Bankers Sell $2.2 Billion of First Data Bonds
Submitted by
CalculatedRisk on Tue, 10/16/2007 - 11:39am (28 comments)
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First! (to buy the bonds)
How much could CS and Citi leverage up with $10.4 billion instead of having it sit at the end of a pier?
that was quite a discount on the price they took to move them.
giacutter, I'm sure they'll try to get rid of the debt as quickly as possible. The article makes it sound like the market is more receptive to junk (the spreads have fallen somewhat).
The real disaster happens if one of these companies goes into default with the pier loans still on the IB books.
Best Wishes.
CR,
What do you think is the ultimate explanation for the market's receptivness to this paper? Is the market convinced there won't be any more liquidity crisis? Who bought this paper? How leveraged are they? That's the real question in my mind. If they are not very leveraged (pension fund) it's fine. If they are (hedge fund) it's another story...
Also, the melt-up in oil continues.
One buying panic after another...
We've seen this before.
We dont know the terms for default if they have tied toggles, it is simply more debt. On a percentage basis, it does not seem as though they were wildly successfull at finding homes for the debt.
Breaking news-
CNBC's Maria Bartiromo says everything is great! Nothing to see here.
We're going to 15k!
probert, this is a nice return (10.875% per year for eight years) if you thing First Data Corp. will be able to make the payments.
Defaults are about to rise, but these investors are betting the odds of a First Data default are low enough to make it worth the risk.
It sounds to me like the IBs are holding the riskiest debt.
Best Wishes.
Spurred by massive commercial building projects like the World Trade Center, the city is poised to spend $83 billion in three years building office towers, apartments, arts centers and sports complexes, an industry group reported Tuesday.
The New York Building Congress' report described a sustained building boom helped by long-term construction projects like the redevelopment of the trade center site, the Atlantic Yards project in Brooklyn and new stadiums for the New York Yankees and the New York Mets.
Spending on new construction, which was a record $24.6 billion last year, will increase to $26.2 billion this year, $27.5 billion next year and $29 billion in 2009, the group said.
The 2009 projection is 18 percent up from last year's total and reflects "an industry in which every sector seems to be booming," the report said.
Residential and commercial building, infrastructure projects like road repair and transit hubs, as well expansions of schools and hospitals are all performing strongly, the group said.
The biggest success in recent years is office construction and other commercial spending, which more than doubled between 2005 ($4.3 billion) and this year ($8.3 billion.) By 2009, $11.3 billion will be spent on commercial construction, with 30 million square feet planned.
Spending on new homes, which are coming up as new apartment buildings and in conversions of older office buildings, will rise 14 percent this year to $5.6 billion, producing more than 35,000 new apartments -- nearly four times as many as a decade ago, the report said.
Business finance news - currency market news - online UK currency markets - financial news - Interactive Investor
I agree. I was trying to say that even if the debt is from a healthy company, somewhere down the line, a simple decline in the bonds' market price could bring about trouble if the holder is leveraged (think Bear Stearns Enhanced Leverage Fund).
Still, we'd be looking at yields above 11% for a good company like FDC... this requires another summer 2002.
Is my math right that these bonds sold @ 91 cents?
Because if that's the case, all these banks who did writedowns based on 96 cents have to lop off a heck of a lot more off their 10Q come January
Alec -
the B Berg articles says, "... the bonds... were offered at 94.796... The 5% discount means banks took a loss of about $114.5 million, on top of about $360 million from the loan sale. The banks are still holding as much as $10.4 billion in First Data debt."
I guess we can assume that the $10 bananas they're left holding have at least another half a billion of losses attached, and probably more if they're lower quality. Not a pretty picture.
We were doing CLOs until the market evaporated in July.
I don't think the CLO market is going to come back as spreads are widening while earnings are contracting.
First Data might as well have been done a a credit card with that rate.
Here's my walkthrough. If @ par it yields 9.875 and the effective yield is +100bp We have:
100 *.09875 = 9.785
So my thinking is how to solve for X. Do you have the effective rate match, like:
x *.10875 = 9.785
If so, the bonds sold @ 90.81 cents
If they sold @ the offering price:
94.796 * .10875 = 10.309
So to match the actual yield:
94.796 * Y = 9.875
Y=.10322
Which would be 50bp below the effective yield they say it sold at. Or am I solving for the wrong thing?
There's a reason I hate logic puzzles, I'm not very good at identifing what is what.
