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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

High Yield

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.


2 Responses

  1. W, I have lots of family in Ecuador + some investments there. Always try to convince them that going back to the Sucre is the answer, but they think it would make things worse. You would think that with a U of Chicago economist as president they would have figured that out by now. But at least he is on the right track by defaulting on external dollar denominated debt. You’ve endorsed that idea before.

  2. yes, it’s not intuitively obvious the answer is to have their own, floating fx currency, probably because when that does happen govt has made a mess of things that got blamed on the currency rather than policy.

    yes on external debt. they don’t need it. and if i were running the ecb the fed would never see their $300+ billion, and it would be a lot larger than that…

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