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Merkel’s `Moralistic Hysteria’ Ban Unsettles Trading in Debt, Currencies

by on May 19, 2010

By Pierre Paulden May 19 (Bloomberg) — German Chancellor Angela Merkel ’s unilateral attempt to rein in speculators and build support for a $1 trillion bailout is backfiring in debt and currency markets. “It’s moralistic hysteria,” Charles Dumas , research director at Lombard Street Research Ltd. in London, said in an interview on Bloomberg Radio. “If she starts a heavy push to try and broaden this thing out to become a European rule it could cause a lot of trouble.” Volatility measures rose as German regulator BaFin, seeking to calm Europe’s financial markets, banned traders within the country from buying default protection on government bonds they don’t own. The move fails to address deficits and surprised markets, suggesting more “vulnerability in the eurozone than investors had anticipated,” said Christopher Garman , chief executive officer of Garman Research LLC in Orinda, California. The JPMorgan G7 Volatility Index, which measures the perception of risk in the currency market, rose for a fourth consecutive day and traded as high as 14.98 percent. It rose to 15.93 percent on May 6, the highest level since June 2009. Merrill Lynch’s MOVE Index , an options-based gauge of expectations for price swings in Treasuries, rose to 97.2 yesterday from this year’s low of 74.10 on March 17. The reading means traders expect a yield range of 92.2 basis points on an annualized basis in the coming month. A Europe-wide ban following Germany’s is “doubtful,” Eddy Wymeersch , Europe’s top market regulator, said in a telephone interview today. European Union Financial Services Commissioner Michel Barnier said the rules would have been “more efficient” if they were coordinated with the EU. ‘Counterproductive’ to Euro “This uncoordinated effort is counterproductive to the long-term survival of the euro,” Garman said. “While it may temporarily alleviate what they see as the animal imagery of locus and wolfpack, or however else they describe speculators, it adds to a climate that’s becoming more uncertain by the day.” Merkel told lawmakers in Berlin today that her country would act alone if needed, saying the national ban will last until a European solution is found. She said the ban on naked short-selling is part of her proposals to gain control over “destructive” financial markets. The euro is at risk and Europe may be facing its greatest challenge since the founding of the European Union, with “incalculable” consequences if leaders fail to act, Merkel said. The ban failed to reduce the rate banks pay for three-month loans in dollars, which has risen to the most in more than nine months. Libor Rises The London interbank offered rate, or Libor, rose for a sixth straight day, reaching 0.477 percent today, from 0.465 percent, according to data from the British Bankers’ Association. That’s the highest since July 31. The dollar Libor-OIS spread, a gauge of banks’ reluctance to lend, rose to 25 basis points from 24 basis points, the highest since Aug. 13. The spread, which compares three-month dollar Libor and the overnight indexed swap rate, ballooned to 364 basis points, or 3.64 percentage points, after the 2008 collapse of Lehman Brothers Holdings Inc. The Markit iTraxx Crossover index of swaps on 50 European companies surged 44.2 basis to a mid-price of 576.2, according to Markit Group Ltd. The Markit CDX North America Investment Grade Index Series 14 declined 3.5 basis points to a mid-price of 117.2 as of 12:54 p.m. in New York, after rising 12.2 basis points yesterday, Markit data show. The indexes typically rise as investor confidence deteriorates and fall as it improves. German Ban Credit-default swaps are derivatives that pay the buyer face value if a borrower — a country or a company — defaults. In exchange, the swap seller gets the underlying securities or the cash equivalent. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. To be covered by the ban, bonds must have been admitted on a German exchange for trading on the regulated market, BaFin spokeswoman Anja Engelland said in an interview today. Short selling of these securities is outlawed regardless where it is done, she said. Credit default swaps transactions are only covered if they are done within Germany, she said. ‘Act Together’ Short sellers borrow assets and sell them, betting the price will fall and they’ll be able to buy them later, return them to the lender and pocket the difference. In naked short- selling, traders never borrow the assets so betting is unlimited. France, The Netherlands, Spain and Finland have no plans to implement similar measures. “We haven’t envisioned doing it,” French Finance Minister Christine Lagarde told reporters in Paris. “It is important that member states act together and that we design a European regime to avoid regulatory arbitrage and fragmentation,” the EU’s Barnier said in an e-mailed statement. European Commission President Jose Manuel Barroso said “we agree on the need to address the issue of abusive short selling.” The ban doesn’t cover branches of German institutions outside of Germany or in the U.K., said U.K. Financial Services Authority spokesman Joseph Eyre . The FSA will assist BaFin, where appropriate, he said. “It won’t stop people sitting in Zurich or New York from shorting so it won’t make a row of a beans difference to the ultimate outcome,” said Lombard’s Dumas. “It will make markets a lot less efficient and adjustment that much more painful.” To contact the reporter on this story: Pierre Paulden in New York at ppaulden@bloomberg.net

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Merkel’s `Moralistic Hysteria’ Ban Unsettles Trading in Debt, Currencies

Deutsche Bank Said to Replace Lippmann With Sprenger as CDO Trading Head

by on April 20, 2010

By Sarah Mulholland and Pierre Paulden April 20 (Bloomberg) — Deutsche Bank AG named Pius Sprenger as head of trading for asset-backed securities and collateralized debt obligations, replacing Greg Lippmann , whose bets against subprime mortgages helped the firm weather the financial crisis. Sprenger previously ran European asset-backed and CDO trading for Deutsche Bank in London, according to two people familiar with the matter who declined to be identified because the move hasn’t been made public. Renee Calabro , a spokeswoman for Frankfurt-based Deutsche Bank, Germany’s largest lender, declined to comment. Sprenger couldn’t be reached for comment. Lippmann, 41, is joining an investment firm being started by Fred Brettschneider , Deutsche Bank’s outgoing head of global markets in the Americas. Brettschneider’s departure and plans were announced internally in a Feb. 24 memo. Lippmann helped create the market for betting against subprime mortgage bonds in 2005 and then profited along with hedge funds when home prices declined and defaults soared to records two years later, sparking the worst financial crisis since the 1930s. To contact the reporters on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net ; Pierre Paulden in New York at ppaulden@bloomberg.net

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Deutsche Bank Said to Replace Lippmann With Sprenger as CDO Trading Head

`Unloved’ Junk Offers Best Bond Returns to Goldman Sachs: Credit Markets

April 5, 2010

By Pierre Paulden and Shannon D. Harrington April 5 (Bloomberg) — Speculative-grade bonds with the highest rankings may offer the best returns after trailing the riskiest debt in a record credit-market rally. Goldman Sachs Group Inc. is recommending high-yield, high- risk bonds with rankings in the BB tier, the first below investment grade on the Standard & Poor’s scale. Pioneer Investment Management Inc. favors BB and B bonds, the next lowest bracket, while saying the riskiest debt is overvalued. Debt ranked in the BB category gained 39.1 percent in the past 12 months, underperforming the CCC tier by 66 percentage points, according to Bank of America Merrill Lynch index data. Junk bonds have rallied at an unprecedented pace since December 2008 after the market seizure that followed the failure of Lehman Brothers Holdings Inc. Companies are issuing record amounts of the debt as the economy improves, corporate default rates decline and the Federal Reserve holds interest rates at near zero, spurring investors to seek higher yields. “BBs have been in an unloved space, too risky for investment-grade investors but not risky enough for high-yield investors,” said Alberto Gallo , a strategist at Goldman Sachs in New York. “That has preserved a lot of value.” Investors seeking higher returns amid low rates will drive up prices on BB debt, which also offer some protection from defaults if the economic recovery flags, Gallo said. Gains in speculative-grade debt are justified by lower default rates, said Andrew Feltus , a money manager who helps oversee $8 billion of high-yield debt at Pioneer in Boston. His $2.8 billion Pioneer High Yield Fund has returned 64.3 percent in the past year, in the top 5 percent of funds, according to data compiled by Bloomberg. ‘CCCs Look Rich’ “CCCs look rich to me,” Feltus said. “We’re not in love with leveraged buyouts, and the default rates will be higher for these securities.” High-yield, high-risk, or junk, debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P. Elsewhere in credit markets, Treasury 10-year note yields climbed to 4 percent for the first time since June as evidence the economic recovery is gaining traction added to concern debt sales will overwhelm demand as the U.S. funds record deficits. Yields on Fannie Mae and Freddie Mac mortgage securities that guide home-loan rates rose to the highest in almost eight months. Leveraged loan prices rose 0.07 cent to 91.91 cents on the dollar, the highest since June 2008, according to the S&P/LSTA U.S. Leveraged Loan 100 index . Supervalu Inc. , the second- largest U.S. grocery chain, extended the maturity of $2 billion of bank loans to 2015, according to a person familiar with the transaction. Treasury Yields Ten-year Treasury yields rose as a gauge of service industries and pending sales of U.S. homes rose more than forecast. The 10-year note yield increased 4 basis points, or 0.04 percentage point, to 3.98 percent as of 4:41 p.m. in New York, according to BGCantor Market Data. The yield reached 4.0095 percent, the highest level since Oct. 16, 2008. Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds climbed 0.11 percentage point to 4.67 percent, the highest level since Aug. 10, Bloomberg data show. The Fed ended its unprecedented purchases of the debt last week. Supervalu arranged with lenders led by Royal Bank of Scotland Group Plc and Credit Suisse Group AG to push out $1.5 billion of its $2 billion revolving line of credit to April 2015 from June 2011, said the person, who declined to be identified because the transaction is private. The Eden Prairie, Minnesota- based retailer also extended $500 million of its $1 billion term loan to October 2015 from June 2012, the person said. Credit-Default Swaps The extended revolver will pay an interest rate 2.25 percentage points more than the London interbank offered rate, up from 1 percentage point more than Libor on the existing credit line, the person said. Three-month Libor, a borrowing benchmark, is 0.29 percent, the highest since September. An indicator of corporate credit risk fell to the lowest in more than two weeks. The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that is tied to 125 companies in the U.S. and Canada, dropped 1.7 basis point to a mid-price of 83.4 basis points, according to Markit Group Ltd. Investors use the default-swap indexes to hedge against losses on corporate debt or speculate on creditworthiness, and the swaps typically rise as investor confidence deteriorates. Credit-default swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point equals $1,000 annually on a contract protecting $10 million of debt for five years. Bond Offerings Nexstar Broadcasting Group Inc. of Irving, Texas, and Fort Myers, Florida-based Radiation Therapy Services Inc. led five companies that began marketing at least $1.34 billion of high- yield bonds today. Companies in the U.S. have issued $70.125 billion of junk bonds in 2010 as corporations with speculative-grade rankings sought to take advantage of the lowest borrowing costs since October 2007. That compares with $12.8 billion for the same period in 2009, Bloomberg data show. The Bank of America Merrill Lynch U.S. High Yield Master II index gained 4.99 percent this year, following a 57.5 percent return in 2009. Debt graded in the CCC tier and below has more than doubled in the past year. Spreads on BB ranked debt have fallen 0.66 percentage point to 4.07 percentage points since the start of the year, the Bank of America Merrill Lynch index shows. That’s down from the record spread of 14.68 percentage points in December 2008 and above the long-term average of 3.84 percentage points. ‘Sweet Spot’ For debt ranked CCC and lower, relative yields have declined 0.81 percentage point this year to 9.19 percentage points, index data show. That compares to the record 44.3 percent spread over benchmarks in December 2008 and is below the long-term average of 12.56 percentage points, index data show. The bonds of companies with the highest junk ratings are poised to thrive in an economy that may slow as the Fed begins withdrawing a record $1 trillion in excess cash that propped up the banking system during the recession. “BBs in particular are the sweet spot for a slow recovery environment,” said Goldman Sachs strategist Gallo, who said investors in the bonds will benefit as the Fed keeps interest rates low to guard against another slump, while foreign investors seek higher yielding assets that offer a cushion against another slowdown. Goldman Sachs, based in New York, estimates that the economy will grow at 2.6 percent in 2010, below the 3 percent median forecast, Bloomberg data show. While Moody’s said the speculative-grade default rate will decline to 2.9 percent by the end of the year from a record 12.9 percent in November, companies with the lowest rankings will need a strong recovery to reduce debt and avoid default, Gallo said. Fed officials said they planned to keep the main overnight interest rate near zero for an “extended period” after meeting on March 16. To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net ; Shannon D. Harrington in New York at sharrington6@bloomberg.net

