Interest Rate Roundup

Wednesday, February 20, 2008

The financial blowups will continue until morale improves

That's the lesson of the day (and the past few weeks and months, for that matter). Until and unless credit market sentiment improves, losses will continue to amount in the financial sector and "blowups" -- unexpected surprises like Credit Suisse's out-of-the-blue $2.85 billion writedown yesterday -- will continue. The latest ...

At KKR Financial (via Bloomberg) :

"KKR Financial Holdings LLC, Kohlberg Kravis Roberts & Co.'s publicly traded fixed-income fund, delayed repaying some asset-backed commercial paper and started restructuring talks with its creditors.

"The fund, which invests in corporate debt and mortgages, agreed with holders of its residential mortgage-backed securities to defer repayment a second time, KKR said in a regulatory filing yesterday. About half the debt will be due by March 3 instead of Feb. 15, with the rest owed on March 25. KKR didn't provide details of how much debt is affected.

"The talks come less than six months after the fund received a $230 million cash infusion from investors following losses on residential mortgages in the wake of the U.S. subprime crisis. The fund, led by Chief Executive Officer Saturnino Fanlo, raised a further $270 million in a rights offering with some of KKR's own partners buying shares in it, which had $19 billion of assets at the end of December.

"The picture is getting worse and worse,'' said Felix Freund, who helps manage the equivalent of $14.7 billion of fixed-income securities at Frankfurt-based Union Investment GmbH. KKR's second extension of repayment deadline "shows there is still a lot of levered investments in the credit market that we can't see,'' he said."

At a major U.K. mortgage lender (via Bloomberg): "Alliance & Leicester Plc plunged in London trading to the lowest level since going public in 1997 after the U.K. mortgage lender scrapped its profit target for this year and next because of the seizure in credit markets.

"Alliance & Leicester said today its previous target for earnings per share growth through 2009 of at least 9 percent above inflation "is no longer appropriate'' because of a surge in funding costs and a slowdown in mortgage lending. The company said in a statement that second-half profit fell 67 percent to 73.1 million pounds ($142 million), or 17.4 pence a share.

"The Leicester, England-based company gets almost half its funds in the capital markets and now faces rising costs and declining valuations on asset-backed securities after the U.S. subprime mortgage slump. U.K. rival Northern Rock Plc is being nationalized after a bailout by the Bank of England, while Bradford & Bingley Plc reported an unexpected loss last week.

"The outlook is pretty abysmal,'' said James Hutson, an analyst at Keefe, Bruyette & Woods Ltd. in London who has a "market perform'' rating on the stock. The company's own targets "have been slashed.''


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