One Of The Last Covenant Lite LBO´s Is Already Hitting The Wall

Oh boy..... Seems to be not a smart move to do a LBO in the music industry......Shocking! But that the worst case is coming just 6 month after the deal is done shows you how incomptente the buyers & lenders have become...... Needless to say that the rating agencies are as always way behind the curve and are just starting to wake up ( see Moody’s names ‘aggressive’ buy-outs )

Was für ein Deal..... Sieht ganz so aus als wenn ein LBO in der Musikindustrie nicht die beste aller Ideen ist. Wirklich überraschend....... Der eigentliche Hammer ist das bereits nach 6 Monaten anscheinend alle Dämme brechen. Das zeigt recht deutlich wie vollkommen abgehoben der Käufer und die Kreditgeber auf dem Höhepunkt der Übernahmewelle gewesen sind. Überflüssig zu erwähnen das die Ratingagenturen wie zuletzt üblich im Tiefschlaf gewesen sind und erst langsam erwachen ( siehe Moody's outet aggressive Investoren )


EMI falters on £2bn Citi loan facility? FT Alphaville
This weekend, EMI gave, perhaps, a grim portent of things to come for leveraged buyouts.

By our reckoning, Monday’s £200m rights issue is, in fact, an “equity cure.”

This equity has probably been issued to meet a cash-flow shortfall - real or projected - on EMI’s £2bn loan facility with Citi, put in place this July when the record label was the object of an LBO from Terra Firma. The cure may be required to bolster faltering EBITDA to debt ratios tested by the loan facility.

Cause for around a third of its workforce - or around 1,700 jobs - to be slashed, as reported by the Mail on Sunday.

Other LBOs too, are likely to be feeling the pinch. What, we wonder, will be the impact on deals such as Alliance Boots - where the debt taken on board is an eye-watering £12bn.

The Citi facility for EMI was one of the last “covenant-lite” LBO financing deals to be pushed through. Under more common LBO financing terms, we suspect EMI would be looking at a default.

> Time to review An investment banking lexicon :The post-credit squeeze edition :-)

COVENANT-LITE
Pre-squeeze: Please pay back the money (no rush)
Post-squeeze: Please get approval for all expenses above £50

EMI
Pre-squeeze: Coveted transaction
Post-squeeze: Distressed debt play

You only give me your funny paper / Economist

I think it gives a good picture when a minor rise (still close to historic lows) in spreads is already leading to so much trouble...... Here and here are more on this topic.

Ich denke es gibt einem schon zu denken wenn bereits eine minimale Ausweitung des Risikoaufschlages einige "Problemchen" bereitet. Unter de Links oben mehr zu diesem Thema

Debt markets turn grouchy as creditors ask for more

BEFORE the brain was established as the body's ruling organ, the stomach was thought to be king. Descartes may have thought and therefore known that he was, but he reckoned that most of his moods were regulated by his guts. Credit markets seem never to have adjusted to this reordering, and still think with their stomachs. This week they were grumbling, and several big bond sales were postponed until they settle. “It's not a buyers' strike,” says Paul Read, a bond fund-manager at Invesco, “but a bit of indigestion.”

Until two Bear Stearns hedge funds got into trouble last week, things had been bubbling along merrily in the credit markets. Last year default rates on high-yield bonds fell to their lowest since 1981, according to Edward Altman of New York University. They have stayed low this year and, with healthy corporate profits and plenty of liquidity, there is no reason to suggest that is about to change.
Even so, there are signs that investors still holding American subprime mortgage debt might not be the only ones feeling a little queasy. In Asia a sizeable bond sale from MISC, the world's largest owner of liquefied natural gas tankers, has been postponed. In Europe Arcelor-Mittal, the world's largest steelmaker, put back a bond sale too. US Foodservice, an American wholesaler, has made such hesitance look like a trend by delaying plans to raise $2 billion in loans. That spells trouble for even bigger issues on the horizon, like the $62 billion that Cerberus Capital Management, an investment firm, hopes to raise for Chrysler, which it is buying.

