We live in Financial TImes – Page 3

About all those high-yield energy bonds…

January 19, 2015 Tracy Alloway Comments 1 comment

I’m not an energy person. So I was delighted to learn about reserve-based lending and the semi-annual “redetermination of the borrowing base” procedure that oil companies undertake with their bank lenders.

It’s no secret that energy companies have borrowed heavily from Wall Street to fund their shale exploration. With the price of oil halved from its peak last year, those companies are under pressure. One place this is showing up is in the world of bank credit lines to energy firms, and also junk-rated bonds they sold.

There is lots of information in the below article, including talk of the hedge funds and private equity firms waiting in the wings to “rescue” energy firms on potentially punitive terms. One thing I would like to stress is a rather unsavory dynamic at play here. If energy companies have to turn to second-lien financing to plug holes in their bank loan facilities, the claims of existing unsecured creditors – i.e bondholders – get pushed further down the payment hierarchy. Because so many of these bonds have been issued on a cov-lite basis, subordinating them becomes even easier. In short, there are interesting times ahead for the high-yield energy sector.

April in Texas traditionally marks the start of the spring thunderstorm season. This April, the tempestuous weather looks set to be accompanied by an additional financial squall for the state’s oil and gas companies as banks begin cutting back on the reserve financing on which these firms rely.

Such financing is typically re-evaluated twice a year, usually in October and April, and is tied to the value of the borrowing firms’ oil and gas reserves and related assets such as pipelines.

With the price of US crude now less than 50 per cent of its recent peak of $107 a barrel, the likely consequence is that banks will significantly reduce their lending to energy firms across the US, forcing companies to look for alternative sources of financing on more punitive terms.
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Energy bondholders at risk as bank loans ebb
Energy bondholders could lose out in refinance deals
A dozen ways to stretch your borrowing base

Tourists caught on the wrong side of the volatility trade?

December 22, 2014 Tracy Alloway Comments 1 comment

We know that banks and hedge funds a traditional sellers of volatility. But low interest rates and somnambulant markets have also encouraged asset managers (or “tourists” as the banks and hedgies sometimes call them) to take up the strategy as they seek to juice their returns. It seems … risky.

This story has a lot of stuff in it, including a smallish dive into the events of October 15.

Long the domain of professional speculators like big banks and hedge funds, “selling volatility” — as such wagers are known — became one of the most popular trades of the year as a much wider range of investors piled into bets that asset prices would remain stable.

Now, as the prospect of the Federal Reserve raising interest rates draws increasingly near, the concern is that market volatility will return with a bang in 2015 and those investors caught on the wrong side of the revival will suffer badly.

“Volatility is a zero-sum game — for every buyer there is a seller. But what has changed is the type of sellers,” says Maneesh Deshpande at Barclays.

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Caught on the wrong side of the ‘vol’ trade

Here’s looking at you Lending Club

December 11, 2014 Tracy Alloway Comments 0 Comment

Two years ago I took an interest in an up-and-coming fintech company called Lending Club.

Today they listed on the New York Stock Exchange, achieving an astounding valuation of $8.9bn in the process.

Here are a few stories that illustrate how we got from San Francisco start-up to NYSE listing.

The New York Stock Exchange on Lending Club listing day

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New column – Won’t somebody please think of the bond funds?

November 24, 2014 Tracy Alloway Comments 0 Comment

Bond inventories held by dealer-banks have halved since 2007 blah blah blah.

What gets far less attention than bank balance sheets in the bond market liquidity puzzle is the other side of the equation, and that is the astounding growth of bond funds.

This column, based on a big BIS paper, has some big numbers to go along with it.

The BIS estimates that the bond holdings of the 20 biggest asset managers have jumped by $4tn in the four years immediately following the crisis. By 2012 the top 20 managers held more than 60 per cent of the assets under management of the 300 biggest bayside firms in 2012, up from 50 per cent in 2002.

In other words, while asset managers are increasingly concentrated in bonds, the asset management industry, in turn, appears to be increasingly dominated by a select group of elite managers.

… The issue of decreasing levels of liquidity in the bond market was recently highlighted by the Bank for International Settlements, better known as the central bank’s bank, which last week released a 57-page paper with the rather dry title of “Market-making and proprietary trading: industry trends, drivers and policy implications”.

Yet the dearth of traditional market makers is only one half of the liquidity story.
The other is the astounding growth of big bond funds, which in recent years have ridden a wave of low interest rates and a period of huge debt issuance by governments and companies to grow their balance sheets by staggering amounts.

Many of these funds have been herded into similar investment positions thanks to the increasing use of benchmarking, as well as ultra low interest rates, which have essentially encouraged them to “go long” on credit. Moreover, in an environment of one-sided demand for bonds, few fund managers have had to pay for their liquidity in recent years.

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Liquidity puzzle lurks within bond funds’ extraordinary rise

Did someone ask for more on bond market liquidity?

November 24, 2014 Tracy Alloway Comments 0 Comment

The Bank for International Settlements has released a 57-page paper on bond market liquidity, mostly examining the issue from the perspective of shrinking capacity on the dealer-bank side. It comes with the above schematic and plenty of other interesting facts and charts.

See also FT Alphaville, where my colleague Izabella Kaminska has started a liquidity series.

October 15. A financial markets whodunnit.

November 17, 2014 Tracy Alloway Comments 0 Comment

On October 15, prices of US government bonds – one of the most liquid markets in the world – whipsawed violently and sparked a wave of speculation on Wall Street as to the culprit(s) behind the wild moves.

Here’s a longish analysis of what happened. The key suspects: lack of liquidity, the rise of electronic trading, a classic gamma trap (possibly sparked by the scuppering of the AbbVie/Shire deal) and much, much more.

