Tuesday, March 13, 2007

CDOs May Bring Subprime-Like Bust for Buyouts, Junk-Rated Debt

......like falling dominoes. everybody who thinks that the events in the subprime sector are isolated must either be naive, a perma bull or has a show called "mad money" on cnbc...... :-)

....man kann förmlich erkennen wie nach und nach ein domino nach dem anderen fällz. jeder der meint das die probleme im subprimesektor isoliert zu betrachten sind wird wohl eines besseren belehrt.


March 13 (Bloomberg) -- Bond investors rattled by mounting losses in subprime U.S. mortgages say trouble is brewing in collateralized debt obligations, the same securities that fueled the boom in leveraged buyouts and cut-rate finance.


Sales of CDOs, which package loans, bonds and derivatives into new securities, rose by almost half to $918 billion last year, .... Demand for investments to use in CDOs has helped push risk premiums lower for everything from home loans to high-yield, high-risk bonds, forcing managers to borrow ever more money to maintain returns and stand out from the competition.

``There will ultimately be a shakeout,'' said ... ``Many'' new managers ``lack the pedigree, or at a minimum the track record. Many have not managed'' in a downturn, he said.

Managers of CDOs backed by speculative-grade loans are borrowing as much as 13 times the amount they raise in equity from investors, up from nine to 10 times as recently as late 2005, according to Wriedt. Forty-one percent of the 142 CDOs backed by corporate loans and rated by Moody's Investors Service last year were set up by first-time issuers.

Subprime Parallels
``There certainly is potential for some excesses and that could turn into some performance issues,'' .....
CDOs are financing a record number of loans to low-rated borrowers that forego standard investor protections, such as quarterly limits on the amount of debt relative to earnings. Some $36 billion of the loans were made this year, more than the previous 10 years combined, New York-based Morgan Stanley found.

Individuals with poor credit histories who borrowed for home loans obtained similar easy terms. Many of those subprime loans also have ended up in CDOs.
As of Dec. 31, about 10 percent of subprime loans in securities were either delinquent by at least 90 days, in foreclosure or turned into seized property, the most in at least seven years, ....
`Toxic Waste'
``When you talk about no documentation loans, you can't have any less of a standard than that,'' .... The lenders ``lower their standards and say `Well, we can put them into CDOs.' Like that's somehow burying that it's toxic waste.''


About $173 billion of CDOs backed mainly by U.S. subprime mortgage bonds and related derivatives were created last year, according to New York-based JPMorgan. Yield premiums for BBB rated bonds issued by CDOs that hold some of the riskiest mortgage debt have soared to 6 percentage points over benchmark rates from 3.65 percentage points this year, JPMorgan found. (still a joke but a start..../ immer noch witz aber immerhin ein beginn.....)

Investors ``need to worry a good bit'' about subprime delinquencies spilling over into the CDO market,... ``The scenario where the BBBs all blow up is a reasonably possible scenario,'' ...

Bankers bundle what is often speculative-grade securities into a CDO, dividing it into pieces with credit ratings as high as AAA. The riskiest parts have no rating, and are known as the equity tranches because they are first in line for any losses. Investors in the equity portion expect to generate returns of more than 10 percent. ....

Better than GE
CDOs with loans and AAA ratings yield 23 basis points over benchmark rates, according to JPMorgan. That's 10 basis points more than top-rated regular corporate bonds sold by Fairfield, Connecticut-based General Electric Co., Merrill Lynch data show.

The Dallas Police and Fire Pension Fund invested in its first CDO about two years ago to boost returns, according to Richard Tettament, administrator of the $3.2 billion fund.

``We were beefing up our risk and we were hoping for a greater return,'' Tettament said in an interview from his Dallas office. ``We have an unfunded liability to pay off.''


Tettament said he isn't sure what type of collateral backs the CDO, though he thinks returns exceeded 20 percent last year.
read this statement twice! / bitte zur not zweimal lesen!

Buyout firms from Kohlberg Kravis Roberts & Co. to Blackstone Group LP have been among the biggest beneficiaries of CDOs. High-yield, or leveraged, loans financed 57 percent of the record $1.55 trillion of mergers and acquisitions last year, the most in seven years, according to S&P.


`Credit Amnesia'
About $154 billion of CDOs that focus mainly on loans were created in 2006, up from $68.2 billion in 2005, according to data compiled by Morgan Stanley. The demand has allowed companies rated four or five levels below investment-grade to pay just 2.12 percentage points more than benchmark rates this month to borrow, an all-time low, S&P says.

``We think there is a kind of a credit amnesia that is going on,'' said William Chew, managing director at S&P in New York. LBO loans the last two years ``had a record number of the deals at the lower end of the credit spectrum. .....


Little Worry
....Investors in CDOs have had little to worry about. February was the first time in more than nine years that no speculative- grade companies defaulted, Moody's said last week. ( can it get any better.....? even mody´s is estimating higher defaults and (surprise) was too early and pessimistic....kann es noch besser werden.....selbst moody´s prognostiziert höhere ausfälle und zu meiner überraschung war mal zu früh dran und pessimistischer.....)



Competition among CDO managers is so fierce that GoldenTree took 11 months to find enough attractive loans for a $750 million fund created two weeks ago, about double the amount of time it took to collect collateral in 2002, Wriedt said. ....

UNC Stays Away
The University of North Carolina at Chapel Hill, which invested in one CDO backed by loans in 2002, isn't buying any now, .....

``We have historically only invested in the equity tranche and today those equity tranches are yielding between 10 and 13 percent,'' ... ``Given the level of risk we feel we're taking in those pieces of paper we don't feel we're being compensated.'' ...

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