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.

HUNGER PANGS : Restaurants Feel Sting Of Surging Costs, Debt

Add the latest news from Starbucks to the mix and is getting harder almost on a daily basis even for permabulls to spin things in their favour..... Needless to say that this will put massive pressure on the commercial real estate market.....

Nimmt man noch die gestrige Warnung von Starbucks hinzu wird es selbst für den versiertesten Daueroptimisten immer schwieriger die Dinge in einem positiven Licht erscheinen zu lassen....Da lag ich mit meinem Kommentar aus den Anfängen des Blogs Mitte 2006 wohl doch nicht ganz verkehrt...starbucks / sbux als barometer . Überflüssig zu erwähnen das diese Entwicklung heftigen Druck auf den gewerblichen Immobiliensektor ausüben wird.....

Starbucks
Citing "the sharp weakness in the U.S. consumer environment," ... Starbucks said U.S. comparable-store sales fell by the mid-single digits on a percentage basis amid lower traffic. ...

Thanks to Matt Davies

HUNGER PANGS: Restaurants Feel Sting Of Surging Costs, Debt WSJ - The $558 billion restaurant industry is hitting rough times, squeezed by many of the same woes affecting other sectors of the economy: tightfisted consumers, scarce credit and surging commodity prices. Adding to the pressure is a big jump in the minimum wage starting this summer, which will boost wages by 12% in some states.

That's sent the industry into its worst slump in decades. Many chains have scaled back expansion plans or cut costs by skimping on things like extra sauce and free sour cream. Some are shuttering sites and laying off workers. Private-equity firms, which plunged into the business earlier this decade using gobs of borrowed money, are now especially vulnerable as those debts come due.

This week's earnings results, despite some glimmers of good news, paint a sobering picture. McDonald's Corp., the world's largest restaurant chain, saw U.S. sales at restaurants open at least 13 months fall 0.8% in March, the first decline in monthly same-store sales in five years

The slowdown has broad implications for the economy. The industry employs 13.1 million people, making it the nation's third-largest employer, behind the U.S. government and the health-care industry, according to the National Restaurant Association, a trade group. Many of those jobs are held by the poor and immigrants who have few other options for work.

> Keep this in mind when the BLS will still be reporting job gains in the birth death model .... Heren is more on the BLS Black Box via Mish

> Behaltet das im Hinterkopf wenn in den nächsten Monaten das Bureau of Labor Statistics trotzdem noch immer massive Jobzuwächse in diesem Segment berichten wird.... Kann jedem empfehlen BLS Black Box von Mish zu lesen. Mit dieser Methodik hätten auch wir in Deutschland gute Chancen auf eine Vollbeschäftigung.....

Moody's Investors Service has downgraded seven prominent national and regional chains, including Landry's Restaurants and the parent of Pizzeria Uno, to its lowest liquidity rating -- the most restaurants to be given this rating at once since it was created in 2002.

Restaurants overexpanded in recent years, too. There were 524,286 eating and drinking places in the U.S. in 2006 -- a 45% increase from 1990, according to the National Restaurant Association. The U.S. population rose 20% during that period, according to census figures.

In part because of the glut, overall same-store sales at about 70 restaurant chains were flat or down in the fourth quarter, says Wachovia Capital Markets. Dips are rare in a business that has seen growth in all but two of the past 26 years, according to Wachovia.

> Now to the private equity part with all their "smart" money.........

> Nun zum Teil der sich mit den "smarten" Private Equity Investoren befasst....

At Vicorp -- which owns 400-plus Village Inn and Bakers Square restaurants in cities like Chicago, Denver and Phoenix -- chief executive Ken Keymer is trying to adapt and wring out costs one ounce at a time

Same-store sales at both Village Inn and Bakers Square declined, and a slight profit in 2005 turned to growing losses the next two years. Through the first nine months of 2007, Vicorp had a loss of $20.9 million on sales of $336 million. Vicorp's debt-to-equity level ballooned from four times to 10 times on its $127 million in public debt.

Like many restaurant chains, Vicorp was a target of private-equity investors earlier this decade, which loaded it up with debt the company later couldn't cover. Flush with cash in the past few years, private-equity funds saw restaurants as relatively cheap investments that could potentially be turned around quickly by a management change or new menu concept.

I Want My Buyback Back..... Washington Mutual Edition Part II

They really should have hired Homer or Paris Hilton to run the company.... No joke! After attending the conference call back in Jan 07 ( see Flashback January 2007 ) even the dumbest outside Wall Street could have predicted this outcome. Here is more from Mish . Mish has done another update WaMu Raises Cash, Skeptical Eyebrows

Denke Homer oder Paris Hilton hätten das besser hinbekommen....... Traurig aber wahr! Jeder der wie ich im Januar 2007 ( siehe Flashback January 2007 ) sich den Call angetan hat konnte genau das vorhersehen. Voraussetzung natürlich man arbeitet nicht an der Wall Street......Hier gibt es mehr von Mish . Hier ein weiteres lesenswertes ein Update WaMu Raises Cash, Skeptical Eyebrows von ihm.

Flashback January 2007

On Jan. 3, 2007, the company entered into an accelerated share repurchase agreement with a dealer, buying back $2.7 billion of its common stock ( Stock close to $ 40 )

Fast forward April 2008 Washington Mutual Gets $7 Billion From TPG-Led Group

Wahington Mutual the largest U.S. savings and loan, got $7 billion from a group of investors led by David Bonderman's TPG Inc. after losses on subprime loans ate up capital and erased 74 percent of its market value.

Washington Mutual sold 176 million shares at $8.75 a piece, 33 percent below yesterday's closing price on the New York Stock Exchange, and preferred shares, the company said in a statement today

Bravo!

It will be interesting to see how long this infusion will last......

Bleibt abzuwarten wie lange diese Kapitalspritze vorhalten wird......

A new monoline exposure for banks: CLO negative basis trades

Another day another problem for banks, "pirate equity" and financials...... It feels like more and more pillars of the "alchemy of finance" are crumbling down.....

Ein neuer Tag und mal wieder neue Probleme für Banken, "Pirate Equity" und Finanzwerte im allgemeinen.... Es sieht so aus als wenn immer mehr Pfeiler der "Finanzalchemie" beginnen wegzubrechen....

