- Corporate bonds. According to the WSJ, the price of Apple bonds has sunk to 90% of face value: "The loss from the high point to the low is around three years' worht of coupon income — a big hit". Corporate bond prices have fallen slightly more than ultra-safe Treasury bonds. Not good from a discount rate perspective! A good source for corporate bonds: KDP High Yield Daily Index.
. Credit Default Swaps. Speaking of discount rates, the iTraxx Europe Crossover Index trades again above 400bps. You can track this very important index on page 28 of the WSJ. See also the Markit website.
. Brazil rating outlook. From Bloomberg: "S&P lowered yesterday the outlook on Brazil’s BBB rating, which is two levels above junk, saying it was concerned by the country’s sluggish economic growth, weakening fiscal accounts and loss of credibility with investors. S&P also cut the rating outlook for state-controlled companies Petroleo Brasileiro SA and Centrais Eletricas Brasileiras SA. The nation’s $2.2 billion of bonds due 2023 fell 0.19 cent to 92.40 cents on the dollar, the lowest price on a closing basis since the notes were issued in September, according to data compiled by Bloomberg. Yields rose 3 basis points, or 0.03 percentage point, to 3.57 percent" (*). Note how closely corporate rating changes follow on the heels of a change in sovereign ratings.
(*) Katia Porzecanski & Blake Schmidt: "Brazilian Dollar Bond Slump Deepens as S&P Lowers Rating Outlook", Bloomberg, 7 June 2013.
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Showing posts with label Credit Markets. Show all posts
Showing posts with label Credit Markets. Show all posts
Saturday, June 8, 2013
ECB MEETING OF GOVERNING COUNCIL: NO CHANGES, AS EXPECTED
The official communiqué: "6 June 2013 - Monetary policy decisions. At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.50%, 1.00% and 0.00% respectively. The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today". Text of press conference: see.
Two things to note: (1) subdued inflation expectations: "The underlying price pressure in the euro area is expected to remain subdued"; (2) the progress made in terms of fragmentation of credit markets within the Eurozone:
It is essential that the fragmentation of euro area credit markets continues to decline further and that the resilience of banks is strengthened where needed. Progress has been made since last summer in improving the funding situation of banks, in strengthening the domestic deposit base in stressed countries and in reducing reliance on the Eurosystem as reflected in repayments of the three-year LTROs.
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Two things to note: (1) subdued inflation expectations: "The underlying price pressure in the euro area is expected to remain subdued"; (2) the progress made in terms of fragmentation of credit markets within the Eurozone:
It is essential that the fragmentation of euro area credit markets continues to decline further and that the resilience of banks is strengthened where needed. Progress has been made since last summer in improving the funding situation of banks, in strengthening the domestic deposit base in stressed countries and in reducing reliance on the Eurosystem as reflected in repayments of the three-year LTROs.
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AN IMPORTANT PAPER!
George Magnus, the UBS advisor, has published an important paper about the so-called 'middle-income trap' (*). The idea is simple enough: developing countries that hit the $12,000/$15,000 level (in terms of GDP per capita) will find it difficult to grow beyond that level if they fail to improve governance:
The appetiser to this discussion is the recent slowdown in growth in China, India, Brazil and elsewhere since 2011, notwithstanding signs of stabilisation in recent months. The cyclical issues are well understood, including weak Western demand. [To escape the middle-income trap, countries must] built trust, rules, good macro, corporate and social governance, and property rights and the rule of law, into national institutions … High levels of prosperity, which are ultimately about investment and innovation, rest on important political foundations, namely strong central government, and inclusive economic, social and political institutions, political checks and balances.
Political checks and balances! I like the idea! In fact, I have cooked up my own Checks and Balances Index [see, in Spanish].
(*) “Hitting a BRIC Wall: the risk of the middle income trap”, UBS Investment Research, 21 January 2013. See also the article: "China can yet avoid a middle-income trap", Financial Times, June 2011: "Richer, more complex economies need high-quality institutions, especially in the legal arena, to sustain human development. This is far more important than national output, steel production or any other metric".
