Moody’s managing director of public finance, Jack Dorer, tells Reuters Insider that in light of a judge’s ruling on the city of Detroit’s pensions, there is a “good possibility” general obligation bonds will see haircuts as well.
Archive for the ‘Credit’ Category
The SEC is bolstering/demonizing the reputation of hedge funds, with the somewhat shocking headline that the top hedge funds hold more than $1 Trillion in debtâ€¦ This is another instance where we like to brag a little. You Ready? Managed futures total debt = $0. The difference between managed futures and hedge funds are that managed futures doesn’t need to barrow money… Ever. Continue Reading…
While our nation’s leaders battle out a bill that allocates funding for the IRS, we in the managed futures industry are playing close attention, as a provision in the bill would give the CFTC an additional $110 Million in its budget. This is far from becoming law, but in the meantime, we must contemplate how they funds will be utilized. Continue Reading…
Round, round, round it goes, where Crude Oil Backwardation Stops, nobody knows! Newedge is out with a great piece tackling everything from the CME fine tuning the nickel content allowed in deliverable crude, to Egypt’s foreign reserves to the Jones Act which requires any goods moving from a US port to another US port to be done on a US flagged vessel. Continue Reading…
MRP’s mission is to identify actionable investment themes. Here’s a look at some of our active themes right now. For the full theme reports, click HERE.
Extended Bull in Stocks: The rally in equities that began in 2009 has had a recent correction but the major indexes will see new highs at least over the next year, supported by ample liquidity and stronger economic growth that earnings estimates have yet to reflect.
Bear Market in Bonds: Globally, long-term interest rates have begun to rise generally. Many central banks continue to support bond prices through their purchase programs, which will slow â€“ Âbut not stop â€“ the rise in yields. And then there is the tricky inflation issue central banks will have to recon with.
Abe Trade: The recent correction in global equity markets hit the Nikkei hard, but it has rebounded and we expect the Abe Trade to persist. We look for the elections to the upper house in July as an important inflection point leading to another surge.
US Housing: Typically an early cycle source of growth, US housing is coming late and is now spreading into other sectors of the economy. We expect to see continued strength in financials (mortgages servicing, loan origination), paper and forest products (lumber), and consumer durables (white appliances, carpeting, etc).
France - Under Pressure: France just got downgraded by Fitch. And while France is not quite standing cap in hand in need of a formal bail out, our outlook is the same as in April: Bad economy, worse polity, ugly outlook.
Energy Infrastructure: Booming energy production in North America has helped keep a lid on West Texas oil prices and, since 2011, created a differential with global oil prices. This trend has a long way to go, giving North America’s energy users a competitive edge in industries from plastics to chemicals.
Media: Content providers of shows and other media continue to benefit from booming demand relative to their peers.
Asset Managers & Investment Banks: In the US, both groups are benefiting from rising markets, increased fund flows, more M&A, a pipeline of IPOs, and write-up of mortgages and other housing-related securities. European financials continue to face headwinds.
You can find the full reports HERE.
Warren Hatch, PhD, CFA
Portfolio Manager and Global Strategist
McAlinden Research Partners
Risky business: Distressed investing generates healthy returns, but one market veteran advises caution and diligenceThursday, May 2nd, 2013
Investing in distressed assets has plenty of appeal in a low interest-rate environment, and yet interest is outpacing activity levels, particularly in what many investors had hoped would be an active European market. Veteran banker Robert Willoughby explains to Alpha Now why that might be the case, and lays out the real risks associated with this investment strategy.
In an investment universe characterized by ultra-low interest rates and rock-bottom yields on the safest of fixed income securities, investors are succumbing to the temptation to push the envelope and set out in search of ever-higher yields. At its most basic level, this has been reflected by the strong and sustained interest in high-yield mutual funds on the part of both retail and institutional investors; among more sophisticated institutions, it has also led to a growing interest in putting money to work in the distressed debt markets. The latter trend may have been sparked by the high yields available to savvy investors, but it has been further fueled by the returns that some have been able to capture.
According to data from Eurekahedge, distressed debt was the top-performing hedge fund strategy in 2012, generating an average return of 13.67% for the year and an additional advance of nearly 4% in the first two months of 2013. (Data for March were not available at the time of writing.) Despite what Robert Willoughby, the former chairman of the Leveraged Finance Origination and estructuring Group at Credit Suisse, describes as growing interest in distressed investing as an asset class â€” especially on the part of insurance companies, pension funds and others trying to reconcile the need to meet fixed payout obligations to their clients with the low-yield investment environment â€” inflows and investment activity in this space has yet to take off. Indeed, data from Eurekahedge show that while assets under management in distressed strategies totaled 6% of all assets under management in strategic mandates as of December 2007, that had declined to 5% as of December 2009 and a mere 3% as of December 2012. Indeed, net flows were negative to the extent that for every dollar of performance gain, they witnessed $2 of net outflows on a relative basis.
