Monthly Archives: August 2017

Sales of investment-grade US corporate debt surge

Major US corporations have sold more than $1 trillion of investment-grade debt this year, exceeding that threshold earlier in the year than ever before. The market for corporate bonds usually slows in August, but several large offerings, including $17.25 billion from British American Tobacco, have surfaced in recent weeks. Read More

Lessons From the Quant Liquidity Crunch

Commentary: A decade after the August 2007 “Quant Liquidity Crunch,” Peter J. Zangari, global head of research and product development, writes about the changes and lessons learned from this event and the ensuing financial crisis. Among them: Best-in-class risk management is now integrated into the investment process and investors have placed greater emphasis on alternative sources of return, from factor investing to private asset classes.

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A Tesla 2017 Update: A Disruptive Force and a Debt Puzzle!

These are certainly exciting times for Tesla. The first production version of the Tesla 3 was unveiled on July 28, with few surprises on the details, but plenty of good reviews. Elon Musk was his usual self, alternating between celebrating success and warning investors in the stock that the company was approaching “manufacturing hell”, as it ramps up its production schedule to meet its target of producing 10,000 cars a week. It is perhaps to cover the cash burn in manufacturing hell that Tesla also announced that it planned to raise $1.5 billion in a junk bond offering. Investors continued to be unfazed by the negative and lapped up the positive, as the stock price soared to $365 at close of trading on August 9, 2017. With all of this happening, it is time for me to revisit my Tesla valuation, last updated in July 2016, and incorporate, as best as I can, what I have learned about the company since then.

The market risk that makes Nobel laureate Robert Shiller ‘lie awake worrying’

Yale University economics professor Robert Shiller has a warning for investors.

The Nobel laureate says low volatility paired with a questionable price-earnings ratio could wipe out a chunk of the stock market’s value.

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Public Sector Mergers in India: Does Size Bring Synergies?

In June 2017, the $23 billion Vodafone-Idea Cellular merger got the go ahead from the Competition Commission of India. A few days later, the government announced a deal between two public sector undertakings (PSUs) – the Oil & Natural Gas Corporation (ONGC) and Hindustan Petroleum Corporation Ltd (HPCL). The Rs. 28,000 crore ($4.4 billion) merger involves ONGC buying up the 51% government stake in HPCL.

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IFRS 9 Implementation Challenge For Low Default Portfolios: One Possible Approach To Compute PDs

As of January 1, 2018, IFRS 9 will replace the current IAS 39 across several jurisdictions, including many European countries.

By focusing on expected credit losses, IFRS 9 will represent a significant shift from IAS 39 (incurred losses) since the new impairment requirements determine that expected losses will have to be computed not only for non-performing assets, but also for performing assets, with a direct impact on Profit and Loss (P&L).

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Webinar Replay: Will the FOMC Continue to fuel Interest in Senior Loan?

In the tailwinds of 2016 when LIBOR finally crossed 1%, and given the prospect of further rate hikes, senior loans are poised for an uptick in demand. But is there room for more?

Join us as we explore why the fundamentals of floating-rate instruments are increasing institutional allocations to senior loans at home and abroad.

Leading industry practitioners will examine:

A risk/reward analysis of leveraged loan fundamentals
How index-based strategies and ETFs impact depth of liquidity in primary and secondary senior loan markets
The refinancing effect – how stronger demand is weighing on credit spreads and yields
Speakers:

  • Ted Basta, Senior Vice President, Market Data, Loan Syndications and Trading Association
  • Myles Gilbert, Managing Director, Cambridge Associates LLC
  • Jason Giordano, Director, Fixed Income Product Management, S&P Dow Jones Indices
  • James Meyers, CFA, Director of Fixed Income ETF Product Strategy, PowerShares by Invesco   View the Speaker Bios

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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