The $900 Million Hit
Lehman beats street... despite a $900 Million hit.
#4 Investment Bank Lehman Brothers Q3 profit fell 3.2%. The biggest hit taken by Lehman was in fixed-income trading, which declined 47% ($900 Million).
Stronger businesses helped to compensate for a $700 million fixed income net revenues hit from "substantial valuation reductions" in MBS and other investments as Lehman beat the number.
Lehman employed a strategy which many banks will follow for the next two quarters, massive writedowns in an attempt to "clear" the bad debt from the books.
Lehman is still exposed to large amounts of LBO debt being held on its books. These questions remain: How much bad debt are they still holding?
And how much writedown will be necessary, once all the holdings are re-marked or re-rated (S&P, Moody's, Fitch's) vis a vis mark to market valuations?
More Northern Rock Exposure...
Northern Rock is the U.K. bank most vulnerable to higher interest rates because it relies on capital markets for 73% of its funding.
Savers across the U.K. have removed about 2 billion pounds ($4 Billion) from Northern Rock since Sept. 14 and the bank's shares have tumbled 67%.
Higher yields...
Offering higher yields enabled companies to sell a record $92 billion of investment-grade debt in August, after they raised less than $40 billion in July, the lowest in more than two years.
By contrast, high-yield, high-risk issuers have been shut out of the market. More than 45 companies were forced to cancel, delay, or postpone debt offerings.
Sales of junk bonds total $1.93 billion since July, compared with this year's weekly average of $3.3 billion.
Wider Spreads...
As companies raised yield premiums on new debt, investment- grade corporate bond spreads widened to an average of 158 basis points, the most since 2003, from 86 basis points in February.
Paying the piper...
The new debt issues at higher yields causes spreads to widen, thus repricing the existing debt (secondary market) DOWNWARDS.
Thomas Houghton, Advantus Capital Management: "These things look attractive when they come, but when everything else you own gets pushed wider it's frustrating.
We're very hesitant to buy anything on the new issue front right now given expectations for further issuance and wider yield spreads."
The upside... "If you're a buy-and-hold insurance company or pension fund, you're getting some pretty attractive levels."
To the wayside...
Impac Mortgage an Alt-A lender, said it will quit most lending activities, and cancelled its divident.
Impac CEO: "Given the severe dislocation of the marketplace, which included unprecedented margin calls...
we are left with no other alternative but to downsize our company to better operate and navigate through this difficult and unrelenting environment."
Accredited Home Lenders posted a $260 Million loss compared with a profit of $35.8 million YOY and said its survival remained in doubt.
Accredited statement: "We cannot assure you that we will continue to operate as a going concern." Hat Tip to Bloomberg and MSN.
#4 Investment Bank Lehman Brothers Q3 profit fell 3.2%. The biggest hit taken by Lehman was in fixed-income trading, which declined 47% ($900 Million).
Stronger businesses helped to compensate for a $700 million fixed income net revenues hit from "substantial valuation reductions" in MBS and other investments as Lehman beat the number.
Lehman employed a strategy which many banks will follow for the next two quarters, massive writedowns in an attempt to "clear" the bad debt from the books.
Lehman is still exposed to large amounts of LBO debt being held on its books. These questions remain: How much bad debt are they still holding?
And how much writedown will be necessary, once all the holdings are re-marked or re-rated (S&P, Moody's, Fitch's) vis a vis mark to market valuations?
More Northern Rock Exposure...
Northern Rock is the U.K. bank most vulnerable to higher interest rates because it relies on capital markets for 73% of its funding.
Savers across the U.K. have removed about 2 billion pounds ($4 Billion) from Northern Rock since Sept. 14 and the bank's shares have tumbled 67%.
Higher yields...
Offering higher yields enabled companies to sell a record $92 billion of investment-grade debt in August, after they raised less than $40 billion in July, the lowest in more than two years.
By contrast, high-yield, high-risk issuers have been shut out of the market. More than 45 companies were forced to cancel, delay, or postpone debt offerings.
Sales of junk bonds total $1.93 billion since July, compared with this year's weekly average of $3.3 billion.
Wider Spreads...
As companies raised yield premiums on new debt, investment- grade corporate bond spreads widened to an average of 158 basis points, the most since 2003, from 86 basis points in February.
Paying the piper...
The new debt issues at higher yields causes spreads to widen, thus repricing the existing debt (secondary market) DOWNWARDS.
Thomas Houghton, Advantus Capital Management: "These things look attractive when they come, but when everything else you own gets pushed wider it's frustrating.
We're very hesitant to buy anything on the new issue front right now given expectations for further issuance and wider yield spreads."
The upside... "If you're a buy-and-hold insurance company or pension fund, you're getting some pretty attractive levels."
To the wayside...
Impac Mortgage an Alt-A lender, said it will quit most lending activities, and cancelled its divident.
Impac CEO: "Given the severe dislocation of the marketplace, which included unprecedented margin calls...
we are left with no other alternative but to downsize our company to better operate and navigate through this difficult and unrelenting environment."
Accredited Home Lenders posted a $260 Million loss compared with a profit of $35.8 million YOY and said its survival remained in doubt.
Accredited statement: "We cannot assure you that we will continue to operate as a going concern." Hat Tip to Bloomberg and MSN.
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