Sunday, July 1, 2007

Dodged the Bullet on That One?????

Now that the Bear Stearns issue concerning two highly leveraged hedge funds is behind us (one is going to be bailed out, the other will probably fail), the debt markets appear to have dodged a bullet, and everyone is more knowledgable about CDOs and CLOs it may make some sense to review the credit market news in the last two weeks just to see how things are going.

The following is a list of companies from the Wall Street Journal that recently had to cancel leveraged buyouts (LBO) because they could not obtain financing because what was acceptable in the credit markets a month ago is not acceptable today.

. . . . investors rejected a $3.6 billion buyout-related bond-and-loan deal by U.S. Foodservice Inc. . . . . when the underwriters began to shop the offering around two weeks ago, they met a frosty reception from analysts and portfolio managers at big mutual-fund companies and other potential buyers.

Catalyst Paper Corp., citing "adverse" market conditions, scrapped a $200 million offering of junk bonds

underwriters delayed the launch of a buyout-financing deal for Myers Industries Inc. in the hope that the market would settle down in coming days.

Magnum Coal Co. became the latest company to postpone a junk-bond offering, this one for $350 million.

In Europe, Arcelor Finance put off its plans to issue more than $1.34 billion in bonds, citing the turbulent debt market.

In Malaysia, shipping company MISC Bhd. put plans for a $750 million bond offering on the back burner.

How about some hedge fund news from some place other than Bear Stearns. In England from the WSJ:

The London fund, Caliber Global Investment Ltd., announced it was shutting down because of souring investments in bonds backed by mortgages to American homeowners with sketchy credit. . . . Caliber, which listed on the London Stock Exchange in June 2005, lost 53% of its value. It said it will unwind the fund and attempt to return about $900 million to investors in the next 12 months. The company said in a statement there was "insufficient demand currently for investment through listed investment companies exposed to this asset class."

From the New York Post:

Caliber's collapse is the second example within the week of the spreading woes from subprime mortgages, as Queens Walk Investment, a London-based publicly traded mortgage investment fund managed by Cheyne Capital, reported a $91 million annual loss.

How about some bond rating news just to make it more interesting. From the Yahoo Finance:

Fitch Ratings has downgraded 11 classes of securities from Countrywide Asset-Backed Securitizations (CWABS) series 2006-SPS1.

These consist entirely of second liens extended to sub-prime borrowers on one- to four-family residential properties and certain other property and assets.

The impact of the slowdown in the housing market has been particularly evident in highly leveraged subprime borrowers, and delinquency and losses to date for series 2006-SPS1 have been significantly higher than initially expected. After 12 months of seasoning, losses to date as a percentage of the original pool balance are 9.86%. Approximately 14% of the outstanding pool balance is delinquent. Due to the high percentage of losses to date, the cumulative loss trigger will likely fail for the life of the transaction. The failed trigger will generally maintain a sequential allocation of principal with the exception of principal cashflow from the subsequent recoveries of charged-off loans, which may be allocated to subordinate bonds. Fitch expects the amount of principal cashflow from subsequent recoveries to be limited.

While the subordinate classes are expected to incur principal writedowns - as reflected by their distressed ratings - the failed triggers and sequential principal allocation should help mitigate some of the risk of the weak collateral performance for the senior classes.

What do you think the SEC is up too? From the Washington Post:

The SEC is examining the near-collapse of two Bear Stearns hedge funds that made bad bets on the mortgage market. . . . The SEC inquiry is informal and has not resulted in any subpoenas or formal document requests, a person familiar with the matter said yesterday. This person spoke on condition of anonymity because the inquiry has not been publicly disclosed.

Also from the same article (back to bond ratings for a minute):

. . . . researchers at Citigroup said subprime mortgage bonds issued last year by Goldman were being downgraded by rating agencies at a faster pace than any other issuer.

From another article about the SEC investigation of Bear Stearns from the WSJ:

Pricing could also prove to be an issue in the now-pulled public offering of Everquest Financial Ltd., a company backed by Bear Stearns and its two hedge funds. The company in May filed with the SEC to go public, with Bear Stearns as underwriter. The offering was pulled this week in the wake of Bear Stearns's problems. Ralph Cioffi, a veteran Bear Stearns banker, managed the funds and was co-chief executive of Everquest.

Based on the information above one could conclude that this is going to be a tough summer for the people that manage hedge funds with a lot of mortgage debt, firms seeking financing for new purchases that want to use the "junk" credit markets, and for firms that provide ratings for bonds and those that originate or hold those bonds. I am curious to see what things look like in fall. I think the credit world will be a very different place.

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