Failed Korean Debt Sale

With tsunamis of sovereign debt being issued around the globe i think news like this will pop up on a regularly basis ( especially for those countries mentioned in So Begin The (Serious) Sovereign Downgrades…? ). This also raises the question what will happen to spreads on corporate bonds ( see Death of Corporate Bonds Is Worth Investigating from William Pesek/ Bloomberg ) .... It will be interesting to see if some countries will be forced to issue debt in foreign currencies if even higher yields are failing to attract enough investors.....And lets all hope that the central banks are resisting the call to be the buyer of last resort ( monetize the debt )..... This would almost definitely lead to trouble down the road......

Mit der nicht enden wollenden Flut an neuen Staatsschulden rund um den Globus dürften vergleichbare Meldungen bald öfter über die Ticker laufen ( verweise in diesem Zusammenhang auch besonders auf die Staaten die in dem folgenden Link angesprochen werden So Begin The (Serious) Sovereign Downgrades…? ). Desweitern muß man sich fragen was solche Ereignisse für Unternehmensanleihen bedeuten ( sieheDeath of Corporate Bonds Is Worth Investigating from William Pesek / Bloomberg ) ..... Entscheidend wird sein ob bestimmte Staaten gezwungen werden einen Teil Ihrer Verbindlichkeiten in Fremdwährungen zu begeben wenn selbst steigende Renditen nicht mehr ausreichen um genügend Investoren anzuziehen..... Bin gespannt ob auch dann die Notenbanken sich dem Druck widersetzen und nicht als Käufer auftreten ( sprich die Notenpresse anzuwerfen )......... Das dürfte eher früher als später zu großen Problemen führen.....

Korea Fails to Meet Target in Bond Sale for 2nd Month

South Korea failed to meet its target at an auction of 10-year bonds for a second consecutive month on concern that the nation will increase debt sales to fund stimulus spending.

The government raised 584 billion won ($415 million) at today’s sale, less than the 800 billion won targeted, after investors offered to buy 604 billion won, the finance ministry said on its Web site. The securities were sold at an average yield of 5.2 percent, higher than the 5.1 percent the market expected, said Kim Do Sung, a futures trader with PB Futures Co. in Seoul.

“The market has shown little interest in longer-dated debt,” Kim said. “The trend may continue for a while as concern about oversupply lingers.”

Investors including Pacific Investment Management Co., which runs the world’s biggest bond fund, and DBS Asset Management Ltd., are avoiding long-term securities as governments fund extra spending by increasing debt sales. Asian nations have pledged an additional $685 billion over the next five years to support growth after recessions in the U.S., Europe and Japan caused exports in the region to collapse.

In a Jan. 19 auction, the Korean government sold 426 billion won of similar-maturity debt, failing to raise a planned 800 billion won. Malaysia attracted bids for 1.46 times the 3.5 billion ringgit ($967 million) of five-year notes sold on Jan. 22, the weakest bid-to-cover ratio since May 2008. The Philippines rejected all bids from investors for 7 billion pesos ($148 million) of treasury bills at an auction on Feb. 9 in Manila.

Curve Steepens

The extra yield that investors are asking to hold 10-year Korean bonds over those maturing in three years widened to 1.63 percentage points last week, the most since November 2001. The spread was 81 basis points at the end of 2008.

Asian local-currency government bonds have handed investors a 4.3 percent loss this year, after rallying 9.7 percent in December, when interest-rate cuts by central banks drove down yields, according to indexes compiled by HSBC Holdings Plc.

Borrowing costs will climb in the region this month as policy makers increase spending to revive their economies, Mirae Asset Investment Management Co. and CIMB-Principal Asset Management said.

India, the Philippines, Thailand, Korea and Malaysia were scheduled to sell at least $3.8 billion of local-currency bonds maturing in 10 to 30 years in February.

“The deeper the recession, the more the stimulus and the more the bond supply,” Kim Sung Jin, head of debt investment at Mirae, South Korea’s biggest asset manager with the equivalent of $43 billion under management, said last week. “The long-end maturities are the most vulnerable.”

Yields Rise
South Korea has already allocated 51 trillion won in tax cuts and infrastructure projects to shore up the economy, and the government needs to increase its budget spending to revive growth, Deputy Finance Minister Noh Dae Lae said on Feb. 12.

The yield on Korea’s 10-year government debt rose one basis point, or 0.01 percentage point, to 5.20 percent today compared with 4.22 percent on Dec. 31, according to Korea Securities Dealers Association. The rate averaged 5.15 percent over the past five years, according to data compiled by Bloomberg.

“Asian local-currency yield curves have bear-steepened so far this year on supply concerns, but more steepening lies ahead as 10-year yields remain below their long-term averages,” said Jens Lauschke, a fixed-income strategist at DBS Group Holdings Ltd. in Singapore.

So Begin The (Serious) Sovereign Downgrades…?

A possible downgrade of Spain.......Shocking..... But i doubt we will see some serious action to under AA- ( besides minor countries ) on this front ( just watch the table with regulatory risk weitghtings & the impact on bank´s balance sheets) UPDATE: S&P lowers Greece rating to A- & an excellent Interactive graphic: Europe on credit alert ...... Why numerous countries are still able to get away with an AAA rating is beyond me. Main reason in my mind is the political pressure ( especially when it comes to the US )..... Too bad that countries like Greece, Italy and Spain cannot stimulate their economy with a weak currency like in the past before they joined the €.... It´s a safe bet that the Euro in the current form won´t last ( see also from the FT Could the eurozone actually split up? )? No wonder Gold in € is hitting new highs almost on a daily basis ( see Daily gold price in a range of currencies since January 2000 ) ?

