Companies are privately issuing a record level of private-placement bonds, according to the Financial News April 4. RepoWatch wonders if these bonds will begin showing up as repo collateral.
From the Financial News:
The market for privately placed bonds is running at record levels this year, according to bankers, as issuers turn to alternative and more flexible sources of financing in the face of continued difficult conditions in the credit and bank lending markets. …
Private placements are individually structured bond issues, often by companies on the fringes of investment-grade ratings, that are sold to a select group of investors, frequently insurance companies. As private deals, they bypass the often lengthy process of raising debt in the public bond markets, but are difficult to track.
Bankers at BNP Paribas and JP Morgan confirmed that more companies were turning to the private placement market because they had either found bank lending or the public bond markets closed to them or prohibitively priced, or they were attracted to the flexibility and speed offered by private placements.
If repo lenders begin reaching for better returns, they could conceivably begin accepting these private-placement bonds as collateral for repo loans.
RepoWatch tries to track repo collateral because the credit crisis in 2007-2008 occurred mainly because repo lenders lost faith in the mortgage-backed securities that borrowers were using as collateral and the lenders refused to renew the repo loans.
For most of the repo market, which is privately negotiated, there’s no way for outsiders to know what the collateral is. However, the tri-party and primary dealer markets report collateral in some detail, so RepoWatch will be checking these sources regularly.