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Today is a ‘beautiful day’ for U2’s front-man Bono as a ‘miracle’ saved him from what could easily have become ‘Wednesday bloody Wednesday’ for him and his friends as they flew from Dublin to Berlin. As NBC News reports, Bono had a mid-air scare on Wednesday when the rear door of his private jet plummeted at least 15,000 feet to the ground. The pilots said they noticed a rumble similar to turbulence during a right-hand turn on approach, but that they felt no major change in how the plane was flying even as luggage and door fell to earth… The search for the missing door continues but investigators were overheard saying they ‘still hadn’t found what they’re looking for’.

 

 

As NBC News reports,

U2 singer Bono had a mid-air scare on Wednesday when the rear door of his private jet plummeted at least 15,000 feet to the ground. The rock star and four friends were aboard the Learjet 60 traveling from Dublin to Berlin when the mishap occurred over Germany, authorities said. The plane landed safely and the two pilots only found out on the ground that the aircraft had lost its door and two suitcases from the luggage compartment.

 

 

The door has not been found. “The aircraft and its rear door are painted black, so the search in the wooded area will be difficult,” said Germout Freitag, a spokesman for the German Federal Bureau of Aircraft Accident Investigation. U2 is in Berlin to receive a Bambi entertainment award. After he landed on Wednesday, Bono met with a German lawmaker.

*  *  *

The question is… is Bono also friends with Putin?

via Zero Hedge http://ift.tt/1wtgi1n Tyler Durden

WTI has now dropped over $2 today with December futures trading below $75 for the first time in over 4 years… “unequivocally good news” right?

 

via Zero Hedge http://ift.tt/1xBOLil Tyler Durden

A month ago we wrote that with oil plunging, the flipside of the widely documented “secret” deal by Obama/Kerry with the Saudis to crush Russia with low, low oil prices, is that none other than America’s own shale industry would be placed under the microscope soon, as its viability at a price well below the shale industry’s cost curve is suddenly put in doubt.

We concluded that “while we understand if Saudi Arabia is employing a dumping strategy to punish the Kremlin as per the “deal” with Obama’s White House, very soon there will be a very vocal, very insolvent and very domestic shale community demanding answers from the Obama administration, as once again the “costs” meant to punish Russia end up crippling the only truly viable industry under the current presidency. As a reminder, the last time Obama threatened Russia with “costs”, he sent Europe into a triple-dip recession. It would truly be the crowning achievement of Obama’s career if, amazingly, he manages to bankrupt the US shale “miracle” next.”

Since then crude has continued to slide, and both Brent and WTI are now trading at a price where just a year ago would seem ludicrous: in the mid-$70s. And the future of America’s “shale miracle” has only gotten ever murkier since a month ago.

But suddenly it is not just the shale companies that are starting to look impaired. According to a Deutsche Bank analysis looking at what the “tipping point” for highly levered companies is in “oil price terms”, things start to get really ugly should crude drop another $15 or so per barrell. Its conclusion: “we would expect to see 1/3rd of US energy Bs/CCCs to restructure, which would imply a 15% default rate for overall US HY energy, and a 2.5% contribution to the broad US HY default rate…. A shock of that magnitude could be sufficient to trigger a  broader HY market default cycle, if materialized. “

Here are the details:

So how big of an impact on fundamentals should we expect from the move in oil price so far and where is the true tipping point for the sector? Let’s start with some basic datapoint describing the energy sector – it is the largest single industry component of the USD DM HY index, however, given this market’s relatively good sector diversification, it only represents 16% of its market value (figure 2). Energy is noticeably tilted towards higher quality, with BB/B/CCC proportions at 53/35/12, compared to overall market at 47/37/17. We find further confirmation to this higher-quality tilt by looking at Figure 3 below, which shows its leverage being around 3.4x compared to 4.0x for overall market. Similarly, their interest coverage stands at noticeably higher levels, even having declined substantially in recent years (Figure 4).

