Browsed by
Tag: bonds

Peer-to-Fear

Peer-to-Fear

Comments 0 Comment

In January of this year I resurfaced some of my older reporting on the peer-to-peer, or marketplace, lending industry and wrote this line in the first article about Lending Club raising interest rates for the riskiest borrowers on its platform:

It’s worth recalling the words of some investors at the time who criticized LendingClub’s lofty $8.9 billion valuation—reached partly because of overwhelming enthusiasm for all things tech-related.  “These companies are really specialty finance companies, but look at where specialty finance companies trade in the public markets,” said one major marketplace lending investor at the time [of LendingClub’s late 2014 IPO].

It’s a point that, like much of my coverage, has been oft-repeated since – especially in the wake of recent news that Renaud Laplanche, LendingClub’s CEO, resigned following allegations of internal control issues and a rather sloppy ABS deal with Jefferies. My interest in marketplace lending has always been its overlap with traditional finance and the degree to which – as I’ve often written – the disruptive sector has been  co-opted by the very thing it sought to disrupt. In fact, one of the earliest enterprise pieces I wrote on the nascent industry, from January 2013, included the following gems:

“The one thing about peer-to-peer lending is it’s still a relatively manual process. This business needs a lot of scale to be profitable,” said a P2P analyst.

“In order to grow this business one must really have made relationships on the institutional side,” said a P2P CEO.

“On the surface it really almost comes across as too good to be true,” said a P2P institutional investor.

More than three years later and the pressures of scaling a ‘technology’ business that still relies on direct mail for advertising, and which derives much of its value from avoiding the legacy costs (including regulation) of traditional banks, seems to have come to a head viz LendingClub’s apparently lax internal controls, funding and securitization processes.

For those interested, here’s my more recent coverage of the industry’s travails.

When credit market concerns arrive at the marketplace lenders, January 2016 – Recall that the bear case for marketplace lenders was always a turning of the credit cycle that would either produce a rise in borrower defaults or result in a dearth of funding as skittish investors cut their lending on the platform. At the beginning of this year, credit markets spasmed,and LendingClub raised rates on lower-quality loans on its platform by about 67bps as it sought to better compensate nervous investors.

More trouble in bonds backed by peer-to-peer loans, March 2016 – A rating agency slapping a credit rating on a securitization only to downgrade it eight weeks later because of faster-than-expected-delinquencies seems … reminiscent of something.

A new class action suit wants to treat peer-to-peer lenders like mobsters, April 2016 – A scoop about a class action suit that strikes at the heart of the marketplace lending model and came on top of the already troublesome Madden vs Midland Funding decision, completed the ‘doomsday duo’ of funding concerns and regulatory scrutiny for the industry.

LendingClub is turning out to be anything but a direct lender, May 2016 – The resignation of Laplanche sent LendingClub shares plunging and, more significantly, exposed one of the biggest oddities at the center of the company’s business model. While promising to democratize finance by using new technology to directly match borrowers with lenders, LendingClub has turned to a complicated network of middlemen and professional investors to fund its rapid expansion and disintermediate traditional banks.

And the latest edition of our Odd Lots podcast, which sums up some of my thoughts on the matter:

https://soundcloud.com/bloomberg-business/28-how-finances-hot-new-thing-ended-up-in-an-old-school-scandal

Bad time to be a bank

Bad time to be a bank

Comments 2 comments

Bank stocks have plunged in the new year, surprising a number of analysts and investors who had hoped that the long-awaited rate rise by the Federal Reserve would (finally!) help boost financials’ collective profit margins. Instead, the market seems squarely focused on the turning of the credit cycle and the idea of losses yet to come.*

On that note, I think it’s worth reiterating where the froth on bank balance sheets lies.

I’m willing to bet it’s about to get interesting to be a banking reporter again.

Fierce battle for corporate loans sparks US bank risk concerns (May 2013, Financial Times) – US banks were sharply increasing loans to big and small businesses in the aftermath of the financial crisis. In itself, the move to more business lending was not necessarily a bad development for the wider economy, or for the banking system. But the worry, as ever, was that intense competition to extend more commercial loans combined with a desperate need to boost return on equity, could spur banks to offer money at dangerously low rates and on far too loose terms.

Regulators on alert as US banks boost commercial loans (May 2013, Financial Times) – Companion piece to the above. This part proved rather ironic in the wake of collapsing oil prices: “Dick Evans, the chief executive of Texas-based Frost Bank, remembers the recession that hit the Lone Star state in the 1980s: banks that had been lending to booming energy groups suffered when the price of crude collapsed. Then, he says, it was real estate lending that banks turned to in an effort to replace some of their lost returns from commercial lending. Three decades on, that history may be reversing across the US [as banks trade real estate lending for commercial loans].”