Ein mögliches Downgrade von Spanien.....Schockierend.....Aber ich denke das wir von dieser Seite nichts richtig drastisches auf unter AA- ( abgesehen von einigen unbedeutenden Ländern ) sehen werden ( man braucht dazu nur einen Blick auf die Übersicht mit den risikowichteten Bilanzpositionen zu werfen um zu erkennen welch desaströse Auswirkungen das auf Bankbilanzen hätte ) UPDATE : S&P lowers Greece rating to A- & sowie eine erstklassige Karte der FT Interactive graphic: Europe on credit alert ..... Man muß sich ernsthaft fragen ob die Ratingagenturen überhaupt was aus dem kollosalen Versagen während des Kreditbonanzas gelernt haben..... Wie anders ist es zu erklären das noch etliche Staaten mit AAA bewertet werden? Schon bald peinlich wie noch immer behauptet wird das Ihre "Bewertungen" jenseits von politischen Einflüssen erfolgen ( ist besonders auf die Boni der USA gemünzt )..... Habe noch gut das Hohelied der "Unabhängigkeit" bei den Bewertungspraktiken der implodierten strukturierten Produkten in den Ohren ...... Für Staaten wie Griechenland, Italien, Irland und Spanien ist es natürlich nicht gerade hifreich das Sie sich nicht wie in der Vergangenheit über die Währung etwas Linderung verschaffen können. Ich denke die Aussage das dem € noch turbulente Zeiten ins Haus stehen dürfte untertrieben sein ( siehe auch aus der FT Could the eurozone actually split up? )...... Sicher kein Zufall das Gold in € momentan nahe der historischen Hochs notiert ( siehe Daily gold price in a range of currencies since January 2000 ) .

So begin the (serious) sovereign downgrades…? FT Alphaville

Not just developing world sovereigns either. From S&P today (emphasis ours):

Jan 12 - Standard & Poor’s Ratings Services today said it had placed its ‘AAA’ long-term foreign and local currency sovereign credit ratings on the Kingdom of Spain on CreditWatch with negative implications. A CreditWatch listing signals a potential but not inevitable change in a rating over the short term.

The ‘A-1+’ short-term ratings were affirmed.

“The CreditWatch placement reflects our view of the significant challenges facing the Spanish economy as it traverses a period of very weak growth, and a sustained period of deleveraging, which we expect to lead to a rebalancing toward traded sectors requiring real exchange rate depreciation,” Standard & Poor’s credit analyst Trevor Cullinan said.

In our opinion, the credit-driven nature of Spain’s strong growth performance in recent years has led to a build-up in imbalances, as evidenced by the sizeable current account deficit (around 10% of GDP in 2008).

> For more insights read Why Spain’s Economic Crisis Is Something More Than A “Housing Slump” from A Fistful Of Euros / Edward Hugh. Cleary worth a AAA rating.......

> Deutlich mehr Details bitte Why Spain’s Economic Crisis Is Something More Than A “Housing Slump” von A Fistful Of Euros / Edward Hugh lesen. Klarer AAA Kandidat.......

Due to the need for the private sector to restructure and deleverage balance sheets, we believe that the unwinding of the deficit increases the probability of a protracted economic slowdown… Despite a relatively strong starting position, we expect the Kingdom’s public finances to deteriorate markedly, with the general government deficit rising well above 3% of GDP until 2011, and peaking above 6% in 2009.

Now this is only a ratings watch action. No downgrade is necessarily forthcoming. It’s just a distinct possibility.

The spectre of which might go some way as to suggesting why CDS on a triple-A-rated sovereign should be a possibility. Something which has been discussed on FT Alphaville before.

Downgraded securities carry more onerous regulatory risk weightings under the Basel II ratings-based approach:

… unless you have a hedge in place. Such as a sovereign CDS.

That might go some way towards explaining why CDS contracts on Spain are some of the most heavily traded - and have the highest net notional levels - $13,489,091,873 according to the latest DTCC data.

Also up there with Spain: Italy. $158,198,385,126bn gross, $18,283,028,951 net.

If there are downgrades in the Eurozone, there could be some other rather nasty effects.

Country Default Risk Rises Across the Board Bespoke

Ireland, Austria, Greece, and the UK have seen default risk rise the most over the last month. All have risen close to or more than 100%. US default risk has risen the 8th most at 68%.

> Compare the table above from November 2008 with the latest news from last Friday and it looks like the "market" is once more way ahead of the agencies.....

> Vergleicht man die obrige Tabelle für den November 2008 mit der aktuellen Meldung von letztem Freitag sieht es ganz so aus als wenn die Märkte einen deutlich besseren Indikator als die Ratingagenturen abgeben..... Mal abwarten wann auch hier das Shorting verboten wird........:-)

FT Alphaville

On Friday, Greece and Ireland were also warned by the agency that their ratings could be downgraded as economic conditions worsen

> More evidence example that the market has lost total confidence in the rating agencies....

> Hier ein weiterer Beleg das der Markt zum Glück einiges an Vertrauen in die Methodik der ratingagneturen verloren hat

Credit-Default Swaps on Ireland, Spain Surge on Ratings Threat Bloomberg

Yields on the bonds of smaller European economies, such as Spain, Italy and Greece, have risen to the highest relative to German bunds since before the ECB was established a decade ago. Spanish 10-year notes yield 99 basis points more than bunds, up from 17 basis points one year ago. For Italian notes, the gap almost quadrupled to 141 basis points from 36 basis points.

