Libor Transition Stokes Sales of Risky Corporate Debt

Link: https://www.wsj.com/articles/libor-transition-stokes-sales-of-risky-corporate-debt-11631451601

Excerpt:

Managers of collateralized loan obligations — securities made up of bundled loans with junk credit ratings — are rushing to close deals ahead of the year-end move away from the London interbank offered rate. The interest-rate benchmark underpins trillions of dollars of financial contracts but was scheduled for phaseout after a manipulation scandal.

That is helping push CLO sales to records. U.S. issuance topped $19.2 billion in August, a monthly record in data going back a decade, according to S&P Global Market Intelligence’s LCD.

…..

A wave of CLO refinancings this year allowed some managers to include fallback language shifting to SOFR in their documents, analysts said. But for other deals, CLO managers and investors must negotiate that changeover, which could create conflicts if they have different rate preferences.

Disruptions to the transition could increase the extra yield, or spread, that investors’ demand to hold triple-A rated CLO debt during the fourth quarter of this year, depending on how quickly the loan market transitions and how new CLO deals and investors position themselves, said Citi analysts in a June note.

SOFR is based on the cost of transactions in the market for overnight repurchase agreements, where large banks and hedge funds borrow or lend to one another using U.S. Treasurys as collateral. Unlike Libor, which tends to rise during periods of market stress, it doesn’t adjust for shifts in credit.

During last year’s spring selloff, the difference between three-month Libor and SOFR rose to 1.4 percentage points at its peak, according to BofA. That means CLO debtholders received a higher rate than what they would have if their bonds were linked to SOFR.

Author(s): Sebastian Pellejero

Publication Date: 12 September 2021

Publication Site: Wall Street Journal

U.S. Insurance Industry’s High-Yield Bond Exposure Grows Following COVID-19-Related Credit Deterioration in 2020

Link: https://content.naic.org/sites/default/files/capital-markets-special-report-covid-related-credit-deterioration.pdf

Graphic:

Excerpt:

At year-end 2020, the U.S. insurance industry reported $286 billion in high-yield bond exposure,
an increase of just over 25% compared to year-end 2019 due in part to the broad-based credit
impact of the COVID-19 pandemic.

High-yield bonds accounted for 6.1% of the industry’s total bond exposure, the highest level in
more than 10 years and an increase from 5.1% at year-end 2019.

High-yield corporate bonds, asset-backed securities (ABS) and other structured securities, and
private-label commercial mortgage-backed securities (CMBS) were the primary contributors to
the increase in high-yield exposure.

Author(s): Michele Wong and Jean-Baptiste Carelus

Publication Date: 6 August 2021

Publication Site: NAIC, Capital Markets Special Report

China’s Corporate Crackdown Adds to Junk-Bond Distress

Link: https://www.wsj.com/articles/chinas-corporate-crackdown-adds-to-junk-bond-distress-11629019801?mod=e2tw

Excerpt:

The latest Chinese market to buckle under pressure from Beijing’s wide-ranging corporate crackdown: junk bonds.

Companies from China make up the bulk of Asia’s roughly $300 billion high-yield dollar bond market, thanks to a surge in borrowing by the country’s heavily indebted property developers.

But the investor optimism that drove that borrowing has collapsed.

…..

The widening regulatory crackdown that sparked a big selloff last month in the shares of internet-technology and education companies has also weighed on Chinese credit markets, pushing down prices of even investment-grade bonds.

The moves show China is getting more serious about reining in companies whose business practices are seen at odds with national priorities. Investors are now actively looking for sectors that might be next in the crosshairs.

Author(s): Serena Ng

Publication Date: 15 August 2021

Publication Site: Wall Street Journal

Mortgage Rates Are Low: Why Aren’t Minority Homeowners Refinancing?

Excerpt:

The reasons behind the racial disparity in refinancing align with documented evidence about other inequities in housing, Keys said during an interview with Wharton Business Daily on SiriusXM. (Listen to the podcast above.) Structural racism built into both public policy and the private sector has led to longstanding asymmetry in income, credit scores, loan-to-value ratios and other risk factors that inhibit refinancing for minorities.

