正文
New Hitches in Markets
May Widen Credit Woes
By LIZ RAPPAPORT, CARRICK MOLLENKAMP and KAREN RICHARDSON
February 11, 2008
Awidening array of financial-market problems threatens to trigger a newwave of the global credit crunch, extending it far beyond the riskymortgages that have already cost banks and investors more than $100billion in losses, and potentially bruising the U.S. economy.
Inthe past few days, low-rated corporate loans -- the kind that fueledthe buyout boom of recent years -- have plummeted in value. As aresult, banks are expected to try to unload some of those loans thisweek at fire-sale prices.
Meanwhile, nervous buyers have pulledback from the market for securities backed by student loans andmunicipal bonds, wreaking havoc in some corners of the short-term moneymarkets. Similarly, investors have recoiled from debt backed bycommercial real estate, such as office buildings.
One sign ofinvestors' anxiety: Standard & Poor's said its index of the priceson high-risk corporate loans fell to a record low of 86.28 cents on thedollar at the end of last week.
Few market participants expectdefaults on any of this debt to match the elevated levels seen in lastyear's rout in the market for risky, or subprime, mortgages. Butcollectively, they threaten to deepen the financial system's wounds andcreate a growing pileup of shaky assets on the books of banks.
Overthe weekend, the world's top banking authorities warned that theU.S.-led economic slowdown and continued uncertainty about securitiescould lead banks to further reduce their lending, and choke offeconomic activity. (Please see article.)
Behind the latestproblems are some common themes: Investors bought some of these debtsecurities with borrowed money, or leverage. As prices have declined,lenders have forced the sale of some of these securities. The cashbeing pulled out of the market by these sales has magnified the lossesfrom rising defaults.
Meanwhile, the Federal Reserve'sinterest-rate cuts, which were designed to reinvigorate the slowingU.S. economy, may be having unintended consequences in some corners:sending investors fleeing from investments that do poorly when interestrates fall.
After years in which banks and investors have lentmoney on especially easy terms, "you've had the biggest credit bubble-- probably the biggest credit bubble we have ever had," says Jim Reid,credit strategist at Deutsche Bank AG in London. Part of the bubble hasalready been unwound, he says. The problem is, "nobody quite knowswhere that ends."
Especially hard hit: the market for loans tobig U.S. companies with low credit ratings. Problems in this markethave been percolating for months. These loans, known as leveragedloans, were a popular way to finance the multibillion-dollarprivate-equity buyouts of recent years that have wound down amid thecredit crunch, like the takeovers of Freescale Semiconductor Inc. in2006 and TXU Corp. last year. Investors started to shun buyout loanslast summer, causing a buildup of the debt on bank's balance sheets.
Duringthe past two weeks, prices on many of these loans have fallen to levelsthat in a normal environment would indicate that the market expectedthe corporate borrower to restructure or seek bankruptcy protection.But, though they are creeping up from record lows in 2007, the defaultrate on leveraged loans is still very low, at around 1% in January, outof the more than half-trillion dollars of these loans outstanding.
Investorsare also fleeing leveraged loans because the payments they make toinvestors are tied to short-term interest rates. With short-term ratesfalling, thanks to the Fed's rate cuts, those payments are shrinking.
"Theyields are just not all that attractive especially if you fear that[interest rates are] going to fall further," says Christian Stracke ofdebt-research firm CreditSights in London. "That just means that theyield you are going to be receiving is going to fall further."
Theloans to Freescale and TXU are trading at around 80 and 90 cents on thedollar, respectively, after being issued at about face value, largedeclines for these types of instruments.
Many types of investorshave left the market, including individuals. According to AMG DataServices, investors pulled their money out of bank-loan mutual fundsfor the 18th straight week as of last Wednesday, an exodus that haswithdrawn $4.26 billion from the market.
This, in turn, hascreated problems for securities called collateralized loan obligations,which are pools of bank loans bundled together and sold to investors inpieces. Like the mortgage market's collateralized debt obligations,these instruments were assigned high credit ratings and were touted asspreading the risk of default on the underlying debt.
This week,UBS Securities and Wachovia Securities will be trying to sellportfolios of loans that may be held by a class of collateralized loanobligations called market-value CLOs. Both investment firms werelenders to these CLOs, which depend heavily on borrowed money. Now,with the market value of the loans behind these securities falling, thefirms are liquidating a total face value of more than $700 million ofthose loans.
Fitch Ratings last week cut the credit rating onpieces of 24 CLOs, putting several of them deeply into junk territory,with ratings in the triple-C or double-C range. Fitch also says it isreviewing its methodologies for rating market-value CLOs. Theseinvestments have triggers in place that force banks to liquidate theloans being used as collateral when their prices fall by a certainamount.
Having to liquidate portfolios of collateral is an addedburden for banks, which already had $152 billion of loans they weretrying to sell from buyouts of recent years. As the values of the loansthey are holding decline, they could need to take additionalwrite-offs. Market-value CLOs account for about 10% of the estimated$300 billion total, according to research by J.P. Morgan Chase & Co.