It was in the context of this data that a group of distressed investing specialists gathered at the global headquarters of Thomson Reuters in New York in mid-April to discuss this conundrum and other issues related to the emerging asset class. The audience was treated to an overview of the macroeconomic trends driving interest in distressed investing as well as insight into some of the specific opportunities that may be emerging, in the defense industry and cyclical businesses such as shipping here in the United States, for example, as well as those arising from Europe’s twin banking and fiscal crises.
The latter issue is of particular interest to Willoughby, whose own views have been shaped through his work in the banking universe, which has included posts overseeing high-yield bond issuance and working on corporate recapitalizations and restructurings. Having just returned to the United States after 19 years spent based in Europe, most recently with Credit Suisse, Willoughby, who in his previous role rarely discussed these topics publicly but who now is making an exception for Alpha Now, says he has watched as the interest in distressed debt has increased along with the difficulty in investing in the asset class. One hedge fund CEO Willoughby said he has spoken to recently confirmed his interest in the asset class, and in particular the opportunities that the European crisis might create. But, as the CEO told Willoughby, “we haven’t figured out how to crack the Euro market” yet.
It isn’t just the European market that offers challenges to potential investors in distressed securities, however, as Willoughby pointed out in a far-ranging conversation with Alpha Now only days before the panel discussion. “As a distressed investor you are buying something someone else created; you have to be a forensic financial analyst to understand what the instrument is really worth, and to understand the appropriate discount,” he explained. “A lot of the debt instruments that people are chasing, are discounted because they should be, because the borrower can’t pay or because the current owner needs to sell and there isn’t a demand” for the assets in question, so the prices plunge.
As an investor moves further along the risk spectrum â€” from analyzing investment-grade corporate bonds, to seeking out opportunities in high yield securities and ultimately trying to understand the nuances of distressed investing â€” the complexity and magnitude of the due diligence challenge increases. The further along that continuum an investor moves, Willoughby says, the more due diligence he or she must be prepared to undertake, and the more aspects of the transaction must be scrutinized. For instance, investors in investment-grade corporate debt and the better quality of high-yield issues can “borrow confidence” from analysts who publish research on the company or who apply a credit rating to the specific security. That kind of guidance is absent from the distressed investing arena, where potential investors don’t just have to understand the asset they are buying, or the motivations of the seller and of other potential buyers. For instance, Willoughby points out, “the value of leveraged loans in Europe in 2007 and 2008 fell off a cliff; prices went from 96 to 76 (per $100) without hard evidence of impairment (of the credit quality) just because demand fell off a cliff.”
Willoughby believes that similar issues are constraining growth in today’s European market, which logic suggests should be full of opportunities for eager investors in distressed assets. Certainly, those investors have been anticipating a big influx of supply, he says, in which they could go “trawling” for deals. Theoretically, Willoughby adds, that would create a pool of bargains made up of assets that are cheap because of the volume of supply rather than the poor or deteriorating credit quality. In practice, he says, what has happened is that European banks, in particular, have been slow to dispose of assets. “The slow pace of selling has forced the creation of a much more rational and rational market price,” he says. “If something trades at 65 (cents on the dollar), either that is what it is worth or the unknowns justify the price.”
How does Willoughby explain the mismatch between the degree of interest in European distressed debt and the level of activity? Part of the answer, in his opinion, has to do with banks’ accounting treatment of their loan portfolios and other assets that could end up in the distressed market â€” but only if the banks are willing to write down those assets and then accept the need to raise more capital to compensate, at a time when regulatory requirements for bank capital are rising.
The difficulties associated with cross-border investing in distressed assets is another reason that activity in the European market has been constrained, Willoughby suggests. Moving offshore simply magnifies the existing challenges associated with distressed assets. “When you have multiple assets, each of which has a legal claim whose validity you have to investigate” the level of complexity increases, he says. “And when you are in the Spanish market, where a secured interest isn’t understood the same way, you really don’t understand what the net value of the claim will be because don’t know when or how much you will be repaid.”
The end result is a tug-of-war of sorts between highly-motivated investors, eager to capture a few extra percentage points of yield and the kind of upside return that this corner of the financial market already has demonstrated its ability to generate. The questions that have weighed on Europe’s potential to become a hub for distressed investors are simply some of the more obvious ones that came up for review during the panel discussion, but they capture some of the broad issues of valuation, liquidity and risk that any investor in this space must take into consideration, those panelists agreed.
Bankers and investors were getting a sense of deja vu last week as news from Cyprus reminded them of the Grexit jitters almost three years earlier. “We can be grateful we have seen three years of very benign markets, but I’m not sure what would happen if the market sees some serious volatility,” said one syndicate banker in Hong Kong.
