The Credit Crunch Is Here: I-Banks Fail To Sell Bonds and Loans To Finance Chrysler and Alliance Boots LBOs

July 26, 2007 at 10:04 am  ·  Category: Bonds, Market Commentary, Private Equity

All you really need to read to understand today’s market crash is an article on the front page of The Wall Street Journal titled: “Banks Delay Sale of Chrysler Debt As Market Stalls” (subscription required).  If you really want to do your homework also read “Buyout Boom Hits a Snag: Deal Delays Mount Amid Debt Shakeout; Boots Awaits Calm” (subscription required). 

These two articles detail the failure yesterday of the investment banks behind the LBOs of Chrysler and Alliance Boots, a UK pharmacy chain, to sell the debt to investors.

The way it works in these LBOs is that the private equity firms put up some equity and then a consortium of investment banks agree to put up the rest with the idea of quickly turning around and selling the debt to investors in the form of junk bonds and CLOs. 

This time, however, the investors said no and the investment banks are being forced to hold all this debt, around $10 billion in each case, on their own books.  That’s not the kind of risk the I-banks want to be taking on as they are much happier making their money on the fees for processing these deals.

Anyways, the failure of these deals to get done is rippling through debt markets.  Insurance, called “credit default swaps”, on all kinds of debts has gotten much more expensive.  “There’s a full scale repricing in the market,” said Scott MacDonald, head of research at Stamford, Conn. hedge fund Aladdin Capital.

This kind of credit crunch leads to a slowdown in economic activity.  With liquidity scarce, companies and individuals are forced to hunker down and spend more carefully. 

This hurts cyclical and discretionary companies and is less of a problem for companies selling everyday necessities to both businesses and individuals.  You can see this in the way various sectors are acting today:

S&P 500: -2.21%

S&P Financials (XLF): -3.23%

S&P Basic Materials (XLB): -3.59%

S&P Energy (XLE): -3.47%

S&P Consumer Discretionary (XLY): -2.91%

S&P Industrials (XLI): -2.19%

S&P Technology (XLK): -1.80%

S&P Consumer Staples (XLP): -1.28%

S&P Health Care (XLV): -1.45%

As you can see, consumer staples and health care are holding up pretty well while financials, consumer discretionary, energy and basic materials, all cyclical businesses, are getting hit hardest.

Consider this: Proctor & Gamble (PG) which sells Crest toothpaste, Old Spice anti-perspirant and deodorant and a bunch of other personal products is up .95% today.  After all, even if times get tough you’re still going to brush your teeth and wear deodorant.  I hope you do! 

On the other hand, Starbucks (SBUX), is down 3.93% – you might, however, cut back on those $4 lattes!

Posted by Greg Feirman  ·  Trackback URL  ·  Link
 

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