Wall Street trades home mortgages for corporate credit – (July 2014, Financial Times) – Home mortgage lending stagnated as banks and other lenders grappled with new rules and the continued fallout from the biggest housing crash in US history. At the same time, lending to many American companies surged, helping shift Wall Street’s once-dormant securitisation machine into gear, while the market for corporate bonds also boomed (with much of that money flowing into the energy sector). Where once the origination and bundling of home loans was big business, corporate credit has for the past few years been the thing keeping banks and other financial institutions busy.

Commercial credit is the new mortgage credit – (September 2015, Bloomberg) – Key sentence: “Whether the surging popularity of commercial credit in all its forms results in the same kind of bust that overtook the housing bond market remains to be seen. Plenty of analysts, investors and regulators have certainly expressed concerns about an asset class that is being chased by so many yield-hungry investors, and pitched by so many profit-hungry financial institutions.”

All that commercial lending by banks suddenly isn’t looking so hot – (January 2016, Bloomberg)  – Written a day or two before the beginning of bank earnings season, this post pointed out that financial institutions; commercial and industrial (C&I) loan portfolios were showing signs of cracking. Sure enough, the fourth-quarter earnings season yielded a bunch of big-name banks setting aside more loan loss provisions to cover soured energy loans, which fall into the C&I classification.

*And I haven’t even mentioned the impact of negative rates, which wreak havoc on the business model.

The year in credit

The year in credit

Comments 0 Comment

Credit markets, I wrote a lot about them this year. One day some other asset class will grab my attention but for the time being it’s this. Sorry.

Here’s what I wrote about the market in 2015 – or at least, since starting the new gig over at Bloomberg in April. I may have missed a few here and there (and included some fixed income posts that I think are related to over-arching credit themes), but I think this is pretty much covers it.

Happy holidays, and may 2016 be filled with just the right amount of yield.

…

Read More Read More

The corner in corporate bond markets

The corner in corporate bond markets

Comments 0 Comment

The backlash to the bond market liquidity theme in full-swing. That’s fine and expected though I do think some people are taking it a bit far. The problem with the liquidity story is not the story itself but simplistic bandwagon reporting that does not advance the narrative at all. I’ve said before on Twitter, it’s not enough to simply say that dealer holdings of fixed income have fallen X percent over the past X years, or that bond market liquidity is “a concern.” Many people, myself included, were talking about that theme and writing that story years ago and we need move on from that.

With that in mind, here’s a fresh angle to a stale story. In my opinion, it strikes at the heart of the issue – which is that the liquidity story is simply the flipside of what has been an intense scramble for corporate bonds in recent years.

What no one ever says about corporate bond market liquidity

Everyone’s worried about bond market liquidity. That much we know. Whether it’s high-yield corporate bonds sold by junk-rated companies or the ultra-safe Treasuriessold by the U.S. government, investors’ ability to buy and sell these securities without “overly” affecting prices has moved to front and center of the proverbial market concerns.

The causes, we hear, are myriad. Regulation that has curbed banks’ ability to hold vast sums of bonds on their balance sheets is often blamed. We are also told that years of low interest rates have herded investors to the same positions, spurring billions of dollars worth of inflows into global bond funds. The worry is that should those inflows reverse, bond prices could hit an air pocket and face a rapid descent.

There’s a long list of potential solutions to the problem. A shift toward electronic trading was once supposed to save a corporate bond market in which many trades are still done over the phone (although so-called electronification has apparently impeded liquidity in the U.S. Treasury market). Exchange-traded funds that give investors the ability to instantly dart in and out of positions are promoted as a quick fix for a longer-term problem. BlackRock, the world’s biggest asset manager, is pushing standardized bond issuance and wants to delay trade reporting for corporate debt.

All these solutions miss the point, however. None focus on the real reason behind deteriorating liquidity, which is that vast swaths of the corporate bond market have simply been cornered …

Read the rest over here.

Big bond news buried in a little report

Big bond news buried in a little report

Comments 0 Comment

Buried in BlackRock’s recent report into bond market liquidity was a bombshell bit of news.

Here’s the story:

BlackRock Inc. is muscling into trading venues that had long been the exclusive territory of big banks as the world’s biggest asset manager seeks to make up for declining liquidity in the bond market.

BlackRock revealed last week that it’s now trading bonds directly with inter-dealer brokers, following years of warning that liquidity is waning. In September, BlackRock said the corporate bond market is “broken.”

Banks have long facilitated the business, but regulations passed after the 2008 crisis hobbled their ability to do so. By trading with inter-dealer brokers — an industry that includes ICAP Plc and Tullett Prebon Plc — BlackRock is circumventing a middleman.