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CDO `Samaritan’ Hildene Duels With Fund Goliaths Over Stripping Collateral

March 19, 2010

By Caroline Salas and Pierre Paulden

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Citigroup Plans $2 Billion TruPS Sale After Repaying U.S.: Credit Markets

March 9, 2010

By Pierre Paulden and Caroline Salas March 9 (Bloomberg) — Citigroup Inc. , seeking to bolster capital after repaying bailout funds to the Treasury, is selling trust preferred securities as rising investor demand drives borrowing costs to near the lowest in almost five years. The 30-year fixed-to-floating rate securities may initially yield about 8.875 percent, according to a person familiar with the offering who declined to be identified because terms aren’t set. Citigroup plans to issue as much as $2 billion of the securities as soon as tomorrow, another person said. Citigroup, 27 percent owned by the government, is selling the debt as borrowers marketed $13.2 billion of U.S. corporate bonds today, poised to be the busiest in more than a month. The New York-based bank’s offering shows that liquidity is improving in the markets, which in turn will help the economy, said Daniel Fuss , vice chairman at Loomis Sayles & Co. in Boston. “It’s wonderful news for Citigroup and also shows markets are functioning very well,” said Fuss, whose Loomis Sayles Bond Fund is in the 97th percentile among peers this year, according to data compiled by Bloomberg. Citigroup is selling the securities following a $7.6 billion loss in the fourth quarter after repaying $20 billion of trust preferred securities issued under the Treasury’s Troubled Asset Relief Program, set up in late 2008 to support financial firms and markets. “It’s a capital structure need,” said David Hendler , head of U.S. financial services research at CreditSights Inc. in New York. “It’s not as dilutive like common equity issuance and they’ve already done a ton of that. Part of their earnings-per- share problem is they have a ton of shares from all that equity issuance they did last year.” Novartis, MGM Mirage Yields on corporate bonds are near five-year lows, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. They fell to 4.015 percent on Feb. 26, the lowest since May 31, 2005, and were 4.054 percent as of March 8. Elsewhere in credit markets, Novartis AG, Switzerland’s second-biggest drugmaker, and MGM Mirage, the largest casino owner on the Las Vegas strip, led what was poised to be the busiest day for U.S. corporate bond sales since Feb. 4, Bloomberg data show. Novartis sold $5 billion of 3-, 5- and 10- year senior notes for its acquisition of Alcon Inc., the world’s largest eye-care company. MGM Mirage issued $845 million of 10- year bonds to repay some of its loans. In Europe, Goldman Sachs Group Inc. led the busiest day for corporate issuance this year, with 10 sales totaling 7 billion euros ($9.5 billion) Bloomberg data show. New York-based Goldman Sachs, the most profitable securities firm in Wall Street history, priced 1.25 billion euros of seven-year debt in its first benchmark deal in the currency in five months. Sales in Asia Asian companies are selling record amounts of dollar- denominated bonds amid the lowest relative borrowing costs in more than two years and demand from international investors. BOC Hong Kong (Holdings) Ltd., the Hong Kong unit of Bank of China Ltd ., and Chinese developer Evergrande Real Estate Group Ltd. led Asia-Pacific borrowers selling $38.4 billion of dollar debt this year, the fastest start on record, according to data compiled by Bloomberg. Sales climbed 35 percent from $28.4 billion in the same period last year, when they slumped 22 percent in the aftermath of the seizure in credit markets. Nakheel PJSC bonds, part of parent Dubai World’s planned $26 billion debt restructuring, climbed the most in two months after JPMorgan Chase & Co. said creditors may get paid face value. The developer’s $750 million sukuk, or Islamic bond, added 5 cents, the most since Jan. 6, to 56.25 cents on the dollar, prices compiled by Bloomberg show. Low Interest Rates Federal Reserve Bank of Chicago President Charles Evans said low interest rates are likely to be needed “for some time” as high unemployment lingers and inflation stays below his goal. “With the unemployment rate at 9.7 percent and inflation significantly under my benchmark for price stability, there is no conflict between our policy goals,” Evans said in the text of a speech in Arlington, Virginia. Weakness in the job market, including long-term unemployment, means that “this accommodation will likely be appropriate for some time.” In the loan market, Anheuser-Busch InBev NV, the biggest beer maker, will cut at least $90 million from annual interest costs by refinancing $17.2 billion of debt it took when the company was formed in 2008. Lenders to the maker of Budweiser set interest at 117.5 basis points over benchmark rates on three-year term loans, and 97.5 basis points on a five-year revolving credit line, according to two people with direct knowledge of the deal. That compares with a margin of 175 basis points the company is paying on its existing debt. Credit-Default Swaps The cost of protecting against U.S. corporate defaults rose. The Markit CDX North America Investment-Grade Index, linked to credit-default swaps on 125 companies, increased 1.2 basis point to 83.7 basis points, according to CMA DataVision. The Markit iTraxx Europe index of swaps on 125 companies with investment-grade ratings was little changed at 74 basis points. Credit swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point equals $1,000 a year on a contract protecting against default on $10 million of debt for five years. Citigroup shares rose 26 cents, or 7.3 percent, to $3.82 in New York Stock Exchange composite trading, the biggest rise since August, Bloomberg data show. ‘Screaming Bargain’ “People are looking at Citi more as a stable to hopefully gradually growing entity,” Hendler said. The stock is a “screaming bargain,” CreditSights analysts wrote in a March 8 report. The bank raised more than $80 billion of new capital last year, increasing the number of shares outstanding during the last three years by sixfold to almost 30 billion. Its book value per share — its net worth, divided by total shares outstanding — tumbled to $5.35 as of Dec. 31 from $24.18 at the end of 2006. Citigroup is the sole bookrunner on the sale, the company said today in a prospectus filed with the U.S. Securities and Exchange Commission. The filing didn’t specify the amount of the sale. Citigroup’s $2.35 billion of 8.3 percent fixed-to-floating bonds due in 2057 rose 1.4 cent to 96.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The hybrid debt has more than tripled in price in the last year from 30.5 cents, Trace data show. To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net ; Caroline Salas in New York at csalas1@bloomberg.net

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Blockbuster Creditors Said to Hire Houlihan as Adviser Amid Restructuring

March 1, 2010

By Pierre Paulden, John Detrixhe and Jonathan Keehner March 1 (Bloomberg) — Blockbuster Inc. secured bondholders hired Houlihan Lokey Howard & Zukin to advise them as the video retailer seeks to restructure its debt, according to people familiar with the situation. The company has $652.5 million of 11.75 percent notes due 2014 and sold Sept. 17, according to data compiled by Bloomberg. The debt has fallen to 63.25 cents to yield 25.5 percent as of Feb. 10, the last time it was actively traded, according to Trace , the bond-price reporting system of the Financial Industry Regulatory Authority. Blockbuster , which lost $434.9 million in the fourth- quarter ended Jan. 3, will close at least 500 U.S. stores as it seeks to develop kiosk, mail and digital distribution. The senior secured notes may recover as much as 81 cents on the dollar in a restructuring as a going concern, said Mary Ross- Gilbert , an analyst at Imperial Capital LLC. The senior secured notes “appear to have minimal downside risk at current prices,” Ross-Gilbert said. Blockbuster, based in Dallas, has total debt of $963.9 million. The largest U.S. movie-rental chain hired Rothschild Inc. as a financing and strategy adviser, Blockbuster said Feb. 24 in a statement. Michelle Metzger , a spokeswoman for Blockbuster, couldn’t immediately be reached for comment. Michael Utley, a Houlihan spokesman, declined to comment. To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net ; John Detrixhe in New York at jdetrixhe1@bloomberg.net ; Jonathan Keehner in New York at jkeehner@bloomberg.net ;

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Bank Bonds Lure TCW After Stock Decline, P&G Spreads Widen: Credit Markets

