Australian Flooding - Sugar, Grain and Coal Affected

On the wire more news about the flooding in Australia.  Bottom line:  If things don't clear up soon, the ports will be down longer than expected and coal, sugar and grain markets will be affected.  Keep an eye on the news out of Queensland and the prices of the affected goods.

SYDNEY (Reuters) - Flood water rose across Australia's northeast on Friday, covering an area bigger than France and Germany combined, inundating 22 towns and stranding 200,000 people, and closing one of the country's major sugar export ports.

Flooding has already shut major coal mines in Queensland state and its biggest coal export port, forcing a long list of miners such as Anglo American and Rio Tinto to slow or halt operations.

The worst flooding in about 50 years has been caused by a La Nina weather pattern which has resulted in torrential rain over the past two weeks across northeast Australia.

"This disaster is a long way from over," Queensland state premier Anna Bligh told reporters on Friday.

"We now have 22 towns or cities that are either substantially flooded or isolated. That represents some 200,000 people spanning an area that's bigger than the size of France and Germany combined," said Bligh.

Prime Minister Julia Gillard toured the flood-hit sugar city of Bundaberg, which closed its port on Friday after flood debris was washed downstream into shipping channels and damaged navigation beacons.

"This is a natural disaster across Queensland," said Gillard in announcing a A$1 million ($1 million) government contribution to a flood aid appeal which now totals A$6 million.

Shipments of sugar from Australia, one the world's leading exporters of the sweetener, have been disrupted because of Bundaberg's port closure. The port normally ships about 400,000 tons of raw sugar annually, with three 30,000-tonne vessels due to arrive in the next few days.

"If the port is closed for only a few days it won't be a big issue but any extended delay would cause some concern," said Brian Mahoney, an executive with Marybrough Sugar Factory Ltd that ships through Bundaberg.

Possibly as much as half the Australian wheat crop or about 10 million tons has been downgraded to less than milling quality because of rain damage, tightening global supplies and helping send prices for the grain up about 45 percent this year, the biggest surge since 2007.

The floods have also pushed coking coal and thermal prices sharply higher and tight markets are keeping a close eye on further disruptions. Queensland's ports have an annual coal export capacity of 225 million tons.

Australia is the world's biggest exporter of coking coal used for steel-making and accounts for about two-thirds of global trade. Its is also the second-biggest exporter of thermal coal used for power generation. 

Traders are Functioning Psychopaths

Someone just sent me this article (little snips here, link to the article at the end) and I found it to be pretty straightforward.  Most people in the business know that emotions serve only to screw up returns (or better put, skew risk/return to the downside), but here at last we have academics telling us what we already know:  traders are emotionally stunted.  I greet this with open arms and a warm smile as it vindicates me on a number of fronts.


Enjoy!

CITY brokers have never enjoyed the best of reputations. The popular image is of a brash and boastful twentysomething with more money than sense or sensitivity.

But now a study by a group of eminent American academics suggests that star performers on the stock market may be even worse and could best be described as “functioning psychopaths”.

In a study of investors’ behaviour, the team from three US universities suggest that people with brain damage can make better financial decisions than the rest of us.

Market traders may feel slighted, but this study comes from the growing field of neuroeconomics, which investigates the mental processes that drive financial decision-making.

The experts found that emotions can make investors play it too safe. They claim the emotionally impaired are more willing to gamble for high stakes.

 Antoine Bechara, an associate Professor of Neurology at Iowa, suggested that successful investors in the stock market might plausibly be called “functional psychopaths”.

These are individuals either much better at controlling their emotions or, perhaps, not experiencing them with the same intensity as others.

 Traders

Allstate Sues Bank of America - Its Not Our Fault Litigation

From the "It Couldn't Be Our Fault" files, we have a new entry.  Now, I am not saying that the loans were good and did not pose risks, but come on, you honestly didn't know there could be problems?  I remember hearing terms like "liar loans" and other terms of affection during that period.  Basically, no one expected HPD or home price depreciation.  It was the "prices go up always" mentality.   Makes me wonder what type of analysis was done.  There were no stats on the loans?  That I am aware, they broke down the pools and you could see the LTVs, FICOs etc.  


Mine is not a popular view, admittedly.  I realize that suing issuers is all the rage as some of the biggest names have done it, but do the investors have no liability here?  I was an institutional investor for 15+ years, and I would not pursue litigation if the error was mine.  If it were fraud and we had no information on it or could not have picked it up through our analysis (which was thorough and involved more than a cursory rating review) then it was go time (an example was the split up of Tyco).  If you didn't do your homework, take your lumps.

(Reuters) - Allstate Corp has sued Bank of America Corp, its Countrywide lending unit and 17 other defendants for allegedly misrepresenting the risks on more than $700 million of mortgage securities it bought from Countrywide.

Allstate, the largest publicly traded U.S. home and auto insurer, alleged it suffered "significant losses" after Countrywide misled it into believing the securities were safe, and the quality of home loans backing them was high.

The lawsuit also names several former Countrywide officials as defendants, including longtime Chief Executive Angelo Mozilo. Countrywide was the largest U.S. mortgage lender before Bank of America bought it in July 2008.

Allstate said that starting in 2003, Countrywide quietly decided to boost market share and ignore its own underwriting standards by approving any mortgage product that a competitor was willing to offer, in a "proverbial race to the bottom."

Countrywide then passed on the added risks to investors who bought debt backed by the mortgages, Allstate said.

Leveraged Loans - Another Good Year

Leveraged loans have made a tremendous comeback in the last two years (yeah, what hasn't) and I fully expect that we will see a continuation of this in 2012.  If you want to play in the high yield markets, why not play where you might actually get some covenants (there is a reason loans do better in bankruptcy and earn more fees along the way).  The only issue for some institutional investors is that loans are not securities and many mandates specify securities as permissible investments.  Loans also help in a rising rate environment as they float and will float up (although keep this in mind when you are doing your analysis as the float up - unless swapped - can cost a company dearly).

(Bloomberg) Leveraged-loan issuance in the U.S. more than doubled this year, as private-equity firms sought funds for buyouts and borrowers refinanced debt amid a rebound from the worst financial crisis since the Great Depression.

More than $369 billion of loans were raised as of Dec. 28, led by financing for the purchases of Tomkins Plc and Burger King Holdings Inc., up from $170 billion in 2009, according to data compiled by Bloomberg. Interest rates fell to 3.91 percentage points more than the London interbank offered rate on average, from 10.28 percentage points at the end of 2009, according to Standard & Poor’s Leveraged Commentary and Data.

