April 5, 2013 at 5:18 pm #7346
Time bomb to the next crash is ticking as debt sales surge
By Harry Wilson, 4:50PM BST 01 Apr 2013
When dotcoms crashed, sub-prime imploded and banks collapsed it was not hard to find the markets’ Cassandras who had spotted the problem and either made millions betting against the bubble or written a book explaining how it was all going to go wrong.
Today, another bubble is ballooning but unlike those that have gone before it most investors, policymakers and analysts are well aware of its existence and the problems it could create.
Sales of high-yield debt – or, as they were once known, junk bonds – have exploded this year. In January alone, non-investment grade Asian companies, those whose debt is ranked by credit rating agencies as riskiest, sold just over $9bn (£6bn) of high-yield bonds, a year-on-year increase of more 6,000pc, according to figures from data provider Dealogic. In Europe, sales of high-yield debt is also running at record levels and nearly $30bn of bonds have been sold so far this year.
The massive increase so soon after a financial crisis that was caused in part by the credit meltdown has raised fears that less than five years on from the bankruptcy of Lehman Brothers and the near failure of Royal Bank of Scotland and HBOS, the world is setting itself up for another crash.
In large part, the explosion in demand for high-yield debt has been a direct consequence of the response of Western governments to the last crisis. Since Lehman’s collapse, some $12 trillion has been pumped into the global financial system by central banks across the world in an effort to prop up banks and maintain low interest rates.
The impact of this unprecedented monetary stimulus has been to create a potent mix of historically low yields on government bonds and rising inflation, forcing even the most conservative of investors to hunt for yield in an effort to preserve their capital and achieve a return.
“What you’ve basically seen is people who don’t really want to take more risk being forced up the risk curve to get the yield they need,” says one London-based bond trader.
While these include Asian investors looking for ‘lucky’ 8(%) yields, it also includes pension funds who have been starved of income from the bond yield slump. But it gets better, not content with investing their own money, several ‘investors’ are borrowing money to get leverage on these ‘deals’:
Several bankers and investors said the provision of leverage was now common in Asia, where clients of private banks will routinely demand to be lent money to win their custom amid a dog-fight among local and international banks to win a share of the region’s increasingly wealthy private investor base. Experienced traders regard many of these newcomers as “dumb money” and point to the enthusiasm with which the clientele of Asian private banks have bought highly-risky bail-in bonds from European banks.
The most notorious case of this was the sale by Barclays in November of a 10-year $3bn CoCo, or contingent convertible bond, which attracted enough orders to sell the debt more than five times over. That was despite the inclusion of a clause that meant that should the bank’s capital levels fall below a predetermined level the entirety of the investment would be wiped out.
Christine Johnson, manager of Old Mutual’s corporate bond fund, was among those alarmed at the terms on which Barclays was able to sell its CoCo.
“By losing all value prior to existing credit and equity investors, this bond is essentially providing insurance to every other investor. In short, investing in these bonds is like being in a reverse lottery where someone gives you one pound every week and then suddenly turns up demanding millions,” said Ms Johnson.
Still its one way of ‘recapitalisation’ I suppose, looks like Vinnie the knee-capper’s gone global… :S
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