OH NO! More of the Same

Via Reuters:

Worries over the euro zone debt crisis and the region's banks hit global stocks and boosted the dollar on Wednesday after Italian lender UniCredit priced a rights issue at a huge discount and a German bond auction failed to impress.

The U.S. dollar index, which tracks the greenback against a basket of currencies, gained 0.6 percent to 80.10 points.

Banking sector fears were ignited by news UniCredit (CRDI.MI) had launched a 7.5 billion euro ($9.8 billion) two-for-one rights issue at a discount of 69 percent to its closing share price on Tuesday. The capital increase, meant to shore up its ravaged balance sheet, sent shares in Italy's largest bank by assets down 8.5 percent.

Germany sold 4.057 billion euros ($5.30 billion) of 10-year government bonds in its first auction of the benchmark maturity since one last November that raised fears Europe's debt crisis had begun to threaten its biggest economy. Bids for the Bunds amounted to 1.3 times the amount offered and were improvement over the previous sale - one the country's least successful debt since the introduction of the euro. The debt sold at an average yield of 1.93 percent, lower than the 1.98 percent from November.

In another sign of stress among euro zone banks, commercial lenders' overnight deposits at the European Central Bank hit a record high of 453 billion euros, data showed on Wednesday. However, key euro zone bank-to-bank lending rates continued to drop, pulled down by the ECB's recent record injection of almost half a trillion euros of ultra-long and ultra-cheap three-year liquidity. Euro zone banks received 489 billion euros late last month in the first of two opportunities to access the long-term loans.

Reuters article

Anyone who has read anything I have written here or on Seeking Alpha knows my opinion on this:  the situation is a train wreck. Austerity is necessary (not just in Europe either), but it is a mid to long term solution.  The ECB can QE all it wants, the banks are keeping the cash (or arbing vs sovereign debt) and not lending it out.  The banks have thin capital (especially if you adjust their risk/market models) and need a ton more.

While some European banks look cheap, I am not a buyer (LT2 will get interesting though), preferring instead to but European corporates in USD or hedging the currency risk.

November 17, 2011 Credit Market Recap

The tone in the fixed income markets today was one of de-risking as Spanish yields on the auction blew out.  Eurozone concerns continue to weigh heavy on the markets and the financial sector has been bearing the brunt of the smackdown.

The general tone in the credit market was somewhat negative as CDX NA IG/HY 17 were off a tad more than 1% with the indices adding 1.7 and 12.6 bps respectively.  European CDX fared slightly better with the series 16 shaving 5bps off the index.

Source: Markit

Breadth in the market was negative (as one would expect given the magnitude of financial issues)

FIG issuers have been body slammed by the turmoil with JEF (and brokers) leading the way:

The above chart is JEF 6.875% '21.  Closed out at $78 for a 10.6% yield (the 5.125 '18 are $78.25 9.8% and the 8.50 '19s are $86.25 11.2%).  I find this to be somewhat interesting.  Obviously these maturities are further out and should they come out of this situation, the bonds will perform well.  With this in mind, we buy the lowest cost exposure - the '21s.  Ahhhhh, but what do some of us who got kicked in the teeth in '08 remember?  FINANCIALS ARE BINARY!  They are good or not.  The equity continues to trade down after hours hitting fresh two year lows.  That said, this is a situation that warrants further investigation for value players (like myself).

And Morgan Stanley....well MS has never fully recovered from "the crisis" and gets taken to the woodshed faster than the rest.  See MS '21s closing +525 (remember a scant month ago the re-opened this baby at +335) out 50bps.   Ouch.   Goldie fared little better with GS '21s 425/15 out 35bps.


The new issue market was somewhat robust with approximately $5B in deals announced.

Personally, I have liked LLL in the defense space and think it warrants consideration in the 5yr.

November 16, 2011 Corporate Bond Issuance

Corporate issuance slowed today from its breakneck pace.

I personally think there is some value remaining in corporates as the credit risk premium is still attractive (not fat and juicy attractive, but attractive nonetheless).

