Intelligent home energy management systems should be able to reduce energy bills by up to 28%. (The Economist)
Kauffman Foundation launches Energy Innovation Network so entrepreneurs can accelerate the clean energy revolution
SWFs’ investments rose from $10bn in first half of 2009 to $50bn in second half, but still down 3% for year (IFSL)
It’s Time for Swaps to Lose Their Swagger (NY Times Gretchen Morgenson)
Very poor people in emerging economies surprisingly interested in mobile financial services (McKinsey)
Book Excerpt from ‘The Responsibility Revolution’ – Don’t Ignore the Transparency Imperative (via strategy+business)
Credit Suisse Annual Survey Finds Hedge Fund Managers Moderately Optimistic About Inflow Growth, Fees
Technorati Tags: credit-default-swaps, energy-efficiency, Hedge-Funds, mobile, Sovereign-Wealth-Funds, SWF, transparency, Twitter
As U.S. home prices show early signs of stabilization, so are subprime asset values, according to a new Fitch Index of US subprime assets.
Fitch’s total market U.S. subprime Index stood at 8.34 as of Sept. 1. Though higher than the all-time low of 7.27 on May 1, the index is still significantly lower than the opening value of 42.56 on Nov. 1, 2007.
In general, the synthetic subprime market is still seeing more activity than its cash equivalent and hence can be used as an effective proxy for asset values – Fitch Managing Director Thomas Aubrey.
Fitch Solutions says its five new indices, which are presented as cash prices, provide a total market view of all vintages as well as vintage specific indices thus providing a broader insight into the US subprime market.
The indices will be made available within Fitch Solutions ABCDS pricing service (Subscription required) which provides consensus pricing for credit default swaps of asset backed securities (ABCDS) with a complementary benchmark service to provide a derived price for illiquid assets.
Coverage includes:
Residential Mortgage Backed Securities (RMBS)
Commercial Mortgage Backed Securities (CMBS)
Credit Cards
Automobiles
CDOs
U.S. RMBS Subprime Indices
Technorati Tags: asset-backed-securities, auto loan ABS, CDS, commercial mortgage-backed securities, credit card debt, credit-default-swaps, residential mortgage-backed securities, structured-finance, subprime
Excerpted from Market Derived Signal: Wider CDS Spreads May Indicate That Target Corp. Is Off The Mark
A recent widening of the spread on Target’s (NYSE: TGT) credit default swaps is raising concern as the spread is moving closer to a “BBB” rating level than the “A+” Standard & Poor’s corporate credit rating it has held for the past three years.
Target’s CDS was similar to other CDS spreads in the market during the past year. Spreads widened in fall 2008 and have generally tightened since then. Last summer, Target’s CDS spreads were close to the ‘A’ consumer discretionary benchmark but widened toward the ‘BBB’ consumer discretionary benchmark in November 2008 as the market became uneasy. With the tightening since then, Target’s CDS spreads have slowly crept closer to its ‘A+’ consumer discretionary benchmark. However, since mid-July, Target’s CDS spread began to widen again, possibly signaling concerns about consumer spending and the upcoming back-to-school season.
With the widening move, the spread crossed over the ‘A-’ consumer discretionary benchmark and is once again moving toward the ‘BBB’ consumer discretionary benchmark.
S&P highlights several factors of concern with Target:
- Target has relatively high leverage (3.1x debt to EBITDA and 57% debt to capital) compared with other retailers. Target also has lower margins (EBITDA margin of 9.4%), compared with Kohl’s (12.6%) and Nordstrom (11.9%), likely because the company is a discount retailer. Additionally, its three-year EBITDA growth is lower than that of Kohl’s and Nordstrom’s, which potentially reflects Target’s more mature status.
- In just over two years, Target’s margins have materially declined. Gross margins dropped 150 bps to 28.4%, and EBITDA margins are down 160 bps to 9.2% since year-end 2007. The margins decline was possibly owes to an adverse change in its sales mix.
- Target’s debt increased since fiscal 2007 as the company likely used proceeds to develop its credit business. During that time debt to capital increased to 57% from 39%, and total debt to EBITDA grew to 3.1x from 1.5x.
[ Target today reported better-than-expected earnings for the second quarter, though same-store sales fell 6.2 percent from a year earlier and credit card profits fell 15%.]
Technorati Tags: (TGT), CDS, credit-default-swaps, Target
Suggestions today that AIG’s equity value may be zero should come as no surprise to anyone who has read Michel Lewis’s account in Vanity Fair of how the firm’s Financial Products group dug itself such a big hole.
Lewis skewers former FP group head Joe Cassano, essentially arguing that Cassano’s tyranical control-freak management style effectively stifled any warning signs that AIG was becoming catastrophically exposed to credit default swaps insuring subprime mortgages.
It’s hard to know what Joe Cassano thought and when he thought it, but the traders inside A.I.G. F.P. are certain that neither Cassano nor the four or five people overseen directly by him, who worked in the unit that made the trades, realized how completely these piles of consumer loans had become, almost exclusively, composed of subprime mortgages.
