Category: corporate debt

Corporate debt déj

As the WSJ reported yesterday in an article titled, “Borrowing for Dividends Raises Worries,” Fed chairman Bernanke’s zero interest rate policy (ZIRP) has given new life to old habits:

Borrowing from bondholders to pay shareholder dividends is “a hallmark of an earlier credit era,” Jeffrey Rosenberg, head of credit strategy at Bank of America Merrill Lynch, wrote in a report Friday. Such deals were popular in 2003 and 2004, the last time the Federal Reserve lowered its benchmark interest rate to historically low levels, keeping it at 1% for more than a year.

In fact, under captain Alan Greenspan, the Fed began its historic and fatal maiden voyage towards ZIRP in January, 2001. As the corporate credit spigot opened up, such luminaries as Tyco, Enron, and WorldCom rushed to raise money. In fact, WorldCom’s pulled off a record-breaking $11.9 billion debt offering in May, 2001. The company, with $103.9 billion in assets, was sunk 14 months later. Only the women and children were saved.

Of course, there were more serious consequences to the Fed artificially lowering rates in order to contain the tech bust, such as lighting a fuse under the housing and credit bubbles, encouraging recklessness, punishing thrift, and putting off the day of reckoning. Human nature being what it is – especially within the power elite – nothing was learned.

As Mark Twain remarked, “history doesn’t repeat, it rhymes.”

(Thanks to Sal Pramas.)

Corporate debt déj

As the WSJ reported yesterday in an article titled, “Borrowing for Dividends Raises Worries,” Fed chairman Bernanke’s zero interest rate policy (ZIRP) has given new life to old habits:

Borrowing from bondholders to pay shareholder dividends is “a hallmark of an earlier credit era,” Jeffrey Rosenberg, head of credit strategy at Bank of America Merrill Lynch, wrote in a report Friday. Such deals were popular in 2003 and 2004, the last time the Federal Reserve lowered its benchmark interest rate to historically low levels, keeping it at 1% for more than a year.

In fact, under captain Alan Greenspan, the Fed began its historic and fatal maiden voyage towards ZIRP in January, 2001. As the corporate credit spigot opened up, such luminaries as Tyco, Enron, and WorldCom rushed to raise money. In fact, WorldCom’s pulled off a record-breaking $11.9 billion debt offering in May, 2001. The company, with $103.9 billion in assets, was sunk 14 months later. Only the women and children were saved.

Of course, there were more serious consequences to the Fed artificially lowering rates in order to contain the tech bust, such as lighting a fuse under the housing and credit bubbles, encouraging recklessness, punishing thrift, and putting off the day of reckoning. Human nature being what it is – especially within the power elite – nothing was learned.

As Mark Twain remarked, “history doesn’t repeat, it rhymes.”

(Thanks to Sal Pramas.)

Corporate debt déj

As the WSJ reported yesterday in an article titled, “Borrowing for Dividends Raises Worries,” Fed chairman Bernanke’s zero interest rate policy (ZIRP) has given new life to old habits:

Borrowing from bondholders to pay shareholder dividends is “a hallmark of an earlier credit era,” Jeffrey Rosenberg, head of credit strategy at Bank of America Merrill Lynch, wrote in a report Friday. Such deals were popular in 2003 and 2004, the last time the Federal Reserve lowered its benchmark interest rate to historically low levels, keeping it at 1% for more than a year.

In fact, under captain Alan Greenspan, the Fed began its historic and fatal maiden voyage towards ZIRP in January, 2001. As the corporate credit spigot opened up, such luminaries as Tyco, Enron, and WorldCom rushed to raise money. In fact, WorldCom’s pulled off a record-breaking $11.9 billion debt offering in May, 2001. The company, with $103.9 billion in assets, was sunk 14 months later. Only the women and children were saved.

Of course, there were more serious consequences to the Fed artificially lowering rates in order to contain the tech bust, such as lighting a fuse under the housing and credit bubbles, encouraging recklessness, punishing thrift, and putting off the day of reckoning. Human nature being what it is – especially within the power elite – nothing was learned.

As Mark Twain remarked, “history doesn’t repeat, it rhymes.”

(Thanks to Sal Pramas.)

Moody’s sees corporate defaults rising

From MarketWatch:

“Going forward … many more weak companies will be unable to obtain new financing and will default either when debt maturities come due or when they run out of cash,” the agency said.

The default rate among U.S. speculative-grade companies will more than double to 4% during the next year, Moody’s predicted.

Homebuilders, auto makers, retailers and consumer durable companies may be most affected, Moody’s said. Many companies in these industries have been acquired in leveraged buyouts in recent years and have borrowed a lot of money in the process, the agency said.

“The bumper crop of highly leveraged new issuance in 2006 and 2007 expanded the number of these low-rated, highly leveraged issuers to a record level,” Moody’s said. “We expect defaults to rise substantially among the large population of companies that have been aggressively financed with less than two times EBITDA/interest coverage and little or no free cash flow.”

My comment: Perhaps Moody’s has learned from the mortgage bubble and decided to get ahead of the curve on the private equity bubble.

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