New Issue Hype - Buyside Gets the Pipe

On the tape (Reuters):

LONDON, July 5 (IFR) - Rising disquiet over new issue bond market practices has prompted a rethink among debt syndicate officials regarding the processes they employ and the manner in which they transmit information to investors, bankers said.     Underwriters have been discussing ways to fairly provide investors with information on price and the size of order books.     So-called price whispers, where dealers float a level with a small group of investors could be a thing of the past, for instance.     Another practice that is about to change is regular updates on the size of order books and the controversial, some would say cavalier, use of internal tickets to inflate the magnitude of investor interest. 

Investors routinely overstate their true interest in order to receive a larger allocation of bonds at pricing.     "I think both sides need to be careful. The world has changed - all the clients we deal with are trying to operate higher standards," said the syndicate official.

 This has been the buy/sell side conundrum forever.  If the deal looks hot (and you know it was -as it always is - pre-shopped to the big guys) you have to double or triple what you want to end up with.  Then, god forbid, it falls apart you end up with an over allocation.  The street knows the chronic padders, but this crap inflates the book to monstrous proportions.  I can't think of a way around this.  Blame it on the street for hyping, blame it on the buyside for padding - whatever.  This is the way it is.  It also allows the street to reduce pricing due to demand and see how many people drop from a deal or increase the size of the deal to meet demand.  Accrues to the issuers benefit either way.  Who wins:  street gets underwriting commission and follow on trades, issuer gets lower rates and more money, and the buyside?  Well, someone has to be left holding the bag.

Risk - Is it Being Priced In?

After an interesting afternoon in the hospital, I am going to attempt a recap of the days affairs and attach some opinions to them.


First off, equities took a breather today as they have been grinding higher.  I look at this action as rational and fully expect the market to trade down.  Snapshot of the equity market over the last week:

So, why do I think that the market should be headed lower?  Risk friends, its all about the risk.  Consider:

1. Libya is going to be anything but easy.  What to do after enforcing the UN no-fly zone?  Wait for the power vacuum if Gadhafi is removed.  This is long haul stuff that the US and Europe (and some Arab states) find themselves embroiled in.
2. Bahrain - Saudi forces in the country point to Saudi concerns about the country and the wider region - especially as Iranian influence is being seen behind the scenes.
3. Yemen - Saleh has resisted stepping down as calls for his resignation increase.  He has asked the Saudi's for help within his country as the Saudis play a role in the country and have ties to tribal leaders.
4. Increasing number of protests in Saudi Arabia itself.
5. Still uncertain outcome in Japan with their nuclear issues.  Power has been delivered, but do the generators work and can they cool the systems?  Will be days or weeks until we know.  
6. Irish stress tests - are we gonna see the $35B that was not going to be used get used?  How bad is it really?
7. Housing data came in bad - yeah, I know there is point to point volatility, but the bigger picture is not good.  At some point FNM and FRE are going to have to be dealt with.  Will banks step in?

Bottom line, I don't like the risk profile and I don't like how the market is somewhat shrugging off the risk.  I like (and am long) oil, think silver is still interesting, still like credit products (bonds and preferred) although they are getting heady as well.  New issue calendar has been robust as there are willing buyers - points to some upside (but not much from here).

Wednesday Market Wrap

Another day of uncertainty and volatility.  The risks I listed yesterday were only compounded today leading to more risk shedding.  Until we see some resolution in Japan (and to a lesser extent the middle east), I don't see much of a rebound in risk.  That said, we might see some dip buying at some point.


Some economic and news review:


Home construction plunged 22.5% in February from January to a seasonally adjusted 479,000 homes. It was the lowest level since April 2009 and the second-lowest on records dating back more than a half-century.  Single-family homes fell 11.8% in February. Apartment and condominium construction dropped 47%.  Building permits fell 8.1% last month to the lowest level on records dating back to 1960. Permit requests for single-family homes saw the biggest decline. Apartments and condos remained flat.  This, when piled on the MBA data suggest housing isn't posting a sharp rebound (at least last month as the numbers are volatile).


