Connect with us


Beijing Blinks: Will Allow Evergrande To Renegotiate Debt Terms

Beijing Blinks: Will Allow Evergrande To Renegotiate Debt Terms

Maybe it was the 3rd consecutive day in a row that Evergrande bonds were halted…

Share this article:



This article was originally published by Zero Hedge
Beijing Blinks: Will Allow Evergrande To Renegotiate Debt Terms

Maybe it was the 3rd consecutive day in a row that Evergrande bonds were halted after furious selling amid growing concerns of imminent default...

... or maybe one of those pro-China US billionaires - such as Larry Fink and Ray Dalio - who are now engaged in discrediting George Soros for speaking out against the one true Chairman, and who still remember what happened the weekend after Lehman collapsed made a phone call to Beijing and urged them to reconsider, but whatever the reason, on Thursday China blinked and according to Bloomberg, regulators in Beijing signed off on a China Evergrande's proposal to renegotiate payment deadlines with banks and other creditors, paving the way for a temporary reprieve as the cash-strapped developer struggles to come to grips with more than $300 billion of liabilities.

The news comes one day after REDD reported late Wednesday that Evergrande plans to suspend interest payments on loans from two banks due Sept. 21, adding that the developer asked one lender to wait for details on a proposed extension plan, suggesting the developer did that already knowing the government would back it.  Not that it will do much good of course, as Evergrande has been unable to liquidate even its prize asset - its HQ - at cost, but at least it has bought itself some time.

In any case, while Evergrande bonds were crashing in the past weeks, China’s Financial Stability and Development Committee, the nation’s top financial regulator, had already given its blessing to Evergrande’s plan last month after the property giant missed interest and principal payments on some loans, a Bloomberg source said.

Having gotten the government's blessing, Evergrande has already contacted some banks and trusts to request deadline extensions, according to Bloomberg although it was unclear how many of those discussions - if any - have led to agreements and whether the company intends to delay payments to bondholders. As a reminder, all it takes for one creditor to balk at nonpayment for a technical event of default to have taken place.

Perhaps just as important, we learn that Evergrande's last minute reprieve comes as the company’s main banks had discussed setting up a creditor committee as recently as last week - something that happens only when the debtor is bankrupt - but then lenders and regulators decided to give Evergrande more time to solve its liquidity crisis before taking more drastic measures. Like forcing the company into involuntary bankruptcy perhaps.

As Bloomberg notes, and as has become all too clear judging by the non-stop coverage of this company on this website, Evergrande’s intricate web of obligations to banks, shadow banks, bondholders, suppliers and homeowners has become one of the biggest sources of financial risk in the world’s second-largest economy. While China’s government has publicly urged the company to solve its debt problems, officials have yet to state explicitly whether they would allow a major debt restructuring or bankruptcy. Speculation over Evergrande’s fate has fueled outsized swings in its shares and bonds, with the latter rising from record lows on Thursday.

Even with the bounce, bond investors are pricing in a virtually certain likelihood of default. Even after Thursday’s rally, Evergrande dollar notes due next year are trading at just 27 cents on the dollar.

Still, some lenders - usually those who are state-backed and thus have no balance sheet concerns - have indicated a willingness to be flexible on payment deadlines. Bloomberg reported last month that China Minsheng Banking, China Zheshang Bank Co. and Shanghai Pudong Development Bank Co. had agreed to give Evergrande extensions on some project loans. Citic Trust, one of the developer’s biggest non-bank lenders, has given preliminary approval to a three-month extension on loans that were due in August, a Bloomberg source said.

But while Evergrande's fate is all but sealed, the big fear is one of contagion, and whether the company’s troubles infect the broader credit market. While junk bonds trading in China have seen their yields explode to levels last seen during the depths of the March 2020 covid shutdown due to growing Evergrande concerns...

... a default will certainly push them even higher as holder of Chinese junk debt puke; as such the degree of contagion depends on the company’s ability to buy time with banks as a messy default on loans could stoke fears of widespread contagion, something Xi Jinping’s government has been keen to avoid even as it tightens financing restrictions on overstretched developers and discourages government bailouts.

