April 29, 2010

Interesting mutual fund idea:

BlackRock Inc., the world’s largest asset manager, and Blackstone Group LP’s GSO Capital Partners LP are forming mutual funds to invest in loans as the London interbank offered rate rises to the highest level since August.

Within the past two months, the firms have joined Goldman Sachs Group Inc. in announcing funds that invest in leveraged loans pegged to short-term interest rates. Investors poured more than $2.5 billion into bank loan mutual-funds in March and the first three weeks of April, more than triple the amount for March and April last year, according to Lipper FMI data.

The S&P/LSTA U.S. Leveraged Loan 100 Index has returned 5.68 percent this year, building on last year’s record 52 percent as lending continues to open up. New money “will provide financing, which will help” merger and acquisition deals get done, according to Invesco Ltd.’s Tom Ewald.

This year, $91.6 billion in leveraged loans have been underwritten, more than four times the figure from the same period in 2009, according to data compiled by Bloomberg. The interest charge on leveraged loans is typically tied to Libor.

However, the only term-criteria for inclusion in the index is:

Minimum initial term of one year

… which suggests that – as always – people are so fixated on interest-rate risk that credit risk is forgotten. It brings up a number of issues … we’ve seen (oh boy, have we ever seen) how the redemption on demand nature of mutual funds doesn’t mix too well with borrowers’ desire for long-term funding at short term rates (see Volcker to Regulate Money Market Funds as Banks? and The US Dollar Shortage & Policy Response).

This dichotomy will not play out in precisely the same manner as the USD MMF crisis, of course, since the loans have a contractual term that didn’t begin as money-market …. but a similar crunch could lead to forced selling that that will put the Credit Crunch to shame.

There are rumours that regulatory extortion works as well as ever:

After 11 hours of accusations by members of the Senate Subcommittee on Permanent Investigations, people close to the bank said Goldman is mulling closing the SEC fraud-case chapter on the belief the firm’s reputation, already damaged, might not endure a street fight with the Wall Street watchdog.

“It’s almost a certainty that there will be a settlement,” said a source.

As another person put it, the SEC has an “unlimited supply of ammunition” in the form of e-mails and records that it could release, and Goldman officials would like to avoid having those documents fired back at them the way they were on Tuesday.

Predictably, the boo-hoo-hoo brigade is in full cry. For example, there are reports that Basis Yield Alpha Fund is claiming that it did not independently analyze its investment and simply bought whatever their salesman offered:

Citing several people familiar with the matter, The FT said Basis Yield Alpha Fund was seeking compensation over its $100 million investment in Timberwolf, a so-called hybrid collateralized debt obligation that Goldman took to market in March 2007, Reuters reported.

As far as I can tell, Basis Yield Alpha Fund was run by Basis Capital. It is worthwhile to note the company’s Executive Team page; the proprietors, Steven Howell and Stuart Fowler tout their experience but not their results.

There is pressure to use German banks as a political tool:

German lawmakers considering a bill to aid Greece challenged Chancellor Angela Merkel to involve banks in the rescue, refusing to back down after her government said that would send a “fatal signal” to markets.

The main opposition Social Democratic Party threatened to withhold support for aid next week when the bill is fast-tracked through parliament unless banks are asked to contribute. Members of Merkel’s Christian Democrats said the government should ask banks to voluntarily accept losses on their investments.

After having been hammered by dumb investments in CDOs, the banks should be grateful to the politicians for pointing out better investments, eh?

So-called “Strategic Mortgage Defaults” in the States are increasing:

Decisions by U.S. homeowners to walk away from mortgages they can afford account for an increasing share of defaults, according to Morgan Stanley.

About 12 percent of all mortgage defaults in February were “strategic,” up from 4 percent in mid-2007, New York-based Morgan Stanley analysts led by Vishwanath Tirupattur wrote in a report today. Borrowers are more likely to stop paying their mortgages the higher their credit scores and the larger their loans, the analysts said.

Defaults by borrowers who owe more than their homes’ values are among the biggest risks for the housing market, according to analysts including Zelman & Associates’ Ivy Zelman and Amherst Securities Group LP’s Laurie Goodman. Last month, the Obama administration said it would adjust its anti-foreclosure program to encourage reductions to borrowers’ principal amounts, instead of just the payments they make, to address the issue.

The importance of asset-ratio relative to income-ratio in mortgage default analysis was discussed in the post Redefault on Modified Mortgages

You knew this was coming, didn’t you? The US Senate financial regulation bill says that pension fund managers are too dumb to act as principal or, to put it another way, only the sell-side has the ability to analyze financial instruments:

Fannie Mae, Freddie Mac and Harvard University are among public and private entities that could be shut out of the $605 trillion privately negotiated derivatives market they use to manage risks under legislation being debated in the U.S. Senate, according to an industry group.