The Labor Department on Wednesday said the producer price index jumped 1.6% last month, following increases of 0.8% in January and 0.9% in December. Producer prices have risen an unadjusted 5.6% over the past 12 months.  Core producer prices rose a much smaller 0.2%, but it was still the third straight monthly increase. Core prices have risen a much slower 1.8% over the past year. Economists surveyed by MarketWatch had predicted a 0.7 % increase in overall producer prices and a 0.2% increase in the core rate.  Inflation in the pipeline.  Stay close to home on the duration front and watch manufacturers for their ability to pass on price increases.

Reuters reported Wednesday that Patrick Parkinson, the director of the Federal's Division of Banking Supervision and Regulation, that although asset quality was "stabilizing," the banking system was "still in the repair and recovery stage." "Around 30 percent of all banks have less than satisfactory supervisory ratings," he is quoted as saying at the American Bankers Association annual government relations summit Washington, according to Reuters.  Great.
The Federal Reserve Bank of New York bought $6.58 billion in Treasury debt on Wednesday, the latest operation of the Fed's second round of quantitative easing to support lending and spending. Dealers offered to sell the Fed $26.46 billion in debt maturing from 2015 to 2016.  $26B offered, $6.5B bought.  Gotta keep those rates down.

Fixed Income:

Another interesting day in the fixed income markets.  Housing numbers and increased risk overwhelmed the wholesale inflation numbers.

"Risk free" had another strong day as investors shed risk and bought govvies.  Seriously, Look at the long end.  Bets against the long end (like my TBT) are getting crushed.  Curve is flattening though.

Credit markets had a tough day (although trace hi/lo data would suggest otherwise).  Market traded down a bit with CDS ending at HV15 126/136 +5   IG15 91½/92 +3   HY15 101 9/16/101¾.

Cliffs, AGL and Teva were in the market.  Teva broke better, Cliffs broke wider and AGL broke tighter.


While CDS was wider, credit was up on the day using LQD as a proxy:

Equities:


Risk off!  Selloff continued.  Equities tanked mid-day but rebounded somewhat as conditions in Japan seemed to get better (debatable at best, but optimistic).

Not pretty for risk here in the states.

The sell-off was broad based, but conglomerates and tech got an extra bit of beating.  Personally think the drop in GE is overdone, but then again, I am long the name.

Global markets fared no better.


Commodities:


Commodities were mixed, but mostly down.  Gold came back as did silver and cotton got spanked.  I Don't expect much of a rebound in commodities until the damage in Japan is known and we start to get a feel for the global demand impact.

Currencies:


A decent spike in the Yen after a pretty dramatic sell-off.  Greenback is at a 15yr low vs the yen.

While the euro fell versus the dollar, it rebounded a bit late in the day.

Tuesday Fixed Income Brief

Interesting day today to say the least.  Risk came off in torrential form as Asia got pounded and Europe followed suit.  What I see as the primary sources of risk right now:

1. A total meltdown at one or more reactor in Fukushima.  The typhoon has already constrained capacity - which will no doubt be felt by nearly all manufacturers, but a total meltdown will shutter more factories and further reduce capacity.  The hit will obviously be felt more in Japan, but the global markets will roll.  As I am aware as of this writing, it does not look likely, but cracks in the containment units and hydrogen build-up can go bad fast.
2. Continued - and increasing - unrest in the middle east.  With the Saudis in Bahrain, Iran will be pressed to react in some way - either in Bahrain or opening up a new front somewhere else to spread Saudi (and/or coalition) forces thin.  The Saudis are also facing discontent at home, but this move helps keep an opposition movement down with the show of force.  Japan of course has averted the worlds eye from the middle east for the time being.

I am also concerned about the effect of the European Financial Stability Facility ( euro440 billion  - $606 billion) which allows it to buy government bonds (from the governments if austerity measures are agreed to) instead of on the secondary markets - which means the ECB is still the buyer of last resort.

