Monday 19 September 2011

Markets - Credit - Controlled demolition

"Demolition is the tearing-down of buildings and other structures, the opposite of construction. Demolition contrasts with deconstruction, which involves taking a building apart while carefully preserving valuable elements for re-use."

The respite was short lived in the credit space and the tone, was once again about widening spreads.
Itraxx 5 year crossover index (High Yield, wider by 41 bps to 756 bps:
What is interesting is the fact that tomorrow is the 6 months roll for the credit indices. The Itraxx crossover index will comprise 50 entities instead of previously 40 names. 12 new entries in the index for two names dropping including Rhodia. The big change comes from the fact that a previously less liquid name can be included in the index, provided: the company has issued 500 million euros of bonds in the last 12 months and if the company is as well present in the Iboxx Liquid HY index in euros or in dollars.

Itraxx Financial Senior 5 year index widening today by 27 bps to 292 bps:

and the Itraxx Financial Subordinate 5 year index moving touching again 500 bps on the day, up by 35 bps:

The liquidity picture as per Bloomberg:
And my good credit friend to comment:
"Central bankers’ intervention is finally analyzed the right way, i.e. the US $ funding problem is worst than what people have in mind and liquidity provided versus collateral will only be accessible for those which are the stronger …. Explanation: In order to get the needed US $ funds, banks have to pledge collateral to the Central Bank for a defined period of time -3 months. If the value of the collateral decreases (bad mortgages or loans), a haircut on the collateral principal is applied and the bank will get less US $ per nominal.

Therefore, the Central Banks’ action is not an unlimited source of liquidity. It will help, but not be enough as the banks will still have to find some US $ funding … and the worst the assets, the bigger the funding gap to be filled!"

In relation to the liquidity issues now facing Russia we discussed in the post "Markets update - Credit - After all tomorrow is another day", Jack Jordan and Jason Webb in Bloomberg indicated today the following:
"Russia’s central bank provided the biggest cash injection for lenders in two years to ease a shortage of rubles and avoid a repeat of 2008, when policy makers had to grant more than $131 billion in aid to banks.
Bank Rossii lent 149.8 billion rubles ($4.9 billion) to local banks on Sept. 16 in the biggest auction of repurchase loans since December 2009, according to central bank data. The overnight MosPrime rate, the average banks charge to lend to each other, jumped to 5.29 percent, the highest since January 2010."

Cash crunch we have. From the same Bloomberg article:
"Russia is experiencing a cash crunch as the ruble’s 9.6 percent drop versus the dollar since the start of August erases the need for the central bank to stem its appreciation by buying dollars in exchange for local currency, UralSib Financial Corp. said. Concern European banks, hobbled by the region’s debt crisis, will prevent Russian companies from refinancing the $48 billion of debt due before the end of 2011 is also spurring outflows of capital, according to Alfa Bank."

But it isn't only Russia trying to sustain its local currency by buying rubles, it is also happening in India with the regulators also starting to buy local currency and selling dollars and Argentina as well. According to Bloomberg: "Argentina's central bank has been sellingg foreign currency every trading day since August 15, according to data compiled by Bloomberg."

As reminder for what happened to Russia in 2008 and from the same source:
"Russia saw record capital outflows of $130 billion during the credit market crisis three years ago, forcing the government to provide emergency funding to banks and take over Svyaz Bank and Globex Bank, two of
the country’s top 50 lenders by assets."

It looks like Russia is heading towards another credit crunch. 2008 redux?

The liquidity is still very poor hence another session of flight to quality as displayed by the German 10 year bund and Swedish 10 year government bond moving in perfect tandem (correlation still at 1):

The greek jitters goes on with two year Greek bonds creeping up higher:

Tomorrow is payment day on Greece 4.5% 2037 9 billion euros issue, currently trading at around 31 in cash price (bid side):
The last coupon ever to be paid on that issue? It might well be a collector's issue fairly shortly...

While all the focus seems to be on Europe these days, another credit friend of mine, brought to my attention some interesting developments in the Chinese space (where all is going well, at least from an official point of view).
Source: Bloomberg
" The Ministry of Finance, the Ministry of Commerce and the Ministry of Industry and Information Technology have notified Shandong,Qingdao, Henan and Sichuan that the home appliance subsidy program in the above regions will expire on 30 November 2011.
From 1 December 2011, the above three provinces and one city will no longer enjoy subsidies on home appliances purchases."

And following this announcement HAIER Electronics Group Co Ltd shares in Hong-Kong took a severe beating:

Why is it relevant?

"Founded in 1984, Haier Group is headquartered in Qingdao, Shandong Province, the PRC and is today one of the world's leading white goods home appliance manufacturers. The products of Haier Group are now sold in over 100 countries. In October 2009, Haier was ranked first in Fortune Magazine's "China's Most Admired Companies"."

"Haier Electronics Group Co., Ltd. is an investment holding company engaged in manufacture and sales of washing machines, water heaters and provision of logistics services, as well as sales and distribution of home appliance and other products. It has three segments: washing machine segment, which manufactures and sells washing machines; water heater segment, which manufactures and sells water heaters, and the integrated channel services segment, which provides logistics services, as well as sells and distributes home appliance and other products."

So you can start thinking about the "decoupling story" with China given a consequent artificial stimulus has just been pulled right under the feet of one of the largest white goods manufacturers of the world, namely Haier Group.

While Europe is busy with the demolition, we have China attempting deconstruction. In both case we have an attempt of controlled demolition, it is just a question of style.

Stay tuned!

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