Europe’s corporate treasurers can pop open the champagne. After much lobbying, they have won an exemption from new European Commission rules forcing over-the-counter derivative trades to be centrally cleared. But the decision could create a loophole that allows companies to take on big positions and pose a systemic threat.
The G20 group of leading nations last year agreed that all derivative trades should, where possible, be moved onto clearing houses. The thinking was that central clearing spreads risk, reducing the chance that the failure of a single large counterparty can drag down the financial system.
More than ever, sovereign wealth funds and institutions are entrusting their money disproportionately to the largest hedge funds. They may find out bigger isn’t always better.
The size fetish has meant that the share of industry assets held by firms with more than $1 billion under management has risen gradually from about 75 percent in 2006 to about 82 percent at the start of this year, according to Hedge Fund Intelligence. And the trend seems to be accelerating. In the second quarter, 92 percent of net inflows went to managers with more than $5 billion under management, Hedge Fund Research reckons.
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).