AFP Blogs

Debt markets are not complicated. In fact, one expert says they are getting simpler with time.

“If anything, the debt world has been really dumbed down over the last decade,” says Andrew Kalotay, PhD, an authority on institutional debt management and fixed-income valuation. “There used to be more types of bonds issued and much of them on the corporate side have disappeared. Today, you would be hard pressed to find a single callable bond.”

Kalotay will lead “What Every Corporate Debt Manager Should Know,” a one-hour webinar for AFP members, April 15, 3:30 ET. Corporate treasury professionals can hear Dr. Kalotay discuss new issue structuring, debt retirement and hedging.

“Whether a swap or bond, think about the product as something to manage over time, cradle to grave, and contemplate contingencies,” says Kalotay. “Often corporates use them as a hedging transaction. They get a presentation that talks about locking in the interest rate but the transaction cost is not mentioned. The bid ask spread is narrow when you enter and quite wide when you get out.”

While Washington, D.C., and most of the northeastern United States tries to get back on its feet after suffering through what has been the snowiest winter since William McKinley was president, the rest of the world was focused on events in Europe (specifically Greece), and China.

Signs that the European Union (EU) will provide some sort of support and aid to Greece was enough to create a bit of a floor for the troubled sovereign credit and the Euro itself. After the freefall of credit spreads, CDS, equities, commodities and currencies over the past couple of weeks, this week actually seems calm.

We will have to take a wait-and-see approach to developments in Europe. How the EU would response to a further deterioration of the situation is foremost on people’s minds.

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Back in 2002, when the University of Maryland was making its run at the NCAA men’s basketball championship, the term “Fear the Turtle” became popular. It was a reference to the less-than-frightening school mascot, the Terrapin. This week, a significantly more frightening chant heard around the world, which was “Fear the PIGS”. With the “PIGS” being a reference to the countries of Portugal, Ireland and Italy, Greece and Spain.

We witnessed a great bit of uncertainty in the global markets as participants around the world were greatly concerned about the potential of a credit event in one or more of these European Community members. We watched as absolute credit spreads and credit default spreads continued to widen and as debt and equity deals were delayed and postponed.

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To paraphrase Frankie Valli and the Four Seasons, the word of the week is “Greece”. Concerns about the financial stability of the Greek economy were the focus of the global capital markets. Because Greece is a member of the European Community (EC), questions have been raised about the value of the currency, the riskiness of credit in Europe and the impact on the potential growth of the European economy.

Unlike 2009, when the general feeling was that all the economies were slowing down as a result of the financial crisis, 2010 is already shaping up as a year where individual countries’ economies will not be moving in such lockstep.

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Does your risk management strategy support your firm’s strategic plan? Here are two opinions:

“Many of my current and former clients do not holistically align all their risk management with their business strategy,” says Dan Perkins, CTP, Senior Vice President, GTreasury. “If a company wants to truly align its risk management with its business strategy the treasurer should either sit on the purchasing/commodity committee, or execute the hedges—or both.”

Jennifer Morrison, CTP, Vice President, Senior Risk Manager, Corporate One Federal Credit Union: “What we have found to be fundamental to our weathering the storm has been, first, our organization’s cultural alignment with our risk management practices. Where there are no risk mitigations available, our Enterprise Wide Risk Management Committee, a committee of the board, is tasked with reviewing the risk assessment, mitigation plans, and accepting the residual risk (or not). This has created a culture that is very risk aware and a culture that then understood the storm that hit our investment portfolio in particular beginning in late 2007.”

Read more in the February issue of Risk, coming soon.

Download the January Risk here.

As we continue to move forward in the new year, the floodgates of new corporate debt issuance continue to be wide open. After the traditional quiet time of year end, January debt issuance is usually a busy time. But this year looks to be busier than most. In fact, we may be experiencing the busiest January since the late 1990’s.

Why is this occurring? Often the factors that cause this to occur are due to alignment. Issuers have a lot of supply and investors have a lot of demand. But it goes much deeper than that.

After experiencing a once-in-generation credit event and concerns about the global economy heading towards a depression, we find ourselves in a much different place here in 2010.

After the central banks of the world provided massive amounts of liquidity to the world economy and drove interest rates down to levels not seen in 70+ years or more, we are faced with the questions of: How will all this liquidity be removed from the market? When rates start to rise, how high will they go? (more…)

Global Capital Markets

JPMorgan sold $4 billion of 13-month extendible notes with a final maturity in December 2015

Travelers raised $500 million selling catastrophe bonds, the biggest issuance this year of securities that allow investors to bet against natural disasters.

U.S. Treasuries

Treasuries dropped, pushing 10-year yields to the highest level in four months.