The S&P/LSTA U.S. Leveraged Loan 100 Index returned 9.35 percent this year as of Dec. 28, following last year’s 52.23 percent. In 2008 the index lost 28.2 percent. Gains for 2009 compare with 14.7 percent for junk bonds, based on the Bank of America Merrill Lynch U.S. High Yield Master II Index. 

 Leveraged loan index vs. SPY.  (Courtesy Bloomberg).

Rare Earths - No Good News Goes Unpunished

More news out of China today on rare earth quotas.  Quotas are getting cut (again) which will shrink supply.  Normally, I would expect this to be greeted with REE stocks a jumping like sailfish.  Today, a jump then a dive.

(Reuters) China's Commerce Ministry said on Wednesday it would not issue more export quotas for foreign companies as it did last year and the first set of volume totaling 14,446 included those for foreign firms.

That means China's first batch of export quotas for rare earth fell by 35 percent as compared with the volume issued a year-ago.

In March, the ministry issued 5,978 tons of quotas for foreign companies, in addition to 16,304 tons of the first batch of 2010 export quotas issued to Chinese companies in late 2009.

"We have included the volume (for foreign firms) in the first batch of quotas and will do so in future," said one official with the ministry's export division of industry products. He said the ministry will issue more rare earth export quotas for this year, but declined to give the total volume.

The ministry said it has not decided full-year rare earth export quotas and urged concerned parties not to estimate full-year quotas by just looking at the first set of quotas, in an apparent move to soothe market concerns.

So the reaction (in terms of Molycorp -MCP):

Spike - splashdown.

Citigroup - Taking debt Out of Bad Bank

As I own Citigroup equity and preferred, I saw an interesting item come up on my alerts today.  Citi filed an 8-k announcing an exchange and consent offer for $392 million of CitiFinancial Credit (formerly Commercial Credit Corp) debt.


Essentially, this is an exchange of Citi Holdings Co ("Bad Bank") into Citigroup notes.  It would appear to me that Citigroup is preparing to shed assets of Citi Holdings and the buyer is not going to assume the debt associated with the assets.


The exchange and consent memorandum is expected out starting today - I haven't found it on EDGAR, but if anyone wants to forward it, that would be great.




From the 8-k:

The purpose of the Exchange Offer and Solicitations is to provide Citi Holdings greater flexibility with respect to the business and assets of CitiFinancial Credit Company.

The exchange details: 

Eligible Holders have the opportunity to either (i) exchange any and all of their outstanding Old Notes for Citi’s intermediate term benchmark notes (the “New Citigroup Notes”), thereby delivering consents, or (ii) deliver consents for the Consent Payment without tendering their Old Notes, upon the terms and subject to the conditions set forth in the Offering Memorandum and Letter of Transmittal.  Eligible Holders who deliver their Old Notes in exchange for New Citigroup Notes in the Exchange Offer will not be eligible to receive the Consent Payment as the Early Exchange Consideration will be consideration for such Eligible Holder’s consent (provided that the Eligible Holder tenders the Old Notes prior to or on the Early Tender Date (as defined below) and does not withdraw them prior to the revocation deadline (as described in the Offering Memorandum).

Munis - Can't Get Enough Bad Coverage

A little story from the New York Times.  We are starting to hear more and more of this kind of talk (Ms. Whitney aside) which is certainly not helping the municipal market.  One thing to consider, however, is that most of the towns mentioned are small and have little debt outstanding.  Stay away from the smaller towns, especially smaller towns with special projects outstanding - or the debt of the projects themselves.  Opportunity or disaster - maybe a little bit of both.

(NYT) HAMTRAMCK, Mich. — Leaders of this city met for more than seven hours on a Saturday not long ago, searching for something to cut from a budget that has already been cut, over and over.

The political leaders of this old working-class city almost surrounded by Detroit are pleading with the state to let them declare bankruptcy, a desperate move the state is not even willing to admit as an option under the current circumstances.

“The state is concerned that if they say yes to one, if that door is opened, they’ll have 30 more cities right behind us,” Mr. Cooper said, as flurries fell outside his City Hall window. “But anything else is just a stop gap. We’re going to continue to pursue bankruptcy until the door is shut, locked, barricaded, bolted.”

“There could be many cities in this position next year,” said Summer Hallwood Minnick, director of state affairs for the Michigan Municipal League, who added that in this state, cities had already struggled with billions less than expected in state revenue sharing. “All our communities have done is cut, cut, cut. They’re down to four-day workweeks and the elimination of parks, senior centers, all of that. So if there’s anything else that happens, they will be over the edge.”

This month, the authorities in Rhode Island said the City of Central Falls could face bankruptcy if immediate, drastic changes — perhaps the city’s annexation into a neighboring municipality — failed. Some leaders in Harrisburg, Pa., which owes millions in debt payments tied to an incinerator project, say bankruptcy may eventually be the only choice.

Prichard, Ala., which stopped paying monthly checks to retired city workers when its pension fund ran out last year, is appealing a bankruptcy judge’s ruling that it did not qualify for Chapter 9 under Alabama law.

Only about 600 cities, counties, towns and special taxation districts have filed for bankruptcy (known as Chapter 9 for these sorts of entities) since 1937, said James E. Spiotto, a municipal bankruptcy expert at Chapman & Cutler, a law firm in Chicago, and fewer than 250 in the last three decades. In part, it can be hard — even impossible — to do: about half the states have statutes authorizing such filings, but some of them set limits or require elaborate approval processes. Other states have no specific provision allowing cities to pursue bankruptcy, and at least one, Georgia, bans such moves. 

 Full article here: NYT Munis

Corn - Highest and Best Use

Bloomberg story on ethanol following corn higher.  Imagine if people actually ate corn?  Could be inflationary.  Yep, great use of a staple crop.

(Bloomberg) -- Ethanol futures rose for the 13th straight day, reaching an eight-week high as more expensive corn signaled higher manufacturing costs for producers.

The biofuel followed corn higher on speculation that hot, dry weather in Argentina will harm crops. Corn is the primary ingredient used to produce ethanol in the U.S. One bushel distills into about 2.75 gallons of the gasoline additive.

“A lot of focus is on South American weather right now,” said Matt Janney, a trader at Citigroup Global Markets Inc. in Chicago. “If your input costs are going up, of course you want to get a higher price.”

