Bankruptcies And Defaults Gather Pace

And the "official" recession hasn´t even started yet......

Und das obwohl die "offizielle" Rezession noch nicht einmal begonnen hat.......

Bankruptcies and defaults gather pace FT

The number of companies defaulting on their junk-rated debt and filing for bankruptcy in North America is running at its fastest pace in five years amid the slowing economy and contraction in credit markets.

So far this year, 28 “entities” have defaulted, according to Standard & Poor’s. The defaulted debt of the one Canadian and 27 US companies totals $18.4bn and exceeds the 17 defaults in the US for all of last year

As economic conditions deteriorated...and volatility in the financial markets protracted, corporate casualties began to emerge at a rate unseen in years,” said Diane Vazza, head of S&P’s Global Fixed Income Research Group. “The surge of defaults in the early months of 2008 is the first leg of an extended period of high default occurrences that will characterise the rest of 2008 and 2009.”

> and much much longer......

> und wohl noch wesentlich länger......

S&P said the pace of US defaults in the first five months of the year is the fastest since 2003.

The US is leading the global default rate for companies, said Ken Emery, senior vice-president at Moody’s.

The global default rate for speculative-grade companies rose to 1.7 per cent in April, up from 1.5 per cent in March and a multi-decade low of less than 1 per cent last year, said Moody’s.

Meanwhile, in the US the default rate rose from 1.8 per cent in March to 2.1 per cent in April. Moody’s expects the global default rate to reach 4.98 per cent by the end of the year, with defaults in the US reaching 5.7 per cent. In Europe the default rate is currently 0.7 per cent.

> I assume that we no way near the peak........ Especially when you look at the following table..... The market share of junk in 2007 was even more depressing.....

> Bin mir ziemlich sicher das die aktuellen Zahlen den USA nicht das Ende der Fahnenstange sind.... Das gilt besonders dann wenn man sich die nachfolgende Tablle ansieht...... Für das Jahr 2007 sah das ganze sogar noch depresseiver in Sachen Junkmarktanteil aus......

This week the latest Federal Reserve Senior Loan Officer survey highlighted tougher lending conditions from banks to lower-rated corporate borrowers. In spite of the recent rally in credit markets, the number of junk-rated companies trading at highly elevated levels remains well above normal.

“This increases the risks to the weakest links, entities rated B minus or lower,” said S&P. Weak links, which are three times more likely to default than the rest of the speculative grade market, rose to 101 entities in April. This was compared with 78 at the end of 2007 and a 10-year low of 64 in July.

“If the recession is deeper and longer than expected and lending constraints worsen more markedly, the default rate could be significantly more pronounced and severe, possibly reaching 8.5 per cent,” said S&P. Such a rate would reflect 136 defaults.

Credit Quality in a Freefall

I assume that lthe majority of these distressed companies have bought back shares during the past few years....

Ich gehe jede Wette ein das die Mehrzahl der jetzt betroffenen Firmen in den letzten Jahren fleißig Aktien zurückgekauft haben.....

Credit Quality in a Freefall / CFO.com
The distressed-debt ratio quadruples in a month's time though some signs point to a light at the end of the tunnel.

Credit quality deteriorated steeply from mid-October to mid-November despite the recent actions by the Federal Reserve to stimulate credit markets.

As of Nov. 15, $36.2 billion worth of debt was in distressed issues, more than four times the $8.6 billion reported a month earlier, according to Standard & Poor's. Distressed debt as a percentage of total debt recorded its largest monthly increase in five years, more than doubling to 4.9 percent from 2.3 percent. The ratio was as low as 2.1 percent 12 months ago.

Distressed credits are defined as speculative-grade-rated issues that have option-adjusted spreads of more than 1,000 basis points relative to Treasuries.

Other metrics also suggest that the credit crunch continues to impact the overall credit markets. For example, the non-distressed speculative-grade bond spread widened to 502 basis points in mid-November from 392 basis points a month earlier, according to S&P.

In addition, the total number of rated companies with issues trading at distressed levels ballooned to 224, almost double the 120 in October, according to the report.

S&P noted that of the 224 companies on this month's distressed list, half had either negative outlooks or ratings on CreditWatch with negative implications. The outlooks on 39 percent of the companies were stable, 7 percent were positive, and 4 percent were developing.

Of the 52 companies listed at the 1,000 bps level, 27 were rated "B-" or lower, and 39 were on CreditWatch with negative implications or had negative outlooks.

Not surprisingly, financial issues are suffering the most. Of the $36.2 billion of distressed issues, finance companies had the largest exposure, constituting 45 percent of the total debt affected, according to S&P. Next came media and entertainment at just over 20 percent.

Brokerage and finance companies displayed the highest distress rates as a share of total speculative-grade-rated issues, at 20 percent and 13.6 percent, respectively.

Not all of the news was bad. S&P pointed out that the U.S. speculative-grade default rate — typically the last indicator of stress within a credit cycle — hit an all-time low of 0.98 percent at the end of October, down from a previous low of 1.13 percent in September.

"Though default risk is rising, this year's default count continues to be constrained in part because of limited refunding needs, as well as structural concessions that avert payment default," S&P said in its report.

Year to date, the U.S. has recorded 13 defaults. "The U.S. speculative-grade default rate remains suppressed and is likely to post a year-end 25-year low of close to 1 percent,” S&P predicted.

> This low defalut rates ratios will dramatically spike during the years to come....

> Diese paradisischen niedrigen Ausfallraten dürften für lange lange Zeit Geschichte sein.....

Credit Cards & Junk Default Rates

Pimco is out with a new report A Hard Day’s Knight: The Global Financial Market Confronts Uncertainty, Not Just Risk (and the Difference is Important) I have taken the two charts out of context to point to two post i have done in the past few days.

Pimco hat einen neuen Report herausgebracht. Ich habe hier mal 2 Charts aus dem Post zum Anlaß genommen um meine Posts aus den letzten Tagen zu ergänzen. A Hard Day’s Knight: The Global Financial Market Confronts Uncertainty, Not Just Risk (and the Difference is Important)

Topic One "Credit Cards"

I think it is safe to say that the credit card spread will "adjust" sooner than later.......

Ich denke man braucht kein Hellseher zu sein um vorherzusagen das der Spread für die Kreditkarten sich demnächst wohl "anpassen" wird....

Topic Two "Junk-Grade Defaults"

Keep in mind that over 50% of US bonds issuance was junk in 2007. Compare this table with the precitction for defaults from Moody´s .....

