Bond market: A Lehman moment? ~ 26 Sep 2016
http://www.straitstimes.com/business/bond-market-a-lehman-moment
Treasury market’s biggest buyers are selling as never before ~ 26 Sep 2016
http://www.bloomberg.com/news/articles/2016-09-25/u-s-bond-market-s-biggest-buyers-are-selling-like-never-before
- Central banks have cut Treasuries for three straight quarters
- Pullback may be a sign the bond market is at a tipping point
Corporate bond market gets its skates on26 Sep 2016
The corporate bond market is really starting to heat up.
After a tense week of central bank decisions passed relatively smoothly, companies look set to take advantage of the boost provided by the European Central Bank’s bond buying programme, and the Bank of England’s equivalent, which kicks off tomorrow.
As Barnaby Martin at Bank of America Merrill Lynch points out, global central banks are pumping out the stimulus at a record clip.
There has been a surge in issuance in both the euro and sterling markets over the last few months, and this is set to continue, if not accelerate this week.
Suki Mann at CreditMarket Daily says:
The pipeline in IG non-financials is fairly rammed and we look for up to €10bn of issuance in the week. There’s little in the way to stop us.Sterling issuance so far this month is well beyond £3bn, the highest tally for any calendar month in two years, and is likely to push even higher as the BoE kicks off its programme tomorrow.
The mere announcement of the programme has reinvigorated the market, with a flurry of large deals, including £3bn from National Grid, and £1.8bn in the space of a week from Vodafone.
The US is getting in on the act too, notes Armin Peter at UBS:
Issuance volumes in the US are only $18bn away from an all time record… Moving into the new week we are looking at much lower yieldsAverage yields have already hit record lows in the euro and sterling markets this month, touching 0.57 per cent and 2.06 per cent respectively.
Last week the ECB ramped its bond buying, snapping up a record €2.66bn. To continue accelerating its pace of buying, it will tuck into the splurge of primary issuance, says Mr Mann. This will likely complicate the new-issue process further. Already, investors are forced to ‘over-bid’, or place an order to buy more debt than they expect to be allotted, in an effort to gain a decent slice. The arrival of central banks into the mix will lead them to amp up those orders still further “so that they might be looked on more favourably in the allocation process”, Mr Mann says, adding:
Inflated orders make the deal look like a winner, so the pricing is squeezed some more. A vicious circle, indeed. Thus the initial price guidance that banks come out with for new deals ought to be taken with a more than a pinch of salt where 15-20bp of a repricing tighter has become the norm.Chinese bondholders face heavy losses, as metal producer folds ~ 26 Sep 2016
http://www.reuters.com/article/gxnf-debt-bonds-idUSL3N1C21K8
China in debt ~ 24 Sep 2016
http://www.aljazeera.com/programmes/countingthecost/2016/09/china-debt-160924081946832.html
How to value (worthless) Venezuelan oil bondsBy John Dizard
23 Sep 2016
John Dizard asks if the bonds issued by PDVSA are intrinsically worth a lot or nothing at allMichael Corleone: Senator? You can have my answer now, if you like. My final offer is this: nothing. Not even the fee for the gaming license, which I would appreciate if you would put up personally. - The Godfather, Part II, 1974
Venezuela may not be a fun place to live at the moment, what with the high levels of violence, inflation and general social disintegration. Its external bonds, though, continue to provide a wide variety of speculative opportunities for the cool-headed international investor.
The question of the moment among Venezuelan bond investors is whether the $31bn of outstanding bonds issued by PDVSA, the national oil company, are intrinsically worth a lot, even after a restructuring, or intrinsically worth nothing at all. Active emerging market investors seem to be split almost evenly on the matter, though PDVSA bonds have been bid up rapidly over the past few weeks.
The “worth a lot” group points to Venezuela’s need to maintain its oil exports. These are all channelled through PDVSA’s oil production, gathering, processing and exporting system. The oil company also has a 50.1 per cent interest in the huge Citgo refinery on the US gulf coast. The optimists believe PDVSA’s credit is better than that of the country, what with owning all those real assets.
The “worth nothing” faction points out that the state-owned oil company does not actually own Venezuela’s 300bn barrels of oil reserves. Those are owned by the republic itself, which has granted a revocable concession to PDVSA, really just another Venezuelan company. The oil changes owner in the export terminals, where title is taken by the foreign importer. The PDVSA ships may be owned by a group of banks and shell companies. If the oil company defaults, bondholders may have nothing at all to seize.
They could, arguably, proceed against the company in a Venezuelan bankruptcy court, but such a course of action might be somewhat uncertain in the best of times, let alone after any default in the near term. And the oil concession could just be cancelled by whatever government is in power.
The Venezuelan government has, so far, appeared to support the “worth a lot” case, as it has continued to pay PDVSA and republic bondholders while children go hungry and hospitals go without supplies.
A PDVSA bond maturing in October was being bid for at 96 cents on the dollar this past week, in addition to what should be another couple of points of accrued interest payments. The November 2017 bond, which has a principal payment due in November of this year, is going for a touch over 80 cents, which implies a yield to par of about 56 per cent, better than most savings accounts.
