C.M.O. 4.16.2009
Credit Market Overview
April 16, 2009
April 16, 2009
Operating under the media’s microscope as the market has been since the phrase “credit crunch” shot to the top of the lexicon league tables. The causes and cures for how we got here and how we get back are daily fodder for the forecasters, pundits and practitioners.
Through all of this it is important to keep in mind that actions will always speak louder than words. In the marketplace those actions are the prices where buyer meets seller at a single point in time, plain, pure and simple.
Part of why we are where we are is because for a while, in some securities, buyers and sellers did not know where to meet. Not in a physical sense as the exchange hasn’t moved in 100+ years or so but with regard to price. Participants lost faith in price as a determinant of value. Buyers didn’t want to pay the offer price and sellers most definitely did not want to hit the bid. In stocks, yes there was a lot of bid hitting, but in the debt markets trying to assign a value to a piece of paper that had previously been rated AAA and was now rated “who knows what” created stagnation.
As such the sale of $2.7BN worth of high yield bonds by Crown Castle International Corp. and HCA made for the single highest day of issuance in the junk market since last June. We will look at the pricing in a moment but before doing so it should be recognized that just for this to happen is evidence that there is progress being made in re-establishing liquidity in the debt markets.
OK, enough with the sentimental stuff, let’s look at how this got done. CCI’s issue was rated Ba1e by Moody’s and BBe by S&P. $1.2BN was sold in the Euro-Dollar market, has a 7.75 coupon, matures in 2017 but is callable in 2013 at 103.88. The interpolated Treasury curve in 2017 is 2.50% which puts the spread at 525 over. The 2 3/8’s of 3/31/16 is the closest real issue and the spread above that note was 550bp. Unfortunately there is no CDS information on CCI so it is not possible to compare the CDS spread to the issuance spread to see what premium the market is adding for the use of real balance sheet.
HCA’s issues came at 624bps over the 2 3/8’s of 3/31/16 TSY at an issue price of 96.755. It has a coupon of 8.5%, matures in 2019 and is callable in 2014 at 104.25. There is an active CDS market on HCA and the 10-year CDS spread was ~818 yesterday. This is interesting as during the crux of the credit crunch balance sheet space was trading at a premium to the CDS market. In other words buyers of physical bonds required a higher return to use their cash than was implied by the CDS contract. This is the first time in a long time the reverse is true.
We have been hearing that one of the pillars that the economic recovery will be built on is the availability of credit. To the extent that is true yesterday’s issues in the high yield market might be early signs of a thaw.
Enjoy the week.
Jim Delaney
Through all of this it is important to keep in mind that actions will always speak louder than words. In the marketplace those actions are the prices where buyer meets seller at a single point in time, plain, pure and simple.
Part of why we are where we are is because for a while, in some securities, buyers and sellers did not know where to meet. Not in a physical sense as the exchange hasn’t moved in 100+ years or so but with regard to price. Participants lost faith in price as a determinant of value. Buyers didn’t want to pay the offer price and sellers most definitely did not want to hit the bid. In stocks, yes there was a lot of bid hitting, but in the debt markets trying to assign a value to a piece of paper that had previously been rated AAA and was now rated “who knows what” created stagnation.
As such the sale of $2.7BN worth of high yield bonds by Crown Castle International Corp. and HCA made for the single highest day of issuance in the junk market since last June. We will look at the pricing in a moment but before doing so it should be recognized that just for this to happen is evidence that there is progress being made in re-establishing liquidity in the debt markets.
OK, enough with the sentimental stuff, let’s look at how this got done. CCI’s issue was rated Ba1e by Moody’s and BBe by S&P. $1.2BN was sold in the Euro-Dollar market, has a 7.75 coupon, matures in 2017 but is callable in 2013 at 103.88. The interpolated Treasury curve in 2017 is 2.50% which puts the spread at 525 over. The 2 3/8’s of 3/31/16 is the closest real issue and the spread above that note was 550bp. Unfortunately there is no CDS information on CCI so it is not possible to compare the CDS spread to the issuance spread to see what premium the market is adding for the use of real balance sheet.
HCA’s issues came at 624bps over the 2 3/8’s of 3/31/16 TSY at an issue price of 96.755. It has a coupon of 8.5%, matures in 2019 and is callable in 2014 at 104.25. There is an active CDS market on HCA and the 10-year CDS spread was ~818 yesterday. This is interesting as during the crux of the credit crunch balance sheet space was trading at a premium to the CDS market. In other words buyers of physical bonds required a higher return to use their cash than was implied by the CDS contract. This is the first time in a long time the reverse is true.
We have been hearing that one of the pillars that the economic recovery will be built on is the availability of credit. To the extent that is true yesterday’s issues in the high yield market might be early signs of a thaw.
Enjoy the week.
Jim Delaney
Labels: CDS, CEC Strategy, correlation, credit, cross asset, equity, Jim Delaney
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3:54 AM
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