> Needless to say that the US is of course a rock solid AAA..... For more AAA facts & charts read Deficits, Debt and Looming Disaster: Reform of Entitlement Programs May Be the Only Hope from the St. Louis Fed. I´m with Bill Gross ( see Ponzi meets treasuries bubble ) but am not willing to bet against bonds yet . Here is another very good summary on this topic ( On return-free risk and the bond bubble )It will be fascinating to see what happend to the bondmarket & the $ if the foreigners are finally waking up ( see Who Will Be Left To Buy US Treasuries...... ) I´m still fascinated how the US has manage to finance this ponzi game for years ( NO SARCASM!)....... UPDATE: Another must read via The Mess That Greenspan Made A deflationary spiral?? Not likely in the U.S

> Wie man bei den nachfolgenden Aussichten längerfristig ein AAA der USA rechtfertigen will wissen wohl nur die Ratingagenturen...... Für mehr AAA würdige Fakten und Charts bitte Deficits, Debt and Looming Disaster: Reform of Entitlement Programs May Be the Only Hope der St. Louis Fed lesen. Bin hier klar der Meinung von Bill Gross ( siehe Ponzi meets treasuries bubble ) traue mich aber noch nicht schon jetzt gegen die Bonds zu setzen. Hier kommt eine weiter sehr gute Zusammenfassung zum "Sratus" der US Staatsanleihen (On return-free risk and the bond bubble ) Ein Katalysator für den Shorteinstieg könnte sein wenn die Ausländer die ja den Großteil finanzieren sich aus den Auktionen zurückziehen oder was ja anscheinend keiner auch nur auf dem Radar hat aktiv anfangen Positionen zuverkaufen.Denke dann werden alle von einem "Black Swan" sprechen.( siehe Who Will Be Left To Buy US Treasuries.......) Bis dahin muß man den USA ehrlich Respekt dafür zollen das Sie es bisher geschafft haben Ihre Defizite zu diesen fast beispiellos günstigen Konditionen zu finanzieren. Das meine ich ausnahmsweise mal nicht sarkastisch. UPDATE: Hier noch ein echtes Sahnestück via The Mess That Greenspan Made A deflationary spiral?? Not likely in the U.S

Quote of the Day: S&P is Cool with U.S. Debt HT Infectious Greed

Quote of the day goes to S&P credit analysts for this comment while keeping U.S. credit at a “AAA” rating:

The rating (for the U.S.) was affirmed despite our judgment that fiscal risk has noticeably increased as we expect that the fiscal deterioration will be temporary.

Words to remember

Update / Hat Tip Credit Writedowns

New Zealand’s AA+ Credit Rating May Be Cut, S&P Says -

Bloomberg.com (The article sys “nations that have been downgraded from AAA previously include Japan, Sweden, Finland and Denmark. The rating company today affirmed Australia’s AAA rating.”)

Chart Of The Day "Junk Yields"

Despite the rollercoaster ride in stocks the action in the bond & debtmarket is even more fascinating....... The main driver of equities for the next few years will be the quality of the balance sheet ( especially after goodwill....) and the timetable for the refinancing of the maturing debt/bonds..... Earnings will be a second-tier issue..... Bondholders will be in the driver seat........ No more attempts to "return value to shareholders" like shown from Daimler ( see How Daimler Wasted € 7 Billion On Buybacks In Just 15 Months...... )..... Needless to say they are also now begging for some kind of bailout.......

Trotz des tagtäglichen Wahnsinns an den Aktienmärkten spielt sich noch sagenhafteres an den Kredit & Anleihemärkten ab. Denke das in den nächten Jahren wie bereits mehrfach erwähnt vorrangig die Bilanzqualität ( vor allem nach den kommenden Goodwillabschreibungen, da versteckt sich noch so manche Bombe....siehe Die nächste Bilanzbombe tickt FTD, besonders interessant wenn mal wieder auf die niedrige Buchwertbewertung der DAXtitel hingewiesen wird .... Got Gold......) sowie die Zeitachse der kommenden Refinanzierungen der ausstehen Anleihen/Kredite die erste Geige für die Aktienkursentwicklung spielen wird. Die Gewinne ( oder besser ausgedrückt Verluste ) rücken da eindeutig in den Hintergrund. Die Bondholder werden zukünftig das sagen haben..... Immerhin bleibt uns dann der Wahnsinn der schuldenfinanzierten Aktienrückkäufe erspart ( das passiert wenn der Vorstand sich mit Haut und Haaren dem kurzfristigen "shareholder value" & seinen Aktienoptionen verschrieben hat.....Betonung liegt hier auf kurzfristig ... Fragt mal bei Daimler nach... siehe How Daimler Wasted € 7 Billion On Buybacks In Just 15 Months...... )


WSJ

Unrelenting declines in corporate "junk" bonds have pushed yields on these riskier securities to over 20% on average, a record

Bespoke

Based on data from Merrill Lynch, high yield bonds are yielding nearly 1,800 basis points more than comparable Treasuries. In the last month alone, spreads have risen by more than 200 basis points, and since bottoming in the Summer of 2007 at 241 basis points, they are up 645%. To put this in perspective, with the 10-Year US Treasury now yielding 3.4%, a high-yield borrower would need to pay roughly 21.4% per year to take out a ten-year loan. With terms like these, who needs loan sharks?

Much more insight via Naked Cpitalism Junk Bond Yields Up Sharply. On top of this visit FT Alphaville for an even more "impressive" chart on CDS ( see iTraxx Europe at all time high ). Combine all this with this chart and is not difficult to imagine that the worst is still to come.....

Mehr Details mal wieder von Naked Capitalism Junk Bond Yields Up Sharply . Einen noch beeindruckenderen Chart der CDS bietet FT Alphaville ( siehe iTraxx Europe at all time high ). Wenn man nun das Drama mit diesem Chart kombiniert ist unschwer zu erkennen das uns "ruppige" Zeiten ins Haus stehen......

Chart Of The Day " CDS On 10yr US Treasuries

There is no free lunch..... Looks like some are questioning the AAA rating of the US..... :-) And with future liabilities from roughly $ 40 to 50 trillion ( growing $ 3-4 trillion p.a. - see If we are Rome, Wall Street's our Coliseum ) only the rating agencies and their bullet proof models are able to justify/create this rating ..... Got GOLD?

Ist das nicht herrlich.... Die Kreditabsicherung gegen einen möglichen Zahlungsausfall von US Staatspapieren ist im Zuge der ganzen täglichen Balioutaktionen geradezu explodiert. Sieht so aus als wenn einige Marktteilnehmer das AAA Rating der USA ernsthaft in Frage stellen... :-) Bei knapp 40 - 50 Billionen $ an zukünftigen Zahlungsverpflichtungen die zudem jährlich momentan ohne all die Bailouts mit ca. 3-4 Billion $ anwachsen ( siehe If we are Rome, Wall Street's our Coliseum ) ist die Sorge eigentlich kaum verständlich. Immerhin haben die Ratingagentuen in einem Ihrer unfehlbaren Modelle die AAA Einschätzung trotz dieser Daten etliche Male bestätigt . Hoffe man hat meinen Sarkasmus heraushören können..... Got GOLD?

