Asset Performance During Periods of Stress - Market Colour from Alicia Le

During the prevailing period of COVID-19 uncertainty, asset prices are being impacted by a multitude of fast changing developments whereby conventional economic factors are taking their lead from a range of public health issues including:

• how local leaders react
• how populations adhere to suggested/enforced measures
• how heath systems identify and treat patients

In periods of stress, asset holders benefit immensely from having a clear view of the impact of market movements on the value of their portfolio. More than ever, maintaining an up-to-date and accurate valuation of their book can impact on a firm’s profitability. By identifying vulnerabilities within a portfolio before a market has shifted, and by highlighting opportunities to exit assets that may be mis-priced, or no longer appropriate, accurate valuations can ensure a firm has the information they need to weather the storm. In addition, scenario analysis and stress testing can provide valuable insight as the climate evolves.

European ABS and CLO markets have gone through a tumultuous period for the past few weeks as the number of cases of Covid-19 virus started increasing first in Europe and then in the US. The combination of outflows, volatility, and a lack of activity from trading desks has put downward pressure on prices in addition to widening bid/ask spreads. Weekly BWIC volumes are running at higher levels than the averages seen in 2019, but with an estimated traded ratio of just 58%, compared to an average of 80% over the last few years. Nonetheless the number of successful trades remains relatively high, considering the circumstances. This can, at least partly, be explained by the fact that banks are in a much stronger capital position this time, as compared to the previous crisis, and were generally pretty light from a balance sheet perspective on the way in. In fact we are seeing more orderly trading, and thus better price discovery, when compared to the weak flow and dislocations that persisted for extended periods in 2008/2009.

The announcements of sizeable stimulus packages by the ECB, via the increase of the Asset Purchases Program and the PEPP - ‘Pandemic Emergency Purchase Program’, and by the Fed with the TALF - ‘Term Asset-Backed Securities Loan Facility’, and the announcement of potentially unlimited asset purchases, have brought some optimism to the market. As a result we have observed notable distinctions in the last week between European ABS bonds that are eligible for the purchasing program and the rest of the market. Over the course of the week trading activity also picked up in CLO AAA and to some extent, RMBS and ABS senior. However buyers remain more opportunistic with respect to the lower part of the capital structure.

Source: Bloomberg, J.P. Morgan Securities LLC

- Since 2003, LoanClear has advised on over $700 billion of credit exposure for more than 50 clients around the globe -

In the current global crisis, LoanClear can provide transparency and guidance for participants in European, US, and Asian loan and credit markets.

LoanClear’s experienced team of specialists combine in-depth knowledge of loan products, data, and scenario modelling with real time market information. LoanClear has access to global primary and secondary markets spanning many loan types and credit products, including non-bank originated loans.

Advisory services include fair market valuation, expected loss and impairment analysis, cash flow scenarios, risk analysis, bench-marking and portfolio solutions.

Get in touch with your usual contact, or via info@loanclear.com, to explore how we can help to provide you with scenario analysis or valuations.