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Back in Asia...
Asia Bank Bond Risk Soars to Record, Credit Default Swaps Show
By Patricia Kuo
Jan. 16 (Bloomberg) -- The risk of Asian banks defaulting on their debt rose to a record after Citigroup Inc. posted the biggest loss in its 196-year-history, according to traders of credit-default swaps.
Contracts on Kookmin Bank, South Korea's largest by market value, jumped 10 basis points to 140 basis points, according to Barclays Capital prices. Credit-default swaps on ICICI Bank Ltd., India's biggest, moved out 20 basis points to 330 basis points, according to Barclays. That means it costs $330,000 a year to protect $10 million of ICICI's debt from default.
Surging defaults on U.S. home loans forced Citigroup, the biggest U.S. bank, to write down the value of subprime-mortgage investments by $18 billion in the fourth quarter. Investors are concerned more U.S. banks will announce losses this week, increasing pressures to sell stocks and bonds.
``The sell-on-the-news reaction to bad results, which we reckoned was largely priced in, implies more selling on any bad rumors ahead,'' said Brett Williams, a fixed-income research analyst with BNP Paribas SA in Hong Kong. ``Asian cash flow simply can't withstand current U.S. news flow.''
Credit-default swaps are financial instruments based on bonds or loans that are used to speculate on a company's ability to repay debt. They were conceived to protect bondholders by paying the buyer face value in exchange for the underlying securities should the borrower default.
`Mounting Systemic Risk'
``Prices in the CDS market are implying mounting systemic risk,'' Williams said. ``It's difficult for me to square that noise with signals on the ground in Asia, which remains fundamentally sound.''
The bond yield for the sector is also rising because of potential debt sales by banks this year, traders said.
Banks in the region have $5.9 billion of overseas debt maturing this year, including $4.8 billion from South Korean banks and $300 million from ICICI, according to a Merrill Lynch & Co. research report published on Jan. 11.
``We do expect new issuance for senior paper to be strong again this year and could see pre-funding for a heavier redemption schedule in 2009,'' analyst Michele Barlow, who is based in Hong Kong, said in the report. ``Given sizeable redemptions and rising domestic rates, we could see banks consider raising more in the international bond markets, however pricing will be an issue.''
ICICI Borrowings
ICICI Chief Financial Officer Chanda Kochhar said on Jan. 2 that the Mumbai-based bank may increase foreign borrowings by a third this year from a record $109 billion in 2007, to help clients fund overseas takeovers and investments.
The bank's $750 million 5.75 percent bonds due in 2012 now trade at 410 basis points more than U.S. Treasuries, up 1 basis point from yesterday, according to Royal Bank of Scotland Group Plc prices.
The Markit iTraxx index of 50 investment grade borrowers in Asia outside Japan rose by 10 basis points to a record 118 basis points at 11:43 a.m. in Hong Kong, according to ICAP Plc prices.
The Markit iTraxx Asia Ex-Japan high-yield index rose 18 basis points to 434 basis points in Hong Kong, according to ICAP. The benchmark contains credit-default swaps tied to the debt of 20 borrowers including Mumbai-based Tata Motors Ltd. and Hanarotelecom Inc. in Seoul.
The Markit iTraxx index of 70 borrowers in Asia outside Japan rose 6 basis points to a record 203 basis points, according to ICAP. The index, which includes contracts tied to Bank of China Ltd. and Mumbai-based Tata Motors Ltd., rises as perceptions of credit quality deteriorate.
Benchmark Protection
The indexes are benchmarks for protecting bonds against default and traders use them to speculate on changes in credit quality. A basis point, or 0.01 percentage point, is worth $1,000 on a swap that protects $10 million of debt from default.
Contracts on the subordinated debt of National Australia Bank Ltd., Australia & New Zealand Banking Group Ltd. and Commonwealth Bank of Australia climbed 7 basis points at 11:46 a.m. in Sydney, according to Citigroup prices.
New York-based Citigroup's writedown yesterday was almost double its forecast in November, and is the most so far among the world's biggest financial companies.
Analysts estimate Merrill Lynch & Co. will report a record loss of more than $3 billion after writing down the value of mortgage-related securities, and Bank of America Corp., the second-largest U.S. bank by assets after Citigroup, may report its biggest profit decline since its formation in 1998 from the merger of BankAmerica and NationsBank.
To contact the reporter for this story: Patricia Kuo in Hong Kong at pkuo2@bloomberg.net .