Denatured ethanol for January delivery rose 1.3 cents, or 0.6 percent, to settle at $2.314 a gallon on the Chicago Board of Trade, the highest price since Nov. 9 and the longest streak of gains since Oct. 29, 2007. Futures have climbed 19 percent this year.

Corn futures for March delivery rose 1.25 cents, or 0.2 percent, to close at $6.1525 a bushel, the seventh straight gain. The commodity has gained 48 percent this year.

An average ethanol mill in Iowa is losing 4 cents on every gallon produced while an Illinois plant is earning a penny a gallon on a spot basis, according to Ag Trader Talk, an online grains information service in Clive, Iowa.

Ally Pays Fannie - Robbing from Peter...

Recall that Ally is, for the most part, owned by Uncle Sam.  This is kinda like a little New Year's gift to himself.  While the payment is somewhat more than Ally had set aside, there is no way that our benevolent government ("OBG") would have financially harmed its investment.

(NYT) Ally Financial said Monday that it would pay $462 million to settle buyback claims on $292 billion in home loans it sold to Fannie Maebefore the industry tightened underwriting standards in the wake of the financial crisis.

GMAC Mortgage, which is part of Ally’s Residential Capital unit, originates and services loans then sells them to the government-sponsored mortgage companies Fannie Mae and Freddie Mac. As part of their repurchasing deals, Fannie and Freddie have the option to challenge Ally’s underwriting standards. If successful, they could have required Ally to buy back the loans in question.

The settlement covers loans that GMAC serviced for Fannie Mae before June 30 and all mortgage-backed securities that Fannie Mae bought from the company. The $462 million is slightly more than the reserves that Ally had set aside to cover a potential deal.

Allied Irish - Welcome to Hasbeenville

Well, another one bites the dust.  AIB will be 93% owned by the government in the coming days.  With equity essentially dead on the vine, it will be interesting to see how this "trickles up" the capital structure.  One of my worst value (trap) bets of 2010, as I thought they might be able to raise the required capital and stay quasi-independent.  Bad call Mike.

(Reuters) Ireland's government said on Thursday it would pump 3.7 billion euros into Allied Irish Banks (AIB) setting it on course for nearly 93 percent ownership of what was once the country's largest publicly traded lender.

AIB will be required to raise a further 6.1 billion euros ($8.01 billion) of core Tier 1 capital before the end of February to get its capital ratio up to 14 percent, under the terms of Ireland's bailout from the European Union and the IMF.

AIB, a former stock market darling, will have to cancel its listing on the main Irish and British stock markets and will apply instead for a listing on the enterprise securities market of the Irish exchange to give shareholders access to a trading facility for their stock.

"This capital is essential to allow AIB to fulfill its role in supporting the Irish economy," Finance Minister Brian Lenihan said in a statement.

AIB's aggressive courtship of property developers proved its undoing when Ireland's real estate market bubble burst, triggering huge industry-wide losses that forced the government to seek an 85 billion-euro bailout from the EU and the IMF.

Shares in Allied Irish Banks dropped 19 percent to 32 euro cents following the announcement. The stock hit a peak of over 24 euros in 2007, when Ireland's property boom was at its height.

The government is using funds from the National Pension Reserve Fund (NPRF) to bulk up AIB's core Tier 1 capital ratio, a key measure of financial strength, to 8 percent ahead of a year-end deadline set by the central bank.

In return, the NPRF will get ordinary shares boosting its current 19 percent stake in the bank to nearly 50 percent.

The NPRF will also get convertible non-voting shares which will be converted into ordinary stock, giving it a near 93 percent holding, once AIB completes the sale of its Polish interests to Spain's Santander.

Third Quarter GDP - My Take

Ok, GDP out this morning - everyone and their brother will be analyzing and pontificating on this, so I will leave most of it to them.  I will, instead, just focus on what I am looking at in the release.  The bottom line, in my view, is that growth is decent but not truly robust.  Numbers are no longer coming off a significantly weak base.  I am still cautious in my expectations, but not gloomy nor pessimistic. 

Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $26.0 billion in the third quarter, compared with an increase of $47.5 billion in the second quarter.  Current-production cash flow (net cash flow with inventory valuation adjustment) -- the internal funds available to corporations for investment -- decreased $68.4 billion in the third quarter, in contrast to an increase of $61.1 billion in the second.

Ok, we have to expect a slowdown from the 2nd Q pace, but this is a little much.  The funds available for investment is especially troubling as cost cutting measures cannot propel growth much longer.   But the bright spot:

Domestic profits of financial corporations increased $34.6 billion in the third quarter, in contrast to a decrease of $3.4 billion in the second.  Domestic profits of nonfinancial corporations increased $0.3 billion in the third quarter, compared with an increase of $48.2 billion in the second.  In the third quarter, real gross value added of nonfinancial corporations decreased.

I am still keen on the banks across the capital structure as I do not believe risk premiums fully reflect the improvements to the business and the capital positions.  I primarily focus on the bigger banks as many of the regionals  have more work to do.  Now, with that in mind, we still have BASEL to contend with and coming regulation that could diminish trading profits and reduce profits on the retail side.

Now, for me the tricky part is deciphering the following:

The change in real private inventories added 1.61 percentage points to the third-quarter change in real GDP, after adding 0.82 percentage point to the second-quarter change.  Private businesses increased inventories $121.4 billion in the third quarter, following increases of $68.8 billion in the second quarter and $44.1 billion in the first.

 Was the inventory build in expectation of future sales or as a result of lower than expected sales?  I have to think it is a combination of the two, judging from Q3 conference calls.  Corporate leaders did not show the bubbly confidence one would expect if they were building inventories for future growth.

Ireland - Which Way is Up?

Ah, the daily grind of trying to interpret just how screwed Europe is.  Forget another warning on Greek debt, forget shots across Portugal's bow, forget increased funding costs for Spain - lets just address (for the time being) the luck 'o the Irish.


Headlines ripping across saying the ECB has warned that junior creditors will be eating losses on AIB sub debt (except them, of course as sub debt has been used for loan collateral).  Then, a little while later we see a story that Ireland's desire to force pain on junior creditors might be unconstitutional.


