Just So You Guys Know...

Buy low sell high?

Now why did you just do that? Issue an apocalypse like that? The nerve. Proprietary trader and all. Go get yourself a drink tonight. On me!

Ay ya yai.

Fuck it im going into law. 200k first year working 60 hour weeks

..securities law will no doubt be a growing field with all the lawsuits against defunct hedge funds, banks, and ratings agencies...

Hook me up with a trader gig, I'd perfer in MBS. thanks

Not really sure where you think you're going to swing a job with that pay and those hours. All my friends working legal jobs work hours pretty similar to my own (80-100). We're all recent college grads and to get anywhere you'll have to put in some pretty long hours right out of college.

is there a forum like this for BigLaw?

I'm not quite sure I understand this. A majority of experts think that the global economy is as strong as they've seen and that this is a correction. Corrections don't cause companies to fire people only to rehire them in months.

. . . That's why I work in P.I.P.E's

h4zin yes, http://www.autoadmit.com/main.php?forum_id=2

eletrikq, they must be in NYC sweatshops. NYC is a pretty easy market to get into compared to DC, LA, etc. NYC has the worst hours. LA/DC you lookin about 60 hours a week. btw wtf college grads working legal jobs? LOL at dumb fucks. go to law school, you dont be a shitty paralegal lol

...a majority of experts live in a fantasy world right now. 6 months ago the majority of experts said the housing slowdown would be over by now and in fact it is still getting worse as housing data today confirmed. They also said that the subprime meltdown would have no contagion effects and now the debt markets are frozen for everybody but the best AAA-rated companies like J&J. I would argue that the majority of experts are usually wrong at turning points and this is no exception.

Bondarb,

Are L/S, Risk Arb, Relative Value HFs going under too or is it mostly the structured products/HY funds in trouble ?

What are the companies with AAA rating? J&J, pfizer lost it recently, so did someone else just cant remember.

It's a flight to liquidity. Though I don't like Taleb that much, you might want to read his book "The Black Swan". Six sigma events like this happen every five years--it's a VaR error more than anything else. I think you're forgetting about LTCM--which was a similiar flight to liquidity. People come back... the reason these products are so iliquid is that we're all reaching for the same door. Plus, sell-side traders are making _very_ fat pay checks... bid/ask is huge right now--the problem is that so much of their compensation is stock based, and the bank stocks are taking pain.

At some prop desks this might be true. LTCM was only 10 years ago. Also, a lot of the big losers are stat-arb funds. They’re not selling vol—concrete relationships have broken down here. A lot of the people who have lost money are viewing this as a large opportunity (at least that’s what they tell investors)—AQR, Highbridge, Global Alpha, RenTec, at one point Sowood, etc.

It's not the hedge fund managers who are inventing P&L. All hedge funds mark to market--when there aren't agreed upon model drive valuations for securities, these marks can change based largely on sentiment (how do you have collateralized debt in the first place--you need to create a default adjusted spread, predicting default is what these guys are doing in the first place.) The people who actually determine these marks are _banks_, ie. prime brokerage.

That's an exaggeration.

P.S: It's a great time to be a money manger, if you didn't already get fucked.

...it depends hedge fund to hedge fund. The problem with many hedge funds regardless of strategy is that they hold positions that become illiquid in times of trouble. For eg GS global alpha is just a L/S equity fund that happens to pick stox with quant models but when vol spiked and their models told them to exit positions they couldnt do it. The positions were just to big and the fund lost a third of its value just trying to take off risk into a crazy market. I would argue the problem is worse the more obscure the product. Global Macro funds that trade very liquid stuff like on-the-run treasuries, stock index futures, etc. are in better shape because they can be nimble and easily manage risk. RV funds have a tougher time because they often trade things like off-the-run bonds that are harder to get in and out of.

In terms of structured products, I think the entire business model is questionable. How can you pay a manager based on performance when month to month he can totally make up the value of his portfolio? When the dust settles people are going to be outraged to learn that managers cut themselves huge checks for Q2 and then declared their positions worthless and closed up shop in July or August. These funds wil likely disappear and not come back even when the market calms down.

Sorry I really dont know how to use quotes so the format of this is amatuer...

GKA said:
Six sigma events like this happen every five years--it's a VaR error more than anything else. I think you're forgetting about LTCM--which was a similiar flight to liquidity. People come back... the reason these products are so iliquid is that we're all reaching for the same door. Plus, sell-side traders are making _very_ fat pay checks... bid/ask is huge right now--the problem is that so much of their compensation is stock based, and the bank stocks are taking pain.

