Wednesday, May 09, 2007

first (small) signs of widening spreads for junk/lbo financing

very small signs that spreads are widening. but when you still can refinance within 2 month to lower the interest it is still no wonder that we see crazy deals on a daily basis....and we have blamed the homeowner for refinancing year after year....the big players can do it on a quarterly basis.....but this will change in the near future.

immerhin minimale anzeichen das sich an der kreditfront etwas verschärft. aber solange man binnen 2 monaten ne neue billigere refinanzierung durchdrücken kann ist es kien wunder das wir tagtäglich neue halsbrecherische deals sehen....wenn ich bedenke das mich die jährlichen refinanzierungen der immobilienbesitzer in den usa gewundert haben.......hier geschieht dieses anscheinend quartalsweise......noch....das wird sich sicher in naher zukunft ändern.

May 9 (Bloomberg) -- The high-yield loans that provided the most favorable terms to Kohlberg Kravis Roberts & Co. and Thomas H. Lee Partners LP as they completed the biggest leveraged buyouts are drying up.

Investors have scaled back such credit to LBOs by about 33 percent since February, according to ratings company Standard & Poor's. Yields on loans to buyout firms and companies considered below investment grade rose to 7.76 percent from 7.47 percent three months ago, S&P estimates.

Lenders who sacrificed safety for higher yields last year are becoming skittish after KKR, TPG Inc., Goldman Sachs Group Inc. and Boston-based Lee led a record $188 billion of takeovers in the first quarter. Not only are investors charging more for the riskiest loans, they're also resisting LBO firms that try to lower payments on existing debt. .....

>chart is for the european high yield market, new tranche at 202 (see discussion at the comments)

> europäischer high yield markt, aktuelle tranche bei 202 (bei interesse bitte unter den kommentaren die diskussion nachlesen)

Borrowing costs jumped to 2.4 percentage points more than the London interbank offered rate, a lending benchmark, from an all-time low of 2.12 percent in February for companies rated four or five levels below investment grade, according to S&P. Loans rated below BBB- by S&P and below Baa3 by Moody's Investors Service are considered ``leveraged.''

Petco Rebuffed
Investors bought $16.6 billion of loans with the fewest restrictions, known as covenant-lite financings, in April, down from a record $25 billion in February. The debt agreements impose no quarterly limits on the amount companies can borrow relative to earnings before interest, taxes, depreciation and amortization.

David Bonderman's Fort Worth, Texas-based TPG and Leonard Green & Partners LP of Los Angeles had to ask investors three times before they agreed in April to lower the interest on $700 million of Petco Animal Supplies Inc. debt. The second-biggest U.S. retailer of pet products borrowed the money to pay for a $1.8 billion LBO in October.

San Diego-based Petco asked lenders to reduce their interest margin to 2 percentage points from 2.75. Investors refused and Petco eventually convinced them to lower the premium to 2.5 percentage points over three-month Libor, according to a creditor who declined to be named because the agreement is private.

>bloomberg calls this rebuffed?!? / wie kann man das als zurückweisung bezeichnen?!?

Tighter Restrictions
In February Nashville, Tennessee-based hospital operator HCA Inc. was able to refinance $12.8 billion of loans used to finance its $33 billion purchase by a group of firms including KKR. HCA persuaded lenders to cut the rates by as much as half a percentage point to 2.25 percentage points over Libor.

Hedge funds and mutual funds said tighter lending conditions were inevitable after the increase in buyouts. Banks led by JPMorgan Chase & Co. of New York, Charlotte, North Carolina-based Bank of America Corp. and New York-based Citigroup Inc. arranged $686.2 billion of leveraged loans last year, almost triple the amount in 2003, data compiled by Bloomberg show.

About two-thirds of the loans are syndicated, or sold, to investors, up from a quarter in 2001, S&P says. More than 250 institutions purchased high-yield loans last year, compared with fewer than 100 in 2002, according to the New York-based ratings company.

