(New York)

Some advisors are always searching for the next blow up on the horizon. Well, with that in mind, Fitch has just put out a warning to investors that the next big market storm will likely start in credit funds. Fitch’s warning is predicated on the well-trod idea of a liquidity mismatch between the daily liquidity that open-end bond funds offer, and the relative illiquidity of their underlying holdings. In December, open-ended loan funds saw steep withdrawals, which led to big losses.

FINSUM: This is a fairly well-covered topic, but it is still a big risk. It has not yet happened on a major scale, but if it did, the potential for losses is massive.

Published in Bonds: IG
Thursday, 07 July 2016 10:16

Sovereign Downgrades Coming Hot and Fast


The UK got downgraded strongly after its vote to leave the European Union, and now the sovereign downgrades just keep on coming. So far this year Fitch has downgraded 14 sovereigns, with the Middle East and Africa counting for more than half of the ratings actions. Falling oil prices and a stronger US Dollar are largely to blame. Fitch’s head of sovereign ratings also warned investors that Europe could be next on the chopping block, saying “Europe’s political backdrop could have negative implications for sovereign ratings … Comparatively high government debt levels are observed in several eurozone sovereigns, and are likely to remain effective rating constraints”.

FINSUM: How odd is it that there have been many sovereign downgrades and many more are pending, and yet rates are at all-time lows? In some ways it is ironic, in other ways it makes perfect sense.

Source: Financial Times

Published in Economy
Tuesday, 28 June 2016 10:34

Britain Downgraded Across the Board


S&P and Fitch have both just stripped Britain of its top credit rating. S&P took the UK’s AAA rating away, moving it down two notches to AA, saying that Brexit vote will “weaken the predictability, stability, and effectiveness of policymaking in the UK and affect its economy, GDP growth, and fiscal and external balances”. Fitch meanwhile, cut Britain’s rating from AA+ to AA, having already stripped the country of its AAA rating in 2013. The S&P revised its growth outlook for the country to just 1.1% per year from 2016 to 2019.

FINSUM: We suspect this departure, if it actually goes through, will greatly damage foreign trade, which will obviously hurt the economy and tax revenue. Even if Britain does not leave the EU, the uncertainty in the near to medium term is going to stunt the economy.

Source: Financial Times

Published in Economy
Tuesday, 26 April 2016 09:05

Fitch Warns on Huge BDC Debt Levels

(New York)

Ratings agency Fitch has come out warning that popular “business development companies” are struggling with high debt levels. BDCs, as they are often called, are essentially lending vehicles within the US shadow banking system. BDCs have spent a lot of money buying back their own stock even at a time when their portfolios have done poorly. This has boosted debt levels to a point where Fitch says they will be hard to sustain. A BDC’s debt cannot exceed its equity by law, but the average rated BDC is now trading at a 16% discount to its net asset value.

FINSUM: BDCs are a relatively niche area, but this article shines the light on some of the concerning practices that are occurring in the space.

Source: Financial Times

Published in Markets

(New York)

This article takes a look at the rating agency business, a sector whose deep conflicts of interest became apparent after the near meltdown of the financial system during the Financial Crisis. The piece highlights that despite the huge heat the agencies took for giving out high ratings to very poor credits, the businesses are still very strong, banking near record profits. According to the piece, the three leading agencies—S&P, Moody’s, and Fitch, still rate about 95% of all new issues, a figure almost unchanged since before the Crisis. The article arrives just as Moody’s agreed to pay a $130m settlement to a California pension fund, closing one of the last remaining legal battles for the agencies. Following the Crisis, lawmakers called for a major shakeup of the way the firms made money, but no changes ultimately occurred.

FINSUM: It is astonishing how little things have changed. But let’s be honest, it has not changed because investors do not care enough to pay for ratings themselves. Just look at the Kroll Bond Rating Agency example to see this.

Source: Wall Street Journal

Published in Corporate News
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