Confused?  So am I.  Houston, we've got a problem here.  If the banks are, essentially, insolvent, junior creditors should get hit.  Ireland wants to ensure they will.  Problem number one is that the ECB will get hit too.  See, if your collateral for loans gets whacked, there has to be a margin call.  Who in Europe is going to pony that one up?  Second problem is the whole notion of constitutional.  No problem here, we (the US) subverted our constitution when the govt (administrative branch) stole GM and Chrysler from creditors, essentially creating a sub-rosa bankruptcy plan (I wrote on that a long time ago here: chrysler-a-sub-rosa-by-any-other-name).  Constitution, we don't need no stinking constitution.   


Bottom line: Its going to be interesting and the WHOLE Euro region is going to continue to come under pressure in debt and currency markets.  I would sideline here, maybe look for cheap - but solid - debt and equity stories, for high beta, maybe some T1 or LT2 debt.

(Reuters) Ireland risked a fresh complication to radical plans to overhaul its financial sector on Tuesday with a controversial new banking law facing a possible constitutional veto by the country's top court.

The legislation gives the state wide-ranging powers to restructure the banking industry as part of an 85 billion euros ($112 billion) EU/IMF bailout package.

But its scope has raised objections from the European Central Bank (ECB) and opposition politicians, who warned it will make Finance Minister Brian Lenihan a "one-man legislature.

President Mary McAleese has held off signing the bill into law amid until she hears advice about its constitutionality on Tuesday from the Council of State, a panel of top political figures including the prime minister, attorney general and High Court President.

She will then decide whether to ask the Supreme Court to rule if the law or parts of it is constitutional, a move which could delay plans by government for junior creditors in Irish banks to swallow losses on their investments.

Her decision is expected later on Tuesday or Wednesday. The cut-off date for her to either sign the bill or send it to the court is Thursday.

But today we also read (again from Reuters):

Allied Irish Banks' junior bondholders will have to take a big hit in a future restructuring, the European Commission warned on Tuesday as it rubber-stamped billions of euros in state aid for Irish banks.

Brussels' threat triggered a fall in Irish sovereign debt, stoking fears the continuing financial crisis means more pain, including the spectre of forced discounts for investors, despite an 85 billion euro ($112 billion) EU/IMF bailout. 

FT takes a Swipe at Munis

Another shot at the municipal market.  When all you hear is bad news, opportunity is knocking.

Convention centres, sports venues and other US public facilities that do not provide essential services are a source of potential defaults in the $2,900bn municipal bond market, Fitch Ratings said in a report to be released on Tuesday.

In better times, cities and counties guaranteed the financing for these projects, but, in a downturn, they may struggle or decide not to support them, the rating agency said.

Schools and courthouses are considered to be among municipalities’ core services. But bonds backed by so-called “non-core” services make up about 10 to 15 per cent of the market, estimates Matt Fabian, managing director at Municipal Market Advisors, a research group.

Most are small and relatively obscure, but they have already led to high-profile distress. Problems in Harrisburg, the capital city of Pennsylvania where some officials have warned of bankruptcy, were tied to debt that the city guaranteed for a trash incinerator. When the project’s revenues failed to cover the debt payments, Harrisburg failed to honour guarantees on the debt.

“If a municipality is guaranteeing a project that is outsized and not serving a core function, there is a likelihood that in financial duress, the municipality may not support it,” said Eric Friedland, group credit officer of US public finance at Fitch.

FT on Munis 12-21-10

Mining Victory in Australia

A victory for ore and coal mining companies in Australia.  Essentially, the government has restricted its ability to raise taxes/royalties in the future.   This adds to the attractiveness of the mining space across the capital structure.


WSJ:

Australia's mining giants won support on key concessions in the battle over taxes on the country's $71 billion iron-ore and coal-mining industry, dealing a blow to government efforts to limit credits on future royalties.

The tax proposals have been a flashpoint of national debate this year, prompting the ouster of former Prime Minister Kevin Rudd and almost toppling the now minority Labor government.

The government's Policy Transition Group, chaired by former BHP Billiton Chairman Don Argus, said after five months of consideration that future royalty increases imposed on mining companies by Australia's state governments should be credited against federal taxes.

The government had previously insisted that only current royalties, not future ones, would be credited to the miners.

The Minerals Resource Rent Tax will impose an effective tax of 22.5% on mine operating profits more than 7% above the long-term government bond rate—equivalent to a profit margin of 12.56% based on the current yield on 10-year government debt—once miners earn more than 50 million Australian dollars a year in profits. In contrast to the previous, it will apply only to coal and iron ore—the most-profitable mined commodities.

BMO Takes Out M&I - My Thoughts

I fully expect to see more M&A in the regional space by stronger capitalized foreign banks as there is value to be had if you can inject capital and withstand balance sheet pressure.  I also expect tier 2 domestic banks to buy the regionals (PNC/RF rumor...).  One interesting way to play this is through the hybrid securities of regionals.  If the bank is taken out by a stronger player (especially foreign) then the lack of tier 1 capital status could lead to tender/call/redemption of the hybrids.

(WSJ) Bank of Montreal, Canada's fourth-largest bank in assets, said it is buying Milwaukee, Wis.-based lender Marshall & Ilsley Corp. in a share swap valued at US$4.1 billion, making a long-anticipated move to expand its operations in the U.S.

BMO said Friday it is offering 0.1257 of a share for each M&I share. Based on Bank of Montreal's closing stock price in Toronto Thursday of C$62.05, the deal values M&I at US$7.75 a share. To keep capital strong after the acquisition, the bank plans to issue an additional C$800 million in equity before the deal closes prior to July 31, 2011.

BMO also will repay around US$1.7 billion that M&I received from the U.S. government's Troubled Asset Loan Program.

The purchase bolsters BMO's position in the Midwestern states, where it's operated Chicago-based Harris Bank since 1984. The acquisition nearly doubles BMO's deposit base in the U.S., to US$92 billion, and more than doubles BMO's branches in the U.S., to 695.

It is the latest in a string of U.S. purchases by Canadian banks, which have weathered the financial crisis and recession far better than most of their peers to the south.

European Ratings Tour

So lets review the week in European credit ratings (all via Moodys):

Moody's Investors Service has today downgraded Ireland's foreign- and local-currency government bond ratings by five notches to Baa1 from Aa2. The outlook on the Baa1 rating is negative. Today's rating action concludes the review for possible downgrade that Moody's had initiated on 5 October 2010.

Moody's negative outlook on the ratings of the government of Ireland is based on our forward looking view on the risk that the Irish government's financial strength could decline further if economic growth were to be weaker than currently projected or the costs of stabilizing the banking system turn out to be higher than currently forecast.

