Tag Archives: Subordinated debt

Confusion Reigns

Risky assets experienced a volatile session today, perhaps a reflection of market participants’ confusion over US monetary policy. The two major US economic releases of the day – the Richmond Fed manufacturing and the Conference Board consumer confidence surveys – were both well below expectations.

“Recovery locks are currently indicating a recovery of 18-20.”

Gavan Nolan

This had the typical effect of causing spreads to widen and stock prices to fall. But the markets quickly recovered in the afternoon, and European spreads were only slightly wider at the close.

“It is quite possible that investors see the slew of disappointing data as making the next stage of QE an inevitably, maybe as soon as November,” Gavan Nolan, vice president of Markit Credit Research writes in his daily alert.

Adding: “They will remember that the first stage of QE was positive for financial markets, if not the real economy.”

Earlier in the session, sovereigns were performing their usual role as the source of volatility.

Ireland briefly hit another record wide level after S&P weighed in with their latest assessment of Anglo Irish Bank.

In a radio interview an analyst from the rating agency reiterated the cost of the bailout at EUR35 billion. But he also raised the possibility of the rescue fund exceeding this amount, and that was enough to spook the markets.

Ireland’s spreads widened beyond 500bp and Portugal’s spreads also approached their record wides of 460bp.

A downgrade rumor on Spain also didn’t help.

The Irish government on Thursday is expected to provide some clarity on the Anglo Irish bailout and its intentions regarding subordinated debt.

“This could proved to be an important catalyst for future spread direction,” Nolan points out.

In Japan Takefuji Corp filed for bankruptcy protection today.

This wasn’t a great surprise given its was heavily trailed in the media yesterday.

Indeed, a glance at its spread history over the last two years suggests that it was something of a formality.

A credit event auction – only the third in Japan – will no doubt be announced in the coming weeks.

“Recovery locks are currently indicating a recovery of 18-20,” Gavan Nolan writes.

  • Markit iTraxx Europe 114.5bp (+1.25), Markit iTraxx Crossover 520.5bp (+4.5)
  • Markit iTraxx SovX Western Europe 162.5bp (+4)
  • Markit iTraxx Senior Financials 148.5bp (+4.5)
  • Sovereigns – Greece 800bp (+3), Spain 233bp (+6), Portugal 445bp (+20), Italy 202bp (+6), Ireland 485bp (+13), Belgium 136bp (+1)
  • Anglo Irish Bank 965bp (+17)

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Anglo Irish Downgraded – No Surprise

The rating action was another blow for the beleaguered bank. But its spreads were little moved as the market had already priced in the downgrade. In fact, Anglo Irish senior CDS trades with an implied rating of B, according to Markit Implied Ratings.

“A report in a Sunday newspaper suggested that some of Anglo Irish’s debt will be tendered at a discount to par or swapped for equity in the ARB.”

Gavan Nolan


Spreads were lacking direction in a relatively uneventful day, Monday. “Perhaps the most notable occurrence of the day was Moody’s downgrade of Anglo Irish Bank,” vice president Gavan Nolan at Markit Credit Research writes in his daily market alert.

The agency cuts its rating on Anglo Irish’s senior debt by three notches to Baa3, citing the likelihood of further asset quality deterioration and the lack of an explicit government guarantee.

Moody’s warned that if the latter issue isn’t rectified then additional downgrades into sub-investment grade are possible.

But it was the agency’s action on the subordinated debt that was more significant, Nolan points out.

Moody’s cut its rating on the bonds by six notches to Caa1 from Ba1, citing the increasing risk that subordinated bondholders will be forced to share some of the burden of the bailout.

Specifically, the agency highlighted three factors that have led to the risk rising:

(i) the need for further capital injections as the non-NAMA loan book deteriorates;

(ii) the thin capitalization of the Asset Recovery Bank (ARB), which is likely to be wound down; and

(iii) the longer maturities of the subordinated debt in comparison to the senior debt.

The rating action was another blow for the beleaguered bank. But its spreads were little moved as the market had already priced in the downgrade.

In fact, Anglo Irish senior CDS trades with an implied rating of B, according to Markit Implied Ratings.

“It should be noted that it is not the most liquid of credits, having a Markit Liquidity Score of between 2 and 3 in the past few months. The government is expected to provide clarification this week on its plans for Anglo Irish and the overall cost of the bailout. A report in a Sunday newspaper suggested that some of Anglo Irish’s debt will be tendered at a discount to par or swapped for equity in the ARB,” Gavan Nolan points out.

  • Markit iTraxx Europe 113.25bp (+0.5), Markit iTraxx Crossover 516bp (-0.5)
  • Markit iTraxx SovX Western Europe 157.5bp (+2.5)
  • Markit iTraxx Senior Financials 144bp (+1.5)
  • Sovereigns – Greece 785bp (-10), Spain 226bp (+3), Portugal 405bp (+12), Italy 195bp (+5), Ireland 470bp (+8), Belgium 137bp (-3)
  • BP 187bp (-2)
  • AIB  – Snr 625bp (+5), Sub 1000bp (+28), Bank of Ireland – Snr 520bp (+11), Sub 815bp (+19), Anglo Irish Bank – Snr 985bp (+25), Sub 47 points upfront

Something wrong with this picture?

