C.M.O. 4.9.2009

Credit Market Overview
April 9, 2009

If this crisis of credit and confidence has taught us anything it is that doing the same thing at a different time is not that same thing at all. Yesterday’s announcement that the Treasury Department will include the life insurers as eligible TARP fund recipients added a boost to the names in this sector. That this is was viewed positively by the market at the same time that the banks, both big and small, are wriggling like a ferret caught in a snare trap to get themselves out from under that very same umbrella is a study in something. Of what, however, I am not completely sure.

To make it even more interesting, alright a little less boring, some insurers seem in dire need of assistance while others appear to be in no danger of losing their coveted AAA status.

I thought, while seeing the list of names that have made the necessary changes to put themselves in line for TARP funds (more on that in a minute), it would be interesting to look at the difference between those names and the insurers that don’t appear to be in need of any assistance but Mass Mutual Life, New York Life and Northwestern Mutual are either private or unlisted and none of the three had active CDS quotes. This unto itself is probably testament to how a AAA insurer should be run but that’s not the point of this note.

Of the companies with hat in hand: HIG, GNW, LNC all acquired existing S&L’s (you know, the other massive bailout) last fall so that they could meet the TARP requirement. PRU already owned a thrift and MET owns a federally chartered bank.

Let’s have a look at the CDS/equity relationship for clues as to how things were pre and post announcement. (All CDS spreads are the 5-year most often traded and considered the benchmark by the market place.)

HIG: CDS peaked at 1151 back on March 3rd of this year but was trading as wide as 1119 on April 7th, closed last night at 846. The stock hit its low on 3/6 at $3.62 and has been moving higher in uneven fashion closing at 9.59 last night.

GNW: Pattern looks similar to HIG with different numbers. Stock low $0.84 on 3/6, CDS high 3639 on 3/9, recent CDS peak 3672 on 4/7. Last night’s close: 2834 on the CDS and $2.33 on the stock.

LNC: A little different with the stock putting in a low of $5.01 on 3/9 but the CDS moving rapidly higher from mid-February until its 4/7 peak of 3189 before closing last night at 2152. The stock has been range bound between $5-$10 since late February closing at $9.15 last night.

PRU: Different again with the CDS bouncing off the ~1100 level three times since the 3rd of March closing last night at 849 while the stock bottomed on 3/5 at $11.25 moved up to $24.92 on 3/18, backed off but then started moving higher again and closed at $23.81 last night.

MET: The chart of the CDS/equity relationship is the most symmetrical for this name with the stock hitting a low of $12.10 on 3/5 and the CDS peaking at 1028 on 3/9. Since then the CDS has moved lower (734 last night) and the stock higher closing at 24.73 last night.

The easy observation here is that inclusion in the TARP plan has lowered the implied risk of default for all of the names mentioned and this has been complimentary for the stock price.

It will be interesting to see how soon it will be before management of these companies begins to chafe under the restrictions that come from getting money from Uncle, or is that Comrade Sam.

If your holiday started yesterday I hope you enjoyed and will enjoy, if your holiday is Sunday, please enjoy, if you have tomorrow off, please enjoy and if you have Monday off, please enjoy. The key word here is enjoy!

Jim Delaney