The coronavirus pandemic is exacerbating the problem, Keys said, because Black and Hispanic households are more likely to experience job loss than white households. The U.S. unemployment rate in May dropped to 5.8%, yet it was 7.3% for Hispanics and 9.1% for Blacks.

“Some of this may be a function of just measuring incomes and employment disruptions, but I think there is another factor, which is related to just how tight mortgage credit is right now,” Keys added. “Mortgage credit is perceived as being very tight. It can be a hard time to get a loan, and there are a lot of hoops to jump through when you’re refinancing.”

Author(s): Benjamin Keys interviewed on Wharton Business Daily

Publication Date: 6 July 2021

Publication Site: Knowledge @ Wharton

Editorial | When it comes to Illinois bond ratings, up definitely better than down

Link: https://www.news-gazette.com/opinion/editorials/editorial-when-it-comes-to-illinois-bond-ratings-up-definitely-better-than-down/article_d17d487c-5ff3-5da1-a958-60d7edd5c3e6.html

Excerpt:

Citing a “material improvement in state finances,” Moody’s Investor Services recently raised the state’s bond rating by one notch — up to Baa2 from Baa3.

Ordinary mortals won’t know what that means. But Illinois has climbed the ladder from being one notch above junk bond status to two notches.

It’s the first time Illinois’ bond rating has been raised in 20 years. The improvement comes after a steady spiral downward.

Author(s): Editorial Board

Publication Date: 4 July 2021

Publication Site: The News-Gazette

Op-ed: Illinois gets its first credit upgrade in 20 years, thanks to $138 billion in federal relief

Link: https://www.chicagotribune.com/opinion/commentary/ct-edit-illinois-credit-upgrade-federal-bailout-20210701-mccvijig6fbuzpuhmc4eorkobm-story.html

Graphic:

Excerpt:

The ratings firm Moody’s Investors Service this week upgraded Illinois’ credit rating one notch to Baa2, a level two notches above junk. It’s a major turnaround given that just one year ago Illinois faced the prospect of becoming the first state to ever be rated junk. In mid-2020, shutdowns ravaged the state’s tax base, Sen. Don Harmon asked for a $42 billion bailout from Congress and the state projected billions in multi-year budget shortfalls.

What changed so dramatically in such a short period of time? Ignore the claims by Illinois lawmakers of their heroic acts of “balanced budgets,” “fiscal discipline” and the like. Even if those claims were true – and they are not – they couldn’t by themselves create such a swing in Illinois’ short-term fortunes.

Credit, instead, the massive $138 billion in federal funds from the multiple COVID relief and stimulus packages – as compiled by the Committee for Responsible Federal Budget – that are now flooding Illinois’ public and private sectors. Those billions have significantly reduced the probability of a bond default – which is ultimately what Moody’s really cares about. 

Author(s): Ted Dabrowski, John Klingner

Publication Date: 1 July 2021

Publication Site: Chicago Tribune

Moody’s upgrades Illinois’ credit rating

Link: https://capitolnewsillinois.com/NEWS/moodys-upgrades-illinois-credit-rating#new_tab

Excerpt:

Illinois received its first credit rating upgrade in 23 years on Tuesday when Moody’s Investors Services raised the state’s rating one notch, citing “material improvement in the state’s finances.”

Although the upgrade still leaves Illinois bonds rated just two notches above so-called “junk” status, Gov. JB Pritzker said it marked a turning point for the state, and he credited the General Assembly and members of his own administration for bringing greater fiscal discipline to the state’s budget.

Author(s): PETER HANCOCK

Publication Date: 29 June 2021

Publication Site: Capitol News Illinois

How Costly is Noise? Data and Disparities in Consumer Credit

Link: https://arxiv.org/abs/2105.07554

Cite:


arXiv:2105.07554
 [econ.GN]

Graphic:

Abstract:

We show that lenders face more uncertainty when assessing default risk of historically under-served groups in US credit markets and that this information disparity is a quantitatively important driver of inefficient and unequal credit market outcomes. We first document that widely used credit scores are statistically noisier indicators of default risk for historically under-served groups. This noise emerges primarily through the explanatory power of the underlying credit report data (e.g., thin credit files), not through issues with model fit (e.g., the inability to include protected class in the scoring model). Estimating a structural model of lending with heterogeneity in information, we quantify the gains from addressing these information disparities for the US mortgage market. We find that equalizing the precision of credit scores can reduce disparities in approval rates and in credit misallocation for disadvantaged groups by approximately half.