I reply:
Some sell-side guys are making big checks....for eg market makers in CDX indices, but many areas are moribound. High yield debt, CDOs, CLOs, etc. are just not trading. Those guys definitely arent making big paychecks in fat their desks are deeply in red.

GKA Said:
They’re not selling vol—concrete relationships have broken down here. A lot of the people who have lost money are viewing this as a large opportunity (at least that’s what they tell investors)—AQR, Highbridge, Global Alpha, RenTec, at one point Sowood, etc.

I reply:
Relationships breaking down=Vol picking up. Guys that assume mean reversion are de facto vol sellers. Concrete relationships always break down during events like this but it may take years before they return to normal. 1998 was easy but other panics have been much worse. LTCM was only one fund and the whole credit universe never stopped functioning like it has this week.

GKA Said:
It's not the hedge fund managers who are inventing P&L. All hedge funds mark to market--when there aren't agreed upon model drive valuations for securities, these marks can change based largely on sentiment (how do you have collateralized debt in the first place--you need to create a default adjusted spread, predicting default is what these guys are doing in the first place.) The people who actually determine these marks are _banks_, ie. prime brokerage.

I reply:
You are wrong on this one. I spent three years working for a hedge fund that trades structured products and the prime brokers know nothing. You get your mark either from some model a 25 year old created or you get a mark from a sell-side desk. Salesman generally will give you any mark you want (at least before recently). Just wait until the stories come out about managers getting huge incentive fees in Q2 and then declaring their books worthless a month later.

Many people think that the number of hedge funds could easily be cut in half as the "hedge fund bubble" deflates.
[/quote]
That's an exaggeration.

If the # of hedge funds increased 5-fold this decade why is a 50% decline unreasonable?

GKA Said:
P.S: It's a great time to be a money manger

---I agree but the industry is about to shrink.

Lol the OP is scaring the sh!t of me...

Bondarb is right on the money, esp. regarding structured products. In very illiquid products (like bespoke tranches) there are MANY situations where both the sell-side bank and client both think they have a positive mark-to-market. Both sides report a windfall profit which is impossible since it's zero sum.

Barrons just had an article about Bear Stearns being a good target for acquisition by a larger bank.

http://online.barrons.com/article/SB118679455504694820.html?mod=googlene...

...one of the reasons the stock market rallied late today was a rumor that Bear was going to anounce that they were selling themselves (or a stake in their business) to CITIC which is a bank controlled by China. Bear definitely will become a target if the stock goes lower but i think the business is very much at risk as they have a huge mortgage origination and sales business, a huge prime brokerage business, and their balance sheet is loaded with debt. I can't really figure out how they are going to make money until all this clears up and obviousloy from my above posts I think that could be awhile!

Very informative, thank you bondarb.

Bondarb,

How do you see things playing out a month or two from now ? The contratarian argument is that the underlying fundamentals are strong and this is just a correction, why do you not believe that ?

Very interesting to hear your perspective, which is clearly a well informed one. Not sure it is fair to say though that PE fails to grasp the magnitude of what's happening in the debt markets. Its true, just about every hedge fund I've spoken with regarding junior forms of financing has sworn up and down that the evaporation of liquidity in secondary HY markets will dissipate in short order; however, I believe the vast majority of us in PE know to take these statements for what they are given the source of, and context for, such statements.

I do not believe at this point that the cost of financing has become impossibly high. Thus far, I'm seeing total senior and mezz leverage each getting priced up by 150 to 200 bps - don't get me wrong, this is pricey, but not prohibitively so. I think the real problem will come if we don't see some rationalization in the HY debt markets, since a reduction in leverage levels hits PE returns with much more force than increased pricing on said leverage.

I think that in three months economic growth will have slowed substantially and the consensous view will be that we are headed for recession. I could write all night about why but the bottom line is that I think we are seeing a huge credit bubble deflate and when credit contracts rapidly it almost always ends in a reccession.

...you might be right, I know less about PE then any of the other stuff I commented on in my OP. However, I do think I am right in saying that alot of banks have their balance sheets jammed with debt that they foolishly took on in order to get PE business. Until they sell these loans, which are "cove-light" type grabage, they arent going to be wanting to get involved in the PE business. My personal opinion is that this debt is going to take a long time to sell and it will go at prices much lower then where banks currently have it marked. To me, that means that the PE business is basically out of luck until the general credit problems get cleared up.

Excellent and very informative post Bondarb.

