Wednesday, July 25, 2007

Debt is a four-letter word

Have you seen the headlines this morning?

Things are cooling off big time in the debt markets, and the drop off in demand for high-risk debt is getting pretty intense.

Some of the most prominent stories on Bloomberg are those detailing the turn in the credit markets, as investors decide they are no longer willing to take on risk in corporate bonds and high-yield debt.

Here's a quick wrap-up of what's going on in the credit markets.

"KKR Fails to Sell $10 Billion of Boots Loans".

"Chrysler, Facing Resistance, Abandons Loan Sale Plan".

An excerpt from the Chrysler piece:

Chrysler abandoned plans to sell $12 billion of loans to complete its purchase by Cerberus Capital Management LP after investors balked at purchasing the high-yield, high-risk debt, according to investors who were briefed on the decision.

The unit of DaimlerChrysler AG scrapped the sale of loans linked to its automotive business after failing to find demand, said the investors, who declined to be named because the terms aren't public. Banks led by JPMorgan Chase & Co. will assume $10 billion of that debt and Cerberus and DaimlerChrysler agreed to buy the remaining $2 billion, the investors said.

``The implications of this are simple; there remains a significant amount of risk aversion in the market,'' said Peter Plaut, an analyst at New York hedge fund Sanno Point Capital.

And further down the page...

As Chrysler and its banks led by JPMorgan Chase & Co. sought to arrange financing for the Cerberus deal, investors vanished amid concerns that a crisis in the subprime mortgage market may spread to corporate bonds. Companies' plan to raise $300 billion in bonds and loans for leveraged buyouts also caused buyers to back off.

JPMorgan Chief Executive Officer Jamie Dimon last week described the drop off in demand as ``a little freeze.'' Bill Gross, chief investment officer at Pacific Investment Management Co. in Newport Beach, California, said yesterday that lenders are ``frozen'' and ``absolutely nothing is moving."

There is no mistaking it; the fallout in subprime has definitely spread through the credit markets. Debt has become a four-letter word.

Meanwhile, Pimco bond manager Bill Gross is voicing the opinion that cheap financings which fueled the recent LBO/private equity boom have come to an end.

An excerpt from, "KKR, Blackstone, Find 'Tide Is Going Out,' Gross Says":

The cheap financing that fueled the leveraged buyout boom is over, according to Bill Gross, manager of the world's largest bond fund.

``The tide appears to be going out for levered equity financiers and in for the passive owl money managers of the debt market,'' Gross, chief investment officer at Pacific Investment Management Co. in Newport Beach, California, wrote today in his monthly commentary on Pimco's Web site. The shift ``promises to have severe ramifications for those caught in its wake.''...

...A growing lack of confidence has ``frozen'' lenders, backing up the market for high-yield new issues so that ``absolutely nothing is moving,'' Gross wrote in his commentary. Investor resistance has increased borrowing costs and will bring an end to lax financing standards, he said.

You can also watch video of Bill Gross' comments to Bloomberg TV.


According to Gross, the buyout boom is not necessarily over, but the current "freeze" will significantly raise the costs and difficulty level of financing current and upcoming deals.


Stay tuned for news of further developments in the corporate bond and credit markets.