Shining Star Computing Credit Life After Libor

JUNE 2018 ISSUE 38 www.altcreditintelligence.com Published By SHINING STAR COMPUTING LIFE AFTER Northlight steers funds CREDIT LIBOR to strong 2018 First big data, now DealVector on looming alt data Libor switch ARE YOU EQUIPPED FOR TODAY’S CREDIT MARKET? UP YOUR GAME. We are not changing the game, we are improving the way you compete. Tradeweb Credit harnesses an extensive pool of dealer liquidity, a full suite of intelligent trading protocols and a complete end-to-end workflow to improve your performance in today’s arena. Execute your trade strategies with greater flexibility by leveraging existing relationships or tapping into a new trading environment through our All-to-All network. It’s a total credit market solution that puts you in a whole new league. Game on. Corporate Bonds | Credit Derivatives | Emerging Markets tradeweb.com/institutional/credit [email protected] +44 (0)20 7776 3200 ©2017 Tradeweb Markets LLC. All rights reserved. CONTENTS 03 The CDS market doesn't have a great reputation he CDS market doesn't have a great reputation Michael Lewis, John Stewart, and now the Pope have THIS ISSUE taken aim at the fi nancial product. Alt Credit is no place for theological and moral questions Tof this depth. But it is the place to discuss the recent controversies in the market, and what the real problem is: liquidity. 04 Th e good news is that CDS is actually on the up in many senses, its regula- tors are making progress on some sticky problems, and liquidity is improving. We also take a look at the volumes of data now available to credit managers. Technological advances and a spirit of openness has allowed ABS and MBS managers in particular to move from ploughing through documents to building models and hypotheses. But how far into the data can and should they go? ANALYSIS 04 CDS ﬁ ghts back Credit derivatives have taken a lot of heat The CDS trades which hedge fund managers in the press, but the product could be on are putting on have become simpler, focusing the up on single names and indices” 08 Data gets bigger Ed PArker, Mayer Brown, page 05 Credit is at a tipping point, as data gets bigger, better and possibly fi nally useful 11 March in CLOs Derivatives were the talk of the town in May. Th e town in question being Th e CLO market is on fi re, but managers the Vatican City. Events just outside the Holy See also conspired for an inter- share concerns over lax lending standards esting CDS story as Italy roiled markets. Briefl y. CLO markets continued to plough ahead in the month, but worries about 12 April in derivatives the collateral are mounting. Managers have pointed to Ebitda adjustments as Hovnanian's trade fi nally comes to an a particular bugbear in loan documentation. end, as an Italy arbitrage opens, then DealVector has highlighted one of the problems all parts of the CLO promptly closes market and structured fi nance markets face: poor communication lines. Th e expected phase out of Libor is set to emphasise that problem. Luckily, tech- nology can help. COMMENT A move away from QE could be even more painful for markets. BlueBay 14 Life after Libor describes how it plans for the future. Communication in the structured credit As you read this I will be cycling my way through France and probably world is hard enough, replacing Libor already very sore and wheezing my way up a mountain. Th ere's still time to makes it urgent donate to a great cause in Duchenne UK by visiting Virginmoneygiving.com and by searching for HFM Wheelers. 16 Getting used to expecting the unexpected BlueBay plans for a more volatile market Jon Close, head of content, Alt Credit after central bank liquidity [email protected] DATA 27 Performance data Alt Credit ’s performance tables JUNE 2018 04 ANALYSIS JUNE 2018 ANALYSIS 05 The CDS markets have taken a battering recently, despite some signiﬁcant improvements By Jon Close he CDS industry has come “Ironically, in many ways the CDS trades under attack from no less which hedge fund managers are putting on than the Pope, while its latest have become simpler, focusing on single controversies have moved to names and indices,” says Edmund Parker, T the front pages of the popular global head of derive at Mayer Brown in press. Meanwhile within the London. “Whereas before 2007 they were industry, Isda has been dealing with a moun- often focused on products like CDOs of ABS, tain of issues ranging from new bank struc- basket trades and exotic products like CDO tures, missing fi nancial documents, uncer- squared.” tainty over some of its largest sovereign names and managers trying to play its decisions. Single names The biggest problem the market has faced, Single name CDS has been a different story. however, is declining popularity. Investors