FT Alphaville Banks’ exposures through bond insurers, or monolines, is far from limited to mortgage-related MBS and muni bonds. There’s a third big exposure - to leveraged buyout loans - that banks will have to deal with if monolines hit the rocks.

Negative basis trades have been around for a while. A bank buys a bond - say it’s AAA - and then it takes out a CDS against that bond with a monoline. Since spreads in the CDS market for such tranches have been typically much lower than in the cash market, the bank pockets the difference.

But as well as banks’ much-dissected CDO exposures, there have been two other big markets for that kind of trade: on infrastructure bonds and - most interestingly - in structured finance, on CLOs (collateralised loan obligations) - CLOs being the vehicle of choice in which to park massive buyout loans.

Monolines, of course, are no longer in a position to be writing new contracts for banks to use as one half of their negative basis trades. The consequence of that has been that banks have stopped buying AAA tranches of CLOs. Unable to sell those, CLOs have faltered and banks in turn, have found themselves with lots of big buyout loans stuck on their books. No new financing is available for private equity deals.

According to Euroweek, 90 per cent of all CLO AAA-tranches have been bought and then wrapped in negative basis trades. Which begs a second question. What of all the AAA CLO and infrastructure paper that banks already have on their books? None of it, of course, shows up as exposures in filings because, net, there is no exposure. Assuming, of course, your CDS counterparty is safe. Err…

> Deutsche Bank was very optimistic in yesterdays call to unload all the € 21 bln loans with no losses. They argue that the quality of the loans is high and that it is and has always been the policy from Deusche to take 10 percent of the structured loans onto their books to signal that they have full confidence in their underwriting standarts. I think they are way too optimistic.....

> Die Deutsche Bank has sich gestern in der Analystenkonferenz extrem optimistisch gezeigt das sie die knapp 21 Mrd € an Unternehmenskrediten die sich in Folge des Private Equity Übernahmewahnsinns angehäuft haben ohne Verluste weiterreichen kann. Argumentiert wird das die Qualität hoch sei und das es seit jeher Politik der Deutcshen Bank ist jeweils 10 % der so strukturierten Verkäufe in die eigenen Bücher zu nehmen. Damit soll unterstrichen werden das man vollstest Vertrauen in die Kreditprüfung hat. Löblich...... Denke trotzdem das hier sicher noch einige gewaltige Abschreibungen kommen werden.

Even if monolines don’t crash and burn, banks will still have to make writedowns on these trades. As the value of the CDS written by the monoline decreases, so, too, will banks exposure to CLOs, and through them LBOs, have to increase. And higher exposures will also, of course, put pressure on capital.

And one final point: having set up one negative basis trade, it hasn’t been uncommon for banks to take out a CDS against the CDS counterparty in that trade. As Paul J Davies points out in today’s FT, through negative basis trades, banks’ monolines exposures have often been hedged with other monolines.

Update: The WSJ has an interesting number crunching piece on the state of the LBO industry - and the amounts banks are finding themselves stuck with.

Sustainable?

I must admit that i havn´t heard of this indicator before. I especially like the long time view. The chart is clearly showing that something isn´t working.... Keep this in mind when the spin masters once again point to the "stronger than ever balance sheets" and that companies are awash in cash etc......This is coming from the same guys that said the same thing about the banks balance sheets 12 month ago...... But when you believe the experts news like Capital access: US drops from global top 10 shouldn´t be worrisome.... ;-).......

This graph from the FT Germany is showing the difference from the cashflow minus capital spending, dividends & net equity emissions from non financials vs the national income....

On top of this they are pointing out that the S&P 500 is currently trading at 20.4 time 2008 estimated GAAP earnings.....So much for the "cheap market" spin that is still en vogue....

And we all know that the estimates from Wall Street Finest are still way too high.

Examples like The Great Private Equity Cash Robbery of 2007 from & Big Buybacks Begin to Haunt Firms from Jeff Matthews may explain why the balance is looking so streched......

GAAP tut ganz schön weh FTD Kapital
Tut man es frecherweise doch, schaut man bei der Recherche zunächst mal ziemlich verdutzt aus der Wäsche. Laut S&P notiert der S&P 500 nämlich sage und schreibe mit dem 20,4-Fachen des geschätzten US-GAAP-Gewinns - von 2008. Selbstredend kann man diese Zahlen nicht ernst nehmen, da die Gewinnschätzungen ja durch die - ganz bestimmt nur vorübergehenden - Kalamitäten im Finanzsektor entstellt sind.

> Hier ein Beispiel von Wall Street Finest das zudem zeigt wie abseits aller Realität selbst die Schätzungen für 08 sind.

> Zudem empfehle ich jedem The Great Private Equity Cash Robbery of 2007 & Big Buybacks Begin to Haunt Firms von Jeff Matthews zumindest eine Teilerklärung dafür zu finden warum die Bilanz des Charts so übel aussieht.

Probieren wir es also mit einem anderen herkömmlichen Bewertungsansatz: der Dividendenrendite.

Doch gemessen an Zahlungen über die vergangenen vier Quartale beträgt auch die weiterhin gerade mal zwei Prozent, wobei ironischerweise der Finanzsektor mit einer Rendite von 3,3 Prozent hervorsticht und insofern nur noch vom Telekomsektor überboten wird. Legt man die Dividendenerwartungen für 2008 zugrunde, ergibt sich für den S&P 500 eine Rendite von 2,2 Prozent. Schön, aber wenn in Europa 3,8 Prozent winken, dürfte man von Amerika doch wohl zumindest drei Prozent erwarten. Nur müsste der S&P 500 schon dafür um gut ein Fünftel fallen.

Nicht doch, werden viele nun einwenden. Immerhin kaufen die US-Firmen Aktien zurück wie wild. Doch wie etwa die Citigroup zeigt, kann man sich darauf ebenso wenig verlassen wie auf die verheißenen Dividenden. Und wie lange werden die nichtfinanziellen US-Kapitalgesellschaften in der Kreditkrise wohl noch eine Finanzierungslücke nach Investitionen, Dividenden und Netto-Aktienrückkäufen von acht Prozent des Nationaleinkommens durchstehen? Ein paar Wochen vielleicht.

