Wednesday, 24 September, 2008
Prices of high-risk, high-yield loans fell to record lows as Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke sought to persuade Congress to pass legislation to stabilize financial markets.
The price of the average actively traded leveraged loan fell 0.42 cent to 83.74 cents on the dollar, according to Standard & Poor's LCD. Prices have slumped 3.84 cents since Sept. 11, four days before Lehman Brothers Holdings Inc. filed for bankruptcy protection.
Price declines will make it harder for junk-rated companies to borrow as investors opt instead to buy existing debt trading at distressed levels. Lehman's withdrawal from lending, the acquisition of Merrill Lynch & Co. by Bank of America Corp. and other potential finance company mergers may exacerbate already tight lending conditions, Fitch Ratings said in a Sept. 22 report.
``The bottom line is that if world-class former investment- grade companies are finding it difficult to raise capital, speculative-grade companies will find it even harder to obtain funding,'' said Christopher Garman, chief executive officer of Garman Research LLC in Orinda, California.
Some hedge fund managers are selling assets to prepare for client redemptions at the end of the month and Lehman could unload holdings, Garman said. Lehman had $7.1 billion of high- yield loans and bonds on its books, the bank reported Sept. 10.
Leveraged lending has dropped 66 percent so far this year to $267 billion compared with the same period in 2007, according to Bloomberg data, as banks dealt with a $237 billion backlog of loans they promised to private-equity firms before the credit crisis started in July 2007.
Distressed Prices
While banks have reduced that backlog to less than $45 billion by selling loans at a discount to buyout firms, debt investors can purchase loans and bonds of companies in the secondary market at distressed prices, Garman said.
Loans for Tribune Co., the media company taken private by Sam Zell last year, are quoted as low as 61 cents on the dollar, according to Barclays Capital research. The loans may recover between 67 and 90 cents in a bankruptcy, analysts led by Hale Holden wrote in a report Sept. 22.
Morgan Stanley has reduced the loans and bonds for acquisitions on its books to $9.3 billion from $12.7 billion, Colm Kelleher, chief financial officer, said on Sept. 16.
Average loan prices have fallen from 94.89 cents on the dollar since the start of the year, according to S&P. The decline has boosted spreads to 781 basis points from 394 basis points over the London interbank offered rate, assuming four years to repayment, according to an S&P index. A basis point is 0.01 percentage point. Three-month Libor, a lending benchmark, is currently 3.48 percent. The previous low before Lehman's bankruptcy in February was set when prices hit 86.3 cents on the dollar.
Bailout Push
High-yield, or leveraged, loans are graded below Baa3 by Moody's Investors Service and lower than BBB- by S&P. Loan creditors are repaid before high-yield bonds in bankruptcy.
The Markit LCDX, a benchmark credit-default swap index that banks and investors use to hedge against losses on leveraged loans fell 0.5 percentage point to a mid-price of 93.8 of face value, according to Goldman Sachs Group Inc. The index falls as credit risk increases.
Bernanke today reiterated his call for Congress to pass a $700 billion rescue plan to remove devalued assets from the banking system. The U.S. faces ``grave threats'' to financial stability and the credit crisis has started to damage household and business spending, Bernanke said at a congressional Joint Economic Committee hearing.
Bernanke yesterday told the Senate Banking Committee in a joint appearance with Paulson that lawmakers should pass the rescue plan quickly. Bernanke and Paulson are set to appear later today before the House Financial Services Committee.
Source: http://www.bloomberg.com/