Moody's has today also downgraded Ireland's short-term issuer rating to Prime-2 (commensurate with a Baa1 debt rating) from Prime-1. Ireland falls under the Eurozone's Aaa regional ceilings for bonds and bank deposits, which are unaffected by the Irish government's downgrade.

Should Ireland's adjustment capacity prove to be insufficient to stabilize debt metrics in the foreseeable future, a further rating downgrade would follow. Moody's will closely monitor the specific measures taken by the government as part of the fiscal consolidation plan. Moreover, a severe deterioration in the country's debt metrics in the event of ongoing support needs for the banking system would exert further downward pressure on the rating. Finally, Moody's will also be monitoring the evolution of plans for the long-term support mechanism under discussion within the EU to determine whether there are any developments that might undermine its external support assumptions.

Then on to Greece

Moody's Investors Service has today placed Greece's Ba1 local and foreign currency government bond ratings on review for possible downgrade. Greece's country ceilings for bonds and bank deposits are unaffected by the review and remain at Aaa (in line with the Eurozone's rating).

Moody's decision to initiate this review was prompted, despite significant progress in implementing a very large fiscal consolidation effort, by the increased uncertainty over (1) Greece's ability to reduce its debt to sustainable levels given the recent substantial upward revision in debt levels; (2) the substantial revenue shortfall that we have observed in 2010; and (3) the level and conditions of ongoing support that would be available to Greece in the event that its market access remains cut off. Therefore, Moody's review will focus on the factors, namely nominal growth and fiscal consolidation, that will drive the country's debt dynamics over the next few years. It will also consider implementation risk, which appears to be particularly high in 2011 for both political and administrative reasons.

Moody's says that a multi-notch downgrade would be possible if it concludes that there is an increased risk that Greece's debt-to-GDP ratio will fail to stabilize in the next three to five years, or that there is a greater risk that EU support will turn out to be less strong after 2013 than the rating agency had previously assumed.

And Up to Spain:

Moody's Investors Service has today placed Spain's Aa1 local and foreign currency government bond ratings on review for possible downgrade.

The main triggers for placing the rating on review for possible downgrade are:

(1) Spain's vulnerability to funding stress given its high refinancing needs in 2011. This vulnerability has recently been amplified by fragile market confidence.(2) A potential further increase in the public debt ratio should the cost of bank recapitalisation prove to be higher than expected so far, whether to meet higher-than-expected asset impairments or simply to retain the confidence of the wholesale markets.  (3) Increased concerns over the ability of the Spanish government to achieve the required sustainable and structural improvement in general government finances given the limits of central government control over the regional governments' finances.

"Moody's believes that the above-mentioned downside risks warrant putting Spain's rating under review for downgrade", says Ms Muehlbronner, Moody's Vice President and lead analyst for Spain. "However, Moody's also wants to stress that it continues to view Spain as a much stronger credit than other stressed Euro zone countries. This is reflected in the significantly higher rating for the Spanish sovereign. Moody's review will therefore most likely conclude that Spain's rating will remain in the Aa range." 

Bottom line:  If things don't get better, if mechanisms that are believable aren't put in place - its gonna get worse.  Banks and sovereigns are intertwined, watch the banks.  BIS put out a report yesterday on BASEL III impact on capital ratios and liquidity, worth a read as it will give a framework for understanding how this is all going to shake out and the amount of capital still needed.  


I would be on the sidelines, waiting for an opportunity to jump in cheaper.  Keep your eye on STD as well.  Euro cant hold until this stabilizes but volatility will bring trading opportunities.

Chesapeake Energy Sells Pipes - My Take

Chesapeake Energy announced the sale of 220 miles of its Louisiana pipelines to its MLP for $500MM plus debt.  As an equity investor, this is good news as it takes lower growth assets off its books and allows them to replace the assets with higher yielding, faster growth assets (Haynesville shale).  As a debt investor, this is not good as it takes stable cash flow assets and replaces them with more volatile assets (although Haynesville is a good place to be).  Bottom line, marginal positive for equity, negative for debt.

Chesapeake Energy Corp. (CHK - Ba3) will sell 220 miles of its Louisiana pipelines to subsidiary Chesapeake Midstream Partners LP (CHKM) for $500 million, the companies said on Thursday.

The deal allows Chesapeake Energy Corp., the second largest natural gas producer in the U.S., to shed the pipelines along with any debt that may be tied to them while still retaining a degree of control over the assets as the lead, or general, partner in Chesapeake Midstream. Chesapeake Midstream, meanwhile, can expand the pipelines by tapping into equities markets and not its parent company's balance sheet.

Oklahoma City-based Chesapeake Energy spun off several gas distribution assets earlier this year as the master limited partnership, but still owns nearly 35% of Chesapeake Midstream's shares.

Chesapeake Energy has 525,000 acres in the Haynesville formation and believes its reserves there could exceed the equivalent of 30,000 billion cubic feet of natural gas. Chesapeake said it produces around the equivalent of 785 million cubic feet there each day.

PIMCO Buying Bank Debt - Good Trade

I hate to say it, but "good call!" to PIMCO on buying bank bonds.  I could not agree more that there is value in bank debt - I am still staying at senior level, but sub level could be an interesting bet.

Some levels:
BAC '21s  +240
C   '20s  +185/10s
JPM  '18s  +80/10yr

Pacific Investment Management Co., manager of the world’s biggest bond fund, is betting the rally in U.S. bank bonds is set for further gains with economic growth ready to accelerate next year.

Bank of America Corp. and Citigroup Inc. are poised to be “two of the stars” in fixed-income markets in 2011, said Mark Kiesel, the global head of corporate bond portfolio management at Pimco in Newport Beach, California. The largest U.S. lenders are an attractive value compared with “every bank you can buy in the world,” he said.

Pimco, which boosted its forecast for economic growth last week, reaffirmed its conviction in bank bonds after the securities returned 7.62 percent this year, lagging behind the gain of 7.95 percent for investment-grade company debt, Bank of America Merrill Lynch index data show. Lenders and other U.S. corporate borrowers will benefit as the economy revives following President Barack Obama’s agreement to extend tax cuts, Kiesel said.

“That was the catalyst that sparked upward revision in growth,” said Kiesel, who was nominated for fixed-income manager of the year by Morningstar Inc. “That Obama is showing some indication he’s willing to move more toward the center, that’s net-net going to be marginally more positive for business.”

Disclosure:  Long BAC and C common and preferred. - If I like the lower parts of the cap structure, the fundamental thesis is there.  I think the value is too.

