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5 CREDIT BUBBLE
BULLETIN At
the heart of disorder By Doug
Noland
Virtually every loan-backed buy-out
deal done in the past few months is trading well
below 90 cents on the dollar… The prospect of
massive losses took its toll on the group of banks
arranging the Harrah's financing. Credit
Suisse…sold about $1bn of its share of the debt
ahead of the agreed schedule, infuriating the
other banks… ‘There is no contractual obligation,’
this person added. ‘We cannot concede control over
our own capital.’ That may be the pattern in
future deals. ‘The Harrah’s precedent frees other
underwriters to deal with situations as they see
fit,’ noted S&P's Weekly Wrap. ‘The market is
in total disarray,’ said the head of debt capital
markets at one major Wall Street firm. Another
senior banker involved in the deal added: ‘The
last 10
days
have been the worst ever. There is a complete
buyers’ strike.’"
February 8 – Bloomberg
(Kabir Chibber): "Banks sitting on $160 billion of
unsold leveraged loans may have to write down more
losses after a plunge in the value of the debt,
according to Bank of America Corp. analysts.
Credit-default swaps showed the risk of leveraged
buyout loan delinquencies rose to the highest on
record today. Collateralized loan obligations that
package the debt will be under pressure to wind
down as the value of their assets falls, analysts
led by Jeffrey Rosenberg wrote…"
February
5 – Financial Times (James Mackintosh and Paul J
Davies): "Loans backing leveraged buy-outs are
trading at levels not seen since the buyers’
strike of last summer, because a number of hedge
funds and leveraged credit funds have been forced
into firesales. Traders said loans used by private
equity groups to support buy-outs had plunged in
value as bank proprietary trading desks refused to
buy them from these funds. A series of hedge funds
that were big owners of leveraged loans have been
frozen in the past six months, because severe
losses and investor withdrawals threatened their
survival. The past two months had seen the sale of
loans by these and other funds that were hurt by
banks making higher margin calls, traders said.
They added that lists of assets being sold would
be circulated after funds missed margin calls…
‘The amount of paper for sale is far outstripping
the buying power of the market the moment," said
one hedge fund manager. ‘Every time one of those
lists [of assets for sale] circulates, the market
drops another point.’"
February 6 –
Financial Times (Aline van Duyn, Michael Mackenzie
and Paul J Davies): "Standard & Poor’s… is
warning that the move could be damaging for banks
with direct exposure to the insurers. S&P said
the potential losses for banks triggered in the
event of downgrades for the bond insurers would
mainly be through the hedging arrangements that
the bond insurers have provided on the least risky
tranches of collateralised debt obligations. Bond
insurers have hedged $125bn of subprime-related
CDOs, S&P said. Although S&P did not
specify which banks were most exposed, it noted
that Citibank, Merrill Lynch and CIBC had all
reported hedges on the so-called supersenior
tranches of high-grade CDOs and had recently taken
reserves for counterparty risk. ‘The value of
those hedges has increased as the value of the
underlying CDOs has fallen and can be presumed to
be 40% to 60% of the notional amounts,’ said Tanya
Azarchs, analyst at S&P. ‘More reserving may
be necessary to reflect the increase in
counterparty risk, if the ratings on guarantors
are lowered.’"
February 7 – Financial
Times (Paul J Davies): "Fitch Ratings is poised to
downgrade some of the safest AAA-rated slices of
complex pools of corporate credit derivatives by
up to five notches after a review of its rating
criteria for collateralised debt obligations…
Yesterday it published a draft of its new
methodology for market feedback. Fitch expects to
implement the changes on March 31 and begin
issuing ratings to new and existing deals."
February 8 – Financial Times (Gillian
Tett): "Earlier this week I chatted with a
jet-lagged US financier. Like many of his ilk, he
is flitting around the Middle East and Asia trying
to extract finance from sovereign wealth funds and
other investment groups. His latest travels have
delivered a surprise: some funds are quietly
getting cold feet about the idea of putting more
capital directly into western banks, he says.
