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Credit Market Sea Change?
Posted by: WendyBG
Date: 06/28/2007 11:48AM
The Bear Stearns internal rescue was a wake-up call, for the credit markets. Several junk bond offerings fell through, or were withdrawn, in the past few days. Is this a sea change, in the credit markets? Will lenders finally begin to price in risk?
http://online.wsj.com/article/SB118299592168350999.html?mod=home_whats_news_us
Market's Jitters Stir Some Fears For Buyout Boom
Takeover-Related Debt Gets Chilly Reception; Hearing 'Wake-Up Call'
By SERENA NG, TOM LAURICELLA and MICHAEL ANEIRO
Wall Street Journal, June 28, 2007; Page A1
...Much of the recent record wave of takeovers has been built on borrowed money, fueled by easy credit terms and low interest rates. But on Tuesday, investors rejected...[article then lists rejected or withdrawn junk bond offerings. -- W]
..."The biggest risk we face -- and there are a lot of things that contribute to this risk -- would be a very big crisis in the credit markets," ... A "sentiment shift," he said, "could unravel very quickly" the vast wealth that has been created by the takeover boom.
Treasury Secretary Henry Paulson called the market jitters "a wake-up call to focus on excesses" that have developed in recent years in the debt markets. [Glad to see he's waking up...long past due. -- W]
Several factors underlie the new pushback against buyout financings. One is the growing awareness that investors have been demanding very little in return for the risk they have accumulated in snapping up buyout-related loans and debt.
Yields on junk bonds, when compared with ultrasafe U.S. Treasury securities, hit historic lows around a month ago. [This might be a good time to short junk bond ETFs, if you're into that kind of thing. A historic low in risk premiums, followed by a developing crisis. -- W]
In addition to demanding higher interest rates, investors are resisting many bonds and loans whose terms they believe to be too easy on borrowers. Investors have rejected a number of recent deals that included "payment-in-kind" provisions, which allow companies to postpone debt payments to their lenders if they run short of cash. Investors also have rejected loans that are light on certain common performance requirements, known as covenants. [About time! They were nuts to allow these, in the first place! -- W]
"A lot of managers are starting to get miffed about deals with no covenants and the fact that underwriters seem to have little regard for the risks investors are assuming..." [Miffed?! We are talking hundreds of millions of dollars. Next thing you know, they'll be having hissy fits. ;-) -- W]
Banks in several cases have been stuck holding portions of loans or bonds they planned to parcel out to investors, something that could make them more selective in underwriting deals. [The banks are being paid to lend responsibly. That's their job. It's a disgrace that they let underwriting standards slip, since they were passing the risk to investors. --W] Meanwhile, companies and their private-equity buyers face bigger drains on their cash flow as their interest costs rise.[end quote]
It's about time that lenders demand responsible lending (no "toggle" or "covenant lite" garbage). It's about time that borrowers pay a reasonable risk premium, and face up to paying their obligations...or stop trying to borrow money they can't afford to pay back.
The practical consequence may well be a sea change, in the credit markets. Leveraged takeovers will become fewer and more expensive. The last peaks of leveraged buyouts (value of stock plus debt assumed) were 1988 ($100B -- remember the movie "Wall Street"?) and 2000 (about $30B). In 2006, buyouts totaled $400B. This year, up to today, is already up to $300B.
What I don't understand is...how does the buyout activity affect the stock market, as a whole?
Wendy
http://online.wsj.com/article/SB118299592168350999.html?mod=home_whats_news_us
Market's Jitters Stir Some Fears For Buyout Boom
Takeover-Related Debt Gets Chilly Reception; Hearing 'Wake-Up Call'
By SERENA NG, TOM LAURICELLA and MICHAEL ANEIRO
Wall Street Journal, June 28, 2007; Page A1
...Much of the recent record wave of takeovers has been built on borrowed money, fueled by easy credit terms and low interest rates. But on Tuesday, investors rejected...[article then lists rejected or withdrawn junk bond offerings. -- W]
..."The biggest risk we face -- and there are a lot of things that contribute to this risk -- would be a very big crisis in the credit markets," ... A "sentiment shift," he said, "could unravel very quickly" the vast wealth that has been created by the takeover boom.
Treasury Secretary Henry Paulson called the market jitters "a wake-up call to focus on excesses" that have developed in recent years in the debt markets. [Glad to see he's waking up...long past due. -- W]
Several factors underlie the new pushback against buyout financings. One is the growing awareness that investors have been demanding very little in return for the risk they have accumulated in snapping up buyout-related loans and debt.
Yields on junk bonds, when compared with ultrasafe U.S. Treasury securities, hit historic lows around a month ago. [This might be a good time to short junk bond ETFs, if you're into that kind of thing. A historic low in risk premiums, followed by a developing crisis. -- W]
In addition to demanding higher interest rates, investors are resisting many bonds and loans whose terms they believe to be too easy on borrowers. Investors have rejected a number of recent deals that included "payment-in-kind" provisions, which allow companies to postpone debt payments to their lenders if they run short of cash. Investors also have rejected loans that are light on certain common performance requirements, known as covenants. [About time! They were nuts to allow these, in the first place! -- W]
"A lot of managers are starting to get miffed about deals with no covenants and the fact that underwriters seem to have little regard for the risks investors are assuming..." [Miffed?! We are talking hundreds of millions of dollars. Next thing you know, they'll be having hissy fits. ;-) -- W]
Banks in several cases have been stuck holding portions of loans or bonds they planned to parcel out to investors, something that could make them more selective in underwriting deals. [The banks are being paid to lend responsibly. That's their job. It's a disgrace that they let underwriting standards slip, since they were passing the risk to investors. --W] Meanwhile, companies and their private-equity buyers face bigger drains on their cash flow as their interest costs rise.[end quote]
It's about time that lenders demand responsible lending (no "toggle" or "covenant lite" garbage). It's about time that borrowers pay a reasonable risk premium, and face up to paying their obligations...or stop trying to borrow money they can't afford to pay back.
The practical consequence may well be a sea change, in the credit markets. Leveraged takeovers will become fewer and more expensive. The last peaks of leveraged buyouts (value of stock plus debt assumed) were 1988 ($100B -- remember the movie "Wall Street"?) and 2000 (about $30B). In 2006, buyouts totaled $400B. This year, up to today, is already up to $300B.
What I don't understand is...how does the buyout activity affect the stock market, as a whole?
Wendy
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