 

 

Energy issuer leverage has increased faster than that of the rest of the market in recent years, but this trend has largely exhausted itself in recent quarters. As Figure 5 demonstrates, growth rates in total debt outstanding among US HY energy names have been only slightly higher relative to the rest of HY market. It is almost certain in our mind that with the current shakeout in this space further incremental leverage will be a lot harder to come by going forward.

 

Perhaps the most unsustainable trend that existed in energy going into this episode shown in Figure 6, which plots the sector’s overall capex expenditure, as a pct of EBITDAs. The graph averaged 150% level over the past four years, clearly the kind of development that could not sustain itself over a longer-term horizon. Our 45%-full sample of issuers reporting Q3 numbers has shown this figure coming down to 110%, a move in the right direction, and  yet a level that suggests further capacity for decline. This chart also shows, perhaps better than any other we have seen, the extent to which current economic  recovery in the US has in fact been driven by the energy development story alone.

 

 

The next question we would like to address here is to what extent the move in oil so far could translate into actual credit losses across the energy sector. To help us approach this question we are borrowing from the material we are going to discuss in-depth in next week’s report on our views on timing/extent of the upcoming default cycle. For the purposes of the current exercise we will limit ourselves to saying that we have identified total debt/enterprise value (D/EV) as an important factor helping us narrow down the list of potential defaulters. Specifically, our historical analysis shows that names that go into restructuring, on average, have their D/EV ratio at 65% two years prior to default, and, expectedly, this ratio rises all the way to 100% at the time of restructuring. From experiences in 2008-09 credit cycle we have also determined that there was a 1:3 relationship between the number of defaulting issuers and the number of issuers trading at 65%+ D/EV prior to the cycle. Again, we are going to present detailed evidence behind these assumptions in the next week’s report.

 

For the time being, we will limit ourselves to applying these metrics to current valuations in the US HY energy sector, and specifically, its single-B/CCC segment. At the moment, average D/EV metric here is 55%, up from 43% in late June, before the 26% move lower in oil. About 28 pct of energy B/CCC names are trading at 65%+ D/EV, implying an 8.5% default rate among them, assuming historical 1/3rd default probability holds. This would translate into a 4.3% default rate for the overall US HY energy sector (including BBs), and 0.7% across the US HY bond market.

 

Looking at the bond side of valuation picture, we find that energy Bs/CCCs are trading at a 270bp premium over non-Energy Bs/CCCs today (Figure 7). This premium implies incremental default rate of 4.5% (= spread * (1 – recovery) = 270 * (1-0.4) = 4.5%). Actual default rate among US HY Bs/CCCs is currently running at 3%, a level that we expect to increase to 5% next year (not to be confused with overall US HY default rate, currently running at 1.7% and expected to increase to 3.0% next year).

 

The bottom line is hardly as pretty as all those preaching that the lower the oil the better for the economy:

In the next step we are attempting to perform a stress-test on oil, defined this way: what would it take for overall US energy Bs/CCCs segment to start trading at 65%+ total debt/enterprise value? Our logic in modeling this scenario goes along the following lines: if a 25% drop in WTI since June 30th was sufficient to push their average D/EV from 43 to 55, then it would take a further 0.8x similar move in oil to get the whole sector to average 65 = (65-55)/(55-43) = 0.8x, which translates into another 20% decline in WTI from its recent low of $77 to roughly $60/bbl. If this scenario were to materialize, based on historical default incidence, we would expect to see 1/3rd of US energy Bs/CCCs to restructure, which would imply a 15% default rate for overall US HY energy, and a 2.5% contribution to the broad US HY default rate.

How should one trade an ongoing collapse in oil prices? Simple: sell B/CCC-rated energy bonds and wait to pick up 10%.

If this scenario were to materialize, the US energy Bs/CCCs would have to trade at spreads north of 1,800bp, or about a 1,000bps away from its current levels. Such a spread widening translates into a 40pt drop in average dollar price from its current level of 92pts for energy Bs/CCCs.

It gets worse, because energy CapEx is about to tumble, which means far less exploration (and US fixed investment thus GDP), far less supply, and ultimately a higher oil price.