The correction (or meltdown) is really coming from the capital markets. That will most severely impact the "mega" (TXU, Chrysler, etc.) deals since no i-banks will be comfortable with the syndication risk. However, during this LBO craze, a good deal of PE buyouts have been middle market deals, and often times, middle market lenders hold these on their own books. Granted, leverage levels will be lower, pricing will be more risk-appropriate, and there will be no cov-lite deals, but deals can still get done, provided PE firms are willing to put up more of their own capital.

Can you say permabear? :P...Jk...good post bondarb

...I am not a perma-bear at all. I have been bullish on the economy basically since I graduated from college but when the facts change I try to change with them which is what a good trader is supposed to do. If the price action proves me wrong I'll change my mind again but until then I think I am on pretty good ground in saying that historically credit crunches lead to bad economic outcomes.

So, within IBD what are the safest groups to be in at the moment? An industry group perhaps, like energy?

What do you think the likelihoods of the giant LBO deals at TXU, First Data, etc. completely falling apart are?

The loan market started blowing up halfway through my internship, and the market did start rejecting some of the 9x EBITDA leverage deals, and bps spreads widened to 650-800 for mezz loans(in place of 2nd lien), but I don't know if it's gotten wider since then.

My understanding:
These deals are still set to go through. The terms were structured such that the banks still had/have to provide the financing, even though the debt didn't go to market to pay back the bridge loans. That's why they are shit-out-o-luck with the debt on their books.

LOL, TITCR

WE both know it's 160k first year.

Agree with your point ebrunner. I don't think the middle markets will be hit with the same force as larger markets, where massive blocks of HY securities have created a glut of supply-side capital overhang. However, from the limited exposure I do have to the PE middle market, I've seen an eerily similar dislocation between supply and demand for debt capital.

I recently provided assistance on two MM-size add-ons for one of our portfolio companies. Apparently, for publicly traded lenders in the MM there is very little, if any, push to provide HY financing right now. Even if the lenders have no intention of syndicating these loans, their hands are tied, since any debt issued must be marked to market at the close of each fiscal quarter. Clearly, any losses generated by marking to market would reflect liquidity issues, and not true credit ones. Still, these losses seem very real from Wall Street’s perspective, as they do inflict damage to the P&L.

What exactly do you mean that mezz spreads "widened to" 650-800 bps? Widened relative to what?

Mezz is a fixed rate security (generally at 11-13% cash, 2% PIK), it does not price in terms of spreads over LIBOR, like a second lien debt would.

This does, however, assume that the banks have closed on a transaction - and not merely signed a definitive purchase agreement. Apparently, many of the lead underwriters have walked after signing an SPA in recent weeks. No idea how they're getting away with this (since only a retarded investment banker would allow market MACs in a PA right now), but apparently a number of banks (including JPM) have walked away post-SPA, but pre-close, suggesting to those involved on the deals that they should feel free to sue the bank if they really want to contest the decision.

...my understanding is also that on mega-deals the banks are stuck. Often the deals have an option to terminate at a signifigant fee but that option is held by either the company that was acquired or the PE shop, never the bank. The banks made all sorts of ridiculous gaurantees in order to get business from PE shops at the height of the frenzy and are now left holding the bag. Some have speculated that PE shops might kill deals out of some sense of altruism or to prevent a large bank collapse that would endanger markets generally but to me that sounds like really wishful thinking. Bottom line is that banks will have to write down these loans at large losses if they don't sell them soon. However, unlike many CDO's on bank books these loans do have some intrinsic value and so eventually they should get sold at some price. To put it in Nasdaq bubble terms the leveraged loans are like Amazon.com whereas the subprime CDO's are like Pets.com. At some point the leveraged loans will become good buys for savvy bottom-pickers, but that could be a ways down the road...

Not sure I agree with this recession comment. Ultimately, right now it is fear of the unknown that is creating ultimate panic alongside a much needed correction. To suggest we will have a recession when prime lending is still viable and there is still tremendous global growth providing greater leverage to sub-prime exposure. The race to liquidity seems relevant right now, people are just fearful b/c we're unaware of what exactly is going on. Structured and high yield products could be in trouble, but yet High Yield is actually TAKING on people right now.

