Thursday, June 21, 2007

Leveraged Loan Market The Future Supbrime ?

The Story is mainly about the Bear Sterns drama (click headline). i´ve singled out the last paragraph. i suggest to read this from Calculated Risk about the "covenant lite"

Die ursprüngliche Geschichte behandelt in erster Linie die Probleme von Bear Stearn (Überschrift klicken). Ich finde den letzten Absatz am interessantesten. Zudem solltet ihr unbedingt den link von Calculated Risk lesen

But perhaps the most worrying thing for financial institutions holding mortgage-backed paper is not the subprime market itself, but the unnerving parallels with an even bigger one to which they are also exposed: leveraged loans to companies.

As Daniel Arbess of Xerion Capital Partners points out, corporate lending's giddy leverage echoes the high loan-to-value ratios in subprime; the explosion of “covenant-lite” deals and payment-in-kind notes mirrors that of interest-only and negative-amortisation mortgages; and leveraged buy-outs have their own form of mortgage refinancing in the so-called dividend recapitalisation. Subprime, says Mr Arbess, might well be “a dress rehearsal for something bigger and scarier.”


>here one more example on what path corporate lending about toggle bonds......

>hier ein Beispiel mehr auf welchen Pfadedn sich die Kreditvergabe inzwischen bewegt....

`Fantasy Land'More than half of the junk bonds sold this year were used to pay for leveraged buyouts and mergers and acquisitions, according to Barclays Capital. Money is so easy to come by that for the first time some investors agreed to let borrowers choose to make interest payments in cash or in additional bonds.

``This is fantasy land for corporate treasurers,'' .... They ``are smiling like Cheshire cats'' and borrowing conditions ``entice them to increase their leverage.''

Univision Communications Inc., the Los Angeles-based Spanish-language broadcaster, and real estate broker Realogy Corp. of Parsippany, New Jersey, financed their takeovers in part with so-called toggle bonds that give the issuer the option to pay interest with more bonds.

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Anonymous Anonymous said...

...the issuer the option to pay interest with more bonds.

And why wouldn't an organization choose that option if, let's say, difficulties with cash flow (Umsatz) were to arise? Where would all of that end?

Back in those days I was not sure what the people in business school were studying, but I never imagined it was how to 'borrow' money without having to pay it back.

4:51 AM  
Blogger jmf said...

Hi Anon,

this has to end in tears.....

This reminds me of the deals when Cisco, Nortel etc did all the vendor financing stuff until the musics stops in 2000......

5:56 AM  

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