Collateralized Loan Obligations
The elephant outside the room is named Discontinuity. That’s perhaps an intimidating word, but it is exactly what the USA is in for. It means that a lot of familiar things come to an end, stop, don’t work the way they are supposed to - beginning, manifestly, with the election process now underway in all its unprecedented bizarreness. One reason it’s difficult to comprehend discontinuity is because so many operations and institutions of daily life in America have insidiously become rackets, meaning that they are kept going only by dishonest means. If we didn’t lie to ourselves about them, they couldn’t continue.
Was that it for the great February/March bear market rally?
Over the past month, as expected, the CLO rout has gone from bad to worse, and according to the latest Morgan Stanley CLO tracker, as of the end of February, the median US CLO 2.0 equity NAV stood at -1.99 with the number of CLO 2.0 deals’ equity tranches currently having NAV below zero soaring by 30% from 348 to 453.
It was just three days ago when we brought you what we called “the next shoe to drop:” CLOs. Just hours after our warning, Moody's followed in S&P's footsteps and delivered their first downgrade of post-crisis US CLOs. In the crosshairs: Silvermine Capital or, more specifically, Silvermore CLO and Silver Spring CLO where exposure to junk debt and the increasingly toxic O&G space is worryingly high.
The Next Shoe Just Dropped: Equity NAVs Of 348 CLOs Slide Below Zero; "Market Changed Dramatically In 6 Weeks"Submitted by Tyler Durden on 02/21/2016 23:34 -0400
First it was Junk Bonds, then Investment Grade bonds, then bank loans, and now, in just six weeks, the CLO shoe has finally dropped.
At the worst possible time.
Junk Contagion Spreads: Investment Grade Bonds Plunge To 2-Year Lows, Treasury Liquidity Collapses, CLOs NextSubmitted by Tyler Durden on 12/14/2015 15:49 -0400
First it was just junk, then investment grade bonds started getting whacked, then liquidity in the 10Y Treasury imploded, and now CLOs are getting hit: “The price declines are alarming and worrying," according to Rishad Ahluwalia, JPMorgan’s head of global CLO research.
Currently, there are things occurring that are very troublesome, and in more normal times, would likely already have investors heading for cover. However, in today's liquidity fueled, Central Bank supported environment, that has yet to be the case. The reason was best described recently by Dr. Robert Shiller "I call this the 'new normal' boom ó it's a funny boom in asset prices because it's driven not by the usual exuberance but by an anxiety." What happens next is only a guess. However, historically, it hasn't been the outcome that investors were hoping for. But then again, maybe "bearish bull" isn't as much of an oxymoron as it is just a warning.
Sense of desperation among CEOs?
Wall Street turns junk-rated US corporate loans into highly rated yen-denominated bonds. Desperate Japanese pension funds gobble them up. Blame the Bank of Japan.
March was a record month for CLO issuance with $15.2 billion in deals coming to market, bringing the YTD total to $29 billion and making Q1 2015 the best first quarter in history for CLO new issue volume. And while a JPM analyst who spoke to Bloomberg says managers “want to get deals done early before risk retention kicks in,” we're confident that it’s all about keeping credit flowing to deserving borrowers and not at all about a desire to keep exposure to 5% of a collateral pool littered with loans to “companies that are of lower credit quality or that do not have a third-party evaluation of the likelihood of timely payment of interest and repayment of principal” off of the books.
This morning I had left the TV mistakenly tuned to CNBC with the sound on - and unavoidably caught another bullish strategist jawing about the US economy’s awesome strength. This one was peddling as exhibit #1 the recent surge in C&I loans, arguing that it is a sure sign that business is gearing up for a post-winter boom. In this case, like most of the blizzard of bullish factoids spewed out each day on bubble vision, the purported business lending boom is not all that.
When an economic crisis is coming, there are usually certain indicators that appear in advance...
"This is why Putin is Public Enemy Number 1. It’s because he’s blocking the US pivot to Asia, strengthening anti-Washington coalitions, sabotaging US foreign policy objectives in the Middle East, creating institutions that rival the IMF and World Bank, transacting massive energy deals with critical US allies, increasing membership in an integrated, single-market Eurasian Economic Union, and attacking the structural foundation upon which the entire US empire rests, the dollar." Up to now, of course, Russia, Iran and Venezuela have taken the biggest hit from low oil prices; but what the Obama administration should be worried about is the second-order effects that will eventually show up...
Among those who’ll get to eat the losses: unsuspecting retail investors.