Behaltet bei Betrachtung dieser Tabelle im Hinterkopf das im Jahr 2007 über 50% aller US Anleihen die begeben worden sind in die Kategorie "Junk" fallen. Vegleicht die Tabelle mit der Prognose der Ausfälle von Moody´s .....

Junk-Grade Defaults ‘More Likely’ / FT

I´ll bet that we will see much higher default rates than the agencies are forecasting. When you look at the spreads (chart Bespoke) there is much more room to the upside. Especially when you keep this in mind

Ich bin mir ziemlich sicher das wir in der Zukunft noch deutlich höhere Ausfallraten sehen werden als jetzt vorhergesagt werden. Hier ein Spreadchart via Bespoke der sehr anschaulich zeigt das hier noch "Luft ist". Das gilt insbesondere wenn einige Details näher beleuchtet werden.

More securities than ever have the lowest rankings, with CCC ratings assigned to 26.5 percent of the new debt, according to New York-based Fitch Ratings. That compares with 15 percent in 2006 for debt that itch says has a ``high default risk.''

Bonds that allow companies to pay interest in extra securities instead of cash, including toggle notes, accounted for almost 9 percent of high-yield debt sold this year, compared with less than 1 percent three years ago

Junk Grade Defaults More Likely / FT
Moody’s Investors Service said last month that company default rates in the junk-grade sector would rise by nearly 300 per cent as the credit squeeze hit the wider economy.

The agency predicted that the global speculative-grade default rate would rise from 1.4 per cent now, meaning only 1.4 per cent of the companies rated have defaulted in the past year – to 4.1 per cent in a year’s time and 5.1 per cent in two years’ time.

> Compare the prognosis (dotted chart-line) from the beginning of 2007 with the latest estimate. They had "calculated" roughly a 36% lower default rate. Here is another number that is hinting that the models from the rating agencies one more are outdated.....

> Vergleicht die Prognose im Chart von Anfang 2007 mit den aktuellen "Erwartungen". Hier noch eine weitere Hausnummer die darauf deuten läßt das die Modelle der Ratingagenturen in guten wie in schlechten Zeiten Ihren Zweck evtl. nicht erfüllen......

Distressed Bonds Increase Most Since 2003 / Bloomberg

The corporate bond market's favorite securities last year, so-called distressed debt, yield at least 10 percentage points more than Treasuries. Since June, the amount of distressed bonds has risen more than fivefold to $24.8 billion, according to an index Merrill Lynch & Co. began compiling in 1997.

Wall Street Credit Costs Surge on Widening Spread to U.S. Rates

If you have have read American Investment Banks "Shots In The Dark" from the Economist it is no wonder that lots of people view bonds from Colombia less risky than paper from Lehman, Bear Stearns & Co.......

Nachdem man American Investment Banks "Shots In The Dark" vom Economist gelesen hat sollte es nicht weiter verwunderlich sein warum Anleihen aus Kolumbien momentan weniger risikobehaftet sind als Papiere von Lehman, Bear Stearns & Co.....

Sept. 10 (Bloomberg) -- Wall Street is getting no benefit from the biggest bond market rally in five years.

Lehman Brothers Holdings Inc. faces higher borrowing costs today than it did in June, even after the steepest quarterly drop in U.S. Treasury yields since 2002 pushed interest rates down for everyone from Procter & Gamble Co. to AT&T Inc. Investors are so leery of Bear Stearns Cos. that its 10-year bonds trade at a discount to Colombia, the South American nation that's barely investment grade. Goldman Sachs Group Inc. is being punished with a higher yield than Caterpillar Inc., the heavy-equipment maker.

Credit Ratings
Standard & Poor's said less than a year ago that Lehman continued to merit an A+ credit rating because of its ``exceptional liquidity, strong cost controls and excellent risk management.''

Today, bond yields show that Lehman is considered more risky than Colombia, where the government has been waging a four-decade war with drug-funded rebels and one in 10 members of the workforce is unemployed. Colombia is rated BBB- by S&P, the lowest investment-grade rating, and carries a Ba2 junk rating from Moody's Investor's Service.

Near-Junk Yields
Investors dismissed Bear Stearns's A+ rating when it sold $2.25 billion of five-year notes in August, after two of the firm's hedge funds collapsed because of bad bets on subprime mortgages. They demanded a near-junk yield 2.45 percentage points higher than the comparable Treasury, four times the risk premium Bear Stearns paid on a similar sale in January.

When Goldman raised $2.5 billion of 10-year debt on August 30, bond buyers considered it little better than a BBB borrower, even though the firm has a AA- rating. Goldman paid a premium, or spread, of 1.67 percentage points to sell the bonds, almost double what it cost the firm for a similar issue in January.

The explosion in credit spreads on Wall Street may take an even heavier toll on profit next year, when the five firms have almost $133 billion of bonds maturing, according to data compiled by Bloomberg. Bond indexes maintained by Merrill show that the cost of refinancing that debt has swelled by about $1.3 billion since the beginning of 2007, excluding the cushioning effect of any interest-rate hedges.

Goldman is the only firm to have distributed its refinancing obligations so there's no outsized amount of debt coming due in a single year.

Merrill has $42 billion of bonds maturing next year, the most on Wall Street and about 50 percent more than in 2009. Morgan Stanley is next at $34 billion.

Return on Capital
The securities industry has relied increasingly on borrowed money to boost profits and returns for investors. In the first quarter, Goldman had 24.7 times more in assets than it had in shareholders' equity, and the firm's return on the tangible portion of that capital was 44.7 percent. Five years earlier, in the first quarter of 2002, the leverage ratio was 16.8 and return on equity was 15.4 percent.

Following are 10-year bond yields for each of the five largest Wall Street firms:

Goldman Sachs 5.625% due in 1/2017: 5.818%

Morgan Stanley 5.45% due in 1/2017: 5.926%

Merrill Lynch 5.7% due in 5/2017: 6.110%

Lehman Bros 5.75% due in 1/2017: 6.297%

Bear Stearns 5.55% due in 1/2017: 6.448%

American Investment Banks "Shots In The Dark" Economist

I think that not even the best accounting magic can hide that the earnings and the balance sheet will take major hits down the road and have deteriorated significantly. There goes the low multiple....... This was always one of the main bull arguments, now they already had switch to book value (see comment further down), next......

