Category: Credit risk

Global government debt set to soar to record $71 trillion this year, new research says

Mary Pat Campbell

Link: https://www.cnbc.com/2022/04/06/global-government-debt-set-to-soar-to-record-71-trillion-this-year-research.html

Excerpt:

Global sovereign debt is expected to climb by 9.5% to a record $71.6 trillion in 2022, according to a new report, while fresh borrowing is also broadly set to remain elevated.

In its second annual Sovereign Debt Index, published Wednesday, British asset manager Janus Henderson projected a 9.5% rise in global government debt, driven primarily by the U.S., Japan and China but with the vast majority of countries expected to increase borrowing.

Global government debt jumped 7.8% in 2021 to $65.4 trillion as every country assessed saw borrowing increase, while debt servicing costs dropped to a record low of $1.01 trillion, an effective interest rate of just 1.6%, the report said.

However, debt servicing costs are set to rise significantly in 2022, climbing around 14.5% on a constant-currency basis to $1.16 trillion.

Author(s): Elliot Smith

Publication Date: 6 Apr 2022

Publication Site: CNBC

Blackstone Doubles Insurer Assets, Faces Questions About Role

Mary Pat Campbell

Link: https://www.thinkadvisor.com/2022/04/22/blackstone-doubles-insurer-assets-faces-questions-about-role/

Excerpt:

Blackstone loves managing assets for insurers, but it has no interest in assuming a large amount of investment risk itself.

Blackstone Executives talked about the skin-in-the-game idea Thursday, during a conference call the company held to go over first-quarter earnings with securities analysts.

Patrick Davitt, an analyst with Autonomous Research, asked Blackstone executives Thursday about reports that some insurance regulators have concerns about independent money managers’ role in handling insurers’ investments.

“Some observers have suggested that an outcome of these reviews could be a requirement of more skin in the game for the managers, particularly those that aren’t consolidated with their insurance counterparties,” Davitt said. “So, first, what is your position on this focus? Do you think there’s a risk that regulators will require more skin in the game?”

Author(s): Allison Bell

Publication Date: 22 April 2022

Publication Site: Think Advisor

U.S. Insurer Exposure to Russia, Ukraine, and Oil/Gas Companies Declines from 2020 to 2021

Mary Pat Campbell

Link: https://content.naic.org/sites/default/files/capital-markets-special-reports-Russia-Ukraine-Oil-Gas-YE2021.pdf

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Excerpt:

Total Russian and Ukraine sovereign and corporate debt was $813.3 million at year-end 2021,
representing 97% of total exposure; the remainder comprised $28.8 million in stocks (see Table 2).
While life companies accounted for the majority of the bond exposure at $683.9 million (or 84% of total
Russia and Ukraine bonds), property/casualty (P/C) companies accounted for almost all the Russia and
Ukraine stock exposure at $28 million. About 90% of U.S. insurers’ exposure to Russia and Ukraine
bonds and stocks was held by large companies, or those with more than $10 billion assets under
management.

Author(s): Jennifer Johnson, Michele Wong, Jean-Baptiste Carelus

Publication Date: 14 Apr 2022

Publication Site: NAIC Capital Markets Special Reports

Warning: Tossing Russian Banks From the International System Could Backfire

Mary Pat Campbell

Link: https://www.ai-cio.com/news/warning-tossing-russian-banks-from-the-international-system-could-backfire/

Excerpt:

The decision to boot Russian lenders from the global bank messaging system as punishment for its invasion of Ukraine is a very bad idea that could boomerang and hurt the West, Credit Suisse admonishes.

“Exclusions from SWIFT will lead to missed payments and giant overdrafts similar to the missed payments and giant overdrafts that we saw in March 2020,” wrote Credit Suisse strategist Zoltan Pozsar, in a research note.

….

“Exclusions from SWIFT will lead to missed payments everywhere,” Pozsar wrote. Two years ago, “the virus froze the flow of goods and services that led to missed payments.” Aside from the financial panic at the outset of the pandemic, the world ran into a similar problem in 2008, when Lehman Brothers collapsed, he said. 

 Pozsar wrote: “Banks’ inability to make payments due to their exclusion from SWIFT is the same as Lehman’s inability to make payments due to its clearing bank’s unwillingness to send payments on its behalf. History does not repeat itself, but it rhymes.”

Author(s): Larry Light

Publication Date: 28 Feb 2022

Publication Site: ai-CIO

No Ordinary Panic – Bank Run in Russia

Mary Pat Campbell

Link: https://www.city-journal.org/russian-bank-run-is-no-ordinary-panic

Excerpt:

The war in Ukraine and subsequent international sanctions have triggered a bank run in Russia. But this is no ordinary run—it may become a run on the central bank itself, one that holds important lessons for introducing central bank digital currencies.

Reports show Russians lining up at ATMs to withdraw their cash. For now, the run is largely driven by fears of withdrawal limits and the anticipation that credit cards and electronic means of payments will cease to function. If that happens, cash at hand is the better alternative. For that scenario, central banks know what to do: provide solvent banks with plenty of liquidity against good collateral, as Walter Bagehot recommended.

