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The Great Deleveraging Replies |
rffrydr
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rffrydr
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HenryTo
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HenryTo
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 Posted: Fri May 23, 2008 10:28 am Post subject: |
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Look for more capital raising efforts over the next few months:
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Banks capital raising efforts likely to continue
Friday May 23, 12:17 pm ET
Citi Analyst: Banks likely will need to continue raising capital, cutting dividends
NEW YORK (AP) -- At least five national and regional banks will likely need to raise capital in the coming months, a Citi Investment Research analyst wrote in a report Thursday night analyzing capital and dividend risk.
Citi analyst Keith Horowitz said Bank of America Corp., Comerica Inc., Fifth Third Bancorp, Regions Financial Corp. and SunTrust Banks Inc. are the most likely to need to raise new capital amid the continued deterioration in the lending markets.
Horowitz based his assessment of the need to raise new capital or cut dividends to retain capital by looking at a bank's current capital levels; its earnings power relative to its dividend payout; losses on its balance sheet; and its ability to tap other sources of capital.
Among the banks with the least risk of reducing dividends or raising capital through a new stock issuance are Marshall & Ilsley Corp., New York Community Bancorp Inc., PNC Financial Services Group Inc., JPMorgan Chase & Co. and M&T Bank Corp.
Banks have been forced in recent months to raise capital and cut dividends because of continued rising defaults among loans, especially residential mortgages. The capital raises have been necessary and are likely to continue to be necessary as banks are forced to set aside more cash to cover losses on troubled loans.
"We are still early in the credit cycle with the potential for more negative surprises ahead," Horowitz wrote in the note.
Shares of banks fell Friday morning as broader markets posted steep declines.
Shares of Bank of America, based in Charlotte, N.C., fell 63 cents to $34.10, while shares of SunTrust, Atlanta, declined 69 cents to $54.16. Buffalo, N.Y.-based M&T Bank saw its shares decline $1.68 to $88.21 as JPMorgan, New York, shares gave up 49 cents to $42.56. |
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HenryTo
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| Posted: Sun May 18, 2008 11:56 am Post subject: |
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Note that a default rate of 4.7% in high yield bonds is still significantly lower than what current high yield spreads are implying:
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U.S. defaults already surpass 2007, more forecast
Fri May 16, 2008 3:32pm EDT
NEW YORK, May 16 (Reuters) - Corporate defaults have soared this year, hitting consumer-dependent companies particularly hard and surpassing the defaults recorded for all of 2007, according to Standard & Poor's research released on Friday.
"As economic conditions deteriorate and volatility in the financial markets protract, corporate casualties are piling up faster than in many years," wrote S&P analyst Diane Vazza in S&P's Global Bond Markets' Weakest Links and Monthly Default Rates (Premium) report on global fixed income.
Some 28 defaults have been recorded so far this year globally, exceeding the 22 defaults recorded in all of last year, according to S&P.
Twenty-seven of the defaults recorded were from the United States and one was from Canada, S&P said.
Companies that have defaulted on some debt include casino operator Tropicana Entertainment LLC, greeting card maker Recycled Paper Greetings Inc and publisher Ziff Davis Media Inc, according to S&P.
The United States also leads in the number of companies that are closest to the default threshold, with some 107 businesses, or 82 percent, toeing that line.
Of the 28 defaults, half were from the media and entertainment, consumer products and retail/restaurants sectors.
"As the economy continues to deteriorate, we expect to see more defaults in these sectors and in other consumer-dependent sectors, including retail/restaurants sector," S&P analyst Diane Vazza wrote in the report.
Looking ahead, S&P expected the U.S. speculative-grade default rate to escalate to 4.7 percent in the next 12 months. That means some 75 more U.S. companies are expected to default.
