PrefBlog

Accrued Interest comments on the extraordinary new-issue concession for Citigroup 5-years:

The new issue was sold at a yield spread of 337.5bps over the 5-year Treasury. Prior to the announcement of the new issue, Citigroup’s 5.5% bond due in April 2013 was bid at +275.
…
First, this is an extreme concession for a plain vanilla debt sale of a Aa3 rated bank. In 2006, the concession might have been 5 or 10bps at the most for a new issue. Alternatively, Baa-rated Deutsche Telecom recently brought a new 10-year issue, and the concession was around 15bps. This tells you that while there are buyers of Citigroup debt, they pretty much have to give it away.

Second, at a spread to Treasuries of +337.5, the deal has a very large negative basis to credit default swaps. This means that buyers of Citi bonds could also buy CDS and realize an arbitrage. Citi CDS closed Tuesday at 160bps and 5-year swap spreads closed at +98.5.

Meanwhile, in an incident that doesn’t have the credit rating agencies looking all that good, Bluepoint’s gone BK:

Wachovia Corp.’s BluePoint Re Ltd. unit, which insures structured finance and municipal transactions, filed for bankruptcy protection, citing defaults on securitized mortgages.

BluePoint filed a petition in Manhattan yesterday, saying it has more than $100 million in debt.
…
Wachovia, the fourth-biggest U.S. bank, reported a $330 million charge in the second half of 2007 related to BluePoint’s losses on credit default swaps on collateralized debt obligations, or CDOs. BluePoint decided to liquidate after failing to negotiate a restructuring with banks including UBS AG that were counterparties to its swaps, according to court papers.
…
BluePoint Re, the smallest reinsurer in the bond-insurance industry according to Moody’s Investors Service, had its credit rating cut 14 levels to Ca from A2 by the agency yesterday. Moody’s had lowered its rating two notches from Aa3 on July 11.

The only possible excuse I can find for such a swift downgrade is found in Moody’s press release:

In contrast to most other financial guarantors, BluePoint Re is much more exposed to liquidity risk in its CDS contracts due to payment and settlement terms, including market value termination rating triggers that take effect below the single-A rating level.

… but it doesn’t look good! S&P said:

it lowered its financial strength and financial enhancement ratings on BluePoint Re Ltd. to ‘R’ from ‘A’. An insurer rated ‘R’ is under regulatory supervision because of its financial condition.

According to a S&P request for comment, the lowest 3-year projected rating for an issue currently rated A is B:

Under the proposal, when assigning and monitoring ratings, we would consider whether we believe an issuer or security has a high likelihood of experiencing unusually large adverse changes in credit quality under conditions of moderate stress (for example, recessions of moderate severity, such as the U.S. recessions of 1960 and 1991 and the European recession of 1991 or appropriate sector-specific stress scenarios). In such cases, we would assign the issuer or security a lower rating than we would have otherwise.

I don’t like the proposal, by the way. I prefer a volatility modifier.

Yet another day of recovery for PerpetualDiscounts; their total return index has returned to above that of July 2, but still below the June 30 close. Average yield is 6.14%, equivalent to 8.60% interest (with the 1.4x equivalency factor), which is long corporates +250bp.

There were sixteen other index-included $25-pv-equivalent issues trading over 10,000 shares today.

This entry was posted on Thursday, August 14th, 2008 at 9:21 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.