LBO Debt Market Time Bomb
Demand for high yield bonds encouraged lax underwriting (one of our past natterings)...
Bennie Bernanke, today: "The practice of selling mortgages to investors may have contributed to the weakening of underwriting standards."
Speaking of demand and lax underwriting...
Banks are helping fund a record pace of takeovers this year, with the value of announced LBOs soaring 40% to $188 B in Q1.
About $366 B of LBOs have been announced this year, a rate that may eclipse last year's record of $701.5 B.
More than 50% the junk bonds sold this year were used to pay for leveraged buyouts and mergers and acquisitions, according to Barclays.
And an excellent missive at Bloomberg points out that despite defaults being at an all time low, some market participants have never been so nervous.
Leveraged buyout firms are private investment companies that use debt to cover about two-thirds of the price of their takeovers.
The bonds and loans would be at risk if the acquired company runs into financial trouble and can't meet its obligations.
Companies are piling on debt even as the economy slows. The total debt for about 300 companies rated BB and B expanded by 16% last year, double its growth in 2005.
Worse yet, recent yield curve and risk spread compression has put considerable pressure on some of the LBO issues already placed.
New York Fed President Timothy Geithner, today: officials are "looking carefully" at the loans that finance leveraged buyouts.
Somemore margin squeeze i.e. BOC or BOJ raise or FED lowering will collapse some of these highly leveraged deals.
Leading to less willingness to lend and also to borrow, AKA a credit cycle crunch. And don't think that credit isn't already contracting...
Yoy total US bank lending +8% vs +13.5% last summer, for an excellent missive on why the bond/debt bubble could blow read Succo & Reamer at Minyanville.
As the economy worsens, housing tanks and consumer demand weakens, earnings will decline, the fragile stability of margins will be upset, leverage will unwind and bubbles will start to burst.
And the only thing the Fed can do is lower rates and crank up the printing presses. How much?
In 1980 $1 injected by the Fed = $1 GDP increase. Today, $1 GDP increase requires the Fed to inject $8...
Listen, do you hear Flight of The Valkyrie's? Oh no, I'm having another flashforward.... Why, I can see them on the horizon now...
it's a squadron of Fed helicopters with Captain Bennie at the helm screaming... Charlie don't surf!!! The Nattering One queries: Whats that smell???
Bennie answers: "Freshly printed money, son. Nothing else in the world smells like that. I love the smell of printing presses churning out devalued fiat currency in the morning.
You know, one time we had a housing market bomb, for twelve years. When it was all over I walked up. We didn't find one of 'em, not one stinkin' homeowner body.
The smell, you know that M3 17% growth smell, the whole hill. Smelled like... massive debauchery."
Bennie Bernanke, today: "The practice of selling mortgages to investors may have contributed to the weakening of underwriting standards."
Speaking of demand and lax underwriting...
Banks are helping fund a record pace of takeovers this year, with the value of announced LBOs soaring 40% to $188 B in Q1.
About $366 B of LBOs have been announced this year, a rate that may eclipse last year's record of $701.5 B.
More than 50% the junk bonds sold this year were used to pay for leveraged buyouts and mergers and acquisitions, according to Barclays.
And an excellent missive at Bloomberg points out that despite defaults being at an all time low, some market participants have never been so nervous.
Leveraged buyout firms are private investment companies that use debt to cover about two-thirds of the price of their takeovers.
The bonds and loans would be at risk if the acquired company runs into financial trouble and can't meet its obligations.
Companies are piling on debt even as the economy slows. The total debt for about 300 companies rated BB and B expanded by 16% last year, double its growth in 2005.
Worse yet, recent yield curve and risk spread compression has put considerable pressure on some of the LBO issues already placed.
New York Fed President Timothy Geithner, today: officials are "looking carefully" at the loans that finance leveraged buyouts.
Somemore margin squeeze i.e. BOC or BOJ raise or FED lowering will collapse some of these highly leveraged deals.
Leading to less willingness to lend and also to borrow, AKA a credit cycle crunch. And don't think that credit isn't already contracting...
Yoy total US bank lending +8% vs +13.5% last summer, for an excellent missive on why the bond/debt bubble could blow read Succo & Reamer at Minyanville.
As the economy worsens, housing tanks and consumer demand weakens, earnings will decline, the fragile stability of margins will be upset, leverage will unwind and bubbles will start to burst.
And the only thing the Fed can do is lower rates and crank up the printing presses. How much?
In 1980 $1 injected by the Fed = $1 GDP increase. Today, $1 GDP increase requires the Fed to inject $8...
Listen, do you hear Flight of The Valkyrie's? Oh no, I'm having another flashforward.... Why, I can see them on the horizon now...
it's a squadron of Fed helicopters with Captain Bennie at the helm screaming... Charlie don't surf!!! The Nattering One queries: Whats that smell???
Bennie answers: "Freshly printed money, son. Nothing else in the world smells like that. I love the smell of printing presses churning out devalued fiat currency in the morning.
You know, one time we had a housing market bomb, for twelve years. When it was all over I walked up. We didn't find one of 'em, not one stinkin' homeowner body.
The smell, you know that M3 17% growth smell, the whole hill. Smelled like... massive debauchery."
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