Walden Siew

Junk Bonds

Credit markets today have healed after the entire U.S. junk bond market traded at distressed debt levels suggesting a substantial risk of default. Those bond prices have since recovered and now offer investors returns of 40 percent to lead major asset classes.

Rising Stocks

The U.S. stock market too has recovered lost ground, with financial stocks leading the charge. The S&P 500 Index has rallied for most of this year. The Dow Jones industrial average <.DJI> now trades around 9,300 -- up sharply from a 2009 closing low at 6,547.05, but down only about 15 percent from its close at 10,917.51 on the day of Lehman's bankruptcy filing.

Financial Shares

Financial shares have led the charge, including gains by Goldman Sachs, Citigroup, JPMorgan Chase and Bank of America.

Safe Havens

Safe haven securities, such as gold and U.S. Treasuries, reflect the rally in other markets.

CDOs

The market for giant bonds made up of underlying subprime mortgages, consumer debt and other assets is showing signs of life but no where near peaks reached in 2007 and prior years, despite signs of rebound in other corners of the bond market. Many experts believe structured bonds backed by higher quality assets will need to recover before a full-fledged recovery can take shape.

“Dear Timmy, we are happy to be able to pay back the $25 billion you lent us. We hope you enjoyed the experience as much as we did.”

That's JPMorgan Chase CEO Jamie Dimon's biting sense of humor on display yesterday as he read a  mock letter to U.S. Treasury Secretary Timothy Geithner before the Annual NYU International Hospitality Industry Investment Conference in New York. Dimon's sarcastic tone shocked some participants and cheered others, according to sources who attended the meeting.

"I congratulate him not only for his candor but for his wit," said Mark Grant, managing director of structured finance at Southwest Securities in Dallas. "The fact that Jamie Dimon had the self composure, the sense of humor and the fortitude to make such a statement in public not only made me smile but it reminded me of days seemingly long past when men stood up on their own two feet and played the Great Game with style."

The Wall Street Examiner, a blog of financial analysis and commentary, characterized Dimon's remarks in a different light, calling it "the new and taunting face of state capitalism in America. "

Dimon, a combative executive who took up boxing lessons before he joined JPMorgan, has in the past referred to TARP funds as a  "scarlet letter" and also called the $25 billion that the Treasury forced JPMorgan to take as a "TARP baby."

Dimon repeatedly has said the bank did not want to take the money. However, Wall Street banks including JPMorgan accepted the federal funds last year after the collapse of Lehman Brothers to help alleviate concerns about the health of bank balance sheets.

(Picture of Dimon at Business Council in Dallas by Reuters photographer Jessica Rinaldi; Geithner in China shown in pool photo)

Roman Catholics have fish Fridays. Boxing fans have Friday Night Fights. For distressed investors, like Jon Winick, president of Clark Street Capital, there's Friday night Failure. 
 
"You can count on Friday failures for the next six to twelve months," Winick said at a distressed investing conference in New York this week. He forecasts bank failures to rise to 200 through next year.
 
There have been 14 bank failures so far this year, according to the Federal Deposit Insurance Corp, with filings every Friday since Jan. 16 after the year end and New Year's Day holidays.
    
The FDIC seized 25 banks last year. In just the first seven weeks of 2009, the 14 bank failures mean the FDIC is on pace to close more than 100 banks in 2009.
     
Distressed investors say they are expecting a record wave of bankruptcies this year, marking unprecedented opportunity for investors and a feeding frenzy on Fridays. The filings on Fridays are procedural, as the FDIC posts the failures at the end of the week. That allows the declaring bank to give regulators the weekend to sort things out, and it prevents a big run on the bank because branches are closed.
 
Brad Hunter, national director of consulting at Metrostudy, a housing industry research firm, thinks things are just getting started. He said bank takeovers ultimately could exceed 1,000. 
 
"Option ARM loans are coming due, and that will trigger another wave of foreclosure," he said.

Top-class bankruptcy lawyers, vulture investors and credit experts revealed a range of emotions at a bankruptcy conference on Thursday, from doom and gloom to subdued confidence, but some comments bordered on outright glee.

Reflecting on the prospects for distressed investing opportunities this year, Michael Psaros, managing partner at KPS Capital Partners, was blunt.

"We are going to invest an awful lot of money this year," Psaros said, during a Dow Jones restructuring and turnaround conference in New York. "We're just very excited about this year and next."

KPS Capital, which manages special situations funds and private equity funds with capital exceeding $1.8 billion, is ramping up its investments, he said.