… On October 15, the yield on the benchmark 10-year US government bond, which moves inversely to price, plunged 33 basis points to 1.86 per cent before rising to settle at 2.13 per cent. While that may not seem like much, analysts say the move was seven standard deviations away from its intraday norm – meaning it might be expected to occur once every 1.6bn years.

For several minutes, Wall Street stood still as traders watched their screens in disbelief. Electronic pricing machines, which now play a bigger role than ever in the trading of Treasuries, were halted and orders cancelled by nervous dealers as prices see-sawed.

The events have sparked a financial “whodunnit” as investors, traders and regulators seek to understand what happened – and to determine whether October 15 was a unique event or a harbinger of further perilous trading conditions to come.

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Bonds: Anatomy of a market meltdown

Creditworthy or Not

November 14, 2014 Tracy Alloway Comments 0 Comment

Here’s an analysis of how some corporate accounting shenanigans are playing out in credit markets, where aggressive earnings adjustments known as “add-backs” can make companies appear more creditworthy than their historical cash generation might otherwise indicate. The effect can be pretty darn substantial.

In the competitive world of online dating, men and women will embellish their profiles to attract the best mates. Salaries are engorged, ages are diminished and heights increased as singles seek promising partners.

In credit markets a similar trend is playing out as companies flatter their bottom lines to attract the best financing deals from investors who are willing to play along in order to get a shot at a debt product with juicy yields.

And here’s the key quote:

“Beauty – or the lack of beauty – is in the eye of the beholder,” says Scott McAdam, portfolio specialist at DDJ Capital Management. “In the late stages of a credit cycle where capital is cheap and there’s a lot of money chasing deals, companies will kind of get away with this.”

Credit markets play a risky dating game

Chasing our tails

November 6, 2014 Tracy Alloway Comments 0 Comment

Or, the time I talked to a Belgian former call center worker who turned herself into an actual currency trading guru.

This story is about “social trading,’ which ranges from run-of-the-mill sentiment on Twitter to ‘copy-trading’ strategies that see individual investors following ‘gurus’ on eToro or imitating the investment strategies of hedge funds.

“Twitter is great. I like it almost as much as I like Dell,” Carl Icahn, the activist investor, exclaimed when he made his debut on the social media platform last year. He now counts 190,000 followers who hang on his every tweet.

In finance, as in life, imitation is often the sincerest form of flattery and the arrival of new technology combined with the proliferation of social media platforms and online networks makes it easier than ever for investors to share – and copy – trading ideas.

For its supporters this “social trading” is democratising the world of investing by reducing the traditional disparity in trading resources between large and small investors. For critics, this increasing accessibility opens up huge risks for uninformed traders, emboldened to bet big without performing their own due diligence …

Another question that could be asked is what effect the rise of ‘Simon Says’ (from passive investing to seemingly innocuous Twitter trend-following) has on markets? Do the investors who are able to get ahead of – and then generate the most — inflows, stand to outperform? And what impact does that have on markets in general? To the extent that markets were ever concerned with fundamental value, is that dynamic increasingly off-the-table? Do markets and investors become giant inflow-seeking missiles? Hmmm.

From Icahn to ‘I can’ social trading takes off

Synthetics, derivatives and leverage – oh my!

August 22, 2014 Tracy Alloway Comments 0 Comment

Wall Street banks are encouraging the use of derivatives including total return swaps (TRS), credit index options (swaptions) and variants of the synthetic collateralised debt obligations (CDOs) that proved so disastrous during the previous financial crisis in an effort to serve investors the yield they so desperately crave.

(The crucial difference this time around, is that these are tied to corporate credit rather than residential home loans).

Read the following, and weep/laugh as you see fit.

Boom-era credit deals poised for comeback (December, 2013)

Last month Citigroup placed an unusual job advertisement. The bank was seeking an analyst able to crunch the numbers on an obscure financial security: synthetic collateralised debt obligations. Four weeks later, job applicants would find the position filled. Such has been the clamour among investors for the higher yields from higher-risk products that big banks including Citi, JPMorgan Chase and Morgan Stanley are turning again to the more esoteric parts of the financial markets.

Turning to total return swaps (July, 2014)

A type of derivative known as a “total return swap” has become a hot ticket item on Wall Street as investors seek out new ways of playing booming credit markets, while banks – including Goldman Sachs – find fresh methods to finance their assets.

Investors dine on fresh menu of credit derivatives (August, 2014)

The renewed boom in credit derivatives is being powered by yield-hungry investors and Wall Street banks looking for new revenues. The two instruments helping investors play booming corporate credit markets at this juncture include total return swaps (TRS) and options on indices comprised of credit default swaps.

The slow drip liquidity story – updated

July 23, 2014 Tracy Alloway Comments 0 Comment

Updated: October 17, 2014 given recent market events and sudden interest in all things liquidity-related. To be clear, the lack of liquidity just exacerbates market moves. The underlying problem is that complacent investors have been in the same (long) positions for the past five years, selling volatility and levering up to boost returns.

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A by-no-means-extensive list of my work on the changing structure of the bond market.

Goldman eyes electronic bond trading (March, 2012)

Finance: Grinding to a halt (June, 2012)

Dealer and investor talks over liquidity fears (June, 2012)

Goldman launches bond trading platform (June, 2012)

Bond trading model shows signs of stress (October, 2012)

Banks tout idea of sharing bond data (November, 2012)

Slow-drip bond sell-off masks a problem (November, 2012)

Markets on edge as investors seek exit (June, 2013)

ETFs under scrutiny in markets turbulence (June, 2013)

Markets: the debt penalty (September, 2013)