The FT’s Lex column has a bit of sport with Citigroup’s Charles Prince, who a mere two weeks ago made an upbeat forecast for debt markets:
Who is Chuck Prince dancing with now? Just two weeks ago the Citigroup boss reckoned the music was still playing for the credit-fuelled buy-out boom. But it gets a bit lonely on that dance floor when investors go on a massive buyers’ strike.
The big banks threw in the towel on trying to place a combined $20bn or so of debt on Tuesday – part of the buy-out funding for the Chrysler and Alliance Boots deals. The banks will keep the loans on their books in the hope that, after a decent pause, investors’ nerves will rally.
They could be waiting a while. Some of the leveraged loan paper trades at big discounts in the secondary market. From an investor’s perspective, catching a falling knife looks easier, right now, given the potential supply of leveraged loans and high-yield bonds coming down the pipe and the knock-on effects of the subprime mortgage mess.
For the underwriters, this is a headache on several fronts. First, there are the potential mark downs on debt they have to keep. Second is the capital such funding ties up. Third is the credit exposure, which can be difficult to hedge out.
The big banks, of course, will point to their large balance sheet and seasoned underwriting skills. And they may be right that it makes more sense to weather the storm than panic by shifting the paper into the market at firesale prices.
But even indigestion, if it amounts to no more than that, can be painful. If the well-oiled machines that churn out the paper seize up, even for a short time, a backlog can build quickly given that commitments to fund buy-outs have still been coming in the front door. It may not quite be the day the music died but the tune is sounding a lot more doleful.