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Where's the downside risk for the KKRs of he world in these deals? Do they get stuck with any of the tab or do they walk away scot free?
Where's the downside risk for the KKRs of he world in these deals? Do they get stuck with any of the tab or do they walk away scot free?
Your answer is in the OCC report
pg 5
no credit losses, ever
http://www.occ.treas.gov/ftp/deriv/dq406.pdf
Though they may not lose much over the deal falling through KKR sure as hell won't be able to cash out with an IPO as planned....
I hope they arent complaining yet. The barnacles and wood rot wont set in for a few 10-Qs. Come to think of it; those piers dont look too sturdy.
IF Citi could only fill in the space between those piers with junk bonds and create some new real estate in Lower Manhattan, they'd be set.
Anybody know who is going to end up holding the bag on the Hilton deal?
All I've seen about the financing is that "the $26 billion is coming from two of Blackstone's investment funds." That seems awfully vague to me in the current environment, and Mr. Market has not been showing a lot of confidence with HLT down to $43.70.
By the way, kudos to whoever recommended HLT puts last week. Good timing on the first half of the trade.
From the Hilton release:
Guess I am off topic for the Citi thread.
Locked up tight. Like that constipated owl that is so popular lately. Like an armadillo after a cheese dinner.
Lending capacity soaked up by crap. Not a good place for a bank to be.
albrt, it looks like everyone loves piers!
Best Wishes.
When AMZN and AAPL are "saving the markets" with blowout earnings (and ludicrous valuations, mind you) while the big banks, smaller banks, brokers, mortgage lenders, builders, and the massive real estate complex is cracking at their shaky foundations on a hourly basis.......well, you know we are being set up for a major dislocation in the markets, plain and simple.
Most investors, living hand to mouth, or statement to statement as they say, are completely and utterly oblivious to the fact that Rome is burning.
Most media and Wall Street financed talking heads are happily rearranging the deck chairs on the $USD Titanic while the violin music gets louder and louder.
It is going to be a very, very ugly September and October, friends.
IMHO
Alec,
KKR has several risks when things get like this. In no particular order:
1) Most bridge loans (the sub debt pice of the capital structure)are structured in an increasing rate format. That means the longer the note is outstanding, te higher the rate of interest they pay, and the numbers can get very high. It really eats into equity returns over time;
2) The company which has these sorts of loans out is really restriced from a strategic (M&A) point of view;
3) KKr's ability to raise new funds, which generate more fees, becomes crimped.
Banks Delay Sale Of Chrysler Debt As Market Stalls - WSJ.com
"For all practical purposes the markets are closed right now," said Chad Leat, co-head of Global Credit Markets at Citigroup. "But they're not closed forever," he added, noting that his firm expects activity to pick up in the fall.
Chad Leat with a stiff upper lip.
"Prices have gotten much higher than historical trading levels for many of these companies," said Scott Sperling, co-president of buyout firm Thomas H. Lee Partners, in an interview. "That's probably not sustainable if debt markets adjust to more normalized levels."
Scott Sperling trying to talk the equity market down so he can buy some more companies.
Just so folks know, unlike a lot of people quoted in the Journal, these two are players and have been for a long time.
For the looney doomsayers here, you actually have a moment to crow here. You add this degree of illiquidity in the debt markets to the lack of liquidity on major banks balance sheets and then throw in a major event like another terrorist attack or a major oil shock and things could get ugly pretty quick. It isn't the way to bet, but the possibility is significantly higher than it was two weeks ago.
Um, what are those horrible little blue underlines and did I do that or did the site?
The article starts off great:
Is Chuck Prince still dancing?
Citigroup starring in:
Curse of The Glass-Steagall Pen
The tributes to Sanford I. Weill line the walls...
His achievement required political clout, and that, too, is on display. Soon after he formed Citigroup, Congress repealed a Depression-era law that prohibited goliaths like the one Weill had just put together anyway, combining commercial and investment banking, insurance and stock brokerage operations. A trophy from the victory a pen that President Bill Clinton used to sign the repeal hangs, framed, near the covers.
The richest of the rich, proud of a new gilded age: Times Argus Online
Banker, the double blue underlines are the next "advancement" in context sensitive advertisement. Next up is inserting words into your post touting the greatness of a product.
Have you tried Diet Coke Plus? I have and I find it invigorating!