February 2, 2010

By Pierre Paulden and Caroline Salas Feb. 2 (Bloomberg) — President Barack Obama’s proposals to limit the size of U.S. banks helped wipe out $430 billion of financial companies’ stock market value and also made their bonds irresistible to some of the nation’s biggest investors. Banks in the MSCI World Index fell 7 percent since Jan. 12 while the extra yield investors demand to own their bonds instead of Treasuries widened to 238 basis points, from a low of 224 basis points, or 2.24 percentage points, on the same day, according to the Bank of America Merrill Lynch U.S. Corporates, Banks Index. That compares with a median spread of 119 basis points during the last five years. Now, TCW Group Inc., AllianceBernstein LP and Advantus Capital Management say bank bonds are attractive. The government won’t tolerate another failure like the bankruptcy of Lehman Brothers Holdings Inc. in September 2008, which led to a seizure in credit markets, investors said. “It’s understood now that decisions such as letting Lehman Brothers file for bankruptcy are so dangerous and detrimental to an economy,” said Tad Rivelle , chief investment officer for Metropolitan West Asset Management LLC and a manager of TCW funds, where he helps oversee $55 billion. He’s buying senior and subordinated debt securities of the largest financial firms because a failure is “unlikely to be repeated.” Elsewhere in credit markets, the yield spread on company bonds overall expanded 2 basis points yesterday to 166 basis points, Bank of America Merrill Lynch’s Global Broad Market Corporate Index showed. The spread has widened from this year’s low of 160 basis points on Jan. 14. The average yield ended yesterday at 4.1 percent. P&G Bonds The cost to protect bonds of North American companies from default fell for the first time in four days. Consumer products company Procter & Gamble Co. sold $1.25 billion of notes at a bigger spread than its last offering. Bonds of movie-rental chain Blockbuster Inc. fell for the fifth time in eight days. Fewer banks demanded stricter standards for loans to consumers and companies last quarter, a Federal Reserve report showed, as the economy grew at the fastest pace in six years. Banks continued to tighten the terms of loans they did make, and demand for both business and household loans weakened over the past three months, the Fed said yesterday in its quarterly survey of senior loan officers. Obama asked Congress on Jan. 21 to limit the size of banks, curb proprietary trading and prohibit them from investing in hedge and private equity funds to prevent a repeat of the worst credit crisis since the Great Depression. While the rules would hurt shareholders by restricting growth, they may make the bonds more appealing by reducing the risks the firms are taking, said Tom Houghton , a vice president and portfolio manager at Advantus in St. Paul, Minnesota. ‘A Better Idea’ “I understand from the equity standpoint why you’d be concerned, because you’re taking some of the growth story off,” said Houghton, who manages $2 billion. “If you’re a creditor, you’d be less concerned about a Goldman Sachs or a Morgan Stanley . You’d have a better idea of what they’re doing.” Houghton is “overweight” bank bonds, meaning he owns a higher percentage than is contained in benchmark indexes. Banks deserve wider yield spreads because government involvement may increase volatility in the debt, said Marilyn Cohen , president of Envision Capital Management in Los Angeles, who manages $250 million in fixed-income assets. “Investors thought ‘Uh, oh, here they come again with their sticky fingers and who knows what else they’ll have up their sleeve,” she said. “Clearly this whole ‘Government is better and can do it much better’ idea isn’t going away.” Wider Spreads Citigroup Inc.’s $4 billion of 6.125 percent senior unsecured notes maturing in 2017 have fallen to 100.5 cents on the dollar to yield 6 percent, from 102 cents on Jan. 20, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt dropped 0.5 cent yesterday on speculation the New York-based lender will sell or split its $10 billion Citi Private Equity unit. Citigroup, 27 percent owned by the government following a bailout in 2008, is selling almost a third of its $1.86 trillion of assets under regulatory pressure to shrink, said people familiar with the matter, who declined to be identified because the sale talks are private. JPMorgan Chase & Co. analysts led by Eric Beinstein in New York said in a Jan. 29 report that banks are becoming more creditworthy and spreads will tighten. Morgan Stanley credit strategist Viktor Hjort in Hong Kong recommended on Jan. 25 that investors buy the bonds because lenders are increasingly profitable after selling shares to replenish capital eroded by the global financial crisis. Losses and Writedowns Financial institutions have raised $1.5 trillion to help cope with more than $1.7 trillion of losses and writedowns since the credit freeze began in 2007. The U.S. government has also backed debt and injected capital to prevent further failures. “Just as with 2009, it will be hard to outperform in credit without having exposure to financials,” said J.J. McKoan , head of global credit at AllianceBernstein in New York, who started buying financial securities early last year. The sector is the only one in investment-grade credit that trades at a “meaningful dispersion” to the benchmark index, he said. Credit-default swaps on the Markit iTraxx Crossover Index of 50 European companies with mostly high-yield credit ratings fell 11 basis points to 449, according to JPMorgan Chase & Co. prices at 11:23 a.m. in London. The Markit CDX North America Investment-Grade Index Series 13, which is linked to 125 companies, slipped 2.5 basis points to 94.5 yesterday, prices from broker Phoenix Partners Group show. Both indexes are used to speculate on creditworthiness or to hedge against losses and a drop signals an improvement in investor confidence. The declines in default-default swap prices came after the Institute for Supply Management said its manufacturing index expanded faster in January that economists forecast. Toyota Recall Swaps on Toyota Motor Corp. rose to the highest since July in Asia as the automaker recalled 2.3 million U.S. cars because of sticking accelerator pedals. The contracts surged about 12 basis points to 92, CMA DataVision prices show. Procter & Gamble’s 1.375 notes were priced to yield 55 basis points more than two-year Treasuries, Bloomberg data show. In August, Cincinnati-based P&G sold $1 billion of two-year notes at a spread of 38 basis points. The yield compares with 1.225 percent on 5.98 percent debt due in April 2012 sold by competitor Colgate-Palmolive Co. Both companies have similar ratings from Moody’s Investors Service and Standard & Poor’s. Proceeds will be used for refinancing, B. Craig Hutson , a bond analyst for Gimme Credit in Chicago, wrote in a research note yesterday. Blockbuster Falls Dallas-based Blockbuster’s $300 million of 9 percent notes due in 2012 fell 3.5 cents yesterday to 22.5 cents on the dollar, according to Trace. The securities tumbled from 61.875 cents on Jan. 20, when the company said its cash flow for the year ended Jan. 3 was lower than analyst estimates. Junk-rated companies face “huge uncertainties” as they try to refinance more than $800 billion of borrowings in the next five years, Moody’s said in a report yesterday. More than $700 billion of the debt that will need to be refunded in the speculative-grade market is maturing between 2012 and 2014, the New York-based rating company said. Junk, or non-investment grade borrowers, are those rated below Baa3 by Moody’s and BBB- by S&P. In the market for asset-backed bonds, U.S. political and regulatory “uncertainty” contributed to higher yields on debt tied to hotel, shopping center and skyscraper loans relative to benchmarks, according to JPMorgan analysts led by Alan Todd in New York. The spread on top-ranked commercial-mortgage backed securities increased 0.3 percentage point to 4.8 percentage points more than a benchmark swap rate last week, JPMorgan data show. To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net ; Caroline Salas in New York at csalas1@bloomberg.net

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Citigroup Said to Replace Peterson With Buckley as Head of Its Japan Unit

January 10, 2010

By Pierre Paulden Jan. 10 (Bloomberg) — Citigroup Inc. replaced the head of its Japanese unit, Douglas Peterson , with Darren Buckley , after Peterson oversaw the sale of assets in Japan, a person close to the bank said. Buckley is in charge of Citibank Japan Ltd., said the person, who declined to be identified because the appointment hasn’t been publicly announced. The Wall Street Journal reported yesterday the change without saying where it got the information. Peterson and Buckley couldn’t be reached outside of business hours. Citigroup spokeswoman Danielle Romero-Apsilos in New York declined to comment. Buckley was named president of Citibank Japan in September 2008, after running the bank’s Japanese consumer-finance unit CFJ KK. He joined Citigroup in London in 1992. Peterson will return to New York to help Citigroup repay the U.S. government’s bailout, the Journal reported. Peterson, 51, joined Citigroup in 1985 and served as chief auditor beginning in 2000. In May 2004, he was named head of the bank’s Japan unit. That year, Peterson told Japanese lawmakers his mandate was to fix compliance breaches that cost the company its private banking license in the country. Citigroup agreed in May to sell its Japanese retail brokerage and parts of its investment-banking business to Sumitomo Mitsui Financial Group Inc. for 545 billion yen ($5.8 billion). To contact the reporter on this story: Pierre Paulden in New York at ppaulden@bloomberg.net

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YRC Wins Bondholder Support for Debt Exchange to Avert Failure of Trucker

December 31, 2009

By Pierre Paulden and John Detrixhe Dec. 31 (Bloomberg) — YRC Worldwide Inc. bondholders agreed to swap their debt for equity in the largest U.S. trucker, enabling the company to avoid a bankruptcy filing that may have resulted in liquidation. Bondholders with 70 percent of the company’s $150 million of 8.5 percent notes due in April offered to tender, meeting the required threshold, YRC said in a statement today. That’s an increase over the 59 percent that participated by Dec. 29. Holders of 88 percent of all of the company’s outstanding bonds , with a face value of $470 million, participated, the company said. YRC, which has posted $1.7 billion in losses in the past five quarters, extended the deadline for the bond exchange six times this month. The Overland Park, Kansas-based trucker was locked in a struggle with a group of bondholders who own derivatives that would profit if the company defaulted, people familiar with the situation said. The International Brotherhood of Teamsters, the union that says it represents about 30,000 YRC employees, urged hedge funds and banks it believed owned the debt to vote for the exchange or sell their securities. No so-called less-than-truckload company — one that hauls goods for more than one customer in the same trailer — has survived bankruptcy in the last 30 years, according to the Teamsters. Bondholder Positions UBS AG told the union it tendered its bonds, according to a Teamsters statement yesterday. Cyrus Hadidi , a partner at JMB Capital Partners in Los Angeles, also named by the Teamsters as holding a position, said his company is “fully supportive” of YRC’s restructuring efforts and has tendered all its bonds. YRC had to complete the exchange by today to avoid a $19 million interest payment that it has said would leave it in an “unsustainable” position. The company can now defer this payment and will have increased access to its bank lines, YRC said in the statement. It will defer additional lender interest and fees of $20 million to $25 million per quarter during 2010 depending on usage of its credit agreement and an asset-backed securitization facility. Bondholder support for the exchange overall increased to 88 percent from 84 percent as of yesterday, the company said. Investors exchanged 94 percent of the company’s 3.375 percent convertible notes and 5 percent convertible securities, both due in 2023, the statement said. YRC’s $150 million of 8.5 percent notes rose 4.75 cents to 65 cents on the dollar as of 8:58 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Bankruptcy Alternative The company is required to complete the exchange offer under agreements with bank lenders, the Teamsters and multi- employer pension funds, according to a Nov. 24 regulatory filing. If the exchange failed, YRC said it would seek bankruptcy protection. The company has a $950 million revolving credit line with a group of banks led by JPMorgan Chase & Co., as well as a $111.5 million term loan, according to data compiled by Bloomberg. YRC has $1.6 billion of loans and bonds, Bloomberg data show. Bank lenders are “extremely reluctant” to put YRC into bankruptcy, in part because of “negative publicity related to the Teamsters,” New York-based fixed-income research firm CreditSights Inc. said in a Dec. 24 report. Investors who hold the 8.5 percent notes stood to receive more than 80 percent of the face value of their holdings in a bankruptcy, according to a report Dec. 29 from Egan-Jones Ratings Co. in Haverford, Pennsylvania, while owners of YRC’s 3.375 percent notes and 5 percent convertible securities due in 2023 were “highly unlikely to recover much, if any value.” The trucking company took on debt when Yellow Corp. acquired Roadway Corp. in 2003 for $1.07 billion and then bought USF Corp. in 2005 for $1.37 billion. To contact the reporter on this story: Pierre Paulden in New York at ppaulden@bloomberg.net ; John Detrixhe in New York at jdetrixhe1@bloomberg.net

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YRC Wins Bondholder Support for Debt Exchange to Avert Failure of …

December 31, 2009

By Pierre Paulden and John Detrixhe Dec. 31 (Bloomberg) — YRC Worldwide Inc.

