Monday, October 08, 2007

UFOs (or Unidentified Financing Objects) / FT

The FT should trademark the term UFOs (or Unidentified Financing Objects). Fantastic! This is a follow up on No Kidding.... More Off Balance Sheet Vehicles For Citigroup & Banks use discounts to tempt ‘vulture funds’ / FT.

Die FT sollte sich den Begriff UFOs (or Unidentified Financing Objects) urheberrechtlich schützen lassen. Genial! Das Ganze ist eine Ergänzung zu den vorherigen Posts No Kidding.... More Off Balance Sheet Vehicles For Citigroup & Banks use discounts to tempt ‘vulture funds’ / FT

The Real Deal: beware the banks’ UFOs / FT
Want to get rid of your leveraged loans quickly? Don’t sweat.

All you have to do is leverage up the leverage by creating a new vehicle. Let’s call them UFOs (or Unidentified Financing Objects).

These have a standard CLO structure, but they remain private, are controlled by the banks and are designed to help shift the catalogue of leveraged loans stuck on their balance sheets from financing deals.

Here’s how they work.

The bank holding the loans teams up with a hedge fund, or a buy-out group. Together, they create a UFO to buy selective loans at the current market discount, say 96 cents in the dollar, from themselves.

The bank, which owns the loans at par value, takes the write-off, but gets to hold on to the better quality debt tranches, which it can carry at a much lower cost of capital.

The hedge fund/buyout group takes the highly-leveraged “first loss” or an equity slice of the UFO, in the hope that it can make profit on the underlying loans when they return to par value at maturity or when the debt is refinanced.

The banks say these UFOs are a pure creative genius, that they do the market a favour by creating liquidity where there is none, and help lift the secondary prices of the loans by demonstrating demand.

Meanwhile, they can get a substantial return on the senior slices of debt - at least relative to their cost of funding and the risk capital they are required to hold.

But the credit squeeze means there are hardly any new CLOs to absorb the current loans on offer, so it’s only the bank-sponsored UFOs that can snap up these loans.

It’s like selling your house and giving the buyer the financing. Have you really offloaded it, and is the price a real market price?

These UFOs are not a reflection of real demand driving improving leveraged loan prices.

These new vehicles being created in a stagnant market are merely a stealthy way of financially-engineering the burden of costly risk away from the bank.

It all looks a bit like a close encounter with the wrong kind. Another leveraged solution to an already leveraged problem isn’t a way out of the credit crunch.


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Blogger jmf said...

Herb Greenberg

What Citigroup didn't say
Commentary: investors need to go beyond company spin

1:44 AM  
Blogger jmf said...

Banks desperately discount CLOs

Investment banks are discounting debt securities to help them clear out billions of dollars of assets they had been holding for syndication. Last week, Deutsche Bank sold a $2bn CLO at a discount and for half its usual fee. Credit Suisse sold a similar $1.7bn CLO.

To reflect the market’s lower prices, Deutsche’s deal priced the underlying loans at 98.5 per cent of face value, charging a 0.5 per cent fee. The underlying portfolio for the deal is also static, meaning the management fee is slashed to just 0.05 per cent, a tenth of the usual. The deals help remove an overhang of loans in bank warehouses that has contributed to depressed loan prices as banks have been forced to liquidate CLO deals lacking buyers. It also frees up bank capacity, allowing them to create new warehouses and attempt to restart the market if conditions improve.

2:04 AM  
Blogger jmf said...

Captive bidding at the auction: How bond vigilantism was swamped

2:09 AM  
Blogger jmf said...

Goldman Record Income Shows New Wall Street in Market Shakeout

2:39 AM  
Blogger jmf said...

Goldman fund buys 9.99% stake in U.K. fund manager Winton Capital: Financial Times

A new funds set up by Goldman Sachs has bought a stake in Winton Capital Management, a $10 billion London hedge fund manager, The Financial Times reports Sunday on its Web site.

The Goldman fund bought 9.99% cent of Winton at the end of July. The price is unclear, but similar deals have valued hedge fund managers at between 5% and 17% of assets, which would value the Goldman stake at $50 million to $170 million, the FT said

3:14 AM  
Anonymous Anonymous said...

They can do all the shenanigans they want, and it's all legal. The SEC will help them cook the books if necessary.

5:22 AM  
Anonymous Anonymous said...

Hola jmf,

I only have one thing to say about that:


1:58 PM  
Blogger jmf said...

Moin Edgar,

i have often problems to find any words for the things going on....

10:58 PM  

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