Some real-money accounts and even private bankers echoed his concern because they saw the possibility of a correction in the market, while uncertainty about the future of the eurozone returns to the fore.
“We have seen this before. First, you see volatility pick up just after a wave of supply and, then, there is a correction,” said a high-yield fund manager.
He was referring to the active primary market, which saw almost US$6.5bn in new dollar issues from Asia ex-Japan in the first three days of the week, topping a very active March. The region reached the quarter-end having printed close to US$42bn in dollar bonds, an absolute record for the period.
Amid so much issuance, it is surprising that the market is holding up as well as it is. “The credit market has been very resilient,” said another real money investor.
Still, that strength started to be tested last week with the volatility from a potential banking crisis in Cyprus finally spilling over to the rest of the world. The Asia ex-Japan iTraxx IG Index closed 7bp wider Thursday, at 123bp and JP Morgan Asia Credit Index finished the short week 21bp wider in yield terms.
The steeper drop on the cash side was evidence of one of the reasons for investor concerns. Asian markets remain illiquid and, although they have matured and grown of late, they still suffer sharp swings whenever there is a correction. Furthermore, institutional investors have become increasingly concerned about the build-up of leverage in the system as private banks and hedge funds buy bonds on margins of up to 90% at times.
Both factors together can exacerbate any correction something that was last seen after the downgrade of the US caused a selloff in the high-yield market. Investors admit that, if there is a correction, the high-yield side will take a bigger hit.
However, at the same time, the asset class is also the only one for which they still see some upside because of the looming rise in benchmark rates. “For the time being, people want yield and junk bonds still provide a better cushion against rising Treasuries,” said one real-money investor.
That dynamic, in fact, was seen in secondary markets last week, as the high-yield bonds ended the week above reoffer even as the rest of the market sold off.
The new five-year bonds of Tower Bersama Infrastructure, for example, closed the week at 100.25, 25 cents above the reoffer. Sunac’s deal, which was priced on Thursday, ahead of a wider market selloff, held the reoffer price on the break.
Citic Pacific’s new seven-year bonds ended their first trading session Thursday at 100.50, having priced at par. Even Greentown China saw its 2018s return to 103.00 Thursday after they were reopened at 102.50.
On the flip-side, investment-grade issues all widened. The five-year bonds of split-rated Bharti Airtel dropped to 100.25, below the tap reoffer of 100.625. SmarTone, which, in spite of being unrated, trades on spread and is, as such, an investment-grade credit, ended its first session 10bp wider than reoffer at 225bp over Treasuries. As for Suzlon’s bonds, with a backing of a standby letter of credit from State Bank of India, they never recovered the 20bp they widened on the break earlier in the week.
Clearly, investors do not seem to be positioning for a pickup in volatility, which would prompt an investment-grade rally. If anything, they seem more concerned about additional supply than headline risk.
One hedge fund manager was of the opinion that credit investors in Asia were in a conundrum right now. “If conditions improve, there will be a supply wall and that caps the outside; if volatility increases then we lose anyway,” he said.
However, their bet on high-yield, ultimately, points to strong faith in the ability of central banks to keep pumping money into the system. “You cannot fight the Fed, especially when it is acting in tandem with the Bank of Japan and the ECB,” said one private banker.
A credit analyst in Singapore said that data in the US was looking better and that, if the world’s largest economy started picking up the pace, Asia would benefit. He added that, if Europe saw more volatility, investors were even more likely to park their money into Asian assets. “Asia and EM will both benefit from continued monetary easing,” said the high-yield manager.
As long as the Fed continues to ease, it seems, any volatility will merely be a hiccup.
400 Capital’s Chris Hentemann says he still sees investment opportunities in residential mortgage debt despite the housing recovery, and is increasing his exposure to commercial real estate debt.
You can tune in to all of Reuters Insider’s exclusive GAIM 2013 coverage by clicking here.
Dan Zwirn, who delivered the keynote address at HedgeWorld New York 2012, discusses getting back into business with investment opportunities in the United States and Europe after deciding to wind down his $6 billion hedge fund in 2008.
You can tune in to all of Reuters Insider’s exclusive GAIM 2013 coverage by clicking here.
Here we take a look at December 2012 absolute performance for the top 5 equity market neutral funds in two categories - all funds and U.S.-only funds - as tracked by Lipper’s hedge fund database. To see more analysis, including assets under management and domicile information for the top 10 funds in each category, click here for all funds and here for U.S.-only funds. To be truly connected to all the Lipper analytics available on HedgeWorld, become a HedgeWorld Premium Plus member. To find out more about how to do that, visit hedgeworld.com/membership/.
The latest twist in the legal battle between Argentina and hedge fund holdouts of its 2005 and 2010 bond exchanges has cast doubt on whether credit default swaps referencing the country’s debt may trigger.
