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I believe that investors should keep a close watch on Banco Espirito Santo (ELI:BES), which has come under fire as a result of its ties to Espirito Santo International, which recently missed payments on short-term debt. BES has $1.1 billion worth of exposure to an ESI subsidiary, and investors are worried about the fallout in the event of an ESI meltdown.
1. Real money is a massive consensus overweight in EU peripheral and high-yield credit, especially since the long end of Treasuries blew out last year.
2. It is surprising that the debt-payment miss happened at a time when spreads have compressed dramatically, and presumably, refinancing should have been far easier.
3. The increasing absence of market makers has impacted liquidity. Consequently, the liquidity factor in risk models may not be truly reflective of actual market conditions.
While the base case is that the issue is isolated, that logic is usually the same at the beginning of most problems.
What are the implications for equity investors? High-yield credit multiples expansion has preceded equity P/E expansion, and hence, any reversals could also be correlated.
I believe that investors should keep a close watch on Banco Espirito Santo (ELI:BES), which has come under fire as a result of its ties to Espirito Santo International, which recently missed payments on short-term debt. BES has $1.1 billion worth of exposure to an ESI subsidiary, and investors are worried about the fallout in the event of an ESI meltdown.
1. Real money is a massive consensus overweight in EU peripheral and high-yield credit, especially since the long end of Treasuries blew out last year.
2. It is surprising that the debt-payment miss happened at a time when spreads have compressed dramatically, and presumably, refinancing should have been far easier.
3. The increasing absence of market makers has impacted liquidity. Consequently, the liquidity factor in risk models may not be truly reflective of actual market conditions.
While the base case is that the issue is isolated, that logic is usually the same at the beginning of most problems.
What are the implications for equity investors? High-yield credit multiples expansion has preceded equity P/E expansion, and hence, any reversals could also be correlated.
No positions in stocks mentioned.
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