Bridging the Volatility Gap between IG and HY

The goal of the S&P U.S. High Yield Low Volatility Corporate Bond Index is to construct a high-yield bond portfolio with low credit risk and low return volatility by applying a low volatility factor.  Does the index methodology truly deliver the effect of reducing volatility?  The back-tested results of the 17-year period ending Feb. 28, 2017, show that the S&P U.S. High Yield Low Volatility Corporate Bond Index may offer an intersection that bridges the volatility gap between the high-yield and investment-grade bond sectors, with increased return efficiency. Read more

Banking Regulators to delay meeting in bid to reach bank capital deal

LONDON (Reuters) – Banking regulators will postpone their next meeting in another bid to agree on global capital rules, taking more time to try to overcome objections from European banks to minimum capital levels, people familiar with the talks said.

The negotiations are being closely watched by thousands of lenders, even though the rules would not come into force until 2024 or 2025, and Standard Chartered said on Wednesday it would not pay a dividend because of the regulatory uncertainty.

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U.S. small business borrowing highest in nearly two years

(Reuters) – Borrowing by small U.S. companies hit a nearly two-year high in June, driven by restaurants and hotels, PayNet Inc said on Tuesday, as businesses invested to meet customer demand.

The Thomson Reuters/PayNet Small Business Lending Index for June rose to 139.9, its highest since July 2015, from an upwardly revised May reading of 138.3.

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Regulators Find “High Level” of Risk in Syndicated Loans

Oil, gas lending seen as risk factor in Q1 syndicated loans

The oil and gas industry accounted for a large and worrying portion of large syndicated bank commitments in the first quarter, serving to maintain a high level of risk despite a modest easing overall, according to US bank regulators. The danger is that a downturn in the economy could lead to a spike in loan losses.

Greenspan warns about bond bubble

Greenspan warns about bond bubble

Alan Greenspan, former chairman of the Federal Reserve, says investors shouldn’t be concerned about a bubble in the stock market but should worry about one in bonds. “The real problem is that when the bond-market bubble collapses, long-term interest rates will rise,” Greenspan said.

Big European asset managers wary about high-yield bonds

Big European asset managers wary about high-yield bonds

Large money managers in Europe — including Deutsche Asset Management, BlackRock and JPMorgan Asset Management — are bracing for the two-year bull run in the region’s high-yield bonds to reverse. “We could be in for a prolonged period of readjustment as European fixed-income investors adjust to a world where the ECB is tightening monetary policy,” said Alex Dryden, a strategist at JPMorgan Asset Management.

Bloomberg (8/4

How the Liquidity of S&P 500 Investment-Grade Bonds Compares Against Non-S&P 500 Bonds

Liquidity may be defined as the ability to buy or sell a bond within a reasonable period of time and at a reasonable price.  A simple way to compare two bonds is through the use of Trade Reporting and Compliance Engine (TRACE) daily volume data.  The data represents the daily aggregation of each reported trade throughout the day.  The existence of reported volume data can be indicative of the frequency of trading.  For example, if a bond has volume data for 20 of the last 22 trading days, then it trades relatively frequently—nearly every day.  The volume data itself can also indicate the size in which it trades daily.  For two bonds, we can compare the turnover rate, defined as the total volume traded in 22 days as a percentage of the amount outstanding.  For example, a bond may be considered more liquid relative to another one if a larger portion of its total outstanding is traded over a one-month period.

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The Dark Side of Globalization: An Update on Country Risk!

The inexorable push towards globalization has stalled in the last few years, but the change it has created is irreversible. The largest companies in the world are multinationals, deriving large portions of  their revenues from outside domestic markets, and even the most inward looking investors are dependent upon global economies for their returns. As a consequence, measuring and incorporating country risk into decision making is a requirement in both corporate finance and valuation. It is in pursuit of that objective that I revisit the country risk issue twice every year, once at the start of the year and once mid-year, at which time I also update a paper that I have on the topic, that you are welcome to read or browse or ignore.

Are bonds both a liability and an asset of the borrower?

Early this year, Venezuela issued $5 billion in new bonds to a state owned entity to help raise cash needed for essential imports (“Venezuela issues $5bn in bonds as it seeks cash to ease shortages”, Financial Times, January 3, 2017). In June, Venezuela engaged a Chinese securities firm, Haitong, to resell these bonds reportedly at a steep discount of more than 70% (“Venezuela Discounts $5 Billion in Bonds”, Wall Street Journal, June 6, 2017). Soon, a Canadian firm, Crystallex, obtained a restraining order against Haitong, as a first step towards attaching the bonds. (“Crystallex Moves Closer To Collecting $1.2B Venezuela Award”, Law360, July 17, 2017). Perhaps, this time, the courts will actually decide this question as to whether a debtor’s bonds can be treated as its assets and attached by the creditors.