Actual numbers: cost of protecting US government debt up 2 basis points to 22bp at close Tuesday, exceeding March all-time-high of 20bp. “In normal times, the spread [full stop] is less than 2bp.”

Hat tip HT Alea: & FT Alphaville

UPDATE: Here is more on this topic from Michael Panzner

The Beginning of the End for America's AAA Rating?

There is no doubt that talk of a bailout of Fannie Mae and Freddie Mac has spurred what could be a short-lived spike. Still, it makes you wonder if the market is starting to price in what many say is inevitable after years of profligacy and failed policies: a credit downgrade for the United States.

This is not merely a subprime crisis / Münchau on Credit Default Swaps

I´m back from my 3 week vacation and it looks like i missed a lot of fun..... Thanks for all the mails during the past weeks. I´ll answer them this week.

It looks like more and more dominoes are falling at an accelerating pace. No wonder more and more people are waking up an are finally discovering Gold ..... Wolfgang Münchau from the FT has some good thoughts on one of the next shoes to drop

Melde mich nach einem dreiwöchigen Urlaub zurück und muß feststellen das ich wohl eine Menge Spaß verpaßt habe...... Dank an alle die gemailt haben. Ich werde diese im Laufe der Woche beantworten.

Es sieht so aus als wenn unübersehbar immer mehr Dominosteine kippen. So verwundert es wenig das endlich immer mehr Leute Gold für sich entdecken.....Wolfgang Münchau from The FT hat sich Gedanken zum nächsten drohenden "Unheil" gemacht.

This is not merely a subprime crisis

If this had been a mere subprime crisis, it would now be over. But it is not, and nor will it be over soon. The reason is that several other pockets of the credit market are also vulnerable. Credit cards are one such segment, similar in size to the subprime market. Another is credit default swaps, relatively modern financial instruments that allow bondholders to insure against default. Those who such sell such protection receive a quarterly premium, based on a percentage of the amount insured.

The CDS market is worth about $45,000bn (€30,500bn, £23,000bn). This is not an easy figure to imagine. It is more than three times the annual gross domestic product of the US. Economically, credit default swaps are insurance. But legally, they are not, which is why this market is largely unregulated.

Technically, they are swaps: two parties swap payments streams – one pays a regular premium for protection, the other pays up in case of default. At a time of low insolvency rates, many investors used to consider the selling of protection as a fairly risk-free way of generating a steady stream of income. But as insolvency rates go up, so will be the payment obligations under the CDS contracts. If insolvencies reach a certain level, one would expect some protection sellers to default on their obligations.

So the general health of this market crucially depends on the rate of insolvencies. This in turn depends on the economy. The US and Europe are the two largest CDS markets in the world. It is now widely recognised, including by the Federal Reserve, that the US economy is heading for a sharp downturn, possibly a recession. The eurozone, too, is heading for a downturn, but possibly not quite as sharp. ....

Today, the really important question is not whether the US can avoid a sharp downturn. It probably cannot. Far more important is the question of how long such a downturn or recession will last. An optimistic scenario would be a short and shallow downturn. A second-best scenario would be for a sharp, but still short, recession. .....

So what then would be the effects of these scenarios on the CDS market? Bill Gross of Pimco*, who runs the world’s largest bond fund, last week produced an interesting back-of-the-envelope calculation that received widespread publicity. He projected ( see his latest Investment Outlook ) that the losses from credit default swaps caused by a rise in bankruptcies could be $250bn or more – which would be similar to the expected total loss as a result of subprime.

This is how he arrived at this estimate. His calculation assumes that the corporate insolvency rate would return to a normal level of 1.25 per cent (measured as the default rate of all investment grade and junk debt outstanding). As the entire CDS market is worth about $45,000bn, $500bn in CDS insurance would be triggered under this assumption. The protection sellers would probably be able to recover some of this, so the net loss would come to about half of that. This estimate is very rough, of course. Most important, it is based on the assumption that the hypothetical US recession would not turn into a prolonged slump. In that case, one would expect corporate default rates not merely to return to trend, but to overshoot in the other direction.

So one could take that calculation as a starting point. A downturn lasting two years could easily trigger payments streams of a multiple of $250bn.

At this point we might be tempted to conclude that this all is irrelevant, since this is only insurance, which is a zero-sum financial game. The money is still there, only somebody else has got it. But in the light of the current liquidity conditions in financial markets, that would be a complacent view to take.

If protection sellers were to default en masse, so too could some protection buyers who erroneously assume that they are protected. Given that the CDS market is largely unregulated there is no guarantee of sufficient liquidity behind each contract.

It is not difficult at all to see how the CDS market has the potential to cause serious financial contagion. The subprime crisis came fairly close to destabilising the global financial system. A CDS crisis, under a pessimistic scenario, could produce a global financial meltdown.

This is not a prediction of what will happen, merely a contingent scenario. But it is contingent on an event – a nasty and long recession – that is not entirely improbable.

A Look At High Yield Spreads / Bespoke

Nice chart from Bespoke .(see blogroll) that shows how perfect the credit conditions were. From now on the credit market is facing serious headwinds.....And this move has happened without a major default dampening the appetite.....Not difficult to imagine how this chart would look like when we have a big default....At this point we could see the stress test for the credit default swap market.... The test in subprime is now underway and it is not a pretty picture....

Netter Chart von Bespoke (Blogroll) der sehr schön zeigt wie nahezu perfekt die bisherigen Kreditbedingungen gewesen sind. Von nun an dürfte es etwas ruppiger zugehen....... Das gilt besonders da der jetzige Anstieg ohne eine größere Insolvenz von statten gegangen ist...Nicht schwer sich vorzustellen wie der Chart aussehen würde wenn wir den ersten größeren Kreditausfall haben werden..... Zu diesem Zeitpunkt sollten wir dann auch den ersten richtigen Streßtest im Credit Default Swap Markt sehen....Der aktuelle "Subprime" Test sieht nicht sehr verheißungsvoll aus.....