> Ich muß gestehen das mir dieser Indikator bisher noch nicht untergekommen ist. Was ihn aber besonders aussagekräftig macht ist die Tatsache das er über mehrere Jahrzehnte aufzeigt das besonders in letzter Zeit etwas nicht "gesund" ist. Behaltet das im Hinterkopf wenn mal wieder die Arien auf die so starken Bilanzen und die hohen Cashbestände von "Expertenseite" hingewiesen wird......Das sind oftmals dieselben die vor 12 Monaten identisches zu den Bankenbilanzen zu sagen hatten..... Bleibt zu hoffen das bei Meldungen wie Capital access: US drops from global top 10 die Experten nicht allzuweit daneben liegen.... ;-)

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

Another LBO Deal Bites The Dust....

Looks like Ceberus and others that just a few month ago saw the golden era of private equity are trying to back out of as many deals they have made during the latest quarter of this period. Thank god that Ceberus had forced Daimler only to a few more concessions..... Mish once called the mania "Buyout Bingo". It has worked fine on the upside.....

Sieht ganz so aus als wenn Cebrus & Co die noch vor wenigen Monaten einie goldene Ära für Ihre Branche gesehen haben wollen momentan alles mögliche Versuchen um aus Ihren Kaufverträgen auszusteigen. Zum Glück hat Ceberus Daimer beim Chryslerkauf nur zu Nachbesserungen gezwungen.... Mish hat das ganze mal sehr treffend als "Buyout Bingo" beschrieben. Auf dem Weg nach oben eine tolle Geschichte.....

Cerberus abandons $7bn deal as Alltel founders
Cerberus Capital Management has pulled out of its $7bn deal to buy United Rentals, making the planned private equity takeover of the world’s largest equipment lender the latest casualty of the credit squeeze.

The news sent the company’s shares plunging 30% to $23.76. Cerberus had agreed in July to pay $34.50 per share. United Rentals said Cerberus’ action was “unwarranted and incompatible with the covenants of the merger agreement”.

Amid fresh concerns over the ability of private equity groups to fund LBO deals, bankers for TPG and Goldman Sachs were on Wednesday struggling to find investors for loans funding the $27bn buy-out of Alltel, the US wireless carrier. The underwriters reduced the size of the loan package to $4.89bn from $6bn and increased the discount on the issue to 96 cents on the dollar from 97.5 cents.

More trouble for Ceberus.... This deal was done during the past 2 yaers close to the paek of the housing market.....

Hier kommt weiteres Ungemach auf Ceberus zu..... Dieser Deal wurde binnen der letzten 2 Jahre auf dem Peak des Immobubbles abgewickelt.....

GMAC Unit Poses Challenge to Cerberus

The troubles concern GMAC's Residential Capital LLC, once a big source of profit but now burdened with a portfolio of loans rapidly declining in value. That has put the unit, known as ResCap, in danger of violating terms of loan agreements, triggering concerns that its lenders will demand immediate payment or force the unit into bankruptcy protection if GMAC or its owners don't step in with an equity

Commercial property "View from the top" / Economist

More on the topic Commercial property "Dizzying heights" UK / Economist , So Many Deals, So Much Debt ( The rise and possible fall from Harry Macklow in just 6 month) & Commercial Real Estate Prices May Drop 15% in Next Year

I also want highlight some excellent posts from Toro´s fine blog Am I Wrong About REITs? & REITs - What are Institutional CIOs Thinking? and from Mish Commercial Real Estate Abyss

Mehr zum Thema Commercial property "Dizzying heights" UK / Economist , So Many Deals, So Much Debt ( Die Geschichte eines Immobilienmoguls der binnen 6 Monaten alles zu verlieren droht) & Commercial Real Estate Prices May Drop 15% in Next Year

Zudem möchte ich noch auf diese beiden fundierten Posts von Toro hinweisen Am I Wrong About REITs? & REITs - What are Institutional CIOs Thinking? sowie von Mish Commercial Real Estate Abyss

View from the top It looks a long way down from the peak of the global market for office space

BANKING crises and property crashes often go hand in hand. That is one reason why America's housing bust has so troubled investors and policymakers recently. Commercial property, too, has a history of boom and bust that has brought havoc to the financial markets: think of the Japanese property slump during the 1990s, or Britain's secondary-banking crisis of 1973-74, when too much lending to property developers helped cause the London stockmarket's worst year of the 20th century.

Even though commercial and residential property do not necessarily move together, the same factors associated with the American housing market—tighter lending standards and slower economic growth—should hurt business demand for office and retail space as well. Like residential mortgages, loans for offices and shops have been bundled up and sold to investors. So could some swanky offices and shopping centres eventually suffer the subprime fate?

Until early this year there was plenty of evidence of hubris. In February the $39 billion paid by Blackstone, a private-equity firm, for Equity Office Properties, a big landlord, was a record price for a buy-out—and the seller, Sam Zell, has a reputation for shrewdly judging the top of the market.

> More details on the deal and why it is no wonder that this deal marked the top.....commercial property madness / numbers on the blackstone-eop manhatten sale

> Hier mehr Details zum Deal der gleichbedeutend mit dem Top gewesen ist.....commercial property madness / numbers on the blackstone-eop manhatten sale

In Britain, the share prices of property firms had surged ahead of the government's decision, after years of dithering, to introduce the tax-efficient Real Estate Investment Trust (REIT) structure in January. During part of 2006, more than half the money flowing into British mutual funds was invested in property.

For whatever reason, investors have since taken fright. “The market has had a bucket of cold water poured over it,” says Tony Horrell, head of European capital markets at Jones Lang LaSalle, a commercial agent. Shares in property companies took a battering over the summer, making the sector the worst performer in the American market in May, June and July, according to Lipper, an information group.

But is this really the start of another bust or simply some judicious profit-taking? Commercial property has been the asset to own this decade. Figures from the National Association of Real Estate Investment Trusts, an industry body, show that an investment in American property at the start of 2000 would have more than quadrupled in value by the end of last year. By comparison, the leading American share index, the S&P 500, returned just 8% over the same period.
This has not been just an American phenomenon. According to the Investment Property Databank, 16 out of the 21 national property markets it covers delivered double-digit returns last year. A global economic boom, allied with a desire by investors to diversify from equities and bonds, made property appealing.