Ich denke das nich einmal die größten Bilanzierungstricks verschleiern können das sich sowohl der Gewinnausblick als auch die Bilanzstruktur erheblich und wohl auch auf längere Sicht verschlechtert hat. Soviel zum niedrigen KGV das seit jeher als Kaufargument herangezogen worden ist. Nun wird bereits auf den niedrigen Buchwert hingewiesen (siehe Kommentar weiter unten), demnächst.......

Wall Street pays for its opacity

STOCKMARKET investors come in all shapes and sizes, but in the current turmoil they agree on one thing: if in doubt about a financial firm, shoot first and ask questions later.

> And when you have committed liquidity guarantees as shown in the table from the Handelsblatt to conduits/SIV´s it is no wonder that you dump the shares first.......

> Und wenn man Zweckgemeinschaften lt. dem Handelsblatt solch großzügige Liquiditätsgarantien gemacht hat würde ich auch schnellstmöglich meine Bankaktien auf den Markt schmeißen.......

> John M from Housing Doom has found this via Minyanville

Through the conduits’ convoluted structures, banks were able to “lend” huge amounts off-balance sheet and collect fees on no-capital-required lines of credit. No one - and I mean no one - ever expected these conduits to move from off-balance sheet back on-balance sheet and I don’t think the market yet understands the earnings, capital and liquidity impact of this migration.

If you figure you need anywhere from 6-8% capital per dollar of loans, then a move of $1.0 trln from off-balance sheet to on requires $60-80 bln in additional equity capital. I don’t know about you, but I don’t see this kind of free capital sitting around.

> Exellent find John M! Maybe we should forward this info to the rating agencies.... ;-)

> Nochmals besten Dank für diesen Fund an John M. Evtl- sollte man diese Erkenntnis an die Rating Agenguten weiterleiten....;-)

State Street, a big money manager, is the latest to stumble into the line of fire. Its shares slumped this week on unsubstantiated rumours that it faced big losses in asset-backed commercial paper.

> More details on State Street from Mish

But it is the investment banks that continue to take most of the bullets. They helped drag stockmarkets down on August 28th after Merrill Lynch downgraded a number of its peers, citing exposure to toxic credit, a day after Goldman Sachs had done the same. An unseemly squabble over jurisdiction in a bankruptcy case against two defunct Bear Stearns hedge funds ´probably didn't help to calm nerves. It hurts all the more to fall from a great height. Until a couple of months ago the investment banks were flying. Profit records were smashed quarter after quarter. Bonus pools looked more like lakes. Valuations climbed to three times book value, implying sustainable returns on equity of over 30%, when even 25% is rare in the industry.

As long as the money rolled in, no one seemed to mind that much of the business was cloaked in mystery.

Investment banks are now paying for that opacity, even though their management of risk has improved since the last credit crisis in 1998. They are suffering from their decision to do less moving and more storing of assets: they hold a lot more illiquid, hard-to-value paper these days, and have more capital tied up in lumpy private-equity deals. Worse, some of Wall Street's most lucrative recent creations, such as conduits and CDOs, are suddenly out of favour. This is part of what one analyst, Deutsche Bank's Mike Mayo, calls “dis-disintermediation”: the return of more traditional forms of finance, to the benefit of universal banks like Citigroup.....

Thanks to iTulip

All except Bear are still trading well above book value, the level at which they are generally considered cheap.

> Reminds me of the discussion from the "value" guys that came up with book value to measure the stock as dirt cheap... Until this sector turned to an impaired industry

> Die ganze Argumentation mit dem Buchwert erinnert mich sehr stark an dieselbe Diskussion mit den Homebuildern. Nachdem das KGV zu hoch war bzw. keine Gewinne mehr vorhanden waren kam plötzlich das Argument von sog. "Valueplayern" (LOL) das gemäß den Buchwerten die Aktien praktisch geschenkt sind.....Das war bevor der Sektor eine einzige Abschreibungsruine geworden ist......

Tellingly, while executives at other financial firms piled into their own shares in August, believing them oversold, there was scant buying among investment bankers.

The key now will be to reassure markets that the exotic assets on bank balance sheets are worth something. Investors are waiting with bated breath for Wall Street firms' third-quarter results, beginning in the second week of September. They may try to get as much bad news out as they can while sentiment is at rock bottom.

Mr Hintz sees it as an encouraging sign that none of the investment banks issuing bonds in the second half of August pointed to new “material” risks, as required when a company raises debt. This suggests that, while things are undoubtedly bad, the banks see no further nasty surprises in the short term.

bigger / größer

Thanks to Kevin Duffy / LewRockwell

The debate over how to value elaborate securities, less pressing in good times, is now taking centre stage. Most credit instruments have to be held at the value a buyer might pay for them, not cost. But judging that is more art than science. The Securities and Exchange Commission, the investment banks' regulator, is examining the issue following rumours that Merrill Lynch and Goldman Sachs were too optimistic in their marking. “This is a chance for the SEC to show leadership on a crucial issue. We desperately need an umpire to ensure consistency and restore confidence,” says one senior banker.

At least investment banks are in better shape than they were going into past crises. Their capital structures are more stable: they increased long-term funding by $200 billion in the past year alone, making them less vulnerable when capital markets dry up. They are also more diversified. They have piled into commodities trading and wealth management, which remain attractive. Their proprietary trading desks, once predominantly credit-focused, now trade lots of equities too. All except Bear Stearns now earn roughly half of their non-retail revenues outside America. ....

Peter Nerby of Moody's, a rating agency, points to two further advantages (though his rivals at Standard & Poor's are not so sanguine). The banks have become better at making money in tough times, he says. Thanks to hedging, trading volume and volatility are now bigger earnings drivers than the level or direction of markets.

> Really? Wasn´t it just 2 weeks ago that the Fed bends rules to help two big banks that had to step in for their brokerage affiliates.... And when you look at the leverage the guy from Moody´s is overly confident. The bond market has a much gloomier view on Goldman & Co

> Wirklich? Ist es nicht gerade ein paar Tage her das die Fed Ihre Grundsätze über Bord geworfen hat um 2 Investmentbanken vor dem Kollaps zu retten.....Der Anleihemarkt sieht die Lage von Goldman & Co weniger entspannt...... Second, good first-half results will help to bail Wall Street firms out, as half of their accrued bonus pools can be taken back to cover second-half losses. A generous pay structure can come in handy if markets falter at the right time of the year.

Bear and Lehman Brothers are likely to suffer more than the rest, partly because they are smaller and partly because they are more exposed to asset-backed nasties (see chart). If conditions worsen, they may even have to buy back securities peddled to clients, as they are obliged to make markets in some of them.

