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from Global Investing:

Anticipating the fallout from South Africa’s ratings reviews

South Africa is due ratings reviews this Friday. Chances are that the Standard & Poor's agency will cut its BBB rating by one, or possibly even two notches.  Another agency Fitch has a stable outlook on the rating but could still choose to downgrade the rating rather than the outlook. What will be the damage?

There is undoubtedly a link between ratings and bond prices.  So a one-notch ratings downgrade tends to lead to roughly a 20 percent increase in bond yield spreads and credit default swaps (instruments that are used to hedge against default), according to calculations by JPMorgan. But in South Africa the lower credit rating may already be already reflected in asset prices -- Panama, Brazil, Colombia, Philippines, Uruguay, Indonesia, and Romania carry lower sovereign credit ratings but boast lower CDS and dollar bond yield premia over Treasuries.  Russia and Turkey have lower average ratings than South Africa but their debt and CDS spreads  are roughly on the same level.

So a ratings cut is unlikely to trigger huge outflows from South African debt markets, says JPMorgan, which runs the most widely used emerging bond indices. In Brazil for instance, a well-anticipated  downgrade back in March did not lead to significant cash outflows from its markets, JPM points out:

The current relationships between spreads and ratings do not necessarily imply another step wider in South Africa’s spreads until it is firmly sub-investment grade (not J.P. Morgan’s base case).

from Breakingviews:

Fannie investors may be using magic calculators

By Daniel Indiviglio and Richard Beales
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Fannie Mae investors may be using magic calculators. With the latest reform blueprint taking shape in the U.S. Senate, hedge funds like Fairholme Capital Management have urged Washington to revitalize Fannie, the mortgage finance giant, which along with Freddie Mac was kept alive with nearly $190 billion of taxpayer cash in the aftermath of the financial crisis. The prospect has pushed up the price of Fannie’s preferred stock more than 10-fold in 18 months. But according to a Breakingviews analysis, even cheerful assumptions suggest Fannie’s business isn’t worth enough for shareholders to get much if anything back.

from Breakingviews:

Detroit turns bankruptcy precedents upside down

By Kevin Allison
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Bondholders in Detroit’s $18 billion bankruptcy must feel like they’re in a mirror universe. A restructuring plan filed by the city’s emergency manager would effectively turn bankruptcy precedents upside down by paying equity holders – in this case, ordinary Detroiters – at the expense of secured creditors. Such a shareholder-friendly approach might save the city and anoint Judge Steven Rhodes a hometown hero. But it may yet come at a market price.

from Alison Frankel:

Why (most) consumer data breach class actions vs Target are doomed

Who doesn't empathize with the 70 million Target customers whose private information was supposedly hacked? No one likes to worry about identity theft and impaired credit ratings, the odds of which, according to Reuters, drastically increase for data breach victims. But that doesn't mean Target customers have a cause of action in federal court. I don't see how the vast majority of hacked Target shoppers can get past the threshold constitutional requirement that they show an actual injury, at least under the U.S. Supreme Court's 2013 definition of injury in Clapper v. Amnesty International.

I'm not saying Target faces no litigation exposure for the data breach. Some of the new cases against the company are class actions by financial institutions that had to bear the cost of notifying customers about compromised debit cards, closing customer accounts and reissuing new cards. Those cases involve real-money claims that will be tough for the company to fend off with threshold defenses. So too will be suits by state attorneys general making claims in state court under state consumer protection laws (assuming, of course, that the Supreme Court does not hold that state AG suits have to be litigated in federal court in this term's Mississippi v. AU Optronics case). And depending on the facts that emerge about Target's disclosure decisions, Target shareholders may have viable class action claims that the company engaged in misrepresentation-by-omission.

from Breakingviews:

The lowdown on China’s slowdown

By John Foley

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

For China, 2013 is becoming the year of the credible shrinking GDP growth target. Earlier in the year, the old 8 percent norm was shaved down to an official estimate of 7.5 percent. On Thursday, Finance Minister Lou Jiwei moved that to 7 percent - and said an even lower number was possible. What’s going on? Here’s the lowdown on the China slowdown.

from Breakingviews:

How to cut the cord on China’s shadow banks

By John Foley

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

It’s time for some delicate surgery on China’s financial system. The growth of non-bank lending channels - collectively known as “shadow banking” - is basically helpful for the economy. But regular banks are in too deep. China’s financial regulators need to separate the siamese twins.

from Breakingviews:

Review: Tales from China’s wild lending frontier

By Peter Thal Larsen

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

Joe Zhang has impeccable timing. The former investment banker’s book about running a small Chinese microcredit firm, “Inside China’s Shadow Banking”, has hit shelves just as concerns about the country’s runaway credit boom are capturing global headlines. Yet despite the title, it’s China’s state-owned banking system that emerges as the tale’s dysfunctional villain.

from Breakingviews:

Rumors of credit bubble only partially exaggerated

By Agnes T. Crane and Neil Unmack
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Rumors of a credit bubble are only partially exaggerated. Tell-tale signs of a boom seem to be everywhere. Yet, most investors aren’t panicked. Who’s right? Breakingviews offers a bubble-meter for the credit market.

from Global Investing:

Asia’s credit explosion

Whatever is happening to all those Asian savers? Apparently they are turning into big time borrowers.

RBS contends in a note today that in a swathe of Asian countries (they exclude China and South Korea) bank deposits are not keeping pace with credit which has expanded in the past three years by up to 40 percent.

from Unstructured Finance:

Natural (at) selection

The answer to the moderator’s question was a resounding: yes. The question, asked to several credit hedge fund managers during a conference on Thursday, was: did you make money last year? In fact, the managers from Pine River, BlueMountain, Cerberus and Brevan Howard made a lot. But 2013 is not going to be so easy, they said.

Hedge funds that specialize in credit, especially those who focus on mortgage-backed securities (MBS), blasted past their stock market competitors in 2012. One of those traders, Steve Kuhn, was on stage for the aforementioned credit panel at Absolute Return’s Spring Symposium. Kuhn, a portfolio manager for Pine River Capital Management, saw his fixed income fund rise 35 percent last year.

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