Return Of The Nightmare on Bond Street ?
I have to declare I have not read a single bullish piece out on bonds for a while.
There are reassuring pieces yet. Credit reports that serve to pacify, doing their best to allay fears of the Fed Taper. Yet most reports I read now veer towards caution as it would appear that credit experts are in a hurry to cover their asses without raising too much of an alarm.
Return of boom-era debt deals raise alarm : FT
“Global sales of commercial mortgage-backed securities are nearing $100bn, almost double last year’s total, according to Dealogic….Also making a comeback are collateralised debt obligations, which pool different corporate credits….reassurance that the vulnerabilities created by securitisation are not comparable with 2007 – it will not be the murderer or even provide the murder weapon. But the growth of securitised products may nevertheless be symptomatic of broader financial dangers.”
BIS Rings Alarm on Record Payment-in-Kind Junk Bond Sales
“Record sales of high-yield payment-in-kind bonds are triggering uneasiness among international regulators concerned investors may suffer losses when central banks tighten monetary policy.
Issuance of the notes, which give borrowers the option to repay interest with more debt, more than doubled this year to $16.5 billion from $6.5 billion in 2012, according to data compiled by Bloomberg.” http://www.bloomberg.com/news/2013-12-09/bis-sounds-alarm-over-record-sales-of-payment-in-kind-junk-bonds.html
In the larger scheme of things, these are small distractions in the big picture. We saw the 2 largest bond issues on record this year, out of Verizon in a USD 49 bio 8 tranche issue and Apple Inc with USD 17 bio. Investment grade issuance in USD for 2013 totaled USD 1.127 trillion, exceeding 2012’s USD 1.122 trillion. High yield USD issuance also hit its highest ever at USD 1.493 trillion. Credit spreads are mostly at their lowest since 2007.
Globally, total corporate bond issuance is at about USD 3.7 trillion, down 8% from 2012.
Cracks are showing up though.
* Bond returns in Asia ex Japan are poised for their first annual loss in 5 years even as default rates for high yield Asian corporates end the year at 1.6%, down from a high of 14% in 2009.
* Chinese companies now represent the single largest geographical component of the Asia Credit Index at 25.8% according to Moody’s. * Onshore in China, First China Default Seen as Record $427 Billion Debt Due : Bloomberg http://www.bloomberg.com/news/2013-12-09/first-default-seen-as-record-427-billion-debt-due-china-credit.html
“A record 2.6 trillion yuan ($427 billion) of interest and principal on securities issued by non-financial companies must be repaid next year, 19 percent more than this year and the most since China International Capital Corp. began compiling the data in 2008….
The central bank warned on Nov. 5 the economy may see a decline in leverage over a long period, and said there are “prominent” problems in local government and property industry borrowings….
Following the Communist Party’s Nov. 9-12 plenum, China’s leaders pledged to allow market forces a “decisive” role in the allocation of resources.”
We hear a few squeaks from strategists in their interviews defending EM bonds and that they will see SUPPORT, yet none dare suggest a RALLY.
An old friend just shared with me this morning that he is holding on to a 7% return trust but sitting on 25% paper loss.
Singapore investors had a brief scare with Olam this time last year and I am pleased to congratulate everyone that Olam perp has rebounded to 87 cts or thereabouts (unverified). That is a neat climb from its 78 cts just 2 months back.
Olam is out of the woods now although I cannot speak for the rest. And since it is the season for sharing, I never liked CDOs and CPDOs but they saved my life(the bank’s books) back in 2008 because I saw them coming like a tsunami and decided to get out of everything as much as I could. Luckily, I had about 8 months headstart, but I felt slightly foolish in between too. It would be very entertaining to see how this record rally plays out next year especially with Basel 3 and Dodd Frank, the appetite for corporate bonds is only 1 sided or 2, if you want to count in the central banks (although I cannot see them stepping in to buy Oxley etc.).
SGX just launched a bond index today.
