China collateral issues looming......
( Iron ore having a tough day .... )
Here's Why The Market Is Shrugging At TBE's "Promise" Not To Default In July
Submitted by Tyler Durden on 03/13/2014 21:48 -0400
The "good" news this evening is that Baoding Tianwei Baobian Electric Co (TBE), the company which as recently as two days ago was rumored to be the second "imminent" Chinese corporate bond default which sent copper to multi year lows, has issued a statement that it will not default on its upcoming interest payment (due July 11th - so how the delisted company is convinced it will have enough cash four months from now is a mystery). The "bad" news is that markets don't care. There is a slight whiff of positivity in Copper futures but aside from that, weakness continues in China's corporate bond and stock market. Simply put, the market gets it - this is no longer about the next idiosyncratic bond (or trust) to default; this is about Xi's renewed confidence in efforts to 'clean up' the mounting local government and corporate debts and shrink the shadow-banking bubble. This is systemic, and the markets know it.
- *BAODING TIANWEI SAYS CO. TO PAY BOND INTEREST ON TIME
Copper was excited momentarily...
Co. will pay bond interest for due July 2014 on time, according to a statement to the Shanghai stock exchange.
So to be clear, TBE is promising that in 4 months it will pay interest on a bond that it currently has zero liquidty to pay, is losing money, and is in an industry that the government has specifically targeted for 'normalization'...
BofA explains why is it not a big piece of news in China?
To the Mainland China media, the delisting of TBE bonds is not a big piece of news, in our view, because TBE was already in a law suit on its other debt, and the “new energy” sector has been in deep trouble anyway(as we have seen with Wuxi Suntech and Chaori). TBE is in the business of making power transmission equipment, but in recent years has heavily invested in the ill-fated new energy sector which has resulted in two straight years of losses with the losses in 2013 surging to RMB5.2bn. TBE’s Shanghai Stock Exchange listed bond was issued in 2011, with principal at RMB1.6bn, a 5.75% yield and 7-year tenor. TBE’s stock price has already fallen by 15% this year. TBE’s controlling shareholder is Tianwei Group, which is a central-government owned company.We do see a significant rise in bond and trust loan defaults We believe the chance of corporate bond and trust loan defaults will rise significantly in 2014 as a more confident President Xi Jinping and Premier Li Keqiang will aim to seriously clean up mounting local government and corporate debts.
As Li himself noted,
Though Mr Li said that he could not possibly "want to see" defaults in financial products, he added that "sometimes certain individual cases of such defaults are hardly avoidable".
As a gentle reminder (from our very detailed coverage of the China bubble about to burst), the bubble is gigantic (as Marc Faber would say) and there are many more debt maturities coming up...
From November 2012, The Chinese Credit Bubble - Full Frontal:
Everyone should also know that like a metastatic cancer, the amount of non-performing, bad loans within the Chinese financial system is growing at an exponential pace.
Finally, what everyone learned over the past month, is that as the two massive, and unresolvable forces, come to a head, the first cracks in the facade are starting to appear as first one then another shadow-banking Trust product failed and had to be bailed out in the last minute.
However, as we showed again last week, the default party in China is only just beginning as Trust failures in the coming months are set to accelerate at a breakneck pace.
So as Moody's noted:
Analysts see more such defaults in the coming months in sectors with overcapacity, such as steel and mining, as crackdowns on careless loans continue. "The lack of intervention is consistent with the central Chinese government's adoption of more market-oriented policies, which include increased tolerance for corporate bond defaults, as it reforms the country's financial markets," Moody's said in a commentary after the default.
In conclusion, one default here or there now is no longer relevant as the first crack in the dam has been made. Risk will be re-priced... confidence has been broken that money is free and 10% yields are riskless... finally, as we previously noted in great detail, here are the next steps...
The question, however, in addition to "why", is whether the Fed also agrees with BofA's stunningly frank, and quite disturbing conclusion, perhaps finally realizing that aside from the US, the biggest house of cards that would topple once the "flow"-free emperor is exposed in his nudity, is that of the world's largest "growth" (and credit) dynamo of the past two decades - China. Because, as noted above, if Lehman's collapse was bad, a deflationary collapse brought on by Chinese hard landing coupled with a full unwind of the global carry trade, would be disastrous and send the world into a depression the likes of which have never before been seen.
Finally, for those who want the blow by blow, here is BofA's tentative take of what the preliminary steps of the next global great depression will look like:
If we do experience a sizable default, the knee-jerk market reaction will be cash hoarding since it will strike as a big surprise. Thus, we expect the repo rate to rise first, while the long term government bond would get bid due to risk aversion flows.However, what follows will be quite uncertain, aside from PBoC injecting liquidity and easing monetary policy to help short term rate come down. It has been proven again and again the Chinese government will get involved and be proactive. The bond market reaction will be different depending on the government solution.
Alas, at that point, not even the world's largest bazooka will be enough.
At this point one should conclude that reality - through massive, unprecedented liquidity injections - has been deferred long enough. It is time to let the markets finally return to some semblance of uncentrally-planned normalcy: there is a reason why nature abhors a vacuum. Even if it means the eruption of the very painful grand reset, washing away decades of capital misallocation, lies and ill-gotten wealth, so very overdue.
Is This The Cheapest (And Most Levered) Way To Play The Chinese Credit-Commodity Crunch?