Despite investors' enthusiasm, industry experts argue that the market has not seen some of the excesses that marked previous cycles. There has not been the kind of overbuilding of skyscrapers that usually spells severe trouble. The latest survey by Reis, a research firm, found that the vacancy rate in American offices was 12.5% in the third quarter, the lowest for six years. Rents grew by 2.4% between the second and third quarters, a slower rate than before but still a respectable one. Mr Horrell says that in most European markets the fundamentals for commercial property are good and that rents should continue to grow.

Andrew Jackson of Standard Life Investments, a fund-management firm, argues that commercial-property investors are not as dependent as their home-buying counterparts on borrowed money; the average gearing of the REITs he invests in is just 31%. As a result, tighter lending standards have not had the dramatic consequences that they have had in the residential sector. There has not, as yet, been the sharp rise in loan delinquencies that was seen in subprime mortgages.

The credit crunch has undoubtedly had an effect on confidence but so far it has not been catastrophic. “A number of transactions are on hold while investors wait to see how deals are repriced,” observes Jonathan Thompson, head of real estate at KPMG, an accountancy firm. “Debt is still available but the cost has gone up a bit and the loan-to-value ratio has fallen.”

Ken Cohen of Lehman Brothers says that the volume of new loans to finance property deals has fallen by half since May and June when credit was widely available. In turn, this has led to a sharp fall in the issuance of commercial mortgage-backed securities (CMBSs), the products that consist of repackaged loans which helped propel the structured-finance market before it seized up.

All spreads from B to AAA

That means property is likely to behave in a patchy fashion. Some markets that were overextended, such as Britain's, are already seeing a retreat for the first time in 15 years. Norwich Union, an insurance company, downgraded the valuation of one of its main property funds by 2-3% in September, while British Land, a leading property group, abandoned plans to sell a shopping centre in Sheffield in northern England. In other markets, investors may start to shun properties in poor locations or with low-quality tenants. But they will still be attracted by city-centre buildings that have been pre-let or by markets that are soaring, such as Asia's.

A lot may depend on whether the debt markets recover their confidence. In America, in particular, a healthy property market requires a revival in CMBS issuance. Mr Cohen of Lehman reckons that by the new year the market could be getting back to normal. Investors will be looking to make their allocations into property for next year, he believes, and it will help that they will not have been swamped with issuance in the second half of 2007.

Commercial property is no longer the bargain it seemed a few years ago, when rental yields were well above those on government bonds. But it will probably take a recession, in America and elsewhere, for the recent wobbles to turn into an outright crash.

> As my opening links suggest i´m more bearish than the Economist.....

> Wie Ihr evtl. anhand meiner Links feststellen könnt bin ich erheblich pessimistischer als der Autor vom Economist.....

From Boom to Bust / Interactive M&A Chart WSJ

This Chart is excellent. Check it out. Make sure you click through all the other tables of the link.

Toller Chart über den Verlauf des M&A Jahres. Los gehts.... Ihr solltet nicht vergessen Euch durch die anderen Seiten des Links zu klicken

And it is probably as important to look at the "colour of money". I think it is safe to say that with problems in the credit market the share of cash component will decline considerably.

Ich finde es ebenfalls wichtig sich die Zusammensetzung der einzelnen Übernahmeofferten anzusehen. Mit den Problemen im Kreditmatkt ist es unschwer zu erraten das die zukünftige Barkomponente der Angebote erheblich sinken wird.

First Data Loans Delayed as KKR, Banks Keep Talking, People Say

It looks like the banks and investors have realised that they have gone too far. We can now take this cover "The trouble with private equity" and the men one step further...... Please click at the label to read more about the private equity mess.

Es sieht ganz so aus als wenn Banken und Investoren endlich realisiert haben das Sie heftigst überzogen haben. Ich denken wie können das Cover von "The trouble with private equity" erweitern und davon ausgehen das er sich jetzt auf dem "Abstieg" befindet.... Wenn Ihr mehr "schmutzige" Details zum Thema Private Equity lesen mächtet klickt bitte auf die Labels am Ende des Posts.

Sept. 12 (Bloomberg) -- Kohlberg Kravis Roberts & Co. may delay the sale of loans to fund its $26 billion buyout of First Data Corp. until at least next week after failing to agree on terms with its bankers, people with knowledge of the talks said.

KKR, the New York-based private-equity firm run by Henry Kravis, and banks led by Credit Suisse Group couldn't agree today on pricing or how much of the debt lenders will try to sell, said the people, who asked not to be identified because the negotiations are private.

As recently as April, buyout legend Henry Kravis proclaimed a "golden age" of private equity

The First Data sale is the biggest to be attempted since rising U.S. mortgage defaults triggered the highest leveraged buyout borrowing costs in four years. It's being watched by bankers and buyout firms as a gauge for how $320 billion in debt committed for pending LBOs may fare. The banks would have to hold the loans and bonds if they can't be sold to investors.

``The pricing environment in the credit markets reflects illiquidity and fear,'' said Peter Plaut, an analyst with Sanno Point Capital Management LLC, a New York-based hedge-fund manager. ``If First Data gets done, it will show a significant vote of confidence.''

KKR has other deals to finance after Greenwood Village, Colorado-based First Data, the largest processor of credit-card payments. The firm and TPG Inc. agreed in February to buy Dallas-based power producer TXU for $32 billion in the largest U.S. buyout. The acquisition, which has been approved by shareholders and regulators, is set to close by the end of December.

> If you read the details from the TXU deal it is no wonder that the banks are having trouble to unload this junk.

> Wenn man sich die Details des TXU Deals durchliest ist es nicht weiter verwunderlich das keiner diese waghalsigen Kredite aufnehmen möchte.

Investors Balk
Demand for LBO debt has evaporated. After buying a record $754 billion of leveraged loans this year, investors are balking at debt without covenants, or restrictions, that give them greater power over a company's finances. More than 50 deals have been abandoned or reworked.

KKR has yet to agree to terms that would give its banks confidence they can sell the loans to investors without making the acquisition potentially less profitable, the people said.

The two sides have discussed various structures, including adding a provision that dictates how much debt First Data can assume relative to earnings, people with knowledge of the negotiations said Sept. 10.

Marketwatch reports First Data LBO may be costly for banks involved
Even if the banks manage to sell all the loans, they will probably have to offer them at a discount to entice investors.

If the First Data loans are sold at 94 cents on the dollar, that would leave the banks with a loss of between three and four cents on the dollar. On a $14 billion loan deal, that translates to a loss of $420 million to $560 million.

