CDS

Update: first market post news: 300-350; 100 bps tighter.

Per Yomiuri, TEPCO may be up for nationalization, precisely as we had predicted, due to the insurmountable amount of accrued liabilities from the Fukushima disaster which would bury a standalone company. And just as we rode the CDS on the way up from 90 to 460, so now is the time to assume there will be no credit risk whatsoever, now that TEPCO is the first ever non-bank Japanese TBTF. Time to bail as central planning is about to branch out.

Following the just released post on the Fukushima whistleblower, which completely inverts the liability matrix, with suddenly Hitachi far more on the hook if indeed the company built a plant in full knowledge of faulty structural and support elements, and TEPCO receiving a reprieve, we have been inundated with requests for recent Hitachi CDS pricing. Below we satisfy those requests. We see a lot of levitation in this name's future.

Earlier today, JPMorgan made waves by claiming, some would say rather uncouthly, that Portugal's government is about to keel over and die (even if it is undisputed- after all, on Wall Street no one can hear you speak the truth). Never one to be left wanting, here comes Citi with some charts of "parabolic" moves in the Irish 2 Year bond, and some even scarier claims. As expected any research report that starts with the words: "Oh dear...The picture on Irish interest rate markets is taking a very grim turn" - well, it is clear where it is going from there. In summary, Citi now believes that Ireland is essentially done for, or as Tom Fitzpatrick ever so more diplomatically puts it "things are about to get ugly", and recommends going long CDS since the entire short end of the curve has gone parabolic, now that Europe seems set to watch the island country explode, 2s10s has inverted in the past few days, and overall the Emerald Isle is now a dead man walking in the dumbest game of chicken since the creation of the euro. Too bad neither side is willing to back out, which will ultimately end with the eventual destruction of the eurozone and the euro. 

When we looked at TEPCO last two days ago, we said that as a result of the catastrophe in Fukushima its CDS which then had jumped by 90 bps to 133 bps, "we expect this number will soon be at multiples as the fall out to the company is increasingly exposed to the market." Alas, as predicted, the CDS is now trading 390-440 and will likely go points up very soon. Recall that the utility has over $90 billion in debt, which may or may not be nationalized, but any "conservatorship" treatment will likely trigger restructuring clauses. And the latest news out of Kyodo goes from bad to worse for the electric company: "TEPCO unable to pour water into No. 4 reactor's storage pool for spent fuel."

Our expectation that TEPCO CDS will fly this morning has just been confirmed with a market indicated 92 bps wider from Friday close at 133 bps. We expect this number will soon be at multiples as the fall out to the company is increasingly exposed to the market: to wit - news from Kyodo that the fuel rods at Reactor number 2 at Fukushima (which has so far not exploded) have now been fully exposed. Should there be a trifecta of explosions at Fukushima, TEPCO will likely not survive the public fury aftermath. And in related news, the Japanese government had just announced it will release 3 days worth of oil reserves. Per Wikipedia, Japan has the world's second largest strategic reserve, with state controlled reserves of petroleum at eleven different locations totaling 324,000,000 barrels.

Now that the market has had some time to digest the events over the weekend, it may be time to hedge risk on the company most exposed to the nuclear shock in Japan, Tokyo Electric Power Company. The company was just downgraded by Goldman Sachs to Neutral (which means it held it as a Buy until now) as the firm does not see "a dividend hike"... We see far greater issues for the company's equity investors than just a dividend hike. Number one: TEPCO (9501.T) has over $90 billion in debt and roughly $30 billion in equity buffer. As Bruce Krasting points out vis a vis the equity - "it's gone." More from BK: "I used to work on financing these things. It's all long term leases. The actual debt behind the power plants is multiples of what they show on the balance sheet."

Not sure what rumor can be spread to unspook the market into believing all is well here, but the widely expected March deterioration in Europe which nobody wants to talk about, is happening just as predicted: Greek CDS have just hit an all time wide of 1,036 bps or something like 17 pts up, while Portuguese bond yields have just passed into fresh lifetime highs of 7.65%. As per the Chairsatan, this is purely driven by inverse demand courtesy of surging global economies around the world, which are all experiencing inverse peace and prosperity.

Despite what irrelevant US stock futures indicate, just like yesterday the true appreciation of risk comes from the Gulf region, where following yesterday's 7% rout in the Saudi index, today the drubbing continues. And for those who are confused why the Egyptian stock market continues to be closed, just take one look at what is happening with the Saudi Tadawul Index. Further confirming that Saudi Arabia is coming unglued are Saudi CDS which as we predicted a month ago, are well on their way to 200 and onward, last printing at 145, the widest they have been since July 2009.

