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credit

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The cost of quality: spread differentials between IG credit rating bands

We have frequently written about investment grade (IG) credit spreads over the course of the past year. Today I’m going to dissect the IG universe further and take a look at quality spreads, i.e., the additional risk premium investors can earn when switching from one credit rating band into the next lower band.

The chart below shows how the differential in asset swap (ASW) spread between AA and…

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Covenant case study – after the good, the bad

We recently highlighted a bond covenant that benefited fixed income investors. After the good, this week we have seen the bad. In this case, a bond covenant may impact bondholders in a detrimental way. Both examples are evidence of how critical it is to have a thorough understanding of bond documentation ahead of investing in a bond.

Kuwait’s third largest bank, Burgan Bank, announced in a regu…

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2015-08 blog VJ

The fight for investors rights in the high yield market

The high yield primary market can be a battleground between issuers and investors to determine which covenants (the legal language that protects the right of bondholders) are included or excluded in the bond documentation. For investors, this can offer the opportunity to influence the structure of deals, and include valuable protections in the terms of the offering memorandum, which sets out th…

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2015-08 blog JT

Covenant case study: Change of Control

We’ve written in the past about some of the concerns we have over the gradual weakening of bond covenants (the legal language that protects the right of bondholders) over the past few years. However, today we have seen a real world instance of a bond covenant kicking in to the benefit of existing holders, namely the change of control. This illustrates how and why such covenants can help protect…

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Will the thawing in US-Cuban relations bring havoc to the region’s bonds?

It is August and I should be enjoying a beach holiday, rather than being stuck in London under temperamental weather. To mitigate my despair, I decided to write some blogs on the topic of tourism. Given the ongoing normalisation of US-Cuba relations, I have been looking at the impact that this unprecedented shift in policy could have on the region. Although the embargo and travel restrictions r…

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Investment grade corporate bond market performance in 2015

I’ve spent a bit of time in recent days looking at the performance of global investment grade (IG) credit. The chart below shows the year-to-date (YTD) ranges of asset swap (ASW) spreads for USD BBB 5-10 year corporate bond sectors.

Here are our three key takeaways:

  1. First, on the bright side, the spread of the USD BBB index as a whole has tightened by 18 bps YTD. Despite being modest in magni…

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The downside of bonds

Government bond yields are extremely low across the globe. The highly unusual phenomenon of negative bond yields – even on debt issued by countries that still face a debt crisis – is now commonplace. In addition, investors are looking to protect themselves from the carnage in bond markets we have seen in recent weeks  (for example, the “risk-free” German 2.5% 2046 bond is down -19% since the hi…

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Banks oiling the wheels with liquidity

An overriding theme for U.S. high yield energy companies in the current oil price environment is having sufficient financial liquidity (cash, bank credit, etc.) to cover their obligations as earnings come under pressure due to low oil prices. Maintaining liquidity until oil prices recover will be paramount for energy companies to survive, even for those names that aren’t especially levered. It …

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How steep is the USD IG credit spread curve?

Is now the time to buy long-dated USD IG corporate bonds?

Credit curves are usually upwards sloping; as you’d expect, investors require more of a credit risk term premium for lending for a long time than for a short time, all else being equal. As the charts below show however, the steepness of USD IG non-financial credit curves has become rather extreme in 2014. At year end, the asset swap (ASW) spread differential between c. 25 years and c. 2 years w…

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Long US Treasury bonds are overvalued by 250 bps. Discuss.

As we started 2014 the US Treasury market was expecting 10 year yields to be at 4.13% in a decade’s time. This 10 year 10 year forward yield, derived from the yield curve, is a good measure of where the bond market believes yields get to if you “look through the cycle”, and disregard short term economic trends and noise. I wrote about it here and suggested that we were approaching the top of th…

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