Relatedinvestments called total return swaps have also been hurt. Theseinstruments are set up by banks for hedge-fund clients or otherinvestors to buy loans with borrowed money. The loans serve ascollateral, and when the values of the loans decline, the banks'clients can be driven into forced sales.
Citigroup Inc. is oneof several banks affected by the upheaval. The bank structured nine ofthe 24 CLOs Fitch downgraded, amounting to about $4.5 billion of loans,according to a person familiar with the matter. Citigroup issued astatement Thursday saying the bank hasn't liquidated any loancollateral associated with its total return swap program.
Problemsare cropping up elsewhere in credit markets. Money-market investors inthe past have been large buyers of short-term instruments backed bytax-free municipal bonds and student loans. But they have been shunningthese instruments -- known by such names as auction-rate securities andtender-option bonds -- because they fear the debt used to back theinstruments will default or get downgraded by rating services.
Thursdayand Friday, Goldman Sachs Group Inc. held auctions of hundreds ofmillions of dollars in securities backed by student loans, all of whichfailed to drum up enough demand at their asking prices.
Morethan half of the nation's $2.6 trillion of municipal debt, meanwhile,is guaranteed by bond insurers like Ambac Financial Group Inc., MBIAInc., and Financial Guaranty Insurance Co. Because these insurers arealso on the hook for billions of dollars in troubledsubprime-mortgage-related bonds, their guarantees are no longer worthas much. Concerns about the credit ratings of the bond insurers arefiltering into muni markets.
Several sales of auction-ratesecurities have failed to draw sufficient interest from investors inthe past two weeks. These include auctions held by GeorgetownUniversity and Sierra Pacific Resources Inc. The failures leaveinvestors paying a premium to lenders who would rather let go of thedebt.
Big banks are now working to pour new money into the bondinsurers, which could help relieve the financial system of some ofthese stresses. But the spreading turmoil suggests that might not beenough to relieve banks and investors.
Commercial real estate isanother corner that's showing cracks. There were no new offerings ofcommercial mortgage-backed securities in January, and the cost ofprotection against default on such securities issued in 2005 and early2006 has more than tripled, according to Market Group's CMBX index.Goldman Sachs estimates banks could write down $23 billion from CMBSlosses this year.
--Cynthia Koons contributed to this article.
Write to Karen Richardson at karen.richardson@wsj.com
May Widen Credit Woes
By LIZ RAPPAPORT, CARRICK MOLLENKAMP and KAREN RICHARDSON
February 11, 2008
Awidening array of financial-market problems threatens to trigger a newwave of the global credit crunch, extending it far beyond the riskymortgages that have already cost banks and investors more than $100billion in losses, and potentially bruising the U.S. economy.
Inthe past few days, low-rated corporate loans -- the kind that fueledthe buyout boom of recent years -- have plummeted in value. As aresult, banks are expected to try to unload some of those loans thisweek at fire-sale prices.
Meanwhile, nervous buyers have pulledback from the market for securities backed by student loans andmunicipal bonds, wreaking havoc in some corners of the short-term moneymarkets. Similarly, investors have recoiled from debt backed bycommercial real estate, such as office buildings.
One sign ofinvestors' anxiety: Standard & Poor's said its index of the priceson high-risk corporate loans fell to a record low of 86.28 cents on thedollar at the end of last week.
Few market participants expectdefaults on any of this debt to match the elevated levels seen in lastyear's rout in the market for risky, or subprime, mortgages. Butcollectively, they threaten to deepen the financial system's wounds andcreate a growing pileup of shaky assets on the books of banks.
Overthe weekend, the world's top banking authorities warned that theU.S.-led economic slowdown and continued uncertainty about securitiescould lead banks to further reduce their lending, and choke offeconomic activity. (Please see article.)
Behind the latestproblems are some common themes: Investors bought some of these debtsecurities with borrowed money, or leverage. As prices have declined,lenders have forced the sale of some of these securities. The cashbeing pulled out of the market by these sales has magnified the lossesfrom rising defaults.
Meanwhile, the Federal Reserve'sinterest-rate cuts, which were designed to reinvigorate the slowingU.S. economy, may be having unintended consequences in some corners:sending investors fleeing from investments that do poorly when interestrates fall.
After years in which banks and investors have lentmoney on especially easy terms, "you've had the biggest credit bubble-- probably the biggest credit bubble we have ever had," says Jim Reid,credit strategist at Deutsche Bank AG in London. Part of the bubble hasalready been unwound, he says. The problem is, "nobody quite knowswhere that ends."
Especially hard hit: the market for loans tobig U.S. companies with low credit ratings. Problems in this markethave been percolating for months. These loans, known as leveragedloans, were a popular way to finance the multibillion-dollarprivate-equity buyouts of recent years that have wound down amid thecredit crunch, like the takeovers of Freescale Semiconductor Inc. in2006 and TXU Corp. last year. Investors started to shun buyout loanslast summer, causing a buildup of the debt on bank's balance sheets.