So for now, Beijing blinked but it remains unclear if it will do so again when not just interest but maturities come due. And there is a lot of maturities, starting with some $7.4 billion next year and only rising from there. Indeed, the company’s borrowings totaled 716 billion yuan ($111 billion) at the end of December, with nearly half due in less than a year.

It owes about 830 billion yuan in trade and other payables to suppliers, and has received down payments on yet-to-be-completed properties from more than 1.5 million homebuyers.

Tyler Durden Thu, 09/09/2021 - 19:40


The Fed Has Liquidated Its Entire Corporate Bond Portfolio

The Fed Has Liquidated Its Entire Corporate Bond Portfolio

Last March capital markets as we once knew them ceased to exist: that’s when the…

Share this article:

The Fed Has Liquidated Its Entire Corporate Bond Portfolio

Last March capital markets as we once knew them ceased to exist: that's when the Powell Fed crossed a Rubicon even Ben Bernanke dared not breach and announced that it would start buying single-name corporate bonds and ETFs under its Secondary Market Corporate Credit Facility (SMCCF) with both IG and HY names eligible for purchases in the process effectively nationalizing the corporate bond market.

Purchases under this facility, which were meant to reassure and stabilize the corporate bond market continued until December, at which point - with stocks at new all time highs - the Fed announced the cessation of its corporate bond purchases and entered the beginning stages of fully winding down the Secondary Market Corporate Credit Facility (SMCCF).

At the time, some market participants worried this might translate into a reduction in liquidity, but with purchases amounting to less than $500 million per week since July 2020 ...

... and an overall portfolio holding of just $14 billion, it was unlikely that any material deterioration in market microstructure would take place.

And after all, the Fed's purchases were merely symbolic: the Fed never wanted to become as BOJ-like whale in the corporate bond market, but merely to signal to the world that it would not allow bonds to drop further and would, if required, buy more. Of course, it was not required as the mere guaranteed backstop by the Fed was sufficient to the get dip buyers out in force.

And sure enough, fast forward to the first week of September, when the Federal Reserve has now been able to sell-off the entirety of its corporate bond portfolio with no effect on the market’s microstructure; curiously this also comes at a time when the latest TIC report showed that in Julye foreign investors were net sellers of corporate bonds for the first time this year.

Yet while the SMCCF has now been closed, we continue to think its legacy will live on as a part of the Fed’s policy toolkit with investors forever expecting its reactivation when another macro shock occurs and sends large gyrations throughout corporate credit markets. Or rather "markets" because a world where corporate bonds have no downside is just as centrally-planned as anything China could come up with, and while stonks continue to ramp up for now, there will come a time when everything will crash again and the Fed will once again remind us just how fake price discovery is in a world where the only thing that matters is the Fed's balance sheet as Citi's Matt King put it so elquqently in his latest report:

Some of the most interesting research of recent months concerns the “price inelasticity” of markets. Interesting, that is, to academic economists and monetary policymakers. For anyone who’s actually tried trading in markets over the past decade, the idea that prices might be determined more by flows and liquidity and certain large, price-insensitive buyers than by a rational discounting of fundamentals sounds less like a revolutionary insight and more like a statement of the blindingly obvious

As one investor put it to us recently, central bankers seem to be the only market participants left who fail to appreciate the stranglehold their policies have over asset prices: everyone else gave up looking at fundamental value in favour of obsessing over the minutiae of central bank balance sheet line items a long time ago.

While we are currently on autopilot, we expect to be reminded quite soon just how critical the Fed's liquidity injections are for a binary world where the alternatives are simple: either the Fed prints hundreds of billions every quarter bringing the fiat system ever closer to its death, or we crash.

