Loan Market Suffering Sharp Writedowns

While all eyes have been fixed on the interbank market, and the plunge in the Baltic Dry Index has also garnered some attention, the sudden decay in the loan market (meaning for the most part leveraged loans, the sort used to finance LBOs) has gotten far less commentary. Yet this will wreak havoc on bank balance sheets, as it did last year. Banks have gone to some length to try to reduce their loan inventories, even going so far as to finance sales heavily. But values have continued to erode. Loans were recently trading in the mid 80,. Some contended those prices were suspect, on small volumes to cooperative counterparties.

The cynics’ view appears to have been borne out by the price plunge last week as recounted in the Financial Times:

Investors in European and US loan markets will enter their offices with great trepidation on Monday morning after a flood of forced selling by hedge funds and other leveraged investors sent prices crashing last week.

In Europe, the average price of the most commonly traded large leveraged loans to companies such as Alliance Boots, Ineos, NTL and United Biscuits saw its biggest weekly drop, according to S&P LCD, the market information service, and Markit Group.

The US market for such debt, which is mainly used for private equity buy-out deals, has also suffered big falls in recent weeks as hedge funds and other market value sensitive investors have become forced sellers.

Analysts do not expect the picture to improve in the near term because falling prices for loans and other risky assets lead banks to force hedge funds and other investors who use borrowed money to put up more cash in so-called margin calls or sell holdings…

“A vicious circle of redemptions, margin calls and further redemptions can only make us nervous on [loan and credit] spreads in the short run,” said Peter Goves, Citigroup strategist. “While funds in equities probably have plenty of cash on hand at this point to cope with redemptions, in credit we are not so sure.” He added that a normalisation in loan and credit markets was only possible once so-called real money – or non-leveraged – investors saw value in such stressed prices no matter how bad the economic outlook.

The US loan market saw its worst losses nearer the start of October, when the price of loans to companies such as Celanese and Charter Communications dropped from more than 90 cents in the dollar to the low 80s and the high 70s respectively in a matter of days. Loans to Ford Motor have dropped from 65 cents to 42 cents this month, according to data from Markit.

Investors put out requests for bids on portfolios of loans worth $2.28bn this month alone, according to S&P LCD, which compares with a total of $471m for all of the third quarter.

In Europe, the average price dropped 7.2 cents in the euro to 73.32 cents according to S&P LCD, more than double the previous week’s decline and the biggest weekly drop yet seen.

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  1. evilHenryPaulson

    I expect such analysts to label future price increases due to leverage as fortuitous to balance out their current views of vicious deleveraging. There is nothing more annoying than a spoilt child

  2. EvilHenryPaulson

    re: Baltic Dry Index.

    Contract volume is very light. Seeing about 1-2 per week reported. Light season + Chinese bargaining with Rio Tinto = Ships parked in port.

    With prices this low, at least a boat’s margins are going up so long as oil prices fall faster

  3. melpol

    It is wrong to blame government deregulation policies for causing the recession when the government was responsible for making the laws that regulated the lending policies of the banking industry. They permitted banks to lend without a credit check or down payment on mortgages, and stood idly by as predatory lenders reaped a harvest. This was not letting free market forces rule but only giving special interests the freedom to rip off potential home owners.

  4. Anonymous

    melpol: It was the failure of the government to regulate or failure to adequately regulate that allowed free market forces to rule. Disclosure comes from regulatory requirements not from the invisible hand.

  5. Anonymous

    suspect prices from cooperative counterparties may also be interpreted as the opposite, ie, low prices which a financing party will use to mark and execute the collateral owned by a poor Icelandic bank…. asking for bids in competition on a friday for a large portfolio giving potential buyers 1.5 hours to reach does not really guarantee best execution…

  6. Steve

    The implications for the broad economy of non-financials deleveraging is more worrying than the impact on lenders. The number of jobs in the US tied to over-levered companies without access to refunding hasn’t yet been a focus of politicians and the press — I suspect it soon will be. And with GE Cap and other lenders dropping out of DIP financing, job losses are likely to be unusually severe compared to post-War recessions.

  7. Edwardo

    With respect to the following comment:

    “The cynics’ view appears to have been borne out by the price plunge last week as recounted in the Financial Times:”

    Cynics? This may merely be semantics to you, but it would have been better had you referred to those whose prognostications have been accurate, as realists, (with pardons to the memory of the late George Santayana who said “The only realists are idealists”) since they seem to be in tune with events. Cynics are merely in tune with human nature.

  8. Jojo

    Related article:

    Why Loan Sharks Can’t Make Money
    By mark.gimein
    Created 10/16/2008 – 5:07pm

    A credit crisis is upon us, the economy is tanking, and more people are finding themselves short of work, short of cash, and with fewer places to get it. You’d think that somebody in the business of giving out payday loans-the closest thing to legal loan-sharking the financial world has invented-would be taking in money hand over fist. But you’d be wrong. In fact, the country’s biggest payday-loan operator, Advance America [1], is doing miserably.

    Advance America [2] charges $17.50 as its fee on a two-week $100 advance; that comes out to an annual rate of 456.25 percent. It’s about par for the course for the industry. Online, you’ll find fees of $18.62 and APR figures of about 600 percent. All the decimal points and percentages make payday loans look more banklike, but you can see the origins of the business in the simple old loan-shark’s equation of “six for five”: You pay back $6 for every $5 you borrow.


