Midday Tidbits: Special Credit Edition
Posted by Worth Civils
A few thoughts as the bottom falls out from the stock market amid credit worries, leading the NYSE to put trading curbs into effect to reduce volatility.
Golden era?
The credit markets are taking center stage, one recent example being the difficulty faced in financing the buyouts of Chrysler and Alliance Boots. This is yet another sign that the “golden era” for private-equity (as proclaimed by Henry Kravis just two months ago) has come to an end.
Merrill Lynch investment strategist Richard Bernstein is of that mindset, calling it the end of the “takeover premium.” He says that “fixed-income investors seem to sense that something is changing,” unlike equity investors, who continue to discuss “takeover premiums” and “LBO take-out values.” But, Mr. Bernstein writes, “With the debt markets quickly moving to ration credit, the probability of companies being ‘taken out’ is plummeting, in our judgment.”
Many investors are skeptical of Moody’s after it waited so long to downgrade its ratings on bonds backed by subprime mortgage assets. But a new survey by Moody’s Economy.com says that mortgage credit quality will weaken “substantially” through the remainder of 2007 and well into 2008, with delinquencies peaking at 3.6 % of all mortgage debt outstanding, up from 2.9 % earlier this year. It says that some 2.5 million first mortgage loans are expected to default over the next two years, with the subprime adjustable-rate mortgage segment hardest hit at a foreclosure rate of 10% by mid-2008 versus the current 4% rate. No surprise there.
The risk of owning bonds of Wall Street firms has jumped amid concerns that investment banks will be hurt by losses from subprime mortgages and a freeze in demand for corporate debt. According to Bloomberg, credit-default swaps on $10 million of Goldman Sachs bonds jumped as much as $18,000 to a record $85,000. Among the two most exposed firms, Bear Stearns credit swaps surged as much as $29,000 to $110,000, also a new high, and Lehman Brothers climbed as much as $24,000 to $104,000. |