SYDNEY, July 26 (Reuters) - A second Australian hedge fund
has become caught up in the subprime mortgage fallout, with
Absolute Capital telling investors it has suspended withdrawals
from two funds until October due to a lack of liquidity in
structured credit markets. Sydney-based Absolute Capital, which specialises in
structured credit assets and is half-owned by ABN AMRO
Australia (AAH.AS: Quote, Profile, Research), said the two funds are Absolute Capital
Yield Strategies Fund and the Absolute Capital Strategies Fund
NZD, and are worth A$200 million ($177 million) combined. The suspension follows a decision by Australian hedge fund
Basis Capital to suspend redemptions on two of its funds and
appoint U.S.-based Blackstone Group (BX.N: Quote, Profile, Research) as financial adviser
to help prevent a fire sale of its assets. "Absolute Capital believes a temporary closure of the funds
is the best defensive measure to protect the longer term
interests of our investors given the current illiquid nature of
the funds' investments," Absolute Capital Group Managing
Director Deon Joubert said in a note available on the firm's
webpage.
Second Australia hedge fund suspends withdrawals
| Reuters
More Bagholders
Banker,
Thank you for 'splaining things.
I assumed #3, but I could never really get a handle on who was on the hook for #1. I know the banks are on the hook, but I just didn't know if the dealmaking enviornment had gotten so out of hand that PE was somehow avoiding being a bagholder as well.
For the looney doomsayers here, you actually have a moment to crow here.
Get used to it, banker. None of this is a surprise to us "looney doomsayers". I've been consistent in my expectations for years now, as documented in numerous blog discussions here and elsewhere.
You'll get there eventually.
What do you catch if you fish off one of these piers? Mudsharks?,and what kind of line..."I'm from the government,and i'm here to help you" doesn't seem appropriate,somehow...too lightweight.
TJ:
I have also been right about the economy for several years now. The only part I can't figure out is how my Ameritrade account got so much smaller from being right.
Some quick Citigroup analyis (VERY back of the envelope)
Form 10-K
At year-end 2006, Citi had loans and committments to junk credits of 20% of their corporate portfolio or roughly $125 billion. It looks to me like a lot of that was credit hedged. let's guess Citi is on the hook for 20% of Chrysler's $10 billion, that's another $2 billion, Allison another maybe $750 million, $1 billion for US Foodservice, $500 million for Servicemaster. That's between $4 and $5 billion. For First Data, maybe another $3 billion they'll have to eat, for TXU another $4 billion and for Clearchannel another $3 billion. That is a total of $15-ish billion. Now some of this risk was well-laid off when the markets were stronger so lets give a little credit, say 1/3 was laid off. So you have $10 billion of exposure. Add in another $2 billion of "equity bridges" spread across the deals and that gives SOME idea of where Citi might be.[the above is all a series of guesses based upon how these exposures usually get spread around.]
$12 ish billion of illiquid incremental exposure they'd rather not have on a $630 billion corporate portfolio of which 20% was previously junk. $12ish billion on a balance sheet with $100 billion of tangible equity.
It also looks like in the fourth quarter Citi issued about 3 times as much debt as they do in most quarters. It sort of looks like they were extending maturities and making the business more liquid in anticipation of this possibility.
Certainly not good, but it doesn't look like a crisis to me.
In my career I did not spend a lot of time analyzing financial institutions so if anybody has a better analysis, please correct me. Thanks.
Banker
I think we are on the same wave length.
I expect this to end badly for Citi, Chrysler. and the rest of us who have witnessed this madness. But the people who should really be worried now are the UAW members who will be forced to make this deal make financial sense. I can only imagine the pressure that will be brought to bear on the unions because of Chyslers ties to Cherry automotive of China. The downturn that is headed our way may very well destroy the American auto industry in a way that the great depression did not.
Thank you- Banker interesting posts
B:
I believe only about 245 members of the Light Brigade were killed or wounded in their skirmish at Balaklava. It is my further understanding that the Light Brigade did not charge back into the valley again any time soon after that.
Nomura, Japan's largest broker, on Wednesday said it was considering withdrawing from the US residential mortgage-backed securities (RMBS) market following substantial losses related to the subprime mortgage market and a writedown of its US operations.
The review of its US business follows Nomura's disclosure for the first time of its exposure to the US subprime mortgage market, which has led to a Y31.2bn ($259m) loss in the fixed-income business in the first quarter and a Y70bn write-down of its US business.
Nomura has reduced its exposure to the RMBS market, with RMBS assets falling from Y657.8bn at the end of March to Y266bn in the first quarter to the end of June. Of that balance, subprime mortgages amount to Y71.1bn.
Yahoo! 404 - Page Not Found
This is like watching the bodies wash up on shore after a plane crashed in the ocean.
