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The New ETF Darlings – US-FOREX.US

Forex-Publisher — Thu, 20 Aug 2009 03:14:28 +0000

After the stock market lost 37% last year, retail investors have developed a taste for comparatively stodgy fixed-income assets, especially exchange-traded funds. Assets under management by fixed-income ETFs climbed 47%, to 83 billion, this year, according to Barclay’s data. That gain outpaced the 17% jump in assets held by all U.S. ETFs.“Some people are feeling gun shy with equities,” said Tom Graves, equity analyst at Standard & Poor’s. Graves and others believe that investors, nervous from watching stock investments in their retirement accounts swing, have taken to less volatile bond markets, where high-rated corporate securities with near certain yields of 6% can look more appealing than betting on stocks. ETFs are usually the cheapest route, offering lower fees than managed bond mutual funds or open-end index funds.Of iShares’ four most-popular ETFs in July, two were bond funds, according to Morningstar: the iShares Barclays TIPS Bond
, which follows an inflation-linked index, and iShares Barclays 1-3 Year Credit Bond
, a corporate credit fund.Where the money goes, fund managers soon follow. At least 14 new fixed-income funds were started this year. Bond giant Pacific Investment Management Company launched its first bond ETF in June, the 1-3 Year U.S. Treasury Index Fund
. Vanguard also unveiled seven new bond index funds earlier this month. Expected to become available by the end of the year, the Vanguard funds will track a range of corporate and government bond indexes and be available as ETFs.
Fixed-income funds’ appeal is also partly a result of corporate bonds’ spectacular run. Speculative-grade notes from companies with heavy debt burdens have soared 38% this year and junk bond ETFs have become popular picks on investing blogs. The flow of money into such funds may be evidence of retail investors chasing returns, but that’s not why Vanguard and PIMCO are offering new fixed-income ETFs, said Daniel Wiener, chairman of Adviser Investments.
“They see this is where indexing is heading,” Wiener said. As a result, Vanguard, whose name is synonymous with index funds, wants to compete in the young and growing ETF field, now dominated by iShares and State Street
.
Wiener sees the development of fixed-income ETFs following the same trajectory as open-end bond index funds. They seemed to lag behind stock market funds in assets and variety. Vanguard introduced its Total Bond Market fund in 1986. It took six years to get 1 billion in assets and held 5 billion by the end of 1997, according to his data. Everybody knew about Vanguard’s stock index funds, he said, “but it took years for the Total Bond Market to gain momentum. It’s like people didn’t figure out that if indexing worked in stocks, then it would work in bonds.”

Bonds Still Have Legs – US-FOREX.US

Forex-Publisher — Tue, 18 Aug 2009 22:59:52 +0000

All types of bonds have soared this year, from the debt of speculative-grade companies to the bonds cities and states sell to pay for schools. You might think that, the 38% return so far this year for junk bonds would mark the end of a run. But to Robert Tipp, chief investment strategist for Prudential Fixed Income Management, nearly all varieties of bonds still hold promise, even Treasurys. “We’ve come back a lot,” Tipp said, “but there’s still a long way to go.”At a gathering of Prudential’s
investment managers on Tuesday, Tipp and others discussed their outlook for the economy. All agreed that the worst had passed. “The Great Recession is over,” declared Edward Keon, a portfolio manager for Quantitative Management Associates. Another point of agreement: When economic growth returns, it will likely set a slow pace, so the investment managers expect the Federal Reserve to keep a lid on interest rates for the near future. “There’s no risk of the Fed taking away the punch bowl soon,” Tipp said. That means investments in corporate and municipal bonds should continue to perform well. Low interest rates, for instance, make it easier for companies and municipalities to refinance debt and avoid default.
One bond fund managed by Prudential, the Dryden Total Return Bond Fund, includes a mix of mortgage-backed, corporate and government bonds. As of its most recent regulatory filing, it owned debt from Goldman Sachs
, Bank of America
and JP Morgan Chase
at the end of April. Thirty-year bonds from Freddie Mac are its largest holding.
Tipp believes corporate debt hasn’t completely recovered from the sell-off that followed Lehman Brothers’ bankruptcy, when bond prices seemed to forecast another Great Depression. The average junk bond currently pays 9 percentage points over comparable Treasurys, a spread Tipp expects to fall. Before that spread dropped below 10% in July the entire junk bond market appeared “distressed” – usually a sign of a company’s impending collapse .
While inflation fears and looming bond sales keep some from buying Treasury debt, Tipp sees value in the long 30-year bond, which currently pays 4.35%. If the recession lasts longer, such safe haven securities may start climbing again. On the other hand, if the economy rebounds and the Fed raises rates, longer-dated Treasury bonds would be the least vulnerable. He’s avoiding shorter-dated Treasurys, which could get crushed if the Fed raises rates.

