here's a soaring chart.........
ITraxx Crossover Credit Index May Soar to 1,000, Analysts Say
By Abigail Moses and John Glover
March 5 (Bloomberg) -- The Markit iTraxx Crossover index of credit-default swaps on mainly high-yield European company debt may almost double to 1,000 basis points within six months if there is a U.S. recession, analysts say.
The increase means the cost of protecting 10 million euros ($15.2 million) of debt from default for five years will rise to 1 million euros a year, according to credit analysts at Barclays Capital and Lehman Brothers Holdings Inc. In February last year the cost was 170,000 euros and it was 583,000 euros at 1:10 p.m. in London, JPMorgan Chase & Co. prices show.
``There is a very high chance Crossover will hit 1,000 if there is a recession in the U.S.,'' said Mahesh Bhimalingam, head of high yield and leveraged finance strategy at Barclays in London. ``Higher defaults in the U.S. will mean money flows out of high-yield assets, whatever happens in Europe, where we expect much lower defaults.''
The collapse of the U.S. housing market is rippling through the economy as consumers curb spending and factories reduce production. The Institute for Supply Management's manufacturing index dropped to 48.3, the lowest level since April 2003, from 50.7 in January, the Tempe, Arizona-based group said this week. Fifty is the dividing line between contraction and expansion.
Debt Speculation
The Crossover index tracks credit-default swap contracts on 50 companies from London-based British Airways Plc, Europe's third-biggest airline, to Paris-based Alcatel-Lucent SA, the world's largest telecommunications-equipment maker. It is used by bond investors to hedge against losses and speculate on creditworthiness because default swaps are typically cheaper and easier to trade than the debt they are based on.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.
``There's a contraction in bank lending and tighter bank lending conditions are concerning because they will have a knock-on effect in the wider economy,'' said David Brickman, London-based head of European credit strategy at Lehman. The credit market ``liquidity crisis'' may drive the Crossover index to 1,000, he said at a panel discussion arranged by the European High-Yield Association in London yesterday.
Record Low
The Crossover index fell to a record low 170 basis points last year as banks sold credit-default swaps and packaged them into collateralized debt obligations, using the income to pay investors. The cost of credit-default swaps has soared since the collapse of the U.S. housing market prompted investors to spurn all but the safest government securities and buy contracts to hedge against losses.
``A vicious circle has formed,'' Bhimalingam at Barclays said.
The cost of protecting investment-grade debt from default will also rise, according to Puneet Sharma, head of investment- grade research at Barclays in London. The Markit iTraxx Europe index of 125 companies will increase to 150 basis points, Sharma said today. The index traded at 125 basis points today.
Sharma forecast in November the iTraxx Europe index would reach 100 when it was then trading at 54.5 basis points. A basis point on a credit-default swap contract protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year.
Market Turn
Brickman expects the worst to have passed by the third quarter of 2009, later than other panelists at the event yesterday. Peter Aspbury, a money manager at European Credit management in London, predicted the market will turn in the final quarter of this year with the Crossover at 850 basis points, and Neil McLeish, credit strategist at Morgan Stanley, forecast the peak for the index at between 700 and 800 basis points sometime in the next quarter.
Roman Gaiser, who manages the equivalent of about $1.7 billion in high-yield debt at Threadneedle Investment in London, contends that the worst of the crisis is already past, with the Crossover lower than 630.
High-risk, high-yield debt is rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's. |
