More Autos, Buy Backs & LBO's
Question from Part I: What will happen to companies, bond holders, and markets...where stock buybacks and LBO's where purchased with borrowed funds...
if there is a further drop in earnings growth; the debt gets rerated and/or the debt can't be serviced?
From Bloomberg: "Almost 65% of the bonds in indexes that track subprime mortgage debt don't meet the ratings criteria in place when they were sold."
This brings into question the ratings on not just mortgage backed securities but LBO and stock buy back debt as well.
From Mish's GET: "The S&P says 50.7% of the corporate bond market is now rated speculative grade.
What the S&P does not say is how much of the debt that is not rated speculative should be rated speculative.
What the S&P also does not say is how much of the total debt it has rated is over rated."
Oh, almost forgot, it is different this time... From Yves Smith at Naked Capitalism: "How can investors in credit products have such a different perspective from their stock market counterparts?
The comparison to the LTCM era is the key. As nasty as the 1997-1998 credit crisis was, it had relatively little impact on the equity markets.
The two main reasons why were first, there was no widespread asset price inflation, so a seize-up in the credit markets would not have immediate implications for asset prices.
The only investment that was arguably a bubble at that time was emerging market equities, and they took a beating along with emerging market debt.
Second, while the LTCM crisis could have produced a systemic failure, there was no resulting large scale institutional damage.
So it would seem that the equity markets are seeing the current credit contraction as a re-run of 1997-1998. But the underlying fact set is different.
Not only do we now have bubbles or near bubbles in many markets, but it is not clear that Bernanke is as willing as Greenspan to increase liquidity to stem a crisis (although the bond futures markets are already betting on a rate cut by December).
This Fed has a more pressing inflation problem than in the 1990s, and Bernanke is likely to capitulate at a later point than Greenspan would have."
There seems to be a growing consensus that in the event of the "necessity" to lower rates later this year, the Fed may just "let Rome burn" while taking a stick to the debt markets.
The systemic effects of such inaction could be dire as will be the fallout from the debt markets in the event of further economic downturn.
if there is a further drop in earnings growth; the debt gets rerated and/or the debt can't be serviced?
From Bloomberg: "Almost 65% of the bonds in indexes that track subprime mortgage debt don't meet the ratings criteria in place when they were sold."
This brings into question the ratings on not just mortgage backed securities but LBO and stock buy back debt as well.
From Mish's GET: "The S&P says 50.7% of the corporate bond market is now rated speculative grade.
What the S&P does not say is how much of the debt that is not rated speculative should be rated speculative.
What the S&P also does not say is how much of the total debt it has rated is over rated."
Oh, almost forgot, it is different this time... From Yves Smith at Naked Capitalism: "How can investors in credit products have such a different perspective from their stock market counterparts?
The comparison to the LTCM era is the key. As nasty as the 1997-1998 credit crisis was, it had relatively little impact on the equity markets.
The two main reasons why were first, there was no widespread asset price inflation, so a seize-up in the credit markets would not have immediate implications for asset prices.
The only investment that was arguably a bubble at that time was emerging market equities, and they took a beating along with emerging market debt.
Second, while the LTCM crisis could have produced a systemic failure, there was no resulting large scale institutional damage.
So it would seem that the equity markets are seeing the current credit contraction as a re-run of 1997-1998. But the underlying fact set is different.
Not only do we now have bubbles or near bubbles in many markets, but it is not clear that Bernanke is as willing as Greenspan to increase liquidity to stem a crisis (although the bond futures markets are already betting on a rate cut by December).
This Fed has a more pressing inflation problem than in the 1990s, and Bernanke is likely to capitulate at a later point than Greenspan would have."
There seems to be a growing consensus that in the event of the "necessity" to lower rates later this year, the Fed may just "let Rome burn" while taking a stick to the debt markets.
The systemic effects of such inaction could be dire as will be the fallout from the debt markets in the event of further economic downturn.
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