Monday, May 21, 2007

No Place to Hide / LBOs Attack Finance Company Bondholders

this sums it up........ dieser satz sagt alles zum aktuellen kaufwahn in sachen lbo┬┤s
They had assumed that companies whose profits depend on investment-grade credit ratings couldn't afford to pile on debt.

think again......

May 22 (Bloomberg) -- Finance company bonds, the fastest- growing part of the corporate debt market, are no longer a haven from leveraged buyouts.
Bondholders were ambushed by last month's $25 billion takeover of SLM Corp., the student loan company known as Sallie Mae. They had assumed that companies whose profits depend on investment-grade credit ratings couldn't afford to pile on debt.

``The LBO risk factor is dramatically underpriced,'' said Greg Habeeb, a senior vice president at Calvert Asset Management Co. in Bethesda, Maryland, who manages $8 billion of bonds. ``We're not rushing to buy anything.''
Bonds sold by finance companies ranging from CIT Group Inc. to American Express Co. lost as much as $5 billion of their value since the Sallie Mae deal was announced on April 16, according to CreditSights Inc., a New York-based fixed-income research firm. The acquisition eliminated the last shelter for investors after $1.11 trillion of debt-fueled takeovers since the start of 2006.

Investors this month demanded an average 86 basis points more in yield than on Treasuries to hold the debt of finance companies, 14 basis points more than before the Sallie Mae buyout and the most since 2003, ....

Finance companies were considered immune to LBOs because they profit from the difference between their borrowing costs and the amount they charge on loans.

The increase in yield premiums is bigger than any other part of the investment-grade debt market...

Hardest Hit
The increase means it costs an extra $1.4 million in annual interest to sell $1 billion of debt. Spreads may widen another 20 to 30 basis points, Habeeb said.....

Sallie Mae's $750 million of 5.45 percent notes due in 2011 tumbled 4 cents on the dollar to 96 cents on April 16 when New York-based private-equity firm J.C. Flowers & Co. said it would buy the largest U.S. provider of student loans, according to Trace, the bond-price reporting system of the NASD. The decline pushed the yield on the notes to 6.5 percent from 5.5 percent.

Biggest Holders
LBOs typically wreck returns for bondholders because buyers borrow about two-thirds of the company's purchase price, causing the value of existing debt and credit ratings to fall. Reston, Virginia-based Sallie Mae's A2 rating was put on watch for downgrade by Moody's, as was its A rating at S&P.....

LBO Sting
``Private equity will always swarm,'' said Kiesel. ``You can't keep the bees out of the tent. We had a hole in the screen and the bees got in, and they stung.''

More investors than ever are being hurt by finance company bonds. The industry represents 40 percent of the $2 trillion of corporate bonds outstanding, up from 20 percent in 1990
Finance companies sold $220 billion of debt through April, up 30 percent from the same period last year. Bond sales by industrial companies fell 3 percent to $65.5 billion, while utilities issued $5.7 billion, a decline of 17 percent, data compiled by Morgan Stanley show. Finance companies are selling about 75 percent of all bonds, the firm says.

`Middle of the Storm'
``Investors were looking for a safe harbor and the irony is that they put themselves in the middle of the storm,'' ....

CIT bond spreads widened 29 basis points in the past year to 99 basis points, according to Trace. The largest independent commercial finance company in the U.S. had $58.3 billion in debt as of March 31. Yield premiums for investment-grade companies have increased 4 basis points.....

New Twist
Yield premiums have increased for all the companies. Those of American Express, the fourth-biggest credit-card issuer, rose 10 basis points on average in the past year to 50 basis points. Spokesman Robert Glick declined to comment.

Financial firms such as Salle Mae can withstand additional leverage and get by with lower credit ratings because of the growth of the market for bonds backed by assets such as loans and other receivables, according to CreditSights.

Merrill's broadest asset-backed index contains $1.2 trillion in bonds, up from $253 billion in 2002. The average rating is AAA, and the yield is 5.74 percent. Companies whose ratings are lowered below investment grade pay an average of about 7.31 percent..

Not all finance companies are vulnerable to LBOs because many don't have assets that can easily be turned into asset- backed bonds, according to Pimco's Kiesel.....


Be `Cautious'
The average credit rating in Merrill's main index for finance bonds is A1, or three levels higher than the Baa1 rating for the firm's broadest index.

Even before the SLM deal investors began to hedge their bets, demanding the finance companies include protection from LBOs in bonds they sell.

The companies sold $12 billion of bonds this year through May 21 with so-called poison puts that allow investors to sell the securities back to the issuer at 101 cents on the dollar if there is a change in control, according to data compiled by Bloomberg. That is up 72 percent from the same period of 2006, and compares with a 60 percent rise for all industries.

Poison puts are ``sort of a quick fix'' for investors as they fret nothing's safe from a buyout, Dill at Moody's said.

Capmark Financial Group Inc., the former commercial mortgage unit of GM, on sold $2.55 billion of notes on May 3 containing a poison put, the most ever by a finance company,

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