Crazy For Junk – US-FOREX.US

Forex-Publisher — Fri, 14 Aug 2009 23:50:27 +0000

Here’s more evidence of risk-taking’s rebirth: Sales of the riskiest, speculative debt has already surpassed last year’s total. Corporations have sold 88 billion in junk bonds worldwide, up from 49.5 billion in 2008, according to data provider Dealogic. The 4.2 billion bond sale by Canadian miner Teck Resources Limited
in May is the year’s largest.Telecommunication companies have benefited the most, accounting for nearly 20% of the junk bonds sold. Italian mobile-phone company Wind Telecomunicazioni SpA’s 3.8 billion issue in July is the largest from the sector thus far. More hit the market in the past week. Wireless communication company NII Holdings
is currently marketing 500 million in notes; satellite television provider Dish Network
sold 1 billion in notes on Thursday; and Sirius XM Radio
announced an offering of 250 million in notes to repay debts owed to Liberty Media Corp.
How to explain the rush of new bond sales? Some credit goes to retail investors piling their savings into fixed-income mutual funds. Bond managers say the easiest and cheapest way to use that cash is by buying newly issued bonds from underwriting banks. The alternative can be costly. Putting a large amount of money to work in the secondary market by bidding on already trading notes could allow other bond traders to gouge the buyer. Bond funds received 11.5 billion in the seven days to August 5, according to the most recent figures from the Investment Company Institute. That’s up from 8.6 billion in the previous week. Of the 11.5 billion, 9.3 billion went to taxable funds, which hold corporate and Treasury bonds. Jeff Tjornehoj, research manager at mutual fund tracker Lipper, believes the popularity of fixed-income funds reflects a change in retail investors’ thinking. After getting burned on their stock holdings last year, people have come to see bonds as less volatile and stomach churning than stocks. The change in sentiment creates an opportunity for mutual funds to start new funds. Vanguard, for instance, unveiled seven bond index funds this week .
Low rates for Treasurys have helped, too, by making higher-paying corporate bonds more attractive. But yields on longer-dated government bonds are creeping higher as the Treasury continues to sell bonds to finance spending and the Federal Reserve empties out the 300 billion purse it used to purchase Treasurys. On Wednesday, a 23 billion auction of benchmark 10-year notes sold at a 3.7% yield. That’s much higher than the 2% reached in March but, apart from the 3.66% average rate in 2008, is still well below the annual average over the last 46 years, according to Federal Reserve data.
The 10-year note rose on Thursday to yield 3.59% after a record 15 billion auction of 30-year Treasury bonds turned out better than expected.

The CIT Bankruptcy Watch – US-FOREX.US

Forex-Publisher — Mon, 10 Aug 2009 21:46:42 +0000

CIT Group’s progress in cajoling bondholders to help trim its debt burden has saved the lender from imminent bankruptcy. The most recent good news came Friday: CIT said it was on track to pull off an agreement to pay some bondholders 87 cents on the dollar to hand over their notes. In the past week, as the offer looked more likely to succeed, investors bid up the company’s stock. Shares in CIT shares have jumped 70% since Aug. 4. That optimism looks short sighted. A successful tender offer for the notes maturing Aug. 17 may keep CIT
from defaulting on the 1 billion in bonds, but credit analysts say the lender still looks like a strong candidate for bankruptcy. It has another 10 billion in debt it must pay off through next year, 872 million of which is due in November, according to estimates from debt researchers at CreditSights. Without the ability to borrow in credit markets and lend the proceeds to small businesses, CIT’s funding model is effectively broken.Completing the tender offer, which expires Aug. 14, is probably the easiest of CIT’s problems to solve, especially after the company lowered its minimum participation rate to complete the offer from 90% of bondholders to 58%. Dropping it required the approval of the investor group that came to CIT’s rescue in July with a 3 billion loan. The investor group, as it happens, owns roughly 58% of the notes maturing in August. It’s also what the investor group agreed to tender when it set up the loan. The lending group includes well-known money managers, such as Pacific Investment Management Co. and The Capital Group Companies, those with experience acquiring troubled companies through “loan to own” strategies, and the State of Alaska Permanent Fund-the investment vehicle for Alaska’s oil royalties. Their credit agreement puts these bondholders in a safer position if CIT fails. It also imposes tough terms. CIT must pay a floating interest rate with a 13% floor and pledge assets worth five times the loan amount, or 15 billion. The terms include a 5% fee and a 2% repayment fee and give the lenders a claim on “substantially all” assets that aren’t already collateral, according to the company’s regulatory filings.
The next step, credit analysts say, is probably a prepackaged bankruptcy, a reorganization plan drawn up by a company and its creditors. One scenario would give cash to CIT senior unsecured bondholders from selling CIT’s assets, as well as equity in the new company. The secured lenders would remain in place. Current shareholders, including the Treasury Department and its 2.3 billion in preferred shares, would get wiped out.
The lending group has given CIT until Oct. 1 to adopt a restructuring plan.