In a note to clients Thursday, Citi Investment Research analyst Joshua Shanker said the continued risk of more credit default swap losses and its management’s eagerness to sell off businesses at a low value jeopardizes AIG’s equity position, Business Week reports.
“Such collateral calls could also pressure rating agencies to lower their credit ratings for the company, leading to a similar cycle to the one that the company experienced prior to the massive government intervention in the third quarter.\,” Shanker wrote.
He cut his price target on AIG stock to $14 from the split-adjusted target price of $36. Shanker maintained his “hold” rating.
Our valuation includes a 70% chance that the equity at AIG is zero.
Yves Smith offers some analysis at naked capitalism.
In a June 16 Update on AIG’s Capital restructuring, CreditSights was less pessimistic:
“We think it is likely that AIG’s systemic importance to the international financial system will result in the continued support of the U.S. Treasury and Federal Reserve though we note that there is a high degree of regulatory risk.”
Based on the current performance of AIGFP’s credit default swap portfolio as well as our discussions with AIG’s CFO and structured finance professionals, we believe that our previous negative equity valuation of AIGFP may have been overly punitive.
For more analyst comment on AIG, see Alacra Street Pulse.
Technorati Tags: (AIG), credit-default-swaps
CreditSights is maintaining its Overweight rating on US utility bonds. “Despite the challenges of lower usage, difficulty in asking for rate increases during hard economic times and the necessity of spending on maintenance and capex, most of our utilities should weather the storm relatively well, ” Creditsights says in Utilities: Why We Remain Overweight. “That does not mean that some will not be very stressed and others somewhat stressed. Despite coming challenges, the sector is still a relatively safe one, and, at least in Q1, also outperformed corporates as a whole.”
We expect a rough first quarter for many of our names, but the overall stability of the sector keeps it a good place to look for reasonably safe and attractive yields in a time of turmoil.
“….new issues of utility bonds are still offering fairly generous spreads, as many utilities are taking advantage of their ‘celebrity’ status and low interest rates to issue debt. At the moment, at least, utility bonds and CDS are offering, for the most part, the best of both worlds: safety and some performance. Also, they are issuing when many other sectors cannot or will not, giving investors relatively safe havens for cash at attractive spreads.”
Technorati Tags: credit-default-swaps, credit-markets, utilities
A central clearing house will do little to fix the mess created by the misuse of credit default swaps, according to a new paper* by Darrell Duffie, professor of finance at the Stanford Graduate School of Business. In the preliminary research paper, Duffie, and GSB doctoral student Haoxiang Zhu, conclude that the central clearing houses founded to rationalize the $27 trillion market for credit default swaps will not remove nearly as much risk as regulators might hope.
What’s more, despite a mistaken belief by some commentators, the clearing houses are unlikely to bring much needed transparency to trades of credit-default swaps, or CDS.
Duffie, a member of the Financial Advisory Roundtable of the New York Federal Reserve Bank, supported the establishment of a clearinghouse in testimony last year to the U.S. Senate Committee on Banking, Housing, and Urban Affairs. He still supports the idea, but maintains that the current implementation is flawed in several respects.
Although the worldwide market for credit default swaps is huge at $27 trillion, it has shrunk by more than 50 percent in the past year, and is too small—and the number of participating institutions is too small—for a clearinghouse that deals only in CDS to efficiently reduce counterparty risk, says Duffie.
Instead, Duffie and Zhu suggest that the clearinghouse should clear a much larger fraction of trades made in the $500 trillion market for over-the-counter (off-exchange) derivatives.
Our results make it clear that regulators and dealers should carefully consider the tradeoffs involved in carving out a particular class of derivatives, such as credit default swaps, for clearing.
*Does a Central Clearing Counterpart Reduce Counterparty Risk?
Technorati Tags: CDS, credit-crisis, credit-default-swaps, financial-regulation, structured-finance
As U.S. Treasury Secretary Timothy Geithner is proposing new “rules of the game,” e.g. much tighter regulation of heretofore unregulated entities, perhaps the least surprising aspect of the plan is the requirement that all derivatives be traded on a regulated exchange.
Regulators and the over-the-counter derivatives industry have been moving in that direction for months now, as participants recognize the need for uniformity and transparency in the wake of the credit-default swaps debacle that brought down insurer American International Group (NYSE: AIG).
The International Swaps and Derivatives Association is currently gearing up for a new framework for trading and clearing North American corporate CDS transactions, set to take effect April 8, according to a report by law firm Paul Weiss.
The new framework is aimed at further streamlining the market and preparing existing and future CDS trades for central clearing.
The ISDA has also published updates to its 2003 rules, referred to as the 2009 Supplement and the Big Bang Protocol, that have three main objectives:
- The establishment of credit derivatives “determination committees” for five ISDA regions, including the Americas, Japan, non-Japan Asia, Australia-New Zealand and EMEA (Europe, Middle East and Africa), to help resolve disputes.
- The launch of a standarized CDS auction settlement process across different credit derivatives transactions and credit events.
- The creation of 60-day credit event and 90-day succession event backstop dates for credit derivatives transactions to close a loophole that currently leaves investors exposed to basis risk.