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Sunday, May 5, 2013
NORWEGIAN WEALTH FUND REDUCES DURATION OF BOND PORFOLIO
Norway's oil fund has reduced its bond holdings to their lowest level to date as the world's largest sovereign wealth fund signals its discomfort with the effects of western central banks'' money printing. The fund held just 36.7 per cent of its $726bn assets in bonds at the end of the first quarter, the lowest proportion since it first received money in 1996. Its equity holdings were close to a record high, accounting for 62.4 per cent of the total. Yngve Slyngstad, the CEO of Norges Bank Investment Management, told the Financial Times that the fund could take several courses of action to reduce the risk of a sharp fall in bond prices, including buying property and diversifying into new currencies. It has also reduced the average duration of its bond holdings from about six to five years.
Source. Richard Milne: "Norwegian wealth fund cuts bond portfolio", Financial Times, 27-28 April 2013.
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Source. Richard Milne: "Norwegian wealth fund cuts bond portfolio", Financial Times, 27-28 April 2013.
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Thursday, April 25, 2013
MORE ON THE CREDIT CRUNCH IN SPAIN
Based in the small town of Esquivias south of the capital, Guitarras Manuel Rodríguez and Sons turns out more than 5,000 handcrafted flamenco and classical guitars every year, along with a small range of other wooden instruments. Despite the emphasis on tradition and craftsmanship, this is a capital-intensive business. The work floor is dotted with heavy machinery.
Starting a company such as this, says co-owner Manuel Rodríguez, would be almost impossible in Spain’s current economic climate: “If you go to a bank today, no one will give you credit. And even if they gave you credit, they would demand a big deposit and would demand eight or 10 per cent in interest”. Similar complaints can be heard in small and midsized businesses up and down the country, and are raising concern not just within the Spanish government but within the European Central Bank in Frankfurt.
In the five years since the crisis started, no fewer than 450,000 small and medium-sized enterprises have gone under, says Jesús Terciado, the president of Cepyme, the Spanish association. Researchers at Deutsche Bank, meanwhile, point out that last year almost 20 per cent of all loan applications by Spanish SMEs were rejected – twice as many as for large corporations.
Source. Tobias Buck. “Spain threatened by resurgent credit crunch”, Financial Times, 4 April 2013.
Starting a company such as this, says co-owner Manuel Rodríguez, would be almost impossible in Spain’s current economic climate: “If you go to a bank today, no one will give you credit. And even if they gave you credit, they would demand a big deposit and would demand eight or 10 per cent in interest”. Similar complaints can be heard in small and midsized businesses up and down the country, and are raising concern not just within the Spanish government but within the European Central Bank in Frankfurt.
In the five years since the crisis started, no fewer than 450,000 small and medium-sized enterprises have gone under, says Jesús Terciado, the president of Cepyme, the Spanish association. Researchers at Deutsche Bank, meanwhile, point out that last year almost 20 per cent of all loan applications by Spanish SMEs were rejected – twice as many as for large corporations.
Source. Tobias Buck. “Spain threatened by resurgent credit crunch”, Financial Times, 4 April 2013.
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Wednesday, March 20, 2013
[CREDIT MARKETS] DERIPASKA INTERVIEW
A very useful and interesting interview of Rusal CEO Oleg Deripaska; he is "unusually frank about Russia's ills" (*). Mr. Deripaska sees three key problems in Russia: 1) the judiciary; 2) corruption; 3) interest rates and the cost of capital. Rusal was saved in extremis by the Kremlin in 2009, as huge debts taken on to buy a 25% stake in Norilsk Nickel ($10.8bn today) became unsustainable given the decline in aluminium prices. A new deal brokered —again— by the Kremlin will allow Rusal to obtain $835m in dividends from Norilsk (28% owned by Vladimir Potanin).