Deutsche Boerse Under Pressure – US-FOREX.US

Forex-Publisher — Wed, 05 Aug 2009 21:46:17 +0000

Something’s amiss at exchange operator Deutsche Boerse.April to June should have been a rollicking quarter for the German operator of the Frankfurt Stock Exchange, as well as derivative exchanges Eurex and the International Securities Exchange. Stock markets picked up, raising the value of what was traded, while there was frenzied activity in the corporate bond market. Yet the firm reported a 34% drop in second quarter profits. Both the net profit – 164.9 million euros – and revenues – 516 million euros – missed estimates by a wide margin.”We had expected revenues to go up compared with the first quarter from the high volume of corporate bonds, while we’ve also seen higher share prices that should have made up for a lower number of traded shares,” said Konrad Becker of Merck Fink Private Bankiers, based in Munich.The firm’s problem likely lies in competition. “Deutsche Boerse has probably lost market share to alternative trading platforms, and they are also in the process of reducing fees, so even if volumes increase we will see revenues stagnating or lower,” Becker estimates. Upstart alternative trading platforms – offering faster and cheaper program trading – have been a headache for traditional exchanges in the United States, but have taken a while to infiltrate the European trading community. “At the start some people were a bit suspicious, asking Can I do trades? Now they’ve shown themselves to be working and cheaper, they’re getting much more interest,” says Becker. He added that the platforms also benefit as banks, which have traditionally used the exchanges for their trades, grow more anxious to trim their costs in the downturn.Chi-X, the most successful of the alternative trading platforms in Europe to date, has a 19.4% of the FTSE 100 , though its share of the German DAX has risen rapidly to 15.5%, according to the latest data on the company’s website.
The rapid loss of revenues probably means there is more trouble round the corner. Dirk Hoffman-Becking of Sanford Bernstein forecasts that the third quarter “could be weaker yet given a very sluggish July in derivatives and equities trading.”
Deutsche Boerse
tumbled 6.6%, to 52.95 euros , in Frankfurt on Wednesday, following the release of the results late on Tuesday. Going forward, Deutsche Boerse’s big challenge – like that of the London Stock Exchange – is cost cutting. Last week, NYSE Euronext
scraped past expectations for profit, even as it reported a decline in revenues because of unexpectedly effective cost cutting measures. On that count, Deutsche Boerse seems to be on the right track: The firm spent 620 million euros in the first half, and is on track to meet its targets for a total spend of 1.3 billion euros .

A Tale Of Two Balance Sheets – US-FOREX.US

Forex-Publisher — Tue, 04 Aug 2009 21:46:16 +0000

When insurance companies Prudential Financial and Allstate report earnings on Wednesday, investors will get a glimpse into the health of non-bank financial services companies. On both fronts there’s some cause for optimism, say analysts but Prudential is by far the stronger of the two.J.P. Morgan analyst Jimmy S. Bhullar believes that after issuing 1.2 billion in stock and another 1 billion in debt, Prudential has successfully shore up its balance sheet that “should enable the company to absorb investment losses, maintain its ratings and gain shares from weaker competitors in select markets.”Bhullar expects that Prudential will beat the consensus earnings estimates of 5.57 a share for 2010. He’s looking for 5.90 a share. Meanwhile, Prudential has no large amounts of debt coming due until 2011 and its management has weaned the company from dependence on the commercial paper market.The road may be rougher for Allstate
says analyst John Hall of Wells Fargo Securities. Allstate qualified for Troubled Asset Relief Protection funds but then never availed itself of the money and instead completed a 1 billion debt offering. Allstate’s investment portfolio is worth 94 billion and it has some exposure to commercial and residential real estate as well as private partnerships that need addressing.Hall says that Allstate shares are trading at 1.1 times book value. Historically, it has traded at 1.5 times. He believes that building a capital cushion is the catalyst that will eventually send the stock back to its normal multiples.Both insurers report after the closing bell Wednesday and have conference calls scheduled for Thursday morning.