While the move looks small in the big picture, the spread between high yield corporate bonds and US treasuries has risen by 27% since bottoming on June 1st. As of yesterday's close, junk bonds were yielding an average of 307 basis points more than treasuries.

And here the real times effects hitting (as one of many examples) Daimler-Chrysler-Ceberus..... I think the CEO Zetsche is sweating and praying right now..... :-)

Hier stellvertretent die Auswirkungen am Beispiel von Daimler-Chrysler-Ceberus......Kann mir gut vorstellen das Zetsche momentan feuchte Hände hat und einige Stoßgebete gen Himmel schickt.... :-)

Thanks to Calculated Risk

Wall Street banks that are arranging financing for Cerberus Capital Management LP's acquisition of the Chrysler Group are looking to sweeten the terms on loans

......bankers marketed a $10 billion loan for Chrysler's auto business at 3.75 percentage points above the London Interbank Offered Rate, compared to the 3.25 percentage points discussed when the road show kicked off about three weeks ago, Standard & Poor's said.

And another $2 billion in financing for the auto company is now being marketed at seven percentage points above the London interbank offered rate, compared to the original six percentage points. The banks are also offering to sell those loans at less than 100 cents on the dollar in a bid to further entice investors to the deal....

Pricing for $8 billion in loans for Chrysler Financial is also expected to change...J.P. Morgan Chase & Co., Bear Stearns Cos., Goldman Sachs Group Inc., Citigroup Inc. and Morgan Stanley have committed to raising money for the deal that will require Cerberus to raise about $62 billion in debt.

Bond Risk Rises on Concern Over Bear Stearns Hedge-Fund Losses

But i was told that the subprime problems were "contained" day in and day out...... with spreads everywhere close to lows this could help and reduce the unbelievable riks appetite that is out there...and this time maybe for longer than 2 weeks.....

Und mir hat man täglich erzählt das die probleme im Subprime segment isoliert sind.....nachdem immer noch alle Risikoaufschläge nahe historischen Tiefstständen notieren könnten die probleme im Hypothekenmarkt zumindest dazu beitragen etwas von dem unfassbaren Risikohunger aus den Märkten zunehmen (dieses Mal evtl. sogar dauerhaft)

The perceived risk of owning corporate bonds soared worldwide on concern over losses at hedge funds run by Bear Stearns Cos.

Credit-default swaps based on 10 million euros ($13 million) of debt included in the iTraxx Crossover Series 7 Index of 50 European companies jumped as much as 16,000 euros to 216,000 euros, the biggest one-day rise in three months, according to Deutsche Bank AG. The CDX Crossover index in New York surged as much as $10,000 to a nine-month high of $178,000. ....


Loans Index
The LCDX index of credit-default swaps on high-yield, high- risk loans fell for a ninth day, dropping 1.19 to 98.08, signaling a deterioration in the perception of the creditworthiness of the 100 U.S. borrowers included in the index. The LCDX is down 2.55 since May 22, when 13 Wall Street banks began offering the five-year contracts in the privately negotiated over-the-counter market.

As home-loan defaults rise, bondholders stand to lose as much as $75 billion of subprime-mortgage securities, according to an April estimate from Pacific Investment Management Co., manager of the world's largest bond fund. Investors in all mortgage bonds will probably take about $100 billion in losses, according to a March report from Citigroup Inc. bond analysts.

Bear Stearns Saga Part IV " How To Mask The Derivative Value"

This story that started already interesting ( see links) has the potential for something really big. to me it is obvious that nobody from Wall Street wants to show how far the real market value of the derivatives have already crashed. it will be interesting to see how long this fact can be hidden......one thing is for sure... the liquidity in this segment will take a significant hit....

part 1 http://tinyurl.com/23s9fp ,
part 2 http://tinyurl.com/2sdv2u,
part 3 http://tinyurl.com/2p75le

Das ganze fing ja schon recht interessant an (s.links). Nun denke ich das die Entwicklung der letzten Tage und vor allem das Verhalten der großen Spieler an der Wall Street gezeigt hat das hier wirklich dramatische Auswirkungen drohen. Dürfte für Leser dieses Blogs nicht ganz überraschend kommen :-). Es scheint ziemlich offensichtlich das hier mit aller Macht versucht wird den Marktwert der Derivate zu verschleiern. Habe Zweifel ob das noch lange gelingt. eines scheint aber jetzt schon klar...die Liquidität in diesem Segment wird einen Schlag versetzt bekommen.....aber wie ich den Markt einschätze "die Karavane zieht weiter"......

The high-stakes game of brinksmanship began early yesterday on Wall Street, and continued throughout the day. Bankers traded telephone calls, frenetically negotiating the fate of two hedge funds.

All wanted to avoid a fire sale in the troubled mortgage-securities market, but at the same time, not get stuck with an exploding liability that could result in steep losses. The day ended with deals that appeared to have forestalled a meltdown. But questions remained about how successful they were and whether they had merely delayed the inevitable.

As the morning unfolded, lenders to two hedge funds at a unit of Bear Stearns, the investment bank, tried to ascertain what they could expect if they auctioned off mortgage securities with a face value of up to $2 billion. The solicitations were hastily withdrawn when investors reacted with little enthusiasm. But by the end of the day, some of the less-risky securities did change hands.
At the same time, several lenders, including JP Morgan Chase, Goldman Sachs and Bank of America, reached deals with Bear Stearns that forestalled a need to sell securities in the open market. It appeared that some lenders pulled back over concerns about the effect that a large liquidation would have on bond prices and investor confidence. While the securities involved represent a fraction of the market, a liquidation could have forced a bigger sell-off while setting a lower price.