CDS curve for Southwest Airline.

* Southwest Airlines (LUV) will buy Airtran in a $1.4 billion cash and stock deal in a consolidation of low cost air carriers.

* CDS curve today is seeing a roughly 5 bps parallel shift in response to the transaction in early trading.

* Stocks on both LUV and Airtran were higher. Stocks on other air carriers (JetBlue, US Airways and Delta) were higher as well on merger speculation.

Markit Research & News

Related by The Swapper:

Irish Sovereign CDS Spread Exceeds 500 Basis Points

Ireland And Portugal Close To Collapse

Irish CDS Spreads Back To Record High After Bond Sale

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Irish Sovereign CDS Spread Exceeds 500 Basis Points

The Irish sovereign CDS spread exceeded 500 basis points Thursday – for the first time in recorded history. The future of Anglo Irish Bank is at the heart of Ireland‘s problems. The state has poured money into the failed bank but investors are concerned that the eventual cost of a bailout will be too great for the country to bear.

“The government have strenuously denied that senior debt will be restructured. Subordinated debt, on the other hand, is another question.”

Gavan Nolan


Risky assets experienced a difficult session as a combination of mixed economic data and heightened concerns over Ireland fueled negative sentiment as the price of insuring the nations debt went through the roof.

Ireland is the new black sheep of the sovereign CDS world, and its spreads exceeded 500bp Thursday for the first time on record.

“Given that it was only last Friday when the 400bp level was breached, the rapid widening in spreads reflects the severity of Ireland’s credit deterioration as perceived by the market. The prospect of a medium-term IMF/EU intervention – as mooted in a research report last week – triggered the latest bout of widening, and a well-received bond auction on Tuesday failed to provide the boost many expected,” Markit Financial Information Service writes in its daily update.

The future of Anglo Irish Bank is at the heart of Ireland’s problems.

The state has poured funds into the failed bank but investors are concerned that the eventual cost of the bailout will be too great for the country to bear.

Gavan Nolan

“Rumours are circulating abound that bondholders will be forced to share some of the pain. The government have strenuously denied that senior debt will be restructured. Subordinated debt, on the other hand, is another question,” vice president Gavan Nolan at Markit Credit Research writes.

Finance Minister Brian Lenihan has been less than emphatic in denying that subordinated bondholders will not get all of their money back.

The bank’s CDS spreads reflect the bifurcation in senior and subordinated debt.

The latter CDS are now trading around 47 points upfront (equivalent to over 2000bp using 20% recovery rate), indicating high probability of default.

AIB and Bank of Ireland were also significantly wider today, rumours of a bank default in the morning session not helping.

Ireland’s Q2 GDP figures only added to the negative sentiment.

Ireland’s economy shrank by 1.2% in the second quarter, confounding expectations of a small rise.

On a GNP basis – a more useful measure because of the high level of multinational corporate activity – the economy shrank by 0.3%.

“The disappointing figures raise doubts about Ireland’s severe austerity policies, and will no doubt influence the political discourse in the UK,” Nolan says.

More Bad News

Yet more bad news came in the form of Markit PMIs.

The Markit Flash Eurozone PMI slumped to 53.8 in August, a seven-month low and far worse than expected.

The leading indicator is pointing towards a slowing of growth in the region over the third-quarter.

Weaker than expected US initial jobless claims figures completed the negative economic picture.

“But there was glimmer of hope for optimists with the US existing homes sales figures, which were better than expected. Housing starts earlier this week also beat expectations, and the data helped spreads come off their wides. Even banks, which were underperforming throughout the day, improved during the afternoon,” Gavan Nolan points out.

The Markit iTraxx Senior Financials index was 3.5bp wider at 148.5bp after being as wide as 155.5bp earlier in the day.

Sovereigns also staged a comeback, the Markit iTraxx SovX Western Europe finishing the day tighter.

UPDATE:

  • Markit iTraxx Europe 116.5bp (+2.5), Markit iTraxx Crossover 528bp (+9)
  • Markit iTraxx SovX Western Europe 160bp (-1)
  • Markit iTraxx Senior Financials 148.5bp (+3.5)
  • Sovereigns – Greece 797bp (-4), Spain 225bp (-11), Portugal 405bp (+14), Italy 195bp (-2), Ireland 475bp (+15), Belgium 141bp (-4), Hungary 347bp (0)
  • BP 198bp (+1)
  • AIB  – Snr 615bp (+31), Sub 965bp (+35), Bank of Ireland – Snr 525bp (+33), Sub 815bp (+31), Anglo Irish Bank – Snr 16 points upfront, Sub 47 points upfront

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