Did Deutsche Bank's Junk Bond Firesale Just End The Party?

Less than a month ago, Moody's warned that  "the prolonged environment of low growth and low interest rates has been a catalyst for striking changes in nonfinancial corporate credit quality," and adds that "the record number of highly leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress eventually arrives."

This was followed by an ominous warning from Bill Derrough, the former head of restructuring at Jefferies and the current co-head of recap and restructuring at Moelis: 

"I do think we're all feeling like where we were back in 2007," he told Business Insider: "There was sort of a smell in the air; there were some crazy deals getting done. You just knew it was a matter of time."

Which makes sense when one notes that since 2009, the level of global nonfinancial junk-rated companies has soared by 58% representing $3.7 trillion in outstanding debt, the highest ever, with 40%, or $2 trillion, rated B1 or lower. Putting this in contest, since 2009, US corporate debt has increased by 49%, hitting a record total of $8.8 trillion, much of that debt used to fund stock repurchases.

Meanwhile, as a percentage of GDP, corporate debt is at a level which on ever prior occasion, a financial crisis has followed.

And while all this chaotic risk is building, risk appetite is flashing red signals for the analysts at CreditSights. As Bloomberg reports, students of history will find two parallels to today’s credit market - and neither will provide much comfort. According to a key valuation metric, investors are headed for the kind of bullishness on high-yield bonds that’s been seen just twice before: during the halcyon days of 1997’s tech bubble before the Asia crash, and on the eve of the global financial crisis a decade later.

The ratio between U.S. junk-bond yields and their high-grade counterparts has reached levels that “hearken back to the high risk appetite days of October 1997 and June 2007,” CreditSights Inc. strategists Glenn Reynolds and Kevin Chun wrote in a note this week.

That’s “not a great set of dates along the credit market timeline of overconfidence,” they noted.

“The fear is that the market is underestimating the threat of trade wars and European political instability and what turns they could take,” Reynolds and Chun wrote.

And as that risk appetite surges, so LeveragedLoan.com reports that US High Yield Bond issuance tumbled in May...

In what is typically an active period for the U.S. high-yield market, just $15.3 billion of deals were issued in May, making it the lightest volume for that month since the paltry $9.5 billion in recession-era May 2010, according to LCD

And finally, adding one more straw to the irrepressible credit bid camel's back is news that Bloomberg reports Deutsche Bank is seeking to sell its portfolio of non-investment grade energy loans, worth about $3 billion, according to people with knowledge of the matter.

The potential firesale comes as Deutsche's short-dated CDS (counterparty risk) is soaring..

And comes as European HY Energy debt is weakening notably and US HY Energy is as good as it gets...

Bloomberg reports that Deutsche is planning to sell the loan book as a whole and has marketed it to North American and European peers, said one of the people. The portfolio is expected to sell for par value, said the people, who asked not to be identified because they weren’t authorized to speak publicly; good luck with that!

The bank’s energy business is expected to wrap up on June 30, one of the people said. The bank has been an active lender in the energy space in the past year, participating in the financing of companies including Peabody Energy Corp. and Coronado Australian Holdings Pty., according to data compiled by Bloomberg.

So to summarize: Moody's is warning that when the economy weakens we will see an avalanche of defaults like we haven't seen before; Corporate debt-to-GDP and investor risk appetite is reminding a lot of veterans of previous credit peaks; and now the most desperate bank in the world is offering its whole junk energy debt book in a firesale... just as high yield issuance starts to slump.

All of which raises more than a single hair on the back of our previous lives in credit necks... and reminds us of this...

Thank you all for coming in a little early this morning. I know yesterday was pretty bad and I wish I could say that today is gonna be less so, but that isn't gonna be the case. Now I'm supposed to read this statement to you all here, but why don't you just read it on your own time and I'll just tell you what the fuck is going on here. I've been here all night... meeting with the Executive Committee. And the decision has been made to unwind a considerable position of the firm's holdings in several key asset classes. The crux of it is... in the firms thinking, the party's over as of this morning.

"For those of you who've never been through this before, this is what the beginning of a fire sale looks like." Sam Rogers, Margin Call

There's gonna be considerable turmoil in the Markets for the foreseeable future. And *they* believe it is better that this turmoil begin with us.


new game hedgeless_horseman Thu, 06/07/2018 - 17:50 Permalink

spot on, what other option is there? let it crash and clear the toxic shit for a new beginning(with mucho financial pain-fellow banksters/buds and palls loosing it all) AND in the process eliminate their credibility too! the disdain builds....

oh and a special thanks to a similar(some the same players) cartel of banksters, buds, palls, shysters/gamers, oligarchs and tag alone cocksuking politicians; right here- courtesy of da fed.