Citigroup is particularly exposed to such problems, according to analysts.

Quote Prince CEO Citigroup just a few weeks ago The $1 Billion Break Up Fee & An Ignorant And Deaf CEO

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing".

The bank is a lead underwriter on five of the six largest leveraged loan pending, including debt to support the LBOs of BCE Inc. , TXU Corp. and Alltel Corp. according to Banc of America Securities. That's more than $70 billion worth of loans

> But they are not alone.....See this excellent table The Banks Behind The Biggest Buyouts

> Immerhin sind Sie nicht alleine...Hier eine erstklassige Übersicht The Banks Behind The Biggest Buyouts

Citigroup is also lead underwriter on three of the five largest pending high-yield bond deals, worth more than $20 billion, Banc of America Securities noted.

First Data is one of the last so-called covenant-lite deals. These types of loans, which give companies more leeway and creditors less power, have fallen out of favor in recent months.

Over the weekend, KKR agreed to add one covenant to the First Data debt, the Wall Street Journal reported on Tuesday. The company must now maintain a certain ratio of earnings, before interest, depreciation, tax and amortization (EBITDA) to senior debt, the newspaper explained.

However, that's not much of a concession, especially considering the LBO is already highly leveraged, KDP's Lee said.

This is just in from the FT Talks to start on TXU $45bn financing
Negotiations over the terms of the financing package for the $45bn buy-out of TXU, the Texas-based energy group, are set to begin after the purchase by US private equity groups KKR and TPG received final regulatory approval earlier than expected.

The banks funding the TXU takeover - Citigroup, Goldman Sachs, JPMorgan, Lehman Brothers and Morgan Stanley - are expected to push for the inclusion of covenants in $37bn of loan financing and higher interest payments to make the debt more palatable to investors. But the buy-out groups will be reluctant to make any concessions that could hurt returns. The bond portion, worth about $8bn, would be sold after the loans.

GMAC Gets $21 Billion in Citigroup Funding for Auto, Home Loans

This sounds to me like "throwing good money after bad money". Ceberus and GMAC must be in big big trouble. Too bad that they didn´t disclose the loan terms. But when a "smart" investor like Ceberus bought several subprime lender during the past 2 years and therefore has shown their brilliant expertise i assume the terms of the loan should be far from brutal (sarcasm off...). The clearest sign if the terms are "risk priced" will come to light when Citigroup fails to unload/syndicate them. No wonder Ceberus & Co are launching multi billion vulture funds...... Maybe they can ask Citigroup to invest when they buy some of the loans with a discount.. ;-). And after viewing this Rescap presentation / pdf from August the vultures are probably already rotating......

Das ganze klingt ein wenig nach der wenig erfolfversprechenden Formel "gutem Geld schlechtes hinterherwerfen". Ceberus und GMAC stecken wohl in existensziellen Schwierigkeiten. Was würde ich geben um die Kreditbestimmungen einsehen zu können. Nachdem Ceberus seine überragende Expertise dank der diversen Käufe im Subprimesektor binnen der letzten 24 Monate eindrucksvoll nachgewiesen hat sollten die Bedingungen aber milde ausfallen (Sarkasmus). Wir werden wohl erst erahnen können ob die Bestimmungen dem Risiko angemessen sind wenn Citiroup es schaffen sollte den Kredit zu syndizieren. Bei solchen Meldungen wundert es nicht das Ceberus & Co. gleichzeitig momentan Mrd für sogenannte "GeierFonds" einsammeln die in Schwierigkeit geratenen Kredite für einen Bruchteil des Nennwertes einsammeln. Evtl. kann Ceberus Citigroup ja in einem Jahr um ein Investment fragen ..... ;-). Und nachdem man sich diese Rescap Presentation / pdf vom August angesehen hat sind sicher schon einige Geier am kreisen....

Sept. 12 (Bloomberg) -- GMAC LLC, the lender that reported more than $1 billion of mortgage losses after General Motors Corp. sold a controlling stake last year, is getting as much as $21.4 billion in additional credit from Citigroup Inc. for auto and home loans.

Citigroup, the biggest U.S. bank, will make $14.4 billion available immediately and as much as $7 billion more if GMAC meets certain conditions, GMAC said in a regulatory filing yesterday. The agreement replaces a $10 billion asset-backed funding facility that Citigroup provided GMAC in August 2006. Detroit-based GMAC didn't disclose the terms of the financing.....

GMAC last month moved to inject $775 million into its Residential Capital LLC mortgage unit, known as ResCap, after rival lenders lost access to short-term financing amid the worst U.S. housing slump in 16 years.

The analysts said five-year GMAC credit-default swaps narrowed by 50 basis points to 520 to 545, signaling that investors now consider the company at less risk of defaulting on its debt.

Citigroup Ties
New York-based Citigroup is more than a lender to GMAC. It was part of the group led by Cerberus Capital Management LP that bought a 50.1 percent stake in GMAC last year from GM. Michael Klein, co-head of Citigroup's investment banking and trading group, is a member of GMAC's board.

Minneapolis-based ResCap ranked as the ninth-largest U.S. mortgage lender in the first half of this year, with $41 billion in new loans, according to industry newsletter Inside MBS & ABS. The unit reported losses of $1.15 billion in the past two quarters as defaults on subprime loans made to borrowers with low credit scores accelerated.

``We view today's disclosure as added evidence that GMAC is making an effort to provide funding support to its troubled mortgage operation,'' Kathleen Shanley, a fixed-income analyst at Gimme Credit LLC, wrote in a report to clients yesterday.

`Prudent' Funding
``With the current global credit market, the company decided this funding was prudent,'' said Gina Proia, a spokeswoman for GMAC. ``This gives us additional liquidity. It bolsters our financial flexibility.''

Countrywide, the biggest U.S. mortgage company, was forced to tap $11.5 billion of emergency financing last month to avert a cash shortage. Bank of America Corp. then stepped in with a $2 billion investment on Aug. 22, easing concern that Countrywide might end up in bankruptcy.....

The new credit, which Citigroup may syndicate out to other lenders, has a one-year term, compared with a three-year term for the previous facility, Proia said. A majority of the funds are earmarked for car loans and related securities, Proia said.