By Patricia Kuo
Jan. 16 (Bloomberg) -- The risk of Asian banks defaulting on their debt rose to a record after Citigroup Inc. posted the biggest loss in its 196-year-history, according to traders of credit-default swaps.
Contracts on Kookmin Bank, South Korea's largest by market value, jumped 10 basis points to 140 basis points, according to Barclays Capital prices. Credit-default swaps on ICICI Bank Ltd., India's biggest, moved out 20 basis points to 330 basis points, according to Barclays. That means it costs $330,000 a year to protect $10 million of ICICI's debt from default.
Surging defaults on U.S. home loans forced Citigroup, the biggest U.S. bank, to write down the value of subprime-mortgage investments by $18 billion in the fourth quarter. Investors are concerned more U.S. banks will announce losses this week, increasing pressures to sell stocks and bonds.
``The sell-on-the-news reaction to bad results, which we reckoned was largely priced in, implies more selling on any bad rumors ahead,'' said Brett Williams, a fixed-income research analyst with BNP Paribas SA in Hong Kong. ``Asian cash flow simply can't withstand current U.S. news flow.''
Credit-default swaps are financial instruments based on bonds or loans that are used to speculate on a company's ability to repay debt. They were conceived to protect bondholders by paying the buyer face value in exchange for the underlying securities should the borrower default.
`Mounting Systemic Risk'
``Prices in the CDS market are implying mounting systemic risk,'' Williams said. ``It's difficult for me to square that noise with signals on the ground in Asia, which remains fundamentally sound.''
The bond yield for the sector is also rising because of potential debt sales by banks this year, traders said.
Banks in the region have $5.9 billion of overseas debt maturing this year, including $4.8 billion from South Korean banks and $300 million from ICICI, according to a Merrill Lynch & Co. research report published on Jan. 11.
``We do expect new issuance for senior paper to be strong again this year and could see pre-funding for a heavier redemption schedule in 2009,'' analyst Michele Barlow, who is based in Hong Kong, said in the report. ``Given sizeable redemptions and rising domestic rates, we could see banks consider raising more in the international bond markets, however pricing will be an issue.''
ICICI Borrowings
ICICI Chief Financial Officer Chanda Kochhar said on Jan. 2 that the Mumbai-based bank may increase foreign borrowings by a third this year from a record $109 billion in 2007, to help clients fund overseas takeovers and investments.
The bank's $750 million 5.75 percent bonds due in 2012 now trade at 410 basis points more than U.S. Treasuries, up 1 basis point from yesterday, according to Royal Bank of Scotland Group Plc prices.
The Markit iTraxx index of 50 investment grade borrowers in Asia outside Japan rose by 10 basis points to a record 118 basis points at 11:43 a.m. in Hong Kong, according to ICAP Plc prices.
The Markit iTraxx Asia Ex-Japan high-yield index rose 18 basis points to 434 basis points in Hong Kong, according to ICAP. The benchmark contains credit-default swaps tied to the debt of 20 borrowers including Mumbai-based Tata Motors Ltd. and Hanarotelecom Inc. in Seoul.
The Markit iTraxx index of 70 borrowers in Asia outside Japan rose 6 basis points to a record 203 basis points, according to ICAP. The index, which includes contracts tied to Bank of China Ltd. and Mumbai-based Tata Motors Ltd., rises as perceptions of credit quality deteriorate.
Benchmark Protection
The indexes are benchmarks for protecting bonds against default and traders use them to speculate on changes in credit quality. A basis point, or 0.01 percentage point, is worth $1,000 on a swap that protects $10 million of debt from default.
Contracts on the subordinated debt of National Australia Bank Ltd., Australia & New Zealand Banking Group Ltd. and Commonwealth Bank of Australia climbed 7 basis points at 11:46 a.m. in Sydney, according to Citigroup prices.
New York-based Citigroup's writedown yesterday was almost double its forecast in November, and is the most so far among the world's biggest financial companies.
Analysts estimate Merrill Lynch & Co. will report a record loss of more than $3 billion after writing down the value of mortgage-related securities, and Bank of America Corp., the second-largest U.S. bank by assets after Citigroup, may report its biggest profit decline since its formation in 1998 from the merger of BankAmerica and NationsBank.
To contact the reporter for this story: Patricia Kuo in Hong Kong at pkuo2@bloomberg.net .