C.M.O. 1.28.2010
Credit Market Overview
January 29, 2010
After the kind of 1st day, 1st week most prognosticators would drool over with regard to the “January effect” the market has cooled its heels quite quickly and as of last nights close was down 5.71% since the 19th. The people who look at January as a whole will have quite a different opinion of that “effect” than the folks that dissect the first 120 hours of trading so today, as every day, the future is un-foretold.
One area of the markets that does not seem to understand “pull back” or “slow down” is the corporate debt arena, at least as it pertains to issuance. As of about mid-month there had already been $46.2BN worth of investment grade bonds issued while the high yield side saw about $4BN according to Dealogic, who keeps track of such things.
“Corporate debt issuance has been off the charts. There is nowhere else to go, so there’s a real fight”, is how James C. Camp at Eagle Asset Management put it citing a tentative recovery, little if any inflation and a Fed chief that, after garnering more nays than anyone before him and close to double Paul Volker’s 16, will be hard pressed to click the rate meter up between now and the November elections. Not intending in any way to say that sans P.V. every Chairman of the Federal Reserve hasn’t been at least a tad politicized throughout the institution’s history.
The move by Europeans away from bank loans and towards corporate debt continues as well this year as before the second full week was in the books there had been $17Bn of “covered bonds” issued by banks across the pond. Investors there are broadening their palate as well gobbling up E3BN ($4.3BN) in high yield paper in the same period.
“More and more European borrowers ‘are looking at high-yield bonds as a mainstream financing tool, and I think we’ll see many new names in the market in 2010” said the head of European high-yield capital markets at Deutsche Bank, Henrik Johnson.
One would think that the driving force behind all of this issuance would be a need for cash by the issuers but the opposite appears to be the case. Citigroup analysts recently found that “large nonfinancial companies hold an incremental $290BN of cash above 2007 levels”. They went on to say that “more than half” of that cash was in the hands of U.S. companies.
The good news in having all that cash around is that should the après-Lehman Antarctic credit conditions return there will be enough in the cookie jar to keep things going for quite some time. The bad news is that cash is an asset and eventually corporations need to do something with it to show investors enough of a return that they remain investors.
The other risk, as was made all too evident in the period leading up to the burst and that has recently resurfaced, is that cash on the books makes for an attractive private equity target as the PE firms love to consume such morsels and replace the cash with debt, paying themselves a tasty dividend in the process. After all, they will be doing such great things to enhance shareholder value, why shouldn’t they get paid up front for it?
Investment grade CDS spreads, as per the CDX indices bottomed on 1/11 at 76bps. They have since made their way through resistance at 86bps and reached 96bps on 1/22. They closed there last night as well so it is not clear whether the move off the lows is reversing or just pausing to catch its breath.
The technicians are focused on the 1080-1085 level in the S&P 500 cash index as support for the retracement that began after new highs were reached on the 19th of this month.
The timing between CDS spread and stock price movement has always been fluid and 2009 taught us that easy money a.k.a Fed Funds at zero is a force to be reckoned with regardless of interim moves in the credit markets.
With the bruised yet newly re-minted Fed chief in the engine room and an “Obama 2.0”, as the NY Post described him, at the helm; we are most certain to hit an iceberg at some point but for now the call down the pipe would seem to be “full speed ahead”.
Enjoy the weekend.
Jim Delaney
