Tag Archives: High-yield debt

Spec-Grade Liquidity Worsens

Speculative-grade liquidity has worsened this summer for the first time in 15 months, according to a report published by Moody’s Investors Service.

“The increase in the past six weeks suggests that a long period of improving liquidity for spec-grade companies may be drawing to a close.”

John Puchalla

The liquidity stress index rose to 5.5% in mid-July from 5% in June and 4.8% in May, after 15 months of declines, Moody’s report.

“The increase in the past six weeks suggests that a long period of improving liquidity for spec-grade companies may be drawing to a close amid a tentative U.S. recovery, high unemployment and persistent concerns over sovereign debt in Europe,” John Puchalla, Moody’s vice president and senior credit officer, says in a statement.

The rating agency says that the increase in the stress index could be a warning that speculative-grade corporate liquidity remains dependent on continued access to credit markets, and billions of dollars of high yield debt maturing over the next several years could put pressure on default rates if the economy remains volatile and credit markets are unwelcoming.

Moody’s says that U.S. speculative-rated companies have about $800 billion in loans and bonds maturing between now and 2014.

Overall, there were four downgrades to SGL-4 in June and another five through mid-July, Moody’s says.

However, although the index is rising, it remains below its 8.4% historical average since Moody’s first assigned SGL ratings in 2002, Puchalla notes.

The last time the index started to move up markedly was in June 2007, just before the credit crisis, and it peaked at 21% in March 2009.

Moody’s proprietary index takes the total number of companies rated SGL-4, the lowest liquidity rating on a scale of 1 to 4, and divides it by the number of companies that have SGL ratings. Thus, the more SGL-4-rated companies there are each month, the higher the liquidity-stress index.

The report, “U.S. Speculative-Grade Liquidity Worsens for the First Time in 15 Months,” is available on Moody’s web site, www.moodys.com.

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Merkel, Obama, Sarkozy Have Investors Shitting Their Pants

According to the latest survey by Fitch Ratings, the upcoming regulations are seen by the majority of investors as the greatest threat to the credit market over the next 12 months. The fear is that bank creditors will be forced to share the cost of bank failures. 60% of recipients believe the peak of loss‐taking is still to come in the developed sovereign debt market.

“Survey participants signaled that governments will face higher funding costs amid a rising concern over future defaults and losses.”

Fitch Ratings

The latest “European Senior Fixed Income Investor Survey” from Fitch Ratings is one of the most interesting in a long time. A major shift in investors sentiment have taken place in the first quarter of 2010. Only 6 in 100 would choose government debt if they were to invest today.  The proportion of investors expecting “significant” credit deterioration have nearly doubled – to 19% – since the last survey.

“Potential changes to resolution regimes may provide that certain bank creditors have to share the costs of bank failure. Such changes could have potentially serious implications for bank investors right across the capital and funding structure,” according to the majority of investors participating in the survey.

In fact, they would rather use their money to buy speculative risky junk bonds than invest in government debt.

It’s also interesting to notice that cash most certainly is not king when it comes to fixed income investments.

However, the reason is obvious; cash doesn’t yield much these days.

I guess it’s further evidence that the thing politicians call “greed” and bankers call “risk appetite”, is very hard to kill.

But one small remark by Fitch may give reason for concern:

“Overall, the survey results showed that, while remaining at high levels, investors are signaling a slightly reduced focus on conservative financial priorities such as maintaining cash cushions and prioritizing amortization of debt.”

Uh, uh…

“However, in terms of the outlook for capex, investors remained cautious in the face of weak demand growth and persistent production overcapacity,” the rating agency adds.

States Financial Costs To Increase 25% ?

Since the last survey, at end‐April, major volatility have hit the markets, triggered by concerns over the region’s ability to contain the Greek problem, highlighted by a desperate EUR 750bn rescue package to support the euro.

“Intensifying investor concerns regarding developed‐market sovereigns are expressed throughout the survey results. Respondents believed this bedrock asset class would have by far the biggest difficulty refinancing debt, against a backdrop of an expected weakening in credit fundamentals due to rising budget deficits and debt. Survey participants signaled that governments will face higher funding costs amid a rising concern over future defaults and losses,” Fitch points out.

“Investors signaled intensified concern over developed‐market sovereign issuers, with the proportion expecting significant credit deterioration nearly doubling to 19%. More broadly, the total share of respondents anticipating deterioration (74%) remained in the 70%‐80% range which has prevailed since early 2009,” the survey shows.

Still, an alarming 13% of investors believe that the cost of insuring government debt will increase by more than 25% in the next 12 months.

57% expects an increase by up to 25%.

“The reading for sovereign issuer spread expectations again points to the higher cost that investors expect indebted euro zone governments to pay. In addition, the data signals a general shift of the debt capital markets towards a more cautious mood, with spreads also anticipated to trend up for all other asset classes.”