Future defaults "could be significantly more pronounced and severe" if the U.S. economy continues to slow, Vazza wrote. |
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HenryTo
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rffrydr
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| Posted: Sat May 10, 2008 9:37 pm Post subject: |
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The great REleveraging: aside from the forced leveraging up of LBO paper to remove it from the books there those "other" markets:
| Quote: | nsight: Commodity prices fall? Surely not
By Gillian Tett
Thursday Apr 24 2008 11:25
continued from previous page
...What is undeniably intriguing - as my banker companion pointed out - is the degree of similarity between the mood in commodities right now, and the credit world back in 2004 or 2005. Most notable, having watched the Goldman Sachs Commodity Index rise 238 per cent in the past three years, many investors seem to assume that prices can only go up.
That, in turn, is creating intense pressure on the bankers to play along with this boom - or, as Chuck Prince, former chief executive officer of Citi famously said, to keep dancing with the pack, for fear of censure. Thus hedge funds and investment banks are continuing to pay hefty salaries to anyone with commodities expertise.
Meanwhile, new players, such as asset managers, are joining the dance. And just as few of those whizz-kids who created collateralised debt obligations back in 2005 ever bothered to meet a subprime borrower, face to face, not many of these new commodities dealers have ever eyeballed a soyabean farmer or nickel miner in their life.
Indeed, Javier Blas, the FT commodity correspondent, says that some of the energy traders he encounters these days have never seen a trading world where the price of oil was consistently below $50 a barrel, because they entered the game so recently. Pace those CDO dealers who used to say back in 2005 that their models showed it was almost impossible that AAA would ever default (or, for that matter, that house prices could fall.)
Now, as long as commodity prices keep rising, this lack of historical knowledge need not matter too much. After all, you don't need to understand the micro-level details of copper production if you can keep flipping the stuff into a rising market - and everybody else believes that metal fundamentals have changed to support the boom.
But if commodity prices do ever swing in a truly unexpected way, it remains an open question exactly what the financial fall out might be. After all, a notable feature of the commodities trading universe is that many swathes are distinctly opaque.
Moreover, many entities, such as commodity trading firms, are pretty thinly capitalised too. And while some policy makers - such as the European Commission - have recently tried to improve standards, there has been strong resistence to the idea of imposing higher capital buffers on commodities houses. This implies that if the price of copper did ever crash it could wipe out some of these players.
Now the good news is that some banks are clearly well aware of these risks. Better still, some are moving to contain them, via initiatives to measure their firm-wide exposure to counterparties, or specific market sectors.
But it remains an open question whether these risk-mitigation efforts are occuring on a wide enough scale yet, given that senior management is still apt to be distracted by last year's credit mess. That is one more reason (as if any was needed) to keep an eagle eye on the oil price; and, above all, on those punters who have yet to earn some personal experience of a trading world where commodity prices might actually fall. |
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HenryTo
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| Posted: Wed May 07, 2008 10:32 am Post subject: |
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Corporate America is - on average - full of cash but there are always firms at the margin. The great deleveraging continues...
http://www.ft.com/cms/s/0/95ce8340-1b97-11dd-9e58-0000779fd2ac.html
| Quote: | More US businesses file for bankruptcy
By James Politi in Washington
Published: May 6 2008 22:22 | Last updated: May 6 2008 22:22
Corporate bankruptcy filings in the US last month rose more than 50 per cent over the previous year’s figure, as the economy weakens and an increasing number of businesses fail.
According to Jupiter eSources, a research group in Oklahoma that tracks data from US courts, 5,173 companies filed for bankruptcy protection in April.
The number of commercial bankruptcy filings has been steadily rising over the past few months, with readings of 3,808 in December and 4,236 in February.
Several high-profile companies have been forced into Chapter 11 bankruptcy recently, including Tropicana, the casino company, and Linens N Things, the retailer that was taken private by Apollo Management, the US private equity group, two years ago. |
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rffrydr
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HenryTo
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| Posted: Mon Apr 21, 2008 8:41 pm Post subject: |
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The deleveraging continues....
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Bank of America Corp. has told Sears Holdings Corp. it won't renew the retailer's credit facility that ends in July.
