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from Breakingviews:

ECB Greek loss dodge heralds end of bond buying

By Neil Unmack

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The European Central Bank will avoid losses on Greek bonds through a legal manoeuvre. Such special treatment will not please the private bondholders who are being asked to take losses on their Greek debt. It might also bring the ECB’s bond-buying programme to an end.

The programme was divisive from the start, angering those – mostly German central bankers – who saw it as breaching the principle that the ECB shouldn’t help finance budget deficits. The second Greek bailout, based on a 200 billion euro debt swap, has introduced a new controversy: would the ECB take losses alongside private creditors – thus de facto handing out money to Greece – or get paid back in full, thus angering the other bondholders, coerced into accepting to take losses?

The ECB is trying for the middle ground, but it won’t please everyone. The central-bank owned Greek bonds will be exchanged for new ones that won’t be legally included in the restructuring. So the ECB will be repaid in full. But it then stands to make a profit out of the debt crisis – which would look like a provocation. So the idea is that the bank would over time give those profits back to its shareholders – the euro zone governments. They then could in turn use the money to refinance Greece.

But the fact will remain that private creditors were forced to take losses while the ECB wasn’t. In that context future bond purchases will be self-defeating. The more bonds bought by the ECB, the greater the share of debt deemed untouchable, the greater the risks borne by the other creditors, and the higher the yields could be pushed as the proportion of private sector bondholders shrinks further.

Yet this may not ultimately matter too much. The ECB now owns about 219 billion euros of peripheral bonds, of which up to 100 billion are estimated to be Italian bonds – only 5 percent of that country’s outstanding public debt. The programme may have been rendered obsolete by the ECB’s other crisis-fighting tool – long-term ultra-cheap bank loans injections - which has proved more effective in fighting contagion. But it still means that one of the tools in the ECB’s crisis box has been blunted.

from MacroScope:

European rescue: Who benefits?

The words "European bailout" normally conjure up images of inefficient public sectors, bloated pensions, corrupt governments. But market analyst John Hussman, in a recent research note cited here by Barry Ritholtz, says the reality is a bit more complicated:

The attempt to rescue distressed European debt by imposing heavy austerity on European people is largely driven by the desire to rescue bank bondholders from losses. Had banks not taken on spectacular amounts of leverage (encouraged by a misguided regulatory environment that required zero capital to be held against sovereign debt), European budget imbalances would have bit far sooner, and would have provoked corrective action years ago.

In other words, even if state actors mishandled government finances, Wall Street was, at the very least, an all-too-willing enabler.

from Breakingviews:

Tyco sets new example for conglomerate bondholders

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Shareholders appreciate a good breakup story and Tyco is giving them more to love. The industrial manufacturing group dismantled itself into three parts in 2007. Now, one of them, Tyco International, is being carved into three more pieces. The company's shares gained on Monday amid a broad market selloff. But while equity investors often see value in a less sprawling conglomerate, the same isn't always true for bondholders.

Corporate debt is often an afterthought in breakups, or worse, a tool to help one unit look better at the expense of another. Tyco knows. Last time around, an ugly fight with creditors ensued after it tried to buy them out on the cheap, nearly derailing the dismantling. This time, it is paying them more heed.

Other lenders haven't fared as well. Sunoco, for example, retained some $3 billion of investment-grade borrowings when it spun off its coal mining subsidiary. Now, the debt is rated junk and the company is scrambling to exit the refining business.

Meanwhile, at Dynegy, creditors are in a pitched battle with activist investor Carl Icahn, over a split of sorts. The company transferred assets away from the holding company and, importantly, out of the reach of bondholders should Dynegy ever stumble into bankruptcy -- something management warned was a real danger before Icahn acquired a significant minority stake.

Tyco seems to have learned a lesson. In addition to historical image problems created by former boss Dennis Kozlowski and his $6,000 shower curtains, the company alienated debt investors four years ago. This time, by promising to redistribute $4 billion of borrowings relatively fairly among the residential alarms, pipeline widgets and fire and security units to retain their investment-grade status, Tyco seems to be going out of its way to keep bondholders on its side.

Investors in other conglomerates may not be so lucky. Over 60 companies have announced spinoffs this year and more seem destined to come. Weak debt covenants held over from the boom -- and more recent ones -- mean bondholders should be mindful of their vulnerability amid breakup fever. Tyco's got a second chance. Others may not.

from Breakingviews:

Time to let CIT go

CIT is again trying to stave off what should be the inevitable at this point: bankruptcy. The lender, best known for its loans to small and medium-sized businesses, has been in hot water for years.