The October bond will almost certainly be paid out of PDVSA’s remaining cash, or, if necessary, the country’s gold reserves.
PDVSA has just made a shadily documented exchange offer for its $7bn of remaining bond maturities in 2016 and 2017, which would stretch out the maturities until 2020. The only real incentive for foreigners to accept the exchange is a pledge of PDVSA’s equity share in that Citgo refinery.
Since PDVSA has already borrowed $2.8bn against the refinery and upstreamed the cash to the parent company, the government and well-connected people along the way, and since any creditor trying to seize the refinery after a default would have to deal with another $5bn or so of easily accelerated existing debt, that pledge is not worth much.
There are other problems facing the would-be litigious PDVSA bondholder. Assuming that company’s bonds are equal in rank to those issued in the name of the republic (another $30bn or so), there is a large, non-transparent debt to China of around $30bn-$50bn, which now takes its payments in oil shipments. Think China will let New York vulture funds collect ahead of them?
And as a longtime sovereign debt lawyer says: “There is no doubt that if a civilised regime were to take over the country, there would be a lot of support for [the new government].” That means that the G7 governments, as well as China and the International Monetary Fund, would guarantee new financing for food, reconstructing the oil industry, recapitalising the economy, medicine and so on.
Private sector bondholders will be legally subordinated to these lenders. A US bankruptcy judge would be unlikely to enforce a private bondholder’s claim while there were hungry children on YouTube.
That is more or less what happened to the former creditors of the Saddam regime in Iraq: hair cut, and crammed down by the UN. So I am closer to the “worth nothing” school for PDVSA.
How serious is China's debt problem? ~ 23 Sep 2016
https://www.equities.com/news/how-serious-is-china-s-debt-problem
Dongbei Special Steel Group forced into bankruptcy ~ 23 Sep 2016
http://english.caixin.com/2016-09-23/100991329.html
China starts default-swap trading as buffer against failures ~ 23 Sep 2016
http://www.bloomberg.com/news/articles/2016-09-23/china-opens-door-to-more-firms-failing-with-default-swap-trading
Inside China's ghost towns: 'Developers run out of money' ~ 21 Sep 2016
http://www.aljazeera.com/blogs/asia/2016/09/china-ghost-towns-developers-run-money-160914084316042.html
https://www.youtube.com/watch?v=nGHmk4UeK_w
Guangxi Nonferrous Metals gets court OK to liquidate ~ 20 Sep 2016
http://english.caixin.com/2016-09-20/100990098.html
China bankruptcies surge as government targets zombie enterprisesBy Gabriel Wildau in Shanghai
June 23, 2016
Chinese bankruptcies have surged this year as the government uses the legal system to deal with “zombie” companies and reduce industrial overcapacity as part of a broader effort to restructure the economy.
Courts in China accepted 1,028 bankruptcy cases in the first quarter of 2016, up 52.5 per cent from a year earlier, according to the Supreme People’s Court. Just under 20,000 cases were accepted in total between 2008 and 2015.
China’s legislature approved a modern bankruptcy law in 2007 but for years it was little used, with debt disputes often handled through backroom negotiations involving local governments.
“Bankruptcy isn’t just about creditor-borrower relations. It also touches on social issues like unemployment,” said Wang Xinxin, director of the bankruptcy research centre at Renmin University law school in Beijing. “For a long time many local courts weren’t willing to accept them, or local governments didn’t let them accept.”
At a major Communist party meeting in October 2014 known as the Fourth Plenum, leaders pledged to strengthen “socialist rule of law”, including steps to lessen political interference in court cases.
Now bankruptcy courts have been recruited into China’s drive for “supply-side reform”, which centres on reduction of overcapacity in sectors such as steel, coal and cement.
But there are concerns that the bankruptcy law will allow some zombie companies to continue operating. In guidance to lower courts, the supreme court has said they should, where possible, use mergers or restructuring rather than liquidation, in order to allow a company to emerge from bankruptcy as a going concern. This month the court provided several case studies of successful bankruptcies, all of which kept companies in business.
“We shouldn’t promote simple slogans like ‘use more restructuring and less liquidation’. That’s not really accurate,” said Li Shuguang, professor at the China-EU School of Law at China University of Political Science and Law.
“I personally think liquidations should be used more. Only enterprises with real value should be saved. The most important [thing] for zombie firms is to liquidate them. Then we can find better ways to deal with laid-off workers, like retraining and re-employment.”
Experts say most legal bankruptcies involve small or medium-sized enterprises where the social impact is limited. Liquidation-style bankruptcies also far outweigh restructurings in terms of absolute numbers. But courts face strong incentives to keep larger enterprises operating.
In general, bankruptcy offers greater protection to borrowers compared with dealing with creditors out of court. Without bankruptcy, a single creditor can block a proposed debt restructuring or writedown, even if most others agree. By contrast, judges have the authority to override holdouts and impose a settlement on all parties.
“Once a court accepts a bankruptcy petition, creditors’ sealing off an office or seizing collateral is immediately halted, so it allows a company to return to production,” said Mr Li.