have rarely felt the need to hedge But the industry is fighting back. individual bond positions in recent years, and Isda has successfully implemented some liquidity has been driven by indices. common-sense reforms and the organisa- A number of proposals, led by IHS Markit, tion is making noises that it will continue to have sought to address this in the last few update its framework. The CFTC lent a hand years, with mixed results. to nudge bad actors into line. Meanwhile, vol- Increasing the number of issuers in the atility and new structures are breathing life high yield indices had limited success, they back into the single name market. have rarely held on to the extra liquidity once out of the index. Volumes are back (for some) Another change has been much more Numerous sources told us that the biggest push warmly received by markets. Single name back they got back from investors and managers CDS switched from a quarterly to a semi- wasn't the bad press, or the headline trades – annual roll. "The move to two annual rolls a The return of volatility, since February, coupled with the demand from bespokes has meant there has been a much healthier two- way market in CDS in general” David Meneret, Mill Hill Capital but that the product wasn't liquid enough. year has also helped to improve liquidity, it But volumes in CDS index trading have makes much more sense to roll along with the actually kept up relatively well after the dust index," says Erlandsson. settled from the financial crisis, and European sovereign crises. CSO 2.0 "If you want to add or remove credit risk The biggest factor improving single name from a credit portfolio, there aren’t really any liquidity, has been the re-emergence of the other products that are sufficiently close to bespoke CDO (or CSO) market. the asset and have sufficient liquidity," says Th ese deals comprise pools of typically Ulf Erlandsson, CIO at Strukturinvest. around 100 issuers, with investors selling pro- "From an analytics standpoint, CDS indi- tection against tranches of the risk in the pools. ces are very clean," adds Erlandsson, "When "Th e banks are intermediating between these you start doing an ETF or a TRS, you have to structures and the markets, and so we’re now do lot more analysis on the weighted credit seeing CDS B-wics of banks requesting bids for spreads, duration on the underlying bonds, protection on the names in the bespoke struc- the whole bond curve." he adds. tures," says Mill Hill Capital CIO David Meneret. JUNE 2018 06 ANALYSIS "The return of volatility, since February, That said, the extra liquidity these deals A Noble privacy coupled with the demand from bespokes has – and the increased activity in the indices – One area which shows little sign of movement meant there has been a much healthier two- brings is limited to the names involved. is in Isda's need for documentation to be way market in CDS in general." "The names that are actively traded in the public in order for it to make a decision. This Deals such as these also came under a lot high yield space in bespokes and indices are came to a head recently by Noble, whereby of criticism post-crisis, not least because liquid, but liquidity outside those names is Isda couldn't prove that a subsidiary had a they involved a lot of leverage. But 'CSO 2.0s' dropping,” says Meneret. guarantee to the parent company. have some key differences to their pre-crisis "If something goes wrong at the company, brethren. Banks: Where the real action happened a hedge fund which may have a CDS position, "Pre-crisis you could be levered as high as European banks had been one of the most liq- and knows something’s happened, can’t put 200 times on some AAA tranches; the most uid areas of the market, especially after naked it in front of the determinations committee leverage you could potentially do now would buying of protection against sovereigns was because the agreements aren’t public," says be 80 times," adds Meneret. "But, I literally banned, and managers began using banks as Parker. "Whatever the truth of the matter is, don’t know anybody who is using that much proxies. it can only be judged on publicly available leverage." But under the various capital requirement information. There are some tools available, Another key difference is that banks are regimes coming from Europe, banks have but there are still times that you can’t get the selling the whole capital structure of these been continuously updating their capital information out there." deals, and only executing the trades once both structures, adding new layers at the top and sides of all the contracts have been found, bottom, and CDS markets have been scram- Italy leaving little risk on their own balance sheets.

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