The bill would impose a fiduciary duty on swaps dealers doing business with cities, states, government agencies, pension plans and endowments, applying standards that would require banks such as JPMorgan Chase & Co. and Goldman Sachs Group Inc. to put the interest of those entities ahead of their own.

But I guess it all makes sense, eh? The politicians have to do something to show they are Responding To The Credit Crunch and since the buy side was (approximately, more or less, give or take) unscathed by the horror, the sell side (which nearly destroyed itself) must take on responsibility for advising it.

A mixed day on continued heavy volume for the Canadian preferred share market, as PerpetualDiscounts were able to record a gain of 9bp, while FixedResets continued their descent, losing 17bp to bring the median average yield-to-worst up to 4.56%. That’s a point more than their yield on March 31. A full point!

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
(at bid)
Mod Dur
Issues Day’s Perf. Index Value
Ratchet 2.53 % 2.56 % 50,886 21.06 1 0.2247 % 2,191.2
FixedFloater 4.94 % 3.01 % 45,316 20.36 1 -0.4525 % 3,237.9
Floater 1.92 % 1.67 % 46,102 23.43 4 0.2685 % 2,409.7
OpRet 4.91 % 3.79 % 103,181 1.05 10 -0.1871 % 2,301.8
SplitShare 6.38 % 6.44 % 137,077 3.57 2 0.7542 % 2,137.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1871 % 2,104.8
Perpetual-Premium 5.91 % 4.77 % 26,181 15.86 2 0.1641 % 1,823.1
Perpetual-Discount 6.28 % 6.35 % 218,797 13.40 76 0.0944 % 1,699.2
FixedReset 5.57 % 4.56 % 512,068 3.60 44 -0.1721 % 2,127.4
Performance Highlights
Issue Index Change Notes
IAG.PR.C FixedReset -3.36 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-30
Maturity Price : 25.00
Evaluated at bid price : 25.61
Bid-YTW : 5.66 %
ELF.PR.G Perpetual-Discount -1.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-04-29
Maturity Price : 16.84
Evaluated at bid price : 16.84
Bid-YTW : 7.13 %
BNS.PR.P FixedReset -1.33 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 25.00
Evaluated at bid price : 25.21
Bid-YTW : 4.73 %
Maturity Type : Soft Maturity
Maturity Date : 2018-03-30
Maturity Price : 25.00
Evaluated at bid price : 25.30
Bid-YTW : 5.31 %
BNA.PR.D SplitShare 1.13 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2014-07-09
Maturity Price : 25.00
Evaluated at bid price : 26.05
Bid-YTW : 6.44 %
POW.PR.B Perpetual-Discount 1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-04-29
Maturity Price : 20.70
Evaluated at bid price : 20.70
Bid-YTW : 6.53 %
Volume Highlights
Issue Index Shares
RY.PR.L FixedReset 111,305 Nesbitt crossed 50,000 at 26.05; RBC crossed blocks of 34,600 and 15,400 at the same price.
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 26.10
Bid-YTW : 4.28 %
TD.PR.N OpRet 105,800 RBC crossed blocks of 50,400 shares, 27,500 and 25,000, all at 25.78.
Maturity Type : Call
Maturity Date : 2010-05-30
Maturity Price : 25.75
Evaluated at bid price : 25.77
Bid-YTW : 3.43 %
TD.PR.O Perpetual-Discount 102,357 TD crossed blocks of 50,000 and 25,000, both at 20.15.
Maturity Type : Limit Maturity
Maturity Date : 2040-04-29
Maturity Price : 20.26
Evaluated at bid price : 20.26
Bid-YTW : 6.03 %
RY.PR.P FixedReset 96,325 Nesbitt crossed 75,000 at 26.60.
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 26.55
Bid-YTW : 4.46 %
TD.PR.R Perpetual-Discount 73,425 TD crossed 70,000 at 23.05.
Maturity Type : Limit Maturity
Maturity Date : 2040-04-29
Maturity Price : 22.85
Evaluated at bid price : 23.00
Bid-YTW : 6.12 %
NA.PR.P FixedReset 72,798 TD bought 12,500 from anonymous at 26.55, followed by blocks of 11,000 and 12,000 at 26.50.
Maturity Type : Call
Maturity Date : 2014-03-17
Maturity Price : 25.00
Evaluated at bid price : 26.30
Bid-YTW : 5.12 %
There were 62 other index-included issues trading in excess of 10,000 shares.

One Response to “April 29, 2010”

  1. […] can’t resist picking on Basis Yield Alpha Fund (discussed yesterday; it’s crying about having bought Timberwolf notes from Goldman) a little bit more. It was […]

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