Fears that European banks will be crippled by their sovereign exposure are increasing their borrowing costs. The situation isn’t critical; central banks will act to prevent a report of the post-Lehman crisis. But higher rates won’t help the still fragile recovery gain strength.
It sounds eerily like 2008, when the fear factors were toxic mortgages and the collapse of Lehman Brothers. A collapse in liquidity made the funding market for banks almost dysfunctional. Debts were rolled over at ever higher costs and shorter maturities.
(Refiles on October 19, 2010 to add disclaimer for author’s personal investment. Neil Unmack owned Lloyds CoCos when he wrote this article.)
Ever since the financial crisis struck, regulators have argued for an overhaul of bank capital. Contingent capital, which can absorb losses while the bank remains in business, sounds like the solution. But until last week it had only been used by a few distressed lenders.
(Refiles on October 19, 2010 to add disclaimer for author’s personal investment. Neil Unmack bought Lloyds CoCos shortly before he wrote this article.)
The bad news of 2009 gave markets a chance to turn over a new leaf on the vexed topic of financial innovation. The credit boom was marked – and marred – by a surfeit of clever products that proved toxic when the good times stopped. In the aftermath, investors said they wanted a return to simplicity and conservatism.
Whether a “careful plan” or strategic blunder, Dubai’s request for a debt standstill for its Dubai World holding company has rattled lenders who were counting on government support.
LONDON, Oct 27 (Reuters) – Is mortgage securitisation
making a comeback? Nationwide Building Society <POB_p.L> has
just sold 3.5 billion pounds of mortgage-backed bonds, just the
second deal this year after a similar transaction by Lloyds
<LLOY.L> last month.
The fact that two large transactions have happened is a
good sign, but the market is still some way from recovery.
That’s the message given by Moody’s today on the resilience of UK mortgage-backed securities to the current downturn. The survey is based on so-called master trusts, a kind of securitization vehicle first applied to U.K. mortgages about a decade ago which quickly became the most efficient way for a large bank to securitize home loans. The master trusts grew so big that they now finance about a fifth of all UK home loans (although a large chunk of this must have been from deals issued by banks after the credit crisis to use as collateral for borrowing with the central banks).
Master trust bonds haven’t been immune to the credit crisis. Forced selling by SIVs and funds caused yields on AAA master trust securities to gap out sharply from their low of around a tenth of a percentage point over Libor. Spreads have rallied in recent months, but they are still around 2 percentage points over Libor, largely because many asset managers simply won’t touch illiquid asset-backed debt, even if the returns are much higher than equivalent corporate bonds.
Private equity and European high-yield bond investors have an awkward relationship. Investors recoiled from the market after telecom companies went bust in the dot-com crash. Issuance picked up during the recent credit boom, but PE firms raised most of their funding through private bank loans, many of which were repackaged into collateralised loan obligations (CLOs).
Now that banks won’t lend and the CLO machine is broken, financial sponsors need to find a way of refinancing the hundreds of billions of euros of loans that will come due over the next five years (S&P estimates over 500 by the end of 2015).
A new record has been broken in Moody’s index for UK credit card charge-offs. The index, based on data from credit card debt included in asset-backed securities it rates, saw write-offs rise to 10.12 percent in June, up by nearly half from a year ago and the highest on record.
Moody’s outlook is bleaker still: charge-offs could reach 12.5 percent by June 2010 as unemployment rises. The inevitable result will be more losses for banks and pain on the high street.
Losses seem to be slowing on the 26 billion swiss francs of leveraged loans, asset-backed debt and other exotica UBS shifted last year from its trading to its loan book to avoid having to mark them to market.
UBS, Deutsche and other European banks made good use of this accounting trick introduced in October to avoid taking losses on volatile assets. The justification was that market dislocation exaggerated the assets’ true risk. Of course, it was only a temporary dodge as assets still have to be written down over time as borrowers default or forecast cashflows decline.