One lender, Merrill Lynch & Company, moved ahead with plans to auction $850 million in collateral it had seized from the Bear funds, according to people briefed on the matter. And Deutsche Bank was said to be shopping $600 million in assets. ......

The deal that JP Morgan Chase reached with Bear Stearns Asset Management allowed it to sell $400 million collateral back to the hedge funds for cash, according to people briefed on the matter. It was not clear what price the two banks agreed to.

Goldman Sachs and Bank of America reached similar deals, though details remained unclear. Also unclear is what price the assets will eventually fetch for the Bear funds and what types of losses investors, who have been unable to redeem their investments since May, will face.

The securities causing the greatest concern within the Bear Stearns funds are known as collateralized debt obligations, or C.D.O.’s. Run by portfolio managers, these complex instrument are akin to mutual funds in that they buy stakes in a variety of bonds backed by mortgages.

They often invest in the riskiest portion of the bonds, usually with a hundreds of millions or billions in borrowed money. Some simply buy stakes in other C.D.O.’s. About $316 billion in C.D.O.’s specializing in mortgages were issued last year, up from $178 billion in 2005. ...

>no wonder they dont want to price them to market.....
>hier kann man erahnen warum einer die zum Marktpreis bilanzieren will.....

He said it would take time — perhaps several days — for potential buyers to drill down into some of the more complex securities in order to value them before any bids could be prepared. From 33 to 45 percent of the $2 billion in C.D.O.’s on offer by the funds early yesterday were investments in other C.D.O.’s,

One worry about the possible unwinding of the Bear funds is that it will cascade into larger liquidations by other investors who hold similar securities at far higher prices. Accounting rules require investment banks to mark the value of the investments to the price of similar assets trading in the market. Many mortgage-related securities, and C.D.O.’s in particular, do not trade frequently, making them hard to value.

“Do you want to be the first one out and perhaps cause the lows to be hit in the market, or do you want to wait and see how this all plays out?”

In fact, rather than aggressively selling the assets it has seized, Merrill is quietly showing it to a small group of potential buyers, according to a person briefed on the process.

Such an approach helps to keep the pricing of the securities under wraps, allowing Wall Street firms to avoid marking down their own stakes. Keeping the sales price quiet also means that the firms may not have to add collateral immediately to shore up their portfolios.

At the end of the day, Merrill sold only a small portion of the $850 million in assets it had seized from the Bear funds as collateral. Traders said what did sell was the less risky, well-collateralized securities and that those sold near or at par in many cases. It is unclear whether Merrill intends to hold onto the remaining securities or whether it will try to sell them again down the road.

Yet another emerging worry is that the big investment banks that until now have generously lent billions of dollars on good terms to traders and portfolio managers are pulling back or demanding stricter terms.

One industry executive, who asked not to be named because of the delicacy of the subject, said the banks involved in the Bear funds could collectively lose $1 billion on their lendings to the Bear funds. While the amount is not itself significant given the size of these banks, it suggests the potential for bigger losses down the road.

“We have heard that lenders have already reduced the amount that they are willing to lend against C.D.O.’s,” said Timothy Rowe, a portfolio manager at Smith Breeden Associates.

Still, analysts note that credit remains easy by historical standards and the market seems to be weathering the current storm well.

“Yes, there was too much leverage in the market. Yes, there was too much appetite for risk and yes, that risk was underpriced,” said Mark Adelson, a senior analyst at Nomura Securities in New York. “But there has not been a lick of spillover of this situation in the corporate bond market or stock markets so I don’t think people need to start hoarding food, water and ammunition because the end is coming.”

Bear Stearns' Subprime Bath

this is on top of the must read story from Mish about Bear Stearns. make sure you read this piece about "Wall Street at work" .......

das ganze paßt perfekt zu dem großartigen post von Mish über Bear Stearns. ich empfehle dringend sich das durchzulesen. perfektes beispiel wie an der wall street gearbeitet wird

Bear Tracks & CDOs

Investors in a 10-month-old Bear Stearns (BSC) hedge fund are learning the hard way the danger of investing in risky bonds with borrowed money. The investment firm's High-Grade Structured Credit Strategies Enhanced Leverage Fund, as of Apr. 30, was down a whopping 23% for the year.


The situation is so bleak that Bear Stearns' asset management group is suspending redemptions at the onetime $642 million fund—meaning investors have no choice but to sit on their losses. And that's got some hopping mad.

> "no way out "..... :-)


"At the end of the day, I'd like someone to be honest with me about what's going on," says one investor in the hedge fund, which bet heavily on bonds backed by subprime mortgages, or home loans to consumers with shaky credit histories. An investor in Europe, who didn't want to be identified, says he's been trying to get his money out of the hedge fund since February.

No Questions.
He's particularly incensed that on a June 8 conference call the fund's managers set up to discuss performance, Bear Stearns officials refused to field investors' questions. "They specifically said they weren't taking any questions," says the investor. "They didn't want to say anything."...
Swift Decline
In fact, things deteriorated rather quickly at the fund. The hedge fund got off to a good start, posting a cumulative 4.44% return over its first four months, according to a Bear Stearns investor letter. But early this year the fund's performance began to suffer as the market for subprime mortgages began to implode. Coming into April, the fund was down 4% for the year.

Then things really fell apart. In April, the hedge fund posted an 18.97% decline, according to the June 7 letter obtained by BusinessWeek. But even more shocking than that big loss: only weeks earlier, the company had said it lost just 6.5% for April, according to a May 15 letter the firm sent fund investors. It's not clear what happened in those intervening weeks to force Bear Stearns to significantly revise upward its estimated April losses. ....

> see Everquest.......

Meanwhile, the poor performance of the 10-month-old "enhanced leverage" fund is another black eye for Bear Stearns' plans to roll out an initial public offering for its Everquest Financial affiliate. The investment firm created Everquest last fall, and filed documents on May 10 to sell a stake to the public (see BusinessWeek.com, 5/11/07, "Bear Stearns' Subprime IPO").

