The Banking and Strategy Initiative

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A fresh blow from Capital downdrafts

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Bank of America gets ready for a Manic Monday

Though some observers and we ourselves still believe it is a little unlikely, the world would be waiting on Brian Moynihan when he speaks on America’s heritage bank’s unmitigated disaster in mortgages and banking. As the bank was not involved in trading and commodities cycle apart from a little dalliance in China Construction Bank, it was targeted only recently as settlements in the Mortgages cases were bandied about as solution to America’s problems and more and more likely to be extracted from banks for Countrywide’s sub-prime portfolio, and the same in different avatars at each bank including the Trading specialists that bought new “finance houses” in mortgages like First Franklin to ride the boom.

The “Project new BAC” (explained in our Friday/Saturday reading of Bank of America’s fresh attempt to bring life into its 2012 programs) as basis and a trimmed retail presence that still maintains its complete footprint are likely but formal numbers for the endgame may not be presented till 2011 is completed in hope of a half hearted ( at least) rebound

How much is Europe linked to Leveraged Finance?

Over $65 bln of default can be expected in the leveraged finance markets as that is the lower end of the shortfall expected with maturing issues in leverage debt not getting investment vehicles as the existing Leveraged Finance tranches have run out of reinvestment periods and an increasing number will get extinguished annually ill 2015, Somewhere around 2013 will be the largest amount of defaults in the market unless new investors welcome issues like BJ’s Wholesale and Blackboard and BJ’s Wholesale

The continent will face the heat in this case more than US companies as PE investors still use the debt structures on the continent apart from a lot of the structured debt coming back to the market for refinancing, the exact issue that crashed the interbank cash market in 2008 Leveraged Loans or junk debt are likely to yield upward of 8% in these conditions and interest could come back with that uptick in yield , witnessed in increased appetite on the Blackboard offering by Providence


Loan Prices

The S&P/LSTA Leveraged Loan 100 Index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, rose to 89.54 cents on Sept. 8, from 87.47 cents on Aug. 26. First-lien debt is repaid first in a bankruptcy or liquidation, second-lien debt is repaid next.

High-yield bonds and leveraged loans are rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P.

Only $1.6 billion of leveraged loans were sold in August, a two-year low, according to a Citigroup Inc. research report dated Sept. 7 led by Michael Anderson. About $14.3 billion of leveraged loans are in the pipeline as of a week ago, according to the New York-based lender.

Blackboard is seeking a $780 million first-lien term loan due in seven years, a $350 million second-lien term loan maturing in eight years, and a five-year, $100 million revolving line of credit, Bloomberg data show.


Although the end of August is traditionally quiet in financing markets, this year was marked by great distress. LCD’s index of the largest loans fell to 88.52 on Aug. 11, the lowest level since July 2009, as investors sold risky assets in the wake of S&P’s downgrade of U.S. debt, and amid the turmoil in Europe.

Since Labor Day, however, there have been signs of a rebound. The LCD index reached 92.40 on Sept. 7, Donnelly said.

According to one banker working on several of next week’s deals, all of the loans should find willing investors, but there’s a question about the interest rates that will be set.

Packaging company Sealed Air, which is looking to sell $1.1 billion of loans to finance its $2.9 billion acquisition of Diversey Holdings, is aiming for an interest rate between 5.5% and 6%.

“It’s maybe not as bad as you’d expect,” said the banker, noting that, as a large corporation with a rating at the high-end of the junk spectrum, Sealed Air is getting a lot of interest from investors.

A Sealed Air spokeswoman declined to comment.

The other borrowers are using their loans to finance leveraged buyouts and could price them closer to 8%, the banker said. However, it’s unclear whether the loans will be able to garner enough interest at those levels.

Deutsche Bank going merrily down the whirlpool formed in the spiralling down draining of liquidity in the inter bank market?

The Bank’s June 2011 GS investor Conference shows Tier I core Capital as per Basel 3 norms to be as low as 2-3% in 2011 and thus it faces an uphill battle in rebuilding Tier I core capital that the markets have cottoned on to , giving the last stayers on in Europe a tougher time in the markets. The stock trades at $24 now instead of its $52-55 range when it published its Q2 2010 results. A lot of erstwhile off balance sheet structures, no longer feasible are responsible for this seeming dearth of capitaal, triggering the proverbial whirlpool gathering strength in each cycle from the deficiency powering it from the previous cycle into a bigger and biugger hole. Even Bank of America needs upto $50 bln but with all the bad bank debts provisioned out in 2009 whjen the European banks were busy holding up paper profits and the surviving FICC market. Fortunately, however, leveraged structures are unlikely to be part of the volume as far as the big banks are concerned, the plays more successfully built up by PE and niche Finance hedgies. These players are likely to be different from the players in Commercial Real Estate as well, where wbanks did have a largish portfolio. However the fall of the CRE market would be one of the key contributors to the current sdrought of investors in Leveraged Debt Despie only $5 bln in exposure to PIIGS debt Deutsche Bank is therefore now an important target to watch for obervers looking for the Capital hole in Europe in case it takes other nations from Americas and even Asia into the edge of the whirlpool

The European Sovereign debt crisis

The Grecian Economy manage a 8% contraction in Q1 and another 7.3% in Q2 over 2010 and that debt is already trading at a 90% probability of default. However with 60-70% private investors ready to roll over the new debt as suggested by Joseph Ackerman. Even with Finland, Austria and others discussing stringent collateral for Greek debt the default would have sill been not more than $70 bln In fact with the Euro now ticking down towards $1.30 and lower it increasingly becomes a local problem, a very happy event for the local European governments esp Germany as ECB unveils more internal bickerings

However Spain, Italy and France debt exposures and thus the default risk in Eurodollars keeps increasing multi-fold by a minimum factor of 2 in each case. Also the EFSF at its current rate is only for a total amount including guarantees for about $350 bln of Government debt unlikely to last the bill for Italy and maybe Spain with due additional contributions from the 17 member nations Greece could seriously mull divesting itself from Eurozone denomination and go back to a new currency which would be simpler for it and an emotional response likely to damage the fabric of the future of the Euro zone as Germans are increasingly likely to vote down the required German contribution to default bailouts from the second instance having given a grudging nod for 85% of the amount in the first vote. The case for France is in fact much more interesting as its lenders include its own banks till now safe desite European debt

The IMF, under new management, is already looking to distance itself from the crisis seeking European banks to pay up more han Euro 200 bln or $260bln of Capital as sovereign debt drawdowns have already been written down between 20-50% and have lost much more in each week of trading in August

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