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Pimco Says Corporates to Outperform Treasuries Next Year: New Issue Alert

December 29, 2009

By Pierre Paulden Dec. 29 (Bloomberg) — Fewer sales of U.S. corporate debt will help the securities to outperform Treasuries again in 2010, according to Pacific Investment Management Co., manager of the world’s biggest bond fund. The supply of government debt is growing at a 30 percent pace while the corporate sector’s declines, according to a report by Mark Kiesel , global head of corporate bond portfolio management at Newport Beach, California-based Pimco. While companies have sold more than $1 trillion of debt this year, an improving economy is allowing borrowers to show rising cash balances, Kiesel wrote in the report dated yesterday. “As the corporate sector delevers while the federal government re-levers, bond-market technicals should increasingly turn positive for corporate bonds and negative for Treasuries,” Kiesel wrote. “This will probably be the single largest factor in credit spreads tightening this year for a lot of companies.” Investment-grade corporate bonds yield 4.87 percent on average, or 193 basis points more than Treasuries, according to Merrill Lynch & Co.’s U.S. Corporate Master index. The spread has narrowed from 604 basis points last year. A basis point is 0.01 percentage point. The spread on high-risk, high-yield, or junk, bonds narrowed to 650 basis points from 1,812 at the end of 2008. Junk bonds are rated below Baa3 by Moody’s Investor’s Service or BBB- by Standard & Poor’s. Bond Returns Corporate bonds have returned 25.7 percent on average this year through Dec. 24, including reinvested interest, after losing 10.9 percent in 2008. Treasuries have lost 3.71 percent, after gaining about 14 percent, Merrill Lynch indexes show. Company bond sales totaled a record $1.24 trillion this year, up from $873.3 billion in the similar period a year ago, according to data compiled by Bloomberg. No bonds were sold yesterday and only one issue came to market last week, a $4 billion sale by New York-based JPMorgan Chase & Co., according to data compiled by Bloomberg. Federal spending to combat the financial crisis is spurring unprecedented government borrowing, with U.S. marketable debt increasing to a record $7.17 trillion in November from $5.8 trillion at the end of last year. Net fixed-rate Treasury issuance will approach 10 percent of nominal U.S. gross domestic product in 2010, while net nonfinancial corporate sales will likely be less than 1 percent, Kiesel wrote. The banking sector is the “likely winner” next year among company debt as balance sheets improve, profit grows and regulatory oversight increases, according to Kiesel. Merrill Lynch’s index of bank bonds has gained 18.1 percent this year, while spreads have shrunk to 247 basis points from the high this year of 823 basis points in March. “Banks’ asset quality, while still deteriorating, is benefiting from government efforts to support housing,” he wrote. Following is a description of at least $1.36 billion of pending sales of dollar-denominated bonds in the U.S. Not Rated SENSIENT TECHNOLOGIES CORP. said it entered into an agreement with a group of financial institutions for the issuance of $110 million in fixed-rate, senior notes, according to a Nov. 19 statement distributed by Business Wire. PT BAKRIE & BROTHERS is considering the sale of as much as $250 million of five-year bonds by January, the company said in a statement. There are no credit ratings available for the Indonesian metals producer and telecom operator, according to Bloomberg data. High Yield BIRCH COMMUNICATIONS INC. is offering $100 million of senior secured notes due in 2015, with proceeds going toward refinancing debt, buying outstanding warrants for its common stock and general corporate purposes, including acquisitions, the Atlanta-based company said Nov. 30 in a statement . Birch is rated B- by S&P, the ratings company wrote Dec. 4 in a statement. (Updated Dec. 21. See http://www.birch.com/about/ ) PT CILIANDRA PERKASA, an Indonesian oil palm grower, may sell dollar bonds, a person familiar with the matter said. Ciliandra is a unit of Singapore-based First Resources Ltd . PT CHANDRA ASRI, the Indonesian petrochemical company, plans to raise as much as $250 million from the sale of five- year bonds, according to two people with knowledge of the deal. DBS Group Holdings Ltd. and Deutsche Bank AG are arranging the sale. Standard & Poor’s assigned a B+ rating to the senior secured notes, which will be issued by Chandra Asri’s wholly owned Altus Capital Ltd. unit. Moody’s assigned them a provisional rating of B2. Chandra Asri is considering the dollar bond sale to fund expansion, according to Agustino Sudjono, the corporate secretary at parent company PT Bariot Pacific. PT MEDCO ENERGI INTERNASIONAL plans to sell $300 million of bonds, Bisnis Indonesia reported, citing unnamed people. Indonesia’s largest publicly traded oil company, which is rated B at S&P, has invited banks to bid to manage the bond sale. AO ASTANA FINANCE will offer senior creditors $350 million of new bonds, as well as recovery notes and 58.9 percent of voting shares, the lender said in a statement published through the Kazakhstan Stock Exchange. Holders of Astana Finance’s domestic notes will be offered 20-year tenge-denominated bonds with an 8 percent coupon, the lender said in the statement, which was dated Oct. 16. The DOMINICAN REPUBLIC may sell as much as $600 million of bonds, said Roberto Cabanas , head of general financing at the Public Credit Office. The government hired Barclays Plc and Citigroup Inc. to arrange the country’s first international dollar bond sale in more than three years. The country is rated B2 by Moody’s and B by S&P. VIETNAM may sell its first overseas bond since 2005 in a $1 billion offering as soon as next month, according to a government official. Offerings in Pipeline VIETNAM SHIPBUILDING INDUSTRY GROUP, the state-owned company known as Vinashin, won government approval to sell as much as $600 million of bonds overseas to fund construction of ships. Vinashin plans to raise between $400 million and $600 million in a dollar-denominated bond sale, “hopefully within the first quarter next year and with a government guarantee,” Chief Business Officer Nguyen Quoc Anh said in a phone interview from the northern port province of Quang Ninh. The POLISH government may sell dollar-denominated bonds in the first quarter of next year, PAP newswire cited Deputy Finance Minister Dominik Radziwill as saying. Poland may sell bonds denominated in euros as early as January 2010, PAP cited Radziwill as saying. ANGOLA, which vies with Nigeria as Africa’s biggest oil producer, is seeking to raise $4 billion from a sale of bonds. The debt will be sold in two parts in December and in June 2010, according to John Coulter , chief executive officer of JPMorgan Chase & Co. ’s South African unit, which is managing the deal. Angola will seek a credit rating after the first portion is sold, Finance Minister Eduardo Severim de Morais said Dec. 14. MICHAELS STORES INC. , the world’s largest arts-and-crafts retailer, amended its credit agreement on Aug. 21 to allow the private equity-owned company to issue bonds to repay its existing term loan under a $2.4 billion facility with Deutsche Bank AG and other lenders. The PHILIPPINES may sell most of its $2 billion overseas bond planned for 2010 in the first quarter, before the May elections, Finance Secretary Gary Teves said. The country is rated Ba3 at Moody’s and BB- at S&P. INDONESIA may sell $750 million of dollar-denominated Islamic bonds in July 2010, Dahlan Siamat, director of Islamic financing policy at the nation’s Debt Management Office, said in Jakarta on Dec. 15. The nation is rated Ba2 by Moody’s and BB-by S&P. ALROSA, Russia’s diamond monopoly, may sell as much as $1 billion in foreign-currency bonds in the second half of next year, RIA Novosti reported, citing Chief Executive Officer Fyodor Andreyev. The company is rated Ba3 by Moody’s. To contact the reporter on this story: Pierre Paulden in New York at ppaulden@bloomberg.net

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CIT Group Approaches Bankruptcy After Striking Icahn, Goldman Sachs Deals