CDS Pushback by Municipalities

The municipal market continues to evolve.  I would expect that if California is successful in this attempt, we will see it for most of the larger issuers.  I do not think the smaller issuers will be able to force it on underwriters.  This cannot be viewed favorably by the banks, but I do not think it will have a material impact on them.

(Dow Jones) Bill Lockyer, California's state treasurer, has amended a quarterly questionnaire for all 86 of the state's bondunderwriters, forcing them to disclose what credit default swaps they have traded on the state's bonds, either for customers or for their own accounts.

The disclosure forms could be sent to underwriters as soon as this week. The aim is to better understand how credit default swaps, or CDSs, are affecting the state's borrowing costs, said Tom Dresslar, a spokesman for the state treasurer's office.

"Banks are always saying that by permitting hedging of risk, it will improve liquidity for bonds. But there is no evidence of people with actual exposure to muni bonds being a substantial part of the CDS market," Dresslar told Dow Jones Newswires. "In fact, we believe the evidence points to the contrary--that most of the trading is done by speculators who have no skin in the game."

California's underwriters will have to disclose their gross and net notional CDS volumes over the last three months, starting with the current quarter. Their responses will be due before Jan. 31.

While the treasurer's office does not have the authority to prohibit banks from trading CDSs on the state's bonds, it can take their CDS activities into account when making decisions about membership in its underwriting pool and in selecting bookrunners for its bond sales, said Dresslar.

Credit For Everyone! Short Memory Files

From the "Have We Learned Nothing Files" comes this report:

(Dow Jones) Faced with an erosion in profits stemming from shrinking loan books, and new expansive rules curbing income on credit and debit cards, lenders are exploring ways to lend to a growing breed of borrowers with blemished credit.

A study by Deloitte Center for Financial Servicespublished earlier this month on first-time defaulters found 11% of 5,142 retail banking customers suffered for the first time a significant financial setback in the last two years, jeopardizing their access to credit from banks.

The size of this segment represents "a once-in-a-lifetime opportunity" for lenders, said Deron Weston, a principal at the U.S. banking and securities division at Deloitte Consulting LLP and an author of the report.

Not only are the numbers for these first-time credit offenders too large for lenders to ignore, but a portion still wield the financial heft to take on credit. For U.S. consumers shut off from credit, a new openness by lenders to first-time defaulters may open up funding and a means to rebuild their fractured credit. Finding ways to lend to those with blemished credit is also crucial to the U.S. economy, with the hope that a pick-up in consumer spending will spark job growth.

One subgroup in particular warrants attention: A large segment of borrowers, known as "strategic defaulters," are walking away from underwater mortgages, even though they have jobs, can afford the debt payments and are current on other loans. Strategic defaults totaled 19% of all mortgage delinquencies in the second quarter of 2009, according to data from Experian-Oliver Wyman.

Credit-card lenders are differentiating between strategic defaulters and "other borrowers who may be in trouble across all of their loans," said Cristian deRitis, a director at Moody's Analytics, an economics and credit consulting firm. "They are continuing to lend, at higher rates of course, to those first-time defaulters with otherwise good credit."

 Securitization to follow.  Then, default increase followed by charge offs followed by investor lawsuits.  And investors:  they'll gobble 'em up.

On The Road Again, Recovery that Is

Want further evidence the economy is on the mend?  Well, look no further:

Winnebago Industries, Inc. (NYSE:WGO), one of the leading United States (U.S.) motor home manufacturers, today reported continued improvement in financial results during the Company's first quarter of fiscal year 2011.

Revenues for the first quarter ended November 27, 2010 were $123.7 million, an increase of 52.7 percent, versus $81.0 million for the first quarter of Fiscal 2011. The Company reported an operating profit of $4.9 million for the quarter, versus an operating loss of $6.0 million for the first quarter of Fiscal 2010. Net income for the first quarter was $3.8 million versus a net loss of $1.3 million for the first quarter of Fiscal 2010

Motor home deliveries jumped 40% while Winnebago dealer inventory was up 32%.

Dealer inventory increased 20.7 percent with 2,066 Class A, B and C motor homes on our dealers' lots as of November 27, 2010, compared to 1,567 on November 28, 2009. 

of concern though:

Winnebago Industries' sales order backlog was 0 Class A, B and C motor homes as of November 27, 2010, a decrease of 100.0 percent compared to the end of the first quarter of Fiscal 2010.  " 

 Now think about it:  RVs are one of the most discretionary products on the market.  When we see an uptick in sales (and at higher margins to boot), this is a good sign.  My enthusiasm, however, is held in check by their backlog.

Lehman Estate Settles Derivatives Cases

Once again, we have seen a blow to creditor's rights.  The effect of bankruptcy on derivatives transactions cannot be understated.

NEW YORK (WSJ) —A U.S. bankruptcy judge on Wednesday approved a settlement between Lehman Brothers Holdings Inc. and two parties over derivatives deals that had divided courts on both sides of the Atlantic.

Judge James Peck of U.S. Bankruptcy Court in Manhattan signed off on Lehman's pact with aBank of New York Mellon Corp. unit and Australia's Perpetual Trustee Co. over the "flip" clauses in credit-derivatives contracts that would have allowed those companies to jump ahead of Lehman and grab the assets backing the derivatives in those deals.

Judge Peck earlier this year ruled that such a flip provision violated U.S. bankruptcy law.

Lehman lawyers said they had satisfied the minor objections to the agreement, which calls for Perpetual to redeem the notes and the collateral backing those notes to be sold. Proceeds from the sale will be distributed based on the wording of a settlement payment deed, and Lehman said that will result in a "substantial payment" to the estate of its Lehman Brothers Special Financing Unit.

Judge Peck's prior decision on flips, which he acknowledged "may be a controversial one," upset expectations in the market for collateralized debt obligations and other structured-finance deals, forcing investors to forgo billions of dollars in collateral. It also conflicted with an English High Court ruling last year that put the investors ahead of Lehman in the order to be repaid. 

Recall:

Lehman affiliates Lehman Brothers Special Financing Inc. and Lehman Brothers Financial Products Inc. filed six lawsuits Tuesday in U.S. Bankruptcy Court in Manhattan to recover funds the investment bank said were wrongly transferred to credit-default-swap counterparties after it filed for bankruptcy protection.Lehman said those transfers, which were triggered when the swaps were terminated and the counterparties jumped ahead of Lehman in the payment priority line after its bankruptcy filing, cost its bankruptcy estate and its creditors more than $3 billion.