With that said, lets look at some fixed income:

Treasuries obviously had a good day as risk came off the books.

Corporates were mixed, but hi/low ratio for IG and HY continued to be strong:

Quack, quack  AFLAC (75% sales as a % of 2010 revenue from Japan) was a solid 50 bps wider - and fired Gilbert Gottfried. Other bank/finance names out 7-10bps.   EXC, SO, PCG and EIX feeling pressure due to concerns about effect on nuclear power (Germany is taking 7 older units down for inspection over the next few months).  

Oh yeah, lets not forget that Moody's pinged Portugal from A1 to A3:  "The cost of market funding is likely to remain high until the deficit has been reduced to a sustainable level and the prospects for economic growth have improved," it said in a statement.

Kinda tired, gonna close with that.

Bond market Update

First, lets look at Trace data:

I wont even bother continuing to point out the hi/low ratio - especially in high yield.  So much for the bubble!  Converts are naturally on fire as equities zoomed today (TMO continues to rock!).

Lets move on to CDS indices:

High yield continues to concern me that it is getting ahead of itself - or at least fully valued.  IG is near value - a little left, but not much.  There might be value in select EM credit, but one has to be very picky here.

And govvies:

Risk off - 'nuff said?  EU might raise rates, US economic data coming in stronger than expectations - the one two punch to globals.  Personally, I am short long US govvies as I feel (and pay) rising inflation that these intellectuals are gonna miss (perhaps they should do their own shopping - unless they shop ex-food and energy).

All in - good day for risk, bad day for "risk free".  Ride the wave friend - but wait for the numbers tomorrow to get the feel for risk positions.

Oh yeah, giving credit where due:  the charts today are from the WSJ online.  Usually I have to dig multiple sites, but tonight I was somewhat lazy.

Market Review February 28, 2011

Market overview for February 28.


Corporate Market: Decent day today as some issuance came back with Juniper Networks doing a billion in 5s, 10s and 30s (existing 30s sold off on the deal) and Arcelormittal announcing a benchmark size deal in 5s, 10s and 30s.  

As I have so graciously outlined, issues hitting their highs continue to trounce issues selling at their lows. Tells me that credit is still being sought after. Personally, I would still be a buyer of credit - the hell with the polyannas saying bubble and risk due to rising rates - as the risk premium relative to the yield is still attractive and as far as rising rates, credit should provide excess returns vs treasuries or you can swap into floating. For disclosure, I am long LQD.

Equities: Equities eeked out about 50bps on the day as oil fell somewhat on assurances supplies will be maintained. Investors also seemed heartened by Fedspeak about increasing oil prices not affecting growth.

Advance-declines were a little better than 2 to 1 positive on the New York Stock Exchange, and negative by 2 issues on Nasdaq about dead flat. Up/down volume was 2 to 1 positive on New York with total volume was just under 1.25 billion. Nasdaq traded just over 2 billion shares, and had about an 11 to 9 negative ratio.

As I have continually maintained, mid-cap growth is still the sector to be in.  Here's a little snapshot of YTD large cap growth (SPY), mid cap growth (IWP) and small cap growth (IWO).  I am still overweighted mid cap growth in the passive portfolio with small cap growth bringing up the rear.

Personally, I think equities are getting a bit stretched, but I don't fight tides.

Risk, Whats Up?

Wow, equities got creamed today in the wildebeest stampede out of risk.  Or was it?

Lets look at equities:

Yep, thats an official creaming.  Where did it take place?  Lets look:

I found it interesting that energy did not sell off anywhere near as much as the broader market.

Observe the following chart (courtesy FINRA):

 Last I checked, the credit markets are risk markets.  Look at the high yield data today.  While volume wasn't huge (by any stretch), those issues trading did okay.  Note the new high/low data.  I understand that energy companies invested in the region are not overly represented in this data set, but this does not point to a broad de-risking.