On the judiciary: the Russian FSB security service is now twice as big as the Soviet KGB, which undermines confidence. On corruption: "There is not enough prison capacity to fight corruption". On the cost of capital: "It is a topical issue. Some businessmen have blamed the economic slowdown on the Russian Central Bank's strict monetary policy. Mr Putin himself has expressed concern at the 'troubling rise in interest rates' to a level significantly above the inflation rate". Deripaska: "Russia will not get any benefit out of the World Trade Organisation membership unless we pay attention to these issues — the cost of capital and interest rates".
And he adds: "Small businesses struggle to obtain credit: loans are typically for three years at 15 per cent interest". In order to get a loan of $10m or more, businesspeople from Siberia need to travel to Moscow. The Russian banking system is too concentrated, as 72 per cent of credit is issued by only five banks, most of them state-owned. Ladies and gentlemen: there you have it — a dysfunctional judiciary, high levels of corruption, and a very high cost of capital. But don't expect Mr. Deripaska to connect the dots any time soon.
(*) Guy Chazan: "Deripaska hits out at Russia's big banks", Financial Times, 18 de marzo de 2013.
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On the judiciary: the Russian FSB security service is now twice as big as the Soviet KGB, which undermines confidence. On corruption: "There is not enough prison capacity to fight corruption". On the cost of capital: "It is a topical issue. Some businessmen have blamed the economic slowdown on the Russian Central Bank's strict monetary policy. Mr Putin himself has expressed concern at the 'troubling rise in interest rates' to a level significantly above the inflation rate". Deripaska: "Russia will not get any benefit out of the World Trade Organisation membership unless we pay attention to these issues — the cost of capital and interest rates".
And he adds: "Small businesses struggle to obtain credit: loans are typically for three years at 15 per cent interest". In order to get a loan of $10m or more, businesspeople from Siberia need to travel to Moscow. The Russian banking system is too concentrated, as 72 per cent of credit is issued by only five banks, most of them state-owned. Ladies and gentlemen: there you have it — a dysfunctional judiciary, high levels of corruption, and a very high cost of capital. But don't expect Mr. Deripaska to connect the dots any time soon.
(*) Guy Chazan: "Deripaska hits out at Russia's big banks", Financial Times, 18 de marzo de 2013.
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Monday, March 11, 2013
[CREDIT MARKETS] TREASURIES SELL-OFF ON GOOD ECONOMIC NEWS
OK Bloomberg story on credit markets and the risks of investing in ultra-safe assets in the aftermath of a flight-to-quality episode (*) :
Treasuries extended losses that made them the developed world’s worst-performing bonds after a gain in employment raised expectations the U.S. central bank’s efforts to spur economic growth will bear fruit in 2013. U.S. government securities maturing in 10 years and longer handed investors a 1.3 percent loss in the past month, according to data compiled by Bloomberg and the European Federation of Financial Bank of Analysts Societies. It was the biggest decline of 144 bond indexes around the world. A report this week may show sales at U.S. retailers rose in February for a fourth month, based on a Bloomberg News survey of economists.
(*) Wes Goodman: "Treasuries Are World’s Worst Performers After Jobs Gain", Bloomberg, March 11, 2013.
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Treasuries extended losses that made them the developed world’s worst-performing bonds after a gain in employment raised expectations the U.S. central bank’s efforts to spur economic growth will bear fruit in 2013. U.S. government securities maturing in 10 years and longer handed investors a 1.3 percent loss in the past month, according to data compiled by Bloomberg and the European Federation of Financial Bank of Analysts Societies. It was the biggest decline of 144 bond indexes around the world. A report this week may show sales at U.S. retailers rose in February for a fourth month, based on a Bloomberg News survey of economists.
(*) Wes Goodman: "Treasuries Are World’s Worst Performers After Jobs Gain", Bloomberg, March 11, 2013.