The tables may yet turn. Merrill, Goldman and Morgan Stanley are more exposed than Bear or Lehman to the $300 billion overhang of unsold debt from leveraged buy-outs. This week the bankers fought back, forcing Home Depot to cut the price on the sale of its supply division and the trio of private-equity buyers to swallow higher interest rates on the debt. A bigger test of nerves will come in the next couple of weeks, when buyers are sought for more than $20 billion of loans to finance the takeover of First Data, a transaction-processing group. Were that or another big upcoming deal to collapse, the investment banks could expect a hail of bullets.

> And with appetite for junk like this coming to a halt it is likely that they will have to hold far more toxiy loans than planned.....

> Und nachdem der Junkmarket praktisch zum erliegen gekommen ist ist es sehr wahrscheinlich das die Banken einige ungewollte Kredite in Ihrer Bilanz behalten müssen......

Eleven junk-rated borrowers have sold bonds since the beginning of July, compared with an average of 41 a month in the first half of the year, Bloomberg data show. Three found buyers in August.

Some of them are desperately trying to find a way out..... But with onlyJust three of the 40 biggest pending LBOs have an escape clause that lets the buyer back out if funding can't be arranged this could be very expensive

Einige von Ihnen versuchen bereits verzweifelt sich aus einigen Deals freizukaufen..... Da aber nur 3 der 40 Deals eine Klausel beinhalten das man vom Kredit zurücktreten kann könnte das eine extrem teure Geschichte werden.....

Number Of The Day.... Junk Bond Sales

And i bet the three in August had to made substantial concessions like Home Depot to unload the debt.... :-)

Und ich gehe jede Wette ein das die 3 glücklichen im August erhebliche Zugeständnisse wie im Fall Home Depot gemacht haben.... :-)

Eleven junk-rated borrowers have sold bonds since the beginning of July, compared with an average of 41 a month in the first half of the year, Bloomberg data show. Three found buyers in August.

"Contained".....

Payback time. It will be interesting to see what the Fed will tell us in their statement....I think we won´t hear the word "contained" .......

Zahltag. Bin gespannt was die Fed heute im Statment so zum Besten gibt. Ich tippe mal darauf das wir das Wort "contained" nicht mehr so oft zu hören bekommen......

Even Nonhousing Markets Feel Mortgage Fallout

The day-to-day financial dealings of Oneida Limited, the dinnerware and flatware maker, are typically about as far removed from the mortgage loan business as they can be.

Yet, like the proverbial flapping of a butterfly’s wings that sets off a storm thousands of miles away, the turmoil in the home mortgage market this summer directly affected the fortunes of the company, based in upstate New York, when it was forced to withdraw a planned offering of $120 million in high-yield bonds to investors as the credit markets froze up seemingly overnight
If the deal had been offered just a month earlier, said Andrew G. Church, Oneida’s chief financial officer, the company would have had no trouble raising the money. “But it happened so quickly,” he said. “We’ve never seen anything as quick as this.”

“The liquidity in the credit markets was abysmal,” said William H. Gross, chief investment officer of the bond management firm Pacific Investment Management Company, known as Pimco. “On Friday afternoon, the brokers were unwilling to make markets in almost anything that didn’t have a Treasury or agency sticker attached to it. That’s pretty bad.”
The trading-in-a-vacuum phenomenon is only the latest evidence of how the days of easy, cheap money for corporations and individuals alike have disappeared. The ripple effect is being felt by nearly everyone.

In this bond market rout, debt instruments have had billions of dollars of value wiped out in just a few weeks. By some estimates, the high-yield market alone has lost nearly $50 billion in value since early June. Others say losses in the less easily traded mortgage- and asset-backed securities markets could easily run in the hundreds of billions of dollars.
Whatever the future holds, many say what is leading this debt meltdown is the recognition that credit in recent years had simply become too cheap and too accessible for far too many individuals, hedge funds, private equity firms and corporations.

The gap between prices for high-yield corporate debt and Treasury securities in early June traded at a historic low, suggesting that investors saw little more risk in owning the debt issued by companies with blotchy credit histories than in government-issued debt. In a matter of weeks, that spread has more than doubled.

High-yield bond offerings fell off a cliff last month. In July, only $2.4 billion in junk bonds were issued, a steep decline from the $22.4 billion that came to market in June, according to Thomson Financial.
High-quality bonds issued by companies with sterling credit have not been immune to the rout either. Investment-grade bond issues fell to $30.4 billion in July — the lowest monthly total in five years — from $109 billion in June, according to Thomson.

Bear, Lehman, Merrill, Goldman Traded as Junk, Derivatives Show

Now we have gone from almost junk in March to finally junk. We will see if the rating agencies are correct in giving all the players still very high investment grade ratings. S&P has taken the lead with yesterdays action on Morgan Stanley.

GS & co sind über fast Junk im März nun bei Junk angelangt. Wir werden sehen ob die Rating Agenturen mit Ihrer Einschätzung der hohen A und AA hier richtig liegen.

S&P raises Morgan Stanley debt rating to "AA-minus".
Standard & Poor's on Monday raised its debt rating for Morgan Stanley, citing strength in the bank's core investment banking and trading businesses.

S&P raised Morgan Stanley's senior unsecured debt rating to "AA-minus," the fourth highest investment grade rating, from "A-plus."

>At least for now the market has spoken.......

>Momentan sieht der Markt das etwas anders.......


Thanks to benj

July 31 (Bloomberg) -- On Wall Street, Bear Stearns Cos., Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Goldman Sachs Group Inc., are as good as junk.

Bonds of U.S. investment banks lost about $1.5 billion of their face value this month as the risk of owning the securities increased the most since at least October 2004, according to Merrill indexes. Prices of credit-default swaps based on the debt imply that their credit ratings are below investment grade, data compiled by Moody's Investors Service show.

bigger/größer

Thanks to Kevin Duffy / LewRockwell

The highest level of defaults in 10 years on subprime mortgages and a $33 billion pileup of unsold bonds and loans for funding acquisitions are driving investors away from debt of the New York-based securities firms. Concerns about credit quality may get worse because banks promised to provide $300 billion in debt for leveraged buyouts announced this year.


Credit-default swaps tied to $10 million of bonds sold by Bear Stearns, the second-largest underwriter of mortgage bonds, rose to about $110,000 on July 27, from $30,000 at the start of June, indicating growing investor concerns.