Yes, Libya is gonna burn before its over, but signs don't point to an apocalypse.   That said, warships steaming towards the Suez, chatter about Iran, and the spreading "winter of discontent" in the middle east, don't make me think of going all in on a down day.  Problem is, risk is increasing (yep, Europe still has issues, Africa and the Middle East) and we have better, but still soft, domestic numbers coming in.  I am kinda sitting on the sidelines here.  Still in mid-cap growth with a leg in small-caps and preferreds.

Libya - Corporate Threat Assessment

Trying to compile some companies doing business in Libya.  My concerns stretch far further than Libya at this juncture as I believe we a re seeing a fundamental shift in the governing of Northern African and Middle Eastern countries.  This is not the end of the conflict, rather we appear to be in the 5th/6th inning.  It is going to get worse.

Libya exports some 1.1 million barrels of crude a day from production of 1.6 million barrels -- ranking it about 17th among world oil producers. And it has the largest proven oil reserves in Africa.

The United States, the world's largest consumer of oil, does not import any petroleum from Libya. But disruptions elsewhere can raise the price of oil worldwide.


From Stratfor:

Unlike energy produced in most African states, nearly all of Libya’s oil and natural gas is produced onshore. This reduces development costs but increases the chances that political instability could impact output — and Libya has been anything but stable of late. 

Libya’s 1.8 million barrels per day (bpd) of oil output can be broken into two categories. The first comes from a basin in the country’s western extreme and is exported from a single major hub just west of Tripoli. The second basin is in the country’s eastern region and is exported from a variety of facilities in eastern cities. At the risk of oversimplifying, Libya’s population is split in half: Leader Moammar Gadhafi’s power base is in Tripoli in the extreme west, the opposition is concentrated in Benghazi in the east, with a 600 kilometer-wide gulf of nearly empty desert in between. 

BP - The British firm ended a 30-year absence from Libya in 2007 when it signed its biggest-ever exploration commitment through a bilateral deal. It will spend at least $900 million to search the onshore Ghadames area and offshore Sirte basin with 17 exploration wells.

Royal Dutch Shell - The London-listed company was awarded a gas exploration permit in 2007 for areas in the Sirte Basin, and was also awarded permits in 2005.

ExxonMobil - In February 2008 the U.S. oil major agreed with Libya's national oil company to invest $97 million plus tens of millions in fees in offshore hydrocarbon exploration. The company in 2005 struck an exploration and production-sharing deal with Libya's state oil company that covers the Cyrenaica Basin, covering 2.5 million acres, from deep to shallow waters.

Occidental - The company, which began business in Libya in 1966, reported first-quarter 2009 net production from Libya of 8,000 barrels per day, down from 22,000 bpd a year earlier. In late 2007 it won gas-focused permits to explore areas of the Sirte basin, and in 2005 was the biggest winner in Libya's first licensing round.

Statoil - Statoil participates in land-based oil production and exploration activities in the Mabruk field and in the Murzuk basin. A spokesman said it was keeping its office in Tripoli closed and that a "handful of expatriates" were leaving the country.



Just as a reminder:

While somewhat stale, this should help give you a picture of where the oil comes from in Africa.

Away from oil:

Italy's UniCredit is 7.5-percent-owned by Libyan investors;

While oil is the natural first strike in de-risking exposure to the area, should the political contagion spread further into the middle east (think Iran and Iranian influenced countries) we could see further de-risking on a more broad scale.  Also wise to watch the Euro as Europe is the main benefactor of Libyan oil.

The Euro today is showing strains against the dollar:

More as I get it.

Fixed Income Update

A post on some of the issues in the fixed income markets today.

Short-dated U.S. government debt prices fell to session lows on Tuesday after remarks from Richmond Federal Reserve President Jeffrey Lacker suggesting the central bank should scale back its $600 billion bond purchase program.  Given the recent data which points towards the footings of a recovery, I would expect we will hear more about scaling back QE2 which will continue to result in pressure on the front end of the curve.