“Yesterday saw the launch of first ever SGD Fixed Income Index consisting
of government, statutory board and corporate bonds which represents 80% of
Singapore’s bullet bond index. There will be up to 60 sub-indices covering
various issuer type, maturity and risk profile & all constituents are
priced independently by Thomson Reuters. Aim of this index is to provide
market participants with a better view of the SGD bond market which is
still in its infancy stage but has seen tremendous growth over the past 2
years.” Source : bank trader
Good stuff. Can’t trade it though because it is just practically impossible to execute.
Back to baking. Have a nice day.
no coincidence China is allowing its SOE and ppty firms to raise money offshore all of a sudden…rates will go up but whats different is Fed has managed to change the mindset of the masses; turning everyone into hawks…dont expect bond sell off to be as bad as summer period if isolated against rates
Actually I think the most ironic news is that CINDA – the distressed asset firm that was set up during the crisis to hold all the bad loans – just did their IPO and the ULTIMATE SLAP IN THE FACE is that it ROSE 28% on trading debut.
It is like turning Garbage into Gold.
Good one Tradehaven,
According to the online Bond Price I usually use, Ezra’s Perpetual plummeted today, from ~ S$ 95.0 to ~ S$ 85.5 (Bid Prices). As I’m sitting on some of this, I’m hoping this is a one off rogue trade or similar. I had seen a nice run-up lately, in tandem with the speculation that some corporate action was ongoing (which Ezra have publicly denied to the SGX).
That said, I think a number of perps are potentially vulnerable to major price drops, if Yellen starts to taper and moreover if rates start to rise.
Thanks again Tradehaven.
Ezra has been pretty illiquid but that price drop looks a tad steep to me. At 85.50, that would be a yield to call of 18.87% which would be the lowest it has ever broached.
It’s stock price is doing well though but the main problem with companies like these (and Ezra is a better and bigger one than some of the rest), is that the banks are not keen to buy back the bonds. So it could be that someone switched from the bond to the stock which led to the price drop. Perhaps you can clarify the price with the provider and ask where they would be willing to sell the paper at. I would be interested to know what their response is.
Perps and long dated issues do not typically do well in a rising rate environment which is something we are not used to in the past 5 years. Ezra has a 2015 call but at this rate, it may not be exercised.
Hopefully, as some reports suggest, the supply will start drying up as companies are fully funded from this year and give the current bondholders some breathing space to buffer price losses on higher rates.
Thanks for your response Tradehaven,
The bid price of Ezra’s Perpetual has since turned back up to ~ S$ 95.5, very similar to the levels it was before the precipitous drop mentioned in my posting of four days ago. I sense it was a one-off, rather hurried sale that caused the sudden price drop.
My bank RM wasn’t interested in taking back by Ezra Perp lot – not at anything like a sensible price anyway. Typical – they’ve taken their profit at the initial offering and now they’re not touching the stuff.
With regards to the title of this particular thread, I am one of those who is far from confident regarding the prospects for Perpetuals in the longer term. So I’m getting out of them when I can at a decent price. I’m holding onto the Ezra Perp in the – perhaps forlorn – hope that there is some “fire” causing the market rumour “smoke” of corporate action vis-à-vis Ezra ……. and we’ll see a change-of-circumstances trigger. I realise there is a risk that in this instance there is no “fire” where there is “smoke” – and even my weak accounting skills recognise that Ezra’s balance sheet isn’t the most robust.
I’m trying to dig up the precise terms of the coupon should Ezra elect not to call in September 2015 – as I recall the revised coupon would not be too shabby at all.
Compliments of the season to you Tradehaven.
If it is any help, the call would be at 3Y swap rate + 11.045% for the coupon refix.
I suspect the reason they were willing to pay more for the perp then was because it would not eat into their Debt/Asset ratio and make them look too over leveraged. Now that names like Oxley has successfully defied the paradigm of logical borrowing limits, Ezra could potentially go the bond route with less fear of a stigma.
Agree with you on the perp theory especially those with a fixed rate step up like Genting etc.
Good luck and happy holidays.