>Ten Horses of the Buyout Apocalypse? (hat tip Calculated Risk / blogroll)

The course of the great leveraged-buyout and corporate-acquisition boom of the early 21st century will be determined in large part by 10 companies. They range from providers of wireless service to student loans. The companies have agreed to be bought and will soon be asking credit investors to finance the deals. It’s part of a $200-billion plus tidal wave of financing needs that will crash ashore in the next six months. The ability of bankers to place all that paper with investors will help other companies determine if they will take the LBO plunge themselves. Deal Journal put together a table of the 10 companies.

Here it is

• TXU $25.9 Billion
  
• First Data $24B
  
• Alltel $23.2B
  
• Clear Channel $22.1B
  
• Chrylser $20B
  
• Sallie Mae $16.5B
  
• Cablevision $9.2B
  
• Harrah’s Entertainment $9B
  
• Biomet $7B
  
• Alliance Data $6.6B

The largest issuers of the covenant-lite loans are private-equity firms, which have been able to dictate terms to lenders. Kohlberg Kravis Roberts (KKR), a big buy-out firm, filed to raise a record $16 billion of such loans last month to finance its buy-out of First Data. Covenant-lite loans now account for almost 35% of all loan issuance in America. Many such loans are issued as senior-secured debt by stronger borrowers, making many of them safer than sub-prime residential mortgages.

Buy-outs financed by covenant-lite loans are less likely to fail early (there are, after all, no covenants to break as the company deteriorates). But if a wobble in asset-backed securities caused investors to demand more to hold them, the buy-out market would suffer. Only last week Thomson Learning, an education business, found it surprisingly hard to issue covenant-lite loans as investors grew squeamish.

A second place to watch for changing appetites to risk is in bridge finance. Up until last year, when a buy-out fund wanted to bag a big company it usually had to club together with other funds to increase its firepower. Now it is the norm for banks to provide bridge loans or equity to finance part of the deal. Through bridge equity, Blackstone was able to swallow Equity Office Properties, a property business, without installing too many cooks in the boardroom or having to share its ideas with competitors. This arrangement suits investors, who run the risk of being exposed to the same deal from several angles when private-equity funds club together. As a further inducement, bridge-equity finance also increases what those hard-up folk at Blackstone can expect to make on any upside of their deals, since they get the carry on the bridge-equity too.

The banks collect fees for raising the finance and for syndicating it. Bridge-equity finance can also be a way for them to get exposure to private equity. But, like supermarkets piling up discounted DVD players at the front of a store in the hope of luring customers in to splurge on cream cakes, the banks hope that funds who take these loans will go on to buy advice on mergers and debt-financing too, at which point the banks make their real money. If it goes wrong, they get left holding the equity.

Not all bankers think this is a good trade. “It's an appalling business for the banks,” says a banker at a bulge-bracket firm more used to taking risks than balking at them. “It is the wrong use of your capital,” Klaus Diederichs of JPMorgan said at a seminar on June 26th. “It's crazy and we hope it goes away.” Perhaps this wish is already being fulfilled. The day before he spoke, managers at a big private-equity fund based in New York were muttering in their Monday morning meeting that such loans were becoming harder to come by.

That leaves a third bellwether for the buy-out market. Some firms bought by private equity have been issuing payment-in-kind (or Toggle )(PIK) notes. These allow them to pay interest in the form of further loan notes, rather than hard cash. This further weakens the hands of creditors, adds to the sum of risky paper blowing around and makes investors wonder who owes money to whom. Harsher terms on PIKs would be further evidence of a shift in sentiment. Potential buyers of US Foodservice's debt reportedly balked at both the PIKS and also the lack of covenants.
There are other indications that the appetite for risk is heading down, albeit from somewhere a few thousand feet above the peak of Everest. On June 27th the VIX, a measure of stockmarket volatility (otherwise known as nervousness), rose to 19%. It has been higher only once this year. The yen has appreciated, which is a sign that the buccaneering spirit reflected in the carry trade is waning a little (since unwinding this trade involves buying the currency). After lurching upward in early-June, the yield on American Treasury bonds has been falling, reflecting a stronger demand for safe investments. And spreads on high-yield bonds have widened. None of which means disaster is on the way. But it may leave a sickly feeling, something like a knee to the stomach.

