Friday, July 27, 2007

CDO sales dwindling

KKR, Homeowners Face Funding Drain as CDO Sales Slow

July 24 (Bloomberg) -- The Wall Street money-machine known as collateralized debt obligations is grinding to a halt, imperiling $8.6 billion in annual underwriting fees and reducing credit for everyone from buyout king Henry Kravis to homeowners.

Sales of the securities -- used to pool bonds, loans and their derivatives into new debt -- dwindled to $9.1 billion in the U.S. this month from $42 billion in all of June, analysts at New York-based JPMorgan Chase & Co. said in a report yesterday.

Investors are shunning CDOs after the near-collapse of two hedge funds run by Bear Stearns Cos. that owned the securities. Standard & Poor's downgraded bonds from 75 CDOs as mortgages to people with poor credit defaulted
at record rates. Concern about losses on home loans are rattling investors across the credit spectrum.

``We're walking on thin ice,'' said Alexander Baskov, a fund
manager who helps oversee $25 billion of high-yield debt for Pictet Asset Management SA in Geneva. ``People are trying to find value and the right price and right now nobody knows what it is. Pretty much everyone is in the dark.''

The shakeout is leading firms from Maxim Capital Management in New York to Paris-based Axa Investment Managers to delay or scrap planned CDO sales.

Maxim began buying mortgage bonds for a new CDO after completing its second deal in March. Chief Investment Officer Doug Jones in New York said he slowed the purchases, having acquired only a third of the assets planned, partly because the bank underwriting the deal grew concerned it could lose money as volatility increased. He declined to name the underwriter.

``We don't want to get too far along and create something
that's not sellable,'' said Jones, who manages $4 billion of CDOs.

The slowdown comes as private equity firms such as Kravis' Kohlberg Kravis Roberts & Co. and Blackstone Group LP, both based in New York, need to borrow at least $300 billion in coming months to finance acquisitions, according to Baring Asset Management in London.

Buyout groups rely on CDOs for 60 percent of the loans to
finance U.S. acquisitions, according to JPMorgan.

“Sales of the securities -- used to pool bonds, loans and their derivatives into new debt -- dwindled to $9.1 billion in the U.S. this month from $42 billion in all of June”.

I would call that a rapid slowdown. I would also point to it as further evidence of the unwinding that is taking place, the unwinding that no one wants to talk about, after all, that would be admitting failure.

The bottom line is things are coming apart fast, much faster than analysts predicted and with wider scope than anticipated by experts.

How far and wide the pain will be distributed will only be known in hind- sight. However for investment analysts to recommend buying into the CDO or LDO markets is irresponsible or just plain criminal and I hope they get more than a hand slap after the dust settles.

I think I can safely predict that the third and fourth quarters of 07 will be a white knuckle ride for some and a nightmare for many as subprime contagion spreads and derivatives markets buckle.


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