`Wall of Worry'
Prices of credit-default swaps for Goldman, the biggest investment bank by market value, Merrill, the third largest, and Lehman, the No. 1 mortgage bond underwriter, also equate to a Ba1 rating, data from Moody's credit strategy group show. Bonds of New York-based Goldman and Merrill are rated Aa3, seven levels higher than swaps suggest. Lehman is rated A1, the same as Bear Stearns.

About 1 percent of the thousands of companies followed by Moody's have a gap of more than five levels between their actual and implied rankings, analyst Tony Smith said in a July 19 report titled ``Broker Securities Climb a Wall of Worry.''

> Here is another one

Losing Value
Investment-grade bonds of brokerage firms lost 0.47 percent on average since June, while securities with similar ratings returned 0.19 percent, according to Merrill indexes. Finance companies are the biggest part of the corporate bond market, accounting for 40 percent of the $2 trillion of debt outstanding, according to New York-based Morgan Stanley, the second-biggest investment bank by market value.


Investors demand an extra 1.25 percentage points in yield to own the bonds of brokers instead of Treasuries, up from a low of 0.64 percentage point on Jan. 29. The wider spread represents an extra $6 million in annual interest for every $1 billion they borrow. ....

Bond and credit-default swap prices suggest Wall Street firms are no safer for debt investors than companies teetering on the edge of investment grade, including mining company Freeport-McMoRan Copper & Gold Inc. in Phoenix and Stamford, Connecticut-based copy machine maker Xerox Corp.


Pimco Buys
Pimco bought bonds of banks and brokers in the past two weeks, expecting them to sustain earnings growth and benefit from global mergers and acquisitions, Kiesel said. Profits at Bear Stearns will rise to $14.53 a share this year and $15.66 in 2008 from $14.27 in 2006, according to the average estimate in a Bloomberg survey of 16 analysts.

> I know that bond manager have a different view than equity investors and i respect kiesel. He has written some great reports like "still renting" but to assume that Bear Stearns will have any increase in earnings is just nuts. Bear is the most dependend on the US bondmarket and has almost no international exposure. The only way is able to increase their earnings is to "exclude" special items like losses in subprime exposure. But this would be like GM exclusing losses from their SUV´s.....But i will not rule out that this time we will see new ways of hiding bad numbers :-)

> Ich weiß das Bondinvestoren ein anderes herangehen als Aktieninvestoren haben und ich mag Kiesel von Pimco wirklich sehr. Er hat einige großartige Reports verfasst. Wie man aber allen ernstes darauf kommen kann das ausgerechnet Bears Stearns auch nur annähernd einen Gewinnzuwachs ausweisen kann ist mir schleierhaft. Bear ist die Bank die fast ausschließlich vom US Bondmarkt abhängig ist und kaum internationales Geschäft vorweisen kann. Der einzig mir denkbare Weg Zuwächse zu erzielen ist indem man zum beliebten Mittel greift und "special items" hearusrechnet. Das wäre in diesem Fall aber so als wenn man bei GM die Verluste der SUV´s herausnehmen würde....Das heißt nicht das dies in den USA nicht möglich ist :-)

Marking Down
Bear Stearns analyst Ian Jaffe raised his recommendation on broker debt to ``overweight'' from ``underweight'' on July 13 because risk premiums increased and the economy is growing. Jaffe, who is based in New York, declined to comment.

CreditSights Inc., an independent bond-research firm in New York, also says investors should buy broker bonds.

Disclosure: Short GS, long UBS

Number of the Day.....Levereged Loans

They will hit the wall like the subprime borrowers in the housing sector. Should be fun to watch when the ultralow default rate will also spike at the same time. Time to hire staff for the distressed debt division.......

Denen wird ein ähnliches Schicksal wie den Subprimeschuldnern momentan blühen. Besonders spaßig dürfte es dann werden wenn zur selben Zeit die Anleiheausfälle zunehmen. Höchste Zeit die Abteilungen für notleidende Kredite massiv aufzustocken......

Hat tip to wmbz!
Junk-rated companies that have tapped generous loan markets in recent years could soon face funding difficulties, according to Fitch.

A report by the rating agency published on Thursday predicts that more than half of the $1,300bn leveraged loans market in the US will need to be refinanced in the next three years.

Companies that have low credit ratings have increasingly turned to the loan market for funding at a time of unprecedented liquidity from hedge funds and other non-traditional investors.

The report shows that about $680bn of loans will mature between 2008 and 2011 compared with only $180bn of maturing high-yield bonds.

If Leveraged Buybacks, Why Not Leveraged Dividends? / Kasriel

Kasriel from Northern Trust asks the right question. The management will be forced to do more "bondholder value" management. I recommend to read the Expedia story to see how the sentiment has collapsed within 3 weeks.

Kasriel stellt hier eindeutig die richtige Frage. Das Management wird sich zukünftig wohl immer mehr um die Belange der Anleihebesitzer kümmern müssen. Ein gutes Beispiel wie schnell die Stimmung gekippt kann man am Beispiel von Expedia sehen.

The equity investing community seems to get giddy when it hears the words "stock buyback." And why not if the stock is being bought back out of current profits? But what if the corporation is increasing its debt to fund its stock buybacks?

The chart below suggests that is what is occurring now and what occurred in the late 1980s and late 1990s. The red bars in the chart represent the dollar amount of the net issuance of equities of nonfinancial corporations. Readings below zero, which predominate, signify the net "retirement" of equities. As the chart shows, record amounts of nonfinancial corporate equities are being retired in this cycle. The blue line in the chart represents nonfinancial corporate borrowing as a percent of their nominal capital spending. If the percentage is rising, as it is now, then this indicates corporations are borrowing for purposes other than to fund their capital spending. If corporate borrowing is rising relative to capital spending and corporations are retiring equity, then it is likely that they are borrowing to fund their share buybacks.

Equity investors do not seem alarmed that corporations are leveraging themselves to fund stock buybacks. Would corporate borrowing to increase dividend payments be greeted equally as gleefully?

As an aside, with some risk starting to be priced into the credit market, funding stock buybacks via borrowing is getting more expensive. Ask Expedia . It recently had plans to buyback 42% of its shares, predominantly with borrowed funds. But with the credit markets having turned more discriminating in recent weeks, Expedia has scaled back its repurchase plan to only 8% of its shares.

Enough is Enough / PIMCO´s Bill Gross

On top of his monthly comment is here a link via Marketwatch Bond guru sees possible 5%-10% drop in stocks. Click on the headline to read the entire piece with some thoughts on the "rich getting richer".

