Essien’s Ecobank charm offensive

Essien’s Ecobank charm offensive

Albert Essien has brought much-needed calm to the bank

Too quick to PIK?

Too quick to PIK?

The deals set to haunt European high yield

Tuesday, August 12, 2008

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Special focus: Sub-prime and leveraged loans

Rising personal bankruptcy levels and an uncertain economic outlook led Euromoney to warn as early as 2006 that non-conforming and sub-prime mortgage lending may lead to disaster.



"Frankly, there's a real sleaze element that's developing in banking, particularly with some of the sub-prime lenders...I think that's going to be emerging as an issue, although there has been a desire, particularly on the part of the House Banking Committee, to avoid it." 
- Bert Ely, Washington-based banking expert, Euromoney December 1999
Follow the story behind today's subprime and leveraged loan problems, and ensure you are reading  Euromoney's current market coverage so you are prepared for the market's next move – before it happens.


Recent sub-prime coverage


Parliament is dangerously naïve about securitisation: A Northern Rock special  August 2008
The UK parliament and media do not understand structured finance. In one lawyer's words, "securitisation is being subjected to tabloid journalism."

Sub-prime litigation: Vague, inconsistent drafting August 2008
Structured finance documentation has been revealed as inscrutable and ambiguous.

Debt markets: The American dream turns into a nightmare  September 2007
After every great party comes a reckoning. Because they overindulged sub-prime borrowers with unprecedented excess credit, US financial markets are facing a long and severe hangover. The American dream of homeownership for all has turned sour, while cleaning up the mess will be painful. Amid the finger-pointing, dislocation and illiquidity, though, fortunes will be made. 

The week Wall Street went into meltdown Euromoney September 2007
In the week of August 13 participants in the financial markets – credit traders, equity investors, heads of repo desks, hedge fund managers, risk controllers, originators and capital markets bankers, credit strategists, treasurers, chief financial officers – began to lose faith in the financial system itself.

UK RMBS master trusts – Northern Rock: From hero to zero Euromoney September 2007
Northern Rock's inability to tap the wholesale funding market is a body blow for the whole sector

Money market mayhem Euromoney September 2007
The disappearance of both CP investors and ABS buyers in August had grave consequences for those vehicles that rely on both.

Lack of diversification killed the SIVs Euromoney September 2007
The problems in the SIV sector are not only the result of funding and mark-to-market distress, but also because of sloppy structuring in the first place.

Sub-prime market: Correction or catastrophe? Liquid real estate issue 03
It was just a matter of time before the true extent of the damage caused by sub-prime mortgage losses was uncovered. When, in February, the significant increase in sub-prime delinquencies became known, credit market watchers could only speculate about the ultimate impact.

Crunch time for LBOs
 Euromoney August 2007
The investor revolt in the leveraged loan market during June and July was long overdue and much needed. But have the excesses of the past few years left the LBO market teetering on the precipice of a far more serious credit squeeze?

Synthetics: Great expectations  Euromoney August 2007
Dealers are hoping a new-look contract will finally get the European leveraged loan credit default swap market off the ground.

Covenant-lite CLOs: From sub-prime to the ridiculous  Euromoney June 2007
Why covenant-lite CLOs are the next accident waiting to happen
The recent disruption in the US sub-prime mortgage market served as a warning to the CDO market of what happens when deals are backed by increasingly risky underlying assets. So why aren’t CLO managers – who are now buying single-B rated, covenant-lite loans in their droves – paying more attention? 

Debt markets: Too close for comfort?  Euromoney June 2007
Amid the fallout from the US sub-prime sector collapse, investors are once again questioning the role of the ratings agencies. It’s not just that the agencies assessed the risks so badly; their harshest critics suggest the main cause for concern is that the raters are too cosy with the issuers on which they pass judgment. 

Covenant-lite means risk-heavy  Euromoney May 2007
Slackening underwriting standards in loans that back a burgeoning CDO market? It all sounds horribly familiar.

Sub-prime contagion: Guilty by association Euromoney April 2007
The sub-prime mortgage crisis in the US will feed through to mortgage markets elsewhere as share prices plummet and borrowing costs soar.

US sub-prime: Hedge funds make light of sub-prime woes  Euromoney April 2007 
Press reports that hedge funds will be the hardest hit by the sub-prime mortgages free fall in the US have been proved wrong by Paulson and Co. According to sources, the $7 billion merger arbitrage and event-driven hedge fund has produced 100% net returns year to date, and 60% in February alone on the back of sub-prime bets.

Liquidity is never there when you need it most Euromoney April 2007 
In recent years success in the financial services industry has been predicated on two main strategies: first, taking on significant if not massive proprietary risk, a strategy as old as the hills; second, underwriting risk positions and using the capital markets to exit. This is an even more well-established feature of the most successful investment banking operations.

Why BAA’s refinancing can’t get off the ground  Euromoney April 2007
The foundation on which Ferrovial built its acquisition of BAA was its securitization exit. But nearly a year after the buyout, the refinancing is nowhere to be seen. 

SF market round up: Huge European CLO pipeline builds  Euromoney April 2007

Have Wall Street banks gone subprime at the wrong time? Euromoney December 2006
Wall Street is praying that the US economy will land softly now that the Federal Reserve has pricked the housing market bubble, because it will be bad news for mortgage origination if house prices stall for long or, even worse, fall. Already there are early signs of credit deterioration in some of the riskier mortgage securitizations. It can only be a matter of time before subordinated CDO tranches start to take a hit.

Distressed debt: Clever ways to do the dumbest things Euromoney December 2006 
Large numbers of new institutional credit investors – mezzanine funds, hedge funds, CLOs, CDOs and distressed debt funds, are disguising the true level of stress and distress among borrowers at the riskier end of the credit spectrum. In some cases, they might even be exacerbating it.

Structured credit debate: The leveraged loan revolution  Euromoney November 2006
A huge influx of liquidity has made the collateralized loan obligation almost standard fare for Europe’s institutional investors. But as they snap up CLO equity and new credit opportunity funds, they need to choose carefully.

Dresdner’s dreadful doggerel Euromoney September 2006

"Squeal squeal squeal with delight,
Northern Rock shows us its might,
Bears must have got quite a fright,
Shares up 8% what a sight.

Bears tried to claim bad debts would bite,
But Bob Bennett said that wasn’t right,
It seems that some now see the light,
Squeal squeal squeal with delight."


Mortgage finance: Have sub prime lenders missed the boat? Euromoney April 2006
Rising personal bankruptcy levels and an uncertain economic outlook in the UK might suggest that non-conforming and sub-prime mortgage lending is not the smartest business line to jump into at the moment. Try telling that to the succession of new entrants now preparing to try their luck in this sector – one in which veterans might suggest that they are already 10 years too late.




More on the subprime market

More on leveraged loans