Another day, another subprime casualty? The Caliber hedge fund was heavily exposed to 2005 subprimes, which is a new cause for pause, since heretofore, it was the 2006 subprimes that had shown the worst performance. But now troubles are showing up in the 2005 cohort.
The UK fund isn’t as big as either of the Bear funds ($900 million in assets) but still large enough to be noteworthy.
From the Wall Street Journal, “As London Firm Shuts Down, Worries Spread To American Home Loans Made Back in 2005“:
Bond market turmoil spread yesterday as a London investment fund shut down because of bad bets on mortgage-backed securities and, separately, banks were left holding part of a closely watched corporate bond offering.
The London fund, Caliber Global Investment Ltd., announced it was shutting down because of souring investments in bonds backed by mortgages to American homeowners with sketchy credit. So far, most of the pain in the mortgage market was caused by loans made in 2006, when lending standards reached a low. Caliber, a unit of hedge-fund operator Cambridge Place Investment Management LLP, was hurt by loans made in 2005. Delinquencies in these older loans are also building, and investors have been selling off bonds backed by these mortgages in anticipation of problems.
Caliber, which listed on the London Stock Exchange in June 2005, lost 53% of its value. It said it will unwind the fund and attempt to return about $900 million to investors in the next 12 months. The company said in a statement there was “insufficient demand currently for investment through listed investment companies exposed to this asset class.”….
In the mortgage sector, the 2006 vintage of subprime loans have already been labeled a bust because delinquencies and defaults on these loans started rising shortly after they were made. The 2005 vintage is now showing more signs of stress.
Among its mortgage bond holdings, those tied to 2005 loans were most prominent in Caliber’s portfolio. As of March 31, Caliber had $320.1 million worth of 2005 residential mortgage backed securities, versus $40.5 million worth of 2006 securities. The bonds tied to these 2005 loans are losing their value.
Caliber’s unrealized losses for its 2005 holdings were $58.4 million, including a $12 million second-quarter charge, are $46.4 million, the company said in a report last month. This week, Caliber threw in the towel.
Defaults and foreclosures on 2006 loans are worse than 2005. But the rates of bad loans for 2005 are rising and are considerably worse than for 2004 and 2003.
According to First American LoanPerformance, 19.6% of 2006 subprime home loans that are at least 15 months old were delinquent as of April. The 2005 loans are going bad at a slower pace — but the delinquencies are mounting. As of April, delinquencies accounted for 18.9% of 2005 subprime loans that were at least 26 months old. A delinquency is a loan that is 60 days or more overdue or already in foreclosure.
One portfolio manager, Bryan Whalen at Metropolitan West Asset Management, said the worst loans were made between September 2005 and November 2006, as cutthroat competition encouraged some lenders to push down their lending standards to new lows.
Investors are also concerned about borrowers who took out 2005 adjustable-rate mortgages, many of which will reset with higher interest rates this year. In some cases, the value of bonds backed by these mortgages are falling in anticipation of problems. Moreover, borrowers have had trouble refinancing out of these loans and into fixed rate mortgages because lenders have been tightening their credit standards.
Caliber said the decision was made after a review that began in early May. Later, Caliber told investors it was witnessing a “deterioration” in the U.S. subprime market and it had sold six positions in investments backed by 2006 subprime mortgages, including three at a loss.
The article also mentioned that investors balked at part of the financing for the Dollar General LBO, leaving underwriters holding $725 million of unsold bonds that had a “payment in kind toggle.” PIK paper hasn’t been seen since the long-in-tooth phase of the last LBO cycle. The underwriters plan to sell the bonds later (one of the rules of Wall Street is “everything can be solved by price”).
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