Zusätzlich zu dem monatlichen Kommentar von Gross hier noch ein weiterer Link via Marketwatch Bond guru sees possible 5%-10% drop in stocks. Klickt bitte auf die Überschrift um zusätzlich noch die Meinung zu den Reichen die immer reicher werden.

Several hundred billion dollars of bank loans and high yield debt wait in the wings to take out the private equity and leveraged buyout deals that have helped propel stocks to Dow 14,000. And lenders…mmmmm, how do we say this…don’t seem to have much of an appetite anymore. Six weeks ago the high yield debt market was humming the Campbell’s soup theme and now, it’s begging for a truckload of Rolaids. Yields have risen by 100 to 150 basis points in response as shown in the Chart

Some wonder what squelched the hunger of potential lenders so abruptly, while in the same breath suggesting that the subprime crisis is "isolated" and not contagious to other markets or even the overall economy. Not so, and the sudden liquidity crisis in the high yield debt market is just the latest sign that there is a connection, a chain that links all markets and ultimately their prices and yields to the fate of the U.S. economy. The fact is that several weeks ago, Moody’s and Standard & Poor’s finally got it into gear, downgrading hundreds of subprime issues and threatening more to come. "Isolationists" would wonder what that has to do with the corporate debt market. Housing is faring badly but corporate profits are in their prime and at record levels as a percentage of GDP. Lenders to corporations should not be affected by defaults in subprime housing space, they claim. Unfortunately that does not appear to be the case.

Thanks to Minyanville

As Tim Bond of Barclays Capital put it so well a few weeks ago, "it is the excess leverage of the lenders not the borrowers which is the source of systemic problems." Low policy rates in many countries and narrow credit spreads have encouraged levered structures bought in the hundreds of millions by lenders, in an effort to maximize returns with what they thought were relatively riskless loans. Those were the ABS CDOs, CLOs, and levered CDO structures that the rating services assigned investment grade ratings to, which then were sold with enticing LIBOR + 100, 200, 300 or more types of yields. The bloom came off the rose and the worm started to turn, however, when institutional investors – many of them foreign – began to see the ratings downgrades in ABS subprime space. Could the same thing happen to levered structures with pure corporate credit backing? To be blunt, they seem to be thinking that if Moody’s and Standard & Poor’s have done such a lousy job of rating subprime structures, how can the market have confidence that they’re not repeating the same structural, formulaic, mistake with CLOs and CDOs? That growing lack of confidence – more so than the defaults of two Bear Stearns hedge funds and the threat of more to come – has frozen future lending and backed up the market for high yield new issues such that it resembles a constipated owl: absolutely nothing is moving.

.... Covenant-lite deals and low yields were accepted by money managers as if they were prisoners in an isolation ward looking forward to their daily gruel passed unemotionally three times a day through the cellblock window. "Here, take this" their investment banker jailers seemed to say, "and be glad that you’ve got at least something to eat!"

Well the caloric content of the gruel in recent years has been barely life supporting and unhealthy to boot – sprinkled with calls and PIKS and options that allowed borrowers to lever and transfer assets at will. As for the calories, high yield spreads dropped to the point of Treasuries + 250 basis points or LIBOR + 200. Readers can sense the severity of the diet relative to risk by simply researching historical annual high yield default rates (5%), multiplying that by loss of principal in bankruptcy (60%), and coming up with an expected loss of 3% over the life of future loans. At LIBOR + 250 in other words, high yield lenders were giving away money!

>Looks like Homer has also entered the bond and credit market.... :-)

>Sieht ganz so aus als wenn Homer auch den Anleihe und Krdeitmarkt geentert hat... :-)

Over the past few weeks much of that has changed. The mistrust of rating service ratings, the constipation of the new issue market and the liquidity to hedge the obvious in CDX markets has led to current high yield CDX spreads of 400 basis points or more and bank loan spreads of nearly 300. The market in the U.S. seems to be looking towards this week’s large and significant placing/pricing of the Chrysler Finance and Chrysler auto deals to determine what the new level for debt should be. In the U.K., a similarly large deal for BOOTS promises to be the bell cow for European buyers. But the tide appears to be going out for levered equity financiers and in for the passive owl money managers of the debt market. And because it has been a Nova Scotia tide, rising in increments of ten in a matter of hours, it promises to have severe ramifications for those caught in its wake. No longer will double-digit LBO returns be supported by cheap financing and shameless covenants. No longer therefore will stocks be supported so effortlessly by the double-barreled impact of LBOs and company buybacks. The U.S. economy in turn will not benefit from this tidal shift and increasing cost of financing. The Fed tightens credit by raising short-term rates but rarely, if ever, have they raised yields by 150 basis points in a month and a half’s time as has occurred in the high yield market. ...

Expedia cuts planned buy-back size due to lack of financing

I´m shocked.... :-)

Looks like overnight nobody wants to finance a multi billion $ buyback with junk debt...... S&P cuts Expedia's rating to junk

Harte Zeiten für (junk) schuldenfinanzierte Aktienrückkäufe...... :-)
Expedia, Inc announced today that it is amending its tender offer to purchase shares of the Company's common stock to reduce the maximum number of shares that the Company is offering to purchase to 25,000,000 shares, due to the lack of available financing, on terms satisfactory to the Company, as a result of current conditions in the credit markets

Bloomberg
Expedia Inc., the Internet travel agency run by Barry Diller, slashed the number of shares it plans to buy back by 79 percent because it can't get enough financing with acceptable terms.

Its original plan called for buying back as many as 116.7 million shares, or 42 percent of common stock

The company's debt would have climbed to $4.07 billion from $500 million if it repurchased all 116.7 million shares at the maximum proposed price of $30 each, according to a regulatory filing June 29.

Expedia spent $660 million buying back 30 million shares in January.

Garbage and Potatoes / Hussman

Interesting chart once again from Hussman. Click on the headdline to read the entire piece

Mal wieder ein interessanter und nicht alltäglicher Chart von Hussman. Klickt bitte auf die Überschrift um den kompletten Report zu lesen.

To offer an idea of how much the recent advance has represented a speculative run on “low quality,” Bill Hester put together the following chart. It presents the performance of stocks rated “high quality” by Standard & Poor's, compared with the performance of all stocks with an S&P quality rating. Presently, the capitalizations being awarded to “garbage stocks” are very rich. Historically, these extremes haven't persisted.