FAST-MOVING MARKETS: REVISITING THE AUGUST 2007 QUANT CRUNCH IN REAL TIME

One of the lessons from the August 2007 “quant liquidity crunch” – now about to mark its 10-year anniversary – was that institutional investors underestimated the speed and magnitude of losses that can take place over very short periods. The challenge that remains for investors today is to find real-time data to help them respond to market events as they unfold. This need for transparency is especially true where fund managers have exposure to factors that may experience high volatility in crisis periods.

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Asian Asset Owners Are Leapfrogging Into ESG

Sustainable investing has become particularly popular in Europe, across many countries.  In the Asia Pacific region, certain countries such as Japan and Australia have shown stronger interest in ESG thanks to asset owner demand, availability of ESG data, and regulatory pressures.  In the last couple of years, we have seen some of Japan’s largest institutional investors, including the Government Pension Investment Fund, which is the biggest pension fund in the world, incorporating ESG into their investment practices.  This has had a major trickle-down effect on the investment value chain, from asset managers to providers of data.

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Asian Fixed Income: The Birth of Bond Connect

As a follow up to the previous article, Bond Connect officially launched on July 3, 2017. Bond Connect allows international market participants to trade China’s interbank bonds through the Hong Kong Stock Exchange.  It marked a milestone in China to further open up its capital market, following the China Interbank Bond Market (CIBM) announcement last Read more […]

Basel panel rates China, US as LCR compliant, EU one notch worse

Basel panel rates China, US as LCR compliant, EU one notch worse

Liquidity Coverage Ratios in China and the US are “compliant” with the Basel framework, the Basel Committee on Banking Supervision reported Monday. But the European Union’s LCR is rated only “largely compliant.”

Banks increase CLO forecasts as issuance thrives

Banks are increasing their US Collateralized Loan Obligation (CLO) forecasts with issuance set to surpass some of the most pessimistic 2017 predictions.

The market has defied expectations with issuance this year of US$49bn through June 23, 90% higher than the same period last year, according to Thomson Reuters LPC Collateral. If these revised forecasts are realized, 2017 would be among the top five years of volume ever. Issuance in 2014 of US$123.6bn is the record.

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LPC: Low-rated companies fuel record US syndicated lending

Low-rated companies, rushing to slice borrowing costs with interest rates low and demand for higher-yielding assets elevated, drove US leveraged lending to a first-half record and in turn propelled total US syndicated loan issuance to an all-time high for any half-year period.

The US$732.2bn of leveraged loans issued in the first half, a 92% spike above the US$380.7bn during the same time a year ago, boosted overall syndicated volume to US$1.22trln, according to Thomson Reuters LPC.

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Aligning SDG Goals – The Next ESG Challenge

The term “sustainable development” has been in existence for decades — 30 years ago, in 1987, the World Commission on Environment and Development proposed developing new ways to assess progress toward sustainable development in the “Brundtland Report.”

Historically, there was a lack of comprehensive goals or targets for “the future we want” and a lack of adequate monitoring of progress toward enduring human and environmental well-being.  This absence of an overarching framework limited the ability to assess progress toward attaining sustainable development.

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When Enough Is Enough: Assessing Credit Risk Of Companies With Incomplete Financials

Risk analysts are often confronted with incomplete financial information when dealing with private corporations, and therefore face gaps in their credit risk analysis. When this happens, some analysts may approximate missing financial values with industry averages, or forego the analysis altogether.
In his latest blog, Giorgio Baldassarri, Global Head of the Analytic Development Group, explains why taking a dual approach to credit risk analysis, that takes into account both the quantity and materiality of the exposures, is encouraged when there are missing financials.
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Green Bonds: Addressing Solvency II Benchmarking Requirements

Solvency II is the new region-wide supervisory framework for insurance and reinsurance companies operating in the European Union.  The new regime includes three pillars, calculation of capital reserves, management of risk and governance, and reporting to the national supervisory authority.  Moving to a risk-based approach in calculating solvency capital requirements (SCR) will require reassessment of investment choice.  Risky assets that will require a higher charge may become less appealing vis-à-vis a low risk asset, despite the expectation of better performance.

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Understanding Drivers Of Credit Risk

Since the introduction of Altman’s Z-score in 1968, there have been many statistical models that combine financial ratios, socio and macroeconomic factors with advanced mathematical techniques to estimate a company’s credit risk. In most instances, they will produce the same, or very comparable assessments; however, at times, due to the different “DNA” of the models, they can (and will) provide divergent credit risk assessments for the same companies.

In his latest whitepaper, Giorgio Baldassarri, Ph.D. discusses the differences and similarities of two of our fundamentals-based credit risk models, and how their outputs can help you distinguish the real drivers of risk.