Tyler Durden Sun, 09/19/2021 - 19:30
Continue Reading


Former Lehman Trader On “China’s Lehman Moment”

Former Lehman Trader On "China’s Lehman Moment"

By Larry McDonald, former trader at Lehman Brothers, author of "A Colossal Failure of Common…

Share this article:

Former Lehman Trader On "China's Lehman Moment"

By Larry McDonald, former trader at Lehman Brothers, author of "A Colossal Failure of Common Sense" and publisher of the Bear Traps Report

My name is Larry McDonald, that is the UK cover above. In the years before the failure of Lehman Brothers, I ran a successful distressed credit business at what was the 4th largest investment bank in the U.S. – becoming one of the most consistently profitable traders in the fixed income division. In late 2008, early 2009 – with Patrick Robinson, we penned “A Colossal Failure of Common Sense” – the Lehman Brothers inside story. At least once a month, I tell my wife while wearing a hopeful smile —“if we sell a million books — we´ll break even on our Lehman stock.” On September 15, 2008 – it all came crashing down in the largest bankruptcy in U.S. history. Known as, “the week that changed the world,” a very painful experience indeed. I was down on the mat looking up at the referee as he delivered the count. It was one of those fateful moments most of us face. Staring into the abyss, drenched in blood-curdling uncertainty, there are times in life when we must get up. Even when it looks like all is lost in a valley of no hope.  Ultimately, the lucky ones learn there are valuable lessons in re-invention. The last 13 years have been a breath of fresh air. 

Life's Lessons

One of the important lessons in our book comes down to how to use leading credit risk indicators? In the 2007-2010 period, the global credit risk epicenter was obviously inside the US. In the 2011-2013 period, Europe´s banks were the focus during the Grexit panic. In recent years, Asia has become far more interesting, a new epicenter has been formed.

As far back as the spring of 2007, U.S. banks began to underperform financial institutions in Asia. By now, everyone knows most of the subprime mortgage credit risk was inside the USA with domestic banks more exposed than other banks around the world. Notice above, Goldman Sachs (purple above) 5 year CDS (the cost of default protection on the bank), began to meaningfully divergence from Standard Chartered. Standard Chartered PLC is an international banking group operating principally in Asia, Africa, and the Middle East. The company has far more credit risk exposure to China – Asia than U.S. banks. It is clear above, more than 12 months prior to Lehman´s failure, banks in the USA were dramatically underperforming from a credit risk perspective. In other words, in 2007 – the cost of purchasing credit default protection on Goldman Sachs was far more expensive than the bank's Asian peers. Indeed, elephants leave footprints – when large hedge funds see credit risk – they start placing bets months if NOT years before a credit event. The credit market sniffed out Lehman´s demise months BEFORE equity investors got the joke.

Now, let us think of Asia in the summer of 2015. The Fed was attempting “liftoff” – their first rate hike since 2004. Finally, in December of 2015, the Fed hiked rates 25bps for the first time in eleven years. In the process, as the central bank prepared the world for the now-infamous rate hike. In just six months the dollar ripped from 80 (July 2014) to 100 (March 2015). Emerging markets were in flames, the Fed had triggered a global dollar crisis. More than $1T left China (the country´s fx reserves were on the run). The world was in a real currency devaluation panic, with Asia wearing the epicenter title this time around.

Credit Risk, the Asia Epicenter 2015-2021

During 2015, the China currency devaluation crisis picked up steam in September and came to risk climax in Q3. But months before, the cost of default protection on Asia´s Standard Chartered began to sharply diverge from Goldman Sachs in the U.S. Once again, credit risk was screaming “there is a problem” in May 2015, by September the S&P 500 lost 16%. In 2007, Goldman’s credit risk was so telling. Then, eight years later – banks in Asia would wear the credit risk epicenter title. Fast forward to 2021, Evergrande headlines are all the media rage, especially with the Lehman, the lucky 13th anniversary this week.

But, what are credit markets telling us this time? As you can see above – far right. Credit risk is calm on Asia banks with exposure to China, no difference to speak of. Central bank liquidity is so abundant, there is NO way Lehman would have failed today. Free markets no more. Adam Smith has one (invisible) hand tied behind his back. We have unintended consequences as far as the eye can see with Uncle Sam’s fingerprints on every street corner.

