| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Bond yields hint at corporate bankruptcies |
Key index identifies
72 issues in distress;
banks seen hit hard
By DUNCAN KERR
August 19, 2008
AS RECESSION FEARS loom for the world's leading economies, analysts say a rise in corporate bankruptcies is inevitable over the next 12 to 18 months, and the banking sector could provide a larger-than-expected chunk of the proportion of companies that fail.
According to the Merrill Lynch Corporate Master index, which tracks the performance of dollar-denominated, investment grade-rated corporate bonds, there are 72 bonds trading in distressed territory, 28 of which have been issued by banks.
Washington Mutual Inc., National City Corp. and Huntingdon Capital in the U.S., HBOS PLC in the U.K. and Iceland's Kaupthing Bank HF, Landsbanki Islands HF and Glitnir Bank HF all have bonds trading in distressed territory -- a spread of 10 percentage points and over an equivalent treasury.
"This unusual development could indicate expectations for more bank failures following IndyMac Bancorp. closing its doors last month," says Martin Fridson, chief executive of Fridson Investment Advisors, a U.S. credit-investment firm. IndyMac was seized by Federal Deposit Insurance Corp. of the U.S. after a run on the bank by depositors left the California lender short on cash.
The episode fueled speculation about which banks, particularly in the U.S., will be next to fail, as declining house prices erode the value of mortgage holdings, resulting in increasing loan defaults.
We are forecasting 110 banks with $850 billion in assets to fail by next July. That's eight times the FDIC's total reserves," says Chris Whalen, managing director of Institutional Risk Analytics. "The next president of the U.S. is going to have to create a vehicle to buy banks that we can't sell after they fail."
The fallout from IndyMac has hit the broader banking sector hard, as evidenced in the option-adjusted spreads -- a measure of a security's extra yield over the yield of a comparable treasury security after accounting for any options or sinking funds -- on outstanding bank bonds.
"In October 1998, the average option-adjusted spread on investment grade bank bonds had more than doubled from three months earlier on the heels of the Long-Term Capital Management bailout, yet there were no issues quoted wider than 433 basis points," says Mr. Fridson.
By comparison, the highest spread of the 72 distressed bonds on the Merrill Lynch index on Aug. 5 was 31.46 percentage points on an outstanding senior secured bond due 2013 from bond insurer MBIA. The second-highest was the spread of 30.71 points on a subordinated bond due 2011 from Iceland's Glitnir, and the third-highest a spread of 29 points on a junior subordinated bond due 2011 issued by Wachovia Capital Corp.
Washington Mutual Inc., where most of the market speculation on another bank failure has focused, had seven of its bonds trading in distressed debt territory of the 28 on the Merrill index. Spreads on the bonds ranged from 10.48 percentage points to 21.32 points, according to the index on Aug. 5.
Last month, the Seattle, Wash.,-based bank reported a second-quarter loss of $3 billion, the largest quarterly loss in its history, as it increased its loss reserves to more than $8 billion to cover souring loans in its mortgage portfolio. The loss led Goldman Sachs Group to cut its full-year estimate on the bank, citing its "severe" credit challenges.
However, William Isaac, chairman of consultancy Secura Group and a former chairman of the FDIC, says that while bank failures will increase over the next year from historically low levels, numbers will not approach those seen in the 1980s and early 1990s unless the U.S. experiences a deep and prolonged recession.
Mr. Isaac added that holders of subordinated debt typically recover part of their investment in a bank failure, but should expect significant losses.
Joseph Mason, a banking professor at Louisiana State University, said there was typically something left for holders of subordinated debt when a bank fails, but there have been instances of full losses.
The FDIC uses various resolution strategies when a bank fails, ranging from purchase-and-assumption transactions to deposit payoffs.
In Mr. Mason's view, the credit market is "rationally overestimating" risk by assigning distressed levels to investment-grade bank debt. Investors are looking for information on banks' exposures to bad mortgages, an area that has not had adequate reporting requirements.
Given the lack of information, the market is rationally discounting banks that may have exposure.
• From Financial News at www.efinancialnews.com.
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