October 31, 2009

By Pierre Paulden and Linda Shen Oct. 31 (Bloomberg) — CIT Group Inc. , the 101-year old commercial lender seeking to avoid collapse, may file for a prepackaged bankruptcy as soon as this weekend after striking deals with billionaire Carl Icahn and Goldman Sachs Group Inc. A prepackaged bankruptcy “is probably going to go through,” Icahn said yesterday. He will supply a $1 billion loan for “supplemental liquidity” that can be used as bankruptcy financing, the New York-based company said. CIT also said it reached an agreement with Goldman Sachs to keep a credit line open should the lender file for court protection. The accords were disclosed the day after a deadline passed for CIT to solicit votes in support of either a $30 billion out- of-court debt exchange or a prepackaged bankruptcy . CIT is seeking to reduce debt by at least $5.7 billion after being locked out of credit markets it relies on for funding and posting nine quarters of losses totaling more than $5 billion. “CIT has gotten its ducks in a row for filing,” Adam Steer , an analyst with CreditSights Inc. in New York, said in a telephone interview. “They can hopefully get out of the bankruptcy court faster, which may be better for debt recoveries.” Under the prepackaged plan, CIT bondholders will get 70 cents on the dollar in the form of new notes and equity in the reorganized company. If CIT is forced into a “free-fall” bankruptcy, unsecured claims may fetch as little as 6 cents on the dollar, according to Jeffrey Peek , the company’s chief executive officer. $4.5 Billion Loan CIT arranged a $4.5 billion term loan that can be used in bankruptcy, the company said Oct. 28. The lender said “through the substantial deleveraging featured in CIT’s restructuring plan, whether completed in or out of court, the company is confident that CIT will emerge as a strong bank-holding company with improved capital, liquidity and earnings potential.” CIT spokesman Curt Ritter declined to comment yesterday. While CIT said it’s still counting the more than 150,000 ballots, bond and credit-default swap prices show that investors are betting the lender will file for court protection. Since Peek started the debt swap Oct. 1, the company’s notes due Nov. 3 dropped 12 cents to 68 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Holders of the $500 million in notes were offered 90 cents on the dollar in new debt and equity in an out-of-court exchange that expired at 11:59 p.m. in New York on Oct. 29. Bondholder Protection The cost to protect CIT debt against default for five years has risen 4.5 percentage points to 38.5 percent upfront since Sept. 30, according to CMA DataVision. That means it would cost $3.85 million initially and $500,000 annually to protect $10 million of CIT bonds from default for five years. The cost of the credit-default swaps implies that traders have priced in an 85.5 percent chance that the company will default within five years, a standard pricing model used by Bloomberg shows. The model assumes investors could recover 40 cents on the dollar in a bankruptcy proceeding. CIT dropped 23 cents, or 24 percent, to 72 cents in New York Stock Exchange composite trading yesterday. The shares, which traded at more than $61 each in February 2007, have declined 84 percent this year. If the prepackaged plan is approved, the company plans to file for bankruptcy before $800 million of bonds mature next week, according to people familiar with the situation who declined to be identified because the talks are private. Noteholder Control Icahn, 73, who says he’s CIT largest bondholder with $2 billion of its debt, initially opposed CIT’s plan, contending the investments were worth more in a traditional bankruptcy. The New York-based investor proposed this week to buy CIT holders’ bonds for 60 cents on the dollar in a tender offer lasting 30 days if they rejected the plan. CIT’s agreement to “give control to the noteholders” and an accelerated process for appointing directors “significantly improve corporate governance and cash flow protections, and are positive for the company and all noteholders,” Icahn said in a statement yesterday, explaining why he changed his vote in favor of the prepackaged bankruptcy. “The board in general acted responsibly by saying, ‘We’re willing to do this.” Icahn said in a telephone interview. Icahn also said he’s changing the terms of the tender offer for bondholders who voted against the prepackaged bankruptcy. “Whether or not the Exchange Offer/Prepackaged Plan fails, they will still be protected at $600 per note for 30 days,” the statement said. Icahn’s Goals “Icahn had two goals in mind: Influence over the board and participation in the expansion loan facility,” said Kevin Starke , an analyst at CRT Capital Group LLC in Stamford, Connecticut, said in a telephone interview. “He’s won on both counts.” CIT finances about 1 million businesses from Dunkin’ Brands Inc. in Canton, Massachusetts, to Eddie Bauer Holdings Inc., the clothing chain in Bellevue, Washington, that’s operating under bankruptcy protection. The company says it’s the third-largest U.S. railcar-leasing firm and the world’s third-biggest aircraft financier. Icahn Associates Corp. is the largest shareholder of American Railcar Industries Inc. , which depended on CIT for 31 percent of its business as of June 30, according to data compiled by Bloomberg. Icahn is chairman of the St. Charles, Missouri-based railcar maker. CIT’s agreement with New York-based Goldman Sachs will reduce a $3 billion credit facility to $2.13 billion and keep the line open should CIT file for bankruptcy. Goldman Sachs Agreement In exchange, Goldman Sachs received $285 million in termination fees, CIT said yesterday in a filing with the U.S. Securities and Exchange Commission. Under the terms of the two companies’ original agreement, Goldman Sachs would have been due a $1 billion termination payment to close the credit line after a CIT bankruptcy. The agreements should make the bankruptcy process easier by removing opposition to the bondholder plan, Michael Taiano , an analyst at Sandler O’Neill & Partners LP said in a telephone interview. “They’re effectively in control and there’s not really a bankruptcy judge that has to approve everything,” he said. “It creates less disruption to the business because you’re in bankruptcy a shorter period of time.” To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net ; Linda Shen in New York at lshen21@bloomberg.net

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CIT Accords With Icahn, Goldman Sachs Pave Way for Prepackaged Bankruptcy

October 30, 2009

By Linda Shen and Pierre Paulden Oct. 30 (Bloomberg) — CIT Group Inc. , the 101-year old commercial lender seeking to avoid collapse, paved the way for a pre-packaged bankruptcy after reaching agreements with billionaire Carl Icahn and Goldman Sachs Group Inc. Icahn, who says he’s CIT largest bondholder, will supply a $1 billion loan to provide “supplemental liquidity” for CIT’s restructuring that can be used as bankruptcy financing, the New York-based company said today in a statement. Earlier today, CIT said it reached a deal with Goldman Sachs to keep a credit line open should the lender file for court protection. A deadline passed last night for CIT to solicit votes in support of a $30 billion out-of-court debt exchange, or pre- packaged bankruptcy. Under the pre-packaged plan, CIT bondholders will get 70 cents on the dollar in the form of new notes and equity in the reorganized company. If CIT is forced into a “free-fall” bankruptcy, unsecured claims may fetch as little as 6 cents on the dollar, according to CIT Chief Executive Officer Jeffrey Peek . The prepackaged bankruptcy “is probably going to go through now,” Icahn, who says he owns $2 billion of CIT debt, said today in a telephone interview. “The board in general acted responsibly by saying, ‘We’re willing to do this.’” CIT arranged a $4.5 billion term loan that can be used as bankruptcy financing, the company said Oct. 28. While CIT said it’s still counting ballots, bond and credit-default swap prices show that investors are betting the lender will file for court protection. Notes Fall Since Peek started the debt swap Oct. 1, the company’s notes due Nov. 3 dropped 12 cents to 68 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Holders of the $500 million in notes were offered 90 cents on the dollar in new debt and equity in an out-of-court exchange that expired at 11:59 p.m. yesterday in New York. The cost to protect CIT debt against default for five years has risen 4.5 percentage points to 38.5 percent upfront since Sept. 30, according to CMA DataVision. That means it would cost $3.85 million initially and $500,000 annually to protect $10 million of CIT bonds from default for five years. The cost of the credit-default swaps implies that traders have priced in an 85.5 percent chance that the company will default within five years, a standard pricing model used by Bloomberg shows. The model assumes investors could recover 40 cents on the dollar in a bankruptcy proceeding. Icahn initially opposed CIT’s plan, contending the investments were worth more in a traditional bankruptcy. The New York-based investor proposed this week to buy CIT holders’ bonds for 60 cents on the dollar in a tender offer lasting 30 days if they rejected the plan. Still Protected CIT’s agreement to “give control to the noteholders” and accelerated process for appointing directors “significantly improve corporate governance and cash flow protections, and are positive for the company and all noteholders,” Icahn said in a statement today, explaining why he changed his vote in favor of the pre-packaged bankruptcy. Icahn also said he’s changing the terms of the tender offer for bondholders who voted against the pre-packaged bankruptcy. “Whether or not the Exchange Offer/Prepackaged Plan fails, they will still be protected at $600 per note for 30 days,” the statement said. Dunkin’ Brands “Icahn had two goals in mind: Influence over the board and participation in the expansion loan facility,” said Kevin Starke , an analyst at CRT Capital Group LLC in Stamford, Connecticut, said in a telephone interview. “He’s won on both counts.” CIT finances about 1 million businesses from Dunkin’ Brands Inc. in Canton, Massachusetts, to Eddie Bauer Holdings Inc., the clothing chain in Bellevue, Washington, that’s operating under bankruptcy protection. The company says it’s the third-largest U.S. railcar-leasing firm and the world’s third-biggest aircraft financier. Icahn Associates Corp. is the largest shareholder of American Railcar Industries Inc., which depended on CIT for 31 percent of its business as of June 30, according to data compiled by Bloomberg. Icahn is chairman of the St. Charles, Missouri-based railcar maker. CIT shares dropped 23 cents, or 24 percent, to 72 cents as of 4:01 p.m. in New York Stock Exchange composite trading. The shares have declined 84 percent this year. Goldman Sachs Agreement CIT’s agreement with New York-based Goldman Sachs will reduce a $3 billion credit facility to $2.13 billion and keep the line open should CIT file for bankruptcy. In exchange, Goldman Sachs received $285 million in termination fees, CIT said today in a filing with the U.S. Securities and Exchange Commission. Under the terms of the two companies’ original agreement, Goldman Sachs would have been due a $1 billion termination payment to close the credit line after a CIT bankruptcy. The agreements should make the bankruptcy process easier, Michael Taiano , an analyst at Sandler O’Neill & Partners LP said in a telephone interview. “They’re effectively in control and there’s not really a bankruptcy judge that has to approve everything,” he said. “It creates less disruption to the business because you’re in bankruptcy a shorter period of time.” To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net ; Linda Shen in New York at lshen21@bloomberg.net

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CIT Reaches Agreement With Carl Icahn to Back Lender’s Restructuring Plan

October 30, 2009

By Linda Shen and Pierre Paulden Oct. 30 (Bloomberg) — CIT Group Inc., the 101-year-old commercial lender seeking to avert collapse, reached an agreement with billionaire investor Carl Icahn to support its restructuring plan. Icahn will supply a $1 billion credit line to provide “supplemental liquidity” for CIT’s restructuring, the New York- based company said today in a statement distributed by Business Wire. The $1 billion line can be used as bankruptcy financing, CIT said. A deadline passed last night for CIT to solicit votes in support of an out-of-court debt exchange, or pre-packaged bankruptcy plan. Icahn, who says he owns $2 billion of CIT debt and is its largest bondholder, initially opposed the plan, contending the investments are worth more in a traditional bankruptcy. To contact the reporter on this story: Linda Shen in New York at lshen21@bloomberg.net

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CIT Bonds Show Bankruptcy May Be Foregone Conclusion as Debt Exchange Ends