Y.S.,
Some people I highly respect think the world of Steve Feinberg, incredibly smart and a good guy to boot. But for the life of me I can't see how this works. The economy has to go right, the turnaround has to go right, competition has to not come up with the next great thing etc. When's the last time everything went right?
Given my current pessimism on this one, it'll probably be one of the great deals in history
ABX lowest levels and remittance report
The latest news to pummel the indexes was tied to the July remittance reports, which give a snapshot of subprime loan performance over the last 30 days. Subprime loans are made to borrowers with poor credit.
The data, due on the 25th of the month, showed delinquencies in home loans made to less-creditworthy borrowers were increasing, market participants said.
July remittance reports are "worse than we expected," said one market source. "Delinquencies are accelerating still."
Mike Kagawa, portfolio manager at Payden & Rygel in Los Angeles, said, "The expectations were poor going into the July remittance reports, but the data showed even further weakness."
and
Borrowers of almost half of the $500 billion of risky subprime mortgages facing higher interest rates over the next 18 months are expected to have trouble refinancing, according to J.P. Morgan
Danny- "Borrowers of almost half of the $500 billion of risky subprime mortgages facing higher interest rates over the next 18 months are expected to have trouble refinancing, according to J.P. Morgan"
Oh, joy. $250 billion will have "trouble" refinancing. Well, at least it's "contained."
banker,
You have that IB stuff down cold, I'll give you that! Keep up the great posts.
albrt,
Direction is easy; it's the timing that's extraordinarily difficult. Unfortunately great investing requires both. So far I'm well ahead, but that's mostly because my trades are few and far between.
I'm sure I'm not the first to suggest this.. but I hadn't noticed this on a Rock Blogging post yet..
But I can't help but hum this whenever I read another bridge loan blowing up post....
YouTube -
mp: even if you get 80 cents to the dollar (optimistic I believe), that's $50 billion dollars down the drain.
And who knows how much non-subprime will go down the drain, too.
Last but not least, I wonder how much of those multi-billion "losses" turn into 1099 and tax due to the F[ormer] Borrowers.... [how ironic(?) that dotbust resulted in many taxes owed as well.]
Ladies and gentlemen, things have become slightly non-contained, but we plan to have containment back on line in the fall. Nothing to worry about.
Possibly OT, but can someone explain to me in monosyllables what is meant by the :
'Fed Put', or the
'LBO Put', or the
'Chrysler Put'
I see these phrases popping up in the blog world, but don't grasp the meaning.
Hapsburger, a "put" is an option contract that gives the buyer the right to sell stock, for example, at an agreed upon price to the the seller of the put for a fixed length of time. You pay a premium for the option. If the price of the stock falls by an amount greater than what you paid for the option, then it's "in the money." Get the idea? You can buy the stock at the lower price and deliver it to the seller of the put and settle your contract. You pocket the difference.
Anyway, when people talk about the "Greenspan put," they mean that the Fed would bail out the market, if it got into trouble, by lowering interest rates. Which is what happened. It encourages speculation.
Does that explain the terminology for you?
mp:
Thanks.
I understand what a Put is technically - (right not obligation to sell at a predetermined price), but in the case of the "Greenspan" Put, is he buying or selling the Put? and the Put is on the value of the dollar? state of the economy?
Can you give me a little context or 'color' on this?
Money quote:
Just last week, Prince, Citis CEO, struck a defiant tone as the leveraged-finance market crumbled around him. As long as the music is playing, youve got to get up and dance.
He also said: When the music stops, in terms of liquidity, things will be complicated.
For a guy who cut his teeth helping his "mentor" Sandy Weil peddle usurious loans to poor people in the South, I wonder if he's asking himself the question whether what goes around...
but in the case of the "Greenspan" Put, is he buying or selling the Put?
Greenspan would be selling the put in this analogy. The problem is that he's selling it for nothing. The implicit promise of Fed intervention to prop up the markets puts a cap on how much you can lose if your risky upside investments go bad do to systemic market drops. Since the Fed is going to prop it up, the worst case scenarios won't happen. You have a put that you can use to hedge your potential losses, that would be paid for by the taxpayer.
Is Prince still dancing? In case people don't remember, that's in reference to this (already a pumpkin after only two weeks):
NEW YORK, July 9 (Reuters) - Citigroup Inc's (C.N: Quote, Profile, Research) Chief Executive on Monday rejected concern the recent boom in private equity buyouts fueled by low borrowing costs will end soon, the Financial Times said on its Web site.