The new framework for North American CDS that begins April 8 will result in more standardized trading and even a new acronym, “SNACs,” which stands for Standard North American Corporate CDS trades.
Dealers will be required to quote fixed coupons and upfront payments on SNACs and the contracts will have a standard quarterly termination date, similar to those for exchange-traded derivatives, of March, June, September and December, Paul Weiss said.
Legacy corporate CDS in North America will not fall under the new standards.
Technorati Tags: (AIG), CDS, credit-default-swaps, derivatives, Geithner, Hedge-Funds, ISDA, OTC trading, Paul Weiss, private-equity, shadow markets, Treasury plan, venture-capital
NERA Economic Consulting has a new working paper chronicling the history of the credit crisis. In typically clear-eyed fashion, NERA avoids any simple answers but identifies a confluence of contributory factors, illustrated with compelling charts.
A few highlights:
Opposing trends in housing prices and cost of credit led to a surge in subprime and other types of mortgage originations and securitizations until the deceleration occurred by the end of 2005 and beginning of 2006.
Starting in early 2000, housing prices adjusted for inflation began to increase to levels far exceeding the trends in rent and building costs, a key contributing factor to the current distress in the mortgage markets.
A $100 investment in the 07-01 BBB ABX (Credit Default Swaps) index in January 2007 was worth $5 in September 2008. This drop in value suggests significant losses on the underlying collateral that have not yet completely materialized.
NERA concludes by saying that “even after the credit crisis is over, it is not clear that the financial markets will ever be the same again.”
The free paper How Did We Get Here? The Story of the Credit Crisis is well worth a read.
Technorati Tags: credit-crisis, credit-default-swaps, housing, mortgages, subprime
Visitors to Research Recap can’t seem to get enough of George Freidman’s new book looking ahead to the next 100 years. Our Jan 15 post on Freidman’s The Next 100 Years, was the most popular for the second straight week. Freidman predicts that the US will not be usurped by China or any other country as the leader global power in the coming century. He also sees Japan, Turkey, Poland and Mexico as rising powers, each for different geopolitical and demographic reasons.
The Motley Fool’s report on several large-cap companies at risk of bankruptcy, also reappeared, moving up to the second spot, followed by our Research Roundup of the mostly negative initial reaction to Tim Geithner’s Financial Stability Plan, which landed with a thud last week. While later comments from the likes of CreditSights, Standard & Poor’s, Moody’s, and Oxford Analytica were more positive, Geithner is now in the unenviable position of pushing a rock up a hill after the plan’s lukewarm reception.
Other new entrants were McKinsey’s analysis showing that global M&A activity is holding up rather well in the current recession, and Fitch Ratings’ Late Payments on US Credit Cards Reach Record High Levels.
Research Recap Quote of the Week:
With these credit default swaps, I never know whose legs I’m supposed to break. – Character in New Yorker cartoon by Paul Noth.
Technorati Tags: credit card ABS, credit card debt, credit-default-swaps, Financial Stability Plan, financial-regulation, M&A, Stratfor, Zeitgeist
Research Recap’s most viewed posts, attracting thousands of visitors, reflect the credit crisis that spread from the subprime mortgage meltdown throughout the US financial system and into markets and economies worldwide.
All of the top 10 posts and 19 of the top 20 were related to the credit crisis, and it was not until number 26 that a more positive post made the list.
Interestingly, some posts from early in 2008 remained well-read throughout the year as readers tried to make sense of the deepening credit crisis, particularly primer posts like the Research Primer on Credit Default Swaps and the IMF analysis of the role of hedge funds in the subprime crisis.
Research Recap’s Most Read Posts of 2008 were:
1. Warning Signs Seen in Rising Credit Card Delinquencies
(CreditSights – Mar 27)
2. Lenders Slow to Address Florida Mortgage Defaults
(Barrons - Apr 21)
3. Role of Hedge Funds in Subprime Crisis Examined
(International Monetary Fund – December 2007)
4. US Mortgage Insurers’ Troubles May Worsen
(Fitch Ratings – Jul 17)
5. 2007 Worst-Ever Vintage for US Subprime, Alt-A RMBS
(Standard & Poor’s Ratings Service – May 23)
6. Research Primer: Credit Default Swaps
(Fitch Ratings – Jan 14)
7. Alt-A Borrowers Looking More Like Subprime than Prime
(Fitch Ratings -Jun 2)
8. Global Junk Bond Default Rate Doubled in First Five Months
(Moody’s Investors Service – Jun 10)
9. Subprime-Related Litigation on the Rise
(NERA Economic Consulting – Jul 15)
10. What Lies Behind Higher US Negative Equity, Default Rates
(Bank for International Settlements -Dec 9)
With the credit crisis far from over, we would expect it to be a prominent topic again this year. With a new administration in place in Washington, we also expect to see infrastructure and greentech emerge as hot topics.
Click here to see The Top Posts of 2007.
Technorati Tags: Alt-A, asset-backed-securities, corporate bonds, credit card ABS, credit-crisis, credit-default-swaps, credit-markets, delinquencies, Hedge-Funds, junk-bonds, litigation, mbs, mortgages, negative equity, structured-finance, subprime, top posts, Zeitgeist