According to a filing with the Securities and Exchange Commission, BofA told Sears it wouldn't renew the agreement, a 364-day secured facility with a commitment amount of up to $1 billion, under its existing terms.
As of April 18, $1.6 million in letters of credit were outstanding under the agreement, which provides solely for the issuance of letters of credit and does not provide for direct borrowings.
Sears says the termination of the agreement won't have any effect on the company's liquidity.
Illinois-based Sears Holdings (NASDAQ:SHLD) is a retailer that operates under three segments: Kmart, Sears Domestic and Sears Canada.
BofA (NYSE:BAC) is based in Charlotte. |
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HenryTo
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| Posted: Thu Apr 17, 2008 9:34 am Post subject: |
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Moody's on junk bond defaults - says its original 2008 estimate may have been overestimated although 2009 could still disappoint:
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Defaults may not be as high as forecast -Moody's
Thu Apr 17, 2008 9:10am EDT
By Richard Barley
LONDON, April 17 (Reuters) - Moody's Investors Service said on Thursday the global default rate may not climb as high as its model forecasts, as balance sheets remain reasonably strong and high-yield bond spreads may not be reflecting expected losses.
Moody's earlier this year forecast on the basis of its model that default rates for debt-laden companies would rise sharply to 5 percent by end-2008 from a current level of 1.5 percent.
However, based on an analysis of balance sheet strength, refinancing risk and market spreads, the rate is more likely to reach 3 to 4 percent by year-end, Moody's said.
The lower forecast may reassure jittery markets concerned about the spill-over impact of the financial crisis onto the real economy. While defaults will rise, a rate of 3-4 percent is still below the long-run historical average of around 4.5 percent.
However, Moody's warned that default rates would rise further in 2009 as refinancing risk built and as balance sheets became more strained.
SPREADS MAY REFLECT LIQUIDITY, NOT DEFAULTS
A key input for the model is high-yield bond spreads. Data from Merrill Lynch shows that global junk bond spreads stand at 738 basis points over government bonds, up from 594 basis points on Jan. 1 and 287 basis points at the end of the first half of 2007. However, "in contrast to previous credit crises, current credit market dislocations did not originate from the non-financial corporate sector," Moody's said.
"As a result, recent increases in high-yield bond spreads may more proportionally reflect increases in liquidity and risk premiums, rather than increases in expected corporate credit losses," the agency said.
In addition, balance sheets of U.S. non-financial corporations -- which account for the bulk of high-yield bond issuers -- "look in reasonably strong condition relative to prior periods leading up to recessions", Moody's said.
"Near-term refunding risks for Moody's rated speculative-grade issuers are relatively low due to the refinancing wave of the past several years," the agency added.
Moody's noted that model-based forecasts had persistently overestimated the default rate between 2005 and 2007. It said this was due to very easy credit market conditions that had allowed companies that would have defaulted under more normal circumstances to refinance. (Reporting by Richard Barley, editing by Will Waterman) |
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rffrydr
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| Posted: Sun Apr 13, 2008 12:52 pm Post subject: |
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Brad Hintz, an analyst at Sanford C. Bernstein & Co., talks with Bloomberg's Tom Keene from New York about the Federal Reserve's backing of Bears Stearns Cos. sale to JPMorgan Chase & Co., the impact of accounting rules on the liquidity of brokerage assets and the outlook for the financial industry.
Discusses historic leverage ratios of no more than 28X on liquid assets and the current 30X on illiquid ("cement") ones. And on the need to push leverage to take advantage of the treasury trade.
http://media.bloomberg.com/bb/avfile/Economics/On_Economy/vjwM5S9lfr6c.mp3
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HenryTo
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rffrydr
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| Posted: Mon Mar 24, 2008 10:26 pm Post subject: |
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Housing was THE outlet precisely because it had value outside of that of an "asset"--that it could not be a bubble because it was not floating in air. That it would too become its opposite says as much about the Bull behind it. Wall St. proved the mightiest magician of them all turning gravity on its head and making matter disappear!
