WSJ CREDIT MARKETS Will Hair of the Dog Come Back to Bite Financing of New Deals?
- From: Capitalist Pig <cochon-capitaliste@xxxxxxxxxxx>
- Date: Wed, 19 Sep 2007 02:26:03 -0700
By HENNY SENDER and SERENA NG
WSJ September 19, 2007; Page C1
When the Federal Reserve cut rates yesterday, Wall Street held a
party. But the Fed's move could backfire, helping spur another round
of carefree borrowing that ends with an even bigger credit-market
hangover.
The cuts were a shot of adrenaline for the credit markets, driving up
prices of risky bonds and lubricating the sputtering deals machine.
The risk is that the Fed's move reignites the debt-driven euphoria of
the past few years and sets the stage for a nastier crash down the
road.
Junk bonds of GMAC Financial services, General Motors Corp. and
Harrah's Entertainment Inc. all moved higher, according to data from
bond-trading platform MarketAxess. Nearly every other kind of debt
rallied.
Some bankers and companies moved quickly to take advantage. Barely two
hours after the Fed's announcement, R.H. Donnelley Corp. announced
plans to sell $650 million in junk bonds to refinance older debt and
to raise new funds. The telephone-directory-company's bond sale, to
take place today, is being handled by J.P. Morgan Chase & Co. and
marks the biggest junk-bond offering since June.
The Fed decision breathed life even into risky debt associated with
leveraged buyouts. Freescale Semiconductor bonds rose one cent to 91
cents on the dollar, up three cents on the week despite a warning from
Standard & Poor's that the company may cut its credit rating because
of deteriorating profitability and cash flows. Freescale was acquired
by a private-equity consortium led by Blackstone Group last year.
In one of the most closely watched dramas in the debt market, First
Data Corp. managers Monday began marketing a portion of the $24
billion debt package that will finance the purchase of the credit-card-
processing company by private-equity giant Kohlberg Kravis Roberts &
Co. Although First Data was downgraded by Standard & Poor's yesterday,
the marketing team was upbeat that the first $5 billion chunk of the
debt will meet strong investor demand, in part because bankers selling
the deal appear to be offering investors new loans to enable them to
buy the debt. More generous lending "will help to get the deals done,
but it's a bit worrisome because the recent correction in credit
recently was all about getting leverage down," says Chris Towle, a
portfolio manager at Lord Abbett & Co. in Jersey City, N.J.
The new willingness to lend shows how eager banks are to rid
themselves of the First Data debt. The loans are first in a series of
packages from leveraged buyouts they've committed to finance. The
banks want to sell off most of that debt soon, and how successful they
are will have an impact on their bottom lines.
Those leveraged buyouts are from earlier this year, when interest
rates were low and "leverage" (Wall Street's term for borrowing) was
abundant. That borrowing helped drive up Wall Street profits and
fueled a leveraged-buyout boom that pushed up the stock market.
Starting at the end of July, as problems emerged with risky mortgages
made in a parallel borrowing frenzy by home buyers, investors suddenly
became concerned about nearly the whole array of debt in the economy.
That caused credit markets to seize up and the stock market to gyrate
in August, prompting the Federal Reserve to mount a broad-based effort
to get credit markets moving.
That effort culminated yesterday with the Fed's move to lower its
federal-funds target rate, an attempt to prevent the financial-market
convulsions from harming the broader economy by making it easier for
banks to lend. However, if the rate cut encourages too much lending,
the result could be another rapid contraction as even-more-leveraged
investors pull back again. The First Data deal highlights the problem.
Short-Term Treasurys Like the News, Too
The Fed's move sent investors piling into shorter-dated Treasury
notes, but notes with longer maturities suffered amid worries about
inflation.
At 3 p.m., in the wake of the Fed's announcement, the benchmark 10-
year note was down 2/32 point, or $0.625 per $1,000 face value, at 102
5/32. Its yield rose to 4.478% from 4.447% as yields rise when prices
fall. In contrast, the two-year note, the most sensitive to official
rate cuts, gained 5/32 to yield 3.982% as investors priced more rate
cuts from the Fed in coming months.
Paul Brennan, senior portfolio manager at Nuveen Investments, said
investors who had been banking on a quarter-percentage-point cut were
forced to cover their bets.
.
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