Pardon my ignorance but....
I've read in numerous articles that with the recent problems due to subprime lending, there is a credit squeeze on the market, and that many many companies are pulling their debt offerings (off the top of my head Cerberus Captial Mgmt w/ the Chrysler buyout comes to mind). My question is...what exactly do they mean by a credit squeeze? Also, why is there seemingly no market for company bonds now? If anyone could explain this to me, or link me to a page that describes it, I would greatly appreciate it.
appetite for credit risk is down, so tough to sell bonds of companies deemed to have lousy credit. that's the credit squeeze.
Banks are increasingly unwilling to loan money as favorably now as they have over the past several years.
As interest rates charged by banks to borrowers such as Cerberus, KKR, JC Flowers, etc. . . increases, their ability to raise debt to fund buyouts decreases substantially. Thus delays in funding Chrysler as well as GM's Allison Transmissions division.
*There was a BusinessWeek Article about just this entitled: The Buyout Boom's Dakside in the August 13th Issue.
I don't have a strong enough understanding of the bond aspect to write about it.
GateBreaker
Thank you guys both very much. I felt I was going in the right direction but that definitely clarifies things for me a bit more.
of the lenders of all these leveraged buyouts. Keyword on the word leveraged. There's a reason you're seeing the KKRs of the world going after these "old American" companies a la Cerebus-Chrysler. Good consistent cash flows.
And why is cash flow important. Again the word "leverage" In order for these deals to work out for the PE firms, they need to be able to cover their short-term debt. Before sub-prime, markets were flowing and the banks were happy to make these huge loans for LBOs.
Also, when the big ibanks make these huge loans, they don't just leave it sitting on their balance sheets. These loans get sliced and diced and sold off/put into various derivatives (CDO's, etc.). But now after sub-prime, nobody (not individual people, but the financial institutions that buy these loans) don't really want them anymore.
So the guys who used to freely loan $$$ for the LBOs are less excited to make out the loans (and are charging several hundred bps more than just a couple weeks ago). They're trying to sell off these loans they're making and the markets are saying "i dont wanna touch that." Thus you have these pauses in the deals like Chrysler.
That's my general understanding of it. Not in IBD - in capital markets so my understanding of the LBO process may not be as good as most of the guys here.
Banks typically flush out the loans that they've made through CLOs to investors in the capital markets (typically the big institutional buyers here and abroad). Buyers of CLOs (both notes and equity) have been very reluctant recently because 1) actual credit concerns due to lending standards and document protections (eg, cov-lite, priority), 2) relative subordination in the structures in the pipeline, 3) the spread blow-out makes the assets in the deals that are currently warehoused (waiting to be put into CLOs) unattractive, and 4) CLO investors can probably get far better spreads after this period of price discovery, so they're being patient. It also warrants mention that warehousing lines have been significantly reduced (and costs increased) by the banks and funding conduits, and PMs will have a somewhat more difficult time convincing committees (sometimes with people who do not have a structured finance background) that SF investments are still OK, despite the negative publicity. The turnover is generally expected to be slower for the time being. Index (eg, LCDX) off-loads by the banks also seems less viable because the cost of protection nowadays. There will likely be more attention to investor issues now, else the banks may end up holding the loans (at 'B' reserve rates(!), and likely adversely selected). The concerns of the Swiss bosses at UBS a few months back now don't seem so unreasonable.
BTW, very senior market players are making exorbitant efforts to distinguish structured mortgage problems with structured loans. There is some merit to this argument (although negative 'Home Price Appreciation' is often contemporaneous with macro downturns), but investors (often international) have different options and market panics are not known for attention to details.
Thanks for raising a very relevant topic, so no need to apologize.
BTW, how many of you actually made it to work on time today (despite the subway flooding)? ...Another clog in the pipeline.
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