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3 Reasons Investors Should Keep a Close Watch on Banco Espirito Santo
For one thing, the liquidity factor may not be properly included in risk models.
Debashish Bose    

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

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.
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No positions in stocks mentioned.
More From Debashish Bose
    3 Reasons Investors Should Keep a Close Watch on Banco Espirito Santo
    For one thing, the liquidity factor may not be properly included in risk models.
    Debashish Bose    

    This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

    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.
    < Previous
    • 1
    Next >
    No positions in stocks mentioned.
    More From Debashish Bose
      3 Reasons Investors Should Keep a Close Watch on Banco Espirito Santo
      For one thing, the liquidity factor may not be properly included in risk models.
      Debashish Bose    

      This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

      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.
      < Previous
      • 1
      Next >
      No positions in stocks mentioned.
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