Cadbury

We have an unusual chart about what the market is thinking about the 16 bln USD cash and stock offer from Kraft for Cadbury. The credit default swap spread for Kraft in the 5 years is jumping. A normal reaction to new that an already indebted company plans to load his balance sheet with even more debt. This spread will only widen because Kraft will be pushed to sweeten the offer or to tolerate another bidder.

Who could that be? The CDS market gambles on Hershey rather than on Nestlé, even though Nestlé has seen as the most viable alternative bidder.
Intriguing.

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To liquidate

Everything seems to be under attack these days. Now it is the ETF department where regulators are asking questions about leveraged ETFs and commodity ETFs. These have become so big that they start to dominate the underlying markets. What do we read?
From Reuters:

It was the second day in a row in which holdings had fallen. [GOL/SPDR] SPDR has shed about 53 tonnes over the past month, the largest drop ever for the fund.
"The rise in SPDR holdings has been a major factor driving the market higher and if the fund is now turning around to be a seller, that would be a major bear factor,

But there is more.

A US legislative plan to regulate the near-$600,000bn market in OTC derivatives suggests that lawmakers debate the idea of banning so-called “naked credit default swaps”, which allow investors to speculate on the creditworthiness of companies. The proposal by key congressional committees would push most derivatives on to an exchange or clearing house but leaves open the issue of whether to outlaw CDSs, in which the buyer does not own the underlying asset.

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Another blow for banks

Moody’s Investor Service announced that they are going to modify the rating methodology applied to structured finance securities insured by financial guarantors aka monolines. From the FT

New York, July 14, 2009 — Moody’s Investors Service is modifying the rating methodology it applies to structured finance securities insured by financial guarantors. Specifically, starting September 1, 2009, Moody’s will withdraw the ratings on those structured finance securities insured by guarantors that have financial strength ratings below Baa3 (that is non-investment grade) if either of two conditions are met: Moody’s is unable to determine an underlying rating (i.e., absent consideration of the guaranty) on the security or the issuer has requested that theguaranty constitute the sole credit consideration.

Below is a list of securities impacted by the new policy whereby their ratings will be withdrawn on September 1, 2009 unless prior to that date Moody’s is a) provided sufficient information to determine the underlying rating or b) informed by the issuer in the case of GMAC Certificados Bursatiles UDIS MXMACFW 07-5U to no longer rate the security solely based on the guaranty.

The aforementioned list is deals mostly insured by monolines like MBIA and Ambac.
We remember that these structured products got a credit enhancement in the form of a guarantee of payment of principle and interest to bond issuers.

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High risk

CMA – the credit information specialist – organizes and structures CDS, bond quotes and valuation data. Professionals can use this service to have an idea what’s going on in their markets.
They published recently a global sovereign credit risk report. The world's riskiest sovereign debt can be found here:

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Panic is over ... for now

We have a chart of the top 20 sovereigns with the largest amount of net Credit Default Swap notional exposure. The winner is clearly Italy, followed by Spain. The green boxes show the difference between the prices of these CDS dating from 6 March and now.
Yes: tightening all over the place.
How come?
Better underlying data? A positive credit event? As far as I know things are becoming gloomier with the day.
The only reason can be a squeeze.
If one counts well, he only will find 19 names. Yes, one is missing. Just behind Belgium.
Let’s have a guess: which country could that be?

Yes: The Emerald Isle

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A regulated CDS market

Did you read it too?

The Obama administration on Wednesday unveiled a sweeping plan to regulate OTC derivatives in a move to increase transparency and reduce risk in a largely unregulated market worth more than $680,000bn. The new rules would force “standardised” OTC derivatives to be cleared through central clearinghouses to reduce the risk of investors being over-exposed to a single counterparty. The plan could force banks and other big corporate users of derivatives to set aside more capital to cover potential losses.

680.000 billion USD is 680 trln USD. That’s notional value. Real market value of the derivatives contracts is estimated around 13 to 15 trln USD. However: you’re never sure these days. Another thing with these contracts is that it is a zero sum game. For every buyer, there’s a seller. What these contracts actually do is transferring wealth between parties. And they can destroy the market for particular bonds or sectors, because sometimes CDS amounts are a multiple of the underlying bond issue they covering.
So yes indeed, if this market is regulated in an intelligent way, it will clean one of the biggest threats of the financial crisis.
Aaargggh – finance and intelligence don’t work well together. Greed, theft, GS on the contrary ….

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The New Normal

In the New Normal world the economic health of economic agents is measured by CDS-levels (credit derivatives swaps). As governments are taking up more and more corporate risks on their balance sheets, it’s important to keep track with sovereign CDS levels.
Not that much decent information is available concerning this topic. Credit Derivatives Research has launched a government risk index which aggregates the sovereign risk of the G7 nations.
Let’s strip the US of that AAA rating.

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