"It was my understanding there was to be no math."
This seems to be a lower yield than the Chrysler/Cereberus deal (unless my memory is failing me, that paid ~12%). Is First Data that much more stable than Chrysler, or have the taps been opened a little more? (And any bets on what the rest of the $10bil is going to sell for? Given Citi's troubles funding their SIV credit lines, I doubt they're going to be able to hold $10bil in pier loans for a long time...)
Chrysler is a much more dicey proposition.
IIRC, the 1st go round(best of the best) of First Data debt sold @ 96.
The riskier stuff(this round anyway) was offered @ 94.796 , but may have sold @ 91
Citi wrote down @ 96, when in all likelihood it should be closer to 93(or lower), So slash another $6 billion off next quarter.
Alec -
you're solving for the wrong thing. The 10 7/8% is yield to maturity. It's an iterative process that includes reinvesting the coupons at the yield to maturity. The price in my above posted comment is correct.
Gab,
Thanks, but now this gets confusing.
Are you saying that it's the equivalent of a zero coupon bond? Or is the effective yield the stated yield plus the extra cash when redeemed @ par?
HOLD IT...DAMMIT....a solid outfit like First Data has to pay 10% to borrow money and all the fancy shmancy thingies have no-doc, no-credit dreamers pay 5% on mortgages??? Something does not jive here.
I'm just a simple country boy, but I'd rather loan my mason jar money to First Data for 10% than to Jerome Jackson and his buddies for 5% to buy houses they may or may not live in, to be repaid by income they may or may not have, but I can't know because Im taking thier word for it....and as I assume the New York smarties know more than I do, am wondering how they make this work.
I'll get back to tending the still...where the financing is cash, no checks or credit cards and even then only if I know you.
swamp-
Thanks for the laugh!
oh... and outstanding application of common sense.
Swamp, the reason First Data has to pay 10% is because if people got smart like your(or burned) and stopped using credit cards they'd be out of business.
Citi & Swissie are innocents who've been taken advantage of.
They merely offered their services to bring the 1st Data bonds to market, earn their small commissions, and return to business as usual once again.
That's their story. The markets turned bad and these two good guys have been caught in the storm far away from home.
So, the Treasury and Fed Res are rescuing them.
Yes, it's outrageous. These are ruthless wolves who prowled for meat and stole and devoured it every time they could. But they're "banks". With no separation between banking and brokerage,
JQPublic has just found himself screwed...as he's not the innocent. JQP assumed the risk here. He allowed his legislators to remove the bureaucratic layer of government regulation (same M.O. that Reagan did before the S&L blow up; same that Chris Cox tried to do over and over).
The eternal lesson was taught by Thomas Jefferson. "The price of liberty is eternal vigilence." My phrase is, "Vested interests are vested; and never forget it."
Where are the brainiacs who should be thinking about what comes next after next?
Bernanke and Paulson have shown themselves to be weak-thinkers. Nouriel doesn't do the future forecasting well enough to my expectation and satisfaction, though his work is worth sifting through.
Who's thinking about this? Is there a working group on the web at any site or blog you know of?
This is economic crunch time, and I read the signs as unfortunately extremeley short on time, measuring the window to avoid a major US equity drop in no more than 10 trading days, given current market patterns.
Might someone here post a working group whose postings or communications are open to wonks like myself?
A couple of thoughts. What makes this significant is that these bonds are subordinated to the bank debt. So the market is now open for sub debt, not just senior bank debt. Good news no matter how you slice it. Also, the banks here had at least 2 points and probably three as their spread, so their net loss is closer to 2 points or $50 million, than the $114 in the article. The best news? The bonds traded up two points in the aftermarket.
Now this leaves the banks stuck with toggle paper (very tough) and a bunch of other high yielding debt. When you think about the writedowns and the banks earnings, don't forget they are earning 8+% on what they are holding.
Swampfella,
This is subordinated debt, several steps riskier than a mortgage equivalent.
Alec,
These bonds traded up, not down in the aftermarket.
They BETTER have.
Eight years interpolates fairly nicely at approximately 4.55%. So the notes are about 625 bp over. And those, as noted above, are the GOOD bonds.
My 12C prices them at about 94.746, Alec.
It's not priced as a zero-coupon. It's priced as if you were getting the coupon and able to reinvest it at the current rate. (You get $98.75/2 per $1,000 bond every six months, and reinvest that money at 10.875%.)