yup - bottom's in - buy with abandon.......got corp. defaults.....
Leveraged Loans Fall by Record as Bank Losses Deepen (Update1)
By Cecile Gutscher and Neil Unmack
April 1 (Bloomberg) -- Prices for high-yield, high-risk loans in Europe dropped by a record in the first quarter, causing bigger losses for banks and hedge funds.
Deutsche Bank AG, Germany's largest bank, announced its steepest writedown at 2.5 billion euros ($3.9 billion) today after the market for leveraged loans and commercial mortgages became ``significantly more challenging'' in recent weeks. UBS AG, the European bank with the highest losses from the U.S. subprime crisis, reported a second straight quarterly loss today after an additional $19 billion of writedowns.
Investors have abandoned the market for leveraged loans on concern corporate defaults will rise because of higher borrowing costs triggered by the U.S. subprime mortgage crisis. Banks in Europe are holding 58 billion euros of loans they planned to sell, according to Standard & Poor's.
``What's largely driven the deterioration is forced selling by hedge funds and market-value funds,'' said Paul Watters, head of loan and recovery ratings at S&P in London. ``Some banks are doing what they are required to do by marking their portfolios to indicated secondary market levels. For now, those are largely unrealized losses.''
Frankfurt-based Deutsche Bank was the second-biggest underwriter of European high-yield loans last year, arranging 9 percent of $360 billion of total debt sold, according to data compiled by Bloomberg. Sales of the debt have dwindled to $6 billion in Europe from $130 billion in the first three months of 2007, according to Bloomberg data.
Alt-A Writedowns
Deutsche Bank committed 7.9 billion euros to so-called Alt-A mortgages, which fall between subprime and prime, it said on March 26. The lender also invested 1.2 billion euros in subprime securities through collateralized debt obligations as of the end of 2007. Other mortgage-related assets accounted for 9.8 billion euros in its trading and bond origination business.
The difference in yields between AAA rated notes backed by European commercial mortgages and benchmark rates has widened to 223 basis points from about 92 basis points a year earlier, according to Deutsche Bank data.
Deutsche Bank led eight lenders left holding 8 billion pounds ($15.8 billion) of loans to finance the acquisition of U.K. pharmacy chain Alliance Boots by Kohlberg Kravis Roberts & Co. after they couldn't find buyers for the debt in July.
Banks underwriting the financing for leveraged buyouts commit to raise the money and earn fees to compensate for the risk of having to take on any debt they can't sell to a wider group of investors. They have to mark down the value of the debt and assume a loss if the price of loans falls below 100 percent.
Prices Fall
Prices for the debt fell to a record-low 87.04 percent of face value at the end of March, according to S&P's European Leveraged Loan Index of 575 borrowers rated high-yield high-risk, or below Baa3 by Moody's Investors Service and BBB- by S&P. Prices fell from 95.03 at the start of the year, the biggest decline since the index began in 2003.
``We expect further writedowns from banks,'' said Matthew Hegarty, a credit analyst at Barclays Capital in London. ``As we move through the default cycle, we would expect to see mark-to- market writedowns replaced by credit impairments, although that is likely to start to happen toward the end of the year rather than this quarter.''
Default Rate
The default rate for high-yield U.S. corporate bonds may rise to as much as 5.7 percent by February 2009 from 1.09 percent as the credit crisis makes companies more vulnerable to a slowing economy, S&P said in a press release yesterday.
Deutsche Bank rose 2.5 percent to 73.73 euros at 1:38 p.m. in Frankfurt. The stock is down almost 18 percent this year.
The cost of contracts to protect bonds of Deutsche Bank rose 3 basis points to 100, according to CMA Datavision. The credit- default swaps traded as low as 8.5 basis points last year and as high as 155 basis points on March 17, according to data compiled by Bloomberg.
``A lot of people had a lot of doubts on Deutsche Bank's writedowns the first time around,'' said Hank Calenti, a credit analyst at Royal Bank of Canada in London. ``The market has long anticipated more writedowns.'' |