Duringthe past two weeks, prices on many of these loans have fallen to levelsthat in a normal environment would indicate that the market expectedthe corporate borrower to restructure or seek bankruptcy protection.But, though they are creeping up from record lows in 2007, the defaultrate on leveraged loans is still very low, at around 1% in January, outof the more than half-trillion dollars of these loans outstanding.
Investorsare also fleeing leveraged loans because the payments they make toinvestors are tied to short-term interest rates. With short-term ratesfalling, thanks to the Fed's rate cuts, those payments are shrinking.
"Theyields are just not all that attractive especially if you fear that[interest rates are] going to fall further," says Christian Stracke ofdebt-research firm CreditSights in London. "That just means that theyield you are going to be receiving is going to fall further."
Theloans to Freescale and TXU are trading at around 80 and 90 cents on thedollar, respectively, after being issued at about face value, largedeclines for these types of instruments.
Many types of investorshave left the market, including individuals. According to AMG DataServices, investors pulled their money out of bank-loan mutual fundsfor the 18th straight week as of last Wednesday, an exodus that haswithdrawn $4.26 billion from the market.
This, in turn, hascreated problems for securities called collateralized loan obligations,which are pools of bank loans bundled together and sold to investors inpieces. Like the mortgage market's collateralized debt obligations,these instruments were assigned high credit ratings and were touted asspreading the risk of default on the underlying debt.
This week,UBS Securities and Wachovia Securities will be trying to sellportfolios of loans that may be held by a class of collateralized loanobligations called market-value CLOs. Both investment firms werelenders to these CLOs, which depend heavily on borrowed money. Now,with the market value of the loans behind these securities falling, thefirms are liquidating a total face value of more than $700 million ofthose loans.
Fitch Ratings last week cut the credit rating onpieces of 24 CLOs, putting several of them deeply into junk territory,with ratings in the triple-C or double-C range. Fitch also says it isreviewing its methodologies for rating market-value CLOs. Theseinvestments have triggers in place that force banks to liquidate theloans being used as collateral when their prices fall by a certainamount.
Having to liquidate portfolios of collateral is an addedburden for banks, which already had $152 billion of loans they weretrying to sell from buyouts of recent years. As the values of the loansthey are holding decline, they could need to take additionalwrite-offs. Market-value CLOs account for about 10% of the estimated$300 billion total, according to research by J.P. Morgan Chase & Co.
Relatedinvestments called total return swaps have also been hurt. Theseinstruments are set up by banks for hedge-fund clients or otherinvestors to buy loans with borrowed money. The loans serve ascollateral, and when the values of the loans decline, the banks'clients can be driven into forced sales.
Citigroup Inc. is oneof several banks affected by the upheaval. The bank structured nine ofthe 24 CLOs Fitch downgraded, amounting to about $4.5 billion of loans,according to a person familiar with the matter. Citigroup issued astatement Thursday saying the bank hasn't liquidated any loancollateral associated with its total return swap program.
Problemsare cropping up elsewhere in credit markets. Money-market investors inthe past have been large buyers of short-term instruments backed bytax-free municipal bonds and student loans. But they have been shunningthese instruments -- known by such names as auction-rate securities andtender-option bonds -- because they fear the debt used to back theinstruments will default or get downgraded by rating services.
Thursdayand Friday, Goldman Sachs Group Inc. held auctions of hundreds ofmillions of dollars in securities backed by student loans, all of whichfailed to drum up enough demand at their asking prices.
Morethan half of the nation's $2.6 trillion of municipal debt, meanwhile,is guaranteed by bond insurers like Ambac Financial Group Inc., MBIAInc., and Financial Guaranty Insurance Co. Because these insurers arealso on the hook for billions of dollars in troubledsubprime-mortgage-related bonds, their guarantees are no longer worthas much. Concerns about the credit ratings of the bond insurers arefiltering into muni markets.
Several sales of auction-ratesecurities have failed to draw sufficient interest from investors inthe past two weeks. These include auctions held by GeorgetownUniversity and Sierra Pacific Resources Inc. The failures leaveinvestors paying a premium to lenders who would rather let go of thedebt.
Big banks are now working to pour new money into the bondinsurers, which could help relieve the financial system of some ofthese stresses. But the spreading turmoil suggests that might not beenough to relieve banks and investors.
Commercial real estate isanother corner that's showing cracks. There were no new offerings ofcommercial mortgage-backed securities in January, and the cost ofprotection against default on such securities issued in 2005 and early2006 has more than tripled, according to Market Group's CMBX index.Goldman Sachs estimates banks could write down $23 billion from CMBSlosses this year.
--Cynthia Koons contributed to this article.
Write to Karen Richardson at karen.richardson@wsj.com
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