Hedge Funds needed that leverage to make their "cut." Now they can do it on yield alone, so, yes, it doesn't have to be ruinous. Here's one going its own way:
| Quote: | Hedge funds seek help of their investors to repel banks
By James Mackintosh
Published: March 24 2008 02:00 | Last updated: March 24 2008 02:00
Troubled hedge funds are increasingly going cap in hand to their owners and investors in an effort to avoid banks seizing assets or forcing them to sell into a falling market.
Carrington Capital Management, which is offering investors an 18 per cent payout on preferred shares in an effort to raise up to $200m to replace bank debt, is the latest. But others, including funds from Peloton Partners, Goldman Sachs, Citigroup and Carlyle have all looked to parents or investors for bail-outs - with mixed success.
Hedge fund advisers say many more are likely to turn to investors as banks, concerned about over-stretched balance sheets, clamp down on lending and demand fatter margins, offering less leverage than before.
"There's a lot of creativity going into finding ways to cope when the banks pull the plug," said one consultant who has worked on several hedge fund crises.
"But, at the end of the day, if the banks are no longer prepared to put up finance you are in the hands either of a large investor who can put in more funding, or you are looking to play off your primes [prime brokers] against each other."
Peloton, the most spectacular hedge fund collapse this year, is a case in point.
After it realised its $2bn ABS [asset-backed securities] fund was no longer viable with the high level of leverage it had - long positions totalled $15bn, with short positions thought to be up to $6bn - the London manager frantically tried to persuade the banks to give it breathing space to find a solution.
In February, Ron Beller and Geoff Grant, the founders, begged their biggest backers to provide a $600m loan to reduce bank debt. They also offered to subordinate $117m of partners' capital in the fund, meaning they would take the first hit if there was a loss for investors. By the Monday morning the loan had been raised, but negotiations with the 14 banks that needed to approve the deal had not been finalised by all of them, Mr Beller told his investors on a conference call, so it had to be delayed pending sign-off by the rest.
"As the hours ticked by we were unable to achieve this," Mr Beller said.
The rescue plan fell apart as prices of its highly-geared mortgage-backed investments plummeted, pushed down in part by speculation that Peloton would become a forced seller - speculation that proved true when banks started seizing and selling assets.
But funds do not always end up as forced sellers. Last August, at the height of the panic among highly-geared computer-driven quantitative equity hedge funds, Goldman Sachs stepped in with allies to bail out its Global Equity Opportunities fund.
By injecting a total of $3bn of new cash the investment bank was able to reduce leverage in the fund by about half, allowing it to hold on to more of its positions while rivals were selling to pay off debt.
In the process, Goldman also demonstrated the potential rewards available to investors ready to stump up cash to help a troubled fund: it and its allies made a $450m paper profit in a little over two weeks. (Investors who had been in the fund before the rescue still lost out badly, but may have avoided even bigger losses.)
Of course, these potential rewards come with risk. In the case of Carlyle Capital, a $150m rescue by its private equity parent Carlyle Group last summer led to nothing but losses when the 32-times geared, listed mortgage fund collapsed this month.
Hedge funds are becoming increasingly worried about banks sparking a crisis by cutting the level of leverage they are willing to offer, forcing sales of assets into falling markets and putting a fund into a death spiral.
Bruce Rose, founder of Carrington Capital, said that the decision to raise new money in a letter to investors this month, saying: "The markets and dealer behaviour have changed dramatically over the last several months and are no longer conducive to maintaining leverage in the portfolio."
Troubled funds whose backers see little reason to throw good money after bad have no chance.
But even those with supportive investors or strong parents might find it hard to persuade banks to provide the time needed to organise a rescue.
Geoff Varga, partner at hedge fund consultants Kinetic Partners in the Cayman Islands, said: "With everything that's happened in the markets, standstill agreements are not going to be that well received. The banks have seen how quickly the value of some of these assets evaporates." |
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HenryTo
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| Posted: Mon Mar 24, 2008 9:24 pm Post subject: |
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The great deleveraging continues...