Where Was The "Merger Monday"........?

This could be a coincidence but i think that we really have seen the peak in merger activity. When i talk about the peak i mean in terms of the cash component. It could well be that some gigantic stock deals will pump up the total amount. But this should have not such a big impact on equities overall. The key point is that with a lower cash component fewer fresh money is flowing from credit markets back in the equity markets. And i think one should remember that the actual deals that are and will be announced soon were done when credit conditions were almost perfect. Even when this "call" is premature the buyout premiums should shrink.

Das ganze könnte natürlich auf reiner Zufall sein, aber ich denke das wir in der Tat den Höhepunkt der Fusionsaktivitäten gesehen haben. Damit meine ich den Teil der Fusionen die mit Cash abgewickelt werden. Es kann sehr gut sein das noch weitaus gigantischere Aktiendeals durchgehen und die Gesamtzahl nach oben hieven. Entscheidend aber wird sein das hier zukünftig deutlich weniger frisches Geld vom Kreditmarkt and den Aktienmarkt zurückfließt, es also mehr oder minder ein Nullsummenspiel ist. Zudem sollte man bedenken das die ganzen Deals die jetzt oder in den nächsten Wochen bekanntgegeben werden noch zu Zeiten angeleiert worden sind als das Kreditmarktumfeld perfekt gewesen ist. Selbst wenn sich die these als voreilig erweisen wollte so dürften doch in jedem Fall die Aufschläge bei den (Cash)Übernahmen deutlich leiden.

The buyout boom may be about to hit a bump.

After years of supersize private equity deals, investors in the debt that supports these transactions — the lifeblood of the industry — have begun to not so quietly push back at several prominent transactions.

Rising interest rates and tougher terms from investors may signal that private equity players will soon be struggling to continue reaping the outsize returns that have made the buyout business so lucrative.

Already a raft of bond offerings for recently announced deals, including the $7.75 billion buyout of Thomson Learning and the $7.1 billion deal for U.S. Foodservice, have been scaled back after facing resistance from investors.

This week, two other buyouts, the $4.7 billion deal for ServiceMaster and the $6.9 billion sale of Dollar General, are expected to price their bonds, and they may serve as an important barometer for a series of even larger deals to sell bonds to investors this summer.....
These setbacks come as Cerberus Capital Management begins a road show this week to sell bonds for its $7.4 billion buyout of Chrysler; it plans to raise up to $62 billion. First Data, which was acquired by Kohlberg Kravis Roberts for $29 billion, plans to price its bonds next month. And later this year, bonds for the buyout of TXU, the largest in history, will go on sale. TXU is likely to seek about $24 billion.

The resistance from bondholders may already be cooling the buyout market. The proverbial Merger Monday has not been so merger-filled lately. Yesterday, only seven deals were announced, compared with 43 a week ago and 84 on June 4, according to data from Thomson Financial.
“In the last couple of days, we’ve seen some cracks,” said Kingman Penniman, president of KDP Investment Advisors, a bond research firm. “Private equity people have for a long time now gotten funding at very low rates and very liberal terms. The market has known for a long time that this was ridiculous.”

Not only bondholders but banks themselves appear to be thinking twice before they agree to lenient financing of these huge deals.

A small correction appeared to have taken place Friday when Thomson Learning scaled back the debt offering it hoped to sell to finance its buyout by two private equity firms, Apax Partners of Britain and the buyout arm of the Ontario employees’ pension fund. Originally, Thomson, a former division of the media publisher Thomson, sought $2.14 billion; it is now seeking $1.6 billion.

