Message 21560066
John,
this is well worth reading.
In many of the
structured finance markets, Fitch analysts understand
that some hedge funds now play a critical role in
financing the least liquid, highest yielding
subordinated tranches of transactions, giving them a
degree of influence that far outstrips the notional size
of their investments.
Credit-oriented hedge funds also are able to influence
pricing in all segments of the credit markets through
the use of credit derivatives. Alternative investment
vehicles are thought to control as much as 30% of the
trading volume in the $8 trillion global credit
derivatives market (CDx), according to surveys by
Fitch and others (see Global Credit Markets table
above).
The effects of such an event would be felt first and
foremost in the form of price declines and credit
spread widening across multiple sectors of the credit
markets. In turn, this could present challenges to
some market value structures with mark-to-market
and deleveraging triggers. Beyond potential trading
losses, including among some prime brokerage
banks, cost-effective financing for all forms of credit
could be adversely affected. In Fitch’s opinion,
potential ratings volatility would be felt most in the
high yield sector and among borderline investmentgrade
companies due to their sensitivity to liquidity access and refinancing risk. The timing of such a
liquidity event would be a determinant factor. In the
near term, the risks appear to be mitigated partially,
as most companies have fortified their balance sheets
by raising cash and extending debt maturities.
However, from 2006–2008, these bond issues begin
to come due, with $377.3 billion of high yield and
‘BBB’ rated bonds maturing in this period, elevating
the overall level of refinancing risk. |
