April 21, 2008

Slowly, slowly, loans are coming off the banks’ books:

Carlyle Group, the world’s second largest private-equity firm, is raising a $500 million collateralized loan obligation to buy high-risk, high-yield debt being sold by banks at discounted prices, according to people with knowledge of the plan.

The CLO is being arranged by Deutsche Bank AG, said the people, who declined to be identified because the terms aren’t public. The fund follows a similar $450 million CLO that Carlyle and JPMorgan Chase & Co. closed this month.

Carlyle, the Washington-based buyout firm run by David Rubenstein, joins Blackstone Group LP and Apollo Management LP in purchasing loans from banks that have struggled to offload the debt after losses on securities tied to subprime mortgages caused investors to shun all except the safest of government bonds. Private-equity firms are emerging as buyers at a time when financial institutions from Goldman Sachs Group Inc. to Citigroup Inc. are willing to sell the loans for as little as 63 cents on the dollar.

Royal Bank of Scotland is doing the same:

Royal Bank of Scotland Group Plc, the U.K.’s second-biggest lender, plans to start a fund to transfer the risk of losses from 1.5 billion euros ($2.3 billion) of high-yield loans, according to three people with knowledge of the proposal.

The fund will earn a return for investors by selling contracts to RBS that protect the bank from losses on 15 loans in euros and pounds and a further six in dollars, said the people who declined to be identified because the discussions are private.

And hedge funds are still pulling in money! I’m certainly not about to declare the credit crunch over, but this is a good sign:

Some investors expect the current credit crisis will create opportunities for managers who trade distressed bonds and loans. Such funds attracted $8 billion in the quarter. Investors allocated $8.2 billion to equity hedge funds and $6.5 billion relative-value strategies, which try to profit from price discrepancies between securities.

The biggest outflows in the quarter were from funds that trade the securities of companies going through mergers, which lost a net $4 billion. Investors pulled $1 billion out of macro funds, which chase macroeconomic trends by trading stocks, bonds, currencies and commodities. The funds were the best performers in the first quarter, rising 4.7 percent.

In a further sign that the banks are serious about repairing their balance sheets, Citigroup is issuing $6-billion hybrids, although it’s not entirely clear to me whether these are prefs or Innovative Tier 1 Capital, as if there’s any difference anyway:

Citigroup Inc., the biggest U.S. bank by assets, plans to sell $6 billion of hybrid securities to bolster its balance sheet after reporting almost $16 billion in writedowns.

The perpetual, preferred shares may pay a fixed rate of 8.4 percent for 10 years, according to a person who declined to be named because terms aren’t set. If not called, the debt will then begin to float, the person said.

This follows hard on the heels of JPMorgan’s monster deal. How much is enough, already? The Reuters tally grows daily:

Financial companies around the globe have scrambled to raise capital to offset massive write-offs. Below are the 15 largest capital infusions announced by financial institutions since the credit crisis began, totaling more than $150 billion.

The Bank of England is going forward with the bond lending programme discussed briefly on April 17 … it is, in fact, a bond LENDING programme, with quite rational terms:

The measures, backed by Prime Minister Gordon Brown’s government, mimic a swap of $200 billion of securities by the U.S. Federal Reserve last month as central banks around the world struggle to prop up financial markets.

Financial institutions will retain responsibility for losses from the assets they loan to the Bank of England. The swaps will be for a period of one year, renewable for up to three years. Only assets existing at the end of 2007 can be used in the swap.

The Bank of England won’t announce how much money has been tapped until the borrowing window closes in six months.

Assistance will come at a price. Banks will have to pay a borrowing fee to participate in the plan and the value of the securities they receive will be less than that of the mortgage- backed bonds they hand over to the Bank of England.

“The Bank of England’s actions do seem to be quite punitive,” said James Nixon, a director of Societe Generale SA in London. “The sense yet again from the Bank of England is that it will provide an absolute backstop to the financial system, but won’t make any effort to ease the market’s liquidity.”

