Thursday, April 24, 2008

There've been some disappointments ....

You really need to put a plum in your mouth and put on your best (worst) British accent before you subvocalise this quote, from Bloomberg's Bondholders Lucky to Get 10 Cents in Looming Defaults:
"There've been some disappointments," Paul Scanlon, team leader for U.S. high yield and bank debt at Putnam Investments, said in a telephone interview from his Boston office. Putnam manages $66 billion in fixed-income, including bonds of Univision. "As people look back over the last 24 months, there are many transactions in portfolios that people have hoped the outcome might have proceeded differently than it has."

Rather than receiving the historical average recovery of 42 cents on the dollar in a default, owners of a third of high- yield, high-risk bonds rated B+ or lower may get no more than 10 cents, according to New York-based Fitch Ratings. About 22 percent are likely to get 11 cents to 30 cents.

The amount of debt in Merrill Lynch & Co.'s U.S. High Yield Distressed Index has swelled to $206 billion from $4.8 billion a year ago. The index contains non-defaulted bonds with yields of 10 percentage points or more above Treasuries.

Moody's anticipates defaults will quadruple to 5.9 percent in 12 months. That assumes a "mild" recession.

Along with the surge in bank loans came covenant-lite loans, which typically don't limit the amount of debt a company can have relative to earnings. A record $141 billion of covenant-lite loans was made last year, according to S&P.

The value of companies with those loans is likely to be 25 percent less when they ultimately default than if they'd been forced to restructure earlier, Fitch estimates.

"Whereas in the last recession it was more common perhaps to see the inter-creditor fights between subordinated unsecured creditors and the senior unsecured creditors, it may very well be that in this cycle that will have moved up a level in the priority chain," Andrew Rahl, a partner in commercial restructuring and bankruptcy at Reed Smith LLP in New York, said.

Other commentators didn't have so much of the stiff upper lip:

International financial system was close to the brink
The international financial system was close to the brink in March when joint action by the U.S. Federal Reserve and JP Morgan Chase & Co. avoided the collapse of investment bank Bear Stearns, Credit Suisse Group's ex-CEO Oswald Gruebel said.

'We've narrowly escaped a system collapse. This has never happened before,' Gruebel said.

The breakdown of the comparatively small investment bank would have triggered a global run on other financial institutions around the world and the situation would have spiraled out of control, he said in an interview with Swiss Sunday newspaper SonntagsBlick.

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