ResCap was borrowing $12.3 billion as of June 30 through an affiliate that issues asset-backed commercial paper, according to a presentation on its Web site ( see Rescap presentation link above)

`Good for GMAC'
``It's really good for GMAC,'' said Thomas Flaherty, who owns GMAC's 8 percent bonds due in 2031 as part of the $25 billion he manages at Aberdeen Asset Management in Philadelphia. ``This is a very difficult environment, a very tough market.''

"He´s in fine as long as i take my medication"

Cerberus, the New York-based buyout firm and hedge fund manager, led the $14.4 billion purchase last year of a 51 percent stake in GMAC. GM later injected $1 billion of capital into GMAC to make up for writedowns on mortgage assets at ResCap.

Further Details Home Depot Private Equity Deal

Business Week has a cover story Private Equity's White-Knuckle Deal about private equity in general and the Home Depot deal in special. I have filtered some of the Home Depot details but i suggest to read the entire story. This is some kind of follow up to the post Home Depot Hit As Credit Crunch Squeezes Deals

After hearing more of the details it wouldn´t surprise me if this deals will haunt Home Depot ......

Business Week hat eine Titelgeschichte zum Thema Private Equity Private Equity's White-Knuckle Deal und konzentriert sich hierbei besonders auf den modifizierten Deal von Home Depot. Der komplette Bericht ist lesenwert. Das gabze hier ist ne Art Vervollständigung zu meinem Post Home Depot Hit As Credit Crunch Squeezes Deals

Nachdem die letzten Details an Licht gekommen sind bin ich mir ziemlich sicher das dieser Deal und die Zusagen Home Depot noch jahrelang verfolgen und einholen wird.

After bashing the media almost every week i think it is appropriate to praise Business Week for warning about the risks associated with private equity in their cover story from October 2006 Gluttons At The Gate "A story of excess"

Nachdem ich ja beinahe wöchentlich auf die Medien für Ihre unterirdische Berichterstattung losgehe möchte ich diese Gelegenheit nutzen um ein ausdrückliches Lob an Business Week für Ihre Cover Story vom Oktober 2006 Gluttons At The Gate "A story of excess" die sich mit den Risiken von Private Equity auseinandersetzen.

After several more hours of furious bargaining, an accord was reached. The banks agreed to provide financing, including a reduced loan of $1 billion. Home Depot agreed to assume the loan payments if the firms were to default on it. And the buyout firms agreed to put more cash into the deal, pay the banks higher fees, and give Home Depot a 12.5% equity stake in HD Supply. The final price tag came to $8.5 billion.

The debt terms were revealing. BusinessWeek has learned that the package includes two loose types of funding that have flourished in recent years—exactly the kinds of loans and bonds that pundits had assumed were dead. The $1 billion loan was of a type called "covenant-lite," named for its easy repayment terms. And the deal included $1.3 billion in "payment-in-kind" (toggle)bonds, which allow the borrowers to pay off the debt with securities instead of cash.

Number Of The Day..... Toggle Bonds

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

A retreat from loans with easy terms could put a damper on private equity dealmaking. Covenant-lite loans burst on the scene a few years ago and quickly gained favor among buyout firms looking for easy money. Traditional loans carry strict requirements that dictate when the borrowers have to repay them. Some stipulate that the borrower's profitability must improve every year; if it doesn't, the lender has the right to renegotiate the loan at a higher interest rate or demand repayment immediately. Covenant-lite loans, by contrast, come with relatively few stipulations. Payment-in-kind bonds are just as loose, allowing borrowers to pay off the debt by issuing more securities. Such freewheeling terms are advantageous for borrowers but risky for the people holding the debt.

Investors threw caution to the winds until the credit crunch began, and the market for risky securities vanished overnight. The $8.3 billion in covenant-lite loans made in June shriveled to zero in August, according to Standard & Poor's Leveraged Commentary & Data (MHP ).

Number Of The Day.....Covenant Lite Loans

In 2004, there were just $100 million of such loans. But the total rose to $2.4 billion in 2005, $23.6 billion last year and $103.9 billion in the first half of this year.

He also agreed that Home Depot would guarantee a $2 billion covenant-lite loan for the buyers. The lower deal price certainly appealed to the buyout firms. The discussions were "all remarkably free of acrimony," says someone close to the deal.

Private equity firms have already embraced debt to a seemingly dangerous degree. On average they're paying 14.7 times the target companies' operating earnings, up from 3.8 in 2002, estimates Thomson Financial

> And this at times when earnings are at peak margins and not so depressed like in 2002 and a US recession in the cards..... Get ready to hire the distressed debt manager and float some funds in this segement....I´m just daydreaming how it will be if the distressed fund from Blackstone wants to buy some of the the Blackstone assets that are in trouble......

> Und das zu Zeiten wenn die Gewinnmargen bereits historicche Hochs erreichen und es nicht wie in 2002 noch gewaltige STeigerungsmöglichkeiten gibt. Dazu kommt noch das die US Wirtschaft fast zu 100% in die Rezession abgleiten wird bzw schon geglitten ist. ..... Höchste Zeit Manager die sich in notleidenden Krediten auskennen anzuheueren und neue Fonds für diese Kategorie aufzulegen..... Stelle mir gerade vor wie es wäre wenn der Fonds für notleidende Kredite von z.B. Blackstone Vermögenswerte von einem Blackstone Buyout Fonds kaufen möchte.....

Home Depot Hit As Credit Crunch Squeezes Deals

60 Days were enough to reduce the price by roughly 20 percent, force Home Depot to take an equity stake, guarantee some of the debt and eliminates lots of convenants that were given to the private equity buyer..... Look like the famous "private equity put" is still there but at a 30% lower pricelevel...... This deal looks similar to the Daimler/Ceberus/chrylser deal where Daimer was forced to step in to unload Chrylser.

60 Tage haben genügt um den Preis um 20% zu drücken, Home Deopt zu nötigen das sie entgegen dem ursprünglichen Plan eine Beteiligung behalten & noch zusätzlich für Schulden geradestehen müssen, die Kreditbestimmungen der Private Equity Käufer fast alle "lockeren Kreditbestimmungen" gestrichen worden sind usw......Sieht ganz so aus als wenn der sog. "Private Equity Put" der angeblich die Märkte nach unten absichert jetzt den Markt 30% tiefer absichert....... Dieser Deal ist fast ne 1:1 Kopie vom modifizierten Daimler/Ceberus/Chrylser Abschluß der Daimler ebenfalls zu ähnlichen Zugeständnissen genötigt hat um endlich Chrysler loszuwerden.