Leveraged loans became more popular as corporate defaults dropped and yields on corporate bonds declined. The $25 billion of covenant-lite loans in February compared with a total of $32 billion from 1997 through 2006, according to S&P's LCD.

>and on the other hand bonds with convenants for "change in ownership" are soaring

>auf der anderen seite explodieren anleihen mit schutz vor eigentümerwechsel.

Investors say the turning point came March 12 when Philadelphia-based Aramark Corp., which runs food services at Boston's Fenway Park and New York's Shea Stadium, asked investors to cut rates on about $4.4 billion of loans. A group of firms including Goldman had used the money to buy the company two months earlier.

Aramark Denied
Aramark wanted to cut the interest margin to 1.75 percentage points more than Libor from 2.125 percentage points. Investors declined, agreeing to reduce the borrowing margin to 2 percentage points.

The Bank of England warned about the growth of leveraged loans last month, comparing them to the market for U.S. subprime mortgages that collapsed when the real estate boom cooled. About half the loans made this year worldwide were rated below investment grade, up from 20 percent in 2004, the U.K. central bank said......

Investors in collateralized loan obligations that own as much as two-thirds of the bank debt sold to institutional investors have become more wary. The extra yield over benchmarks on BB rated debt of CLOs, or pools of loans sliced into bonds, has increased to 4.50 percentage points from 3.50 percentage points at the start of the year, according to data compiled by JPMorgan. The firm is the biggest arranger of leveraged loans since 1999.

....the default rate on U.S. leveraged loans fell to a record low of 0.22 percent in April, according to S&P. That compares with a 10-year average of 3.05 percent

>i think moody´s is right this time. the record low´s are unsustainable......

>ich denke dieses mal bekommt moody´s recht und ist evtl. sogar zu konservativ. diese niedrigen ausfallraten sind unmöglich von dauer.

Credit-Default Swaps
The cost to protect $10 million in BBB rated CLOs from default with credit-default swaps has risen to $210,000 a year, from $145,000 in February

Borrowers who sought to refinance or reprice leveraged loans at lower rates are down 75 percent from the first quarter, said analysts at Bank of America, the second-biggest arranger of the debt.

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Anonymous the cds trader said...

great blog, great post, but if you care to update your credit chart on the Itraxx Crossover to today, you will see that basically ALL the widening from late February/early March has retraced right back to the tights, give or take. Credit market still shrugging off any concerns of a bubble...

1:31 AM  
Blogger jmf said...

This comment has been removed by the author.

2:28 AM  
Blogger jmf said...

thanks for the kind words and the hint

it was the only chart i have had from the index.

if i am correct the spread is now almost in the mid-range from the low from 160 and the spike 240 at around 200.

09-May-2007 iTraxx Crossover 5 Y EOD

202.75 204.75 EURO

still to low but at least we havn´t seen the bottom yet again.

and it seems that the spreads in europe are still lower than in the rest of the world

2:43 AM  
Anonymous the cds trader said...

the new index is trading around 202 yes, but the old index is trading ~ 175, and thats the one you have in your graph (the new index was launched on March 20th).

So basically it has retraced ALL the way back...crazy i know!

4:35 AM  
Blogger jmf said...

thanks again

where can you find quotes from the older tranches?

at itraxx this was the last quote i could get

02-Apr-2007 iTraxx Crossover 5 Y 12:00

200.04 201.71 EURO

4:43 AM  
Anonymous the cds trader said...

only way to get decent credit spread data is to be in the credit market full-time.

bloomberg historical data on individual credits is now very good mostly though, do CDSD and search by corporate bond ticker, or you can select the indices from the same screen. MarkIt data very reliable if you can get your hands on it.

having been in the credit markets for a LONG time now, I can tell you that the amount of risk being taken and leverage being used by market participants is almost certainly multiple times greater than at any other time in history. If a few investment grade companies were to actually default, and CDS spreads went back to where they were in the 2002/2003 credit "crunch", the pain and losses out there would be incredible. bring it on.

2:10 PM  
Blogger jmf said...


thanks very much.

i agree that the amount of leverage in the system is going to end very very badly.

9:44 PM  

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