In an interview with the newspaper, Prince said the boom will eventually end, but will continue for now because markets have plenty of liquidity, despite turmoil in the U.S. subprime mortgage market.
He denied Citigroup was pulling back, the newspaper said. "When the music stops, in terms of liquidity, things will be complicated," he said. "But as long as the music is playing, you've got to get up and dance. We're still dancing."
Prince added: "The depth of the pools of liquidity is so much larger than it used to be that a disruptive event now needs to be much more disruptive than it used to be. At some point, the disruptive event will be so significant that, instead of liquidity filling in, the liquidity will go the other way. I don't think we're at that point."
Indymacs breakdown of delinquency by loan type :
http://theimbreport.com/wp-content/uploads/2007/07/tables-for-dq-blog.pdf
And their blog post on the subject:
http://theimbreport.com/?p=40
Pretty good LA Times article on the state of the market:
Industry's foundations get shakier
""We expect inventory levels to increase based on the credit issues with the increasing level of mortgage resets in the coming months through spring '08," building analyst Daniel Oppenheim of Banc of America Securities wrote in a note to clients.
"We think inventory is the best indicator of future pricing trends excess inventory equals lower prices ahead," he added."
...
""These higher prices did not allow the market to absorb the excessively high inventories, which stand at levels not seen since 1991," said Carl Reichardt, an analyst with Wachovia Securities who said affordability is one of the most significant roadblocks facing the industry as it struggles to recover.
Southern California has a 12.6-month supply of unsold existing homes, about double the inventory from a year ago, according to a sampling of for-sale listings taken by the California Assn. of Realtors. The month before, the supply was 12.5 months."
...
"During the worst of the Southland's last housing downturn in the mid-1990s, inventory maxed out at 19 months of supply, with foreclosures accounting for about a third of the homes, Veling's statistics show. Today, the proportion of foreclosures or bank-owned properties on the market is less than 10%."
Hapsburger, the LBO put is locking in the prices on stocks that are potential rumor targets for buyout. The prices of many stocks aren't falling because speculation keeps them high, regardless of fundamentals. This is an effective put, like buying a put option guaranteeing a price floor.
But it looks like the expiration date of the LBO put was yesterday. Wonder how long until the market realizes this.
For the looney doomsayers here, you actually have a moment to crow here.
Nice underhanded compliment, banker. If I may paraphrase, "yeah, you were right, you idiots"
uh-huh.
BULLS EAT CROW
Coming soon to a stock market near you.
Ron Paul Music Videos.
26 Pauls music videos - Liberty Forest
sorry, that would be 'backhanded compliment'. It is way too late for me.
OT: The yen is pretty strong today, movimg up againat many major currencies. Yen carry trade unwinding a little?
LHF,
I don't think that's off topic.
In these days when industrial jobs have been being outsourced, the "financial industry" has been carrying a lot of the load in the US.
It could be that the Yen is the "financial industry's" rectal thermometer. And, yes, it seems to be deflating, so to speak.
If the average man has a negative savings rate, which I don't think is a nothing burger, and the financial industry becomes flacid, what's left?
Counter-work at MacDonald's?
I know the counter argument. The American economy is too big to fail.
Warning, anecdotal info ahead -
Ran into a friend last night who works on syndicating leveraged loans for an overseas bank. I was surprised to see him out late on a weekday, but he said he suddenly decided to take a vacation because "there's nothing to do at work".
This is interesting, because his bank avoids the big deals that have tended to have the worst sort of gimmicks (toggles etc.) and low coverage ratios.
ABX 20 out of 20 closed at lows.
CDX 8 out of 8
LCDX just a few ticks above the all-time low and closed down yesterday.
CMBX - think it was 12 out of 15
as someone here always says - "we're going to need a bigger box to keep this thing contained".
Moin,
WCI Communities says sale of firm more challenging ...LOL!
Stock on the way to zero...
Expired
"It isn't the way to bet, but the possibility is significantly higher than it was two weeks ago."
That's why you keep reading this blog, right, Banker? Because in spite of what you'd like to believe, you know that some people here told you two weeks ago that things would get riskier, and they did.
My suggestion for next SB-rollin'
Sittin'in the dock of the bay,
...
I am not sure how many of you have read iTulip.com's commentary on the 'FIRE economy' (Finance, Insurance, Real Estate) but with two of those pretty much taking a beating lately, I am not sure what else is left to prop the markets or the economy up.
I think the resession just officially started...
If we see a 750K-ish number on the New Homes Sales, do you think talk of containment will subside?
CNBC: "New-Home Sales Declined 6.6% in June"
The yen is going straight down.
