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.

Kuhn doesn’t see a repeat of those monster returns in 2013. It’s all about security selection this year, he said and that that selection process is going to require a lot of work. It’s a view we reported in early March, and one that Scott Stelzer, a CMBS specialist for Cerberus Capital Management and David Warren, the CEO of DW Investment Management and CIO for a Brevan Howard credit fund also echoed at the conference in mid-town Manhattan.

So, where are these managers allocating capital this year? At the moment, Steve Kuhn likes convertible bonds in Asia. He said there’s still some alpha in the RMBS market, but the beta trade is now a now 6/10, whereas it was 10/10 a year ago. He’s also excited about opportunities to invest in new issuance as Fannie and Freddie begin to reduce their 95 percent mortgage-market footprint.

Cerberus’ Stelzer, who still likes the CMBS trade, emphasized that last year’s desperate yield search had seen a ton of players move into those securities where they probably should have stayed away. This style-drift has occurred as hedge fund managers moved outside of their specialties, desperate to boost returns in the a low-interest rate environment. We reported, for example, on the move into CLOs and CDOs in the second half of last year.

Cocos – credit market classics?

 ”Cocos” has become the user-friendly name for a new type of hybrid bond created to help UK bank Lloyds raise money from investors to break away from a government insurance scheme for bad loans.

This nickname seems to have caught on in financial circles as it is much snappier than the bonds’ official title: Enhanced Capital Notes.

The name Cocos seems to have derived from “contingent convertible,” which describes one characteristic of these bonds – they convert to equity in certain circumstances.

Keeping score: U.S. bonds, European convertibles, Chinese IPOs

From this week’s Thomson Reuters Investment Banking Scorecard:

· US CORPORATE DEBT TOPS $20 BILLION, BREAKS RECORD

For the second consecutive week, the volume of corporate investment grade debt in the US market topped the $20 billion mark, bolstered by benchmark names in the energy & power and financial sectors.   Shell International Finance raised $5 billion via Morgan Stanley, Bank of America Merrill Lynch and Deutsche Bank, while Canada’s Cenovus Energy raised $3.5 billion this week.

Investment grade debt activity from non-financial issuers totals $372.3 billion for year-to-date 2009, already besting the previous all-time record for annual non-financial activity set in 2001 when $360.5 billion in new corporate issues were brought to market.

· EUROPEAN CONVERTIBLE BONDS UP 50%
While global convertible bond activity is down 46% over 2008, the market for convertible bonds in Europe has picked up dramatically, with $24.1 billion in new convertible offerings – a 50% year-over-year increase.  Issuers in the materials, financial and industrial sectors account for nearly 60% of this year’s volume in Europe.  Deals from Anglo American, Arcelor Mittal and Alcatel Lucent top the list of convertible offerings this year.

UPDATE-BA’s convertible bond flies off the shelves

*This post was updated after the bond priced*

British Airways unveiled a $1 billion fundraising aimed at securing its future earlier on Friday, including $540 million in bank loans that had been earmarked for its pension funds as a safety net against the airline going bust.

The fundraising also included a 350 million pound ($570.5 million) convertible bond, which was over 7 times covered, pointing to healthy investor appetite.

Convertible bonds have become an increasingly important source of finance for firms in Europe. The instrument allows companies to raise capital paying less interest than standard bonds, while avoiding an immediate dilution of earnings per share because investors look to gains in share prices over a medium term.

Sungard sees bright spot in convertible arb

Convertible arbitrage is the hedge fund trade of the moment, with top-ranking returns of 12.58 percent so far this year, but there could be more to come.

rtxd7bdThe strategy, in which managers usually buy a convertible bond and short the underlying stock, is proving particularly profitable because the bonds are rebounding from the battering they took last year. The strategy lost 31.59 percent, the second-worst performing strategy, in 2008 as funds scrambled to sell their positions in what had become a crowded trade.

Such is the scale of the rebound in convertible bonds now that simply buying the convertible, without shorting the underlying stock, is proving very profitable.

After the storm

stormThe latest update on funds of hedge funds (FoHFs) performance arrives from Fitch Ratings — and it makes for an unsurprisingly sober read.

We perhaps know already that 2008 was the worst year ever for FoHFs, and that cumulative losses reached an all-time high as the year ended with a Madoff-shaped bang. Fitch also raises a fear that managers have shared after imposing redemption restrictions on clients wanting to stash their cash under the proverbial mattress:

The year has witnessed a wave of managers implementing restraints on clients’ access to their assets, thus putting again into question the business and sales model of the industry

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