Forced To Pay For Bank Failures?

Even if the sovereign debt problem is seem as the greatest threat to the overall economy, the new financial regulations are seen as the greatest threat to the credit market; the banks and other credit institutions.

Investors fear they may be forced to pay for bank failures in financial firms they’ve invested in, or lent money to, the report says.

New regulations are seen as the biggest risk to the banks credit quality, followed by commercial property exposure, macro economic development and withdraw of stimulus.

The Q2 survey features 70 responses from the top 100 investing institutions in Europe, obtained during April 2010, Fitch disclose.

More Highlight

The survey reveals several more interesting facts about what’s going on in the heads of investors these days.

For example, 47% thinks the risk of a so-called “double-dip” in the economy is high, while 53% thinks it’s low.

54% sees the risk of withdraw of fiscal stimulus as a high risk in the coming 12 months, and nine out of ten investors says there are a high risk of more souvenir debt problems in the near future.

According to the survey one of three investors buy co-called “Credit-default Swaps”, but very few use these instruments as debt insurance, as originally intended.

When it comes to inflation or deflation, there are just as many who thinks we’ll see high inflation in the months to come, as who thinks we’ll see severe deflation.

There are just as many who believe in low inflation, as in high inflation.

I’m not sure what to make of this, but either the balance between optimism and pessimism is perfect.

Or no one’s got a clue

I’m afraid the last alternative is the truth.

Here’s a copy of the Fitch survey – it’s well worth a read.

Related by the Econotwist:

European Banks: “Leman Times Ten”

Welcome Back to Earth, Mr. Market

Proposal For New Single European Bond

RBS Analyst Warns Investors

Euro-Slide Continues After Spanish Bank Rescue

Mr. B Says “Thanks”

Albert Edwards: Europe On The Edge Of A Deflationary Precipice

“Sending Europe Back To The 1950′s”

Europe’s Crisis; Out Of Control

Stock Market Guru: Sell Everything!

Merkel: The Euro Is At Risk, Could Have Global Consequences

You Sue Me, I Sue You, Oh Peggy, Peggy Sue


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Bank Funding Crunch Deepens as Swap Rates Soar

Europe’s government debt crisis is starting to infect the bank funding system, driving borrowing costs higher from Asia to the U.S. and threatening to slow the global economic recovery, Bloomberg reports.

“At the moment, it feels worse than 2008. There is no buyer of risk in the market.”

Geraud Charpin

The interest rate that financial companies charge each other for three month loans in dollars is the highest since August, while traders are paying record amounts to hedge against losses in European bank bonds. Yields on all types of corporate bonds rose last week by the most relative to government debt since Lehman Brothers Holdings Inc.’s bankruptcy in September 2008, according to Bank of America Merrill Lynch indexes.

European Union finance ministers pledged to stop a sovereign debt crisis from shattering confidence in the euro as they held an emergency summit over the weekend to hammer out a lending mechanism for deficit-stricken nations. The sovereign debt crisis may end up costing governments more than $1 trillion, according to credit investment firm Aladdin Capital Holdings LLC in Stamford, Connecticut, with knock-on effects on banks and corporates.

“Whether the markets completely unravel depends on whether politicians can stabilize the peripheral government market,” said James Gledhill, who helps manage about 58 billion pounds ($85 billion) as head of fixed income at Henderson Global Investors Ltd. in London. “The tail risk is the stress on banks which stops them from lending to corporates and feeds through to become a real economy problem.”

Global corporate bond issuance plummeted last week, with $9.4 billion of debt sold, the least this year, following $30.1 billion in the previous five-day period and $47.9 billion in the week ended April 23, according to data compiled by Bloomberg. JPMorgan Chase & Co. said in a May 7 report that it’s taking off a recommendation that investors own a greater percentage of junk bonds than contained in benchmark indexes.

“Look for the de-risking that is underway to continue,” the New York-based bank’s fixed-income strategists including Srini Ramaswamy wrote. “Funding pressures have increased for European banks and could worsen over the near term, but are unlikely to deteriorate to the extent seen in 2008 that led to forced develeraging.”

The rate banks say they pay for three-month loans in dollars, known as the London interbank offered rate, or Libor, jumped 5.5 basis points to 0.428 percent on May 7. It climbed 8.2 basis points, or 0.082 percentage point, on the week, the biggest increase since October 2008.

The spread between three-month dollar Libor and the overnight indexed swap rate, a barometer of the reluctance of banks to lend known as the Libor-OIS spread, jumped to 18.1 basis points on May 7, three times the 6 basis-point spread on March 15 and the highest level since August.

“At the moment, it feels worse than 2008,” said Geraud Charpin, a fund manager at BlueBay Asset Management in London. “There is no buyer of risk in the market.”

Full article at bloomberg.com


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