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Hedge funds seen keeping tight hold of borrowing
Mon Mar 24, 2008 4:54pm EDT
By Kevin Plumberg
NEW YORK, March 24 (Reuters) - Hedge funds paused on Monday from last week's aggressive moves to pare debt and add cash to their balance sheets, but few are expected to return to a reliance on strategies involving heavy borrowing because of the permanent damage of the credit crisis.
Hedge fund advisers and fund managers said they believed the crisis was far from over, with the roughly $140 billion of write-downs at banks so far around the world only the beginning, keeping lending conditions tight and fears high about the viability of creditors.
As a result, last week many funds took profits on positions in which they were ahead and used the cash to plug holes in their portfolios, causing the biggest crash in the commodities market in 50 years.
A lot of these positions had been leveraged to varying degrees, using borrowed money to enhance returns. When the price of an underlying asset moves sharply in an adverse direction, causing lenders to call in their debts, some funds can go bust, such as Amsterdam-listed Carlyle Capital (CARC.AS: Quote, Profile, Research), which defaulted on $16.6 billion of debt earlier this month.
Equity and commodity prices as well as foreign currencies could all tumble if hedge funds have to keep liquidating their best trades to generate cash on their balance sheets.
"People have just got burned on leverage," said John Mauldin, president of Millennium Wave Investments, a hedge fund investment adviser in Arlington, Texas.
"When you kill 60 percent of your customers with subprime exposure and then you wound the other 40 percent, they are not going to want to buy this stuff anymore."
He believes that a "significant" number of hedge funds will go out of business in the next three to five years because of the difficulty of generating high returns with low leverage.
In their place, Mauldin said he expects more funds of funds, with highly transparent portfolios along with higher risk premiums, to produce somewhat modest returns of 8 percent to 10 percent with lower fees. That would be a far cry from the returns in the high-teens reaped in the heyday of the credit bubble.
THE TIPPING POINT
Mauldin added that more funds may focus on finding assets for heavily discounted prices and then selling them at a premium, rather than using leverage to augment bets against an asset.
In what could be a preview of what is to come for the hedge fund industry, money management firm BlackRock Inc (BLK.N: Quote, Profile, Research) and hedge fund Highfields Capital Management on Monday said they were backing a new firm that will buy up distressed mortgages, betting that investors are ready to snap up bargains in the beaten down sector.
David Greenwald, chief operating officer at TG Capital in Newport Beach, California, a hedge fund that invests in currencies only, also thinks the worst may not be over for some funds.
"You are seeing some very aggressive moves by hedge funds having trouble with liquidity to sell their winning trades. I could see more hedge funds collapsing after the banks," said Greenwald, who helps to oversee $200 million in assets.
The $1.79 trillion hedge fund industry is mostly struggling to keep clients' money amid heightened market volatility and tightening credit markets.
Total net flows of fresh money into hedge funds slowed by two thirds to $13 billion in the final three months of 2007 compared with the third quarter, according to data from Lipper HedgeWorld.
Two of the three strategies that worked best at hedge funds in the third quarter no longer did well in the fourth quarter, the data showed.
Liquidation of winning trades was on fully display last week when gold and oil prices dropped more than 7 percent. Net selling of Australian dollars by hedge funds last week was the most since July 2006, according to UBS.
With its relatively high interest rate, the Australian dollar had been a favorite of investors putting on carry trades, in which a low-yielding currency is borrowed to finance purchases in another higher-yielding currency.
That trade has been severely curtailed.
"People don't want to face off with the prime brokers and they want to get cash on to their balance sheets," said Geoffrey Yu, a currency strategist with UBS in Zurich.
"We have reached a tipping point at which funds no longer could afford to be so highly leveraged." (Additional reporting by Gertrude Chavez-Dreyfuss; editing by Leslie Adler) |
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