposal for bond swaps for all Greek government debt falling due for repayment up to the end of 2019 has emerged as the central element in the scheme, although the eurozone governments now accept that such a plan would almost inevitably trigger a “selective default” declaration by credit rating agencies. Agreement on a very strict definition limiting the bondholder participation to Greece was reached by France and Germany on Wednesday night in order to reassure Jean-Claude-Trichet, president of the European Central Bank, enough to relax his outright hostility to any scheme that might prompt such a selective default. According to the officials, any declaration of default would only be triggered when the bonds were actually exchanged and could be limited to “a very few days”. If the declaration were then rescinded, the ECB would be able to resume accepting Greek debt as collateral for providing liquidity to the Greek banks that are the principal private creditors.
Or, why is that when we hear that Thursday’s euro leaders summit (and the ECB) will allow selective default in a Greek bond swap and buyback — we get taken back to Appendices 7 and 8 of the IMF’s famed postmortem on the Argentine disaster?
Give ‘em a read. Read more
The US bond market may be sending a false signal to Washington that it is unconcerned by the prospect of default should wrangling politicians fail to raise the Federal debt ceiling, the FT reports. “This is a very linear event, it’s like walking to the edge of a cliff – you either stop at the edge or go over,” said Ira Jersey, US interest rate strategist at Credit Suisse. “People in Washington can point and say the market is not worried as there is little reaction so far, but the market is waiting until just before the deadline.” While the consensus in the bond market is for a last-minute deal ahead of the August 2 deadline, sentiment may start faltering later this month when the market is asked to absorb hefty new debt sales. Separately, White House budget director Jack Lew said on Sunday, that there had been “activity and progress” on a deal to raise the US debt ceiling, but there was little sign that Republicans and Democrats were much closer to an agreement, the FT reported. China, meanwhile, has said it expects that the US will be able to resolve its debt-ceiling impasse without triggering a default, according to advisers to the central bank and government. China is the biggest foreign creditor to the US.
It’s a changed, changed world.
The introduction of bail-ins and burdensharing means capital markets will never be the same. Read more