The chart above is through the end of 2006. The same relative performance can be observed in the debt markets, where junk has clearly outperformed higher rated debt in recent years. It's notable that the “quality spread” in stocks has begun to reverse in recent weeks, along with risk spreads in the corporate bond market. Note that the yield spread on the CBOT's new credit default swap (CDS) index has just moved to a fresh high. A credit default swap is a way of transferring credit risk from one holder to another – a rising spread indicates increased concern about default risk. This will be important to monitor in the weeks ahead.

As I've often noted, the worst situation for an investor is when risk premiums are low and are being pressed higher. When that happens, stock and corporate bond prices can weaken significantly because the only way to get the yield (and risk premium) up is to drive down the price, and it takes a substantial amount of price decline to bring a low yield to higher levels.

Public v private equity / Economist

What a great cover! The Cover was originally related to the story the trouble with private equity but it is too great to not put it up. The Economist does a good job of pointing to a view points like pensions etc that havn´t been discussed in the past. It might be true that private equity or as Rodger Rafter would say "pirate equity" has done a good job in the past and has delivered great returns. But i´ve learned that the most important point is to buy cheap and sell high. When i look at the multiples at the deals in the past year and especially in the past 90 days i have the feeling their is a need/rush to "invest" and i doubt that lots of deals will work out to be profitable in the future.

Geniales Cover! Das Titelbild gehört ursprünglich zu der oben verlinkten Geschichte, war aber zu gut um es nicht zu bringen. Der Economist betrachtet hier einige gute Punkte wie z.B. was im die Pensionsverpflichtungen usw angeht die bisher wenig diskutiert worden sind. Es mag ja sein das Private Equity oder wie Rodger Rafter sagen würde "Pirate Equity" in der Vergangeheit gute Ergebnisse erzielt hat, aber ich habe mal gelernt das der Gewinn maßgeblich von einem günstigen Einkauf abhängt. Wenn ich mir die Deals des letzten Jahres und besonders im letzten Quratal ansehe habe ich eher das Gefühl das hier auf Krampf "investiert" wird. Ich denke das die Mehrheit der Deals unterm Strich in der Zukunft als nicht so "smart" angesehen" werden.

BACK in the late 1980s, the Financial Times carried a spoof story about a planned buy-out of General Motors. Nowadays the sale of such a giant would not be regarded as a joke. Every day yet another company seems to succumb to the clutches of private equity. And this week saw what could be the biggest deal ever: a $48.5 billion offer by a consortium of investors for BCE, a Canadian telecoms group. It was swiftly followed by a potential $22 billion bid for Virgin Media, a British cable-television company, and the $26 billion purchase of Hilton Hotels.

Even after those deals, the private-equity titans have plenty of firepower left. According to Private Equity Intelligence, a research group, the industry raised $240 billion in the first half of this year, leaving it well placed to surpass last year's record of $459 billion. That compares with less than $10 billion raised in 1991. In the process, private equity's share of mergers and acquisitions has grown massively (see chart). .....
Public tedium
Life is no longer much fun in a publicly quoted company. Executives have to suffer the slings and arrows of intrusive media coverage, the oppressive tedium of “box-ticking” corporate-governance codes, the threats of activist investors and short sellers, and the scrutiny of single-minded political campaigners.

And what do companies get in return? Traditionally they have had three main reasons to list their shares on a stockmarket. The first is to raise capital, either to expand the business or to allow the founders to realise their wealth. The second is to help retain staff, who can be offered share options as an incentive to stay and work hard. The third involves prestige; customers, suppliers and potential employees may be reassured (and attracted) by the apparent seal of approval given by a public listing. However, all three reasons seem to be less compelling than they used to be.

Historically companies have got their equity capital from four sources: pension funds, insurance companies, mutual funds and retail investors. The first three groups faced legal or regulatory impediments to buying unquoted shares, while the public naturally valued the liquidity a stockmarket listing could bring.

In the absence of a public quote, companies often had only one financial alternative: the banks. In some areas of the world this worked quite well. Banks were reliable partners to Germany's Mittelstand of unquoted companies and to Japan's industrial empires. But in the Anglo-Saxon economies companies often felt nervous about being in hock to the banks. A change in lending policy, due to new management or an economic downturn, could lead to the sudden withdrawal of credit.

Nowadays companies have many more options when it comes to raising money. Banks are much less important as a source of lending; they have been “disintermediated” by capital markets.

Banks might arrange loans, but they quickly offload them to outside investors such as hedge funds. Bond markets are much more liquid than they used to be, and thanks to high-yield products even companies with a poor credit-rating can tap them.

> indeed..... in der Tat....

More securities than ever have the lowest rankings, with CCC ratings assigned to 26.5 percent of the new debt, according to New York-based Fitch Ratings. That compares with 15 percent in 2006 for debt that itch says has a ``high default risk.''

Bonds that allow companies to pay interest in extra securities instead of cash, including toggle notes, accounted for almost 9 percent of high-yield debt sold this year, compared with less than 1 percent three years
ago

Then, of course, there is private equity. It can provide finance at an early stage (venture capital) or as an attractive alternative for companies that have a public quote (the leveraged buy-out). Whereas pension funds will be reluctant to hold a direct stake in an unquoted company, they are willing to pay hefty fees to private-equity firms to invest money on their behalf. .....

> sarcasm?

Mr Motivator
In the 1990s it seemed as though everybody in America had a neighbour or a relation who was about to become a millionaire through their stock options. Companies were handing them out like free newspapers on Piccadilly. Company boards were happy to offer options since accounting rules allowed them to pretend they had no cost. ....

And now that options are properly accounted for, companies are just as happy to hand cash over.

Besides, partnerships such as lawyers and accountants (not to mention hedge funds) have historically managed to offer very generous rewards to their top employees without the need for a stockmarket quote. And private-equity groups have also been successful at retaining important staff by offering them potentially lucrative stakes. Indeed, top executives may prefer the private sector. For a start, private-equity bosses can keep what they earn secret, while chief executives of quoted companies find themselves the subject of impertinent comments from the media and activist shareholders.

Perhaps as a result, managers can earn a lot more in the unquoted sector. The most famous example is Dave Calhoun, a top GE executive who turned down jobs at S&P 500 companies for the chance to run privately owned VNU, a Dutch media group, for a reported $100m package

There is another problem, identified by Professor Jensen almost two decades ago. The structure of a public company creates an inherent conflict between investors and the managers they hire to run the business. The main problem is what to do with free cashflow, the money left over after all profitable investment projects have been funded. In theory this money should be returned to shareholders, but managers may be reluctant to do so. Holding on to cash means they do not have to go cap in hand to capital markets.

