Interest Rate Roundup

Sunday, August 24, 2008

Bonfire of the leveraged loans

It's the weekend, so I'm not going to spend too much time delving into the financial headlines. But I couldn't help bringing the following Wall Street Journal story to your attention. It talks about how leveraged loans are the latest financial product to be thrown on the credit market bonfire. Color me completely unsurprised. As long-time readers may recall, I warned that the LBO/PE bubble was getting out of control and would likely burst a long time ago.

Anyway, back to the Journal (I especially like the quote that's bolded below):

"There's nothing like a bad bust to make investors regret a good boom.

"The feeling is particularly acute in the leveraged-loan market, where during the bull years of 2006 and early 2007, investors felt emboldened to take on excessive risk.

"As a result, the rate of defaults -- instances where a company is unable to make its interest payments or meet the obligations in its debt agreements -- is higher in the loan market than it is in the junk-bond market, which has traditionally been perceived as the riskier of the two markets. To make matters worse, investors stand to recover less in leveraged-loan defaults than what was historically normal because of the riskier composition of the market.

"What that tells you about is the tremendous amount of poor quality financing in the easy money period of 2004 to 2007 and now, when the economy slows down, these companies have way too much debt and they're hitting the wall," Margie Patel, portfolio manager at Evergreen Investments, said. "It also tells you why loans have been trading, in general, at a substantial discount to face value."

"The average price in the loan market is around 88 cents on the dollar these days, according to Standard & Poor's Leveraged Commentary & Data unit, down from above 100 cents before the credit crisis."


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