Greeks Embrace Austerity Measures - NOT

Austerity, we don't need no stinking austerity.

Wait until the full effects are felt.  Admittedly, Greeks are known for their protests, but it has only just begun.

Simon Properties Goes Abroad

Simon Properties (SPG) has announced a proposed takeover of a British mall chain for $4.8B.  This comes after their failed bid for GGP.  I fully expect that SPG will continue to pursue acquisitions both domestically and abroad.  I still expect that SPG will follow their Prime Outlets acquisition (announced 12/09 closed 8/10) with further outlet center space.  Tanger (SKT) would be a good fit for this approach.

(NYT)  The Simon Property Group, the American shopping mall operator, said on Wednesday that it was ready to pay 425 pence a share for the British mall chain Capital Shopping Centers in a deal valued at £3 billion.

The $4.8 billion offer is 26 percent above Capital Shopping’s share price immediately prior to the offer period and 21 percent above the average price for the six preceding months.

The transaction has kept the London deal community on edge, waiting to learn the size and prospects of the bid, which is threatened by Capital Shopping’s attempt to buy the Trafford Center in Manchester, one of Britain’s largest malls.

Simon Property has said any offer is contingent on an end to the Trafford bid.

“We should work together to announce a recommended offer, and would urge you to listen to calls from your shareholders — many of whom we have spoken too — opposing the Trafford Center transaction or asking you to adjourn your forthcoming E.G.M.,” Simon said, addressing Capital Shopping’s board in a filing to the London Stock Exchange.

Creditor Rights - The Erosion Continues

The erosion of creditor rights continues.  This time Ireland has decided to jump into the game:

Ireland’s government will be able to force junior bank bondholders to share losses to protect financial stability under legislation published today.

The government may take action if “necessary for preserving or restoring the financial position of the relevant institution,” according to the Credit Institutions (Stabilization) Bill, published on the Irish Parliament’s website. Lawmakers will vote on the plan, which also gives ministers power to veto bonuses at bailed-out lenders, tomorrow.

Under the rules, the finance ministry and central bank would have to review an individual bank’s debt, the extent of government financial support it received and the chances that junior debt holders would be repaid if the lender were wound up. The government would then be able to seek a court order forcing bondholders to share the cost of rescuing the bank.

The law gives the government power to alter bondholders’ rights, including those regarding the payment of interest, repayment of principal, events of default and the timing of the payback of debt, according to an explanatory note, published on the finance ministry’s website. Effected subordinated bondholders may also be given a stake in a lender, it said. The powers will expire at the end of 2012, the ministry said.

“In terms of forcing losses on subordinated bondholders, the government is distinguishing between institutions in terms of how much state support they received,” Ciaran Callaghan, an analyst at Dublin-based NCB Stockbrokers, said by telephone. The law may let the government “take a more punitive position” in Allied Irish Bank Plc’s restructuring than in the case of Bank of Ireland Plc, he said. 

Full article here:  Bloomberg on Irish Banks 

Treasury Blood Letting

Anyone get the tag of that truck that hit Treasuries?

Treasuries continue their sell-off today as we are getting signs that a recovery is in our midst (yep, them green shoots).  I fully expect that this will continue to happen should we continue to trade off fundamental data.  Should the Eurozone blossom into a full fledged panic, all bets are off.  I would stay short my duration here and focus on spread product, well credit product.  Why credit product - mortgage duration is extending and credit still has a favorable risk/return profile.  The risk premium in credit is still attractive relative to historical standards.  More on this later.

Disclosure:  Long TBT.

JPMorgan - Commodity King or Conspiracy theory

JP Morgan is having to deny that it has amassed 90% of copper stock warrants, following up on yesterday's denial of its silver position and the changes in its silver position.  Ultimately, it seems to be a search for the grand conspirator within the commodities markets.  I have a hard time believing that JPMorgan (read Jamie Dimon) is going to allow a significant net risk position in these two metals.

(Reuters) U.S. investment bank JPMorgan said it does not hold more than 90 percent of copper stock warrants in London Metal Exchange warehouses, but declined on Tuesday to comment on whether it had a smaller position.

A single holder, recently controlling 50-80 percent of copper stocks and cash contracts in London Metal Exchange warehouses, appears to have raised the position to above 90 percent, latest data from the world's biggest metals market showed.

A spokesman for JPMorgan, asked by Reuters to comment on the market talk, said the company did not hold more than 90 percent but declined to comment further. 

Reuters full article here:  Reuters JPM Copper

And yesterday's FT article:

JPMorgan has quietly reduced a large position in the US silver futures market which had been at the centre of a controversy about its impact on global prices for the precious metal.

The decision by JPMorgan was an attempt to deflect public criticism of the bank’s dealings in silver, a person familiar with the matter said. The person added that the bank’s position in silver would from now on be “materially smaller” than in the past.

However, JPMorgan said in a statement: “It is absolutely incorrect to say or imply that the Nymex, CFTC or any other exchange or regulator has instructed or asked us to reduce our position.” The bank declined to comment on whether it had reduced its position in the silver market.

Full FT article here: FT JPM Silver

PIMCOs Gross Buys Munis

My favorite book talker putting his money where my mouth is.  Bill Gross buying Munis.  I will not hold this against Munis as I still see value in the sector.  BABs are getting pretty interesting here.

The opportunity created by falling prices for tax-exempt debt has tempted Bill Gross to invest $4.4m of his own money in five municipal bond funds run by his firm, Pacific Investment Management Co

Mr Gross, a founder of Pimco and manager of the world’s largest bond fund, made the investments between the 8th and 10th of December, according to Securities and Exchange Commission filings, taking his total investment in the funds to $8.9m.

It follows more than a month in which investors have been selling “munis” as yields on benchmark US Treasury bonds rose and a popular subsidy programme that has supported the market since the financial crisis was poised to expire at year end.

Many market participants had hoped for an extension of the so-called Build America bonds programme, which provides for a federal subsidy for 35 per cent of the interest on newly issued taxable infrastructure bonds.

Full article here :FT - Gross Buys Munis

LNG - Qatar and Ras Laffan Keep on Growing

A little tidbit on LNG.  If you ever see the Ras Laffan bonds (Aa2/A rated 4.5% '12 and 6.325% '27) around, they are a very solid (if illiquid) credit.  A great way to play LNG and the early LNG trains of Ras Laffan.