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Sunday, March 10, 2013
[BANKS] [CREDIT] RUSSIAN BANKS & RENMINBI FUNDING
What a story! Russian banks are funding themselves through the renminbi bond market! How quickly things have changed! Here's a very interesting article by Sarka Halas: "Russian Banks Look to Yuan Bond Market", Wall Street Journal, February 26, 2013.
Russian banks are increasingly selling bonds in the offshore renminbi market as growing investor demand allows them to borrow at cheaper rates and a chance to diversify their funding base. Investors say they are keen to buy the bonds because they are often issued by state-backed, high profile Russian banks and offer an attractive yield and exposure to the Chinese currency.
Russian banks-including JSC VTB Bank, Russian Agricultural Bank OAO and Russian Standard Bank ZA--have already sold the equivalent of $480 million of the bonds this year, compared with just $309 million in the previous three years. Gazprombank OAO, the financing arm of energy giant Gazprom, also issued yuan debt.
The trend illustrates the growing prominence of the offshore renminbi market, which Standard Chartered expects to be worth between 320 to 350 billion yuan ($50.8 to $55.6 billion) in issuance this year, up from last year's record issuance of 267 billion yuan. The bank expects yuan issuance to rise in 2013 on further regulatory liberalization and a more constructive outlook for the currency.
"What's driving this largely is yield, some expectation of currency appreciation and the need for investors to put their renminbi somewhere while they wait," said Edmund Harriss, director at Guinness Asset Management. Mr. Harriss' Renminbi Yuan Chinese Currency Fund bought VTB's yuan bonds, which offered a coupon of 3.8%, in January. The Guinness Atkinson Renminbi Yuan & Bond Fund has $92 million of assets under management.
As well as yield, investors have been drawn to the Russian debt sales because they feel more comfortable giving them their money than some of the more local issuers. "A large percentage of bond issuance in the offshore renminbi market are from either China or Hong Kong, and for European-based investors who might not be familiar with these companies, the risk profile of these issuers may be deemed to be on the high side," said Liang Choon Koh, Nikko Asset Management's Head of Asia Fixed Income. "They [investors] are more comfortable with issuers that have recognizable brand names and those that are investment-grade rated."
Mr. Koh said he looked at all three investment grade-rated issuers from Russia, but declined to say which ones were picked up by the fund. Nikko Asset Management has a total of $154 billion assets under management. VTB, Gazprombank, and Russian Agricultural bank are all investment-grade rated, quasi-sovereign borrowers, with vast experience issuing in the dollar and euro markets. Russian Standard Bank has a high-yield rating, but is the country's biggest lender to consumers and one of the largest privately-owned banks in the country.
Such demand is allowing the banks to borrow at cheaper rates than they would do in the dollar or euro markets. For example, Russian Agricultural Bank sold a three-year one billion yuan ($160.78 million) bond with a yield of 3.6%. It pays 5.3% to investors in the dollar market for debt of a slightly longer maturity of five years. Alan Roch, head of bond syndicate Asia Pacific region at the Royal Bank of Scotland, one of the banks that placed the Russian Agricultural Bank bond, said he was very confident of selling the Russian bank's debt at a discount to the dollar market before his team even visited prospective investors to pitch the sale.
The Singapore-based banker said RBS was seeing growing interest from foreign issuers and Russian names in particular because of an increased need to fund in offshore renminbi, increase depth of demand and investor diversification, and arbitrage opportunities (ability to issue in renminbi and swap back into main currency). "European issuers have been quicker in identifying this and the more that come and issue in renminbi, the more will want to follow, as their comfort on the execution of these deals improves," said Mr. Roch.
Artyom Lebedev, a spokesperson for Russian Standard Bank, said the attractive cost of funding in yuan and the diversification opportunity for the bank's debt portfolio, meant the bank would be keen to sell more debt in the offshore renminbi market. Since being sold, the Russian yuan bonds have performed well on the secondary market. Yields are lower than what was offered when the bonds were sold as the price of the bonds have risen due to secondary market demand.