October 28, 2009

By Pierre Paulden and Caroline Salas Oct. 29 (Bloomberg) — CIT Group Inc. bond and credit- default swap prices show that investors are betting the 101- year-old commercial lender will file for bankruptcy after a debt exchange expires today. Since CIT Chief Executive Officer Jeffrey Peek started a $30 billion debt swap Oct. 1, the company’s notes due Nov. 3 have dropped 13 cents to 67 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Holders of the $500 million in notes are being offered 90 cents on the dollar in new debt and equity in an out-of-court exchange. They would get 70 cents on the dollar in bonds and new stock in a pre-packaged bankruptcy. “We believe they will file for bankruptcy within the week, provided nothing unexpected occurs,” Adam Steer , an analyst with CreditSights Inc. in New York, said in a telephone interview. CIT, which lost $5 billion in the past nine quarters and failed to get a second round of taxpayer funding in July, is seeking to avert collapse by asking bondholders to agree to the swap or vote for the pre-packaged bankruptcy. It faces opposition from billionaire investor Carl Icahn , who says he’s the largest bondholder, with $2 billion in debt. If CIT is forced into a “free-fall” bankruptcy, unsecured claims may fetch as little as 6 cents on the dollar, Peek said. Bankruptcy Alternative If the debt swap fails, CIT plans to file for bankruptcy before $800 million of bonds mature next week , according to people familiar with the situation who declined to be identified because the talks are private. A group of bondholders that provided the emergency financing in July has always preferred a pre-packaged bankruptcy that would have the New York-based company emerge from court proceedings in 60 days, the people said. The debt-exchange offer expires at 11:59 p.m. Curt Ritter, a CIT spokesman, declined to comment. In its statement yesterday, the lender said “through the substantial deleveraging featured in CIT’s restructuring plan, whether completed in or out of court, the company is confident that CIT will emerge as a strong bank-holding company with improved capital, liquidity and earnings potential.” CIT finances about 1 million businesses from Dunkin’ Brands Inc. in Canton, Massachusetts, to Eddie Bauer Holdings Inc., the clothing chain in Bellevue, Washington, that is operating under bankruptcy protection. The company says it’s the third-largest U.S. railcar-leasing firm and the world’s third-biggest aircraft financier. Bondholder Assistance The company said yesterday it received $4.5 billion in loans from a “diverse group” of lenders, including some of its bondholders, to finance its restructuring, spurning an offer for a loan of the same size from Icahn. The money will be used to “finance a portion of the company’s existing secured indebtedness, which may come due as a result of restructuring,” CIT said in a statement. The CIT notes due Nov. 3 fell 2.5 cents to 67 cents on the dollar yesterday, Trace data show. The cost to protect CIT debt against default for five years has risen 4.7 percentage points to 38.7 percent upfront since Sept. 30, according to CMA DataVision. That means it would cost $3.87 million initially and $500,000 annually to protect $10 million of CIT bonds from default for five years. The cost of the credit-default swaps implies that traders have priced in an 86 percent chance that the company will default within five years, a standard pricing model used by Bloomberg shows. The model assumes investors could recover 40 cents on the dollar in a bankruptcy proceeding. ‘Default Is Imminent’ “The credit-default-swap market is telling you default is imminent,” Kevin Starke , an analyst at CRT Capital Group LLC in Stamford, Connecticut, said in a telephone interview. “The bond prices are indicating the pre-pack is likely.” Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt or to hedge against losses. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. Shares in CIT rose 10 cents, or 10.4 percent, to $1.06 in New York Stock Exchange composite trading. The shares, which traded at more than $61 each in February 2007, have lost 77 percent this year. Icahn, 73, who built his reputation in the 1980s as a corporate raider, said this week that CIT debt is worth more in a traditional bankruptcy and proposed to buy holders’ bonds for 60 cents on the dollar in a tender offer lasting 30 days if they reject CIT’s plans. Maturing Debt About $9.11 billion of CIT loans and bonds mature through 2010, according to data compiled by Bloomberg. The company has $47.2 billion of loans and bonds, Bloomberg data show. CIT altered the terms of its debt-exchange plan yesterday so that if it filed for a pre-packaged bankruptcy, bondholders will get to recommend a majority of its directors. The steering committee comprising Capital Research & Management Co., Centerbridge Partners LP, Oaktree Capital Management LLC and Silver Point Capital LP will identify four of the 13 directors. Other investors who own at least 1 percent of CIT’s bonds and unsecured bank debt can recommend three directors. CIT turned to its bondholders in July for the $3 billion rescue financing after failing to win access to a Federal Deposit Insurance Corp. program to sell U.S.-backed debt. The company had received $2.33 billion in taxpayer funds in December to stay afloat. To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net ; Caroline Salas in New York at csalas1@bloomberg.net

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Citigroup Attempts to Stop TPG Fund From Cherry-Picking Broken CDO Assets

October 16, 2009

By Caroline Salas and Pierre Paulden Oct. 16 (Bloomberg) — Citigroup Inc., the lender 34 percent owned by the U.S. government, is seeking to block a TPG Credit Management LP fund’s attempt to buy assets from a collateralized debt obligation for pennies on the dollar. Citigroup owns $19.5 million of senior notes in Tropic CDO V Ltd. and the “improper” sale of assets would cause “irreparable harm” to its stake, Jay Huang , the New York-based bank’s head of global CDO trading, said yesterday in a letter to trustee U.S. Bancorp. Huang and Jeanette Volpi , a Citigroup spokeswoman, declined to comment. A fund associated with TPG is exploiting an unintended wrinkle in the $650 billion market for CDOs by asking holders of the riskiest portions to allow asset sales in exchange for millions of dollars in fees. While equity holders have the right to decide which assets the CDOs sell because they’re first in line for losses, they may no longer have the incentive to ensure that assets are sold at fair value because their investments have been wiped out by the worst financial crisis since the Great Depression. “Noteholders have the very reasonable expectation that no arbitrary third party would be able to ‘cherry pick’ the portfolio collateral,” Huang said in the letter obtained by Bloomberg News. 5 Cents TPG Credit, a Minneapolis-based firm founded by former Cargill Inc. executive Rory O’Neill and associated with private equity firm TPG, has offered in the past week to buy $470.8 million of bank trust preferred securities from seven different CDOs for 5 cents on the dollar, according to trustee reports obtained by Bloomberg News. TPG Credit will pay holders of so- called equity portions another $23.5 million in fees to allow the sales, the documents say. Owen Blicksilver, a spokesman for TPG, declined to comment. Steven Gomes of trustee U.S. Bancorp didn’t respond to phone calls and an e-mail. TPG Credit joins Babson Capital Management LLC, GoldenTree Asset Management LP and other investors buying assets of CDOs, securities that contributed to the $1.6 trillion of writedowns and credit losses taken by the world’s largest financial institutions since the start of 2007. Citigroup has taken about $118 billion of writedowns and losses, according to data compiled by Bloomberg. ‘Consent Payment’ CDOs parcel fixed-income assets such as bonds, loans or trust preferred securities and slice them into new securities of varying risk intended to provide higher returns than other investments of the same rating. Julie Braun , chief operating officer of TPG Credit, said in an Oct. 9 letter to Tropic CDO V noteholders that Trust Preferred Solutions LLC is seeking to buy $115 million of securities issued by 20 finance companies including Centra Financial Statutory Trust II and Forstrom Capital Trust II for 5 cents on the dollar. Investors must agree by Oct. 23, the letter said. Trust Preferred Solutions is a TPG Credit investment vehicle. While Tropic CDO V’s equity holders haven’t received payments in a year, they’ll get “a consent payment equal to half of the aggregate purchase price of the subject securities, unfairly benefiting the preferred shareholders at the sole expense of the noteholders,” Huang said in the letter. “We intend to hold the issuer, its directors and the trustee responsible for any transaction that improperly impairs our collateral or interferes with our legal and contractual rights,” Huang wrote. To contact the reporters on this story: Caroline Salas in New York at csalas1@bloomberg.net ; Pierre Paulden in New York at ppaulden@bloomberg.net

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KKR `Disaster’ LBO of TXU Hurts Bondholders With Swap, CreditSights Says

October 7, 2009

By Pierre Paulden Oct. 7 (Bloomberg) — Energy Future Holdings Corp. is punishing bondholders with losses to protect KKR & Co. and TPG Inc. ’s investment in the $43 billion buyout of the Texas electricity provider, according to CreditSights Inc. The company, formerly known as TXU Corp., is seeking to cut $2 billion of debt by asking bondholders to swap some securities for less than 50 cents on the dollar, Dallas-based Energy Future said in an Oct. 5 regulatory filing. Energy Future has to reduce debt after the buyout firms purchased the company in October 2007 using a combination of high-yield, high-risk loans and bonds before gas prices tumbled, credit markets seized up and stocks fell. By forcing bondholders to take losses, the firms are protecting their investment in Energy Future, CreditSights said in a report yesterday. “This buyout is a disaster,” Dot Matthews , one of the analysts at New York-based CreditSights who wrote the report, said in a telephone interview. “They desperately need to cut the outstanding debt.” The power company will issue as much as $4 billion of 9.75 percent secured notes maturing in 2019 in exchange for $6 billion of outstanding notes, Energy Future said in the regulatory filing. Energy Future is asking debt holders with $750 million of 6.55 percent notes maturing in 2034 to swap holdings for 46.5 cents on the dollar of new secured notes if they tender by Oct. 19, according to the filing. The proposed debt exchange “will give bondholders some security,” Energy Future spokeswoman Lisa Singleton said in a telephone interview. She cited an Oct. 5 report from Fitch Ratings saying the offer isn’t coercive because there’s little probability of a bankruptcy absent the swap. ‘No-Win Proposition’ If bondholders reject the offer their securities may be subordinated by new debt, Matthews said. “The once proud Texas Utilities has been reduced to threatening bondholders with a no-win proposition — tender and lose, don’t tender and maybe lose more,” according to the report written with analysts Adam Cohen and Scott Greenstein . Energy Future’s $2.65 billion of 11.25 percent so-called toggle notes due in November 2017 rose 2.1 cents to 65.1 cents on the dollar as of 11:54 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bond traded as high as 75.5 cents in August. KKR, TPG Private-equity firms KKR and TPG closed on the TXU acquisition in October 2007 toward the end of a takeover boom that saw a record $1.4 trillion worth of deals announced in 2006 and 2007. The TXU leveraged buyout was “done at the top of the market,” leaving the company with an untenable debt load, said Carl Blake , a Washington-based analyst at Gimme Credit LLC. Kristi Huller, a spokeswoman for KKR in New York, declined to comment. Kristin Celauro, a spokeswoman for TPG of Fort Worth, Texas, referred questions to Energy Future. Energy Future has $44.5 billion of loans and bonds, including $22.4 billion coming due in 2014, according to data compiled by Bloomberg. Franklin Advisers of San Mateo, California, Berkshire Hathaway Life Insurance Co., a unit of Warren Buffett’s Omaha, Nebraska-based Berkshire Hathaway Inc., and Capital Research & Management Co. are among the largest bondholders, according to data compiled by Bloomberg. Franklin Resources spokesman Matt Walsh didn’t immediately return a telephone message. Buffett didn’t immediately reply to a request for comment left with his assistant, Carrie Kizer. Capital Research spokeswoman Maura Griffin in New York declined to comment. To contact the reporter on this story: Pierre Paulden in New York at ppaulden@bloomberg.net

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CIT Swaps Bonds in Effort to Reduce Debt by $5.7 Billion, Avoid Bankruptcy