I've been fooled before.
I should say that it is going straight up against the dollar.
There's a little bit of unwinding here.
Banker, what do you think?
Weakness in the housing market "will get materially more severe," Richard F. Syron, chairman and chief executive of Freddie Mac, said yesterday. The government-sponsored mortgage-funding company based in McLean holds about $712 billion of mortgage-related investments.
Freddie Mac is relatively insulated from the subprime segment of the mortgage market, but it has funded unconventional loans such as those on which borrowers pay only interest for a time instead of paying down the principal. At the margins, problems have been creeping from the weaker segments of the market into the stronger ones, Syron said.
"Housing prices will go down," he said. The result will not be "catastrophic," he said, "but it will have a measurable impact on how people spend money. It will have a material impact on how people spend on cars, how they spend on consumer appliances, how they spend on lots of things."
Easy Money, Lifeblood Of Economy, Is Drying Up
materially folks ... with material non-containment
fjr --
*ISM index is still above 50
*Nominal wage gains are healthy compared to the past couple of years
*Unemployment is low
*The global economy is healthier than it has been in several years
*Bernanke has effectively cut real interest rates by not raising the fed funds rate at a time of rising inflation
*With all of the housing-related problems, the national (nominal) median home price has not yet fallen significantly.
We have major drags on the economy, but things are not an overall disaster yet. A housing-induced recession is certainly possible, but I am inclined to think that we wind up running at slow growth rates and 2.5-3% core and 4% headline inflation over the next several years as the Fed cannot substantially cut or raise rates and tries to muddle though, hoping that it simultaneously retains its inflation-fighting credibility while not crushing too many marginal borrowers who took on too much debt in the past couple of years.
Of course, we may be better off with a recession clearing out the deadwood quickly rather than spreading pain over half a decade.
-JLR
JLR,
Can a housing-induced recession be a quick recession? I would tend to think that it cannot be. Lower interest rates won't change things now in place they way they would kick-start businesses. There are two interconnected components here: the credit problem and the price problem. The price problem is sticky.
You cannot end a housing recession without a readjustment of prices to fit incomes. You cannot change incomes without accepting substantial inflation. You cannot change prices without about a hundred million homeowners individually throwing in the towel, and that will only happen after years of pessimism.
We have major drags on the economy, but things are not an overall disaster yet. JLR
Sorry to beat this analogy to death, but this economy is a drunk walking a tightrope.
We've got credit contraction going on and people are starting to look @ CRE funny. When CRE can't build using OPM anymore, the wheels fall off because housing ain't gonna save it, retail ain't gonna save it, durable goods ain't gonna save it, windows vista ain't gonna save it and the iPhone ain't gonna save it.
How bad it gets, I don't know(hopefully, not that bad.)
How long it is, I don't know.
Anecdotal evidence: The town I live in (Tempe, AZ) was supposed to be immune to the real estate problems because it's landlocked; older, stable neighborhoods next to a university where 44,000 students go.
The number of FCs in the zip code around the university has gone from 10 to 418 since January
That's why you keep reading this blog, right, Banker? Because in spite of what you'd like to believe, you know that some people here told you two weeks ago that things would get riskier, and they did.
Wally,
I read blogs for one of three reasons
1) They can teach me something (check)
2) Exceptional writing or
3) A pleasant place to spend time
Arbo,
I'm so far from being an expert on currencies that I'm not going to offer an opinion.
I think the yen is finally making its move to relieve pressure on the Euro and Sterling. It was dancing @ 120 for a while, but now has blown thru it in a hurry. I also think that's why the 30 year isn't moving anywhere near in lockstep with the 10.
If anybody was wondering how bad it's getting in the credit markets:
NEW YORK, July 26 (Reuters) - Gazprom postponed on Thursday the expected sale of its 30-year benchmark dollar Eurobond as emerging markets sold off.
"It is not going to price today," a market source said in London, without giving details.
The Russian gas export monopoly had already scrapped on Wednesday its plans to issue 10-year paper as part of the same deal, due to volatile market conditions.
But the question is, in the new-world of covenant-lite, did the IBs let themselves get beaten down on the usual-and-customary escalator clauses on these bridge loans ?
Mish over at Mish's Global etc.
converted over from haloscan to js-kit comments.
They seem to work pretty well. JS-Kit ECHO
The Yen is testing 118.50 at the moment... if the big unwind cranks up over night then tomorrow will be another very interesting day!
At the risk of being repetitious, another ABX blooooowout day - one, count it one value (on CMBX I think) - not at a new high or low.