Shorter-dated German bonds underperformed longer maturities on Tuesday with euro money market rates expected to come under renewed upward pressure after a low take-up of European Central Bank loans drained excess liquidity.  Commercial banks borrowed a total of 218 billion euros from the central bank's weekly and one-month tenders, less than the amount expiring and resulting in a 66 billion euro drain of surplus funds.  The liquidity taken out of the system does not help support fund raising by EU members and/or the Euro.  Should this continue, we should expect pressure on front end rates and the currency.

Moody's Investors Service said its measurement of debt defaults worldwide fell to 2.8 percent in January, a marked improvement form the 12.6 percent rate a year earlier. For the first time since 2007, Moody's said, none of the corporate debt issuers that it rates defaulted during the month. By comparison, there were eight corporate defaults last January. The January default rate was down from 3.2 percent in December. The ratings agency said the monthly decline in defaults is part of a gradual improvement in credit markets that should continue through 2011, although debt-laden European governments like Spain and Ireland could endanger the outlook. "We continue to expect stable, low default rates for the near future," Albert Metz, Moody's director of credit policy research, said in a statement. But Metz warned that if lenders become jittery and financing dries up again defaults could rise, particularly in Europe. For January, the U.S. speculative-grade default rate fell to 3 percent from 3.4 percent in December. In January 2010, that rate stood 13.7 percent.  By next January, Moody's predicts that the global speculative-grade default rate will decline to 1.5 percent. It expects the default rate will decline to 1.7 percent among U.S. speculative-grade issuers and to 1.1 percent among European speculative-grade issuers.  Lower default rates imply lower risk which further implies lower spreads (risk premiums) on corporate bonds.  While the market has tightened expecting this outcome, I believe it has further to go and that credit will outperform the risk free and generate positive excess returns.

Bottom line:  While risk free debt gets hit globally, risk assets will continue to perform - although not as well as they have.  We can see the risk appetite through the EETCs getting done, CMBS, drive by high yield deals and IG credit with virtually no covenant protection.

On the credit note:  let these cov lite and no covenant deals get done, do your homework and buy the prior issues with better covenant protection as documents are rarely priced into the market.  A little homework can help mitigate risk and lead to outperformance.

Bond Managers Up Their Credit Allocation

Below is part of an article from Reuters.  Essentially, it says that credit investors are overweight their benchmarks. In IG space, investors have been drawn to financials due to the improvement in their financial condition as well as the relative "cheapness" when compared to other sectors and on a ratings basis.  HY has focused on industrials and energy (two primary issuers) as these sectors stand to benefit from current trends in both sectors, an improved economic outlook and, realistically, the availability of bonds.  This should really come as no surprise as investors have been embracing risk for a while now and investors need yield.  I personally think that credit will continue to attract investors and outperform on an excess spread basis.

Bond investors boosted U.S. corporate debt exposure to the highest levels since at least 2005 as they took a more optimistic economic outlook, according to a Bank of America Merrill Lynch survey released late Tuesday.

The first-quarter survey found 89 percent of high-grade corporate bond investors were overweighted with those assets, well up from 29 percent in the fourth quarter. In riskier high-yield bonds, 71 percent of investors were overweight, compared with 30 percent in the prior survey.

Investment grade bondholders were most bullish on financial company debt. Nearly 70 percent of investors said they were overweight the sector, up from about 30 percent.

In high-yield, investors raised allocations to industrial and energy bonds but stayed bearish on financial companies.

Concerns of investors were topped by the European sovereign debt and municipal bond crises, the survey found. Almost half of them said Europe's management of its sovereign debt burden was the bigger problem for U.S. credit markets.