As the market adjusts to realities of sharply lower oil prices, it is important for to remember that the US HY energy sector is a higher quality part of the market. Higher credit quality will help many of them absorb an oil price shock without jeopardizing production plans or ability to service debt. Their capex rates, expressed as a pct of EBITDAs, have already declined from an average of 150% over the past four years to roughly 110% today. We still consider this level to be high and thus subject to further pressures. This in turn should work towards slower rates of supply growth, and thus ultimately towards supporting a new floor for oil prices. A 25% in oil price so far has pushed debt/enterprise valuations among US energy B/CCC names to a point suggesting 8.5% future default probability, while their bonds are pricing in a 9.5% default probability.

And the scariest conclusion of all:

Finally, our stress-test shows that a further 20% drop in WTI to $60/bbl is likely to push the whole sector into distress, a scenario where average B/CCC  energy name will start trading at 65% D/EV, implying a 30% default rate for the whole segment. A shock of that magnitude could be sufficient to trigger a  broader HY market default cycle, if materialized.

And now back to the old “plunging oil prices are good for the economy” spin cycle.

via Zero Hedge http://ift.tt/1EGH10N Tyler Durden

Submitted by Dr. Constantin Gurdgiev via True Economics blog,

Ireland has been basking in the spot of an unusual sunshine this October. The cold spell, that normally takes the island over at the end of the month and into early November, coating it in a wet blanket of wind-swept and never ending rains was nowhere to be seen, replaced by the strangely regular appearances of the sun, blue skies and sight of the still leafy, colour-turned trees.
 
Similarly, the markets have been kind to Ireland too. There is not a day going by without a praise for the country reforms or recovery or both from some European leader or a Wall Street analyst or a hired gun from the ‘official’ sectors of the Irish state gracing international newspapers and media screens. CDS are down, estimated probabilities of default are down, bond yields are down. Sales of new bonds are up. Foreign direct investment figures are up. Jobs announcements are up. And forecasts… well, forecasts just keep on climbing.
 
In the latest round, the European Commission weighed in with its prediction that Ireland will outgrow its euro area peers by some 3-fold in 2014 and 2015.
 
Truth is, all of this is largely nonsense. Ireland is a small open economy with trade and investment exposures to the Euro area, the US and the UK. In almost even shares.
 
This means three things, relating to the Irish economy forecasts. 

Firstly, Ireland benefits from the accommodative monetary policy in the Euro area (making its gargantuan public and private debts overhang more manageable, for now, and its exports cheaper).

 

Secondly, due to the geographic distribution of its trade and investment links, Ireland is also benefitting from the faster growth in demand in the UK and the US.

 

Both points translate into more robust exports performance for Ireland than for its European peers. But both also mean that most of Ireland’s trade in goods and services is nothing more than transfer pricing and tax optimisation-driven shifting of digits across the borders. Yes, the multinational companies provide some employment – roughly 10 percent of the country total. But beyond that, they deliver little. The hiring they are doing is increasingly about bringing people with skills from abroad rather than taking people for training from within. And while in January-October 2013 corporation taxes accounted for just 9.46% of total tax revenues collected in Ireland, over the same period this year, the number is 9.24%.

 

So whilst the external trade tends to boost Ireland’s GDP, the fact that over 3/4 of the country exports are accounted for by the multinationals, making Ireland’s GDP / GNP gap the largest of all advanced economies. That’s “growth in and profits out” model of an economy run on FDI.

 

Which brings us to the third point about Ireland’s growth outlook: it is highly unpredictable. Whilst exports are volatile because they are dominated by the considerations of tax optimisation rather than actual production, the domestic economy is desperately searching for a growth catalyst, and to-date, finding none strong enough.

 

In H1 2014 the GDP / GNP gap was actually slightly lowered. But not by a pick up in the domestic activity. The reclassifications of R&D spending as investment in ESA 2010 standards adopted by Ireland ahead of all other countries in the euro area generated a significant uplift in GNP. Overnight, Irish ‘investment’ side of the National Accounts boomed by almost EUR10 billion (in full year 2013 terms). And surprisingly high retention of profits by the Multinationals in Ireland (most likely prompted by the sluggish capex spending in the stagnating global economy) further helped to temporarily and superficially boost the GNP.

