2 International Financing Review March 21 2020Top news
Lenders scour loan docs 04 Frantic grab for cash 06 Fallen angel risk increases 08
Concerns grow over mismarked bond positions
Bonds Price swings amid extreme volatility complicate portfolio valuationsBY CHRISTOPHER WHITTALLExtreme levels of volatility in
credit markets are
compromising traders’ ability to
mark corporate bond positions
accurately, raising further
questions about the true value of
beaten-down debt markets.
Composite bond pricing
services run by trading and data
platforms such as Bloomberg,
MarketAxess and Tradeweb are
struggling to put an accurate
value on large sections of credit
markets, traders and investors
say, as trading desks provide
wildly diverging quotes for
individual bonds.
On volatile days such as March
9 when oil prices collapsed,
MarketAxess said it couldn’t put
a pre-trade price on an unusuallylarge proportion of bonds in the
energy sector, because the data
it received was so volatile and
unreliable. Usually, it can put a
pre-trade price on 95% of all
corporate bonds in the market.
More generally, the trading
platform’s ability to put an
accurate pre-trade price even on
high-grade bonds has also
diminished in recent weeks.
The mismatch between where
bonds are marked and the
amount of money they can be
exchanged for in practice could
have serious consequences for
fund managers already faced with
mounting redemption requests.
Some traders fear that
investors selling bonds will re-
price the market (and therefore
their own positions) lower,
creating a self-reinforcing cyclethat encourages even more
selling.
“The ability of the market to
agree on a price, separate from
the trade, is more dispersed than
it’s ever been – by quite a lot,”
said David Krein, global head of
research at MarketAxess.
“The disorder borders on
chaos, especially in energy. It’s
quite a challenge to see any
consistency in liquidity sources
from dealers or elsewhere.”LIQUIDITY CONCERNS
Long-standing concerns over the
liquidity of corporate bond
markets – or the ease of trading
bonds in decent size – have
resurfaced in recent weeks as
debt prices have collapsed amid
the coronavirus pandemic and
plunging oil prices.Traders have reported
yawning gaps between where
bonds are quoted and the levels
at which they actually trade.
Composite pricing services
from trading platforms provide
an important, neutral resource
for traders and investors to
value their bond positions
fairly. But the quotes from
trading desks and data from
the wider market that tends
to feed into these services
have become increasingly
volatile during these extreme
trading conditions, making it
harder to assign securities a
fair value.
There is increased uncertainty
even in high-grade bonds.
MarketAxess’s composite
pricing tool will usually
formulate a price within a basisTop-notch issuers return to primary
Bonds Most deals getting done but elevated risk environment claims three casualtiesBY SUDIP ROYPrimary markets on both sides of
the Atlantic were open last week
but three deals that were pulled
demonstrate that execution
remains fraught with risks for
even the safest of products.
)SSUANCEûWASûMOSTLYûCONlNEDû
to the US high-grade corporate
and European covered bond
markets with supply on Tuesday
and the last two days of the week.
But though there was the
occasional deal from other
sectors too, major areas of the
primary market such as high-
yield and emerging markets
remained a wasteland as the VIX
“fear gauge” index recorded its
highest level ever.
Even for the most stellar
issuers, opportunities to hit the
MARKETûWEREûlTFUL ûWITHûMOSTû
days a complete write-off andsome windows that appeared to
be open at the start of the day
quickly closing.
The backdrop is even tougher
than in the aftermath of Lehman
Brothers’ collapse in September
2008 when primary markets
continued to remain relatively
active. It took around 45 days for
European investment-grade
spreads to double after Lehman
went bust, according to Bank of
America. This year it has taken
19, albeit from tighter levels.
Consequently, there is a huge
element of experimentation
around pricing on the deals
being executed, which is adding
to the risk.
While quite a few issuers are
holding regular go/no go calls –
sometimes twice a day – most
remain on the sidelines.
That is why bankers say
getting almost any deal over theline in this environment is a
lLLIPûFORûTHEûMARKET
“Printing deals now is a
positive signal. It shows you
have cash in the door,” said a
DCM syndicate head in London.TWO CAMPS
There are two camps of possible
issuers: those who think things
are going to get worse and those
who are in tough industries that
simply need money – energy
being the obvious one.
Either way, they have to be
able to move fast and offer an
enticing premium.
Calculating fair value is
BECOMINGûAûlNGER
IN
THE
AIRû
exercise in some instances,
given how secondary quotes on
screens are often several points
higher than the price at which
bonds are changing hands,
assuming they are at all.“You cannot make a
meaningful price discovery from
secondary prices; it is just
impossible,” said a FIG banker.
It has become a bizarre chicken-
and-egg situation, in that a new
deal provides the best measure of
investor sentiment towards a
credit, but execution is dependent
on a meaningless secondary level.
“You know what the direction of
travel is, so put a price on that and
then put a premium on top of that
for the volatility,” was the advice of
one head of capital markets.US$25bn DAY
That was a message taken on
board in the US high-grade market
on Tuesday, when nine issuers
raised more than a combined
US$25bn a day after the Dow Jones
index sank nearly 3,000 points.
Big-name borrowers from
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