In theory, the banks are stuck since almost no one would grant them a Market MAC out. However, just about any bank can get a side-car provision that is pari passu with the diligence out PE buyers hold. It’s basically nothing more than a shell game - the lenders effectively hold the same diligence MAC (though not a market MAC) as PE buyers do. As a result, the banks can simply cite that their choice to drop financing was driven by a business diligence issue (usually customer calls serve as the easiest scapegoat) and not by a deterioration in the capital markets. The only real option around this is for investment banks to greatly reduce the time gap between signing an SPA and closing on one. A year ago, this period could last at least 30 days (since an HSR filing is required for anti-trust, and this takes about 30 days to clear the FTC). However, many bankers are pushing some fucking ridiculous timelines to close right now -- e.g., a banker told me this evening that he wanted us to cut our post-LOI diligence from 5 weeks to 4 days - in response, I couldn't help it and started laughing out loud. Really glad I'm not running an auction right now...

This is of course, only for deals in the relatively slim time window between signing and closing.

Yes it does. Mezz is always expressed in terms of EURIBOR or LIBOR + a percentage. There is no way anyone is getting 11 or 13% for mezz, that's what PIK is at these days. Try 8-9/9.5%. It is split between cash pay and pik.

don't worry... a couple of month and the party starts again...

I've learned more in this single thread than I have from the aggregation of all the other threads on this forum.

What's your take on DCM banks like Barclays ?

Leveraged loan bank debt is currently being scooped up by the same PE firms that forced the banks to commit to these loans. For example, TPG Axon scooped up KKR/Dollar General debt on the cheap at 87 cents on the dollar, set to fetch TPG Axon IRR in the 18% range. So even though equity sponsors may have troubles meeting their 30-40% IRR's on the equity portion, they could very well make healthy returns on the distressed debt side, especially for deals in which they were outbid.

If one LBO portfolio company blows up, or becomes insolvent, all LBO related secured debt would be sold on the cheap, and the distressed funds within PE firms and hedge funds would come out as winners.

Either way the large secured lenders would get smashed by their very own PE clients..ouch!

Bondarb, lighten up, the fed discount window is now accepting illiquid structured paper..

" ...The Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets .." Fed Statement 8/17/2007

But just to enlighten the board ..

The discount rate program is a repurchase "repo" program where the commercial banks and other financial institutions in distress exchange their distressed securities, as collateral, (MBS, CDO's, etc.) in exchange for cash, which in effect becomes a loan. So in effect it's a sale and repurchase agreement where the Fed lends cash (Repo buyer, cash issuer) to the distressed institution (repo seller, cash recepient), to help with liquidity issues surrounding their structured products, thus bolstering the solvency of large financial institutions with broad exposure to sub-prime related structured products (GS/BS/LEH,etc.).

It's more like a semi bail-out, because although the distressed entity receives cash for its worthless paper, it still has to repurchase the collateral at a later date. The maturity of the Fed loans hasn't been disclosed, but I believe the rate on the loans are 50 basis points over the fed funds target rate.

Bottomline: In the interim it'll help the brokers and lenders, but since it's a repo, they still have to buy back their junk at a much later date when they are in a much better position to do so, so in essence, a semi-bailout, and structured products trading desks *may* just be fine after all.

Leveraged loan bank debt is currently being scooped up by the same PE firms that forced the banks to commit to these loans. For example, TPG Axon scooped up KKR/Dollar General debt on the cheap at 87 cents on the dollar, set to fetch TPG Axon IRR in the 18% range. So even though equity sponsors may have troubles meeting their 30-40% IRR's on the equity portion, they could very well make healthy returns on the distressed debt side, especially for deals in which they were outbid.

If one LBO portfolio company blows up, or becomes insolvent, all LBO related secured debt would be sold on the cheap, and distressed funds within PE firms and hedge funds would come out as winners.

Either way the large secured lenders would get smashed by their very own PE clients..ouch!

If you read my post - I indicated that mezz is clearly comprised of cash and PIK - though I think you've got it backwards, since cash is at 11-13%, not PIK. Maybe we're using a different set of lenders, but mezz is the one debt security that we see priced at a fixed rate, not a floating rate over LIBOR. I don't doubt that one could get mezz financing in a floating rate, but I can attest that mezz is most certainly not "always" expressed in terms of LIBOR, since I can't recall ever doing a deal where mezz was priced in the manner you described.

Not to make a big deal out of LIBOR, but Medimedia's LBO from Dunn & Bradstreet (91, 92' or so) had MZ loans set at 3.25% + LIBOR with an equity kicker -warrant call option on 15% of outstanding diluted shares. Back then PIK wasn't too well received as forms of interest payments..So yes I've seen MZ loans that use LIBOR as risk free rates..

I'm finishing up an internship where we see a fair amount of mezz deals pass through and typically what we see is LIBOR+spread though there are some with a fixed rate