However, Russian bonds aren't without risk as investors highlight economic and political risk in Russia and stagnant growth in Europe as factors. Mr. Harriss looked at Russian Standard Bank which is not listed, but decided against buying the bank's debt, because the credit risk was too high with weaker profitability and capital ratios combined with an increasing push into consumer lending in Russia.
Nevertheless market participants expect more yuan debt sales from Russia. "If you are an investment-grade rated borrower, you will have no problems because investors are looking for savvier issuers," said Augusto King, who is head of debt capital markets Asia at RBS and based in Hong Kong. "Russian names offer higher yield and investors buying this debt like the outlook of the long-term appreciation of the renminbi and they like the growth outlook for China," said Mr. Koh. Mr. Harriss agrees that better pick up in yield and quasi government status are strong selling points for the bonds, and in the case of VTB - its diversified operations.
Mr. King added that a large amount of yuan bonds were due to be paid back this year, meaning investors would have to find a new home for their money at a time when debt sales from Chinese banks in the offshore market has been low. The yuan market has so far been largely dominated by state-owned Chinese companies and Chinese government entities looking for foreign investors--something they can't do at home because the Chinese bond market is closed to outsiders.
"The pickup in issuance is largely demand-driven, because Asian investors have increased allocations to emerging market debt," said Mikhail Nikitin, Credit Analyst at VTB Capital. He also noted that for Russian banks, selling debt in yuan not only diversified their funding but helped them avoid potential over-supply to Europe and U.S. Among foreign borrowers, the big global companies such as McDonald's Corp., (MCD), Volkswagen AG (VOW.XE), and Caterpillar Inc. (CAT) have all tapped the market in an effort to grow their businesses in China.
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Russian banks are increasingly selling bonds in the offshore renminbi market as growing investor demand allows them to borrow at cheaper rates and a chance to diversify their funding base. Investors say they are keen to buy the bonds because they are often issued by state-backed, high profile Russian banks and offer an attractive yield and exposure to the Chinese currency.
Russian banks-including JSC VTB Bank, Russian Agricultural Bank OAO and Russian Standard Bank ZA--have already sold the equivalent of $480 million of the bonds this year, compared with just $309 million in the previous three years. Gazprombank OAO, the financing arm of energy giant Gazprom, also issued yuan debt.
The trend illustrates the growing prominence of the offshore renminbi market, which Standard Chartered expects to be worth between 320 to 350 billion yuan ($50.8 to $55.6 billion) in issuance this year, up from last year's record issuance of 267 billion yuan. The bank expects yuan issuance to rise in 2013 on further regulatory liberalization and a more constructive outlook for the currency.
"What's driving this largely is yield, some expectation of currency appreciation and the need for investors to put their renminbi somewhere while they wait," said Edmund Harriss, director at Guinness Asset Management. Mr. Harriss' Renminbi Yuan Chinese Currency Fund bought VTB's yuan bonds, which offered a coupon of 3.8%, in January. The Guinness Atkinson Renminbi Yuan & Bond Fund has $92 million of assets under management.
As well as yield, investors have been drawn to the Russian debt sales because they feel more comfortable giving them their money than some of the more local issuers. "A large percentage of bond issuance in the offshore renminbi market are from either China or Hong Kong, and for European-based investors who might not be familiar with these companies, the risk profile of these issuers may be deemed to be on the high side," said Liang Choon Koh, Nikko Asset Management's Head of Asia Fixed Income. "They [investors] are more comfortable with issuers that have recognizable brand names and those that are investment-grade rated."
Mr. Koh said he looked at all three investment grade-rated issuers from Russia, but declined to say which ones were picked up by the fund. Nikko Asset Management has a total of $154 billion assets under management. VTB, Gazprombank, and Russian Agricultural bank are all investment-grade rated, quasi-sovereign borrowers, with vast experience issuing in the dollar and euro markets. Russian Standard Bank has a high-yield rating, but is the country's biggest lender to consumers and one of the largest privately-owned banks in the country.