Alcoa - Bonds Look Cheap

Alcoa's (Baa3/BBB-) earning are out and look decent.  I have been waiting for the earnings to take a look at the bonds.  The company has been somewhat of a leper for a while now as it is somewhat overlevered and underearning.  Things are improving here.  Do I think the ratings will stabilize in investment grade space?  Yes, I do.  Do I see upgrades?  Not in the near-term as the company must show it is serious about debt reduction (through greater reduction in actual debt rather than increases in equity or EBITDA) and continue to de-lever their balance sheet.  Alcoa’s debt-to-capital ratio stands at 34.8 percent at the end of the fourth quarter, 90 basis points better than the third quarter of 2010, and 390 basis points lower than the fourth quarter of 2009.  Problem with this is that the company has an expressed target of 30-35% debt/capital, so its not gonna get much better from here.

Liquidity improved, with $1.5 billion in cash on hand at the end of the fourth quarter compared to $843 million at the end of the third quarter of 2010.  I would expect that liquidity (in terms of cash) will be somewhat reduced as the company increases capital expenditures.  CAPEX came in for the full year at $1B, down from '09 full year of $1.6B.  While yes, this does increase free cash flow, it will not help grow the business.  Depreciation was $1.4B, so essentially, the business shrunk (yeah, from an accounting perspective).  Capex is expected to come in somewhat higher this year ($1.5B +) which is necessary for maintenance (about $500MM for growth capex) and should help smooth things out.

Accrued pension and post-retirement have shown a marginal improvement as well (which will reduce adjusted debt metrics), but I would like to see a more meaningful reduction.  The company has stated it is evaluating the pension issues and will come up with a minimum funding target.  I would still like to see them go beyond the minimum and take a chunk of their pension down.  Pensions are the same as debt (or very close).

Outlook:

The company has said:  “In 2011, we see aluminum growing another 12 percent on top of last year’s 13-percent improvement. We are well positioned to outpace the recovery in the markets we serve and grow shareholder value.”  This is evidenced by the company restarting three smelters in the US which will increase Alcoa’s aluminum production by 137,000 metric tons over the course of 2011 and by 200,000 metric tons on an annual basis thereafter.

I agree with their assessment of the near-term business conditions and growth prospects (especially should China - isn't it always about China? - reduce their smelting capacity) and therefore think the company is in decent shape in the near to intermediate term.  We should see further financial improvement which should drive spread tightening.  I would be a buyer of the bonds.

Value:

AA      (Baa3/BBB-)  6.15    20   @ 210/200
AA      (Baa3/BBB-)  5.72    19   @ 195/185
RIOLN (A3/BBB+)    3.50    20   @ +79
BHP   (A1/A+)         6.50   19    @ 53/43
CLF    (Baa3/BBB-)  4.80   20    @ 185





Some stats and thoughts (emphasis mine):

2010 Full-Year Highlights

• Revenue of $21.0 billion compared to $18.4 billion in 2009, up 14 percent
• Income from continuing operations of $262 million includes a negative impact from special items of $297 million
• Cash from operations of $2.3 billion, compared to $1.4 billion in 2009
• Free cash flow of $1.2 billion, a $1.5 billion improvement over 2009 - (driven by changes in working capital - notably inventories)
• Debt reduced, cash on hand of $1.5 billion
• Debt-to-capital ratio reduced to 34.8 percent, 390 basis point improvement over 2009 - (due mainly to increases in the equity line ad debt is down by less than $600MM)

Improved earnings were driven by higher pricing, continued strengthening in most end markets and improved productivity as a result of the company’s Cash Sustainability Program. Results were offset somewhat by a weaker U.S. dollar and higher energy and raw material costs.

4Q 2010 Highlights

• Income from continuing operations of $258 million, which includes a net benefit from special items of $35 million
• Net income of $258 million
• All-time record cash from operations of $1.4 billion
• Record fourth-quarter free cash flow of $1.0 billion
• Adjusted EBITDA improves to $782 million, 13.8 percent margin up from 11.4 percent in the third quarter of 2010 and 3.4 percent in the fourth quarter of 2009
• Revenue of $5.7 billion, up 7 percent from third quarter and 4 percent from year-ago quarter
• Projecting global aluminum growth rate of 12 percent for 2011

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).

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.

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.

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.