U.S. District Court Judge Thomas Griesa ruled on Nov. 21 that Argentina must pay holdouts when it comes to make regular payments to exchanged bondholders in December.
This will not apply to a $42 million coupon payment on new 2017 bonds on Dec. 2, but a $3 billion payment due on Dec. 15 to holders of GDP warrants and a $200 million coupon payment to discount bondholders on Dec. 31 will not be able to proceed without also paying the holdouts.
GDP warrants do not count as a debt obligation as far as CDS are concerned, said Ian Harvey-Samuel, a partner with Shearman & Sterling, so a missed payment on the warrants would not be relevant for protection holders. The question of whether CDS could still be triggered following a bond coupon payment made to the trustee, but not passed on to investors, is more of a grey area.
“There are different ways that Argentina might discharge the liabilities on their bonds that don’t necessarily result in payment to the bondholders. That’s not a particularly clear issue in the way that the trust indentures are drafted,” said Harvey-Samuel, speaking on Nov. 21 before the latest court ruling was made public.
In particular, the fact that Argentina is making payments to bondholders in December via a trustee (BNY Mellon) complicates matters. If Argentina made the payments to BNY Mellon, which opted against immediately passing the cash on to bondholders for fear of incurring the wrath of the court, it is not clear whether CDS would trigger as a result of a failure-to-pay credit event.
“The mere fact that the noteholders don’t receive payment doesn’t necessarily mean that there’s been a failure-to-pay on the bond; it would very much depend on the terms and conditions of the bond itself,” explained Harvey-Samuel. “Until we know what Argentina does and until it asserts its position with regard to the legal effect on its proper bonds, we don’t know whether or not CDS would trigger.”
Trading the trigger
Argentina CDSâ€”which has a net notional outstanding of $1.8 billion, according to the DTCCâ€”has become a major focus for emerging markets traders ever since the New York appeal court on Oct. 26 upheld the view of Judge Griesa that old bondholders should be treated equally to those that had agreed to the restructuring.
Five-year CDS ballooned from 974 basis points on Oct. 25 to a record wide of 2,589 basis points (or around 50 points upfront) on Nov. 16, according to Markit. It then re-traced slightly early last week, before rocketing wider to 3,594 basis points during Nov. 23 trading as the market absorbed the latest news.
“When it was known that BNY Mellon was going to be implicated in this, there was a concern that Argentina may make payment to bondholders in a way that could technically trigger CDS, which caused the CDS to gap wider,” said Sean Kelly, an EM credit trader at Credit Suisse, also speaking before the latest ruling was made public. “Some of those reservations over CDS have since disappeared, but we don’t see accounts adding new risk positions here. We mostly see hedge funds taking profits on long protection positions on the back of the CDS widening.”
Some of the activity Kelly saw in the earlier part of last week related to some accounts selling one-month credit protection, taking the view that the court would not lift its stay and Argentina would be free to make its December payments to exchanged bondholders. Now, such bets could well turn sour, given the latest announcement.
Read more from IFR here
By Mark Shore
Since the economic decline in 2008, there has been a growing demand of individual and institutional investors to consider various choices of non-correlated investments to reduce tail risk (downside deviation)(i) and correlation risk, often known as alternative investments.
There is a good chance an investor will have stocks and bonds in their portfolio via a 401k, IRA, pension fund or directly into mutual funds. Perhaps they have some real estate either as an investment or the home they live in and maybe some private equity.
In 2008 and 2009, most stocks both domestically and foreign became highly correlated as they headed south and everyone was seeking the exit door simultaneously, thus causing losses to extend as panic selling and the need to liquidate increased.
One of the increasing areas of non-correlation investment is the currency market or sometimes called forex or FX (foreign exchange). In August, 1971 President Nixon removed the U.S. dollar from the gold standard, ending the Bretton Woods agreement and causing currencies to float at market rates. In December 1971, Professor Milton Friedman wrote â€śThe Need for Futures Markets in Currenciesâ€ť.(ii) May, 1972, the Chicago Mercantile Exchange introduced currency futures.(iii)
Copyright Â©2012 Mark Shore. Contact the author for permission for republication at firstname.lastname@example.org Mark Shore publishes research, consults on alternative investments and conducts educational workshops. www.shorecapmgmt.com Mark Shore is also an Adjunct Professor at DePaul University’s Kellstadt Graduate School of Business in Chicago where he teaches a managed futures/ global macro course.
Past performance is not necessarily indicative of future results. There is risk of loss when investing in futures and options. Always review a complete CTA disclosure document before investing in any Managed Futures program. Managed futures can be a volatile and risky investment; only use appropriate risk capital; this investment is not for everyone. The opinions expressed are solely those of the author and are only for educational purposes. Please talk to your financial advisor before making any investment decisions.