October 2, 2009

By Pierre Paulden and Shannon D. Harrington Oct. 2 (Bloomberg) — CIT Group Inc., the 101-year-old commercial lender, is seeking to cut at least $5.7 billion of debt to help it avoid collapse and return to profitability after nine quarters of losses. CIT will ask bondholders to exchange unsecured obligations for either new secured debt maturing in four to eight years, preferred shares or a combination, the New York-based company said yesterday in a statement distributed by Business Wire. Investors holding bonds closest to maturity would get more new debt, while those with notes due later would receive proportionately more equity, said a person familiar with the matter, who declined to be identified as the talks are private. Should the exchange fail, CIT said it would seek court protection through a pre-packaged bankruptcy. Yesterday, its bonds and credit-default swaps showed investors were growing increasingly concerned that the company, led by Chief Executive Officer Jeffrey Peek , will be unable to restructure out of court as $1.15 billion of debt comes due by year-end. “To do what they want to do out of court, they need very high consent levels to eliminate the problem of holdouts,” Kevin Starke , an analyst at CRT Capital Group LLC in Stamford, Connecticut, said this week before details of the plan were released. CIT is also asking creditors to approve a pre-packaged bankruptcy if it misses the exchange target, according to the statement. Court Authority The company can use the “authority of the courts” offered in bankruptcy proceedings, Starke said. The bondholder steering committee, which provided $3 billion of emergency cash in July, told the company it will exchange $10 billion of unsecured debt or vote for the prepackaged bankruptcy plan, according to the statement. CIT didn’t disclose how much it’s offering bondholders for their debt. The holders of notes maturing in 2009 will get as much as 90 cents on the dollar of new debt and 10 cents of equity, the Wall Street Journal reported, citing unnamed people. Notes maturing in 2010 are set to receive 85 cents of new debt and 15 cents of equity, the Journal reported. The exchange offers, which have specific reduction targets for debt maturing by 2012, will expire on Oct. 29, CIT said. The company could emerge from a pre-packaged bankruptcy within 30 days to 60 days of that date should the offers fail, a person familiar with the matter, who declined to be identified, said Sept. 30. ‘Acceptable’ Plan “This plan maximizes franchise value and can be executed quickly and effectively through a series of voluntary debt exchange offers or an expedited in-court restructuring process,” Peek said in the statement. “Upon completion of either alternative, CIT will be a well-funded bank-holding company with a strong capital position and market-leading franchises.” CIT had to come up with a restructuring plan “acceptable” to the majority of the bondholder steering committee by Oct. 1, the company said in an Aug. 17 filing. About $9.14 billion of CIT loans and bonds mature through 2010, according to data compiled by Bloomberg. The company has $43 billion of loans and bonds, Bloomberg data show. CIT’s $1 billion of floating-rate notes due in March fell 2.5 cents yesterday to 70.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The annualized amount credit-default swaps traders demanded to protect against a default for three months climbed more than five-year protection, according to CMA DataVision, signaling that traders were bracing for bankruptcy. ‘Market Concern’ “The bond prices reflect the market concern that a pre- packaged bankruptcy is becoming more likely,” Adam Steer , an analyst at fixed-income research firm CreditSights Inc. in New York, said in a telephone interview yesterday. Credit-default swaps protecting against a CIT default through Dec. 20 have jumped 5 percentage points in the past two days to 27 percent upfront, according to CMA DataVision, while contracts for five years have climbed 2.5 percentage points to 36.5 percent. The prices mean that on an annual basis it costs more to protect CIT debt for three months than for five years, a so- called inverted curve that signals the perceived risk of a near- term default has climbed. Few of the contracts appear to be trading, said Tim Backshall , chief strategist at Credit Derivatives Research LLC in Walnut Creek, California. Bondholder Protection Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt or to hedge against losses. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. CIT fell 15 cents, or 12 percent, yesterday to $1.06 in New York Stock Exchange composite trading, the lowest price since Aug. 4. The shares, which traded at more than $61 each in February 2007, have lost 77 percent this year. The company recovered in European trading, climbing to $1.24 as of 9:34 a.m. in Frankfurt today. CIT funds about 1 million businesses from Dunkin’ Brands Inc. in Canton, Massachusetts, to Eddie Bauer Holdings Inc., the bankrupt clothing chain in Bellevue, Washington. The company says it’s the third-largest U.S. railcar-leasing firm and the world’s third-biggest aircraft financier. The lender needs to cut debt after posting more than $5 billion in losses during the past nine quarters and losing access to the unsecured debt markets it relied on for funding. CIT is “targeting a capital structure with significantly less leverage and establishing capital ratios well in excess of our regulatory standards and in line with the most financially sound of our peers,” the lender said yesterday in a regulatory filing , “positioning the company for a return to profitability and investment-grade ratings.” To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net ; Shannon D. Harrington in New York at sharrington6@bloomberg.net

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CIT Group Pledges $5.7 Billion in Debt Reductions as Exchange Offer Begins

October 2, 2009

By Pierre Paulden Oct. 1 (Bloomberg) — CIT Group Inc. said it started a restructuring plan designed to help the 101-year-old commercial lender meet regulatory capital requirements and return to profitability. The company is asking bondholders to swap unsecured notes for new secured debt or shares or a combination of the two, New York-based CIT said today in an e-mailed statement. The debt will have maturities ranging from four to eight years, CIT said. The swaps can’t be completed unless the company reduces its debt by $5.7 billion, CIT said. The company said it may choose to file for Chapter 11 bankruptcy protection if it doesn’t meet the target of the exchange. At the same time, CIT is asking bondholders and other owners of its debt to approve a prepackaged reorganization plan. A steering committee of bondholders told the company it will exchange $10 billion of unsecured debt or vote for the prepackaged bankruptcy plan, according to the statement. To contact the reporter on this story: Pierre Paulden in New York at ppaulden@bloomberg.net

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CIT Said to Consider Financing From Citigroup, Barclays as Deadline Nears

September 30, 2009

By Pierre Paulden and Kristen Haunss Sept. 30 (Bloomberg) — Citigroup Inc. and Barclays Capital are offering to provide financing to CIT Group Inc., the commercial lender that’s struggling to avert bankruptcy, according to people familiar with the situation. The 101-year-old company’s bondholders are also seeking to provide about $2 billion in loans as a restructuring deadline approaches tomorrow, said the people, who declined to be identified because the negotiations are private. New York-based CIT may choose other options, the people said. CIT said in July it may seek court protection from creditors after Chief Executive Officer Jeffrey Peek failed to win a second government bailout and had to turn to bondholders for $3 billion in rescue financing. The company said in an Aug. 17 regulatory filing that it has to come up with a plan “acceptable” to the majority of a bondholder steering committee that provided it with the emergency cash by Oct. 1. “Some sort of secured financing is a likely component of the company’s restructuring plan, launched in conjunction with a debt exchange,” Brian Charles , a debt analyst at brokerage firm RW Pressprich & Co. in New York, said in a telephone interview. CIT needs to raise $5 billion to $6 billion in financing to be able to make loans, he said. Bonds Rally CIT’s $750 million of 4.25 percent notes due in February climbed 2.5 cents yesterday to 77 cents on the dollar, and have gained 14 cents since the end of August, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The company’s shares rose 53 cents, or 32 percent, to $2.20 in New York Stock Exchange composite trading. Citigroup, Barclays Capital and CIT spokesmen in New York declined to comment. About $9.14 billion of CIT loans and bonds mature through 2010, including $1.15 billion of debt securities by the end of this year, data compiled by Bloomberg show. The restructuring plan for CIT, which had a net loss of $1.62 billion in the second quarter, may include selling business lines or assets, debt-for-equity-swaps and offers to extend debt maturities, CIT said in the Aug. 17 filing. The company may be able to create $6 billion to $9 billion of capital by exchanging $30 billion of unsecured notes through debt swaps, Charles at Pressprich wrote in a Sept. 9 report. CIT bonds rose last week on speculation the lender was in talks with Citigroup and Bank of America Corp. to refinance a $3 billion loan with an $8 billion to $10 billion secured-loan facility, New York-based fixed-income research firm CreditSights Inc. said in a Sept. 27 report. Fed Approval Needed CreditSights said it couldn’t confirm the validity of the speculation and that the Federal Reserve would need to approve any transaction. Danielle Robinson , a spokeswoman for Charlotte, North Carolina-based Bank of America, declined to comment. While the financing would get management “out from under the thumb of the steering committee,” the extra debt doesn’t reduce the risk of an exchange offer or prepackaged bankruptcy, CreditSights analyst Adam Steer said. “The company is going to need to raise equity to appease the regulators and ultimately re-establish its business,” he said in an interview. Bank of America and Citigroup arranged CIT’s five-year, $2.1 billion bank line that needs to be repaid in April 2010, according to Bloomberg data. Barclays, the documentation agent for that loan, was the administration agent on CIT’s $3 billion rescue financing in July. Stock Decline CIT, whose stock has fallen 52 percent this year through yesterday, turned to its bondholders after failing to gain access to the Federal Deposit Insurance Corp.’s program to guarantee debt sales. Newport Beach, California-based Pacific Investment Management Co., Centerbridge Partners LP in New York, Los Angeles-based Oaktree Capital Management LLC, Boston-based hedge fund Baupost Group LLC, Capital Research & Management Co. of Los Angeles, and Silver Point Capital LP in Greenwich, Connecticut, made up the group that initially provided the $3 billion in emergency funding and are part of the steering committee. Under terms of the rescue loan, CIT had to complete a tender offer to exchange $1 billion of floating-rate notes that matured in August. Holders of 59.8 percent of the notes tendered the debt after CIT raised its offer 5 cents to 87.5 cents on the dollar. Bondholders that provided the rescue financing agreed to tender their holdings. To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net ; Kristen Haunss in New York at khaunss@bloomberg.net .