McGraw-Hill Rides The Debt Wave – US-FOREX.US

Forex-Publisher — Mon, 27 Jul 2009 20:50:15 +0000

The sale of Business Week won’t make much money for the McGraw-Hill Companies but it will take a money-loser off the books and signal to investors that there will be more judicious sales ahead – that’s the bullish take on McGraw’s stock. The company reports earnings Tuesday.Michael Meltz, an analysts at JPMargan Choose has an overweight rating on McGraw’s stock. He believes that Business Week which has seen advertising declines in 7 of the last 8 years has revenues of up to 150 million and is costing McGraw 20 million a year. Business Week competes with Forbes but also Fortune which is owned by Time Warner
and Barron’s which is owned by News Corp.
Meltz doesn’t believe that any of Business Week’s existing competitors will buy it.Though Business Week gets a lot of attention, it’s not anywhere near the largest players in the 6 billion financial service conglomerate that owns bond ratings agency Standard & Poor’s. Financial services account for 44% of sales and the three quarters of cash flow. McGraw-Hill
Educational, which includes the financial publishing arm is another 40% of sales.McGraw is fortunate that, with ample assistance from the US Treasury, debt issuance from companies, states and municipalities is running quite high – nearly 2 trillion for the first six months of the year . That should drive sales for its much-criticized but very influential bond rating service.Meltz expects revenues of 1.5 billion for the second quarter, down 12% from a year ago, and earnings of 48 cents a share, down from 71 cents in 2008.

Geithner The Bond Angel – US-FOREX.US

Forex-Publisher — Fri, 24 Jul 2009 22:45:57 +0000

Has the credit crisis passed? Companies sold a record 1.79 billion in bonds worldwide in the first half of the year, according to a recent analysis by the rating agency Standard & Poor’s. Investors have clearly developed an appetite for corporate debt even while some companies, like the CIT Group, struggle under their debt burdens. Here’s the wrinkle: a third of that 1.79 trillion has government backing. In the U.S., the Federal Deposit Insurance Corp. guaranteed 160 billion through its Temporary Liquidity Guarantee Program of the 595 billion in corporate bonds sold through June. The largest beneficiaries of the effort to support financial firms’ debt were Citigroup
, General Electric Capital Corp
and Bank of America
. The TLGP expires Oct. 31. Unless the program is extended, financial companies will have to go it alone. Outside of financial firms, however, investment-grade corporations have unfettered access to the bond market, says Diane Vazza, head of global fixed income research at S&P. Aircraft maker Boeing
Co., for instance, sold 1.95 billion in bonds on Thursday. So the question is really how Citigroup, Bank of America and other banks will fare without Uncle Sam’s help. General Electric
could be a test case. GE said it would stop using FDIC backing for short-term debt and restrict using it for longer-dated bonds. Another boost to bond sales comes from retail investors who continue to shift their savings into bond funds. The easiest place to put new cash is into newly issued bonds, portfolio managers say, because secondary trading is less liquid and more costly. Taxable bond funds received 6 billion in the week ending July 15, according to the Investment Company Institute. For bond buyers, the risk remains from more speculative-grade companies missing debt payments. S&P’s trailing 12-month default rate for the U.S. is now 9.25%. Some companies default because they simply run out of cash. Others default in an attempt to survive through bond exchanges, asking bondholders to help them shed debt by swapping their bonds for other debt or cash at a discount.
In the past week, the beleaguered lender CIT launched an offer to pay holders of 1 billion in notes coming due in August 775 for every 1,000 in principal payments, with an extra 50 for those who tender their bonds early. If it fails, the company says it may file for bankruptcy. A successful exchange could save CIT more than 200 million, but it warned that it may still file for bankruptcy .
Some think the dangers of a rising default rate are overblown. Gary Sullivan, head of high yield bond portfolio management at Deutsche Bank’s DWS Investments, recently said he expects the default rate to increase but not as high as 14%, what S&P forecasts for early next year. Certain bond buyers say they can study balance sheets to find companies with risky credit profiles that will survive a recession and pay a high yield. Sullivan favors health-care, cable and telecom companies and bonds with ratings of B and BB, near the top of the junk range. He’s even willing to pick through companies with CCC ratings, those with the greatest debt burdens and most likely to default .