Money managers are “looking to get liquidity anywhere they can get it, and the other side is the inter-dealer brokers — their business model has been totally turned upside down,” Kevin McPartland, head of research for market structure and technology at Greenwich Associates, said in a phone interview.
Tara McDonnell, a spokeswoman for New York-based BlackRock, declined to comment.

A large investor trading directly with inter-dealer brokers marks a sea change for Wall Street, where big bond trades traditionally are executed between asset managers and large banks like JPMorgan Chase & Co. and Goldman Sachs Group Inc. Trading venues run by ICAP and Tullett Prebon, meanwhile, have historically brokered trades between banks and stayed clear of interacting directly with buy-side investors such as BlackRock …

…

Read More Read More

What we didn’t learn about the events of Oct. 15

What we didn’t learn about the events of Oct. 15

Comments 0 Comment

This week, the US.government released its report on the events of October 15.

I was disappointed.

The 72-page report has lots of points of interest but doesn’t come up with any definitive reason for the sharp movements in the 10-year U.S. Treasury. More disappointing than that (for me) was the report’s treatment of the events leading up to the day and specifically its very brief mention of volatility selling.

Here’s what the report said:

In addition, market participants reported that some large asset managers had maintained positions structured to profit from a continuation of the low-volatility environment that characterized much of 2014, though data to validate such claims are limited. Some market participants have speculated that a change in the distribution of certain options-specific risk factors among certain firms could have been a contributing factor. In particular, anecdotal commentary suggested that some dealers had absorbed a portion of the sizable “short volatility” position believed to have been previously maintained by large asset managers. As volatility spiked on October 15, those positions would have prompted some dealers to dynamically hedge this exposure, exacerbating the downward move in yields.

Long-time readers of this blog may remember that this is something I’ve written about before, specifically in a piece for the Financial Times entitled: “Caught on the wrong side of the ‘vol’ trade.” Unlike the Oct. 15 report, that article names a specific player who was said to have suddenly stopped selling vol.

“Pimco was a massive seller of volatility and when Gross left they started taking that position back,” says one hedge fund trader. “The Street was still thinking that short was out there. People expected the road to be there and the road wasn’t there.”

Given the debate over whether large asset managers are or are not systemically-important, it’s shame the Oct. 15 report did not dive into this particular theme a bit more.

The most interesting thing in GSElevator’s new book

The most interesting thing in GSElevator’s new book

Comments 0 Comment

John Lefevre, the former banker behind the GSElevator Twitter account, has written a book and it has some pretty fascinating tidbits about the business of selling bonds. Readers of my work (the three of you out there) will know that this is a favourite topic of mine and Lefevre’s experience as a fairly senior syndicate guy means he has some some authority here. Even Matt Levine, who isn’t generally a GSElevator fan, thinks so.

Here’s what I found most interesting after reading a preview.

…

Read More Read More

A short lesson in duration, from some long Petrobras bonds

A short lesson in duration, from some long Petrobras bonds

Comments 0 Comment

Earlier this week, Petrobras, the scandal-ridden, junk-rated state-controlled Brazilian oil producer, sold $2.5 billion worth of 100-year bonds.

The idea of these century-long bonds sent some tongues wagging about so-called duration risk. This is one of the more esoteric topics in bondland, but can roughly be defined as the sensitivity of a bond’s price to changes in its yield. The greater a bond’s duration, the more sensitive its price is to changes in its yield. With investors putting their money in Petrobras bonds for 100 years, so the thinking goes, these bonds are heavily exposed to the movement of interest rates. But is this the case?

One way of measuring duration is to look at something called PV01 on your (handy!) Bloomberg terminal.

This tells you by how many cents would the bond price changes following a 1 basis point move in yield. For Petrobras’s new century bonds, it’s less than 10 cents.

How does that stack up against some other bonds? For comparison, Petrobras’s bonds due in 2044 have duration of roughly $1.16.

Now I don’t mean to say that the 100-year Petrobras bonds aren’t risky. Investors still have to consider interest rates. And they have to think about what the Brazilian economy and the Brazilian government and the global oil market and Petrobras, still in the midst of a massive corruption investigation, will look like over the course of a century.

But duration risk for these bonds is not as high as it might be given investors are being compensated with a relatively high coupon and yield. Where duration risk is a concern is with all those low-yielding government bonds where that might not be the case. As Mark Holman at TwentyFour Asset Management points out, the duration of those 100-year Petrobras bonds is roughly equivalent to the duration of the current 10-year German Bund which, at the time of writing, has a yield of just  0.66 percent and a coupon of 0.5 percent.

The lesson: maturity ≠ duration.

Also, duration risk can crop up in unexpected places.