We had a story earlier this morning on hard times in the financial services industry, but this merited separate comment.
There is no institutional memory on Wall Street. In superheated M&A markets, investment banks start providing bridge loans even though they should know better. Inevitably, the party ends, credit markets back up, and the securities firms take big losses on unsold inventory. In the 1980s, hung LBO loans led to a restructuring cum acquisition of one-time merger powerhouse First Boston.
Investment banks are having to offer investors higher yields (i.e., mark down the principal value) to clear out over $230 billion of LBO loan positions. From Bloomberg:
Citigroup Inc., Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. are offering discounts of as much as 10 cents on the dollar to clear a $231 billion backlog of high-yield bonds and loans.
“The market can absorb all of these deals,” said John Eydenberg, head of leveraged finance for the Americas at Deutsche Bank AG in New York. “It is a question of time and price.”
While lenders reduced the overhang by 32 percent since July, they are struggling to unload debt from this year’s record $438 billion of leveraged buyouts after losses from securities linked to subprime mortgages reduced demand for higher-yielding assets, according to data compiled by Bloomberg. They sold some bonds at a discount of 10 percent to face value and loans at 5 percent below par, according to London-based Barclays Plc….
The extra yield investors demand to own high-yield bonds, those rated below BBB- by Standard & Poor’s and Baa3 by Moody’s Investors Service, rather than Treasuries widened to 5.64 percentage points yesterday from a record low of 2.41 in June, Merrill Lynch data show.
Interest rates on loans rated B rose to 4.28 percentage points more than the three-month London interbank offered rate, a lending benchmark, from a low of 2.13 in February, according to S&P. Libor is 4.83 percent.
Lower premiums earlier in 2007 allowed private-equity firms led by Kohlberg Kravis Roberts & Co. and Blackstone Group LP to pursue the biggest LBOs ever. Henry Kravis, head of New York- based KKR, said at a conference in Halifax, Nova Scotia, in May that the business was in a “golden era.”…
Banks have $161.9 billion of loans and $69.6 billion of bonds left to distribute, according to JPMorgan data.
“A python that swallowed an elephant is being absorbed through the system,” said Mario Gabelli, chief executive officer of Rye, New York-based Gamco Investors Inc., which has $31.6 billion in assets under management….
“It will be important to get this Alltel deal done in an orderly fashion,” said Manny Labrinos, who helps oversee $2 billion as a bond fund manager at Nuveen Investment Management in Los Angeles. It may take until October to sell all the debt, he said.