Such demand is allowing the banks to borrow at cheaper rates than they would do in the dollar or euro markets. For example, Russian Agricultural Bank sold a three-year one billion yuan ($160.78 million) bond with a yield of 3.6%. It pays 5.3% to investors in the dollar market for debt of a slightly longer maturity of five years. Alan Roch, head of bond syndicate Asia Pacific region at the Royal Bank of Scotland, one of the banks that placed the Russian Agricultural Bank bond, said he was very confident of selling the Russian bank's debt at a discount to the dollar market before his team even visited prospective investors to pitch the sale.
The Singapore-based banker said RBS was seeing growing interest from foreign issuers and Russian names in particular because of an increased need to fund in offshore renminbi, increase depth of demand and investor diversification, and arbitrage opportunities (ability to issue in renminbi and swap back into main currency). "European issuers have been quicker in identifying this and the more that come and issue in renminbi, the more will want to follow, as their comfort on the execution of these deals improves," said Mr. Roch.
Artyom Lebedev, a spokesperson for Russian Standard Bank, said the attractive cost of funding in yuan and the diversification opportunity for the bank's debt portfolio, meant the bank would be keen to sell more debt in the offshore renminbi market. Since being sold, the Russian yuan bonds have performed well on the secondary market. Yields are lower than what was offered when the bonds were sold as the price of the bonds have risen due to secondary market demand.
However, Russian bonds aren't without risk as investors highlight economic and political risk in Russia and stagnant growth in Europe as factors. Mr. Harriss looked at Russian Standard Bank which is not listed, but decided against buying the bank's debt, because the credit risk was too high with weaker profitability and capital ratios combined with an increasing push into consumer lending in Russia.
Nevertheless market participants expect more yuan debt sales from Russia. "If you are an investment-grade rated borrower, you will have no problems because investors are looking for savvier issuers," said Augusto King, who is head of debt capital markets Asia at RBS and based in Hong Kong. "Russian names offer higher yield and investors buying this debt like the outlook of the long-term appreciation of the renminbi and they like the growth outlook for China," said Mr. Koh. Mr. Harriss agrees that better pick up in yield and quasi government status are strong selling points for the bonds, and in the case of VTB - its diversified operations.
Mr. King added that a large amount of yuan bonds were due to be paid back this year, meaning investors would have to find a new home for their money at a time when debt sales from Chinese banks in the offshore market has been low. The yuan market has so far been largely dominated by state-owned Chinese companies and Chinese government entities looking for foreign investors--something they can't do at home because the Chinese bond market is closed to outsiders.
"The pickup in issuance is largely demand-driven, because Asian investors have increased allocations to emerging market debt," said Mikhail Nikitin, Credit Analyst at VTB Capital. He also noted that for Russian banks, selling debt in yuan not only diversified their funding but helped them avoid potential over-supply to Europe and U.S. Among foreign borrowers, the big global companies such as McDonald's Corp., (MCD), Volkswagen AG (VOW.XE), and Caterpillar Inc. (CAT) have all tapped the market in an effort to grow their businesses in China.
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Thursday, March 7, 2013
[CREDIT MARKETS] AN AMAZING HEADLINE!
Welcome to our crazy world! The seemingly bads news from the recent Italian elections lead to lower yields ... Down Under! From Bloomberg: "Italy’s voters handed former leader Silvio Berlusconi a blocking minority in the Senate, sparking concern that turmoil in Europe will undermine prospects for a global economic recovery […] “When there is a bit of a wobble globally, Australia becomes a beneficiary again in a world where there are fewer AAA nations,” said Su-Lin Ong, Sydney-based head of Australian economic and fixed-income strategy at Royal Bank of Canada" (*)
(*) Kristine Aquino & Wes Goodman: “Berlusconi Boosts Demand for Bonds Down Under: Australia Credit”, Bloomberg, 28 February 2013.
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(*) Kristine Aquino & Wes Goodman: “Berlusconi Boosts Demand for Bonds Down Under: Australia Credit”, Bloomberg, 28 February 2013.
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