But will that be all? As Western countries freeze the Russian central bank’s reserves and limit the ability of banks to transact internationally, the exchange rate of the ruble has collapsed, falling by more than 40 percent. Prices for ordinary goods may begin to rise, perhaps dramatically so. If that happens, then rubles would no longer be a good store of value. Russians may seek to convert them into foreign currency, but that’s hard to do with the current sanctions. Consequently, they may start to hoard goods instead, dumping their cash as they go along. The situation would no longer be a run on specific goods, but a run away from fiat money and toward goods—a run, in other words, on the central bank.

Author(s): Linda Schilling, Jesús Fernández-Villaverde, Harald Uhlig

Publication Date: 7 Mar 2022

Publication Site: City Journal

Comptroller asks for upgrade to Illinois’ worst-in-nation credit

Mary Pat Campbell

Link:https://www.thecentersquare.com/illinois/comptroller-asks-for-upgrade-to-illinois-worst-in-nation-credit/article_464a70c6-8862-11ec-b879-afe32c50f8c6.html utm_term=0_3386e99c24-8d6a8659cc-71461060

Excerpt:

Illinois Comptroller Susana Mendoza is asking the credit ratings agencies to upgrade Illinois’ worst-in-the-nation status.

S&P Global has Illinois at BBB. Moody’s has the state at Baa2. That’s after upgrades from the agencies last year. Fitch has Illinois at BBB-.

“My office is doing everything possible to manage the current backlog of bills and address Illinois’ finances head-on,” Mendoza said in a letter to the agencies that her office announced Monday. “The Illinois Office of Comptroller urges you to consider these positive factors and progress made in strengthening Illinois’ financial position when evaluating Illinois’ creditworthiness.”

Mendoza said in the letter she has paid back recent borrowing from a federal program. Illinois was the only state to borrow from the Federal Reserve’s Municipal Liquidity Fund for a total of $2.6 billion.

Author(s): Greg Bishop

Publication Date: 8 Feb 2022

Publication Site: The Center Square

Investors Sour on Muni Funds

Mary Pat Campbell

Link:https://www.wsj.com/articles/investors-sour-on-muni-funds-11643568253

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Excerpt:

Investors pulled $1.4 billion from municipal-bond funds in the week ended last Wednesday, the biggest weekly outflow since the early days of the pandemic, according to Refinitiv Lipper.

Municipal-bond yields, which rise as prices fall, climbed last week after the Federal Reserve signaled it would begin steadily raising interest rates in mid-March, reducing the appeal of outstanding debt. Yields on the highest-rated state and local bonds jumped to 1.55% Monday from 1.34% last Tuesday, according to Refinitiv MMD.

Returns on the S&P Municipal Bond Index have fallen to minus 2.33% this year through Jan. 28, counting price changes and interest payments, the lowest year-to-date returns in at least 16 years.

Author(s): Heather Gillers

Publication Date: 31 Jan 2022

Publication Site: WSJ

Credit FAQ: Understanding S&P Global Ratings’ Request For Comment On Proposed Changes To Its Insurer Risk-Based Capital Adequacy Methodology

Mary Pat Campbell

Link:https://www.spglobal.com/ratings/en/research/articles/211206-credit-faq-understanding-s-p-global-ratings-request-for-comment-on-proposed-changes-to-its-insurer-risk-bas-12183007

Graphic:

Excerpt:

The main reasons for the proposed changes to our criteria include:

Incorporating recent data and experience since our last update of the insurance capital model criteria;

Enhancing global consistency in our risk-based capital (RBC) analysis;

Increasing risk differentiation in capital requirements where relevant and material to our analysis, as well as reducing complexity where it does not add analytical value;

Improving the transparency and usability of our methodology, such as with our proposal to supersede 10 related criteria articles; and

Supporting our ability to respond to changes in macroeconomic and market conditions by introducing sector and industry variables.

A list of changes to our proposed criteria appears in the RFC and in the appendix of this article.

Author(s): 

Simon Ashworth, Ali Karakuyu, Carmi Margalit, Eunice Tan, Sebastian Dany, Olivier J Karusisi,	Ron A Joas, Mark Button

Publication Date: 6 Dec 2021

Publication Site: Standard & Poors

Growth in Private Ratings Among U.S. Insurer Bond Investments and
Credit Rating Differences

Mary Pat Campbell

Link:https://content.naic.org/sites/default/files/capital-markets-special-reports-PLR-Rating-Differences.pdf

Graphic:

Excerpt:

The number of privately rated securities reported by U.S. insurance companies totaled 5,580 at
year-end 2021, an increase from 4,231 in 2020 and 2,850 in 2019.
• Small credit rating providers (CRPs) to the NAIC, such as Egan-Jones, DBRS Morningstar, and the
Kroll Bond Rating Agency LLC (KBRA), produced a dominant share of the private letter ratings
(PLRs), accounting for almost 83% of U.S. insurers’ privately rated securities as of Dec. 31, 2021.
• Designations based on PLRs averaged 2.375 notches higher than designations assigned by the
NAIC Securities Valuation Office (SVO) according to data from 2019 through Q3 2021.
• Based on the credit rating analysis conducted by the SVO, the use of PLRs can result in lower
risk-based capital (RBC) charges and potentially lead to the undercapitalization of insurance
companies.
• Regulatory oversight of nationally recognized statistical rating organizations (NRSROs) does not
result in uniform ratings across the NAIC’s CRPs.
• Ten U.S. insurer groups accounted for 55% of the industry’s exposure to privately rated
securities at year-end 2020.
• No significant issuer concentrations of privately rated securities were noted.

Author(s): Jennifer Johnson, Michele Wong, and Linda Phelps

Publication Date:21 Jan 2022

Publication Site: NAIC Capital Markets Special Bureau

Puerto Rico Released From Bankruptcy as Economic Problems Persist

Mary Pat Campbell

Link:https://www.wsj.com/articles/puerto-rico-released-from-bankruptcy-as-economic-problems-persist-11642537090

Excerpt:

Puerto Rico received court approval to leave bankruptcy through the largest restructuring of U.S. municipal debt ever, ending years of conflict with creditors as the U.S. territory confronts other stubborn economic problems.

Tuesday’s court ruling approved a write-down of $30.5 billion in public debts built up during an economic decline marked by high joblessness, outward migration and unsustainable borrowing that tipped Puerto Rico into bankruptcy in 2017. The restructuring plan calms tension between Puerto Rico and its Wall Street creditors dating to its debt default, the largest ever on bonds backed by the full faith and credit of a U.S. municipality.

….

The territory entered bankruptcy with $74 billion in bond debt and a $55 billion gap between the pension benefits promised to employees and retirees and the funding set aside to pay for them. Public agencies were beset by cronyism and failed for years to draw up accurate budgets or account for expenses, according to a 2018 investigation commissioned by the board.

Sprawling bureaucracy and a high cost of doing business discouraged investment, especially after the expiration of some corporate tax breaks in 2006 pushed some pharmaceutical and other manufacturers to depart. To make up for a shrinking tax base, officials borrowed to paper over deficits and skimped on pension contributions.

Many residents of Puerto Rico, political leaders, and some investors have called for an independent audit of how the huge debt was built up, according to Judge Swain’s decision.

Author(s): Andrew Scurria and Soma Biswas

Publication Date: 18 Jan 2022

Publication Site: WSJ

2022 Predictions

Mary Pat Campbell

Link: https://www.linkedin.com/pulse/2022-predictions-max-rudolph/

Graphic:

Excerpt:

Regional conflicts are heating up around the world. Resource needs will accelerate the trend. Fresh water in the Himalayas provide multiple countries who have nuclear arsenals. Oil and rare earth metals could also trigger a war. Climatic events are happening more often, so the cost takes money away from solutions while making the goals seem more obvious.

….

Resource depletion has no recommended debit treatment from accountants, but attribution analysis is going to do the work after the fact and charge companies for their past practices through the court system. I assume this is how the asbestos risk played out but I will need to learn more about similar historical events as these events play out. How should this enter your thought process as an investor? In 2021 I wrote 4 papers about climate; Climate System, Integrated Assessment Models, Impact of Climate Change on Investors and Municipalities and Climate Change. They are part of the SOA’s Environmental Risk Series. The impact of climate on investors will continue to evolve for many years. One topic of interest to me is how TCFD (disclosures) will play out – we could see “bad” investments like oil companies, gun makers and cigarette companies become privately owned. This would make it harder to apply peer pressure so is an important reminder to be careful what you wish for!

Author(s): Max Rudolph

Publication Date: 16 Jan 2022

Publication Site: LinkedIn

Chicago school district finds buyers after offering higher yields

Mary Pat Campbell

Link: https://fixedincome.fidelity.com/ftgw/fi/FINewsArticle?id=202201141507SM______BNDBUYER_0000017e-59c7-de0b-a77f-dbef44d30001_110.1#new_tab

Excerpt:

Chicago Public Schools’ $872 million of junk-rated paper met with a more fickle high-yield audience this week, underscoring the district?s vulnerability to market volatility even as it inches closer to investment grade status.

At attractive spreads that offered a healthy yield kick with many maturities offering 4% coupons, the bonds were 2.2 times oversubscribed, CPS said in a statement. More than 40 institutional investors placed orders including some in excess of $150 million each.

The district will pay a true interest cost of 3.51% that ranks among the lowest paid by the Chicago Board of Education over the last two decades. The sale provides $500 million of new money for capital projects and the remainder refunds 2011 bonds.

Author(s): Yvette Shields

Publication Date: 14 Jan 2022

Publication Site: Fidelity Fixed Income