After a $2.3 billion government injection and an emergency $3 billion lifeline from bondholders just this summer, the company is still scrambling to stay afloat.

And with good reason. It hasn't presented an acceptable debt restructuring plan to its white-knight bondholders, and an October 1 deadline is looming large. It either puts up or faces almost certain default.

That it hasn't been able to conjure up a plan before the deadline does little to inspire confidence. Neither does the company's decision earlier this month to keep on for another year its chief executive, Jeffrey Peek, who led the company down the road of excessive risk-taking and billion dollar losses in the first place.

At this point, it's time to call it a day -- something the company itself is clearly considering.

CIT is preparing an exchange offer that could wipe out 30 to 40 percent of its outstanding debt by issuing new debt and essentially handing over the keys to the company (sorry, shareholders). But who wants a company that still hasn't figured out a way to rebuild a broken business model based on access to cheap short-term funding?

Even if the plan under consideration passes the muster of the bondholder steering committee, the tough job of convincing all the other bondholders to accept the offering still lies ahead, distracting management even further from what should be its core mission of figuring out how to become a viable company again.

from Commentaries:

CIT far from out of the woods

It looks like CIT has once again narrowly escaped falling over the edge after a group of bondholders agreed to extend $3 billion to the troubled lender in exchange for high-quality collateral and juicy interest rates. The thing is CIT still needs to sort out its failed business model based on borrowing in credit markets to provide financing to small and medium-sized businesses. But as we've seen again and again in this credit crisis, relying overwhelmingly on markets can sink even well established banks - think Northern Rock.

CIT's alternatives, however, are few. Its deposit base is small, and as David Hendler notes via Bloomberg, building up it up isn't easy or cheap.

“We still think it is a losing effort in the intermediate term although some bondholders may end up better than others with this structure,” said David Hendler, an analyst at CreditSights Inc. in New York. “The wholesale model is dead and creating a branch deposit system from scratch is too expensive for CIT and takes too long to build to help any time soon.”

For the bondholders, it looks like it's a risk worth taking since the bridge financing at least gives them a claim on what the Wall Street Journal calls CIT's "highest quality collateral" and an interest payment of 10 percentage points over Libor.

More from the Journal:

The new loan could act like a "bridge" to a series of debt-exchange offers that CIT would launch in order to get bondholders to swap some of their bonds for equity in the company or for new debt that matures later.

On Sunday afternoon, six of CIT's largest bondholders, including Pacific Investment Management Co., Oaktree Capital, Silver Point Capital and Centerbridge Partners, agreed to the proposal, which would see investors providing $3 billion in funds and committing to other steps to help strengthen CIT's financial position. Other bondholders, including Capital Research & Management and Baupost Group, are also part of the proposal.

Each bondholder would take up a portion of the loan, which isn't evenly divided among the six-fund group. Each one is on the hook for hundreds of millions of dollars each, said a person involved in the talks.

Early readings are the financial markets are cheered by the bondholder rescue, but expect more bumps along this road as CIT attempts to transform itself into a viable lender.

from Commentaries:

GM drives route 363, bondholders beware

     The rough justice meted out to General Motors bondholders may have short-circuited the bankruptcy process, but it has damaged the confidence that holders of other debt can have in their right to fair treatment.     There will be a long-term cost, both to borrowers and lenders as a result. Key to this has been the use -- by both GM and Chrysler -- of section 363 of Chapter 11 of the U.S. bankruptcy code. By invoking the "emergency" need to restructure the companies, this section has allowed the automakers to speed through the sale of the viable parts of the businesses to new companies and leave the debt behind.     While route 363 by-passes lengthy court hearings, its use to sell prime assets drives straight through the spirit of the code, which was meant to allow companies going through a Chapter 11 to jettison non-core assets quickly as part of a longer and wider reorganisation. It was not designed to cream off the best ones.     Lawyers are already invoking the Chrysler and GM examples to try and get round long-established rules for reorganisations.     The result would be to deprive bond investors of their rights in a company restructuring.     GM bondholders who would normally have enjoyed preferred credit status in a Chapter 11 were railroaded by the Obama administration into giving the quick-fire sale the go-ahead, on the grounds that this was a one-off.     From GM's point of view, the process has worked well, allowing the business to emerge only 40 days after filing for bankruptcy. The cost of the turnaround has been $50 billion in emergency government financing. The longer-term cost in the much bigger market for corporate debt may be far larger.