“There’s not a lot of room for error in these transactions, so investors have become very cautious,” said Chris Donnelly, who tracks leveraged finance at Standard & Poor’s Leveraged Commentary and Data. “Investors have been pushed to the wall on structure. At this point, we can’t go any further.”
> European data q1 2007

Among the changes Thomson made was to eliminate a $540 million provision for a pay-in-kind toggle, a type of debt that allows interest to be paid in cash or with the issuing of more bonds. The entire offering must now be paid back in cash, and Thomson Learning agreed to add more covenants to both the loan and the bond portion of the sale.

U.S. Foodservice, a division of Royal Ahold of the Netherlands, has now twice scaled back its own debt offering to help finance its buyout by Kohlberg Kravis and Clayton Dubilier & Rice. Scheduled to go on sale today, U.S. Foodservice’s offering will now also be paid back in cash, not with the issuing of more bonds.

thanks to http://bespokeinvest.typepad.com/bespoke/

Pay-in-kind debt, in particular, has fueled the buyout boom, largely because of the flexibility it affords private equity firms to pile on debt. Those instruments, proponents argue, allow companies to avoid bankruptcy.

But, according to Mr. Penniman, that debt has also loaded up many companies with potentially more debt than they can pay off.

Companies just cannot keep issuing debt, he said. “That assumes the market is pretty stupid.”

> As seen in subprime.........

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"

http://tinyurl.com/2up7mk

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.”

AMEN


>here one more example on what path corporate lending is....how 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. http://tinyurl.com/23l9dc

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,

Junk Bonds May Repeat Crash of 2002 on Increasing LBO Credits

"toggle" bonds...bring on another credit innovation to keep the game going......this is even more crazier than the option arm for individuals........the end must be near........

"toggle" anleihen. endlich mal wieder ne neue innovation die die kreditblase weiter aufpumpen kann...das ist noch verrückter als die kredite mit negativer tilgung bei den immobilenfinanzierern...das ende dürfte nicht mehr weit weg sein......

May 15 (Bloomberg) -- Never have so many made so much money from junk bonds, and that worries Dan Fuss.

Fuss, whose $10.7 billion Loomis Sayles Bond Fund has been the best performer among its peers the last 10 years, says high- yield, high-risk securities are showing unmistakable signs of a bubble. Yields are near record lows relative to government securities even though sales of the riskiest bonds increased 39 percent from last year, debt has grown faster than earnings and the economy is expanding at the slowest pace in five years.

``I haven't felt this nervous about a market ever,'' said Fuss, vice chairman of Loomis Sayles & Co. in Boston, who's been working in the banking and securities industries since he joined Wauwatosa State Bank in Wisconsin in 1958. His fund has returned an average 9.91 percent a year for the last decade, the best of 45 funds with similar investment rules, according to Lipper, the mutual fund research firm.

Martin Fridson, head of high-yield research firm FridsonVision LLC, and Mariarosa Verde, managing director of credit market research at Fitch Ratings, say sales of junk bonds and the record $366 billion of leveraged buyouts may lead to the worst bear market for bondholders.

The last time junk bonds tumbled was in 2002, when companies defaulted on $166 billion of their securities, according to Moody's Investors Service. Merrill Lynch & Co.'s High Yield Master II Index fell about 2 percent that year as yields on the securities rose to a record 11.2 percentage points over Treasuries. Speculative grade, or junk, bonds are rated below Baa3 by Moody's and BBB- by Standard & Poor's.

Severe Downside
``The downside is likely to be very severe,'' Fridson, who led Merrill's high-yield strategy group until he left in 2003 to start his own firm, said in an interview from his office in New York.

Fridson predicts that in the next few years the default rate may reach or surpass the 2002 level, when WorldCom Inc. in Jackson, Mississippi, and Adelphia Communications Corp., then based in Coudersport, Pennsylvania, filed for bankruptcy.

About 1.5 percent of junk-rated companies have defaulted on their debt this year, near the lowest in a decade, Moody's says.

``Defaults are almost non-existent today and, well, we know that doesn't hold forever,'' ..