The market fell – probably in response to the RY new issue as the RY issues were conspicuous by the presence in the list of poor performers … several issues lost just less than the 1% loss qualifying for mention on the list. Volume was average, as far as recent history goes.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 5.07% 5.11% 30,505 15.3 2 +0.2239% 1,091.7
Fixed-Floater 4.78% 5.17% 62,207 15.31 8 +0.1391% 1,046.2
Floater 5.03% 5.03% 65,143 15.46 2 +0.6346% 836.2
Op. Retract 4.85% 3.33% 86,779 3.29 15 +0.0418% 1,048.1
Split-Share 5.36% 5.94% 86,239 4.07 14 -0.1260% 1,033.8
Interest Bearing 6.17% 6.28% 62,924 3.88 3 +0.1695% 1,098.3
Perpetual-Premium 5.92% 5.65% 183,684 6.29 7 -0.0779% 1,017.2
Perpetual-Discount 5.68% 5.72% 316,132 13.92 64 -0.2694% 918.6
Major Price Changes
Issue Index Change Notes
CM.PR.J PerpetualDiscount -1.9500% Now with a pre-tax bid-YTW of 5.77% based on a bid of 19.61 and a limitMaturity.
CM.PR.P PerpetualDiscount -1.9015% Now with a pre-tax bid-YTW of 6.06% based on a bid of 22.70 and a limitMaturity.
RY.PR.F PerpetualDiscount -1.6545% Now with a pre-tax bid-YTW of 5.60% based on a bid of 20.21 and a limitMaturity.
LFE.PR.A SplitShare -1.5340% Asset coverage of just under 2.4:1 as of April 15, according to the company. Now with a pre-tax bid-YTW of 4.68% based on a bid of 10.27 and a hardMaturity 2012-12-1 at 10.00.
RY.PR.W PerpetualDiscount -1.4570% Now with a pre-tax bid-YTW of 5.58% based on a bid of 22.32 and a limitMaturity.
RY.PR.C PerpetualDiscount -1.4416% Now with a pre-tax bid-YTW of 5.71% based on a bid of 20.51 and a limitMaturity.
BNS.PR.N PerpetualDiscount -1.2632% Now with a pre-tax bid-YTW of 5.62% based on a bid of 23.45 and a limitMaturity.
TD.PR.P PerpetualDiscount -1.1292% Now with a pre-tax bid-YTW of 5.57% based on a bid of 23.64 and a limitMaturity.
NA.PR.L PerpetualDiscount -1.0608% Now with a pre-tax bid-YTW of 5.92% based on a bid of 20.52 and a limitMaturity.
BAM.PR.G FixFloat +1.2048%  
BAM.PR.B Floater +1.4674%  
Volume Highlights
Issue Index Volume Notes
MFC.PR.B PerpetualDiscount 152,645 Now with a pre-tax bid-YTW of 5.34% based on a bid of 22.01 and a limitMaturity.
TD.PR.R PerpetualDiscount 110,308 Nesbitt bought 10,000 from anonymous at 24.93, then another 40,000 at the same price … not necessarily the same “anonymous”! Now with a pre-tax bid-YTW of 5.69% based on a bid of 24.91 and a limitMaturity.
BMO.PR.I OpRet 95,900 Nesbitt sold a total of 93,600 to anonymous in four tranches at 25.35 … not necessarily the same anonymous! Now with a pre-tax bid-YTW of -0.98% based on a bid of 25.30 and a call 2008-5-21 at 25.00.
RY.PR.K OpRet 55,051 TD bought 38,900 from Nesbitt at 25.35 in four tranches. Now with a pre-tax bid-YTW of 0.63% based on a bid of 25.27 and a call 2008-5-21 at 25.00.
RY.PR.G PerpetualDiscount 45,630 Now with a pre-tax bid-YTW of 5.65% based on a bid of 20.27 and a limitMaturity.

There were fifteen other index-included $25-pv-equivalent issues trading over 10,000 shares today.

One Response to “April 21, 2008”

  1. […] Buiter has commented on the BoE liquidity operation discussed by PrefBlog on April 21: The Bank of England is now wholeheartedly committed to acting as market marker of last resort for […]

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