Monday, September 10, 2007
abcp maturity peak: september 17
Banks and companies need to refinance almost $140 billion of commercial paper in Europe by the end of next week and may push up yield premiums on corporate bonds, according to Deutsche Bank AG, Germany's biggest bank.
``This could be a pivotal seven to 10 days,'' Jim Reid, a credit strategist at Deutsche Bank in London, wrote in a note to investors today. ``This will inevitably lead to wider corporate spreads, especially in high yield.''
Almost $60 billion of the commercial paper due this week and next is owed by conduits, firms set up by banks and companies to invest in longer-term assets, according to Reid. The debt is backed by bonds including asset-backed securities, as well as car loans, mortgages and trade receivables. The remaining $80 billion of commercial paper is unsecured.
Yield spreads on corporate bonds are rising in part because banks are more focused on keeping their own conduits afloat than providing finance to other companies. The premium on European high-risk bonds over similar-maturity government debt has increased to 426 basis points from 358 basis points at the beginning of August, Merrill Lynch & Co. indexes show.
Bank of America Corp. estimates that about 59 percent of the $230 billion of asset-backed commercial paper in Europe comes due this month. The peak will be Sept. 17 when the equivalent of $48 billion matures, Bank of America analysts in London led by Raja Visweswaran wrote in a report. The credit markets are likely to remain ``unsettled'' until then, the report said.
Banks' ``increasingly bloated balance sheets will not be good news for overall market liquidity,'' Deutsche Bank's Reid said in the note.
it all leads the market to be very leery of the big banks caught in the structured investment vehicle problem, by which they have sold asset-backed commercial paper (borrowed short) to invest in toxifying mortgaged-backed assets (lent long), all heretofore off balance sheet. the same banks are going to be stuck taking massive wtiredowns on leveraged buyout financing as well.
Lehman Brothers Holdings Inc. faces higher borrowing costs today than it did in June, even after the steepest quarterly drop in U.S. Treasury yields since 2002 pushed interest rates down for everyone from Procter & Gamble Co. to AT&T Inc. Investors are so leery of Bear Stearns Cos. that its 10-year bonds trade at a discount to Colombia, the South American nation that's barely investment grade. Goldman Sachs Group Inc. is being punished with a higher yield than Caterpillar Inc., the heavy-equipment maker.
Bond buyers view the nation's largest securities firms as no safer than taking a flier on subprime mortgages. That's a nightmare scenario for the industry's chief executive officers, who relied on cheap financing for leveraged buyouts, real estate lending and proprietary trading to produce record profits -- and paychecks of $40 million or more for themselves.
The five largest U.S. securities firms -- Goldman, Morgan Stanley, Merrill Lynch & Co., Lehman and Bear Stearns -- will have to fund $75 billion of loan commitments to LBOs at a loss because most investors have stopped buying that kind of debt, Citigroup Inc. analyst Prashant Bhatia estimated last month.