The Trillion Dollar a Day Gravy Train

The flood of cash in U.S. interest-rate markets pushed the amount of money that investors are parking at a major central bank facility to yet another all-time high – every day a new high indeed. In recent weeks, every day more than Eighty participants have been lining up for nearly $1.2 trillion at the Federal Reserve’s overnight reverse repurchase agreement facility. Large counterparties like money-market funds can place cash with the central bank. This easy money gravy train is hiding the next Lehman Brothers, all embraced in deception. In terms of bond yields, let’s look around the planet. In the U.S., close to 90% of the junk bond market is trading below CPI inflation of 5.3% (highest since the early 90s).

Over the last 50 years, the highest this number ever reached was 7%. China’s high yield credit market is just 8-10% away from its March 2020 lows in bond prices – highs in yields. All of which begs the question – How can the U.S.-centric JNK Junk Bond ETF yield 4.4% while China´s junk bonds are offering 10-12% cash flows?! Always with an important lens – our friend, Jens Nordvig reminds us – “foreign involvement is small in China. It is true that the high-yield bond market has a sizable USD component (mostly foreign). But relative to the US, where subprime exposure was sold around the world, it is a much more local (controllable) system.” It has been clear for months, there is Evergrande credit contagion – it’s just inside China at the moment (as for how Evergrande contagion could spread to the rest of the world, read "This Is How Contagion From Evergrande's Default Will Spread To The Rest Of The World").

Security personnel forming a human chain as they guard Evergrande's headquarters, where people gathered to demand repayment of loans and financial products in Shenzhen on Monday

An Unsustainable Reach for Yield Comes with a Price – It is NOT FREE

Each year that goes by while central banks force investors to reach for yield – any paltry plus return on capital will do these days – complacency builds over time to an extreme – dangerous level.  Mark my words – there were dozens of Bernie Madoffs, Al Dunlaps, and Jeff Skillings sipping mint juleps in the Hamptons and the beaches of the south of France this summer. Central bankers are these guys’ best friends, that is the reality no one wants to admit. As long as central banks do NOT allow the cleansing process of the business cycle to function over longer and longer periods of time – credit risk will continue to build under the surface. Each month, week, and year we allow this charade to move forth – the corners capital flows into are deeper and deeper soaked with moral hazard toxicity. Today´s players on the field make “Dick Fuld” – former Lehman CEO –  look like a choir boy walking out of Sunday mass. The coming event will dwarf what was – “A Colossal Failure of Common Sense.”

Tyler Durden Sun, 09/19/2021 - 19:00
Continue Reading


Hedge Fund CIO: The 60:40 Portfolio Is Forever Broken, What Happens Now

Hedge Fund CIO: The 60:40 Portfolio Is Forever Broken, What Happens Now

By Eric Peters, CIO of One River Asset Management



Share this article:

Hedge Fund CIO: The 60:40 Portfolio Is Forever Broken, What Happens Now

By Eric Peters, CIO of One River Asset Management


Allocators can no longer depend on bonds to offset the equity risk in their portfolios, said the CIO to his team, stating the obvious. We can debate whether the Fed will normalize interest rates in the coming decade – and I sincerely doubt they can – but we know for sure that they will not be able to do that in coming few years without causing a simultaneous stock and bond market collapse. We should be confident that the Fed won’t do that. So we can lean on that assumption in our portfolio construction. But let’s think about where else this may lead us.

In previous cycles, when equities were at records, bonds offered reasonable returns relative to today, said the CIO, still discussing markets with his team. For allocators who wanted to play it real safe, they could buy short-dated bonds and at least break even after accounting for inflation. But now, hiding at the short end guarantees deeply negative real returns. Some investors are willing to lose money for short periods to mitigate bigger risks elsewhere in their portfolios. But almost none are prepared to lose money in a trade that appears structural. And the starting point is a portfolio overallocated to bonds and cash.

