Thursday, June 28, 2007


From the Financial Times:

Companies are pulling financing deals across the globe, in one of the clearest signs yet that investors’ worries about rising interest rates and US subprime mortgages could be infecting other areas of the credit world and driving up the cost of corporate borrowing.

MISC, the world’s biggest owner of liquefied gas tankers, day shelved its $750m bond offering.

The move came a day after US Foodservice, the American division of Ahold, the Dutch supermarket group, postponed its $650m bond offering and Arcelor Finance put plans for its euro-denominated benchmark bond issue on hold, citing turbulent market conditions.

The pulled deals highlight the growing risk-aversion among investors amid rising global interest rates and nervousness about credit markets following the near-collapse of two hedge funds owned by Bear Stearns that have heavy exposure to the US subprime market.

From Marketwatch (via Calculated Risk):

NEW YORK (MarketWatch) -- One of the hedge fund industry's biggest stars, Eric Mindich, the chief executive of Eton Park Capital Management, said that he believes the credit cycle will turn and that margins are too narrow. He said the "day of reckoning" may be here, in reference to recent problems in the securitized debt markets. "There's dry timber out there," Mindich said at the Wall Street Journal Deals and Deal Makers Conference on Wednesday. "There are people's lives that are going to be changed by what happens."

Big Picture looks at the similarities between hedge fund accounting schemes and Enron:

There are several issues here that deserve closer scrutiny. Here's how I connect the dots:

1. Side Pockets: A way to move toxic holdings "Off Balance Sheet," to a netherland, hidden from investors and perhaps regulators. This lack of transparency does not exactly comply with truth-in-reporting to your investors or FASB accounting standards.

Sound familiar? It should: Its remarkably similar to Enron Off Balance Sheet Special Partnerships. The WSJ's Scott Patterson went into the details last week:

Even if Bear's pain spreads through the market, other hedge-fund investors might not feel it, at least right away. Sometimes, hedge funds move big pieces of their holdings into separate accounts known as side pockets to keep declining assets from hurting a main fund's performance record -- and managers' wallets. They can also block investors from cashing out.

2. Mark-to-Model: The similarities to Kenny boy's outfit don't end there: What do we do with illiquid holdings where the fund is both the buyer and seller, and the parent company is the buyer of last resort? Unlike most mutual and hedge fund, who mark-to-market based upon the closing price pof their assets, holders of these CDOs get to indulge their "creative" side. Instead of writing the great American novel, they derive a model that optimistically prices these illiquid assets.

Why optimistic? Because the theoretical returns to investors and actual fees to management are based on the pricing of these (non-priced) assets! Keep those Enron parallels coming!

Indeed, the reason Bear was originally willing to pony up $3.2 billion dollars was what would happen if there was an actual public auction price: The entire complex would have to reprice all oft heir holdings. Buy bye investor returns, buy bye fees!

Still feel confident that subprime mortgage problems and hedge fund funkiness are "well-contained?" Don't be:

The Telegraph this morning quotes Charles Dumas, global strategist at Lombard Street Research summarizing the issue: "We don't know what the value of this debt is because the investment banks shut down the market in a cover-up so that nobody would know. There is $750bn of dubious paper out there in the form of CDOs held by banks that have a total capitalization of $850bn."

Also, take a look at Minyanville's take on why the phrase "well-contained" is being used so frequently these days. Hint: it's because many people fear the problems are NOT "well-contained."

UPDATE: Bonddad sees it differently. He agrees with the WSJ that the American economy is "impressively resilient" and therefore these events are probably not fatal.

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