How Long Can CIT Last – US-FOREX.US

Forex-Publisher — Thu, 23 Jul 2009 22:46:02 +0000

News that a group of bondholders had saved CIT Group with a 3 billion loan sent the lender’s shares soaring this week. No longer worried that the federal government’s refusal to bail out CIT spelled bankruptcy, investors pushed its shares up 84% from July 17, until they fell 15% on Thursday. Credit markets, however, told a different story all along: insurance on CIT debt implied a 97% chance of default even while the stock rose.Stock market participants seemed slow to realize a possible bankruptcy still looms. In the event, CIT’s saviors would get first dibs on the carcass, credit analysts say. Shareholders would be wiped out. Thrown a 3 billion lifeline, CIT tackled its most pressing problem: how to pay off 1 billion in bonds coming due Aug. 17. The company said it would use cash from the loan to try buying the August bonds at 800 per 1,0000 – instead of paying the full amount at maturity – as part of a restructuring plan. The lending group, which holds a chunk of the August bonds, has already signed on. But how to convince other bondholders to take the offer? There was still a risk, according to a CIT statement, that if the “offer for the outstanding August 17 Notes is not consummated, the Company may need to seek protection under the US Bankruptcy Code.” That has the ring of a bargaining tactic. But CIT allows that it may file for bankruptcy even if it pulls off the tender offer. The loan isn’t enough to cover the other 6 billion in debt coming due in the next 12 months and its no longer able to sustain itself by borrowing in credit markets and lending to small businesses; CIT’s funding model is effectively broken, say credit analysts and rating agencies. Bond and commercial paper markets are closed off to it. The Federal Deposit Insurance Corp refused to guarantee its short-term debt and, along with Utah state banking regulators, prohibited CIT’s bank from extending credit to the rest of the CIT without their approval .
As long as it survives, CIT must pay a minimum of 13% on the new loan and pledge assets worth five times the loan amount, or 15 billion. The terms of the loan also include a 5% fee and a 2% repayment fee and give the lenders a lien on “substantially all” assets that aren’t already collateral, according to the company’s regulatory filings. So if CIT lands in bankruptcy court, the only bondholders who wouldn’t suffer would be those in the lending group, argued Kathleen Shanley, analyst at debt research firm GimmeCredit.
Bloomberg News recently reported that the lending group’s advisors are pushing for CIT to file for bankruptcy after the tender offer is completed. In a note to clients on Thursday, Shanley said the report outraged her. If CIT files for bankruptcy, “then the rescue facility will have done nothing to save CIT, but will have been merely a sham to enrich powerful creditors at the expense of others, when all the unsecured senior debt obligations should rank equally in a default.”

BA Tries To Find Its Wings – US-FOREX.US

Forex-Publisher — Fri, 17 Jul 2009 15:46:07 +0000

Will 1 billion be enough to get British Airways through a dour mix of slumping premium traffic, swine flu and staffing disputes? This was certainly the hope of investors as the beleaguered British airline announced plans to raise that amount by issuing convertible bonds and tapping funding that was set aside for its pension fund.Shares of the airline rose 3.5%, to 136 pence , as it joined Air France-KLM and Lufthansa in raising additional funds to shore up liquidity. It will raise 300 million pounds by selling convertible bonds which would be convertible to between 15 and 20% of its share capital by 2014, while the remaining 330 million pounds will be raised by taking over bank guarantees for the airline’s pension fund.Whether the amount will be enough to see British Airways through the recession is unclear – aside from the troubles plaguing the whole aviation industry in terms of falling demand and swine flu, British Airways is facing the prospect of strikes over its cost-cutting plans. It said it expects to post an operating loss of around 100 million pounds for the past quarter. The outlook for the global airline industry has continued to darken, with the International Air Transport Association announcing Thursday that business class revenue fell 23.6% in May. Airlines have responded with drastic measures – BA, for example, is looking to cut staff salaries to avoid further layoffs, and is currently said to be considering the sale of OpenSkies, a top-end airline which flies to New York from Amsterdam and Paris. Last week, ratings agency Moody’s cut its rating on British Airways
to Ba3 from Ba2, deeper into “junk” status.
Some hope is also being pinned on a merger with Spain’s Iberia, which has been in the cards for over a year now. Some observers think talks could gain pace under Iberia’s new chairman Antonio Vanzquez. However, it could follow in the footsteps of a tie up between Deutsche Lufthansa and Austrian Airlines. The German carrier on Thursday submitted revised offer terms to the European Commission for the Austrian firm.