Bear Stearns' two hedge funds then sold some of their riskiest CDO investments to the new entity. .... Nearly two-thirds of Everquest's portfolio of CDOs were purchased from two hedge funds. In return, the hedge funds got $149 million in cash and 16 million shares, valued at $400 million, in the soon-to-be public company. But even that largesse from the Everquest deal wasn't enough to overcome the fund's poor April showing.

Banks Sell 'Toxic Waste' CDOs to Calpers, Texas Teachers Fund

who is holding the bag.......looks like more and more pension funds are on the hook for the junk tranches of the rsikiest loans from homeowners, loans that financed buyouts etc..... to me this is just like buying internetstocks in 1999...... wall street at its best!

wer bleibt im schadenfall auf dem schrott sitzen....sieht so aus als wenn immer mehr pensionskassen unter den ersten sein werden....wer allerdings die riskantesten kreditprodukte erwirbt verdient wenig mitleid....ich vergleiche das vom timing und der risikoeinschätzung mit dem kauf von internetaktien im jahr 1999....auf der anderen seite muß man wall street dafür bewundern das die alles an den mann brigen können

June 1 (Bloomberg) -- Bear Stearns Cos., the fifth-largest U.S. securities firm, is hawking the riskiest portions of collateralized debt obligations to public pension funds.

At a sales presentation of the bank's CDOs to 50 public pension fund managers in a Las Vegas hotel ballroom, Jean Fleischhacker, Bear Stearns senior managing director, tells fund managers they can get a 20 percent annual return from the bottom level of a CDO.

>vegas is probably the right place to host this event

>mit vegas haben die in jedem fall den richtigen platz für die veranstaltung gefunden

``It has a very high cash yield to it,'' Fleischhacker says at the March convention. ``I think a lot of people are confused about what this product is and how it works.''

Worldwide sales of CDOs -- which are packages of securities backed by bonds, mortgages and other loans -- have soared since 2003, reaching $503 billion last year, a fivefold increase in three years. Bankers call the bottom sections of a CDO, the ones most vulnerable to losses from bad debt, the equity tranches.

They also refer to them as toxic waste because as more borrowers default on loans, these investments would be the first to take losses. The investments could be wiped out. ....

Pension funds in the U.S. have bought these CDO portions in efforts to boost returns.

Many pension funds, facing growing numbers of retirees, are still reeling from investments that went sour after technology stocks peaked in March 2000. Fund managers buy equity tranches, which are also called ``first loss'' portions, even though those investments are never given a credit rating by Fitch Group Inc., Moody's Investors Service or Standard & Poor's.

`I Have Trouble'
The California Public Employees' Retirement System, the nation's largest public pension fund, has invested $140 million in such unrated CDO portions, according to data Calpers provided in response to a public records request. Citigroup Inc., the largest U.S. bank, sold the tranches to Calpers.....

Tough to Track
....it's extremely difficult to track the contents of any CDO or its current value, he says. About half of all CDOs sold in the U.S. in 2006 were loaded with subprime mortgage debt, according to Moody's and Morgan Stanley.

Since CDO managers can change the contents of a CDO after it's sold, investors may not know how much subprime risk they face, Das says.

As the $503 billion-a-year CDO market thrives, CDO marketers like Bear Stearns and Citigroup find buyers for the portions known as toxic waste, the equity tranches.

A typical $500 million CDO requires a $40 million unrated equity tranche, says Fleischhacker,

`Lipstick on a Pig'
Chriss Street, treasurer of Orange County, California, the fifth-most-populous county in the U.S., says no public fund should invest in equity tranches. He says fund managers are ignoring their fiduciary responsibilities by placing even 1 percent of pension assets into the riskiest portion of a CDO.

``It's grossly inappropriate to take this level of risk,'' he says. ``Fund managers wanted the high yield, so Wall Street sold it to them. The beauty of Wall Street is they put lipstick on a pig.''

Seven percent of all the equity tranches sold in the U.S. in the past decade were purchased by pension funds, endowments and religious organizations...

The New Mexico State Investment Council, which funds education and government services for children, has $222.5 million invested in equity tranches. The council decided in April to buy an additional $300 million of them. That investment would be 2 percent of the $15 billion it manages.

Broker Suggested Purchases
The General Retirement System of Detroit holds three equity tranches it bought for $38.8 million. The Teachers Retirement System of Texas owns $62.8 million of them. The Missouri State Employees' Retirement System owns a $25 million equity tranche.

Kay Chippeaux, fixed-income portfolio manager of the New Mexico council, says it decided to buy equity tranches after listening to pitches from Merrill Lynch & Co., Wachovia Corp. and Bear Stearns.

The council is relying on advice from bankers who are selling the CDOs, Chippeaux says. ``We manage risk through who we invest with,'' she says. ``I don't have a lot of control over individual pieces of the subprime.''

Return: 6.1 Percent
As of March 31, the Texas teachers pension fund's CDO investments had returned a total of 6.1 percent since December 2005, spokeswoman Juliana Fernandez Helton says. They include the fund's $62.8 million in equity tranches, which were purchased from Credit Suisse Group, Goldman Sachs Group Inc., Citigroup and other banks.

>well, and how have the seperate cdo´s performed......?

>und wie haben die besagten cdo´s dazu beigetragen...?

The Texas fund also bought $10.1 million in investment-grade tranches from Merrill Lynch and RBS Greenwich Capital Markets, a unit of Royal Bank of Scotland Group Plc.

Last September, the Missouri retirement system bought half of the equity tranche of the BlackRock Senior Income Series 2006 collateralized loan obligation, managed by New York-based BlackRock Inc. A CLO is a CDO that invests exclusively in loans, not bonds.

`Ahead of Curve'
The Missouri pension system invested $25 million of its $7.7 billion fund. Jim Mullen, fixed-income director of the fund, says he thinks the investment will pay off because he got into that market before most others did. ``We tend to be ahead of the curve,'' he says.

Das says banks have good intentions when they create a CDO; what they lack is control of the performance of subprime loans and other bad debt. ``To just rely on somebody's reputation is absolving your own fiduciary responsibility as a manager,'' he says. .....