Submitted by Tyler Durden on 03/13/2014 21:02 -0400
"The best way to define the mood in the market right now is panic," warns one commodity broker, adding that "everyone understands why we are going down, but nobody can tell where the bottom is." As the WSJ notes, the economic slowdown in China is hammering prices of some raw materials, driving down industrial commodities from copper to iron ore and coal - exacerbated by the vicious cycle of credit-collateral-contraction. So what is the cheapest way to play continued stress (with potentially limited downside)? Thediversified natural resources company Glencore has a huge $55 billion of debt, is drastically sensitive to copper (and other commodity) prices, and its CDS remains just off record tights...
Is Glencore the most exposed to a decline in commodities prices? – A trading giant rated BBB with over $55bn of debt and heavy exposure to commodities.
A downgrade to below investment grade would be catastrophic to Glencore’s trading business.
Company’s 12/31/2013 presentation says a 10% decline in Copper Prices would reduce EBIT By $1.2bn...
By 3/12/2014, Copper has declined to a 44 month low, 12% decline in YTD 2014
Glencore reports Net Debt of $35.882bn, which is $55.2bn of gross debt minus $2bn of cash minus $16.4bn of "Readily Marketable Inventories." Nowhere do they define what’s included in the Readily Marketable Inventories and whether or not the RMIs are hedged. The firm is still highly levered for investment grade even if RMIs can be converted into cash at stated value.
As if that was not enough, the CFTC and DOJ are currently investigating commodities price manipulation and Glencore has been named in several aluminum antitrust suits; leaving the question of liability hanging over their head.
“The economic slowdown in China is hammering prices of some raw materials, driving down industrial commodities from copper to iron ore and coal...copper prices skidded to their lowest level since June 2010, bringing the metal's year-to-date losses to 12%. Iron-ore prices are down 8.1% this week, after falling to their lowest level since October 2012 on Monday. Aluminum, lead and zinc prices also have declined in recent days..."The best way to define the mood in the market right now is panic,"...Now that growth in the world's second-largest economy is downshifting from double digits to an estimated 7.5% this year, many investors and analysts predict global demand growth for industrial commodities will slacken...Iron ore is the main component of steel. China's steel consumption has surged in the past decade as the property and manufacturing sectors boomed. Now that China's leadership has pledged for a more consumer-focused economy, the demand trajectory for steel is in doubt, analysts said…Coking coal, used to fuel the blast furnaces that forge steel, has also been under pressure, with prices down 7.1% this year…Last week's first-ever corporate-bond default on the mainland showed that the Chinese government isn't guaranteeing this corner of the country's credit market, as was widely believed. The yuan's weakening has made it more expensive for companies to import dollar-denominated commodities to be used as collateral for loans created outside formal channels for bank lending..."If there's a string of defaults in China, there's no question that demand for copper and iron ore and other commodities where China's been a major driver would be threatened in a material way,"...And some analysts and investors say the magnitude of the recent price declines in copper and iron ore aren't justified because Chinese authorities are unlikely to allow the country's credit markets to completely unravel…"You've got the credit issue in China...and you've got also reasonably high iron-ore [stockpiles]," said Jimmy Wilson, for iron ore at BHP Billiton, on the sidelines of a conference in Perth, Australia. "Traders have a view that the price is going to go down so they do everything they can to hold back" on buying.”
At 170bps and with 155bps as a floor for the last 6 months, it seems like a cheap protection play on further Chinese/Commodity contraction
( Iron ore having a tough day .... )
Baltic Dry Plunges 8%, Near Most In 6 Years As Iron Ore At Chinese Ports Hits All Time High
Submitted by Tyler Durden on 03/12/2014 16:34 -0400
It would appear record inventories of Iron ore and plunging prices due to China's shadow-banking unwind have started to weigh on the all-too-important-when-it-is-going-up-but-let's-blame-supply-when-dropping Baltic Dry Index. With the worst start to a year in over a decade, the recent recovery in prices provided faint hope that the worst of the global trade collapse was over... however, today's 8% plunge - on par with the biggest drops in the last 6 years - suggests things are far from self-sustaining. Still think we are insulated from the arcane China shadow-banking system, which suddenly everyone is an expert of suddenly? Think again.
Why? Perhaps the following chart showing Chinese iron ore steel stockpiles at the country's 34 major ports will provide the answer:
Copper Limit Down In Shanghai; Falls To Lowest Since July 2009
Submitted by Tyler Durden on 03/11/2014 21:33 -0400
Following a triumvirate of macro misses from AsiaPac (South Korea unemployment surged, Aussie confidence plunged, and Japanese inflation tumbled), the credit concerns running riot through the collateral underlying China's shadow banking system continue to crush Copper (and iron ore) prices. Copper is limit down in Shanghai at its lowest since July 2009 - these size moves have only occurred twice in history (Lehman and the US downgrade). Japanese stocks are ignoring any ramp efforts in USDJPY and US equity futures are fading qucikly with AUDJPY....
A sprinkling of headlines from this evening:
- South Korea unemployment jumped to 3.9% (exp 3.2%, prev 3.2%) - highest in 3 years
- Aussie Consumer Confidence dropped to 10-month lows
- Japanese Producer Price Inflation (Domestic Corporate Goods) MoM -0.2% - biggest deflation since Dec 2012 and YoY slowest since June 2013
- *JAPAN'S NIKKEI 225 DROPS BELOW 15,000
- *JAPAN'S NIKKEI 225 EXTENDS LOSSES TO 2%
- *COPPER IN SHANGHAI DROPS AS MUCH AS 5.2% TO 43,800 YUAN/MT (close to biggest drop since Dec 08)
Leaves copper echoinG Lehman and the US downgrade...
With the Nikkei unable to catch a bid from JPY ramp
and S&P futures continuing to track AUDJPY lower..