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Yesterday, bonds issued by Walt Disney set new records for corporate debt, with the lowest-ever coupons achieved for five-, ten- and 30-year bonds. Disney’s ten-year tranche, with a coupon of 2.75%, boasted a yield roughly the same as French sovereign bonds.
As investors seek safe havens amid market turmoil, yields on US Treasuries have plunged, giving intrepid corporate borrowers in America an opportunity to pitch for low-cost, long-term funding. Coca-Cola and AT&T also issued bonds this week at record-low yields for the companies.
As Treasuries, gold, the Swiss franc and other perceived low-risk assets attract investors, this got us thinking about the creditworthiness of the world’s strongest corporate borrowers vis-à-vis beleaguered sovereigns. At the close of trading yesterday, there were 25 companies with narrower credit default swap spreads than the top-ranked sovereign, Norway. In the minds of CDS traders, Norway is roughly as creditworthy as Walt Disney (is Mickey’s Magic Kingdom now considered a safe haven?). The map below shows the approximate corporate equivalents to a selection of European sovereigns, according to the CDS market.
The European repo market has recovered to levels not seen since before the financial crisis, according to the International Capital Market Association. At just under €7bn, the value of outstanding repurchase agreements between European banks at mid-year pipped its June 2007 peak.
But the underlying details, released by the ICMA last week, show that it is not business as usual. Take the collateral pledged by borrowers in return for short-term loans. European government debt fell as a share of total collateral over the past year, and not just the Greek, Spanish and Portuguese debt that have generated the most hysterical headlines. British government bonds were much more reluctantly pledged as collateral and even German debt fell modestly as a share of the total.
“The already comparatively strong capital and liquidity positions of Canada’s ﬁnancial institutions have strengthened further over the past six months.” In its latest Financial System Review, the Bank of Canada strikes a cautiously confident tone about the country’s financial industry.
Conservative business models and tough regulation made Canadian banks standout performers in the West throughout the financial crisis. They are now the developed world’s “most reliable money-making machines,” according to a recent article at the parent site.
Indeed, as the central bank points out, return on equity at Canadian lenders has consistently beat rivals in America and Europe in recent quarters. Still, ructions in global credit markets may make it difficult for even the strongest bank to refinance debt; the six dominant banks in Canada have C$225bn (US$220bn) in debt maturing by 2015. Even though financial conditions in Canada continue to improve, the central bank concludes that the risks to the country’s financial stability have increased. Should concerns over sovereign debt spiral into a renewed financial crisis, Canada’s banks would likely find themselves insulated but not immune.
If, as the saying goes, you are judged by the company you keep, Greece is running with the wrong crowd.
Despite European Union officials dismissing talk of a debt restructuring and reportedly boosting the size of a joint aid package with the IMF, traders of credit default swaps on Greek sovereign debt have taken a dim view of the country’s ability to service its debts.
A year ago, Greek CDS spreads traded in a similar range to Israel and Malaysia. Today, the spreads on Greek CDS place the country in very different company. Sandwiched between Ukraine and Argentina, Greece is now among neighbours who are no strangers to default.
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Earlier this week, Goldman Sachs announced US$3.5bn in net earnings for the first quarter of 2010. Normally, a 91% rise in profits from the previous year would be cause for celebration. But given the sensational announcement a few days earlier that the Securities and Exchange Commission was launching fraud charges against the bank, Goldman’s stellar quarter did little to help its case.
If the regulator’s action is only the first salvo in a wider campaign, what other banks could face similar charges?
Read more at Financial Services Briefing: “Widening the net” (April 21st)
A series of announcements today from the Dubai government and its most heavily indebted conglomerates—Dubai World and Nakheel—were meant to provide clarity on the debt “standstill” announced by the companies late last year. The state-owned firms froze repayments on some US$24bn in debt, including US$14bn owed to bondholders and banks.
The gist of the deal is that the government will allocate US$9.5bn in fresh funds to the companies and convert previous loans into equity (in effect a write-off). Creditors will be asked to accept full principal repayments via new securities with five- and eight-year maturities. Assuming support for the proposals, Nakheel’s bonds due in 2010 and 2011 will be paid according to schedule, the developer of the emirate’s palm-shaped islands said.
Credit markets reacted enthusiastically to the proposals, with the price of Nakheel’s 2011 bond soaring today. Of course, creditors have had their hopes dashed before, judging by the incredibly volatile trade in this and related securities during previous rescue attempts. Can they finally put their concerns to rest?
After seizing up during the credit crunch, the market for short-term loans between banks is on the mend. The market for repurchase agreements in Europe grew by 15% in the six months to December, according to the International Capital Market Association.
Although an “important measure of banks’ confidence in lending to each other,” the rebound in repos has not been broad based, the ICMA notes. The recent rise has been driven by a “handful” of institutions, with “continued structural deleveraging” at the bulk of banks.
A Reuters story suggests that German government officials are taking steps to “identify speculators in Greek debt to try to prevent them from profiting unduly from any bailout.” The measures that could be taken to prevent such profits are unclear, and the article somewhat conflates investors in sovereign debt with those who invest in credit default swaps linked to sovereign debt.
If the purported goal of the investigation is to crack down on CDS speculators, new data from the Bank for International Settlements should give officials pause. In its latest quarterly banking review, published today, the organisation notes that the net exposure of investors to the sovereign CDS of beleaguered euro area economies is a tiny fraction of the actual sovereign debt of those countries. Thus, assuming CDS traders are largely to blame for pushing up the cost of countries’ refinancing is a rather heroic assumption.
Concerns about derivatives markets’ growing influence over the underlying securities upon which they are based have been around for a while. In the context of CDS, these concerns generally surface when a scarcity of corporate debt threatens the settlement of linked derivatives during credit events (defaults, restructurings and the like). But the notional amount of CDS written on sovereign issues pales in comparison to the value of the underlying debt, so attacking derivatives “speculators” on this front seems misguided.
What’s more, a recent Moody’s report suggests that banks may be buying more protection against sovereign default by Greece, Portugal and other teetering economies for reasons not directly related to growing worries about sovereign default. Derivatives linked to some corporate and sub-sovereign borrowers may not exist, so lenders choose instead to buy “protection on the sovereign on the assumption (hope?) of strong correlation between it and the entity to which they have the long credit exposure,” Moody’s writes. Of course, such correlation could be spurious, leaving banks with imperfect hedges and government officials with misguided conspiracy theories.
In these credit-constrained times, it seems odd to welcome news of a fall in bank lending. But that’s what’s happening in Japan, where new data on bank loans was released today.
In December, loans at domestic Japanese banks fell for the first time in four years. This is being interpreted as a sign of recovery in the capital markets, as companies find it easier to raise money via bonds instead of relying solely on bank loans and credit facilities. However, as the FT points out, the thawing of credit markets appears to benefit large companies most of all, with smaller firms continuing to bemoan bleak financing conditions.
It’s no surprise that private equity firms have had trouble raising money recently.
Preqin, a research company, reckons that global fundraising in the fourth quarter of 2009, at US$35.1bn, was the weakest in six years. The amount raised for the whole of 2009, US$245.6bn, was the lowest since 2004.
These relatively meagre sums were not collected without difficulty. The time that private equity managers left funds open in 2009 was roughly double what it took to close a fund in 2004. Around half of private equity investors polled by Preqin say that they will not make any new commitments until the second half of 2010 or later. These days, convincing cash-strapped investors to devote cash for debt-laden buyouts is a tough sell.