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Private Equity sparks Bond Market Crisis
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FINCEN
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Joined: 08 Mar 2006
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PostPosted: Thu Jul 26, 2007 7:09 pm    Post subject: Private Equity sparks Bond Market Crisis Reply with quote

After months of warning that Mortgage backed bonds were a threat to the economy, it appears that instead the private equity market bears a considerable amount of blame. Three examples of the dangers of an unregulated private equity sector have surfaced. First Citi and JP Morgan are facing a serious problems as a result of their inability or unwillingness to limit their "as well as their investors," exposure to risky debt. There is no debt more risky than that which exists in the private equity arena. Today we find that both JP Morgan and CITI are saddled with an estimated $22 billion in unsecured, unmoveable debt which brings to mind the S&L scandal of the 80s.

Belatedly the banks have announced plans to cut back funding to collateralized debt obligations while increasing collateral requirements when lending to hedge funds and private equity firms. Unfortunately for to many common investors this is a case of closing the barn door after the horse has already gotten out. Again bearing the blunt of the blame are poorly collateralized deals such as the proposed buyout of Alliance Boots buy KKR. Deutsche Bank and JP Morgan Chase & Co are stuck with $10 billion worth of senior notes that foreign investors are refusing to buy due to inadequate collateralization.

Both have imployed the trick of packaging more attractive junior loans in an effort to write down their losses by reselling the loans and charging higher interest rates which will produce underwriting fees to discount the initial loss by as much as 55%. Again this practice in itself is questionable and serves merely to mask the true extent of the damage suffered. So now that we've come full circle it is safe to start

In the food and Entertainment sector, Landry's Restaurants has been hit with a demand from the U.S. Bank, National Association demanding that the company remit payment in full all of its outstanding debt on a credit line of $400 million. The current market scare coupled with Landry's belated release of their 2007 annual report which was due within 90 days of the close of the 2006 business year. Has led investors to bail out of the company post haste. As always Landry's released a positive almost defiant statement saying they felt confident that they would find new financing at 7.5% the same rate they had under the old agreement.

Under the circumstances this is highly unlikely. The alternative maybe to follow the course of Fertitta's cousins at Stations Casinos. Inorder to ensure their bid to take the company private is not derailed, the Fertitta's of Stations have secured their deal posting as collateral six casino properties in Nevada. In the future finance deals backed by commercial mortgage backed securities will be the way to go. Of course the Fertitta's of Stations have also organized their own private finance corporation which just may loan cousin Tilman the money he needs to escape this financial crisis. That is if he is willing to pay their rate.
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