Meanwhile, in the real Irish economy, the country remains the second worst hit by the crisis in the euro area. As shown below, Ireland’s real GDP in per capita terms is down off the 2007 peaks and all the miracles of the recovery are unlikely to get it anywhere near the euro area averages any time soon.

 

 
Of course, the real long-run question for Ireland is whether the current rates of growth observed in 2014 to-date (closer to 5% per annum) are sustainable in the medium term.
 
The answer rests with the potential growth rates in the two sectors that make up Ireland’s bipolar economy:

1) Domestic demand: Domestic demand is starting to show some signs of revival, exactly in the areas where one would expect these signs to materialise at this early stage of the recovery: first domestic investment, then domestic consumption.

 

Domestic spending is rising (at 1-2% per annum rate) on both household consumption and public spending uplifts. We can expect this trend to continue, without significant acceleration until H1 2016, as domestic spending is being held back by slow growth in wages and continued high rates of tax extraction from personal incomes.

 

Domestic investment has been a beneficiary (at the aggregate level) of institutional investors and some domestic cash buyers flooding into the distressed property markets since H2 2012. Accounting gimmickry of ESA 2010 standards is boosting this side of the National Accounts too. The property markets cash-buying spree is now tapering off, and is being partially replaced by the banks starting to issue new mortgages. I suspect this trend will lose more momentum over H1 2015. Aside from this, there is no uplift in domestic investment. Corporate investment is weak, stripping out foreign companies tax inversions. Demand for capital goods is weak. Which underpins the nature of jobs creation claims presented by the Government. Official figures for new jobs created include adjustments made to the labour force surveys in the wake of the last Census, resulting in a massive uplift in the numbers declaring themselves as being employed as farmers back in 2013. Stripping these adjustments out, instead of ca 70,000 new jobs ‘created’ claimed by the Government, real private sector non-farm payrolls are up roughly 27,000 on 2011 levels. No wonder capital investment is running weak. Meanwhile, labour force participation rate is falling due to exits from the workforce, early retirements, and emigration.

 

2) External demand picture is more complex. Rates of growth in exports of services – the factor that drove up Irish current account surpluses in 2010-2013 – are slowing down as Ireland exhausts large FDI sources in the ICT and Financial services sectors, and as negative reputation of Ireland’s tax optimisation policies sets in. In the short run, however, we can see an acceleration in FDI inflows as some of the MNCs rush in to lock into Irish ‘domicile’ before it becomes obsolete. Volatility of exports growth figures will be high in 2015-2016. But in the longer run, we can expect a downward trend in the rates of growth in exports and a pick up in the rates of growth in imports, assuming domestic demand picks up. On manufacturing side, things have been improving due to weakening of the euro. However, there are few new catalysts for growth in the sector at this point in time. Over the longer time horizon there are adverse potential headwinds coming up as patent-cliff-hit pharma companies are gradually starting to bypass Ireland in locating new activities.

In brief, there is little clarity on the future potential growth dynamics. Key ingredients for sustained optimism that are lacking include actual structural reforms (virtually none have been implemented to date and even fewer have been properly planned and resourced) and clear catalysts for growth (there are no broadly-based sectoral drivers for growth other than “things are so bad, they can only get better” argument for domestic demand and “we have lots of FDI” argument for externally trading sectors).
 
One last caveat – we are already witnessing the process of unwinding of reforms that aimed to deliver moderate savings in public spending. The Government is aggressively trading down any expectations that savings in public expenditure secured in 2009-2013 will continue into the future, beyond 2015. Political cycle does not favour continuation of the past reforms as deeply unpopular and internally torn governing coalition is facing general elections before April 2016.
 
As Europe gets hungrier and hungrier for a feel-good story, as Brussels longs more and more for a poster child for its ‘crisis management’ efforts of 2008-2013, as Dublin politicians get closer and closer to facing the crisis-hit electorate, the sunshine being lavished by politicians and the media onto Ireland’s economy is likely to get only brighter. It might not feel much warmer, though, on the ground. Nor will it stave off the onset of winter.

via Zero Hedge http://ift.tt/1sIFkbE Tyler Durden