Asked whether investors should weigh creditor interests, shareholders' concerns, company stakeholder views or even the interests of the country, Eric Zinterhofer, senior partner with Apollo Management, said distressed debt investors will pursue a strategy based on the best "dispassionate distribution of capital" in making their investment decisions.

Various experts said distressed opportunities may last between three to five years, as the U.S. recession continues to grip consumers and companies amid tight lending conditions.

Daniel Loeb, chief executive officer of Third Point LLC, an investment adviser with about $4 billion of assets under management, told participants we're at the "bottom of first inning" in the crisis. That means for bankruptcy lawyers, "you're probably not going to see your family much."

But where are the best investing opportunities? Most investors declined to tip their hands, but Loeb offered one industry to avoid.

"Gambling may be the world's second oldest profession and people seem to really like to do it," he said, eliciting laughter from the crowd of about 180 finance and legal professionals. "No matter how bad of a blackjack addict you are, it seems lower on the list than food and paying your electric bill."

"We've been staying away from the gaming sector because it's not going to be an early recoverer," he said.

One sector they are studying? The auto industry and any opportunities with General Motors, GMAC and other carmakers that are getting support through the government's Term-Asset Backed Securities Loan Facility, known as TALF.

"If the government is going to be giving away money, it's our fiduciary responsibility to take it on behalf of our investors," he told Reuters in a separate interview.

Government-backed lending programs around the world have sparked a revival in financial and corporate borrowing -- for now. Worldwide sales of corporate bonds rose to $251 billion in January, the highest level since May 2008, marking the first signs of a thaw after a long global capital markets winter. The following are the global sales totals and a list of the biggest borrowers, according to Thomson Reuters data.

Read the full story here.

Top Temporary Liquidity Guarantee Program
(TLGP) Issuers

Corporate and Government Guaranteed Debt - Global

"O, be some other name! That which we call a rose by any other name would smell as sweet." --Romeo and Juliet

Debt analysts told an audience at New York University last week that the maligned securities known as collateralized debt obligations can still help diversify investment portfolios and disperse risk when used correctly. But first the markets will have to come to terms with the negative aura surrounding CDOs, which have been blamed for their role in the housing and credit crisis.

"CDOs will be back at some point. They might have a different name...," Stanford University professor Darrell Duffie said, trailing off to a roomful of laughter at a credit conference sponsored by Moody's and NYU.

Duffie, president-elect of the American Finance Association, has a suggestion: "CRTs," or Credit Risk Transfer products. That's how he referred to CDOs and other securitized products throughout his keynote presentation, "Credit Risk Transfer: Implications for Financial Efficiency and Stability."

A name is no small thing -- just ask author and fund manager Antoine van Agtmael. In 1981, he pioneered investing in what was then known as the "Third World." But as that didn't sound very appealing, he created a new term. Ever heard of a little something called "emerging markets?"

Morgan Stanley's Vishwanath Tirupattur had a creative excuse for missing work on Tuesday.

While watching the finals of the men's NCAA basketball tournament, the senior bond analyst fell asleep on his couch after the game went late into overtime.

When he woke up, the senior collateralized debt obligation analyst winced in pain. (CDOs are giant bonds that largely fed the leveraged buyout and mergers-and-acquisitions boom until last year, when the collapse of the structures helped spark a crisis in credit markets.)

"Vishy," as he goes by, had sprained his back and neck. When colleagues asked why he didn't show up at work the next day, Tirupattur claimed "a sport's injury."

The analyst, a Memphis fan, said he felt more pain when Memphis collapsed in the waning seconds of the game, missing several free throws, allowing Kansas to tie the game and later win 75-68 in overtime to claim the national championship.

Business could hardly be slower in the junk bond market, but that means the bankruptcy business is set to go into overdrive.

Global high-yield bond sales are off to the slowest start since the 1991 U.S. recession as an anemic U.S. economy, worldwide credit crunch and no appetite for risk put the squeeze on corporations and investors alike.

That's not only a striking change from the go-go days of the leveraged buy-out boom, it is a sign Chapter 11 filings are about to shoot higher. In previous cycles, the years following a crest in junk bond sales have been typically followed by a surge in defaults and, finally, bankruptcies.

The party's already started in 2008. Sixteen publicly traded companies have filed for bankruptcy this year. At the current pace, nearly 100 public companies may file for Chapter 11 protection this year, which would be the most since 2003.

"2008 will be a busy year for insolvency professionals," says Sam Gerdano, executive director of the American Bankruptcy Institute. "Whether it's a record year remains to be seen."