Commentaries
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Nothing says recovery like par
It’s not there yet, but the derivatives index that references leveraged loans – the debt of choice for big corporate buyouts during the boom – is just a few cents away from par.
The new, cleaner Markit LCDX index that launched earlier this month is already at 98 1/2 cents, while the older series 10 that included such bad boys as bankrupt General Growth Properties, is trading a little over 97 cents. Astonishing really, considering the series 10 tanked to below 80 cents last year.
Such lofty levels are sure to entice new deals since companies hate to pay a discount when raising funds. Makes you wonder if new collateralized debt obligations are around the corner.
Another EQT buyout goes under the hammer
Banks will shortly conduct an auction to settle credit default-swaps on debt issued by SSP, the catering group owned by private equity group EQT. SSP recently failed to make a debt payment, according to derivatives trade body ISDA.
It’s not the first EQT-controlled leveraged buyout to run into trouble and trigger a credit event. The first loan CDS in Europe was for EQT’s ceramics products manufacturer Sanitec. The Sanitec recovery was a miserable 33 percent, but that is still by far the highest recovery to date in a European leveraged loan CDS auction.
Leveraged loans making a comeback?
The $4 billion financing for Warner-Chilcott’s acquisition for P&G’s drug business is another sign of credit markets coming back to an even keel, but it’s not clear how much juice the banks have to keep the momentum going if they don’t find investors for the debt.
The Wall Street Journal reports that six banks, including JP Morgan and Bank of America, will provide the financing, $3 billion going to the acquisition and $1 billion to refinance existing Warner-Chilcott debt.
Delaying the moment of truth
Procrastination is not a virtue, except when it involves billions of dollars of debt.
A mantra has taken hold of lenders sitting on loan piles: amend and extend. Or as lawyers involved in negotiations between borrowers and lenders say: delay and pray.
from Neil Unmack:
Finance’s 80s experiment shows cracks
We may never see mullet hairstyles or other weird fashions again, but in finance, there is a 1980s revival.
   The International Accounting Standards Board has gone back to the future, allowing banks to reclassify assets they previously had to mark to market as loans and receivables, valued at amortized cost. That effectively allowed them to avoid the embarrassment of mark-to-market and return to the historic cost accounting of a quarter-century ago.
   The reasons are plausible enough: many asset classes were quoted at nominal, distressed sale prices only. But you ignore market prices at your peril: problems loans are left to fester, exposing investors to the cost of loan managers (understandably) taking a rosy view of advances they may have approved.
   Many European banks took advantage of the IASB's lenience to whip doubtful assets off their trading books -- not just plain debt, but collateralized loan obligations, leveraged loans and other doubtful exotica. Now Deutsche Bank <DBKGn.DE> has indicated how this stuff is doing, and the answer is: badly.
   Deutsche's pretty figures would have been quite spoiled had it taken a further 1.4 billion euros of unrealized losses on the 37 billion euros of assets it reclassified since last October.
   The discrepancy between the carrying value and fair value shouldn't be a surprise -- that was the whole point of the changes. Unfortunately, the market is proving to have been right in pricing some of these assets as junk, because the losses in the reclassified book are starting to show.
   More than half of Deutsche's 1 billion euro provisions for credit losses in the second quarter derived from these reclassified assets. Some 2 billion euros of the 3.2 billion euro rise in problem loans had previously been reclassified.
   Deutsche is not alone. RBS' <RBS.L> impairment losses on reclassified assets rose to 747 million pounds in the first three months of the year, up from 466 million at the end of last year. UBS is carrying assets reclassified last year at 24.7 billion Swiss francs, versus the fair value of 20.6 billion.
   The accounting changes are not designed to bamboozle investors, even though that is frequently the result. Losses may have been deferred, but they will happen. The question for banks is whether they can generate profits quickly enough to offset them. Market prices that seemed ridiculous in the depths of the panic may turn out not to have been the equivalent of the mullet after all.
Junk bond market, you’re the only hope
Ok, that may be overstating it, but Fitch Ratings released a report on leverage loan recovery ratings – ie how much loan holders can expect to get back should a company default and the findings are hardly surprising: many investors can expect to get back less than they had thought when they invested in this secured debt.
RR1 means investors can expect a recovery of 90-100%, and RR6 0-10%.
A big reason for this is there’s often a lack of unsecured junk bonds below the leverage loans to absorb losses in case of default – another symptom of the boom time.
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The Wall