The global credit crunch has begun to put a squeeze on the buyout boom, with banks and private-equity firms forcing Home Depot Inc. to sell its struggling wholesale supply unit for much less than what had been agreed to just two months ago.

Home Depot's board yesterday agreed to sell Home Depot Supply for $8.5 billion to Bain Capital, Carlyle Group and Clayton, Dubilier & Rice, about 18% less than the price hammered out in June when the buyout boom was at its peak.

In addition, Home Depot itself will hold about 12.5% of the unit's equity, people familiar with the matter said, and guarantee some of the debt issued by the banks to finance the acquisition. That's significant because if the banks can't sell the debt in bond markets, and it sits on their balance sheet, they have to mark down its value, which some can ill-afford to do.

Just weeks ago, the buyout boom was a hugely profitable collaboration between private-equity firms and the Wall Street bankers who financed them. Now, amid the credit crunch, some private-equity firms and their bankers are at loggerheads as each camp tries to protect its bottom line, turning previously close allies against each other.

There are an estimated $400 billion in buyout deals working their way through the banking system. Wall Street committed to lend money for these deals as part of its plan to be in the "moving business," of packaging loans and equity stakes in the companies and selling them to investors, spreading out the risk of those transactions. With credit markets largely shut to big transactions, the banks have found themselves back in the old-fashioned "storage business," forced to keep the debt on their balance sheets and mark down its value.
Absorbing Write-Downs
In the process, the nation's banks might have to absorb tens of billions of dollars of write-downs. Such a toll would add to the pain of the far larger losses they are already toting up from the downturn in real estate and the meltdown in the market for mortgage securities.

That set the stage for the nasty squabble over HD Supply. The banks' argument: If the buyout firms could get a reduction in the price they were paying for the business -- Home Depot previously agreed to cut the price tag for the unit by about $1.3 billion to around $9 billion -- the banks should be able to change the terms of their financing for it and other deals. The buyout firms objected, saying a deal was a deal.

"This is what we pay them for," said one top buyout executive. "This is what underwriting is."

Caught in the middle are the companies that have agreed to be sold to buyout firms. Atlanta-based Home Depot, for instance, is suffering in part because of the downturn in the housing market and had planned to use the proceeds of the HD Supply sale to partially fund a $22.5 billion stock buyback plan. The $8.5 billion price tag will allow the retailer to go ahead with its buyback, a person familiar with the matter said, but it means that Home Depot will have sold the unit for little more than what it had spent to acquire the more than 40 wholesale contracting supply companies that make up the supply unit.

> More on the Home Depot buybacks / Mehr zu den Aktienrückkäufen von Home Depot

How Long Can Home Depot And Others Masked Poor Results With Buybacks?

Reviewing The Home Depot Buyback History.......

Among the features of the original HD Supply deal were many of the innovations private-equity firms have introduced in recent years in their pursuit of maximum flexibility. Those innovations denied the lenders many of the protections traditionally written into loan agreements. For example, there were almost no performance requirements set for HD Supply. If it chose not to use its cash to pay interest, the lenders would have no choice but to accept more debt instead of money.

> Here more on this issue that didn´t matter just 60 days ago....Convenant Lite Loans & Toggle Bonds

> Hier mehr zu diesem Thema das bis vor 60 Tagen noch überhaupt kein Problem gewesen ist....Convenant Lite Loans & Toggle Bonds

Unfortunately for the banks, investors have been on a buyers' strike recently and have refused to buy debt that gives them few rights.

Need for Flexibility
The banks argued that if the target company was so weak that the buyers needed all that flexibility, and refused to put in any terms and conditions, they shouldn't be buying the company in the first place. The lenders initially asked the private-equity firms to guarantee the debt involved in the deal -- which the private-equity firms say they refused to do.

A recent report from Citigroup's banking analyst estimated that J.P. Morgan was holding $40.8 billion of leveraged buyout financing, some of which may wind up on the bank's balance sheet if it can't syndicate the deals.

'Market Out' Provision
The banks had been on uncertain legal ground in pushing for changes in their commitments, according to lawyers who were involved in the deal and many who weren't. Rushing to establish market share in the buyout business, they largely dropped many standard financing conditions in deals struck for private-equity clients in the past few years. For instance, few recent deals have carried an arcane provision known as the "market out" that previously had allowed banks to pull out of commitment if the general financing market deteriorated. Even conditions for declaring an "out" for a specific target company's performance had been tightly drawn for the banks -- in contrast to the strengthened flexibility of private-equity firms when it comes to the ability to renegotiate or walk away.

> Goldman, JPMorgan Stuck With Debt They Can't Sell to Investors

Just three of the 40 biggest pending LBOs have an escape clause that lets the buyer back out if funding can't be arranged,

The revised deal reduces the amount of debt the banks provided to about $6 billion. As part of the deal, the private-equity firms agreed to accept higher interest rates on portions of the debt, which offset some of the firms' other concessions. The buyout firms will write checks for almost $2.5 billion. The banks, in turn, will try to raise the $6 billion in debt from investors so they don't have to provide the entire sum themselves.

Most in the market still expect the bulk of the remaining private-equity deals to be completed. They point to HD Supply and the controversy around it as unusual for two reasons. It is one of the few deals in which the value of the equity as well as the debt involved in the deal was underwater, given the original $10.3 billion price tag, and is unlikely to be resold at anything near the current price anytime in the next few years.

Still, investors are warily trying to determine if other buyout deals might fall victim to similar problems. They have been scrutinizing real-estate-intensive deals, such as the pending buyout of Hilton Hotels Corp. and Harrah's Entertainment Inc., as well as radio broadcaster Clear Channel Communications Inc., whose sector has been hurt in recent weeks.

And they are already toting up losses that the banks will have to put on their books. In the $27 billion deal for First Data, for instance, some investors are figuring that the debt issued in connection with the deal is already worth 10% to 13% less than envisioned. That could mean seven banks sharing paper losses of more than $2 billion. The last-minute accord on the Home Depot's unit, with a reduction in the amount of debt, offers a potential road map for other deals that would avoid drastic write-downs.

Not So Smart "In an era of easy money, the pros forgot that the party can't last forever "

What a difference 6 month made..... It was in early February when Business Week ran this cover story It's A Low, Low, Low, Low-Rate World .