While US stock futures continue to be obstinately high capitalizing on the last remaining shreds of a confirmation bias out of formerly strong European economy from the time when the EUR was still low, and with the US economy failing to pick up the world slack even with the dollar at 4 month high the hangover sure to set in any minute (and the oil price certainly not helping), perhaps the only true indication of risk is being represented by the local MENA stock markets, of which the Saudi is currently the best example (after Egypt's stock market opening planned for today, was once again delayed). At last check the TADAWUL was down over 7% and the trend is certainly not your friend, while Saudi CDS was the biggest widener this morning per CMA, hitting 140 bps. The wildcards at this point are Iran and Syria, the first of which will see any push into Bahrain as a religious provocation, while the latter is a host to a brand spanking new Russian navy base. If any of these two see some media prominence in the next 48 hours, look for today's slide to continue.

Ever felt excluded from the list of people who can (allegedly) buy insurance on their neighbor's house, and then burn it down? That's all about to change. The CBOE has announced that that on Tuesday, March 8, the Exchange will begin trading newly-designed Credit Event Binary Options (CEBOs) contracts. In essence these will be like Credit Default Swaps, accessible to everyone, which will have a $1000 payoff per contract in the event of a bankruptcy before contract expiration. Since the contracts will have specific prices, they will in essence replicate the LIBOR spread on CDS (or the inverse cash bond pricing from par), and the closer a company is seen as being to bankruptcy, the higher the contract price. What this will do is to revolutionize the shorting aspect of trading, as there will be no borrowing need to express a bearish outlook on a company, and no possibility for State Street, BoNY or your favorite repo desk to pull your borrow from underneath your feet thus forcing a short squeeze. In essence, this will be a marginable equity product trading as a credit derivative. We are delighted that finally one will be able to express a bearish opinion without fears of gross market manipulation and melt up, as the CEBOs will have little or no structural relationship to what happens with the broader stock market.

All those focusing on the politburo policy tool known as stocks have missed what is by far the biggest mover in corporate (distressed) land so far in 2011. MBIA, whose CDS had traded in 2010 at levels assuming virtually no recovery, have plunged from 55 points up front a fortnight ago to just 37 up today (a 4 pt tightening today alone), a pick up that could make many a distressed credit fund's (sorry Oaktree) quarter. And while the move has been stunning in its velocity, many have been left scratching their heads as to the reason why. Enter Protium: a Barclays 2009 spin off fund which according to the British bank's results posted yesterday, entered into a CDS commutation with an unnamed monoline effective January 2011. And since it was already known by the market that banks such as JPM and Barclays had dropped lawsuits against MBIA in 2010 in exchange for comparable CDS commutations, it was immediately assumed that the beneficiary of this generous 'Protean' gift is none other than MBIA. The net result? A boost to creditor recoveries, a surge in unsecured claim prices, and a near 20 point tightening in CDS.

The most predictable, (and certainly worthless: see Mark Zandi) entity in the world has gone ahead and done precisely what Zero Hedge said 24 hours ago it would. Moody's has just downgraded Egypt's bond rating from Ba1 to Ba2, with the outlook changed from stable to negative. The move which was as a surprise to idiots everywhere comes as "Moody's notes that Egypt suffers from deep-seated political and socio-economic challenges. These include a chronic high rate of unemployment, elevated inflation and widespread poverty. These, together with a desire for political change, have fueled popular frustrations." And as we predicted yesterday, Egypt CDS continues to slide ever higher, pushing around 460 on the offer side, in those rare occasions it is actually offered.

By now everyone knows that over the past few days, Egypt CDS has taken a hard right angle and has doubled from 200 bps to well over 400 bps (making it just slightly riskier than Illinois). And tomorrow Egypt risk will add another 80 or so basis points. No surprise there. What may surprise some, however, is that just like Egypt, Saudi CDS has also gone vertical. And with momentum chasers finally realizing that there is a direction other than tighter, expect the contagion vigilantes to do some serious damage here. If history is any precedent, there is a long way to go.

With increasing confusion over the cash muni bond market, very little has so far been said about the even more confusing muni CDS market. However, as municipal bankruptcies are likely about to take the country by storm, it is really the synthetic market that should be occupying investors' attentions. This is especially true with yesterday's disclosure that the bankrupt city of Vallejo is offering recoveries of only 5-20 cents to its sub creditors: it means that muni insolvencies will be not only a "survival" issue but one of recovery as well, considering assumptions embedded in cumulative loss forecasts that predict 80% recoveries by default. Below we present the most comprehensive report we have read so far on the matter of muni CDS, which should serve as a primer to anyone who wishes to be abreast not only of events in the muni cash space (where cash outflows are now comparable to what happened to equities following the flash crash), but in the wonderful world of synthetic paper.

As China's president heads over to Barack's home town, we wonder if he is aware that according to the market, Chicago is in a state whose credit risk is about 100 basis points wider compared to a post-revolutionary Tunisia. Despite the country's recent presidential coup, and subsequent downgrade by Moodys to Baa2, the African nation's CDS, which spiked from 120 to 180 bps, is still just 100 basis points inside the CDS of Illinois. And this still assumes 80 cent recovery. We wonder how long before one or more Vallejo precedents reprice the entire CDS muni curve. Should the default recovery be dropped from 80 to, say, 20, it would get very interesting...