Qatar gathered chief executives from the biggest energy companies to celebrate reaching an annual production capacity of 77 million tons of liquefied natural gas, underscoring its rank as the world’s largest LNG exporter.

The Persian Gulf state may further increase its capacity by as much as 10 million tons a year if it can improve efficiency at its production units, Energy Minister Abdullah al-Attiyah told reporters. Exxon Mobil Corp.’s Rex Tillerson, Royal Dutch Shell Plc’s Peter Voser and ConocoPhillips’ Jim Mulva were among the executives attending the ceremony at the Qatari industrial city of Ras Laffan yesterday.

Qatar Liquefied Gas, known as QatarGas, is a venture between state-run Qatar Petroleum,Exxon Mobil, ConocoPhillips, Total SA and Shell. Another company, Ras Laffan Liquefied Natural Gas Co., started its seventh and final LNG production unit earlier this year. RasGas, as this company is known, is a venture between Qatar Petroleum and Exxon Mobil. 

Small Business Confidence Up

Another datapoint which supports a nascent recovery across business size in the US.  Should this continue, it will drive outperformance to lower cap securities as we have been positing.  While always subject to revision, this is yet another peice in the outlook.

(Bloomberg) Confidence among U.S. small businesses rose in November to the highest level since the recession began three years ago as more companies projected the economy and sales will improve, a private survey found.

The National Federation of Independent Business’s optimism index increased to 93.2, the highest since December 2007, from an October reading of 91.7. Seven of the index’s 10 components rose and three declined. The measure averaged 100.7 during the previous expansion.

 The gauge of expectations for better business conditions six months from now rose to the highest level since June 2005, jumping 8 points to 16 percent in November, the report showed.

The measure of hiring plans over the next three months rose three points to a net 4 percent, according to the NFIB report. Nine percent of businesses said they intend in increase staff, up one percentage point from the prior month. Fewer indicated they plan to cut payrolls, with 12 percent anticipating workforce reductions, down from 13 percent in October. 

At the same time, the sales trends are not yet “supportive of a widespread recovery in the small business sector even if a bit stronger than October,” Dunkelberg said. Weak sales continued to be businesses’ top problem, with 30 percent of respondents listing it as their main concern.

“The historically high percent of owners who cite weak sales means that, for many owners, investments in new equipment or new workers are not likely to pay back,” Dunkelberg said. “This is a major cause of the lack of credit demand observed in financial markets.” 

Here's a 5yr snapshot of the index:

Treasuries: Reality Time?

How to lose NRSRO status post haste:

Moody's warned on Monday that it could move a step closer to cutting the U.S. Aaa rating if President Barack Obama's tax and unemployment benefit package becomes law.

The plan agreed to by President Barack Obama and Republican leaders last week could push up debt levels, increasing the likelihood of a negative outlook on the United States rating in the coming two years, the ratings agency said.

A negative outlook, if adopted, would make a rating cut more likely over the following 12-to-18 months.

For the United States, a loss of the top Aaa rating, reduce the appeal of U.S. Treasuries, which currently rank as among the world's safest investments.

"From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth," Moody's analyst Steven Hess said in a report sent late on Sunday.

Credit Suisse - Going CoCo for Capital

CS is Cuckoo for CoCos

Credit Suisse’s chief executive said he hoped to begin issuing billions of dollars in contingent-capital bonds in the next year to help shore up the bank’s financial strength well ahead of new Swiss regulations.

While Credit Suisse has until 2019 to meet new contingent capital rules, Mr Dougan told the Financial Times that he would aim to issue so-called “coco” bonds soon to assure investors and regulators that there was adequate demand for the debt.

“I certainly hope that during the course of next year we can do something,” he said. “We’ve actually received a lot of reverse inquiries that said ‘If you’re going to issue these we’d be very interested in looking at them’.”

The bank may issue as much as $30 billion in cocos over several years to replace a portfolio of hybrid securities that will no longer qualify as capital under new Basel committee rules.

The bonds convert into equity or other capital if a bank’s financial strength begins to crack. Although investors will demand higher interest rates than for more senior debt, the bonds’ tax-deductible status makes them cheaper than common equity. Switzerland is the only country so far to have publicly backed their use in its efforts to force systemically important banks to hold far greater cushions against losses. 

First and foremost, a real market has to develop for the product.  While we have seen the one off issuance, this is not a trading market at this juncture.  I do believe, however, that this will be the next "hybrid" security.

The UK Hits creditor's Rights

A shocking ruling in the UK will, no doubt, reprice risk for credit investors.

(Telegraph) -- Members of bankrupt pension schemes have been handed a near-blanket guarantee by a radical court ruling that pushes them right up the creditor hierarchy but has been branded "catastrophic" for banks and companies.

In a fundamental shake-up of the corporate debt structure, pension trustees will be able to demand a lump-sum payment from administrators of a failed business ahead of all lenders bar those backed by property assets. Even the administrators will be lower in the pecking order.

 Before the ruling, pension claims ranked beneath the riskiest unsecured loans, potentially robbing workers of their retirement income.

In a packed courtroom at the High Court on Friday, Mr Justice Briggs ruled in favour of The Pensions Regulator in its bid to recover funds from Lehman Brothers and Canadian telecoms firm Nortel for the 43,000 members of the insolvent companies' pension schemes.

The administrators of Nortel and Lehman, which went bust with UK pension deficits of £2.1bn and £148m respectively, were contesting the regulator's decision to issue a "Financial Support Direction" (FSD) requiring them to strike an agreement with the pension trustees before disbursing funds to creditors.

Under the current rules, if no agreement is struck the regulator imposes a "Contribution Notice" (CN) demanding the administrator make a payment to the trustees. In a ground-breaking judgment, Mr Justice Briggs ruled that the CN would qualify as an "administration expense" – meaning it must be paid above all but "fixed asset" creditors, even before the administrators take their fees.

 The implications of this on credit investors is potentially huge.  If pension schemes essentially become priority claims (administrative claims) the recovery rate for secured and unsecured creditors will obviously fall.  Given this, the debt of companies with large unfunded pensions should trade wider (in spread terms) as recovery rates are diminished.  This is akin to the Sons of Gwalia debacle in Australia (which was finally reversed - info here:  SoG Reversal or a summary here: Bracewell on SoG) which impacted credit spreads in Australia.


Keep your eye on this one, it could be a big deal (if it sticks, it is a big deal).  This is why pension obligations must be considered when evaluating a company's creditworthiness.