‘There is a backlash building,’ he muttered… This
is striking stuff. In recent months, many equity
investors have taken comfort from the idea that
sovereign wealth funds could ride to the rescue of
Wall Street… Thus far $40bn-60bn-odd worth of
injections have been promised to groups such as
Merrill Lynch and Citi, depending on how you
measure the promises. But having stepped into the
breach so visibly late last year, some funds are
now getting jitters. In China, for example, there
are rising complaints that funds are foolish to
shovel cash directly into risk-laden US banks when
they could be using it in better ways, such as
purchasing western commodity or manufacturing
groups. ‘The Chinese are worried they are turning
into [the source of] dumb money,’ says one
well-placed Asian financier, who partly blames the
trend on the Blackstone saga, which produced
significant paper losses for the Chinese
investors. Meanwhile, in the Middle East, the
latest round of Federal Reserve interest rate cuts
has created unease."
February 5 –
Bloomberg (Jody Shenn): "Buying and selling of
collateralized debt obligations based on mortgage
bonds, high-yield loans or preferred shares has
ground to a near-halt, traders said at the
securitization industry's largest conference.
‘We’re definitely in a period of very low
liquidity at the moment, which has actually been
dropping precipitously in the last few weeks,’
Ross Heller, an executive director at JPMorgan
Securities Inc., said…"
February 5 –
Bloomberg (Pierre Paulden and Bryan Keogh): "Less
than a year after Apollo Management LP paid $6.6
billion for real estate broker Realogy Corp., bond
prices show the deal may be worthless. Debt used
to finance the April purchase trades at 61 cents
on the dollar, and derivatives tied to the
securities indicate an 80% chance that…Realogy
will default. Apollo, the private-equity firm run
by Leon Black, put up about $2 billion of cash to
buy the owner of Coldwell Banker and Century 21,
borrowing the rest... Falling bond prices are
jeopardizing private-equity returns after easy
access to cheap debt fueled a record $1.4 trillion
of leveraged buyouts in 2006 and 2007."
February 4 – Financial Times (David
Oakley): "Heavily indebted European and US
companies face growing financial difficulties
because they cannot refinance their borrowings
owing to the continuing closure of the credit
markets. Companies’ inability to borrow is raising
the spectre of defaults, particularly among the
most highly leveraged companies in sectors, such
as property, that have been hardest hit by
economic uncertainty. A big source for refinancing
in Europe was the high-yield bond market, which
has been closed since July, the longest closure
since 2003. The European leveraged loan market is
also at a standstill, with only a handful of deals
priced in the past month and $64bn in loans still
awaiting syndication, according to Dealogic…"
Willem Sels, head of credit strategy at Dresdner
Kleinwort, said: ‘The closure of the high-yield
bond market is approaching a point where it will
become a problem for some companies. There does
come a time when a company can no longer postpone
the need for refunding.’"
February 6 –
Financial Times (Daniel Pimlott): "CB Richard
Ellis, the world’s biggest real estate adviser,
has cautioned that forced sales of property around
the world would jump in the last six months of
this year if the credit market turmoil did not
improve. Brett White, chief executive of CBRE,
told the FT that distressed sales of commercial
property would rise if borrowers could not
refinance loans after borrowing had become more
expensive in the wake of the credit squeeze. ‘The
issue is that loans come due. A lot of people have
shorter-term loans and its going to be hard to
replace them,’ said Mr White. ‘The longer it goes
on, the worse it gets.’ Sales of commercial
property have slowed dramatically since August, as
the market for commercial mortgage-backed
securities (CMBS) has dried up. CMBS made up
25-30% of all commercial real estate lending in
the US at the height of the market last year… But
December issuance of CMBS was down nearly 75% from
its peak in March… Volumes of US office properties
sold dropped 42% in the final quarter of 2007…"
February 6 – Bloomberg (Pierre Paulden):
"The default rate for high-yield, high-risk bonds
will rise ninefold this year from 2006, said
Edward Altman, the New York University professor
who created the Z-score mathematical formula that
measures a company’s bankruptcy risk. Altman
predicts 4.64% of the $1.1 trillion in junk bonds
outstanding will default this year, up from 0.51%
at the end of 2006, Altman said…"
February
5 – Bloomberg (John Glover): "Fitch Ratings may
downgrade collateralized debt obligations by as
many as five levels under new criteria the company
plans to introduce by the end of March. The
biggest cuts are likely to be made to CDOs based
on credit-default swaps that aren’t actively
managed. So-called static synthetic CDOs that
currently have the top AAA ranking are likely face
downgrades of an average five grades… CDOs holding
high-yield assets will be cut as much as three
levels for the portions first in line for losses,
said the ratings firm."
