Monday, February 18, 2008
Leveraged Loans Inflct More Pain Globally
--Banks, already reeling from persistent losses on subprime meltdown, are facing a new hit as financial crisis spreads to deterioating corporate debts --Among U.S. banks, Citigroup Inc. has the highest volume of leveraged loans, with about $43 billion in loans or loan commitments at the end of 2007. Jeffrey Rosenberg at Banc of America Securities estimates Citigroup could write down the value of those loans by about $4.3 billion. Citigroup declined to comment. --Goldman Sachs has the second-largest U.S. portfolio, with about $36 billion in leveraged loans on its books. London research concern Atlantic Equities said Goldman may need to record a 5% write-down for the fiscal first quarter ending Feb. 29. A Goldman spokesman declined to comment. --J.P. Morgan Chase & Co. was holding about $26.4 billion in leveraged loans at the end of the fourth quarter, after shedding about $16.5 billion of the debt during the period. James Dimon, J.P. Morgan's chief executive, has said the New York bank prefers to hold some of the loans on its books as investments rather than sell them at deep discounts. --European banks will braces for pains --Upheaval in the market has led investors-owners of debt pools called collateralized-loan obligations, or CLOs, to unload loans at fire-sale prices. Like mortgage securities, leveraged loans were bundled and sold to CLOs and hedge funds. But a drop in loan prices in January contributed to borrowing triggers that resulted in hedge funds and CLOs having to sell loans. --Yesterday, the Markit iTraxx LevX Senior, an index of European leveraged-loan credit-default swaps, stood at 90.75. Indexes such as LevX have come to serve as important proxies for the value of loans or bonds, especially when a secondary trading market slows. For banks and investors, the LevX is the only tradeable index measuring the performance of the European loan market. As a result, the steep fall in the LevX, and a comparable U.S. index called the LCDX, is likely to force banks to mark down their leveraged-loan books beyond the hits suffered in last year's third quarter. --But as banks try to establish the value of the loans they hold, the process will mirror the murky pricing used with subprime securities. "There is a lot of qualitative factors and a lot of sort of massaging that the companies can do," Mr. Marinac says.