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They Are Junk No More

18 September 2017 by lberuti

For once it was a quiet week-end in terms of headlines. There was no missile launch nor any tornado hitting the US shores. We saw last week how easily investors brushed aside worrying headlines, and this morning it seemed that no news was good news. Without any specific catalyst, the tone was firm in the market from the word “go” and risky assets traded positively across the board. Credit was further helped by S&P’s upgrade of Portugal to BBB- from BB+. The outlook is stable, and the action ends Portugal’s spell among junk rated credits which started in January 2012. The yield of 10-year Portuguese government bonds was 35bps lower at 2.4% and Portugal’s 5-year risk premium was 13bps tighter at 133bps. It lifted peripheries’ spirit, and prompted some outperformance among financials. It triggered some short covering, particularly on BCPPL (Banco Comercial Portugues) which saw its 5-year CDS tightened 31bps to 189bps.

The End Of The Game

15 September 2017 by lberuti

A number of TOY’s (Toys R Us) suppliers are said to have cut back their shipments to the retailer. TOY has allegedly open talks with lenders over a new loan that would allow the company to stay open while it works out a recovery plan through bankruptcy proceedings. It has thus become extremely expensive for vendors to insure their shipments, as they often rank among the creditors with the lowest priority for getting repaid if a company seeks court protection. Their decision on whether to continue shipping goods will play a decisive part in determining TOY’s fate. Investors rushed to snap up protection on the back of these rumours. They pushed the cost of the 5-year protection up 13pts to 61pts upfront (it costs $61 upfront to insure $100 of debt plus another $5 annually). They also flattened dramatically the risk premium curve, making it almost as expensive to insure debt over 1 year than it is to insure it over 5. The market only sees 1 chance out of 3 that TOY will survive over the next 12 months.

They Will Not Be Missed

14 September 2017 by lberuti

Credit Default Swaps (CDS) referencing NSINO ( Norske Skogindustrier ) were triggered in July after the company missed a €17mln interest payment on one of the bonds it had issued. It was the second credit event on the name in 18 months. The first followed a debt restructuring which did not address any of the issues facing NSINO and was merely designed to accommodate a group of bondholders who, at the time, also owned protection against a default of the company. It left the papermaker struggling with $1Bln of debt and slumping newspaper readership. A few days ago, the long running saga took another twist when senior secured bondholders demanded immediate repayment of their notes after NSINO unveiled another debt restructuring proposal. These senior secured bondholders have a claim over most of NSINO’s asset, including its seven paper mills. Even though they are yet to take possession of any assets, that latest twist, which paves the way for a complicated and unpredictable process, spooked investors ahead of the auction which was held today to determine the payout of the CDS. They almost zeroed the expected value going forward of any existing debt other than the senior secured notes, setting the recovery at 2.25%. An investor who had insured 10M€ of debt will get 9.775M€. It was a brutal end to a long agony on that CDS.

Nordstrom Wants To Focus On Nordstrom

13 September 2017 by lberuti

Though JWN’s (Nordstrom, Inc) sales have slowed, the company has generally performed better than most department store chains and since June JWN’s founding family has been mulling solutions to go private. When the rumours first surfaced, JWN’s 5-year risk premium jumped from 160bps to 320bps but it has then trended back tighter and it was trading at 230bps yesterday. Overnight press reports mentioned that family members, who own more than 30% of the retailer, are close to picking a private equity firm, Leonard Green & Partners, to help put a buyout together. Leonard Green would provide $1bln in equity which would help raising $7 to $8bln in debt in order to finance a deal that could be formally announced in a couple of weeks. The perspective revived investors’ worries, and they pushed JWN’s 5-year risk premium 61bps wider to 293bps, en route to exceed the widest levels of this summer.