February 4 –
Financial Times (Henny Sender and Aline van Duyn):
"Leading private equity firms are unlikely to
participate in any recapitalisation of Ambac and
MBIA, increasing the pressure on banks to come up
with a rescue package for the bond insurers. A
number of firms, including Bain Capital, Carlyle
Group, Kohlberg Kravis Roberts and TPG, have
looked at investing in the cash-strapped groups…
These investors have all concluded that the risks
are far too great, according to people familiar
with their thinking. The decision puts more
pressure on the banks to provide rescue financing
for Ambac and MBIA."
February 5 –
Bloomberg (John Glover): "Fitch Ratings may
downgrade all of the $220 billion of
collateralized debt obligations it assesses that
are based on corporate securities because of
rising losses. The…company may lower the notes by
as much as five levels after failing to accurately
assess the risk of debt that packages other
assets, according to guidelines proposed by Fitch
today. CDOs with AAA grades that are based on
credit-default swaps and aren’t actively managed
may face the steepest reductions."'
February 4 – Bloomberg (Abigail Moses):
"Banks in Europe may cut sales of collateralized
debt obligations as much as 50% this year as
mounting subprime mortgage losses prompt investors
to shun the securities, Moody’s… said. Sales of
CDOs, securities that pool bonds and loans, rose
11% to a record 112.8 billion euros ($167 billion)
in 2007, analysts led by Florence
Tadjeddine…wrote…"
February 4 – Bloomberg
(Laura Cochrane): "Moody’s… may cut the ratings on
A$83 billion ($75 billion) of Australian
mortgage-backed bonds linked to PMI Group Inc. on
concern the U.S. home-loan insurer will find it
harder to pay claims. Moody’s is reviewing the
ratings on bonds tied to loans insured by the
local unit of PMI… They account for about 45% of
the A$180 billion mortgage-backed bonds issued in
Australia…"
February 5 – Bloomberg
(Shannon D. Harrington): "Primus Guaranty Ltd., a
manager of $23 billion in credit-default swaps,
posted its biggest loss after writing down the
value of guarantees it has on mortgage-backed
securities… The fourth-quarter loss was $403.8
million…"
Currency Watch The
dollar index rallied 1.6% this week to 76.67. For
the week on the upside, the Mexican peso gained
0.3%, and the Taiwanese dollar 0.1%. On the
downside, the South African rand declined 4.1%,
the Norwegian krone 2.4%, the Swedish krona 2.4%,
the Danish krone 2.2%, the Euro 2.2%, the British
pound 1.4%, the Australian dollar 1.4%, and the
Swiss franc 1.4%.
Commodities
Watch February 8 - Bloomberg (Tony C.
Dreibus): "Wheat rose to a record for a third day
on the Chicago Board of Trade as the U.S. forecast
its lowest inventories in 60 years. U.S.
stockpiles will drop to 272 million bushels at the
end of May, 6.8% less than expected a month ago
and down 40% from the prior year, the Department
of Agriculture said… Inventories will be the
lowest since 1948 when farmers grew less and
shipped more wheat overseas to help rebuilding
countries after World War II…"
February 4
– Bloomberg (Angela Macdonald-Smith): "Coal jumped
to records at Australia’s Newcastle port and South
Africa’s
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