``When the economy goes bad, defaults will spike up from 1 percent into the 9 percent level,'' Lee said at the Milken Institute Global Conference in Los Angeles on April 25. ``If that happens then the financing part grinds to a halt'' for LBOs, he said.


`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.
Univision, Realogy
Univision sold $1.5 billion of toggle notes on March 1 that are rated B3 by Moody's and CCC+ by S&P. The notes pay cash interest of 9.75 percent and a pay-in-kind coupon rate of 10.5 percent. Realogy sold $550 million of the securities on April 5 with an 11 percent cash coupon and an 11.75 percent rate if paid in extra notes. They are rated Caa1 by Moody's and B- by S&P...

There have been 10 sales of toggle bonds this year, amounting to $5.14 billion, the most ever, according to S&P's Leveraged Commentary and Data unit. There were five sales totaling $4.05 billion completed in November and December of last year. Before that, only luxury retailer Neiman Marcus Group had issued the securities, in September 2005.

A Losing Game
....Betting against corporate bonds has been a losing game. The debt has returned 4.47 percent this year, Merrill data show. U.S. Treasury bonds have gained 1.80 percent and corporate bonds with investment-grade ratings have returned 2.21 percent in the same period, Merrill data show.

Investors get an extra 2.63 percentage points in yield on average to own junk bonds rather than Treasuries, down from 3.73 percentage points at the start of 2005 and more than 10 percentage points in 2002, according to Merrill data.

No `Catalyst'
JPMorgan Chase & Co. analyst Peter Acciavatti, the top- ranked high-yield analyst in Institutional Investor magazine's annual poll the past four years, lowered his default forecast for the end of this year to 1.25 percent from 2 percent on a dollar-weighted basis, in part because issuers have taken advantage of low rates to refinance and extend maturities.

``Companies just don't have payments they need to worry about for the next couple of years,'' Acciavatti said in New York. ``It all goes back to the liquidity we're seeing. I don't see the catalyst for rising defaults except for the economy. If the economy gets worse from here it will eventually start to have a toll on earnings and leverage.''

>with gdp growth only 1,3% ( and probably revised lower to under 1% ) this argument makes sense..............

> bei einem wirtscahftswachstum von nur noch 1,3% in q1 das wahrscheinlich auf deutlich unter 1% reduziert wird eine "mutige" aussage

"you should relax lex!"

The average B rated company borrows at a yield premium of 2.61 percentage points above Treasuries, near the lowest since 1997 and about one percentage point less than it cost BBB rated companies to borrow at the end of 2002, according to Merrill. .....

Risks Building
....Companies are piling on debt even as the economy slows. The total debt for about 300 companies rated BB and B expanded by 16 percent last year, double its growth in 2005, according to Fitch.

Debt strategists at New York-based Morgan Stanley, the world's second-biggest securities firm, calculated in a report last month that leverage is rising for eight of the 15 high- yield industries it covers, the first ``meaningful'' increase since 2002.

Ford Motor Co. lost $282 million in the first quarter and is $23 billion deeper in debt than it was a year ago. The Dearborn, Michigan-based company's $3.7 billion of 7.45 percent bonds due in 2031 trade at a yield premium of 4.63 percentage points, down from 5.38 a year ago, according to Trace, the bond- price reporting system of the NASD. Ford is rated Caa1 by Moody's.

Recovery Rates
Credit quality ``is moving in a less desirable direction,'' said Fitch's Verde, who is based in New York.

Bond investors should also worry because companies are adding more senior secured loans, which rank ahead of junk bonds in a bankruptcy, Verde said. A record $686 billion of high-yield loans were made last year, Bloomberg data show.

The average recovery rate for unsecured bonds may fall by as much as 10 percent from its historical average of 40 cents on the dollar because of the rise in loans, according to Fitch.

``Structural risks are rising,'' Fitch's Verde said. ``They're simply being masked by the low default rate.''

More than $108 billion of so-called covenant-lite loans, or those that don't hold borrowers to limits on quarterly debt, have been completed this year, compared with a total of $36 billion in the previous 10 years, according to S&P's LCD.

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.