Citigroup spokesman Stephen Cohen says public funds pick CDOs based on their management. ``The evaluation centers on the track record and expertise of the manager,'' he says. ...

Orange County Similarities
Orange County's Street says he sees similarities between that county's 1994 bankruptcy, which was the largest municipal bankruptcy in U.S. history, and investments by pension funds in equity tranches.

In the 18 months before the collapse, Street, 56, who then ran financial advisory firm Chriss Street & Co., alerted the U.S. Securities and Exchange Commission and the Office of the Comptroller of the Currency, or OCC, that the county faced a financial disaster.

The manager of the Orange County fund, which included pension money, had borrowed more than $12 billion and speculated that short-term interest rates would remain low. ``The county was earning 8 percent in what was a 3½ percent world,'' Street recalls telling federal regulators.
`Spiked Up Yield'
Those returns ended when rates rose in 1994. Street's warnings went unheeded. Orange County's investment losses totaled $1.69 billion.

Street says the big risks taken by public pension funds managers to juice up their investment performance with CDO equity tranches could result in big losses. Those tranches are filled with risky debt, which is sometimes in the form of subprime mortgages, he says.

``Very few pension plans could meet their fiduciary duty by buying portfolios of subprime loans,'' he says. ``They spiked up the yield, but that yield means nothing when the defaults start to mount, as we know they will. The funds will take big losses.''

Foreclosure filings in the U.S. jumped to 147,708 in April, up 62 percent from a year earlier, as subprime borrowers stopped making mortgage payments, according to data released by research company RealtyTrac Inc. on May 15.

As foreclosures rise, the subprime-mortgage-backed securities in CDOs begin to crumble.

`Eager to Learn'
At its sales presentation at the pension conference in Las Vegas, Bear Stearns has set up a booth stacked with literature about CDOs, including a 14-page primer titled `Collateralized Debt Obligations (CDOs): An Introduction.' Fleischhacker stands in front of the display of brochures after she speaks.

``They should be looking at these types of asset classes,'' she says. ``They're eager to learn. We're doing lots of education.''

Fleischhacker tells the public pension managers that a CDO is like a financial institution: Both have strict oversight, she says. ``The outside agencies that oversee these structures are the rating agencies,'' she says, comparing them with the Federal Deposit Insurance Corp. and the OCC, which regulates banks.

Fleischhacker's comparison is disputed by Gloria Aviotti, Fitch's group managing director of global structured finance, which includes CDOs. ``It's not accurate,'' she says. ``We don't provide any oversight.''

`A Common Misperception'
Yuri Yoshizawa, group managing director of structured finance at Moody's, says people often think of credit raters as investor advocates or oversight groups. ``It's a common misperception,'' he says. ``All we're providing is a credit assessment and comments.''

Darrell Duffie, a professor of finance at the Stanford Graduate School of Business in Stanford, California, says he's concerned about public pension trustees' getting their CDO education from the banks that are selling the investment.

``Either they need to be very sophisticated themselves or they have to know that they're getting into something that could be quite risky,'' he says. Pension fund managers should get advice from independent financial consultants, Duffie says.

Some public fund investors are forbidden from buying junk- rated or unrated portions of CDOs. Wall Street has come up with ways to sell dressed-up CDO toxic waste so that it qualifies as investment grade. One is called principal protection.

Bear Stearns offered this hypothetical example at its Las Vegas presentation: A pension fund wants to buy $100 of CDO equity. Instead of buying it directly, the fund buys a zero-coupon government bond for $46 that will be redeemed for $100 in 12 years. That bond is paired with a $54 investment in CDO equity.

Zero-coupon bonds pay no interest; the investor is paid the full face amount -- that's $100 in this hypothetical situation -- when the bond matures.

Principal Protection
``Principal protection is guaranteed,'' Fleischhacker says. ``It's AAA since you're buying a U.S. Treasury.'' If there are no defaults, this method of investing in CDO equity would return 9.3 percent annually, she says.

The presence of the zero-coupon bond ensures the pension fund will recover its $100 investment even if the equity tranche becomes worthless. While the fund wouldn't lose any money if that happened, there would be no return on the investment for 12 years.

If a fund manager puts all of the same hypothetical $100 into zero-coupon bonds only, it would more than double its money in 12 years, Das says. ``I would have thought with pension fund money, they don't really want to lose principal,'' Das says of this equity tranche sales technique.

``And clearly here the principal is very much at risk. You've got a highly leveraged bet on no defaults, or very minimal defaults.''

Chippeaux says she concluded the principal-protection plan was good for her fund in New Mexico at a time when the state required that public funds buy only investment-grade debt.

>speaking of lipstick ......wie war das noch mit dem lippenstift....

`Smoke and Mirrors'
Chippeaux says she knows there are subprime loans in the New Mexico fund's CDO investments. Wollman says he's confident New Mexico doesn't hold many of the poorest-performing subprime loans that were made at the height of the real estate boom in 2006.

``One of the things that's going to be helpful to us is that we don't have a lot of exposure to 2006 subprime loans,'' he says. ``I think that is going to help us deflect any exposure should subprime collapse.''

> the trouble won´t be islolated to 2006 vintages....the slump is just starting....and this time the bubble was unprecedented....

>da sollte er sich nicht zu früh freuen....die problemen werden mitnichten auf 2006 emissionen beschränkt sein....wir sehen gerade die anfänge...und diese blase ist bei weitem größer als alles bisher dagewesene.....

Pension fund managers face the same hurdle as all CDO investors: The market has almost no transparency, with both current prices and contents of CDOs almost impossible to find, says ..

``I think `smoke and mirrors' in some sense understates the problem,'' he says. ``You can see through smoke. You can see something reflected in a mirror. But when you look at the CDO market, you really can't see enough information to enable you to make a rational investment decision.'' .....

That hasn't stopped pension funds from taking high risks with the retirement plans of teachers, firefighters and police.

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.