Looks like the "Cover Story Indicator" has worked once more.....

Was doch 6 Monate für einen Unterschied ausmachen.....Anfang Februar hat Business Week noch die folgende Titelgeschichte It's A Low, Low, Low, Low-Rate World gebracht.

Es sieht so aus als wenn der "Cover Story Indicator" mal wieder ganze Arbeit geleistet hat.
Not So Smart / In an era of easy money, the pros forgot that the party can't last forever

The boasting and bluster that marked the just-ended era of easy money varied depending on the speaker and his stake in the boom. But the underlying message was consistent: This time it's different. When it came to the hazards associated with borrowing, the old rules no longer applied.

The titans of home loans announced they had perfected software that could spit out interest rates and fee structures for even the least reliable of borrowers. The algorithms, they claimed, couldn't fail. With similar bravado, buyout firms bid up private equity deals, arguing that investors had an insatiable appetite for the increasingly risky and mammoth loans used to fund them. "I don't think it's a bubble," David M. Rubenstein of Carlyle Group told the Financial Times in an interview last December. "I think really what's happening now is that people are beginning to use a different investment technique, and this investment technique, private equity, adds real value."

> This chart from Bespoke shows how well timed the "Low, Low......Rate World" cover was.....

> Dieser Chart von Bespoke zeigt wie gut die Titelgeschichte "Low, Low, ..Rate World" abgepaßt war.

Hedge funds were all too happy to enable the leverage arms race. They, too, borrowed to the max so they could gorge on the debt that financed the housing and buyout booms. "The consumer has to be an idiot to take on those loans," John Devaney, chief executive of United Capital Asset Management, said in May, referring to dicey adjustable-rate mortgages. But since there were plenty of "idiots" out there, and legions of lenders eager to serve them, Devaney and other hedge fund managers eagerly devoured the securities confected by investment banks from batches of dubious home loans. This securitization, the argument went, would spread the risk far beyond banks and mortgage companies. In March, Devaney bragged that mortgage-backed securities were one of his "best-performing investments.

"It didn't work out that way. In June, Devaney's Horizon funds booked a loss of more than 30%, according to Hedge Fund Alert. Shortly after, United Capital suspended redemption requests by investors trying to pull out. Devaney did not return calls for comment.

> maybe he is the guy on the cover.......:-)

> ist wahrscheinlich der Typ auf dem Cover :-)

Making sense of this mess is daunting. One good place to start: the ways various financial players indulged in layer upon layer of leverage, much of it far from transparent. Mortgage lenders threw out common sense underwriting standards. Wall Street sliced and diced the loans, creating the illusion that risk somehow disappeared in the process. Hedge funds then multiplied the leverage by borrowing copiously to buy securities based on the rearranged mortgages. In their version of the game, private equity firms used loads of debt to launch unprecedented buyouts.

bigger / größer

> Looks "contained"´to me....

> Sieht für mich ziemlich "contained" aus......

What some of the smartest guys in each of these fields seemed to forget is that new paradigms can crumble suddenly. Many miscalculated how long the period of easy credit would persist.

Mortgage companies argued their algorithms provided near-perfect precision. "We have a wealth of information we didn't have before," Joe Anderson, then a senior Countrywide executive, said in a 2005 interview with BusinessWeek. "We understand the data and can price that risk."

PRIVATE EQUITY: `A GOLDEN AGE'
As recently as April, buyout legend Henry Kravis proclaimed a "golden age" of private equity. Perhaps he should have called it a golden age of CLOs—collataralized loan obligations.

Like mortgage lenders, the giants of private equity have relied on complicated investment pools to fund their binge. CLOs are cousins of collateralized debt obligations. Managers of the investment pools buy groups of risky, junk-rated loans from banks that have financed buyouts by Kravis and his competitors. The CLOs package the loans, then divide them into risk levels. While the individual loans carry low credit ratings, three-fourths of the securities marketed by CLOs magically boast AAA marks. (That's because some investors give up extra yield in exchange for better protection against losses.)

The financial alchemy has allowed private equity firms to attract a whole new base of investors, including pension funds and insurance companies that never would have bought those risky loans outright. U.S. CLOs raised $100 billion in 2006, quadruple the amount two years earlier.

Buyout firms have generally fronted 30% of the equity in recent deals, vs. just 15% two decades ago. But that doesn't mean firms have been more cautious. Steeled by the seemingly insatiable demand for CLOs, they became bolder and bolder in the deals they pursued. After Kohlberg Kravis Roberts & Co. and Texas Pacific Group's $44 billion bid for Texas energy giantTXU in February, analysts began putting odds on imagined future megabillion-dollar targets like Home Depot Inc. (HD )

As private equity firms bid up the prices for ever-larger LBOs, the transactions began getting riskier. A key measure of leverage, a company's total debt divided by operating earnings, skyrocketed from 4.7 in 2004 to 7.0 in the second quarter of 2007, according to Standard & Poor's (MHP ) LCD. Meanwhile, the ability of companies to cover the interest payments of that debt dropped sharply; the ratio of profits to interest fell from 3.4 to 1.8 in that period.

> It is getting worse if you consider that profit margins are close to record highs and the economy is now tanking.... So there is almost no room for error.....

> Das ganze wird noch dramtischer wenn man berücksichtigt das die Firmen momentan noch Gewinnmargen nahe der historischen Hochs haben und die Wirtscahft sich gleichzeitig abschwächt bzw. wie in den USA sogar abschmiert.... Nicht viel Raum für Fehler......

At the same time, loan terms got looser. For example, in the buyouts of Freescale Semiconductor and retailer Claire's Stores (CLE ), LBO firms peddled bonds that allowed the companies to postpone interest payments until the bonds matured—a previously unheard of feature. Such stipulations applied to 10% of all junk bonds sold in 2007, vs. virtually none 18 months earlier, according to Lehman.

The red-hot demand for even the junkiest of loans allowed many firms to delude themselves into thinking they could endlessly pursue deals. In the three months through July 31, firms announced $254 billion in buyouts, as much as in 2004 and 2005 combined, according to Thomson Financial (TOC ). One credit crunch later, the market for LBO financing has evaporated. Investors won't buy the loans at current prices, leaving banks on the hook for $300 billion in loans to buyout artists.