(Bloomberg) — The rapid failure of Silicon Valley Bank is threatening to upend a rebound in credit markets that had been luring investors back to even some of the riskiest corporate borrowers.
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With phones ringing nonstop on credit trading desks Friday as traders and money managers sought to understand the potential fallout from the biggest US bank collapse in more than a decade, investors across the globe rushed to derivatives markets that offered a hedge against losses, trading data show.
One credit-default swaps index linked to the debt of European financial institutions recorded trading volumes that were three times the levels of a typical Friday, data compiled by Bloomberg show.
The extra premium investors demand to own the bonds of US junk-rated companies instead of investment-grade debt saw the biggest spike since last June, according to Bloomberg index data. Meanwhile, in the resurgent US leveraged loan market, prices dropped by the most since October, a Morningstar LSTA index shows.
Whether the rush to safety continues on Monday may depend on US regulators finding a buyer, or buyers, for the now-seized SVB. But one thing’s for sure: the situation has laid bare the hidden risks lurking in the financial system after the Federal Reserve’s rapid rate hikes.
As Schroders’ David Knutson told Bloomberg’s Caleb Mutua in an interview on Friday, it’s “just the first inning.”
“We’ve had a regime shift in costs and now these business plans are failing and their intermediaries that are levered are struggling,” he said.
Debt talks with China’s defaulted builders are heating up as more early-stage restructuring deal terms emerged. Logan Group Co., one of the developers that saw its dollar notes slump from almost face value to about 10 cents on the dollar last year, is asking investors to exchange its $3.4 billion of dollar bonds for newly issued notes due in seven years.
Some creditors of developers’ defaulted offshore bonds turned to mainland authorities for help, amplifying the challenges faced by global investors while seeking to recoup funds. The legal adviser to an ad-hoc group of holders of Jinke Properties Group Co.’s debt sent a letter, pleading them “to supervise repayment of offshore notes” amid a lack of response from the company.
Hedge funds that bought leveraged loans before markets soured last year, planning to bundle them into CLOs, are increasingly looking to cut their losses by dumping the assets and moving the money into more profitable bets, Lisa Lee and Carmen Arroyo wrote. The debt in question was purchased using short-term lines of credit known as warehouses. Funds that agreed to be first to take losses on the loans are now liquidating the warehouses and selling the debt off.
JPMorgan Chase & Co. wants to make sure it has a seat at the table no matter who wins the battle between Wall Street banks and private credit lenders to provide the multibillion financing for Carlyle’s potential acquisition of a stake in health-care technology firm Cotiviti. The bank has been pitching to lead both a traditional public debt deal and to take a piece of a $5.5 billion loan that private credit firms have proposed to arrange instead.
–With assistance from Dorothy Ma, Josyana Joshua, Lisa Lee, Carmen Arroyo and Caleb Mutua.
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