The yield curve widened to a record as investors bet an accelerating recovery will fuel inflation and hurt demand for unprecedented government debt sales. (more…)

Global Capital Markets

Abu Dhabi provided $10 billion to help Dubai World, the state-owned holding company, avoid defaulting on a $4.1 billion bond payment that roiled global financial markets during the past month.

Companies with credit ratings below investment grade have sold a record $150.6 billion of U.S. corporate bonds this year as borrowers take advantage of surging demand for debt securities after last year’s credit freeze. Sales of high-yield, high-risk junk bonds compare with $149.1 billion in all of 2006, the previous high.

Corporate bond sales in Europe are exceeding the amount raised through bank loans for the first time, with issuance by non-financial companies doubling to a record 337 billion euros this year. Syndicated loans, or debt underwritten by a group of banks which they then sell to investors, fell 46 percent to 279 billion euros

Westpac Banking Corp. raised A$2 billion ($1.8 billion) from bonds backed by home loans in the first such sale by one of Australia’s top four lenders since the financial crisis began in 2007.

Brazil sold $500 million of 10-year bonds in the country’s fifth international dollar bond offering this year.

Denmark’s record $115 billion mortgage-bond auction drew yields at the lowest level since adjustable interest-rate loans were started 13 years ago

Panama scrapped a plan to sell $760 million of bonds through a state development fund after the offer sparked a rout in the country’s debt.

Leveraged-loan returns surpassed 50 percent this week as new bank debt, sold by companies seeking to pay for buyouts, issue dividends or refinance borrowings, rose in the secondary market.

U.S. Treasuries

Treasuries headed for a weekly gain, trimming this year’s loss, as stocks fell around the world on concern the global economic recovery will slow. (more…)

Global Capital Markets

BlackRock Inc., and Time Warner Cable Inc. led a 75 percent surge in U.S. corporate bond offerings this week as issuers took advantage of the cheapest relative borrowing costs in almost two years to refinance debt. Sales of $22 billion compare with $12.6 billion last week. New York-based BlackRock issued $2.5 billion of debentures to repay commercial paper in its first bond sale in two years. Time Warner Cable, also located in New York, sold $2 billion of notes as the second-biggest U.S. cable television-operator raised cash to reduce bank debt and commercial paper.

Mexico is issuing its first yen-denominated bonds, placing 150 billion yen ($1.7 billion) in Japanese markets. The Treasury Department says the so-called Samurai Bonds are 10-year instruments maturing in 2019, with a 2.22 percent interest rate

Kia Motor’s Corp.’s U.S. unit plans to raise $300 million from the first kimchi bond sale in more than two years as it seeks working capital for a new factory.

Wind Acquisition Holdings Finance SA is raising 500 million euros ($740 million) by issuing Europe’s first payment-in-kind notes since the credit crisis started in 2007.

U.S. Treasuries

Treasuries declined, with the yield gap between Treasury 2-year notes and 30-year bonds reaching the widest since at least 1980 amid lower-than-forecast demand for the $74 billion in notes and bonds auctioned in the week. Treasury 10-year notes fell for a second consecutive week as reports showed consumer confidence and retail sales rose more than forecast. (more…)

AFP convened a group of Washington decision-makers and corporate end-users in New York on Monday to discuss the latest in over-the-counter derivatives reform.  Reforming and regulating the OTC derivatives markets is a key pillar of a massive regulatory reform package moving through Congress. The House is debating its bill this week and could take a vote as early as Friday.

Among the participants at Monday’s symposium was Dan Berkovitz, general counsel for the Commodity Futures Trading Commission; Scott Eckel, a financial services policy advisor in the office of Rep. E. Scott Garrett (R-NJ); and Mike Connolly, treasurer of Tiffany & Co. and vice chairman of AFP’s board. Connolly is no stranger to the issue. In September, he was the only corporate practitioner on a panel discussing OTC derivatives reform before a joint hearing of the CFTC and the Securities and Exchange Commission.

Connolly said at Monday’s symposium that Tiffany uses derivatives as “prudent risk management” tools and urged other corporate end-users to “make sure we’re not one of the unintended consequences” of a bill that could increase costs of responsible risk management practices. Panelists suggested calling or writing Congressmen to be heard on the issue.

Derivatives, often traded speculatively, have taken considerable blame for last year’s maket failure, but many corporates deploy them not as speculative investments but instead to manage risk and maintain cost predictability. Proposals to regulate the OTC derivatives markets call for central clearing of derivatives trades through exchanges meant to mutualize risk among market participants and reduce the probability of systemic failure. Margin requirements, also part of legislative proposals, would increase the costs of derivative trading.  AFP and other corporate coalitions have called for a provision to exempt corporate use of derivatives as hedging tools from the clearing process.