Interesting Rd: Buyers of Distressed Mortgage Debt
The Associated Press reports: Three companies swept up in the struggling credit markets said Monday they sold pieces of themselves or their investments to fund ongoing operations, underscoring how tight those markets still are despite government intervention last week.
The buyers in these deals include a major investment bank and several well-known hedge funds.
While most of the deals were done at a discount -- in some cases a very steep discount -- they suggest bargain hunters will eventually snap up the weakened bonds and lenders that have thrust the mortgage industry into distress.
"Some of the buyers for these assets will be well-rewarded," said Les Satlow, a portfolio manager for Cabot Money Management. "This is not the first time that distressed assets have been sold and proven to be wildly underpriced."
The exodus of buyers from the markets where mortgage lenders raise money has brought an entire industry to its knees. More than 50 lenders have gone bankrupt, and entire swaths of the industry have suddenly disappeared.
Nearly all lenders say the problem is not that mortgage debt is worthless, but simply that nobody is buying it, or other kinds of debt like the short-term loans known as commercial paper. Still, with financial backers pulling the plug and in many cases demanding money back, lenders have scrambled to raise enough cash to stay alive.
Monday morning, Thornburg Mortgage Inc. said it sold $20.5 billion of its safest bonds to raise cash. The Santa Fe, N.M.-based lender said reshuffling its portfolio to carry less debt will cost $930 million.
Luminent Mortgage Capital Inc., a San Francisco-based mortgage investor that has been the subject of bankruptcy speculation, offered Arco Capital Corp. a majority stake at a substantial discount in exchange for a $60 million loan and an agreement to buy some of the company's investments for $65 million.
And KKR Financial Holdings Inc. arranged to sell up to $500 million of its stock to investors including Morgan Stanley and the hedge fund Farallon Capital Management, as well as the San Francisco investment fund's own shareholders.
Cabot Money Management's Satlow said these assets are hard to sell no matter how undervalued they are. Any buyer would need to have a strong stomach for risk, a lot of money, and little or no reliance on borrowing, he said.
Plus, a lot of would-be buyers for distressed mortgage assets -- lenders and investment funds that understand mortgage risk -- have cash troubles of their own. For example, he suspects there are plenty of hedge funds that would like to buy this debt but cannot raise enough money, leaving only the biggest players able to do so.
Blackstone Group L.P. and Goldman Sachs Group Inc. said recently they plan to buy some distressed debt if the price is compelling.
KKR Financial Holdings Chief Executive Nino Fanlo, in a conference call Monday, emphasized that the debt markets have not improved in the past few days, even with the Federal Reserve on Friday taking steps to make it cheaper for troubled banks to borrow money. The Fed cut its "discount rate," which is the rate it charges for direct loans to banks, to 5.75 percent from 6.25 percent.
The cut in the discount rate accompanied a $38 billion cash injection, representing the Federal Reserve's attempt to soothe the market and restore order.
But Fanlo said it could take "days, weeks or even months" for the markets to return to normal.
In the meantime, Roth Capital Partners analyst Richard Eckert said he was not so sure that a rate cut would be the tonic the markets need to calm down.
While a lower interest rate would lure buyers into distressed markets, investors will "continue to be leery of the riskier classes of assets," he said.
He said he can not be sure the turbulence will end until the market sees "unambiguous signs of a U.S. housing recovery."
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