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CDO Trading Returns to Wall Street as Babson, GoldenTree Hunt for Assets

September 24, 2009

By Pierre Paulden and Shannon D. Harrington Sept. 24 (Bloomberg) — Babson Capital Management LLC and GoldenTree Asset Management LP are among investors bargain- hunting in the $650 billion market for collateralized debt obligations linked to corporate debt as credit markets open. An estimated $11 billion of CDOs backed by high-yield, high-risk loans or linked to corporate bonds using credit derivatives, have exchanged hands this year, according to Morgan Stanley and JPMorgan Chase & Co. Trading in CDOs that contributed to $1.6 trillion of writedowns and credit losses at banks worldwide increased after the Federal Reserve doubled its balance sheet to more than $2 trillion to rescue financial institutions. Prices have more than tripled since May for some securities tied to company debt as analysts and investors lowered their predictions for defaults and the economy showed signs of emerging from the longest recession since the Great Depression. “CDO trading activity has been huge since May,” said Joseph Naggar , a partner at GoldenTree in New York, which oversees $11 billion and has bought loan CDOs and so-called synthetic CDOs composed of credit-default swaps. “Access to the capital markets has dramatically improved for companies. As some of the underlying corporate assets have improved, CDOs have followed.” The market for buying and selling CDOs, which repackage assets such as mortgage bonds and loans used in corporate buyouts into new debt with varying degrees of risk, was shut down last year in the wake of Lehman Brothers Holdings Inc. ’s bankruptcy filing, Naggar said. Prices Recovered Trading has restarted and prices recovered as government support of the banking system increased liquidity, Citigroup Inc. analyst Ratul Roy said. The three-month London interbank offered rate, the amount banks charge to lend to one another, has declined to 0.28 percent, from 4.82 percent on Oct. 10, when the spread between the lending benchmark and the Fed’s target rate reached a record following the Lehman collapse. Victoria Finance Ltd., a structured investment vehicle that defaulted last year, plans to liquidate $4.3 billion of CDOs tomorrow. The Victoria auction includes $623 million of corporate- debt backed deals, according to a list obtained by Bloomberg News. Stone Tower Management LLC, a New York-based investment firm that took over running the SIV from Ceres Capital Partners LLC after the vehicle could no longer sell commercial paper, is overseeing the auction. They are selling $2.3 billion of residential mortgage-backed securities and almost $500 million of corporate bonds Victoria held. ‘Watershed Event’ “The liquidation of Victoria Finance will be a watershed event” to show market appetite, Roy said in a telephone interview. “There is increased risk appetite for almost all forms of CDOs at the right price. There has been a huge increase in the amount of secondary trading.” More than $6 billion of collateralized loan obligations, a form of CDO that pools high-yield, high-risk loans, have traded publicly since May, according to JPMorgan. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s. Morgan Stanley analysts, who in January called the secondary market for CDOs of corporate credit-default swaps “a $300 billion distressed opportunity,” estimate $5 billion of the CDO securities have traded this year. ‘Active Market’ “There’s quite an active market now,” said Sivan Mahadevan , a derivatives strategist at Morgan Stanley in New York. “Every time there’s a seller in the market, these investors will come in and participate in the auctions or buy them directly.” Babson has bought more than $200 million of CDOs since April, Matthew Natcharian , the head of Babson’s structured credit team, said in a telephone interview. The $110 billion investment firm, based in Springfield, Massachussetts, is among buyers of distressed CDOs such as Elliott Management Corp. in New York and Bain Capital’s $19 billion debt investment arm Sankaty Advisors LLC in Boston. Babson has primarily bought CDOs of loans, Natcharian said. GoldenTree has purchased mainly CLOs and some synthetic CDOs, Naggar said. Index Climbs Loan CDOs have gained as prices on the underlying debt climbed from record lows and prospects for companies failing diminished, Roy said. The S&P/LSTA 100 Leveraged Loan index has gained 19.6 cents since the end of March to 86 cents on the dollar as of yesterday. Loans have gained a record 46.9 percent this year after losing an unprecedented 28.1 percent last year, the S&P/LSTA index shows. That’s boosted CLO portions ranked AA, the third-highest level of investment grade, which have more than doubled in the past four months to as much as 70 cents on the dollar. Securities ranked BBB have tripled to 35 cents, Roy said. The rise in prices still doesn’t always reflect the gains in the underlying loans, Natcharian said. “Buying CLO pieces is an opportunity to buy bank loans at a discount to where they are trading,” he said. Synthetic CDOs, which sell credit-default swaps that receive annual premiums in return for taking on the risk of losses from corporate bond defaults, have in some cases doubled after values dropped to less than 10 cents on the dollar. The most common synthetic CDO is a so-called mezzanine tranche, in which investors take on a thin slice of risk. They may, for example, take losses only after the first 5 percent of companies in the portfolio default, minus the recovery value. If the losses reach 6 percent, the mezzanine portion is wiped out. Top Ratings Many of the bonds were given top ratings by S&P, Moody’s and Fitch Ratings because they were backed by highly rated and diversified companies. Creators of the deals, though, often loaded the portfolios with financial companies that either failed during the crisis last year, including Lehman and three Icelandic banks seized by their government, or were cut below investment grade, such as bond insurers MBIA Inc. and Ambac Financial Group Inc. Prices on the most distressed bonds that fell to less than 10 cents on the dollar may now be approaching 20 cents, Mahadevan said. Bonds less likely to fail, particularly those with shorter maturities, have rallied more, from a range of about 30 to 40 cents on the dollar to 60 to 80 cents, he said. The upfront cost of credit-default swaps guaranteeing the 3-percent to 7-percent slice of risk on the Markit CDX North America Investment Grade Index Series 9 has dropped by 46 percentage points since March 5 to 12.4 percent of face value, according to CMA DataVision. Bondholder Protection Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite. Prospects for corporate debt are improving with Moody’s predicting the global speculative-grade default rate will rise to a peak of 12.6 percent in the fourth quarter of this year and then decline to 4.3 percent by August 2010, the New York-based ratings company said Sept. 21 in a statement. In March, Moody’s estimated the worldwide default rate would reach 14.8 percent by the end of 2009, falling to 13.8 percent by next February. The same appetite isn’t returning for CDOs that are backed by asset-backed securities, said Morgan Stanley analyst Vishwanath Tirupattur . A rise in prices during May and June also made CLO securities less attractive to some investors, such as Elliott. As of June 30, the New York-based investment firm cut its exposure to these securities, which had “traded cheap to the underlying loans,” Elliott wrote in a letter to its investors. Elliott spokesman Scott Tagliarino declined to comment. Many holders of corporate CDOs also are unlikely to sell as prospects for recovery improve. Some investors also have restructured the bonds they hold by injecting money into them and making them safer, Mahadevan said. “Clearly not everyone is going to sell,” he said. To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net ; Shannon D. Harrington in New York at sharrington6@bloomberg.net

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Barclays Said to Repackage Top-Rated Bonds From $1 Billion Downgraded CDO

September 3, 2009

By Pierre Paulden Sept. 3 (Bloomberg) — Barclays Capital repackaged a portion of a $1 billion collateralized debt obligation managed by Highland Capital Management LP that was downgraded in July into new securities with the highest credit ratings. Barclays Capital is selling $77.25 million of securities backed by leveraged loans with AAA rankings from Standard & Poor’s and Moody’s Investors Service, said a person familiar with the offering who declined to be identified because the deal is private. The bank also created an $18.8 million piece rated AAA by S&P and a $250,000 unrated slice, according to the bond agreement. Banks are turning downgraded securities into new investments with top credit ratings, seeking to create more valuable debt to sell or to restructure investors’ holdings. New York-based Barclays Capital is modeling the financing structure after so-called re-REMICs, which bundle mortgage bonds into new securities that may offer investors an additional layer of protection, or collateral, from downgrades. “Critics of this practice have argued that it appears to be the creation of something from nothing — in effect ‘alchemy,’” Moody’s analyst Leonid Mogunov wrote in an August report. “Such repackaging can in fact produce at least one class of notes more creditworthy than the underlying CLO tranche,” he wrote. The new bonds, known as Blue Wing Asset Vehicle, were created from the safest portion of Westchester CLO Ltd., a $1 billion CDO arranged in May 2007 by Lehman Brothers Holdings Inc. and managed by Dallas-based Highland. Brandon Ashcraft, a Barclays spokesman in New York, declined to comment. Kevin Latimer , a partner at Highland, didn’t return a telephone call for comment. ‘Arbitrage Opportunities’ Credit-rating cuts may sometimes force investors to sell the debt and cause financial institutions that own the bonds to increase capital. More than $27 billion of home-loan bond re- REMICs were issued this year, according to a June report by Bank of America Corp., compared with $17 billion in all of 2008. CDOs parcel fixed-income assets such as bonds or loans and slice them into new securities of varying risk intended to provide higher returns than other investments of the same rating. Westchester is a type of CDO called a collateralized loan obligation, or CLO, which focuses on doing the same with company loans. “Repackaging is typically a regulatory maneuver,” said Gene Phillips , a director at PF2 Securities Evaluations Inc., an advisory firm in New York. “Some investors are also unable to hold securities that are rated below AAA.” Moody’s lowered the $570.5 million top-ranked piece of Westchester CLO by three levels in July, to Aa3 from Aaa, citing an increase in defaults and low-ranking company loans. The ratings company has cut 2,560 portions from more than 650 loan CDOs this year through July 31. “We expect to see more repacks as AAA downgrades have increased,” Phillips said. To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net

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Bonds Sold to Widows From CIT to GMAC Have Fine Print That Pimco Resists

August 21, 2009

By Caroline Salas and Pierre Paulden

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BlueMountain Fund Rose 18% Through June With Bets Against Creditworthines

July 27, 2009

By Pierre Paulden and Shannon D. Harrington July 27 (Bloomberg) — BlueMountain Capital Management LLC, whose founders helped pioneer credit-default swaps, rose 18 percent through June in part by betting on creditworthiness declines at New York Times Co.

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CIT May Get $3 Billion Rescue From Bondholders to Avoid Bankruptcy Filing

July 20, 2009

By Pierre Paulden, Caroline Salas and Linda Shen July 20 (Bloomberg) — CIT Group Inc. , the 101-year-old commercial finance company seeking to ward off bankruptcy, agreed to a $3 billion loan for 2.5 years from a group of its bondholders, according to people familiar with the situation. CIT will pay interest of 10 percentage points more than the three-month London interbank offered rate, said the people, who declined to be identified because the negotiations are private

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CIT May Announce $3 Billion Bondholder Financing to Ward Off Bankruptcy

July 20, 2009

By Pierre Paulden and Linda Shen July 20 (Bloomberg) — CIT Group Inc. , the 101-year-old commercial finance company seeking to ward off bankruptcy, may announce an agreement for $3 billion in financing from bondholders as soon as today, a person briefed on the board’s deliberations said.

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CIT May Announce $3 Billion Bondholder Financing to Ward Off Bankruptcy

July 20, 2009

By Pierre Paulden and Linda Shen July 20 (Bloomberg) — CIT Group Inc. , the 101-year-old commercial finance company seeking to ward off bankruptcy, may announce an agreement for $3 billion in financing from bondholders as soon as today, a person briefed on the board’s deliberations said

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