Wednesday, February 6, 2008
Demand for Corporate Loans is drying up
--A new problem is rippling through credit markets: Many of the corporate loans used to finance giant buyouts in the past few years are reeling in secondary market trading, making it virtually impossible for banks to unload other commitments they have made. --The loans of First Data Corp., which was taken private in September by Kohlberg Kravis Roberts & Co. for about $28 billion, were sold into the market this past fall at a 4% discount to their par value; they now trade in the market at a steep 11.5% discount to par value, according to Reuters LPC. Market is reeling --The crisis started last summer, when investors turned up their noses at billions of dollars in buyout debt, just after many buyout firms and their bankers made commitments to history-making megadeals. Many investors say January was the worst performance for this market since those summer months. --"This is bizarre and baffling," said Thomas Ewald, chief investment officer of Invesco Senior Secured Management, on a panel at a Loan Syndication and Trading Association event Monday. "Loans trading in the 80s are typically on the verge of bankruptcy or a major restructuring event." Demand is drooping CLO market is reeling. --Investment vehicles called collateralized loan obligations were huge consumers of corporate loans in 2006 and early 2007. CLOs, as they are called, hold bundles of loans and are sold to investors in slices with varying levels of risk and return. As defaults rise, demand for the riskiest pieces of these instruments is undermined. Less Appealing because of lowering LIBOR. --Investment banks last year touted new investors in the loan market -- hedge funds and high-yield bond investors that crossed over into loans. Many investors were burned on their bets in buyout-related loans when their secondary market values dropped. --Some investors are turning to moving out of loans to find better yields in fixed-rate junk bonds Margin Call pushed out Hedge funds --Hedge funds are also being pushed out of the market as facilities called total return swaps unwind. --Total return swaps are set up by banks for hedge funds and other investors to buy loans with borrowed money. As the value of the loans declines, provisions in these swap agreements are being triggered that act like margin calls to unwind the contracts. Investment Banks Panic --The saga of Harrah's Entertainment Inc.'s loan sale is a sign of the distress in the market. Credit Suisse broke from a group of banks lined up to sell $7.25 billion in loans tied to Harrah's buyout. It offloaded its commitment of about $1 billion through derivatives transactions in December, says a person briefed on the transaction. The move sent other banks scrambling to sell some of their own Harrah's loan commitments in January, and the price of the loans dropped to between 91 and 92 cents on the dollar, bankers said. --The transaction roiled other underwriters involved in the deal who were unable to sell their portions of Harrah's debt, but didn't want to sell it at such a steep discount.