Professor Jensen argued that borrowing imposed discipline on executives. They needed to generate cash to meet interest payments. And, if they wanted to finance a project, they would have to convince investors that it was worthwhile. The result ought to be fewer unprofitable projects because cash is no longer left burning a hole in managers' pockets.

Private-equity firms apply this lesson in spades. They gear up the balance sheets of companies they buy with more debt than public firms are willing to accept. Nearly 20 years of economic stability have led some to believe that even notoriously cyclical businesses, such as carmaking, can now bear higher levels of debt. ....
> Some of the latest deals like Hilton, Huntsman etc are already at a double digit multiple...... In the case of Huntsman the bidding company Hexion /Apollo has had a negative cashflow last year and is in debt up to $ 5 billion. When they will get Huntsman they have to take on another $ 10 billion (via Handelsblatt)....... It should be clear that both bidders for Huntsman are rated as junk....

> Einige der letzten Deals (Hilton, Huntsman etc) sind bereits für einen zweistelligen Cashflowbetrag über die Bühne gegangen.......Hier ein paar mehr Fakten zum dem Hexion/Apollo Gebot für Huntsman aus dem Handelsblatt " Hexion wies für das abgelaufene Jahr einen negativen Cashflow und ein Ebitda von gerade mal 439 Mill. Dollar aus. Dem stand eine Verschuldung von fast fünf Mrd. Dollar gegenüber. Je nachdem, wie viel Eigenkapital Access in die Transaktion steckt, müsste das Unternehmen weitere Schulden von bis zu zehn Mrd. Dollar schultern. " .....Es sollte klar sein das beide Bieter für Huntsman bereits al Junkschuldner "ausgezeichnet" sind.......

Workers do have a legitimate concern about the security of their pensions. When a company takes on a lot of debt it undoubtedly makes the “covenant” between a company and its pensions scheme less secure. For a start, it increases the risk that a company may go bust, and so may not be making contributions into the scheme in future. And in the short term executives will concentrate on paying down debt rather than making additional payments to close a pension deficit.

It may well be that the shift away from quoted companies turns out to be detrimental to workers' pensions rights. However, those rights were already being eroded, with many quoted-company schemes being closed to new members or to future accruals for existing employees. Private equity is not the main, or even a leading, cause of the pensions crisis.

The conglomerate model
Another potent criticism of private equity is the parallel with the conglomerates of the 1970s and 1980s, such as ITT, BTR and Hanson. Like private-equity firms, the conglomerates used their financial muscle (in their case, highly rated shares rather than borrowed money) to construct diverse industrial empires. They argued, just as private equity does today, that they could improve the companies they owned through superior management.

Eventually, those empires fell apart. Like a shark compelled to keep swimming forward to catch its prey, they needed ever-bigger acquisitions to make progress. Investors concluded that they could diversify on their own, by buying shares in different sectors. They did not need a conglomerate to do the job for them.

Private-equity groups insist they will not run into the same problem. “We don't hang on to the businesses,” says the leader of one. But that creates another potential problem: investing for growth. If a business is going to be sold within, say, five years, what incentive is there to approve the financing of projects that may take a decade or more to pay off?

Private-equity bosses maintain that it is not in their interest to ruin the companies they buy, because they want to sell them again. And it is also the case that the executives of publicly quoted companies can sometimes skimp on capital expenditure, given that they are often under pressure to meet quarterly profit targets.

Superior returns?
..... One much-cited study** found that average returns, net of fees, were roughly equal to that produced by the S&P 500 index between 1980 and 2001. That implies that private-equity firms do improve the businesses they own, since gross returns outperform the market. But investors do not seem to benefit. “Overall, returns have not been that special, especially if you adjust for risk,” says Richard Lambert, director-general of the Confederation of British Industry, Britain's main business lobby-group. ....

Going private
In addition, private-equity firms need an exit route to sell their investments. Although there is a growing trend for secondary deals, where one group sells a firm it has bought to another, there must be a limit to which further efficiencies can be squeezed out of any particular business. In the end, a public market will be needed for someone to realise their profit.

Indeed, the need for an exit route was neatly demonstrated by the recent flotation of Blackstone, one of the largest private-equity groups, on the New York stockmarket and the decision this week by Kohlberg Kravis Roberts, another of the industry's titans, to follow suit. It does seem a bit hypocritical for these firms, who regularly tout the benefits of the private model, to head for the public markets—but what other route could they take? They could hardly agree to be bought by each other.

A bigger role for private equity might make the economy more vulnerable. Historically, recessions have often occurred when rising interest rates have cut into corporate profits, causing firms to slash employment and capital expenditure. In a world where most companies carried private-equity-style debt levels, companies would be much more vulnerable and recessions might become much more frequent. Monetary policy would become more difficult, with even small changes in interest rates having the potential to cause massive damage to business. And government revenues might be affected if large portions of industry were financed by tax-deductible debt.
But private equity still accounts for only a small proportion of corporate ownership. Much of the industry's activity is among small and medium-sized companies. There is still plenty of scope for private-equity firms to expand.

It may well be, however, that the peak of the cycle is close at hand. Private equity is inevitably a “feast and famine” business: when one fund can raise a lot of capital, they all can. Competition to buy companies then pushes up the price of doing deals, increasing the interest burden and reducing the returns for equity holders. More deals will be done this year, but they may not deliver the kind of returns that investors are hoping for, just as the late 1980s buy-out of RJR Nabisco, the emblematic deal of the era, proved a disappointment.

Since 2003 conditions have been almost ideal for private-equity firms, with low interest rates, lots of liquidity and rising asset prices. But recent events have been moving against them. Bond yields have been rising, making takeovers (which replace equity with debt) more expensive. The high level of corporate profits suggests that there may not be much more to be wrung out of businesses. And the relentless campaign against private-equity tax privileges has made the groups look like easy targets for finance ministers. It may be symbolic that Blackstone's shares quickly slid below the offer price.
Bad debts
Investors also seem to have woken up to the potential risks, perhaps alerted by the losses being suffered in another part of the credit universe—subprime mortgages. They had previously been happy to extend credit on easy terms, such as “covenant-lite” loans (debts with few checks on operating performance) or payment-in-kind notes, where borrowers can substitute more debt for interest payments. Now they are starting to turn down deals where private-equity firms push