    We’ve yet to see what lesson lenders draw from the subprime debacle. One possibility is that they will conclude that they need to stay away from any but the safest borrowers at all costs-that seems to be the direction they’re heading in. And it’s likely to be bad news for the economy. That’ll mean less credit for those at the bottom and higher rates for everyone else. Another possibility, however, is that lenders will be very careful about raising rates in the hope that borrowers will be more likely to repay more affordable loans.

    Then they will run less risk of crossing what looks like the “fairness threshold” at which borrowers throw up their hands and give up. They might conclude, in other words, that they want to stay as far away from the payday-loan/sky-high-rate model as they can. That would take a little bit of rethinking of interest rates and risk from the credit industry. But then, it sure feels like this is a good time for some rethinking, doesn’t it?

    Full article


  9. Yves Smith


    Since I have been one of the ones harping on this theme, and other bank exposures that have yet to be fully written down, I did not want to appear self-congratulatory.

    And one can argue that the loan prices reflect distressed sales, since hedge funds are making liquidations in a variety of markets, not fundamental values (although I have some trouble with that argument).

  10. eh

    Speaking of the recent dive taken by the Baltic Dry Index, what’s the view on that? Is it a lasting evaporation of demand foreshadowing a nasty downturn or a temporary artifact of tight credit?

  11. Yves Smith


    There is possibly another dynamic at work. If we don’t see more banks taking each other’s letters of credit soon, the tight credit feeds in an ugly way into the downturn. The collapse in trade becomes real, not a short-term anomaly. This could be Smoot Hawley on steroids. And I am amazed that no one in the officialdom seems to be taking note. But then again, the shipping industry does not have much representation among DC lobbyists.

  12. Abbott_Of_Iona


    Apologies, pretty much off topic here.

    Ireland, the Dead Celtic Tiger (the corpse is beginning to stink).

    The Government has just withdrawn GUARANTEED health care for those over seventy years old.

    Do you, or any of your readers, have an opinion on this list. It seems that the credit community (the Credit Market) has already made up its collective mind.

    Irish banks are in some very bad company here.

    Are these numbers correct?

    From Money Week via Bloomberg

    Apologies for the length of the list.

    But if every bank in Ireland is bankrupt what now?

    Worst CDS Ratings:
    1. Kaupthing 833.3 Iceland BANKRUPT
    2. Kazkommerts 766.7 Kazakhstan BANKRUPT
    3. Glitnir Bank 757.5 Iceland BANKRUPT
    4. IKB 612.4 Germany BANKRUPT
    5. Landsbanki 604.6 Iceland BANKRUPT
    6. Banca Italease 397.0 Italy
    7. VTB Bank 332.5 Russia
    8. Anglo Irish Bank 322.7 IRISH
    9. HBOS 236.7 UK
    10. Sberbank 221.3 Russia $37Bn injection
    11. West LB 212.5 Germany
    12. UBS 209.0 Switzerland
    13. Natixis 205.0 France
    14. Bank of Ireland 202.5 IRISH
    15. Allied Irish Banks 195.8 IRISH
    16. Dexia 195.0 Belgium/France
    17. RBS 191.7 UK

  13. printfaster

    This credit and letters of credit crisis is beginning to redound of Archimedes:
    Give me a place to stand and I can move the earth

    The financial irony is the response by Hiero:
    “Give me a place to stand on and with a lever I will move the whole world,”

    Kind of sounds like Wall Street’s motto.

    I fear that we have no place to stand and the earth will move us.

    Substitute economy for earth.

    Seriously, what are the expectations that the letter of credit crises will evolve or evaporate quickly? What is behind it? There has got to be more to this.

  14. Yves Smith


    As I understand it, banks are still giving L/Cs to buyers of goods. The problem is that the sellers’ banks will not accept L/Cs from the buyers’ bank (ie, Paribas is not accepting L/Cs from Citi). So this is another example of banks not being willing to trust each other.

    BDI fell again, slightly, today, which suggests this is not getting any better, and even if it does improve, it may not do so quickly enough to put a dent in trade separate and apart from supply and demand factors.

  15. Abbott_Of_Iona


    From Wiki

    I always thought Cynic was a dog that was kick because it barked to much about social, political and economic reality.

    Could be wrong.

    “The Cynics were an influential
    group of philosophers from the ancient school of Cynicism. Their philosophy was that the purpose of life was to live a life of Virtue in agreement with Nature. This meant rejecting all conventional desires for wealth, power, health, and fame, and by living a life free from all possessions. As reasoning creatures, people could gain happiness by rigorous training and by living in a way which was natural for humans. They believed that the world belonged equally to everyone, and that suffering was caused by false judgments of what was valuable and by the worthless customs and conventions which surrounded society. Many of these thoughts were later absorbed into Stoicism.”

  16. russell1200

    Dominic Crosson at one point seemed to argue that the Christian movement (at least when Jesus was alive) was influenced by the cynic movement: but with a more rural emphasis. I gather that they were somewhat contemporaneous with each other. His later writings seemed to back away from this stance, but I don’t recall him ever explaining why.

    And since we have entered the realm of the mystical and spiritual: I find it really bad Karma that Paulson is talking about profits on our investments, and people (on NPR) are saying that with LIBOR looking better, the rest of the economy doesn’t look too bad. And look! Here is Mr. Bernanke with a new rescue package!

    Seems like every time they start saying that we are past the worst the bottom falls out. I haven’t really looked that closely, but it seems like our cycle is down to about 3 weeks long: depth of disaster to Pollyanna pronouncements.

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