Bankruptcy

Despite Pricing, Credit Markets Still Frozen

By J. Michael McBride

Corporate bond debt is sold around the world. These bonds are priced based on the perceived risk of default. At this moment, there are some “once in a lifetime” deals as far as pricing is concerned; however, there are still no buyers for these well priced bonds. One reason for this is that the typical buyers of these products need their cash, some to cover customer redemptions out of hedge funds. Some buyers cannot buy since their own assets have been seized to cover debts.

Quote, with emphasis supplied:

Barclays Plc, the U.K.'s second-biggest bank, is auctioning $642 million of loans seized this week from Dallas-based Highland Capital Management LP, according to people with knowledge of the sale who declined to be identified because the sale hasn't been announced. …

Corporate debt has been pressured by ``incessant selling by hedge funds and leveraged institutions as they unwind,'' Bill Gross, manager of the world's biggest bond fund at Newport Beach, California-based Pacific Investment Management Co., said in a Bloomberg Radio interview today.

`Priced in Armageddon'

…Corporate bond prices plunged to 79.9 cents on the dollar on average from 94 cents at the end of August and 99 cents at the end of 2007, according to index data compiled by New York-based Merrill Lynch & Co.

About 90 percent of the market trades like high-yield, high- risk, or junk, debt, Garman said in an Oct. 3 report to clients. ­ Prices imply a 5.6 percent default rate, the most since the record 8.4 percent in 1933, he said. Junk bonds are rated below BBB- by S&P and Baa3 at Moody's Investors Service.

``It's quite possible that we had priced in Armageddon,'' …

`The Big Picture'

Wall Street firms have curbed lending after taking $661 billion of credit losses and writedowns since the beginning of last year, according to data compiled by Bloomberg. The collapse last month of Lehman Brothers Holdings Inc., the fourth-largest securities firm, sparked a new round of selling as investors became concerned that more banks may fail, curbing lending even more.

The sales may hamper efforts by Treasury Secretary Henry Paulson to unlock credit markets and challenge the next president as a slowing economy drives prices even lower. …``The big picture is the economy is just starting to deteriorate,'' said Mark Kiesel, executive vice president at Pimco, who runs $180 billion in corporate bonds. ``We still think there are a lot of redemptions and hedge fund liquidations coming.''

Here is a link to the entire article:
http://www.bloomberg.com/apps/news?pid=20601109&sid=a2bXQaolDINs&refer=exclusive

Michael

Full post as published by Texas Lawyer Blog on October 21, 2008 (boomark / email).