Author(s): Laura Blattner, Scott Nelson

Publication Date: 17 May 2021

Publication Site: arXiv

Bias isn’t the only problem with credit scores—and no, AI can’t help

Link: https://www.technologyreview.com/2021/06/17/1026519/racial-bias-noisy-data-credit-scores-mortgage-loans-fairness-machine-learning/

Excerpt:

But in the biggest ever study of real-world mortgage data, economists Laura Blattner at Stanford University and Scott Nelson at the University of Chicago show that differences in mortgage approval between minority and majority groups is not just down to bias, but to the fact that minority and low-income groups have less data in their credit histories.

This means that when this data is used to calculate a credit score and this credit score used to make a prediction on loan default, then that prediction will be less precise. It is this lack of precision that leads to inequality, not just bias.

…..

But Blattner and Nelson show that adjusting for bias had no effect. They found that a minority applicant’s score of 620 was indeed a poor proxy for her creditworthiness but that this was because the error could go both ways: a 620 might be 625, or it might be 615.

Author(s): Will Douglas Heaven

Publication Date: 17 June 2021

Publication Site: MIT Tech Review

Sovereign Defaults Hit Record in 2020; More Are Possible

Link: https://www.fitchratings.com/research/sovereigns/sovereign-defaults-hit-record-in-2020-more-are-possible-08-06-2021

Graphic:

Excerpt:

The sovereign issuer-based default rate rose to a record high in 2020 against a backdrop of weakened sovereign credit profiles due to the Covid-19 pandemic, Fitch Ratings says. Downgrade pressures have eased this year, but our ratings indicate that more defaults are possible.

Fitch’s recent Sovereign 2020 Transition and Default Study shows that five Fitch-rated sovereigns defaulted in 2020, up from only one in the previous year. As a result, the sovereign default rate rose more than threefold to 4.2% from 0.9% in 2019. The previous high was 1.8% in both 2016 and 2017.

Publication Date: 8 June 2021

Publication Site: Fitch Ratings

ACLI Webinar Series: Navigating Credit Trends and Market Challenges

Video:

ACLI learning link: https://learning.acli.com/product?p=acli-webinar-series-navigating-credit-trends-and-market-challenges

Description:

It seems that not a week goes by without an announcement of another merger/acquisition transaction in the life insurance industry. With an overlay of persistent capital market volatility and a sharply increased focus on ESG risk factors, life insurance executives will have their plates full of challenges for the balance of 2021. Whether large national carriers or smaller regional players, virtually every life company will experience changes in their operating environment. Our panelists will share their perspectives on how these trends will shape the insurance markets and discuss the implications for credit and risk management.

Author(s): Peter Giacone, KBRA; Celeste Guth, Erinn King, David Marcinek

Publication Date: 13 May 2021

Publication Site: ACLI on Vimeo

Bidenomics Takes Root in Europe’s Economically Fragile South

Link: https://www.wsj.com/articles/bidenomics-takes-root-in-europes-economically-fragile-south-11620039617

Excerpt:

Since the 1990s, Italian leaders have tried to overhaul the sclerotic economy while also running tight budgets. Mr. Draghi is the first in decades who can deploy massive fiscal firepower to help.

Italy’s economy has rarely grown by more than 1% annually over the past quarter-century. The economy has never fully recovered from the global financial crisis and subsequent eurozone crisis, and slumped by another 9% in 2020 amid the pandemic and strict lockdowns.

Germany, France and other EU countries backed the recovery fund mainly for fear that Italy and Southern Europe could get stuck in another deep economic slump that once again tests the cohesion and survival of the eurozone.

….

Most of Greece’s debt is in bailout loans from the rest of the eurozone, with no repayments due for many years, making another Greek debt crisis unlikely for a long time.

Author(s): Giovanni Legorano

Publication Date: 3 May 2021

Publication Site: Wall Street Journal