“The Game is Over”

Bloomberg writes KKR Losses Show Failure to Close Gap Raising Defaults:

Investment funds that purchased a majority of the lowest-rated loans during the credit boom have stopped buying, threatening to undermine President Obama’s plan to pull the economy out of the worst recession since 1982.

The funds, known on Wall Street as collateralized loan obligations, provided cash to movie-rental chain Blockbuster Inc., which is now exploring a bankruptcy filing, according to a person familiar with the situation. They also helped finance the $33 billion buyout of Nashville, Tennessee-based hospital operator HCA Inc.

Now, as an economic slowdown drags into the 16th month, borrowers unable to pay their debts are causing record losses for CLOs. Moody’s Investors Service put 760 of the funds, holding about $440 billion of assets, on review for downgrades on March 4. Unless policymakers decide to earmark some of the $11.6 trillion of government programs created to combat the seizure in credit markets to support high-yield loans, defaults may soar through 2012, according to investors.

“The game is over,” said Ross Heller, managing director at New York-based NewOak Capital LLC, an investment and advisory firm. “There isn’t going to be money available for refinancing. Companies will have to be put into bankruptcy and the debt restructured.”

As credit losses have climbed, issuance of so-called leveraged loans in the U.S. plummeted to $11.7 billion in January and February from $66.3 billion in the first two months of 2008 and $158.7 billion for the same period in 2007, according to data compiled by Bloomberg.

Below Investment Grade

The Federal Reserve said March 3 it may include CLOs in its bailout programs, though none of the commitments for stimulus and lending is designed to deal with loans to the neediest companies.

CLOs, a type of collateralized debt obligation, pool below investment-grade loans and slice them into securities of varying risk and return. The leveraged loans are rated below BBB- by Standard & Poor’s and less than Baa3 at Moody’s and are defaulting at a 4.5 percent rate, the fastest since November 2002, according to data from S&P’s LCD.

The S&P/LSTA U.S. Leveraged Loan 100 Index has fallen to 62.1 cents on the dollar from 100.3 cents in June 2007. The decline contributed to the $1.2 trillion of losses and writedowns by global financial institutions since the start of 2007.

Blackstone Group LP wrote down to zero the value of billions of dollars of loans it bought last year from Deutsche Bank AG, according to a person familiar with the decision.

The article goes on to list specific examples of troubled loans:

  • KKR’s $1.2 billion loss reported on March 2nd 2009, including charges for loans held in its CLOs to bankrupt Chicago-based newspaper owner Tribune Co.
  • Sirius XM Radio Inc., the New York-based satellite broadcaster, extended the maturity of $350 million of loans due in May 2009 by one year, agreeing to pay lenders a 15 percent rate, according to a regulatory filing March 6 2009
  • Blockbuster, which has a $350 million bank line maturing in August and a $352.1 million term loan due two years later, may need to file for bankruptcy
  • R.H. Donnelley Corp., a yellow-pages publisher, has “large debt maturities beginning in early 2010,” Steve Blondy, chief financial officer, said on a call with investors March 12. The publisher has $2.2 billion of loans and bonds maturing through 2011.
  • Overall:  About $26 billion of bank loans and bonds come due in 2009, with a further $44 billion in 2010 and $120 billion in 2011, according to Moody’s.

This goes to show us that the consolidation of bad debt is far from over. Through 2012 at least the unraveling of CLOs for acquisistions by private equity firms will only add to other bad debt that needs to be liquidated, in particular the mounting pressures for the vast number of homeowners who bought into adjustable rate loans in 2004 and the following years, plus the $2.5 trillion consumer credit bubble which hasn’t even begun to unwind significantly, plus the looming collapse of the commercial properties market.

There is absolutely nothing good the government can do to stop this from happening. All attempts to do so are ill-conceived and will do nothing but prolong the duration of the correction phase in the business cycle and the time that investors remain on the sideline until they identify profitable projects.

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