Caught by SVB, credit traders rush to safety

(Bloomberg) – The rapid collapse of Silicon Valley Bank threatens to reverse a recovery in credit markets that had lured investors back to even some of the riskiest corporate borrowers.

Most read by Bloomberg

As phones rang nonstop at credit trading desks on Friday as traders and money managers tried to understand the potential fallout of the biggest U.S. bank failure in more than a decade, investors around the world rushed to the derivatives markets, which offered a hedge against downside, as trade data show.

A credit default swaps index linked to the debt of European financial institutions saw trading volumes three times higher than on a typical Friday, data compiled by Bloomberg shows.

The additional premium investors demand to own the bonds of junk-rated U.S. companies rather than investment-grade bonds saw the biggest increase since last June, according to Bloomberg index data. Meanwhile, prices in the resurgent US leveraged loan market have fallen the most since October, a Morningstar LSTA index shows.

Whether the escape to safety continues on Monday may depend on US regulators finding a buyer or buyers for the now-seized SVB. But one thing is certain: the situation has exposed the hidden risks lurking in the financial system following the Federal Reserve’s rapid rate hikes.

As Schroders’ David Knutson said in an interview with Bloomberg’s Caleb Mutua on Friday, it’s “just the first inning”.

“We had regime change on costs and now these business plans are failing and their middlemen who are being leveraged are struggling,” he said.

China update

Debt talks with China’s defaulting builders intensify as more early-stage restructuring deal terms emerged. Logan Group Co., one of the developers that saw its dollar bills fall from near par to about 10 cents on the dollar last year, is asking investors to swap their $3.4 billion dollar bonds for newly issued notes maturing in seven years are.

The story goes on

Some creditors of defaulted offshore developers’ bonds turned to onshore authorities for help, compounding the challenges global investors faced while attempting to recover funds. The legal adviser to an ad hoc group of Jinke Properties Group Co. debt holders sent a letter asking them to “oversee the repayment of offshore debt debentures” as the company did not respond.

Elsewhere:

• Hedge funds that bought leveraged loans before markets soured last year and planned to pool them into CLOs are increasingly looking to cut their losses by dumping the assets and investing the money in more profitable bets, Lisa Lee and wrote Carmen Arroyo. The debt in question was purchased using short-term lines of credit called warehouses. Funds that agreed to be the first to absorb losses on the loans are now liquidating the warehouses and selling the debt.

• JPMorgan Chase & Co. wants to make sure no matter who wins the battle between Wall Street banks and private lenders, it has a seat at the table to provide the multibillion-dollar funding for Carlyle’s potential acquisition of a stake in healthcare technology company Cotiviti. The bank has lobbied to both lead a traditional sovereign debt deal and absorb part of a $5.5 billion loan to be arranged by private lending firms instead.

–Featuring Dorothy Ma, Josyana Joshua, Lisa Lee, Carmen Arroyo and Caleb Mutua.

Most Read by Bloomberg Businessweek

©2023 Bloomberg LP