We see increasing interest in diversifying solutions from the world’s largest allocators, continued the CIO. It’s far more demand for such strategies than we’ve ever seen. The common driver is these investors recognize the 60:40 portfolio no longer works. Owning bonds at deeply negative real rates guarantees a loss. And in a crisis, bonds no longer provide material positive convexity. But investors still need to take substantial equity risk to generate their required returns. So they are looking for unique ways to replace their bonds - and there are few.

"If we list every firm in the world that offers diversifying strategies and estimate their combined capacity to deliver the convexity that bonds offered in the past, what would we conclude?" the CIO asked rhetorically. The answer is that there is a small fraction of what is needed to do the job. So what does that tell us about what may happen? A decent number of passive investors will stick with the 60:40 even if its broken. Proactive investors will replace their bonds with more unique diversifiers.

But there’s another possibility.

Some investors may conclude they are unwilling to suffer deeply negative real returns. They will sell their bonds. Instead of buying unique diversifiers, they may instead go all-in and reinvest the proceeds from their bond sales into equities (public, private, venture). This inflow will push stock prices higher. Investors that pursue this strategy will initially outperform their peers, which will in turn pressure their competitors to pursue it lest they be left behind. Such a process holds the potential to be highly reflexive. Prone to wild moves. Unprecedented boom, perhaps. Bust.  

What’s the chance such a process will unfold? asked the CIO. In a world with unprecedented bond supply, negative interest rates, high inflation, and the reluctance of central bankers to normalize monetary policy, I would assign a probability of at least 25%. Possibly higher. Perhaps the process is already underway. If it takes hold, it will first appear as a stable paradigm. Over time it would grow increasingly fragile. The Fed would fear financial instability but would be extremely reluctant to intervene. Eventually, it would be forced to.


“There are numerous ways to look at current circumstances in an area of change,” said the Chairman. “When analyzing an area, it’s helpful to consider at least a few, and explore how we develop our various opinions,” he continued. “What we often discover is that our perspectives are path dependent. How we got here, dominates how we view the future.” We were discussing blockchain technology, its power to transform finance.

“As a thought experiment, picture a world where applications for blockchain technology were developed at one of our largest banks. They were patented, licensed, and then utilized by the banking system to increase the efficiency of settlement, reporting, operations, value transfer, custody, financial stability, anti-money laundering, crime enforcement, etc.” I nodded. “The industry raced to apply the new technology fully, tokenizing all assets so they could move through the system, comparatively free of friction.” Global financial assets are an estimated $223trln (including non-financial wealth an estimated $418trln).

“Picture that the advance to this tokenized world stripped out market inefficiencies, waste, middlemen, rent seekers in the largest, most liquid financial markets. This created industry disruption, winners, losers, with most of the benefits ultimately accruing to society. And the innovators who brought that world to life were widely celebrated,” said the Chairman.

“That would have been the “incumbent markets first” path. And imagine on that path, all sorts of innovation beyond our core markets inevitably popped up. Private sector creativity was unleashed, and cryptocurrency was one of many novel creations in that world.” I agreed this was easy to visualize. “But that world doesn’t exist. The real journey didn’t end with a novel cryptocurrency, it started with one, and this no doubt shaped opinion in ways that led to a much wider, more emotional spectrum of views, including zealous, often blinkered, pursuit of change as well as stiff, often blunt, public and private sector resistance to so much of what blockchain has to offer,” he said.

“It appears many opinions on this issue were formed not on the merits of the technology, but rather, they were swayed by the path. In my experience the path matters a great deal in the short term but not over decades, those kinds of polar opposite opinions on the future fall away or are moderated by tangible successes and failures,” said the Chairman.

“History tells us that those who best adapt to change have a sense of where various paths converge over time. The more and more quickly incumbent markets adopt blockchain technology the more quickly that convergence.”

Tyler Durden Sun, 09/19/2021 - 18:00
Continue Reading