AVM Corporate Credit Weekly Update

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AVM Corporate Credit Weekly (Dec 19)

General Commentary

It looks like people definitely took our thoughts from last week to heart, as the “January Effect” came early to the corporate credit markets this past week. The IG, High Yield and Leveraged loan CDX indices tightened by 45, 100 and 404 bps respectively, since last Thursday’s close. Despite a 400bp rally, LCDX still trades approximately 50 bps wide of HY CDX. This may continue, as the recently defaulted Hawaiian Telecom’s loans’ settling at 40 cents on the dollar does not bode well for the future of loan recoveries.

In the cash markets, investment grade credit has been the star, as the Lehman Corporate Index is up 5.41% MTD and has also managed to outperform treasuries. Despite solid performance this week, the high yield market and the equity markets have been laggards this month, down -0.52% and -0.56% respectively.

News that the Fed is “all in” and broker (sorry) bank earnings that were not as bad as feared, helped the market follow through on last week’s strength. The market actually managed to shrug off S&P’s downgrade of Bank America, Citi, JP Morgan and several other banks of Friday morning. While it will take a while for central bank actions and other forms of stimulus to take hold, the fact remains that a huge amount of money is being focused on repairing the credit markets. At the same time credit valuations are at depression era valuations, while equities are definitely not in that camp. Thus, I would expect credit continue to outperform equities in early 2009.

Investment Grade

  • Spreads in the IG cash market tightened by 17 bps since last Friday to +615. IG CDX tightened in by about 45 bps to 215 for the week as the market has consistently tightened each day.
  • Telecomm and Cable issuers led the rally. Retailers also outperformed the broader market. Cyclical sectors such as Metals & Mining, Paper and Energy all widened during the week.
  • Issuance continued to improve upon the previous week, as $6.5 bln in corporate deals were priced. This week’s calendar was highlighted by a $2.0 billion 30yr, AA- 5 year deal from Proctor & Gamble, which came at a spread of 310. FYI – The spread on the high yield index was 306 in the middle of last July.

High Yield

  • The JPM Yield Index reversed a trend and was up 1.13% since last Thursday’s close. The index barely kept pace with treasuries, as the spread tightened 1 bp to +1888.
  • The Telecomm, Food and Healthcare sectors were all up over 2% this week. Chemicals and Broadcasters were the worst performers, down 3.5%.
  • There was one small new issue that was priced. B2/BB- Kansas City Southern did a $190mm five year deal at 13%.

Credit Events This Week

  1. Republic of Ecuador – The deadline for adherence to the Uniform Settlement Agreement is 4 pm New York time on 12/22/08. Ecuador’s government did not make a $30.6 million interest payment due on 12/15/08 (30 day grace period after 11/15/08 original due date). Ecuador, which also defaulted in 1999, owes approximately $10 billion to bondholders, multilateral lenders and other countries. Ecuador’s debt auditing commission has determined that the 2012 and 2030 bonds showed serious signs of illegality, including issuance without proper government authorization and recommended that the government not pay on the debt.
  2. Tribune Company – The adherence period for the ISDA CDS Protocol opened on Tuesday, 12/16 and will close at 5:00 pm on Friday, 12/19. A separate protocol will be issued for LCDS trades. The auction date has been set for 1/6/09.
  3. Hawaiian Telecom – The LCDS credit event auction on 12/17/08 resulted in a final price of 40.125.