In reply to by hedgeless_horseman

johngaltfla Xibalba Thu, 06/07/2018 - 19:35 Permalink

One night between August 1st and November 15th, the sphincter of some floor manager who is responsible for derivatives is going to be sucking paper up to his britches from the floor. Because the fan is going to spinning faster and the bovine scatology incoming at light speed.

I've got to get some more liquor and popcorn into storage, pronto.

In reply to by Xibalba

Retired Guy BitchesBetterR… Thu, 06/07/2018 - 20:09 Permalink

What the mutual fund salesman did not tell you

People that buy into bond mutual funds often cash out into the down turn. The funds then must sell real bonds which turns the down turn into a rout. That selling turns a potential loss into a real loss. All holders of the fund take the loss.

People who just buy the bond can sit back collecting interest right up to the full cash payout at maturity. As long as they don't sell early at panic time they end up made whole.

If DB is panic selling, is it time to sell or maybe time to pick up a bargain? If you are in a bond mutual fund or your bond has dropped rating to CC, it is always a good time to sell but if you just own a bond this may well be the time to sit back and ignore the market noise.


In reply to by BitchesBetterR…

gregga777 Umh Thu, 06/07/2018 - 17:56 Permalink

Take just the inflation angle, when they print money all the dollars in everyones possession become worth less.

Debtors love inflation because they get pay back their debts using money with less purchasing power. Governments are almost always debtors, hence they love inflation. And that should tell you that the probability of the return of gold as money is about zero. Can you imagine the US Government, which has around $200 trillion in unfunded liabilities, being forced to live with a currency that they can't debase? Neither can I. 

In reply to by Umh

Jtrillian gregga777 Thu, 06/07/2018 - 19:04 Permalink

Actually I can.  First, you assume all that debasement doesn't come without consequence.  Realize that the debt that these governments have accrued is owed to someone WITH INTEREST.  At some point the interest itself can no longer be serviced and a default situation occurs. MORE THAN HALF of the US national debt has been added over the last 12 years alone (can you say EXPONENTIAL?).  Second, you fail to mention where the new money that is created goes.  It would not be quite as bad if that money was spread equally among the population (i.e. Helicopter Money).  However, that's not what has happened. Most of that money has gone to  the Wall St. elite and while they have profited handsomely from it (including bonsues), the rest of America isn't doing as well. 


At some point (not sure when) the governments of the world will dig a hole so deep they will not be able to climb out of it.  Until this day arrives, expect the social unrest in countries with massive wealth inequality to continue to grow until open revolts ensue.  It's not a matter of if but when. 

Finally, be reminded that ALL FIAT CURRENCY eventually goes to zero.  ALL OF THEM!!!  Every.  Single.  One.

Full Faith And Credit

In reply to by gregga777

withglee DSCH Thu, 06/07/2018 - 19:01 Permalink

They buy them with money they create from nothing.

Money is created by traders. When a party creates money with no intention of returning it, well ... that's counterfeiting ... and counterfeiting not met by interest collections of like amount ... well that's inflation.

They don't "dump it on the taxpayers."

Inflation dumps on everyone who buys anything ... and everyone who saves ... on everyone who has anything. And that's not just tax payers.

In reply to by DSCH

BandGap Snaffew Thu, 06/07/2018 - 15:48 Permalink

For the life of me, and the last 10 years, that is the part I don't get.  We watch this fail, and that fail, we see Italy teetering, we see the Real going down the dumper and the very next fucking day the sun is out and shining.

My guess it will continue until one day....poof, gone.

Till then keep on keeping on.


In reply to by Snaffew

Giant Meteor BandGap Thu, 06/07/2018 - 16:04 Permalink

"My guess it will continue until one day....poof, gone."

Yes, on a long enough timeline ....

“How did you go bankrupt?"
Two ways. Gradually, then suddenly.”

On the one hand, when one has access to unlimited free money, to endlessly speculate, without fear of loss, the sun is always shining, at least above ground.

They may lose sight of the fact that they are also walking dead men.

I believe they've learned in 2008-09, that the next go round they're not getting off quite so easy, and to do whatever needs to be done to avoid, delay that moment.

It ain't gonna be pretty ..

In reply to by BandGap